Chapter 3

1. Costscandisplayvariable,fixed,ormixedbehavior,anditimportantthattheyareclassifiedaccurately.
a. True
b. False
ANSWER: True
2. Acostthatdoesnotchangeasoutputchangesisavariablecost,andonethatchangesisafixedcost.
a. True
b. False
ANSWER: False
3. Acostobjectistheitemforwhichmanagerswantcostinformation,sothefirststepistodetermineappropriatecostobjects
.
a. True
b. False
ANSWER: True
4. Fixedcostsarecoststhat,intotal,areconstantwithintherelevantrangeastheleveloftheassociateddrivervaries.
a. True
b. False
ANSWER: True
5. Variablecostsaredefinedascoststhat,intotal,areconstantregardlessofchangeinanactivitydriver.
a. True
b. False
ANSWER: False
6. Mixedcostsarecoststhathavebothafixedandavariablecomponent.
a. True
b. False
ANSWER: True
7. Resources,suchasdirectmaterials,directlabor,electricity,equipment,andsoon,areeconomicelementsthatenableo
netoperformactivities.
a. True
b. False
ANSWER: True

Chapter 3: Cost Behavior

8. Thelevelofactivityperformancewheretheamountofactivitycapacityneededcorrespondstothelevelofefficienc
yrequirediscalledtheactivitycapacity.
a. True
b. False
ANSWER: False
9. Resourcesarecategorizedasflexible,whicharesuppliedasneeded,andcommitted,whicharesuppliedinadvanceofusage.
a. True
b. False
ANSWER: True
10.
Activitybaseduseofresourcescanimprovebothmanagerialcontrolanddecisionmakingbecauseitencouragesmanagerstopaym
oreattentiontocontrollingresourceusageandspending.
a. True
b. False
ANSWER: True
11.
Methodsofestimatingcostsusedbycompaniesincludetheindustrialengineeringmethod,theaccountanalysi
smethod,andtheinstantdecisionmethod.
a. True
b. False
ANSWER: False
12.
Theindustrialengineeringmethodisusedtodeterminewhichactivities,andinwhatamounts,arenecessaryto
completeaprocess.
a. True
b. False
ANSWER: True
13.
Theaccountanalysismethodcanbeusedtoestimatecostsbyclassifyingaccountsinthegeneralledgerasv
ariable.
a. True
b. False
ANSWER: False

Chapter 20: Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints
14.
Thethreewidelyusedquantitativemethodsofseparatingamixedcostintoitsfixedandvariablecomponentsaret
hehigh-lowmethod,thescatterplotmethod,andthemethodofleastsquares.
a. True
b. False
ANSWER: True
15.
ThehighlowmethodpreselectsthetwopointsthatareusedtocomputetheparametersFandXintheexpressionY=F+VX
a. True
b. False
ANSWER: False
16.
Theplotofdatapointsshowingtherelationshipbetweenmaterialshandlingcostsandactivityoutputiscalledas
cattergraph.
a. True
b. False
ANSWER: True
17.
Inthemethodofleastsquares,eachsinglemeasureofclosenessisfirstsquared.Squaringthedeviationsavoidspr
oblemscausedbyamixofpositiveandnegativenumbers.
a. True
b. False
ANSWER: True
18.
Afeatureofregressionroutines,notprovidedbythescatterplotofhighlowmethods,istoprovideinformationtoandintheassessmentofreliabilityoftheestimatedcostsformula.
a. True
b. False
ANSWER: True
19.
Thepercentageofvariabilityinthedependentvariableexplainedbyanindependentvariable(i.e.measureof
activityoutput)iscalledthecoefficientofcorrelation.
a. True
b. False
ANSWER: False
20. Analternativemeasureofgoodnessoffitisthecoefficientofdetermination.
a. True
b. False

Chapter 20: Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints
ANSWER: False
21.
Findingastrongstatisticalassociationbetweenanactivitycostandanactivitydrivercanprovideevidenceto
managersaboutthecorrectnessofadriverselection.
a. True
b. False
ANSWER: True
22.
Wheneverleastsquaresisusedtofitanequationinvolvingtwoormoreindependentvariables,themethodiscalledm
ultipleregression.
a. True
b. False
ANSWER: True
23. WhenMultipleregressionisused,theuserhasachoiceofusingmanualcomputationorusingregressionprograms.
a. True
b. False
ANSWER: False
24. Multipleregressionisadependabletoolforidentifyingthebehaviorofactivitycosts.
a. True
b. False
ANSWER: True
25.
Multipleregressioncanbeusefultoassesscostbehaviorwhendependentvariableisaffectedbyonlyonein
dependentvariable.
a. True
b. False
ANSWER: False
26.
Anumberofcostbehaviorpatternsdonotfollowalinearpattern,instead,theyfollowanonlinearcostcurvecalledthe
learningcurve.
a. True
b. False
ANSWER: True
27. Managersagreethattheideasbehindthelearningcurvecanextendtotheserviceindustryonly.
a. True
b. False

Chapter 20: Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints
ANSWER: False

Chapter 20: Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints
28.
Thebasisofthelearningcurveisthatasweperformanactionoverandover,weimprove,andeachadditionalperf
ormancetakeslesstimethantheprecedingones.
a. True
b. False
ANSWER: True
29.
Theexperiencecurverelatescosttoincreasedefficiency,suchthatthemoreataskisperformed,thelowerthecost
of doing will be.
a. True
b. False
ANSWER: True
30.
Thecumulativeaveragetimelearningcurvemodelstatesthatthecumulativeaveragetimeperunitincreasesbyaconstantpercentage.
a. True
b. False
ANSWER: False
31. Themostwidelyusedmethodtodeterminecostbehaviorismanagerialjudgement.
a. True
b. False
ANSWER: True
32. Managerialjudgementincludesthepossibilityofmixedcosts.
a. True
b. False
ANSWER: False
Beforeoptingtousemanagerialjudgment,managementshouldmakesurethateachcostispredominantlyfixedorvariable.
33. a. True
b. False
ANSWER: True

34. Basedonmanagerialjudgement,thebestpredictorofmanufacturingcostsistheunitsavailable.
a. True
b. False
ANSWER: False
35. Ifacompanychangesfromskilledlabortorobots,thepreviousdataareoflittlevalueinpredictingfuturecosts.
a. True
b. False
ANSWER: True

36.

explainchangesincostsasunitsproducedchange.
ANSWER: Unitleveldrivers

37.

explainchangesincostfactorsotherthanchangesinunitsproduced.
ANSWER: Non-unit-basedcostsdrivers

38.

analysisfocusesonhowcostsreacttochangesinactivitylevels.
ANSWER: Costbehavior

39.

areassumedtobethesoledriversofatraditionalcostmanagementsystem.
ANSWER: Unitbasedcostdrivers

40.

resultwhenorganizationsacquiremanymultiperiodservicecapacitiesbypayingcashupfront.
ANSWER: Committedfixedexpenses

41.

arethoseacquiredfromoutsidesourceswherethetermsofacquisitiondonotrequireanylongtermcommitments.

ANSWER: Flexibleresources
42.

arecostsincurredthatprovidelong-termactivitycapacity.
ANSWER: Committedresources

43. A

functiondisplaysaconstantlevelofcostforarangeofoutputandthenjumpstoahigherlevel.

ANSWER: step-cost

44. Coststhatfollowastep-costbehavioraredefinedas

costs.

ANSWER: step-fixed
45. The

analysismethodisamethodofdeterminingcostbehavior.

ANSWER: account
46. The

methodmaybeusedtodeterminetheactivitiesandamountsforcostbehavior.

ANSWER: industrialengineering
47.

and

studiesmaybeusedinconjunctionwiththeindustrialengineeringmethod.

ANSWER: Time;motion
48. Thethreequantitativemethodsofseparatingamixedcostintoitsfixedandvariablecomponentsare:thehighlowmethod,thescatterplotmethodandthemethodof
.
ANSWER: leastsquares
49. Themethodofleastsquaresrequiresa

inordertobeutilized.

ANSWER: regression
50. TheYintheequationY=F+VXrepresentsthe

,thedependentvariable

ANSWER: totalcost
51. The

parameteristhepointatwhichthemixedcostlineinterceptsthecost(vertical)axis.

ANSWER: intercept
52. Thegraphshowingtherelationshipbetweenactivitycostsanddrivers/outputsiscalledthe__
________.
ANSWER: scattergraph
53. Thehypothesistestofcostparametersindicateswhethertheparametersaredifferentfrom_
_________.
ANSWER: zero
54. A

intervalprovidesarangeofvaluesfortheactualcostwithaprespecifieddegreeofconfidence.

ANSWER: confidence

55. Acorrelationcoefficientnear+1meansthattwovariablesaremovinginthe

direction.

ANSWER: same
56. Acorrelationcoefficientnear0meansthattwovariablesare

ANSWER: unrelated
57. Acorrelationcoefficientnear-1meansthattwovariablesaremovinginthe

direction

ANSWER: opposite
58. The
methodisusedwheneverleastsquaresisusedtofitanequationinvolvingtwoormoreindependentvariables.
ANSWER: multipleregression
59. Multipleregressionhas

or

independentvariables.

ANSWER: two;more
60.

isusefulwhenthedependentvariableisaffectedbymorethanoneindependentvariable.
ANSWER: Multipleregression

61. Whenacostbehaviorpatterndoesnotfollowalinearpattern,anonlinearcostcurveisusedcalledthe
__________ curve.
ANSWER: learning
62. Eachtimecumulative volumedoubles,

fallbyaconstantandpredictablepercentage.

ANSWER: costs
63. Costs in marketing, distribution, and service after the sale
__________.

asnumberofunitsproducedandsold

ANSWER: decrease;increases
64. Cumulative average-time
curveassumesthecumulativeaveragetimeperunitdecreasesbyaconstantpercentageeachtimethecumulativequantity
ofunitsproduceddoubles.
ANSWER: learning
65. Knowledge ofcostand activity-levelrelationshipis usedbyexperienced

ANSWER: managers
66. Costbehavioranalysisfocusesonhowcosts
a. reacttochangesinprofit.
b. reacttochangesinactivitylevel.
c. changeovertime.
d. bothaandc.
ANSWER: b
67. Thedriversthatexplainchangesincostsasunitsproducedchangearecalled:
a. Non-unit-leveldrivers
b. Activitybasedcostdrivers
c. Unit-leveldrivers
d. Allofthese
ANSWER: c
68. Driversthatexplainchangesincostsasfactorsotherthanchangesinunitsproducedarecalled:
a. Functionalbasedcostdrivers
b. Non-unit-basedcostdrivers
c. Unit-basedcostdrivers
d. Noneofthese
ANSWER: b
69. Inatraditionalcostmanagementsystem,costbehaviorisassumedtobedrivenonlyby
a. unitbasedcostdrivers.
b. non-unitlevelcostdrivers.
c. activity-basedcostdrivers.
d. noneofthese.
ANSWER: a
70. Whichofthefollowingwouldbeanexampleofaunit-basedcostdriver?
a. engineeringorders
b. materialmoves
c. inspectionhours
d. directlaborhours
ANSWER: d

71. A$4,000permonthsalarypaidtoasupervisorisanexampleofa:
a. fixedcost.
b. variablecost.
c. stepcost.
d. mixedcost.
ANSWER: a
72. Whenthevolumeofactivityincreaseswithintherelevantrange,thefixedcostperunit
a. decreasesatfirst,thenincreases.
b. remainsthesame.
c. decreases.
d. increases.
ANSWER: c
73. Fixedcostperunitis$7when25,000unitsareproducedand$5when35,000unitsareproduced.Whatisthetotalfixedcostwh
ennothingisproduced?
a.
$130,000b.
$200,000
c. $12
d.$175,000
ANSWER:
d
RATIONALE: SUPPORTING CALCULATIONS:$725,000=$175,000
74. Therangeofactivitywithinwhichalinearcostfunctionisvalidiscalledthe
a. normalrange.
b. relevantrange.
c. activityrange.
d. noneofthese.
ANSWER: b
75. Assumingcostsarerepresentedontheverticalaxisandvolumeofactivityonthehorizontalaxis,whichofthefollowingcost
swouldberepresentedbyalinethatisparalleltothehorizontalaxis?
a. totaldirectmaterialcosts
b. aconsultantpaid$75perhourwithamaximumfeeof$1,200
c. employeeswhoarepaid$10perhourandguaranteedaminimumweeklywageof$200
d. rentonexhibitspaceataconvention
ANSWER: d

76. Giventhefollowinggraphs,whichgraphrepresentsfixedcosts?

I
a. I
b. II
c. III
d. noneofthese

II

III

ANSWER: b
77. Asthevolumeofactivityincreaseswithintherelevantrange,thevariablecostperunit
a. decreases.
b. decreasesatfirst,thenincreases.
c. remainsthesame.
d. increases.
ANSWER: c
78. Amanufacturingcompanypaysanassemblylineworker$12perhour.Whatistheproperclassificationofthislaborcost?
a. variablecost
b. semivariablecost
c. fixedcost
d. mixedcost
ANSWER: a
79. Thedirectmaterialcostis$20,000when2,000unitsareproduced.Whatisthedirectmaterialcostfor2,500unitsproduced?
a.
$15,000b.
$5,000c.
$20,000d.
$25,000
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$20,000/2,0002,500=$25,000

80. SanduskyCorporationhasthefollowingcostsfor1,000units:

Directmaterials
Directlabor
Depreciationonbuilding

TotalCost
$1,500
7,500
30,000

CostperUnit
$1.50
7.50
30.00

Whatisthetotalcostofdirectmaterialsfor100units?
a.$1.50
b.$3.00c.
$150.00d.
$225.00
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:100$1.50=$150
81. Whichofthefollowingcostsisavariablecost?
a. materialsusedinproduction
b. researchanddevelopment
c. supervisors'salaries
d. rent
ANSWER: a
82. Directmaterialsareanexampleofa
a. fixedcost.
b. variablecost.
c. stepcost.
d. mixedcost.
ANSWER: b

83. WhichofthefollowingstatementsisTRUEaboutfixedandvariablecosts?
a. Variablecostsareconstantintotalandfixedcostsareconstantperunit.
b. Bothcostsareconstantwhenconsideredonatotalbasis.
c. Bothcostsareconstantwhenconsideredonaper-unitbasis.
d. Fixedcostsareconstantintotalandvariablecostsareconstantperunit.
ANSWER: d
84. WhichofthefollowingstatementsisTRUEaboutrelevantrange?
a. Whencostsreachalevelabovetherelevantrange,theyareconsideredappropriateforanalysis.
b. Linearestimatesofaneconomist'scurvilinearcostfunctionisonlyvalidwithintherelevantrange.
c. Whencostsreachalevelbelowtherelevantrange,theyareconsideredappropriateforanalysis.
d. Thenonlinearrelevantrangeisignored,andonlythosecostsoutsideofthisrangemaybeconsidered.
ANSWER: b
85. WhichofthefollowingisNOTacorrectstatementconcerningcostbehavior?
a. Accordingtoeconomics,inthelongrun,allcostsarevariable.
b. Variablecostsincreaseintotalinrelationtotheactivitydriver.
c. Unitfixedcostsincreaseordecreaseinverselyinrelationtotheactivitydriver.
d. Noneoftheabove
ANSWER: d
86. Thefollowingisanexampleofamixedcost:
a. directmaterials
b. materialsusedinproduction
c. salarypluscommissiononsales
d. supervisorssalaries
ANSWER: c
87. Thelinearityassumptionismostlikelytobeacloseapproximationforanunderlyingnonlinearcostfunction
a. withinarelevantrangeofactivity.
b. overthelongrun.
c. forshort-runperiods.
d. bothaandc.
ANSWER: a

88. Mixedcosts,bydefinition,containboth
a. productandperiodcosts.
b. fixedandvariablecosts.
c. directandindirectcosts.
d. Controllableandno controllablecosts.
ANSWER: b
89. Assumingcostsarerepresentedontheverticalaxisandvolumeofactivityonthehorizontalaxis,whichofthefollowingcosts
wouldberepresentedbyalinethatstartsattheoriginandreachesamaximumvaluebeyondwhichthelineisparalleltothehori
zontalaxis?
a. totaldirectmaterialcosts
b. aconsultantpaid$100perhourwithamaximumfeeof$2,000
c. employeeswhoarepaid$15perhourandguaranteedaminimumweeklywageof$300
d. rentonexhibitspaceataconvention
ANSWER: b
90. LonghornEnterprisesrentsatruckforaflatfeeplusanadditionalchargepermile.Whattypeofcostistherent?
a. stepcost
b. fixedcost
c. variablecost
d. mixedcost
ANSWER: d
91. Ifproductionvolumeincreasesfrom16,000to20,000units,
a. totalcostswillincreaseby20percent.
b. totalcostswillincreaseby25percent.
c. totalvariablecostswillincreaseby25percent.
d. mixedandvariablecostswillincreaseby25percent.
ANSWER: c
92. MarloweCompanycurrentlyleasesadeliverytruckfromBurtonEnterprisesforafeeof$250permonthplus
$0.40permile.Managementisevaluatingthedesirabilityofswitchingtoamodern,fuelefficienttruck,whichcanbeleasedfromGoliath,Inc.,forafeeof$600permonthplus$0.05permile.Alloperatingcostsand
fuelareincludedintherentalfees.Ingeneral,aleasefrom
a. Goliath,Inc.,iseconomicallypreferabletoaleasefromBurtonEnterprisesregardlessofthemonthlyuse.
b. BurtonEnterprisesiseconomicallypreferablebelow1,000milespermonth.
c. BurtonEnterprisesiseconomicallypreferabletoaleasefromGoliath,Inc.,regardlessofthemonthlyuse.
d. BurtonEnterprisesiseconomicallypreferableabove1,000milespermonth.
ANSWER: b

93. Anequipmentleasethatspecifiesapaymentof$8,000permonthplus$7permachinehourusedisan
exampleofa
a. fixedcost.
b. variablecost.
c. stepcost.
d. mixedcost.
ANSWER: d
Figure3-1
SonorSystemsundertakesitsownmachinemaintenance.Thedepreciationontheequipmentis$20,000peryearandoperatin
gcostis$2permachinehour.Lastyear275,000machinehourswereusedtoproduce100,000units.
94. SeeFigure31.Developacostequationforthetotalmachinemaintenancecost.a.Y=$275,000
b.Y=$20,000
c.Y =$20,000 +$2 MHR
d. Y=$2MHR
ANSWER:
c
RATIONALE: Y=$20,000+2MHR

95. RefertoFigure3-1.Computethetotalvariablemachinemaintenancecostlastyear.a.
$275,000
b.
$240,000c.
$220,000d.
$550,000
ANSWER:
d
RATIONALE: TVC=$2(275,000)=$550,000
96. SeeFigure3-1.Computethetotalmachinemaintenancecostforlastyear.a.
$570,000
b.
$550,000c.
$420,000d.
$20,000
ANSWER:
a
RATIONALE: Y=$20,000+$2(275,000)=$570,000

97. SeeFigure3-1.Whatisthetotalmaintenancecostperunitproduced?a.$0.55
b.
$4.20c.
$5.50d.
$5.70
ANSWER:
d
RATIONALE: Y=$20,000+$2(275,000)/100,000=$5.70perunit
98. SeeFigure3-1.If300,000machinehourshadbeenworkedlastyear,whatwouldbethetotalmachinemaintenancecost?
a.$600,000
b.$620,000
c.$420,000
d.$220,000
ANSWER:
b
RATIONALE: Y=$20,000+$2(300,000)=$620,000
99. Theefficientlevelofactivityperformanceiscalled
a. practicalcapacity.
b. activitycapacity.
c. unusedcapacity.
d. acquiredcapacity.
ANSWER: a
100. Ifalltheactivitycapacityacquiredisnotused,thisisanexampleof
a. practicalcapacity.
b. activitycapacity.
c. unusedcapacity.
d. idealcapacity.
ANSWER: c
101.

Flexibleresources
a. aresuppliedasneeded.
b. areacquiredfromoutsidesources,notrequiringalong-termcommitment.
c. havenounusedcapacity.
d. alloftheabove.

ANSWER: d

102.

Committedresources
a. aresuppliedasneeded.
b. areacquiredbyacontractfortheexactamountoftheirusage.
c. mayexceedthedemandfortheirusage.
d. alloftheabove.

ANSWER: c
103. Whichofthefollowingisanexampleofacommittedfixedexpense?
a. depreciationonafactorybuilding
b. supervisor'ssalary
c. directlabor
d. insuranceonabuilding
ANSWER: a
104.
Theexpensesthatresultwhenorganizationsacquiremanymultiperiodservicecapacitiesbypayingcashupfrontor
byenteringintoanexplicitcontractthatrequiresperiodiccashpaymentsarecalled:
a. Managedfixedexpenses
b. Committedfixedexpenses
c. Discretionaryfixedexpenses
d. Periodexpenses
ANSWER: b
105.
Thetypeofresourcesthatareacquiredfromoutsidesources,wherethetermsofacquisitiondoNOTrequireanylo
ng-termcommitmentforanygivenamountoftheresourcearecalled:
a. Flexibleresources
b. Committedresources
c. Discretionaryfixedexpenses
d. Committedfixedexpenses
ANSWER: a
106. Thecostsincurredthatprovidelong-termactivitycapacity,usuallyastheresultofstrategicplanningarecalled:
a. Discretionaryfixedexpenses
b. Committedfixedexpenses
c. Mixedcosts
d. Step-variablecosts
ANSWER: b

107. Whichofthefollowingisanexampleofadiscretionaryfixedexpense?
a. contractworkers
b. propertytaxesonafactorybuilding
c. depreciationonafactorybuilding
d. insuranceonabuilding
ANSWER: a
108.
Thecostsincurredfortheacquisitionofshortrunactivitycapacity,usuallyastheresultofyearlyplanningarecalled:
a. Discretionaryfixedexpenses
b. Committedfixedexpenses
c. Mixedcosts
d. Step-variablecosts
ANSWER: a
109. Whenafirmacquirestheresourcesneededtoperformanactivity,itisobtaining
a. practicalcapacity.
b. resourceusage.
c. activitycapacity.
d. unusedcapacity.
ANSWER: c
110.
Theactivitybasedresourceusagemodelallowsmanagerstobettercalculatethechangesinresourcesupplyanddemandresultingfromd
ecisionssuchas:
a. tomakeorbuyproductioncomponents.
b. maximizationofindividualunitperformance.
c. increasingtheallocationofcosts.
d. focusingonmanagingcostsratherthanactivities.
ANSWER: a
111. Anursinghomerequiresonenurseforeachsixpatients.Thisisanexampleofa
a. fixedcost.
b. variablecost.
c. stepcost.
d. mixedcost.
ANSWER: c

112. Whichofthefollowingisanexampleofastep-fixedcost?
a. costofdisposablegownsusedbypatientsinahospital
b. costofsoakingsolutiontocleanjewelry(Eachjarcansoak50ringsbeforelosingeffectiveness.)
c. costoftuitionat$300percredithourupto15credithours(Hourstakeninexcessof15hoursarefree.)
d. costofdisposablesurgicalscissors,whicharepurchasedinincrementsof100
ANSWER: d
113. Salariespaidtoshiftsupervisorsareanexampleofa
a. step-variablecost.
b. mixedcost.
c. step-fixedcost.
d. variablecost.
ANSWER: c
Figure3-2
Acompanyusuallyprocesses20,000ordersatatotalcostof$300,000.Duringtheyear,only16,000orderswereprocessed.
114.
RefertoFigure32.Whatisthecostofunusedactivity?a.$300,000
b.$240,000
c.$30
d.$60,000
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:($300,000/20,000)4,000=$60,000
115.
RefertoFigure32.Whatisthecostofresourceusage?a.$300,000
b.$240,000
c.$30
d.$60,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:($300,000/20,000)$16,000=$240,000

Figure3-3
TheSandovalCompanyhasfourprocessengineersthatareeachabletoprocess1,500designchanges.Lastyear5,250design
changeswereproducedbythefourengineers.Eachengineerispaid$60,000peryear
116. RefertoFigure3-3.Calculatetheactivityrateperchangeorder.
a. $4perchangeorder
b. $10perchangeorder
c. $40perchangeorder
d. $15perchangeorder
ANSWER:
c
RATIONALE:activity rate = (4 60,000)/(4 1,500)= $40 per change order
117. RefertoFigure3-3.Calculatetheunusedcapacity.
a. 750changeorders
b. 1,375changeorders
c. 4,000changeorders
d. 2,000changeorders
ANSWER:
a
RATIONALE:Total capacityavailability actual activity= unused capacity (4 1,500) 5,250= 750 change orders
118.
RefertoFigure33.Whatistheunusedcapacityindollars?a.$60,000
b.$30,000c.
$240,000d.
$15,000
ANSWER:
b
RATIONALE: unusedcapacityactivityrate=unusedcapacityindollars750$40=$30,000
119. WhichofthefollowingisNOTamethodofdeterminingcostbehavior?
a. industrialengineeringmethod
b. accountanalysismethod
c. statisticalandquantitativemethods
d. confidenceintervalmodel
ANSWER: d

120. Themethodforanalyzingcostbehaviorthatgenerallyclassifiesgeneralledgeraccountsis
a. accountanalysismethod.
b. multipleregressionmethod.
c. industrialengineeringmethod.
d. learningcurvemethod.
ANSWER: a
121.
Thecostbehaviormethodthatmayusetimeandmotionstudiestodeterminetheactivitiesandamountsforco
stbehavioranalysisis
a. accountanalysismethod.
b. industrialengineeringmethod.
c. regressionanalysis.
d. high-lowmethod.
ANSWER: b
122.
WhichofthefollowingdecisionmakingtoolswouldNOTbeusefulindeterminingtheslopeandinterceptofamixedcost?
a. scattergraphs
b. least-squaresmethod
c. high-lowmethod
d. accountanalysismethod
ANSWER: d
123. Ifatagivenvolumetotalcostsandfixedcostsareknown,thevariablecostsperunitmaybecomputedasfollows:
a. (Totalcosts-Fixedcosts)/Unitvolume
b. (Totalcosts/Unitvolume)-Fixedcosts
c. (Totalcosts Unitvolume)-(Fixedcosts/Unitvolume)
d. Totalcosts-(Fixedcosts/Unitvolume)
ANSWER: a
124. IntheformulaY=F+VX,VXreferstothe
a. totalvariablecosts.
b. intercept.
c. dependentvariable.
d. independentvariable.
ANSWER: a

125. IntheformulaY=F+VX,Vreferstothe
a. dependentvariable.
b. intercept.
c. slope.
d. totalvariablecosts.
ANSWER: c
126. IntheformulaY=F+VX,Freferstothe
a. slope.
b. intercept.
c. dependentvariable.
d. independentvariable.
ANSWER: b
127. IntheformulaY=F+VX,Yreferstothe
a. slope.
b. intercept.
c. dependentvariable.
d. independentvariable.
ANSWER: c
128. IntheformulaY=F+VX,Xreferstothe
a. slope.
b. intercept.
c. dependentvariable.
d. independentvariable.
ANSWER: d
129. Totalcostsmaybecomputedasfollows:
a. Fixedcosts+(VariablecostsperunitUnitvolume)
b. (FixedcostsperunitUnitvolume)+Variablecosts
c. Fixedcostsperunit+(VariablecostsperunitUnitvolume)
d. (FixedcostsperunitUnitvolume)+Variablecostsperunit
ANSWER: a

130.
AmigosIndustriesanalyzedtherelationshipbetweentotalfactoryoverheadandchangesindirectlaborhours.I
tfoundthefollowing:Y=$6,000+$6X
TheYintheequationisanestimateof
a. totalvariablecosts.
b. totaldirectlaborhours.
c. totalfactoryoverhead.
d. totalfixedcosts.
ANSWER: c
131. Assumethefollowinginformation:
Volume
90units
98units
106units

TotalCost
$1,200
$1,300
$1,400

Whatisthevariablecostperunit?
a.
$15.00b.
$12.50c.
$13.75d.
$14.78
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:($1,400-$1,300)/(106-98)=$12.50

132. Thefollowingcostfunctionsweredevelopedformanufacturingoverheadcosts:
ManufacturingOverheadCost
Electricity
Maintenance
Supervisors'salaries
Indirectmaterials

CostFunction
$200+$20perdirectlaborhour
$400+$30perdirectlaborhour
$20,000permonth
$16perdirectlaborhour

IfJanuaryproductionisexpectedtobe2,000unitsrequiring3,000directlaborhours,estimatedmanufacturingoverheadc
ostswouldbe
a.$20,733.b.
$198,000.c.
$152,600.d.
$218,600.
ANSWER:

RATIONALE:

SUPPORTING CALCULATIONS:
Electricity[$200+($203,000)]
Maintenance[$400+($303,000)]

$ 60,200
90,400

Supervisors'salaries

20,000

Indirectmaterials($163,000)

48,000

Overhead

$218,600

133. Advantagesofthemethodofleastsquaresoverthehigh-lowmethodincludeallofthefollowingEXCEPT
a. astatisticalmethodisusedtomathematicallyderivethecostfunction.
b. onlytwopointsareusedtodevelopthecostfunction.
c. thesquareddifferencesbetweenactualobservationsandtheline(costfunction)areminimized.
d. alltheobservationshaveaneffectonthecostfunction.
ANSWER: b
134. Weaknessesofthehigh-lowmethodincludeallofthefollowingEXCEPT
a. onlytwoobservationsareusedtodevelopthecostfunction.
b. thehighandlowactivitylevelsmaynotberepresentative.
c. themethoddoesnotdetectifthecostbehaviorisnonlinear.
d. themethodisrelativelycomplexanddifficulttoapply.
ANSWER: d
135. Thehigh-lowmethodmaygiveunsatisfactoryresultsif
a. thepointsareunrepresentative.
b. volumeofactivityisheavy.
c. volume ofactivity islight.
d. the datapointsallfallon aline.
ANSWER: a
Figure3-4
Thefollowinginformationisavailableforelectricitycostsforthelastsixmonthsoftheyear:

Month
January
February
March
April
May
June

ProductionVolume
1,400
2,800
3,200
1,750
1,200
2,100

ElectricityCosts
$2,200
5,400
5,700
3,900
2,400
4,050

136. RefertoFigure3-4.Usingthehigh-lowmethod,estimatedvariablecostperunitofproductionis
a.
$1.75b.
$1.65c.
$1.53d.
$1.26
ANSWER:
b
RATIONALE:

SUPPORTINGCALCULATIONS:($5,700-$2,400)/(3,200-1,200)=$1.65

137.
RefertoFigure34.Whatarethefixedcosts?a.$420
b.$100c.
$200
d.noneofthese
ANSWER:
a
RATIONALE: $2,400=FC+$1.65(1,200)
FC=$2,400-$1,980=$420
138. Thefollowinginformationwasavailableaboutsuppliescostforthesecondquarteroftheyear:

Month
July
August
September

ProductionVolume
700
1,600
600

SuppliesCost
$3,185
7,100
2,700

Usingthehigh-lowmethod,theestimateofsuppliescostat1,000unitsofproductionis
a.$2,700.
b.$4,460.
c.$4,900.
d.$7,100.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Variablecost=($7,100-$2,700)/(1,600-600)=$4.40Fixedcost=
$7,100- (1,600$4.40)=$60Totalcost=$60+$4.40X=$60+($4.401,000)=$4,460
139. StanfilCorporationdevelopedacostfunctionformanufacturingoverheadcostsof
Y=$8,000+$1.60X.Estimatedmanufacturingoverheadcostsat10,000unitsofproductionarea.
$16,000.
b.
$17,600.c.
$24,000.d.
$26,000.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:Y=$8,000+($1.6010,000)=$24,000

140. BarronEnterpriseshasthefollowinginformationaboutitstruckfleetmilesandoperatingcosts:

Year
2016
2017
2018

Miles
400,000
480,000
560,000

OperatingCosts
$256,000
280,000
320,000

Whatisthebestestimateoftotalcostsusingthehigh-lowmethodiftheexpectedfleetmileagefor2018is500,000
miles?
a.
$288,000b.
$296,000c.
$256,000d.
$320,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:($320,000-$256,000)/(560,000-400,000)=$0.40permileFixed
costs=$320,000- (560,000$0.40)=$96,000Totalcosts=$96,000+($0.40500,000)
=$296,000
141.
TheLadderCompanywantstodevelopacostestimatingequationforitsmonthlycostofelectricity.Ithasthefoll
owingdata:

Month
February
May
August
November

CostofElectricity
$8,100
9,000
10,200
8,700

DirectLaborHours
750
850
1,000
800

Usingthehigh-lowmethod,whichofthefollowingisthebestequation?

a.Y=$900+
$12.00Xb.Y= $900+
$8.40Xc.Y=$1,800+
$8.40Xd.Y=$2,400+
$8.40X
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:($10,200-$8,100)/(1,000-750)=$8.40Fixedcosts=$10,200
-(1,000 $8.40)=$1,800

Figure3-5
LongberryCorporationmanufacturesandsellspartyitems.Thefollowingrepresentativedirectlaborhoursandproductioncost
sareprovidedforafour-monthperiod:

Month
May
June
July
August
Total

Let

a
b
n
X
Y
S

DirectLaborHours
3,600
4,800
6,000
4,800
19,200

=
=
=
=
=
=

ProductionCosts
$15,000
17,500
20,000
17,500
$70,000

Fixedproductioncostspermonth
VariableproductioncostsperdirectlaborhourNu
mberofmonths
DirectlaborhourspermonthTota
lmonthlyproductioncostsSumm
ation

142. RefertoFigure3-5.Themonthlyproductioncostcanbeexpressedas
a. X=aY+b
b. X=a+bY
c. Y=a+bX
d. Y=b+aX
ANSWER: c

143.

RefertoFigure3-5.Usingthehigh-lowmethod,whatisthecostformulaforestimatingcosts?

a.Total cost =$20,000 + $2.08X

b. Totalcost=$7,500+$2.08X
c. Totalcost=$5,000+2.08X
d. Totalcost=$2.08X
ANSWER:

RATIONALE: ($20,000-$15,000)/(6,000-3,600)=2.0833$20,000=FC +(6,000 2.08)=$7,500

144.
RefertoFigure3-5.Predictacostfor5,000laborhours.
a.$17,900
b.$17,700
c.$16,667
d.$30,400
ANSWER:
a
RATIONALE: Y=$7,500+2.08(5,000)=$17,900
145. Thecostfunctionderivedbytheleast-squarescostestimationmethod
a. islinear.
b. mustbetestedforminimaandmaxima.
c. isparabolic.
d. isquadratic.
ANSWER: a
146. Thescatterplotmethodofcostestimation
a. isinfluencedbyextremeobservations.
b. requirestheuseofjudgment.
c. usestheleast-squaresmethod.
d. issuperiortoothermethodsinitsabilitytodistinguishbetweendiscretionaryandcommittedfixedcosts.
ANSWER: b
147.
Thefollowinginformationwastakenfromacomputerprintoutgeneratedwiththeleastsquaresmethodforuseinestimatingoverheadcosts:
Slope
Intercept
Correlation coefficient
Activityvariable

45
5,700
.72
Directlaborhours

Thecostformulais
a. Overhead=$5,700-$45X
b. Overhead=$5,700+$45X
c.Overhead=$5,700+
($450.72)d.Overhead=$5,7000.72
ANSWER: b

148. Whichofthefollowingisanadvantageofusingthescatterplotmethodoverthehigh-lowmethodtoestimatecosts?
a. Itisastatisticalmethodtodeterminethebestfit.
b. Acostanalystcanreviewthedatavisuallyandeliminateoutliers.
c. Thequalityofthecostformulareliesontheobjectivejudgmentoftheanalyst.
d. Thecostformulacanbedeterminedsimplybylookingattwopointsofdata.
ANSWER: b
149.
SpokaneCorporationfounditsmaintenancecostandsalesdollarstobesomewhatcorrelated.Lastyear'shighandlo
wobservationswereasfollows:

MaintenanceCos t
Sales
$46,000
$600,000
$52,000
$800,000
Whatisthefixedportionofthemaintenancecost?
a.
$28,000b.
$52,000c.
$60,000d.
$14,000
ANSWER:
a
RATIONALE
:
SUPPORTINGCALCULATIONS:($52,000-$46,000)/($800,000-$600,000)=0.03Fixedcosts=
$52,000-(0.03$800,000)=$28,000
150.

Inthemethodofleastsquares,thedeviationisthedifferencebetweenthe
a. predictedandestimatedcosts.
b. predictedandaveragecosts.
c. averageandactualcosts.
d. predictedandactualcosts.

ANSWER: d
Figure3-6
TheStanfordCompanyincurredthefollowingmaintenancecostduringafivemonthperiod:
Month
June
July
August
September
October

ProductionVolume
75
115
190
60
135

MaintenanceCosts
$250
310
400
240
355

151. RefertoFigure36.Usingacomputerorcalculator,computetheestimateofvariablecostperunitofproductionusingthemethodofleastsquares.
Roundedtotwodecimalplaces,thisvaluewouldbe
a.$3.21.

b.$2.70.
c.$1.31.
d.$1.23.
ANSWER:

RATIONALE: SUPPORTING CALCULATIONS:

Month

XY

x2

June

75

$250

$18,750

5,625

July

115

310

35,650

13,225

August

190

400

76,000

36,100

60

240

14,400

3,600

October

135

355

47,925

18,225

Totals

575

1,555

$192,725

76,775

September

V=
= [$192,725 - (575 $1,555/5)]/[76,775 - (575)2/5]
= ($192,725 - $178,825)/(76,775 - 66,125)
= $13,900/10,650
= $1.31
152. RefertoFigure 36.Usingacomputerorcalculator,computetheestimateofthefixedportionofmaintenancecostsusingthemetho
dofleastsquares.Roundedtodollars,thisvaluewouldbe
a. $575
b. $166
c. $160
d. $66

ANSWER: c
RATIONALE:
F= ( Y/n-v X/n)
=[$1,555/5-($1.31X575/5)]
=$311-$150.65=$160.35or$160(rounded)

153. RefertoFigure 3-6.Usingacomputerorcalculator,computetheestimateofmaintenancecosts

at100unitsof productionusingthemethod ofleastsquares.Thisvaluewouldbe

a.$291.
b.$321.
c.$336.
d.$698.
ANSWER:
a
RATIONALE:
y=$160+$1.31X=$160+($1.31100)=$291
154. Thehypothesistestofcostparameters
a. isnottestedbythet-statistic.
b. indicateswhethertheparametersaredifferentfromzero.
c. tellsthet-valueofthesignificanceachieved.
d. alloftheabove.

ANSWER:b
155. Thecoefficientofdeterminationis
a. ameasureofthevariabilityofactualcostsaroundthe cost-estimatingequation.
b. usedtoconstructprobabilityintervalsforcostestimates.
c. astandardizedmeasureofthedegreetowhichtwovariablesmovetogether.
d. ameasureofthepercentvariationinthedependentvariablethatisexplainedbyanindependentvariable.

ANSWER:d

Figure3-7
Thefollowingcomputerprintoutestimatedoverheadcostsusingregression:
tforH(0)
Estimate
100.41
14.05

Parameter
Intercept
DLH
RSquare(R2)
StandardError(Se)
Observations

Parameter=0
4.81
6.78

Std.error
ofparameter
20.88
2.07

Pr>t
0.0003
0.0001

0.80
25.03
17

Pleasefindthefollowingstatisticaltable

degreeso
ffreedom

90%

95%

99%

degreesoff
reedom

90%

95%

99%

1
2
3
4
5
6
7
8
9
10

6.314
2.920
2.353
2.132
2.015
1.943
1.895
1.860
1.833
1.812

12.708
4.303
3.182
2.776
2.571
2.447
2.365
2.306
2.262
2.228

63.657
9.925
5.841
4.604
4.032
3.707
3.499
3.355
3.250
3.169

11
12
13
14
15
16
17
18
19
20

1.796
1.782
1.771
1.761
1.753
1.746
1.740
1.734
1.729
1.725

2.201
2.179
2.160
2.145
2.131
2.120
2.110
2.101
2.093
2.086

3.106
3.055
3.055
3.012
2.947
2.921
2.898
2.878
2.861
2.845

Duringthelastaccountingperiod10,000DLHwereworked
.
156. RefertoFigure3-7.Whatisthemodel?
a. Overhead=4.81+6.78DLH
b. Overhead=100.41+14.05DLH
c. Overhead=14.05+100.41DLH
d. DLH=4.81+6.78Overhead
ANSWER: b

157. RefertoFigure3-7.Thecoefficientofdeterminationinthismodeltellsusthat
a. theslopeis14.05.
b. theinterceptis100.41.
c. 80percentofthevariationintheoverheadvariableisexplainedbyDLH.
d. theslopeissignificant.
ANSWER: c
158. RefertoFigure3-7.Thehypothesistestsofthecostparametersindicate(s)that
a. theslopeissignificantlydifferentfromzero.
b. theinterceptissignificantlydifferentfromzero.
c. boththeslopeandinterceptarenotsignificant.
d. boththeslopeandinterceptaresignificant.
ANSWER: b
159. RefertoFigure3-7.Findthetvaluefora90percentconfidencelevel.a.1.740
b.1.753
c.6.314
d.2.920
ANSWER:
b
RATIONALE: degreesoffreedom=#ofobservations-#ofvariables 15=17-2thetvaluefor15degreesoffreedomat 90%=1.753
160. RefertoFigure37.Whatistheconfidenceintervalforthepredictedoverheadcostroundedtothenearestwholenumberfora90per
centconfidencelevel?
a. predictedvaluebetween140,557and140,644
b. predictedvaluebetween140,644and140,731
c. predictedvaluebetween87,000and130,500
d. noneofthese
ANSWER:
a
RATIONALE:thetvaluefor15degreesoffreedomat90%=1.753predictedcost=Y=100.41+(14.0510,000
DLH)=140,600.41confidenceinterval=predictedcost(tvaluestandarderror)=140,600.41(1.75325.03)=140,600.4143.88140,557predict
edvalue140,644
161. Acoefficientofdeterminationof0.91means
a. thetwovariablesmovetogetherinthesamedirectionandhaveastrongrelationship.
b. theparameterisnotsignificant.

c. themodelissignificant91percentofthetime.
d. thattheindependentvariableexplains91percentofthecost.
ANSWER: d
162. Whatisthedifferencebetweenacorrelationequalto-1andacorrelationequalto0?
a. Acorrelationequalto1meanstwoalternativesaremovinginthesamedirection,whereasacorrelationof0meanstheyaremoving
inoppositedirections.
b. Acorrelationequalto1meanstwoalternativesaremovinginthesamedirection,whereasacorrelationof0meanstheyareunrelat
ed.
c. Acorrelationequalto1meanstwoalternativesaremovinginoppositedirections,whereasacorrelationof0meanstheyaremovin
ginthesamedirection.
d. Acorrelationequalto1meanstwoalternativesaremovinginoppositedirections,whereasacorrelationof0meanstheyareunrela
ted.
ANSWER: d
163. Amanagerialaccountanthasdeterminedthefollowingrelationshipsbetweenoverheadandseveralpossiblebases:
Basis
Direct labor hours
Direct labor dollars
Machine hours
Employee minutes in coffee breaks

Correlation with Total

Overhead
0.842
0.279
-0.837
-0.243

Thebestbasisforoverheadapplicationis
a. directlaborhours.
b. coffeebreaks.
c. directlabordollars.
d. machinehours.
ANSWER: a
164. Whatisthedifferencebetweenacorrelationequalto-1andacorrelationequalto+1?
a. Acorrelationequalto-1meanstwoalternativesaremovinginthesamedirection,whereasacorrelationof
+1meanstheyaremovinginoppositedirections.
b. Acorrelationequalto-1meanstwoalternativesaremovinginthesamedirection,whereasacorrelationof
+1meanstheyareunrelated.
c. Acorrelationequalto-1meanstwoalternativesaremovinginoppositedirections,whereasacorrelationof
+1meanstheyaremovinginthesamedirection.
d. Acorrelationequalto-1meanstwoalternativesaremovinginoppositedirections,whereasacorrelationof
+1meanstheyareunrelated.

ANSWER: c

165. Whatdoesacorrelationcoefficientnear+1mean?
a. Twovariablesaremovingintheoppositedirection.
b. Twovariablesaremovinginthesamedirection.
c. Twovariablesareunrelated.
d. Onevariableisnotagoodpredictoroftheother.
ANSWER: b
166. Theappropriaterangeforthecoefficientofcorrelatio
n(r)is
a.0 r 1.
b.-%r+%.
c.-1r 1.
d.-1r+%.
ANSWER: c
167. Whatdoesacorrelationcoefficientnear0mean?
a. Twovariablesaremovingintheoppositedirection.
b. Twovariablesaremovinginthesamedirection.
c. Twovariablesareunrelated.
d. Onevariableisagoodpredictoroftheother.
ANSWER: c
168. WhichofthefollowingstatementsisNOTtrue?
a. Inselectinganindependentvariableforcostbehavioranalysis,itisimportanttodeterminetheactivitythatcaus
esthecostbeinganalyzedtooccur.
b. Professionaljudgmentisveryimportantinselectinganactivitymeasureforaparticularcost.
c. Alowcorrelationbetweentwovariablesprovesthatonecausestheother.
d. Theleast-squarescostestimationmethodcanbeusedtomeasurethelinearfunction.
ANSWER: c
169. Whatdoesacorrelationcoefficientnear-1mean?
a. Twovariablesaremovingintheoppositedirection.
b. Twovariablesaremovinginthesamedirection.
c. Twovariablesareunrelated.
d. Onevariableisnotagoodpredictoroftheother.
ANSWER: a

170. TheconfidenceintervalforthepredictedvalueofY
a. isameasureofthelikelihoodthatthepredictionintervalwillnotcontaintheactualcost.
b. isconstructedbymultiplyingthet-statistictimesthestandarderror.
c. canonlybecomputedwith95percentconfidence.
d. alloftheabove.
ANSWER: b
171. Thefollowingdataisavailableofestimatedoverheadcostsusinglinearregression:

Parameter
Intercept
DLH

Estimate
100.41
14.05

tforH(0)
Parameter=0
4.81
6.78

RSquare(R2)
StandardError(Se)
Observations
TableofSelectedValues:tDistribution
Degreesof
Freedom15
16
17
18
19

Pr>t
0.0003
0.0001

0.80
25.03
17

90%

95%

99%

1.753
1.746
1.740
1.734
1.729

2.131
2.120
2.110
2.101
2.093

2.947
2.921
2.898
2.878
2.861

WhatistheintervalaroundYif95percentconfidenceisdesired?
a.Y20.024
b.Y43.87759c.
Y52.8133d.Y
53.33893
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:2.13125.03=53.33893

Std.error
ofparameter
20.88
2.07

Figure3-8
Thefollowingcomputerprintoutestimatedoverheadcostsusingmultipleregression:

Parameter
Intercept
Setuphours
#ofparts

Estimate
1000

tforH(0)
Parameter=0
1.96

Pr>t
0.0250

Std.error
ofparameter
510.204

25

81.96

0.0001

0.305

100

9.50

0.0001

10.527

RSquare(R2)
StandardError(Se)
Observations

0.94
75.00
160

Duringtheyearthecompanyused1,000setuphoursand500parts.
172. RefertoFigure3-8.Thedegreesoffreedomforthemodelisa.158
b. 157
c. 159
d. 160
ANSWER: b

173. RefertoFigure3-8.Whichslopeandinterceptparametersaresignificantatthe0.05level?
a. intercept
b. setuphours
c. numberofparts
d. alloftheabove
ANSWER: d
174. RefertoFigure3-8.Themodelbeingmeasuredis
a. Overhead=1,000+25(Setuphours)+100(#ofparts)
b. Overhead=510+0.305(Setuphours)+10.527(#ofparts)
c. Overhead=0.98+40.98(Setuphours)+4.865(#ofparts)
d. Overhead=1,000+25(Setuphours)
ANSWER: a

175. RefertoFigure3-8.Whatisthepredictedoverheadcost?a.
$2,500
b.
$75,000c.
$76,000
d.noneofthese
ANSWER:
c
RATIONALE: overhead=$25(1,000)+$100(500)+$1,000=$76,000
176. Whichofthefollowingequationsusesmultipleregression?
a. Overhead=a+b(MH)
b. Overhead=a+b(DLH)
c. DLCosts=a+b(MH)
d. Overhead=a+b(DLH)+c(MH)
ANSWER: d
177. WhichofthefollowingstatementsisTRUEaboutthelearningcurve?
a. Thecurvedecreasesatanincreasingrate.
b. Thelearningeffectwilleventuallydisappearasthenumberofunitsproducedincreases.
c. Failuretorecognizelearningcurveeffectswillcauseunitsproducedlaterinanewproductionprocesstoreceivel
esscostthantheyshould.
d. Allofthese.
ANSWER: b
178. WonderCompanyisplanningtointroduceanewproductwithan80percentincrementalunittimelearningcurveforproductionforbatchesof1,000units.Thevariablelaborcostsare$30perunitforthefirst1,000unitbatch.Eachbatchrequires100hours.Thereare$10,000infixedcostsnotsubjecttolearning.Whatisthecumulativetotalti
me(laborhours)toproduce2,000units?
a. 180hours
b. 160hours
c. 100hours
d. 80hours
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:(1000.80)+100=180hours

Figure3-9
HerefordCompanyisplanningtointroduceanewproductwithan80percentlearningrateforproductionforbatchesof1,000u
nits.Thevariablelaborcostsare$30perunitforthefirst1,000unitbatch.Eachbatchrequires100hours.Thereare$10,000infixedcostsnotsubjecttolearning.
179. RefertoFigure3-9.Whatisthecumulativetotaltime(laborhours)toproduce2,000unitsbasedonthecumulativeaveragetimelearningcurve?
a. 20hours
b. 80hours
c. 100hours
d. 160hours
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:(1000.80)2=160hours
180. RefertoFigure39.Whatisthebatchunittime(laborhours)toproduce2,000unitsbasedonthecumulativeaveragetimelearningcurve?
a. 20hours
b. 60hours
c. 100hours
d. 80hours
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:(1000.80) 2=160hours-100=60hours
181. RefertoFigure3-9.Whatisthecumulativetotaltimeusingtheincrementalunittimelearningcurvetoproduce2,000units?
a. 180
b. 100
c. 90
d. 80
ANSWER:

RATIONALE: SUPPORTING CALCULATIONS: 0.80 100= 80+ 100= 180

182. RefertoFigure3-9.Whatisthecumulativeaveragetimeperbatchusingtheincrementalunittimelearningcurvefor2,000units?
a. 180
b. 100
c. 90
d. 80
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS: [(0.80100)+100]/2=90

183. Thelearningcurvethatdecreasesbyaconstantpercentageeachtimethecumulativequantitydoublesisknownasthe
a. cumulativeaverage-timemodel.
b. cumulativetotal-timemodel.
c. incrementalunit-timemodel.
d. decrementalaverage-timemodel.
ANSWER: c
184. ApparentCorp.hasdevelopedthefollowinginformationonproductcostsandinventoriesforathree-monthperiod:

Finishedgoodsinventory,units:
Beginning
Manufactured
Available
Sold
Ending
Manufacturingcosts

April

May

June

20
25
45
25
20

25
40
65
40
25

30
35
65
50
15

$4,000

$6,000

$5,5,500

Basedonmanagerialjudgment,thebestpredictorofmanufacturingcostsis
a. beginninginventory.
b. unitsmanufactured.
c. endinginventory.
d. unitsavailable.
ANSWER: b
185. Ifamotorcyclemanufacturerchangesfromskilledlabortocomputer-controlledassemblyprocedures,thepastdata
a. areoflittleornovalueinpredictingfuturecosts.
b. areusefulinpredictingfuturecosts.
c. arerepresentativeoffuturecosts.
d. shouldbeusedwithoutadjustmentstopredictfuturecosts.
ANSWER: a

186. TornadoEnterpriseshasthefollowinginformationavailableregardingcostsatvariouslevelsofmonthlyproduction:

Productionvolume
Directmaterials
Directlabor
Indirectmaterials
Supervisors'salaries
Depreciationonplantandequipment
Maintenance
Utilities
Insuranceonplantandequipment
Propertytaxesonplantandequipment
Total

7,000

10,000

$70,000
56,000
21,000
12,000
10,000
32,000
15,000
1,600
2,000
$219,600

$100,000
80,000
30,000
12,000
10,000
44,000
21,000
1,600
2,000
$300,600

Required:
a. Identifyeachcostasbeingvariable,fixed,ormixedbywritingthenameofeachcostunderoneofthefollow
ingheadings:VariableCostsFixedCostsMixedCosts
b. Developanequationfortotalmonthlyproductioncosts.
c. Predicttotalcostsforamonthlyproductionvolumeof8,000units.
ANSWER:
a.

b.

Variable Costs
Direct materials
Direct labor
Indirect materials

Fixed Costs
Supervisors' salaries
Depreciation
Insurance
Property taxes

Mixed Costs
Maintenance
Utilities

Variablecosts=($300,600-$219,600)/(10,000-7,000)=$27.00
Fixedcosts=$300,600($27.0010,000)=$30,600permonth
Totalmonthlyproductioncosts=$30,600+$27.00(monthlyproductionunits)c.
Totalcosts=$30,600+($27.008,000)=$246,600

187. Foreachofthefollowingsituations,drawagraphthatbestdescribesthecostbehaviorpattern.Theverticalaxisrepresentsc
osts,andthehorizontalaxisrepresentsvolume.
a. Directmaterialsperunit
b. Depreciationexpenseonabuildingperunit
c. Anemployeepaid$50perhourwithaguaranteedsalaryof$1,000perweek
d. Aconsultantpaid$100perhourwithamaximumfeeof$2,000
e. Salariesofteacherswhereeachteachercanhandleamaximumof15students
ANSWER:

188. TheHamiltonMillsCompanycostaccountantwantstodeterminethecostbehaviorforoverhead.Basedonobservationanddi
scussionwiththeplantworkers,thefollowingaccountshavebeenidentifiedasthemostrelevant:Supervisorsalariesanddepr
eciationarebelievedtobegenerallyfixed;Indirectlabor,Utilities,andPurchasingaregenerallybelievedtobevariable;Indirec
tlaborprimarilyisresponsibleformovingmaterials;Utilitycostisprimarilycausedbytheelectricitytorunmachinery;andPur
chasingcostsaredrivenbythenumberofpurchaseorders.Theseaccountsandtheirbalancesaregivenbelow:

Indirect
Labor
January
February
March
April
May
June
Total

$ 28,500
31,600
33,600
41,400
40,000
34,000
$209,100

Utilities
$ 24,000
21,200
25,000
25,000
25,000
25,000
$145,200

Purchasing
$ 76,400
70,800
75,200
80,400
79,800
79,400
$462,000

Supervisory
Salaries
$ 40,000
46,000
64,000
55,600
50,800
34,000
$290,400

Depreciation
onPlantandE
quipment
$ 13,000
13,000
13,000
13,000
13,000
13,000
$ 78,000

Informationontheactivitiesisgivenbelow:

#ofmoves
340
380
400
500
480
420
2,520

January
February
March
April
May
June
Total

machine
hours

purchase
orders

5,400
5,200
5,800
6,200
6,000
5,600
4,200

250
300
450
380
340
200
1,920

Required:
1. Whydidthecostaccountantdecidethatsalariesanddepreciationwerefixed?
2. Calculatetheaverageaccountbalanceforeachofthe5accountsandcalculatetheaveragemonthlyamountforeachofthethre
edrivers.
3. Calculatethefixedoverheadandvariableratesforeachofthecosts.Writeanequationforthetotaloverheadcost.
4. InJanuary,490moves;4,375machinehours,and220purchaseorderswereexpected.Whatistheamountofoverheadpred
icted?
ANSWER: 1.Depreciationisfixed.Salariesisfixedbecauseitdoesnotvarywiththedrivers.
2.
Indirect

Utilities Purchasing Supervisory

Depreciationonlabor
PlantandEquipment

Total
$209,100 $145,200
# ofmonths
6
6
AVG
$34,850 $24,200

Total
#ofmonths
avg

#ofmoves
2,520
6
420

$462,000
6
$77,000

Salaries

$290,400
6
$48,400

$78,000
6
$13,000

machinehours
34,200
6

purchaseorders
1,920
6

5,700

320

3.FOH = $48,400 + $13,000 =

$61,400VC=IL$34,850/420=$82.98
Utilities=$24,200/5,700=$4.246Purcha
sing=$77,000/320=$240.625
TotalOH=$61,400+$82.98(moves)+$4.246(MHR)+$240.625(PO)
4.TotalOH=$61,400+$82.98(490)+$4.246(4,375)+$240.625(220)=$173,573.95

189. Theaverageunitcostatamonthlyvolumeof9,000unitsis$3,andtheaverageunitcostatamonthlyvolumeof22,500unitsis
$2.10.
Required:
Developanequationfortotalmonthlycosts.
Volume
9,000
22,500

ANSWER:

AverageUnitCost
$3.00
2.10

=
=
=

TotalCosts
$27,000
47,250

Variablecostperunit=($47,250-$27,000)/(22,5009,000)=$1.50Fixedcostspermonth=$27,000-($1.509,000)=$13,500
Totalmonthlycosts=$13,500+$1.50(#ofunits)
190. Lowell&Companyhasthefollowingcostdatapertainingtotheproductionofsmalldesks:

UnitsProduced
150
120
210
190
140

DirectLaborCosts
$1,600
1,500
1,750
1,700
1,600

OverheadCosts
$2,800
2,570
2,910
2,850
2,600

Required:
a. Plottheprecedingdirectlaborcostsandoverheadcostsusingthescatterplotmethod.Overheadcostsshoul
dbeontheverticalaxis.
b. Computethefixedandvariablecomponentsoftheoverheadcostsusingthehigh-lowmethod.
ANSWER: a.

b.

b=($2,910-$2,570)/(1,750-1,500)=136%ofDLCostsa=
$2,910 - ($1,750 1.36) = $530

Factoryoverheadcosts=$530+1.36(DLCosts)

191. ThefollowingdatawereobtainedfromthebooksofThomasCompany:

Month
1
2
3
4
5
6

OverheadCosts
$14
18
25
12
26
8

Thenormalequationsare

DirectLaborHours
3
5
7
4
8
2

XY=aX+bX2
Y=an+bX

Required:
Useacomputerorcalculatortopreparethefollowing:
a. Plotthedataforoverheadcostasafunctionofdirectlaborhoursusingthescatterplotmethod.
b. Computethefixedandvariablecomponentsoftheoverheadcostsusingthehigh-lowmethod.
c. Computethefixedandvariablecomponentsoftheoverheadcostsusingtheleast-squaresmethod.
d.Discussthestrengthsandweaknessesofthethreedifferentcostestimationtechniquesusedinpartsa,b,andc.
ANSWER:
a.
.

b.

b=($26-$8)/(8-2)=$3perDLH
a =$26(8$3)=$2
Overheadcosts=$2+$3(DLH)

c.
X

XY

3
5
7
4
8
2
29

14
18
25
12
26
8
10

42
90
175
48
208
16
579

X2
9
25
49
16
64
4
167

Normalequations:
(1)
(2)

579= 29a +167b

103= 6a+ 29b

Multiplying(1)by6 and(2)by 29,weget:

3,474=174a+1,002b
-2,987=174a+841b
487=
161bb=$3.0
248
Substituting3.0248intothefirstequationforb,weget:
579=29a+(1673.0248)
a=$2.5468
TheleastsquarescostestimationequationisOver
headcosts=$2.5468+$3.0248(DLH)
d.
ScatterplotMethod:Scattergraphshelpidentifyrepresentativehighandlowvolumes.Theyalsoareusefu
lindeterminingifcostscanbereasonablyapproximatedbyastraightline.Scattergraphsaresimpletouse,
butprofessionaljudgmentisrequiredtodrawarepresentativestraightlinethroughtheplotofhistoricalda
ta.Thismethodissubjectiveinnatureandprobabilityintervalscannotbedeveloped.
HighLowMethod:Thismethodusesdatafromtwotimeperiodstoestimatefixedandvariablecosts.Thisisago
odmethodtousewhendataislimited.Itisasubjectivemethodandprobabilityintervalscannotbedevelop
ed.Itisveryimportantthatthehighandlowvolumesrepresentthenormaloperatingconditionsofallobser
vations.Again,professionaljudgmentisrequiredtoselecttheappropriatedata.

LeastSquaresMethod:Thismethodusesallavailabledata.Itusesamathematicalcriterion,whichprovidesfora
nobjectiveapproachtocostestimation.Inaddition,thismethodcanprovideinformationonhowgoodthec
ostestimatingequationfitsthehistoricalcostdataandinformationneededtoconstructprobabilityinterval
sforcostestimates.Italsocanbeusedtodevelopequationsthatarenotlinearinnature.Thismethodrequire
smoredatapointsthanthehigh-loworscatterplotmethods.

192. MachinehoursandelectricitycostsforLindberghIndustriesfortheyear2016areasfollows:

Month
January
February
March
April
May
June
July
August
September
October
November
December

MachineHours
2,000
2,320
1,520
2,480
3,040
2,640
3,280
2,800
1,600
2,960
3,760
3,360

ElectricityCosts
$9,200
10,500
6,750
11,500
14,125
11,000
12,375
11,375
7,750
13,000
15,500
13,875

Required:
a. Usingthehigh-lowmethod,developanestimateofvariableelectricitycostspermachinehour.
b. Usingthehigh-lowmethod,developanestimateoffixedelectricitycostspermonth.
c. Usingthehigh-lowmethod,developacostfunctionformonthlyelectricitycosts.
d. Estimateelectricitycostsforamonthinwhich3,000machinehoursareworked.
$3.91 [($15,500-$6,750)/(3,760-1,520)]
ANSWER: a.
b. $798.40 [$15,500-($3.913,760)]
c. Y=$798.40+$3.91X,or
Electricity costs=$798.40+($3.91 Machinehours)
d. $12,528.40 [$798.40+($3.913,000)]

193. Giventhefollowinginformation:
Month
January
February
March
April
May
June
July
August
September
October
November
December

HRDeptCosts
$785,000
$569,000
$603,000
$445,000
$463,000
$489,000
$400,000
$423,000
$469,000
$538,000
$667,000
$403,000

#newhires
444
276
219
343
355
298
196
258
307
389
402
361

#terminations
137
250
138
99
75
83
47
92
101
175
23
10

Required:
a. CalculateanestimateofHRdepartmentcostsusingthehilowmethodusing#ofnewhiresasthevariableparameter
b. CalculateanestimateofHRdepartmentcostsusingthehilowmethodusing#terminationasthevariableparameter
c. WhichparameterdoyoufeelisabetterdriverofHRcost?
ANSWER: Solution:
a.VariableusingNewHires=($785,000-400,000)/(444-196)=
$1,552.42b.VariableusingTerminations=($569,000-403,000)/(250-10)= $691.67
a.Fixedusing newhires=$785,000(137 $4,277.78)=
b.Fixed usingterminations=$569,000(250$691.67)=

$198,944.14
$396,082.50

c.ThereisnogoodwaytodeterminewhichdriverisabetterpredictorofHRcostsinagive
nperiod.Usingaregressionanalysisisthebestwaytodetermineifyourparameterscorre
latetothepredictionofoverallcost.

194. Theplantmanagerrequestedinformationtoassistinestimatingmaintenancecosts.Thefollowingcomputerprintoutwas
generatedusingtheleast-squaresmethod:
Intercept
Slope
Correlationcoefficient
Activityvariable

2550
1.85
0.84
Unitsofproductionvolume

Required:
a. Usingtheinformationfromthecomputerprintout,developacostfunctionthatcanbeusedtoesti
matemaintenancecostsatdifferentvolumelevels.
b. Estimatemaintenancecostsifexpectedproductionfornextmonthis10,000units.
ANSWER:
a.
b.

Totalmaintenancecosts=$2,550+$1.85X
Totalmaintenancecosts=$2,550+($1.8510,000)=$21,050

195. Thefollowingexcelprintoutprovidesinformationtoestimateoverheadcostsusinglinearregression:

Intercept
DLH
# setups

Coefficients
6035.987027
4.558482698
771.1028938

Standard
Error
1411.05464
1.609683731
54.93418317

t Stat
4.277642
2.831912
14.03685

P-value
0.002696
0.022085
6.44E-07

Lower 95%
2782.0871
0.846543
644.42436

Upper 95%
9289.88697
8.27042244
897.781429

# moves

29.9411124

2.874675342

10.41548

6.26E-06

23.312095

36.5701299

Regression Statistics
MultipleR
RSquare
AdjustedRSquare
StandardError
Observations

0.996584412
0.99318049
0.990623174
347.9563597
12

Required:
a. Writethemultipleregressionmodel(roundtonearestcent).
b. WhatdoesthetStatmeasure?
c. Whatistheestimateofoverheadifthedepartmenthas1,205DLH,55setupsand125move
s?
ANSWER: a.Overhead=$6,035.99+$4.56(DLH)+$771.10(#setups)+$29.94(#moves)
b.ThereisatStatforeachparameter.Thesetstatisticsareusedtotestthehypothesisthattheparametersaresignificantlydifferentfromzero.Thecolumnlab
eledPvaluemeasuresthelevelofsignificanceachievedforeacht-statistic.
c.Overhead=$6,035.99+$4.56(DLH)+$771.10(#setups)+
$29.94(#moves)Overhead=$6,035.99+$4.56(1,205)+$771.10(55)+
$29.94(125)=$57,683.79

196. TheJohnsonCompanyistryingtofindanappropriateallocationbaseforfactoryoverhead.Presentedarefivemont
hsofdata:

Month
June
July
August
September
October

DirectLaborHours
10
20
15
30
25

MachineHours
3
5
4
5
3

FactoryOverhead
$45
75
70
130
80

r=
Required:
a. Calculatethecorrelationcoefficientbetweenfactoryoverheadanddirectlaborhours.
b. Calculatethecorrelationcoefficientbetweenfactoryoverheadandmachinehours.
c. ShouldJohnsonCompanyusedirectlaborhoursormachinehoursfortheirallocationbaseforfactory
overhead? Why?
a.
X
10
20
15
30
25
100

(X - X)
-10
0
-5
10
5

(X - X) 2
100
0
25
100
25
250

Y
45
75
70
130
80
400

X = 20

(Y - Y)
-35
-5
-10
50
0

(Y - Y)2
1,225
25
100
2,500
0
3,850

(X - X)(Y - Y)
350
0
50
500
0
900

(Y - Y)2
1,225
25
100
2,500
0
3,850

(X - X)(Y - Y)
35
-5
0
50
0
80

Y = 80

r = (900)/(250 x 3,850) .5 = 0.91736

b.
X
3
5
4
5
3
20

(X - X)
-1
1
0
1
-1

(X - X)2
1
1
0
1
1
4

X=4

Y
45
75
70
130
80
400

(Y - Y)
-35
-5
-10
50
0
Y = 80

r = (80)/(4 3,850) .5 = 0.64466

c.
Usedirectlaborhoursbecausethecorrelationis0.91736.Thehighercorrelationindicatesthattheover
headismorecloselyrelatedtodirectlaborhoursthanmachinehours.

197. Thefollowingcomputerprintoutestimatedoverheadcostsusinglinearregression:

Parameter
Intercept
Setuphours
#ofparts
RSquare(R2)
StandardError(Se)
Observations

Estimate
75
13
50

tforH(0)
Parameter=0
2.25
5.10
1.65

Pr>t
0.0250
0.0001
0.0500

Std.error
ofparameter
33.33
2.45
30.30

0.83
50.00
70

Required:
a. Writethemultipleregressionmodel.
b. WhatdoesRSquaremean?
c. Providea95percentconfidenceintervalaroundthenumberofpartsparameter.
Overheadcosts=$75+$13(setuphours)+$50(#ofparts)
ANSWER: a.
b. Eighty-threepercentofthevariationinoverheadcostsisexplainedbysetuphoursandnumberofparts.
c. df= 70-3= 67
tis1.65
$501.65(30.30)=[$(.005),$99.995]

198. Alamo,Inc.,isbeginningtheproductionofanewproduct.Managementbelievesthat500laborhourswillberequiredtoco
mpletethenewunit.An80percentincrementalunittimelearningcurvemodelfordirectlaborhoursisassumedtobevalid.Assumetheq=-0.3219.Dataoncostsareasfollows:

Directmaterials
Directlabor
Variablemanufacturingoverhead

$50,000perunit
$20perdirectlaborhour
$30perdirectlaborhour

Required:
a. Setupatablewithcolumnsforcumulativenumberofunitsshowingthecumulativetotaltimeinhoursus
ingtheincrementalunittimelearningcurve.Completethetablefor1,2,3,and4unitsgiventheindividualunittimeforthenthuni
tas500,400,351,and320for1to4unitsrespectively.
b.Setupasimilartableassuminga90percentwiththeincrementalunit-timelearningcurvewiththe
individualunittime forthenth unitas500, 450,430,405 for1to 4unitsrespectively.
c. Whatisthedifferenceinvariablecostofproducingfourunits?

ANSWER:

c.

a.

Units
1
2
3
4

80%
500
400
351
320

Total Hrs.
500
900
1,251
1,571

b.

Units
1
2
3
4

90%
500
450
430
405

Total Hrs.
500
950
1,380
1,785

0.80 model= $200,000+ (50 1,571)= $278,550/4=

$69,637.500.90 model= $200,000+ (50 1,785)= $289,250/4=
$72,312.50
Thedifferenceis$2,675.00

199. TheKnappCompanyneedstopredictthelaborcostinproducingsmallceramicdolls.Thefollowingproductioninform
ationisavailable:
Year
2011
2012
2013
2014
2015
2016

DollsProduced
1,150
1,600
1,100
2,100
1,500
1,300

LaborHours
850
975
800
1,150
950
875

LaborDollars
$17,000
23,400
25,600
36,800
34,200
35,000

Wagerateshavesteadilyincreasedsince2011;however,managementexpectsnofurtheri
ncreasesin2017.
Required:
a. Selecttheappropriateindependentvariableforpredictinglaborcost.Explainthereasonforyourselection.
b.Developanequationtopredictfor2017thelaborcostofproducingceramicdolls.Usethehighlowmethod.
ANSWER:
a.

Inperiodsofchangingprices,unadjustedcostdatashouldnotbeusedasthedependentvariable.Assumingthatthe
technologyhasnotchanged,laborhoursusedindollproductioncanbesubstitutedforlabordollarsindevelopingth
ecost-estimatingequation:
Y=a+bX
Totallaborhours=aconstant+(b#ofdollsproduced)
Aftersolvingfortotallaborhours,thedependentvariablecanberestatedintermsoflabordollarssinc
ewageratesin2017havenotincreasedoverwageratesin2016,andfor2017:
Totallabordollars/Totallaborhours=Laborrateperhour
Thislaborrateperhourappliedto2017estimateswillgivetotallabordollarsfor2017.
b.

Usinglaborhours:
b =(1,150-800)/($2,100-1,100)
=0.35variablelaborhoursperdoll
a = 1,150 (0.35 2,100)
=415fixedlaborhoursperyear
Totallaborhours=415+0.35(#ofdollsproduced)Thew
ageratefor2017isthesameasin2016.
For2017,$35,000/875=$40perlaborhour.
Total labor costs

=Totallaborhours$40
=415($40)+0.35($40)(#ofdollsproduced)

=$16,600+$14.00(#ofdollsproduced)
200. Highestec,Inc.,isbeginningtheproductionofanewproduct.Managementbelievesthat500laborhourswillberequiredtoc
ompletethenewunit.A90percentcumulativeaveragetimelearningcurvemodelfordirectlaborhoursisassumedtobevalid.Dataoncostsareasfollows:
Directmaterials
Directlabor
Variablemanufacturingoverhead

$50,000perunit
$20perdirectlaborhour
$30perdirectlaborhour

Required:
a.

Set up a table with columns for cumulative number of units, cumulative average time per unit
in hours, and cumulative total time in hours using the cumulative average-time learning curve.
Complete the table for 1, 2, 4, and 8 units.
Set up a similar table assuming an 80 percent cumulative average-time learning curve.
What is the difference in variable cost of producing four units?

b.
c.
ANSWER:

a.

b
.

c.

Units

90%

1
2
4
8

500
450
405
364.5

Unit
s 1
2
4
8

80
%
500
400
320
256

Total Hrs.
500
900
1,620
2,916

TotalHrs.
500
800
1,280
2,048

0.90model =$200,000 + 50(1,620)= $281,000 /4=

$70,2500.80 model=$200,000 +50(1,280)=$264,000/4
=$66,000
Thedifferenceis$4,250.

Chapter 4
1. Unitbasedcostingfirstassignsoverheadcoststodepartmentalpoolsandthenassignsthesecoststoproductsusingpredeter
minedoverheadrates.
a. True
b. False
ANSWER: True

2. Managementinformationsystemscanbedividedintoaunit-basedtypeandactivity-basedtype.
a. True
b. False
ANSWER: True
3. Predeterminedoverheadratesarecalculatedattheendofeachyearusingtheformula:overheadrate=budgetedannualdri
verlevel/budgetedannualdriverlevel.
a. True
b. False
ANSWER: False
4. Unit-leveldriversarefactorsthatmeasurethedemandsplacedonunit-levelactivitiesbyproducts.
a. True
b. False
ANSWER: True
5. Ifappliedoverheadisgreaterthanactualoverheaditiscalledoverappliedoverhead.
a. True
b. False
ANSWER: True
6. Unit-basedproductcostingassignsmanufacturingandsellingcoststoproducts.
a. True
b. False
ANSWER: False
7. Thedifferencebetweenactualoverheadandappliedoverheadisanunderappliedoverhead.
a. True
b. False
ANSWER: False

8. Overheadassignmentsshouldreflecttheamountofoverheaddemandedbyeachproduct.
a. True
b. False
ANSWER: True
9. Thejustificationfornotusingadepartmentalrateforoverheadcostassignmentisthatitincreasesaccuracy.
a. True
b. False
ANSWER: False
10.

Non-unit-baseddriversarefactorsthatmeasurethedemandsthatcostobjectsplaceonactivities.
a. True
b. False

ANSWER: True
11.
Ifoverheadisasignificantproportionoftheunitmanufacturingcosts,thedistortioncausedbyusingmultileveldriverscanbeserious.
a. True
b. False
ANSWER: False
12.

Activity-basedcostingusesonlyunit-leveldriversforcosting.
a. True
b. False

ANSWER: False
13.
Theactivity-basedcostassignmentisthemostaccuratemethodofcostingbecauseitfollowsacause-andeffectpatternofoverheadconsumption.
a. True
b. False
ANSWER: True
14.

Anactivity-basedcostingsystemtracescoststoactivitiesandthentoproductsandothercostobjects.
a. True
b. False

ANSWER: True
15.

Thefirststepindesigninganactivity-basedcostingsystemistoidentifyactivities.
a. True
b. False

ANSWER: True
16.
Alistoftheactivitiesidentifiedinthedesignofanactivity-basedsystemiscalledanactivityinventory.

a. True
b. False
ANSWER: True
17.

Activityattributesarenonfinancialandfinancialinformationitemsthatdescribeindividualactivities.
a. True
b. False

ANSWER: True
18.

Productclassificationattributesdefineanddescribeactivitiesandarethebasisforproductclassification.
a. True
b. False

ANSWER: False
19.
.

Afteridentifyinganddescribingactivities,thenextstepistodeterminethecostoftheperformanceofeachactivity
a. True
b. False

ANSWER: True
20.
Classifyingactivitiesintofourgeneralcategoriesfacilitatesproductcostingbyassociatingtheresponsetodiffere
nttypesofactivitydrivers.
a. True
b. False
ANSWER: True
21.
Effortstosimplifyactivity-basedcostingsystems(ABC)involveeitherbefore-the-factsimplificationorafterthe-factsimplification.
a. True
b. False
ANSWER: True
22.
Timedrivenactivitybasedcosting(TDABC)requirestheneedtoidentifyresourcedriverstoassigncoststoactivities.
a. True
b. False
ANSWER: False

23.
Usingthebefore-thefactsimplificationmethodTDABCeliminatestheneedfordetailedinterviewingandsurveyingtodetermineresourcedriv
ers.
a. True
b. False
ANSWER: True
24.
After-thefactsimplificationincludestwoapproaches:theapproximatelyrelevantreducedABCsystemandtheequallyaccurateen
hancedABCsystem.
a. True
b. False
ANSWER: False
25.
TherearemanytwodrivercombinationsthatmaybeusedtoreducetheABCsystemwithoutsacrificingaccuracy.
a. True
b. False
ANSWER: True
26.

A(n)

methodfirsttracescoststoadepartmentandthentoproducts.

ANSWER: unit-basedcosting
27.
Offeringgreaterproductaccuracythananactivitybasedcostingsystemisnotacharacteristicofa
costingsystem.
ANSWER: unit-based
28.

TheformulaBudgetedannualoverhead/Budgetedannualdriverlevelisusedtocalculatea__________rate.

ANSWER: predeterminedoverhead
29.
intensiveoperations,themostappropriateactivitydriverwould bethe

For laborhours.

ANSWER: directlabor
30.
ctivityconsumedbyaproductisthe

Theproportionofanoverheada
ratio.

ANSWER: consumption
31.

driverscreatedistortionswhendifferentproductsutilizeresourcesdifferently.

ANSWER: Unit-level

32.

The useof
activitydriverstoassigncoststendsto

ANSWER: unit-level;overcost

high-volumeproducts.

33.

A(n)

costingsystemfirsttracescoststoactivitiesandthentoproducts.

ANSWER: activity-based
34.

Activity

arenonfinancialandfinancialdatathatdescribeindividualactivities.

ANSWER: attributes
35.

The activity

isasimplelistofactivitiesidentifiedinanABCsystem.

ANSWER: inventory
36.

Activity

helpsmanagementachieveobjectivessuchasproductorcustomercostingandcontinuousimprovement.
ANSWER: classification
37.

Materialshandlingwouldbeclassifiedasa
activitywhenusingactivity-levelcosting.

ANSWER: batch-level
38.
An
costingdatabaseisthecollecteddatasetsthatareorganizedandinterrelatedforuseina
companysABCinformationsystem.
ANSWER: activity-based
39.

A(n)

isagroupingoflogicallyrelatedinformation.

ANSWER: dataset
40.

In the ABCsystems,managersdirectlyestimatetheresourcedemandsimposedbyeachproduct.

ANSWER: time-driven
41.

Unit-levelproductcostingassigns
a. directmaterialsanddirectlabordirectlytoproductsandassignsoverheadtodepartmentalpoolswhichareassignedto
productsusingpredeterminedoverheadratesbasedonunit-leveldrivers.
b. directmaterials,directlaborandoverheadtodepartmentalcostpoolswhichareassignedtoproductsusingpredetermi
nedoverheadratesbasedonunit-leveldrivers.
c. directmaterialsanddirectlabordirectlytoproductsandassignsoverheadtodepartmentalpoolswhichareassignedto
productsusingpredeterminedoverheadratesbasedonnon-unitleveldrivers.
d. directmaterials,directlaborandoverheadtodepartmentalcostpoolswhichareassignedtoproductsusingpredetermi
nedoverheadratesbasedonnon-unitleveldrivers.

ANSWER: a

42.

WhichisNOTacharacteristicofaunit-basedcostingsystem?
a. Itusestraditionalproductcostingdefinitions.
b. Itusesunit-basedactivitydriverstoassignoverheadtoproducts.
c. Itoffersgreaterproductcostingaccuracythananactivity-basedcostingsystem.
d. Itischeaperthananactivity-basedcostingsystem.

ANSWER: c
43.

Unit-basedproductcostinguseswhichofthefollowingprocedures?
a. Alloverheadcostsareexpensedasincurred.
b. Overheadcostsaretracedtodepartments,thencostsaretracedtoproducts.
c. Overheadcostsaretraceddirectlytoproducts.
d. Overheadcostsaretracedtoactivities,thencostsaretracedtoproducts.

ANSWER: b
44.

Themethodthatfirsttracescoststoadepartmentandthentoproductsiscalled:
a. directcosting
b. absorptioncosting
c. unit-basedcosting
d. indirectcosting

ANSWER: c
45.

Apredeterminedoverheadrateiscalculatedusingwhichofthefollowingformulas?
a. Actualannualoverhead/budgetedannualdriverlevel
b. Budgetedannualoverhead/budgetedannualdriverlevel
c. Budgetedannualoverhead/actualannualdriverlevel
d. Actualannualoverhead/actualannualdriverlevel

ANSWER: b
46.

Theoverheadratesofthetraditionalfunctional-basedproductcostinguse
a. non-unit-basedactivitydrivers.
b. unit-basedactivitydrivers.
c. processcosting.
d. jobordercosting.

ANSWER: b

47.
Acostingsystemthatusesactualcostsfordirectmaterialsandlaborandpredeterminedoverheadratestoapplyov
erheadiscalleda(n)
a. actualcostingsystem.
b. standardcostingsystem.
c. normalcostingsystem.
d. activity-basedcostingsystem.
ANSWER: c
48.

Commonmeasuresofproductionactivityinclude
a. unitsproduced.
b. directlaborhours.
c. machinehours.
d. allofthese.

ANSWER: d
49.

Ifunit-basedproductcostingisused,whichofthefollowingwouldbetraceddirectlytotheproduct?
a. setupcosts
b. directlabor
c. maintenanceofmachinery
d. inspectioncosts

ANSWER: b
50.

Productcostscanbedistortedifaunit-basedactivitydriverisusedand
a. non-unit-basedoverheadcostsareasignificantproportionoftotaloverhead.
b. theconsumptionratiosdifferbetweenunit-basedandnon-unit-basedinputcategories.
c. bothaandb.
d. neitheranorb.

ANSWER: c
51.

Allofthefollowingarenon-unit-basedactivitydriversEXCEPT
a. numberofdirectlaborhours.
b. numberofinspections.
c. numberofsetups.
d. numberofmaterialmoves.

ANSWER: a

52.
Foralaborintensivemanufacturingoperation,whichofthefollowingwouldbethemostappropriateactivitydriver?
a. machinehours
b. directlaborhours
c. numberofemployees
d. unitsofoutput
ANSWER: b
53.
Inadepartmentthatisdrillingholesinmaterials,whichactivitybaseislikelytobemostappropriateforassigningo
verheadcosts?
a. unitsproduced
b. directlaborhours
c. machinehours
d. numberofbatches
ANSWER: c
54.

Allofthefollowingareunit-basedactivitydriversEXCEPT
a. numberofsetups.
b. machinehours.
c. numberofunits.
d. directlaborhours.

ANSWER: a
55.
Adepartmentthatiscapitalintensivemostlikelywoulduseapredetermineddepartmentaloverheadratebasedonwhichofthefollowingactivitybases
?
a. unitsofdirectmaterialused
b. directlaborhours
c. directlaborcost
d. machinehours
ANSWER: d

Figure4-1
TheForemostCompanypredictedfactoryoverheadfor2016and2017wouldbe$120,000foreachyear.Thepredictedactiv
ityfor2016and2017were30,000and20,000directlaborhours,respectively.Additionaldataareasfollows:
2016
25,000
$20
$10

Salesinunits
Sellingpriceperunit
Directmaterialsanddirectlaborperunit

2017
25,000
$20
$10

Thecompanyassumesthatthelongrunnormalproductionlevelis20,000directlaborhoursperyear.Theactualfactoryoverheadcostfortheendof2016and
2017was$120,000.Assumethatittakesonedirectlaborhourtomakeonefinishedunit.
56.
RefertoFigure41.Whentheannualestimatedfactoryoverheadrateisused,thegrossprofitsfor2016and2017,respectively,are
a.$150,000and$150,000.
b.$150,000and$100,000.
c.$250,000and$250,000.
d.$100,000and$150,000.
ANSWER: b
57.
RefertoFigure41.Whenthenormalfactoryoverheadrateisused,thegrossprofitsfor2016and2017,respectively,are
a.$80,000and$80,000.
b.$200,000and$200,000.
c.$120,000and$140,000.
d.$100,000and$100,000.
ANSWER:

RATIONALE: SUPPORTING CALCULATIONS:

Rate = $120,000/20,000 = $6
2013:
2014:

($20 - $10 - $6) 25,000 = $100,000

($20 - $10 - $6) 25,000 = $100,000

Figure4-2
ThefollowinginformationisprovidedbytheSandmanCorporationfortheyear:

Actualdirectlaborhoursworked
Budgetedoverhead
Budgeteddirectlaborhours
Actualoverheadcostsincurred
58.

46,00
0
$300,00
0 30,00
0
$460,00
0

RefertoFigure4-2.Ifnormalcostingisused,theamountofoverheadappliedfortheyearis

a.$414,000.
b.$400,000.
c.$480,000.
d.$460,000.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:Budgetedoverhead/Budgeteddirectlaborhours=
$300,000/30,000=$10/DLH$1046,000=$460,000

59.

RefertoFigure4-2.Theactualoverheadrateforapplyingmanufacturingoverheadis

a.$7.14.
b.$7.50.
c.$10.00.
d.$10.50.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:Actualoverheadrate=$300,000/30,000=$10
60.
AvatarCorporationusesapredeterminedratetoapplyoverhead.Atthebeginningoftheyear,Avatarestimatedit
soverheadcostsat$240,000,directlaborhoursat40,000,andmachinehoursat10,000.Actualoverheadcostsincurredwer
e$249,280,actualdirectlaborhourswere41,000,andactualmachinehourswere11,000.
WhatisthepredeterminedoverheadratepermachinehourforAvatar?
a.$6.08
b.$5.85
c.$22.66
d.$24.00
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$240,000/10,000=$24.00perMH

Figure4-3
TherecordsofFamilyManufacturingshowthefollowinginformation:
Estimatedmanufacturingoverhead
Estimatedmachinehours
Actualmachinehoursworked
Actualcostsincurred:Indirectmaterials
Indirectlabor
Utilities
Insurance
Rent
61.

$690,000
46,000
50,000
$170,000
230,000
120,000
100,000
80,000

RefertoFigure4-3.Theamountofoverappliedorunderappliedoverheadis
a. $10,000underapplied.
b. $50,000overapplied.
c. $60,000overapplied.
d. $65,200underapplied.

ANSWER:
b
RATIONALE:

SUPPORTING CALCULATIONS:
$750,0
00

Applied overhead [($690,000/46,000) 50,000]

Actual overhead:
Indirect materials

$170,000

Indirect labor

230,000

Utilities

120,000

Insurance

100,000

Rent

Overapplied overhead

80,000

700,00
0

$
50,000

62.

RefertoFigure4-3.Thecompanyusesapredeterminedoverheadratetoapplyoverhead.Manufacturingoverheadappliedis
a.$750,000.
b.$700,000.
c.$690,000.
d.$648,000.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:Predeterminedrate=$690,000/46,000=$15Appliedoverhead
= $1550,000=$750,000

63.

ThefollowinginformationpertainstoWhitestoneIndustriesfor2016:
Estimated total overhead costs for 2014
Estimated direct labor costs for 2014
Actual direct labor costs
Actual overhead costs
Activity base

$37,500
25,000
22,500
36,000
Direct labor costs

WhatisthepredeterminedoverheadrateforWhitestoneIndustriesfor2016?
a.66.7%
b. 150%
c. 160%
d.62.5%
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$37,500/$25,000=150%ofdirectlaborcosts

Figure4-4
MannitouCompanymadethefollowingpredictionsfor2016:
Factoryoverheadcosts
Directlaborhours
Machinehours

$300,000
50,000hours
100,000hours

JobA2(whichwasstartedandcompletedinJune)used3,000directlaborhours,2,000machinehours,and$57,000ofprimec
osts.
64.
RefertoFigure44.Iffactoryoverheadisappliedbasedonmachinehours,thecostofJobA2fortheMannitouCompanyis
a.$69,000.
b.$75,000.
c.$63,000.
d.$66,000.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:$57,000+[2,000(300,000/100,000)]=$63,000
65.
RefertoFigure44.Iffactoryoverheadisappliedbasedondirectlaborhours,thecostofJobA2fortheMannitouCompanyis
a.$60,000.
b.$75,000.
c.$63,000.
d.$66,000.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$57,000+[3,000($300,000/50,000)]=$75,000
66.
TheMagnanimousCompanyusesapredeterminedoverheadrateof$12perdirectlaborhourtoapplyoverhead.
Duringtheyear,30,000directlaborhourswereworked.Actualoverheadcostsfortheyearwere$320,000.Theoverheadvar
ianceis
a. $40,000underapplied.
b. $35,560underapplied.
c. $36,000overapplied.
d. noneoftheabove.
ANSWER:

RATIONALE:SUPPORTING CALCULATIONS:

Applied overhead ($12 30,000)

Actual overhead

$360,000

320,000

Overapplied overhead
$40,000

67.

Thefollowinginformationisprovidedfortheyear:

Actualdirectlaborhoursworked
Budgetedoverhead
Budgeteddirectlaborhours
Actualoverheadcostsincurred

27,500
$525,000
30,000
$481,250

Ifnormalcostingisused,theamountofoverheadappliedfortheyearis
a.$568,750.00.
b.$441,031.25.
c.$481,250.00.
d.$525,000.00.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:Predeterminedoverheadrate=$525,000/30,000=$17.50/DLHAppliedoverhea
d=$17.50 27,500=$481,250
68.

ThefollowinginformationisprovidedbytheSuttonCorporationfortheyear:

Actualoverhead
Actualmachinehoursworked
Budgetedmachinehours
Appliedoverhead

$450,000
25,000
27,500
$487,500

Ifnormalcostingisused,budgetedoverheadusedtocalculatethepredeterminedratewouldbe
a.$443,250.b.$450,000.c.$487,500.d.$536,250.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Appliedoverhead=PredeterminedrateActualactivity
$487,500=Predeterminedrate25,000Predeterminedrate=$19.50perhour
Predeterminedrate=Budgetedoverhead/Budgetedactivity
$19.50=Budgetedoverhead/27,500
Budgetedoverhead=$19.5027,500=$536,250
69.
Assumethefollowing:Actualoverheadcostsequaledestimatedoverhead.Actualdirectlaborhoursexceededesti
mateddirectlaborhoursusedtocalculatethepredeterminedoverheadrate.Ifoverheadisappliedusingthepredeterminedo
verheadrate,thenoverheadis
a.$-0-.
b. underapplied.
c. overapplied.
d. indeterminablefromtheinformationgiven.
ANSWER: c

70.
BearClawIndustriesusesajobordercostingsystem.TheMoldingDepartmentappliesoverheadbasedonmachinehours,whiletheAssemblyDepartmen
tappliesoverheadbasedondirectlaborhours.Thecompanymadethefollowingestimatesatthebeginningofthecurrentyea
r:

Molding

Manufacturingoverheadcost
Machinehours
Directlaborhours

$700,000
10,000
12,000

Assembly
$400,000
4,000
16,000

ThefollowinginformationwasavailableforJobNo.7-29,whichwasstartedandcompletedduringAugust:

Direct materials
Direct labor
Direct labor hours
Machine hours

Job No. 7-29

Molding
Assembly
$3,500
$ 7,500
$9,000
$12,500
900
1,250
500
400

Thepredeterminedoverheadrateforthemoldingdepartmentis
a.$100.
b. $83.
c. $70.
d. $50.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:Predeterminedoverheadrate=$700,000/10,000=$70

71.
LonestarCorporationusesajobordercostingsystemtoaccountforproductcosts.Thefollowinginformationpertainsto20160:
MaterialsPlacedintoProduction
IndirectLabor
DirectLabor(10,000hours)
DepreciationofFactoryBuilding
OtherFactoryOverhead
IncreaseinWork-in-ProcessInventory

$140,00
0
40,000
160,000
60,000
100,000
30,000

Factoryoverheadrateis$18perdirectlaborhour.
Whatistheamountofunder-oroverappliedoverheadforLonestarCorporationin2016?
a. $40,000overapplied
b. $20,000overapplied
c. $40,000underapplied
d. $20,000underapplied
ANSWER:

RATIONALE:SUPPORTING CALCULATIONS:
Actual overhead ($40,000 + $60,000 + $100,000)
$200,000
Applied overhead
180,000
Underapplied overhead
$20,000

72.

Materialamountsofunderappliedoroverappliedoverheadshouldbe
a. treatedasanadjustmenttocostofgoodssold.
b. treatedasanadjustmenttoworkinprocess.
c. allocatedtodirectmaterials,workinprocess,andfinishedgoods.
d. allocatedtoworkinprocess,finishedgoods,andcostofgoodssold.

ANSWER: d

73.

AccountbalancesfromtheBoilermakersCompanyareasfollows:

Manufacturing Overhead

$240,000underapplied

WorkinProcess

100,000

FinishedGoods
CostofGoodsSold

300,000
800,000

IfunderappliedoroverappliedoverheadismaterialandisallocatedtoWorkinProcess,FinishedGoods,andCostofGoodsSo
ld(basedonendingaccountbalances),CostofGoodsSoldafteradjustmentwouldhaveabalanceof
a.$960,000.
b.$640,000.
c.$1,040,000.
d.$1,440,000.
ANSWER:
a
RATIONALE:
SUPPORTING CALCULATIONS:
Adjustmenttocostofgoodssold
$800,000/($100,000+$300,000+$800,000)$240,000=
$800,000/$1,200,000$240,000=$160,000
Cost of goods sold
Add: Adjustment for underapplied overhead
Adjusted cost of goods sold

$800,000
160,000
$960,000

Figure4-5
TheBrookstoneCompanyproduces9voltbatteriesandAAAbatteries.TheBrookstoneCompanyusesaplantwideratetoa
pplyoverheadbasedondirectlaborhours.Thefollowingdataisgiven:
Actual overhead
Estimated Overhead
Estimated activity:
9 volt battery
AAA battery
Actual activity:
9 volt battery
AAA battery
Units produced:
9 volt battery
AAA battery

$325,000
$350,000
100,000 direct labor hours
400,000 direct labor hours
125,000 direct labor
hours
400,000 direct labor
hours
500,000
250,000

74.

RefertoFigure4-5.Whatisthepredeterminedoverheadrate?(roundto2decimalplaces)

a.$0.62
b.$0.65
c.$0.67
d.$0.70
ANSWER:
d
RATIONALE: $350,000/(400,000+100,000)=.7
75.
RefertoFigure4-5.Howmuchoverheadisappliedtoeach9voltbatteriesandAAAbatteriesrespectively?
(roundto2decimalplaces)
a.$87,500;$280,000
b.$70,000; $280,00
c.$81,250;$260,000
d.noneofthese
ANSWER:
a
RATIONALE: 9 volt125,000 .7= $87,500 AAA 400,000 .7 =$280,000
76.

RefertoFigure4-5.Howmuchwasoverheadover/underapplied?

a.$25,000
b.$17,500
c.$42,500
d.noneofthese
ANSWER:
c
RATIONALE: 125,000.7=87,500400,000 .7=280,000367,500appliedactualMOH325,000overapplied
MOH42,500
77.

RefertoFigure4-5.Iftheaccountshadthefollowingbalances,howmuchwillcostofgoodssoldbeadjusted?

RawMaterialsInventory
WorkinProcessInventory
FinishedGoodsInventory
CostofGoodsSold
a. debit$12,500

$200,00
0$100,00
0
$200,00
0$500,00
0

b. debit$21,250
c. credit$26,562.50
d. noneofthese
ANSWER:
c
RATIONALE: overapplied$42,500WIP100,000FG200,000CGS500,0005/842,500=$26,562.50total800,000

Figure4-6
TheFast&FuriousCompanyproducestwoproducts:toyplanesandtoyracecars.Theyusedepartmentaloverheadratesfort
hetwoproductiondepartments:moldingandfinishing.MoldingusesmachinehourstoassignoverheadandFinishinguse
sdirectlaborhours.50,000planesand250,000racecarsareproduced.Pleasefindthefollowingdata:

EstimatedOverhead
ActualOverhead
ExpectedDirectLaborHours
planes
racecars
ExpectedMachineHours
planes
racecars
ActualDirectLaborHours
planes
racecars
ActualMachineHours
planes
racecars

Molding
$250,000
$240,000

Finishing
$100,000
$120,000

Total
$350,000
$360,000

5,000
5,000

5,000
35,000

10,000
40,000

17,000
3,000

3,000
7,000

20,000
10,000

4,500
5,500

5,300
34,500

10,000
40,000

16,500
3,200

3,500
6,800

20,000
10,000

78.
RefertoFigure46.Whatarethedepartmentaloverheadratesforthemoldingandfinishingdepartmentrespectively?
a.$25;$2.50
b.$8.33;$2
c.$25;$10
d.$12.50;$2.50
ANSWER:
d
RATIONALE: molding250,000/20,000=$12.50finishing100,000/40,000=$2.50
79.

RefertoFigure4-6.Howmuchoverheadisappliedtotheplanes?

a.$60,000
b.$250,000
c.$219,500
d.$225,000
ANSWER:
c
RATIONALE: molding12.50 16,500 =206,250 finishing2.50 5,300= 13,250total OHapplied =219,500

80.

RefertoFigure4-6.Whatistheoverheadperunitforracecars?(roundto3decimalplaces)

a.$0.50
b.$0.505
c.$0.32
d.$1.40
ANSWER:
b
RATIONALE: molding12.50 3,200 =$40,000 assembly 2.50 34,500= $86,250total MOH$126,250 250,000
racecars$0.505
81.

RefertoFigure4-6.Howmuchwasoverheadoverorunderapplied?

a.$14,250
b.$10,000
c.$4,250
d.noneofthese
ANSWER:
a
RATIONALE: MOHappliedtotrucks219,500MOHappliedtocars126,250totalMOHapplied345,750actualMOH
360,000underapplied 14,250
82.
Motorsports,Inc.hadapredeterminedoverheadrateof$2perdirectlaborhour.Thedirectlaborhourswereestima
tedtobe25,000.Theactualmanufacturingoverheadincurredwas$47,000and24,000actualdirectlaborhourswereworke
d.Howmuchwasoverheadover/underappliedlastyear?
a. $1,000underapplied
b. $2,000underapplied
c. $1,000overapplied
d. $3,000overapplied
ANSWER:
c
RATIONALE: actualMOHappliedMOH=under/overappliedMOH$47,000($224,000)=$1,000
overapplied
83.
TarotCompanyhasapredeterminedoverheadrateof$6perdirectlaborhour.Lastyearthecompanyincurred
$156,600ofactualmanufacturingoverheadcostandtheaccountwas$12,600underapplied.Howmanydirectlaborhoursw
ereworkedduringtheyear?
a. 24,000directlaborhours
b. 25,000directlaborhours
c. 26,000directlaborhours
d. 28,200directlaborhours
ANSWER:
a
RATIONALE: actualMOH-UnderappliedMOH=appliedMOH156,600-12,600=144,000appliedMOH/MOHrate=
actualdirectlaborhours144,000/6=24,000

84.
LamarCorporationusesdepartmentalmanufacturingoverheadratestoapplyoverhead.Directlaborcostisusedt
oapplymanufacturingoverheadinDepartmentAandmachinehoursareusedforDepartmentB.

DirectLaborCost
FactoryOverhead
DirectLaborHours
MachineHours

Dept.A

Dept.B

$66,000
$79,200
8,000
4,000

$33,000
$60,000
9,000
15,000

WhatpredeterminedoverheadratewouldbeusedfordepartmentsAandBrespectively?
a.83%;$5
b.83%;$3
c.120%;$4
d.$8.40;$5
ANSWER: c

85.

TheSterlingCompanyappliesmanufacturingoverhead.Attheendoftheyearthefollowingdatawereavailable:

ActualManufacturingOverhead
EstimatedManufacturingOverhead
AppliedManufacturingOverhead

$115,00
0
$110,00
0$100,00
0

Thefollowingaccountshadtheunadjustedbalances:
RawMaterialsInventory
Work-in-ProcessInventory
FinishedGoodsInventory
CostofGoodsSold

$100,00
0
$100,00
0$100,00
0$300,00
0

Whatisthejournalentryiftheamountisconsideredmaterial?
a. Work in Process $1,000
Finished Goods $1,000
Cost of goods sold $3,000
Manufacturing overhead $5,000
b.

Work in Process $3,000

Finished Goods $3,000
Cost of goods sold $9,000
Manufacturing overhead $15,000

c.

Manufacturing Overhead $5,000

Work in Process
Finished Goods
Cost of goods sold

$ 1,000
$ 1,000
$ 3,000

Manufacturing Overhead $15,000

Work in Process
Finished Goods
Cost of goods sold

$ 3,000
$ 3,000
$ 9,000

d.

e. none of these
ANSWER:
b
RATIONALE: appliedMOH-actualMOH=under/overappliedMOH108,000-115,000=7,000underappliedoverhead
WIP 100,0001/515,000=3000
FG100,0001/515,000=3000
CGS300,0003/515,000=9000
total500,000
WIP3000
FG 3000
CGS9000
MOH15,000

Figure4-7
TheCherokeeCompanyusesapredeterminedoverheadrate.Thefollowingaccountshavetheseunadjustedbalances:
RawMaterials$20,000WorkinProcess$40,000FinishedGoods$10,000CostofGoodsSold$50,000
86.
RefertoFigure47.Ifoverheadisunderappliedby$12,000andconsideredimmaterial,thejournalentrywouldbe
a. Cost of Goods Sold
$12,000
ManufacturingOverhead
b. ManufacturingOverhead
$12,000
CostofGoodsSold
$2,00
0
$4,00
0
$1,00
0$5,00
0
ManufacturingOverhead

$12,000
$12,000

c.RawMaterials
WorkinProcess
FinishedGoods
CostofGoodsSold

$12,000

d. ManufacturingOverhead
$12,000
RawMaterials
WorkinProcess
FinishedGoods
CostofGoodsSold

$2,000
$4,000
$1,000
$5,000

e. ManufacturingOverhead
$12,000
WorkinProcess
FinishedGoods
CostofGoodsSold

$4,800
$1,200
$6,000

ANSWER:
a
RATIONALE: underappliedMOH12000CGS 12000MOH12000

87.
RefertoFigure47.IfManufacturingoverheadwas$12,000overappliedandconsideredimmaterial,whatisthejournalentry?
a. CostofGoodsSold$12,000
ManufacturingOverhead$12,000
b. ManufacturingOverhead$12,000
CostofGoodsSold$12,000
c. ManufacturingOverhead$12,000
RawMaterials$2,000WorkinProcess$4,000FinishedGoods$1,000CostofGoodsSold$5,000
d. RawMaterials$2,000WorkinProcess$4,000FinishedGoods$1,000CostofGoodsSold$5,000
ManufacturingOverhead$12,000
e. ManufacturingOverhead$12,000
WorkinProcess$4,800FinishedGoods$1,200CostofGoodsSold$6,000
ANSWER:
b
RATIONALE: manufacturingovehead$12,000overappliedMOH12,000CGS 12,000

88.
RefertoFigure47.IfManufacturingoverheadwas$12,000overappliedandconsideredmaterial,whatisthejournalentry?
a. CostofGoodsSold$12,000
ManufacturingOverhead$12,000
b. ManufacturingOverhead$12,000
CostofGoodsSold$12,000
c. ManufacturingOverhead$12,000
RawMaterials$2,000WorkinProcess$4,000FinishedGoods$1,000CostofGoodsSold$5,000
d. RawMaterials$2,000WorkinProcess$4,000FinishedGoods$1,000CostofGoodsSold$5,000
ManufacturingOverhead$12,000
e. ManufacturingOverhead$12,000
WorkinProcess$4,800FinishedGoods$1,200CostofGoodsSold$6,000
ANSWER:
e
RATIONALE: manufacturingovehead$12,000overappliedMOH12,000WIP4,800FG1,200CGS 6,000

89.
RefertoFigure47.IfManufacturingoverheadwas$12,000underappliedandconsideredmaterial,whatisthejournalentry?
a. CostofGoodsSold$12,000
ManufacturingOverhead$12,000
b. WorkinProcess$4,800
FinishedGoods$1,200
CostofGoodsSold$6,000
ManufacturingOverhead$12,000
c. ManufacturingOverhead$12,000
RawMaterials$2,000
WorkinProcess$4,000
FinishedGoods$1,000
CostofGoodsSold$5,000
d. RawMaterials$2,000
WorkinProcess$4,000
FinishedGoods$1,000
CostofGoodsSold$5,000
ManufacturingOverhead$12,000
e. ManufacturingOverhead$12,000
WorkinProcess$4,800
FinishedGoods$1,200
CostofGoodsSold$6,000
ANSWER:
b
RATIONALE: manufacturingovehead$12,000underappliedWIP4,800FG1,200CGS6,000MOH12,000
90.

Productsmightconsumeoverheadindifferentproportionsduetodifferencesin
a. productsize.
b. setuptimes.
c. productcomplexity.
d. allofthese.

ANSWER: d
91.

Theproportionofanoverheadactivityconsumedbyaproductisthe
a. overheadratio.
b. consumptionratio.
c. quickratio.
d. fixedratio.

ANSWER: b

92.

Moreaccurateproductcostinginformationisproducedbyassigningcostsusing
a. avolume-based,plantwiderate.
b. volume-based,departmentalrates.
c. activity-basedpoolrates.
d. allofthese.

ANSWER: c
93.

ThaisomCompanyappliesmanufacturingoverhead.Attheendoftheyearthefollowingdatawereavailable:

ActualManufacturingOverhead
EstimatedManufacturingOverhead
AppliedManufacturingOverhead

$115,00
0
$120,00
0$118,00
0

Whatisthejournalentryiftheamountofunder-orover-appliedoverheadisconsideredsmall?
a. CostofGoodsSold

$5,000

ManufacturingOverhead $5,000
b. CostofGoodsSold

$3,000

ManufacturingOverhead $3,000
c. CostofGoodsSold

$2,000

ManufacturingOverhead $2,000
d. ManufacturingOverhead

$5,000

CostofGoodsSold
e. ManufacturingOverhead
CostofGoodsSold

$5,000
$3,000
$3,000

ANSWER:
e
RATIONALE: actualMOH-appliedMOH=under/overappliedMOH115,000-118,000=3000overappliedMOH
3000 CGS3000

Figure4-8
TandemCompanymanufacturestwoproducts(DandF).Theoverheadcosts($84,000)havebeendividedintothreecostpoolst
hatusethefollowingactivitydrivers:
Product
D
F
Cost per pool

Number of Setups

Machine Hours

Packing Orders

10
10

500
2,000

75
175

$11,000

$60,000

$18,750

94.
RefertoFigure4-8.Usingfunctionalbasedcosting,whatistheamountofoverheadcosttobeassignedtoProductDusingmachinehoursastheallocationbase?
a.$12,000
b.$60,000
c.$48,000
d.$16,800
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:($9,000+$60,000+$15,000)/2,500=$33.60
$33.605000=$16,800

95.

RefertoFigure4-8.Whatistheallocationratepersetupusingactivity-basedcosting?

a.$ 550
b.$1,100
c.$11,000
d.$2,200
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$11,000/20=$550
96.

ReferforFigure4-8.Whatistheallocationrateperpackingorderusingactivity-basedcosting?

a.$18,750
b.$75
c.$1,875
d.$250
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$18,750/250=$75

97.
RefertoFigure48.Ifthenumberofmachinehoursisusedtoassignmachinehourcost,determinetheamountofmachinehourcosttobeassigned
toProductD.
a.$12,000
b.$60,000
c.$48,000
d.$16,800
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$60,000/2,500=$24$24500=$12,000
Figure4-9
SummerManufacturinghasfourcategoriesofoverhead.Thefourcategoriesandexpectedoverheadcostsforeachcategoryfo
rnextyeararelistedasfollows:
$255,000
Maintenance
125,000
Materials handling
30,000
Setups
105,000
Inspection
Currently,overheadisappliedusingapredeterminedoverheadratebaseduponbudgeteddirectlaborhours.100,000directlab
orhoursarebudgetedfornextyear.
Thecompanyhasbeenaskedtosubmitabidforaproposedjob.Theplantmanagerfeelsthatobtainingthisjobwouldresultinne
wbusinessinfutureyears.Usuallybidsarebaseduponfullmanufacturingcostplus10percent.
Estimatesfortheproposedjobareasfollows:
Direct materials
Direct labor (8,000 hours)
Number of material moves
Number of inspections
Number of setups
Number of machine hours

$15,000
$12,000
100
120
24
4,000

Theplantmanagerhasheardofanewwayofapplyingoverheadthatusescostpoolsandactivitydrivers.Expectedactivityforth
efouractivitydriversthatwouldbeusedare:
60,000
Machine hours
20,000
Material moves
3,000
Setups
12,000
Quality inspections

98.
RefertoFigure4-9.WhatistheamountofoverheadallocatedtotheproposedjobifWinterManufacturinguses
directlaborhoursasitsonlyactivitydriver?
a.$20,800
b.$30,400
c.$30,000
d.$41,200
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Overheadrate=($255,000+$125,000+$30,000+$105,000)/100,000=$5.15/DLH
Overheadallocatedtoproposedjob=$5.158,000=$41,200
99.
RefertoFigure49.WhatisthetotalcostoftheproposedjobifWinterManufacturingusesdirectlaborhoursasitsonlyactivitydriver?
a.$72,000
b.$68,200
c.$56,200
d.$53,200
ANSWER:
b
RATIONALE

SUPPORTING CALCULATIONS:
Direct materials

Direct labor

12,000

Overhead ($5.15 8,000)

41,200

Total

100.

Unit-levelcostdriverscreatedistortionswhen

a. differentproductsconsumeresourcesdifferently.
b. productsareproducedusingresourceshomogeneously.
c. productsuseresourcessimilarly.
d. alloftheabove.
ANSWER: a

$15,000

$68,200

101.

Theuseofunit-basedactivitydriverstoassigncoststendsto

a. overcostlow-volumeproducts.
b. overcosthigh-volumeproducts.
c. undercostallproducts.
d. overcostallproducts.
ANSWER: b

102.

WhichofthefollowingisNOTalimitationofaplantwideoverheadrate?

a. Productdiversitymayconsumeoverheadactivitiesunderdifferingconsumptionratios.
b. Overheadusageisnotstrictlylinkedtotheunitsproducedbecausesomeproductsaremorecomplexanddiversethanothe
rs.
c. Predeterminedratesusingbudgetedoverheadareusuallythebestestimateoftheamountofoverhead.
d. Overheadcoststendtobeunderallocatedtohighlycomplexproducts.
ANSWER: c
103.

Apossiblesolutiontoovercomedistortionscausedbyunitlevelratesis

a. assigncostsbymultiplyingactivityratestimestheamountofactivityconsumed.
b. calculateindividualratesforeachactivitywithactivitydrivers.
c. increasethenumberofratesusedthatreflectthediverseactivityandnonunitoverheaddrivers.
d. allofthese.
ANSWER: d

Figure4-10
TheManoliCompanyhascollectedthefollowingdataforuseincalculatingproductcosts:
ActivityData:(expectedandactual)
units produced
prime costs
direct labor hours
machine hours
number of setups
inspection hours
number of moves

Rug cleaners
50,000
$200,000
10,000
20,000
25
1,200
140

DepartmentalData:(expectedandactual)
Molding
direct labor hours
rug cleaners
5,000
sweepers
5,000
total
10,000
machine hours
rug cleaners
17,000
sweepers
3,000
total
20,000
overhead costs
machining
$120,000
moving materials
40,000
setting up
70,000
inspecting products
20,000
total
250,000

Sweepers
250,000
$750,000
40,000
10,000
75
2,800
210

Assembly

Total
300,000
$950,000
50,000
30,000
100
4,000
350

Total

5,000
35,000
40,000

10,000
40,000
50,000

3,000
7,000
10,000

20,000
10,000
30,000

$30,000
30,000
10,000
30,000
$100,000

$150,000
70,000
80,000
50,000
$350,000

104.
RefertoFigure410.Whatistheunitproductcostforrugcleanersifaplantwiderateisusedbasedondirectlaborhours?
a.$11.00
b.$4.00
c.$5.40
d.$4.12
ANSWER:
c
RATIONALE: $350,000/50,000=$7$710,000=$70,000+$200,000=$270,000/50,000=$5.40
105.
RefertoFigure410.ManoliCompanyusesdepartmentaloverheadrates:MoldingusesmachinehoursandAssemblyuseslaborhours.Whatis
theunitproductcostforsweepersifdepartmentaloverheadratesareused?
a.$3.50
b.$8.50
c.$3.00
d.$1.40
ANSWER:
a
RATIONALE: molding$250,000/20,000=12.50assembly$100,000/40,000=2.50sweepersmolding3,00012.50
=$37,500assembly35,0002.50=$87,500totalMOH$125,000prime$750,000totalcost
$875,000/250,000=$3.50perunit
106.
RefertoFigure410.Whataretheconsumptionratiosforrugcleanersandsweepersrespectivelyfortheinspectionofproductsactivity?
a.0.3;0.7
b.0.2;0.8
c.0.4;0.6
d.0.67;0.33
ANSWER:
a
RATIONALE: inspectingproductsrugcleaners1,200/4,000=0.3sweepers2,800/4,000=0.7
107.

RefertoFigure4-10.Whatistheconsumptionratiofortheplantwideactivityrateofdirectlaborhours?

a.0.25;0.75
b.0.71;0.29
c.0.2;0.8
d.0.8;0.2
ANSWER:
c
RATIONALE: directlaborhoursmops10,000/50,000=.2brooms40,000/50,000=.8

108.
RefertoFigure410.Whataretheconsumptionratiosforrugcleanersforthedepartmentsonthebasisofthedepartmentaldrivers(molding;asse
mbly)?
a.0.33;0.87
b.0.85;0.125
c.0.33;0.25
d.0.85;0.5
ANSWER:
b
RATIONALE: rugcleanersmoldingmhrs17,000/20,000=.85assemblydlh5,000/40,000= .125
109.

RefertoFigure4-10.Whatistheactivityrateformovingmaterials?

a.0.2
b.$1000
c.$800
d.$200
ANSWER:
d
RATIONALE: $70,000/350=$200
110.

RefertoFigure4-10.Whatistheunitproductcostforrugcleanersusingactivitybasedcosting?

a.$11.00
b.$7.26
c.$4.00
d.$3.75
ANSWER:
b
RATIONALE: machining$150,000/30,000=$5settingup$80,000/100=$800numberofmoves$70,000/350=
$200inspection$$50,000/4,000=$12.50rugcleanersmachining$5 20,000=$100,000settingup
$80025=$20,000moving$200140=$28,000inspection$12.501,200=$15,000totalmoh
$163,000primecosts200,000totalcosts363,000/50,000units=$7.26
111.

Anactivity-basedcostingsystemuseswhichofthefollowingprocedures?
a. Overheadcostsaretracedtodepartments,thencostsaretracedtoproducts.
b. Overheadcostsaretracedtoactivities,thencostsaretracedtoproducts.
c. Overheadcostsaretraceddirectlytoproducts.
d. Alloverheadcostsareexpensedasincurred.

ANSWER: b
112.

Ifafirmhasimplementedactivity-basedproceduresforhomeofficeexpenses,itwill

a. allocateallhomeofficeexpensesonthebasisofsalesrevenues.
b. allocateallhomeofficeexpensestohomogeneouscostpools.
c. allocatethecostsinapoolusingapredeterminedrateperunitofactivity.

d. bothaandb.
ANSWER: c
113.

Thesystemthatfirsttracescoststoactivitiesandthentoproductsiscalled:

a. DirectCosting
b. AbsorptionCosting
c. Functional-BasedCosting
d. Activity-BasedCosting
ANSWER: d
114.

Activity-basedcostingassignscosttocostobjectsbyfirsttracingcoststo

a. productsandthentracingcoststocostobjects.
b. departmentsandthentracingcoststoproducts.
c. activitiesandthentracingcoststocostobjects.
d. customersandthentracingcoststoproducts.
ANSWER: c
115.

Thenonfinancialandfinancialdatathatdescribeindividualactivitiesiscalled:

a. Activitydictionaries
b. Activityattributes
c. Concatenatedkeys
d. ABCinventories
ANSWER: b
116.

ThesimplelistofactivitiesidentifiedinanABCsystemiscalled:

a. Activityinventory
b. Activitydictionary
c. Activityattributes
d. Activitydriver
ANSWER: a
117.

Asecondaryactivityis

a. thesecondactivityontheactivitylist.
b. anactivitydriver.
c. onethatisconsumedbyintermediatecostobjects.
d. onethatisconsumedbythefinalcostobject.
ANSWER: c

Figure4-11
LongviewManufacturingCompanymanufacturestwoproducts(IandII).Theoverheadcosts($58,000)havebeendividedint
othreecostpoolsthatusethefollowingactivitydrivers:
Number of Labor
Product
Number of Orders
Transactions
Labor Hours
15
50
500
I
10
150
2,000
II
Cost per pool
118.

$12,500

$8,000

$40,000

RefertoFigure4-11.WhatistheallocationrateperorderusingABC?

a.$12,500
b.$500
c.$2,320
d.$58,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$12,500/25=$500
119.

RefertoFigure4-11.WhatistheallocationrateperlabortransactionusingABC?

a.$8,000
b.$16
c.$29,000
d.$40
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$8,000/200=$40

120.
RefertoFigure411.Ifthenumberoflaborhoursisusedtoassignlaborcostsfromthecostpool,determinetheamountofoverheadcosttobeassig
nedtoProductI.
a.$58,000
b.$8,000
c.$9,600
d.$32,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$40,000/2,500=$16$16500=$8,000

121.
RefertoFigure4-11.Usingfunctionalbasedcosting,whatistheamountofoverheadcosttobeassignedtoProductIIusinglaborhoursastheallocationbase?
a.$58,000
b.$43,500
c.$11,600
d.$46,400
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:($12,500+$8,000+$40,000)/2,500=$24.20$24.202,000
=$48,400
122.

Whichofthefollowingquantitiesisanexampleofanactivitydriverinactivity-basedcosting?

a. numberofsetups
b. numberofordersplaced
c. numberofmachinehours
d. alloftheabove
ANSWER: d

Figure4-12
TheGardenviewCorporationhasidentifiedthefollowingoverheadcostsandactivitydriversfornextyear:

OverheadItem
Setupcosts
Orderingcosts
Maintenance
Power

ExpectedCos
t
$200,000
80,000
400,000
40,000

ActivityDriver

Expected
Quantity

Numberofsetups
Numberoforders
Machinehours
Kilowatthours

250
1,600
2,000
40,000

Thefollowingaretwoofthejobscompletedduringtheyear:
Direct materials
Direct labor
Units completed
Direct labor hours
Number of setups
Number of orders
Machine hours
Kilowatt hours

Thecompany'snormalactivityis2,000directlaborhours.

Job 6A
$3,000
$2,800
100
50
1
4
20
30

Job 8B
$4,000
$4,800
160
80
4
5
25
50

123.
RefertoFigure412.Ifthenumberofsetupsisusedtoassignsetupcosts,theamountofsetupcostsassignedtoJob6Awouldbe
a.$1,600.
b.$1,000.
c.$800.
d.$1,680.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:$200,000/250=$800persetup$8001=$800
124.
RefertoFigure412.Ifthefouractivitydriversareusedtoallocateoverheadcosts,totaloverheadallocatedtoJob6Awouldbe
a.$5,533.
b.$4,830.
c.$5,030.
d.$5,630.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Setups($200,000/250)

$800persetup

Orderingcosts($80,000/1,600)

$50perorder

Maintenance($400,000/2,000)

$200permachinehour

Power($40,000/40,000)

$1.00perkilowatthour

Setups($8001)

$800

Ordering costs ($504)

200

Maintenance($20020)

4,000

Power($1.0030)
Totaloverhead

30
$5,030

125.
RefertoFigure412.Ifkilowatthoursareusedtoassignpowercosts,theamountofpowercostsassignedtoJob6Awouldbe
a.$33.20.
b.$30.00.
c.$102.00.
d.$53.32.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$40,000/40,000=$1.00perkilowatthour$1.0030=$30.00

126.
Theactivitythataidsmanagementinachievingobjectivessuchasproductorcustomercosting,continuousimprovem
entandenvironmentalmanagementiscalled:
a. Activitydriver
b. Activityclassification
c. Primarykey
d. Concatenatedkey
ANSWER: b

Figure4-13
TheMolotovplantofKaboomIndustrieshastwocategoriesofoverhead:maintenanceandinspection.Costsexpectedforthes
ecategoriesforthecomingyearareasfollows:
Maintenance
Inspection

$50,000
75,000

Theplantcurrentlyappliesoverheadusingdirectlaborhoursandexpectedcapacityof50,000directlaborhours.Thefollowing
datahavebeenassembledforuseindevelopingabidforaproposedjob:
$500
$2,000
500
4
800

Directlabor
Machinehours
Numberofinspections
Directlaborhours

Totalexpectedmachinehoursforalljobsduringtheyearis25,000,andthetotalexpectednumberofinspectionsis1,500.
127.
RefertoFigure4-13.Usingactivitybasedcostingandtheappropriateactivitydrivers,thetotalcostofthepotentialjobwouldbe
a.$1,200.
b.$1,800.
c.$3,700.
d.$3,875.
ANSWER:
c
RATIONALE:
SUPPORTING CALCULATIONS:

Direct materials

$ 500

Direct labor

2,000

Overhead:

($50,000/25,000) 500

($75,000/1,500) 4

Total

1,000

200

$3,700

128.

RefertoFigure4-13.Usingdirectlaborhourstoassignoverhead,thetotalcostofthepotentialjobwouldbe

a.$2,000.
b.$4,000.
c.$4,500.
d.$5,500.
ANSWER:
c
RATIONALE:
SUPPORTING CALCULATIONS:
Directmaterials

$500

Directlabor

2,000

Overhead:
($125,000/50,000)800

2,000

Total

$4,500

Figure4-14
LawsonManufacturinghasfourcategoriesofoverhead.Thefourcategoriesandexpectedoverheadcostsforeachcategoryfo
rnextyearareasfollows:
Maintenance
Materialshandling
Setups
Inspection

$180,000
27,000
24,000
90,000

Currently,overheadisappliedusingapredeterminedoverheadratebaseduponbudgeteddirectlaborhours.20,000directlabor
hoursarebudgetedfornextyear.
Thecompanyhasbeenaskedtosubmitabidforaproposedjob.Theplantmanagerfeelsthatobtainingthisjobwouldresultinne
wbusinessinfutureyears.Usuallybidsarebaseduponfullmanufacturingcostplus15percent.Estimatesfortheproposedjo
bareasfollows:
Directmaterials
Directlabor(600hours)
Numberofmaterialmoves
Numberofinspections
Numberofsetups
Numberofmachinehours

$3,000
$9,000
4
6
8
80

Inthepast,fullmanufacturingcosthasbeencalculatedbyallocatingoverheadusingavolumebasedactivitydriver,directlaborhours.Theplantmanagerhasheardofanewwayofapplyingoverheadthatusescostpoolsa
ndactivitydrivers.Expectedactivityforthefouractivitydriversthatwouldbeusedare:
Machinehours
Materialmoves

5,000
600

Setups
200
Qualityinspections
1,000
129.
RefertoFigure4-14.Ifmaterialmovesareusedtoassignmaterialhandlingcosts,theamountofmaterialhandling
costsallocatedtotheproposedjobwouldbe
a. $ 60.
b. $147.
c. $170.
d. $180.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$27,000/600=$45permaterialmove$454=$180
130.
RefertoFigure414.Ifthenumberofinspectionsisusedtoassigninspectioncosts,theamountofinspectioncostsallocatedtotheproposedjobw
ouldbe
SUPPORTINGCALCULATIONS:$90,000/1,000=$90$906=$540
a.$2,700.
b.$990.
c.$900.
d.$540.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$90,000/1,000=$90$906=$540
131.

Bienvenue,Inc.,hasidentifiedthefollowingoverheadcostsandactivitydriversfornextyear:

Expected
Expected
Overhead Item
Cost
Activity Driver
Setup costs
$100,000
Number of setups
Ordering costs
40,000
Number of orders
Maintenance
200,000
Machine hours
Power
20,000
Kilowatt hours
Thefollowingaretwoofthejobscompletedduringtheyear:
Direct materials
Direct labor
Units completed
Direct labor hours
Number of setups
Number of orders
Machine hours
Kilowatt hours

Quantity
500
3,200
4,000
80,000
Job CC
$375
$350
100
50
1
4
20
30

Job DD
$1,000
$1,200
160
80
4
5
25
50

Thecompany'snormalactivityis4,000directlaborhours.
Iftheactivitydriversareusedtoallocateoverheadcosts,theunitcost(roundedtotwodecimalplaces)forJobDDwouldbe
a.$21.40.
b.$26.56.
c.$26.95.
d.$27.03.
ANSWER:
d
RATIONALE:
SUPPORTING CALCULATIONS:
Directmaterials
Directlabor
Setup[($100,000/500)4]
Ordering[(40,000/3,200)5]
Maintenance[($200,000/4,000)25]
Power[($20,000/80,000) 50]
Total
$4,325/160=$27.03

$1,000.00
1,200.00
800.00
62.50
1,250.00
12.50
$4,325.00

Figure4-15
CarriageManufacturingusesanactivitybasedcostingsystem.ThecompanyproducesModel21andModel22.Informationrelatingtothetwoproductsisasfollows:

Units produced
Machine hours
Direct labor hours
Material handling (number of moves)
Setups

Model 21
24,000
7,500
8,000
4,000
5,000

Model 22
30,000
8,500
12,000
6,000
7,000

The following costs are reported:

Material handling
Labor-related overhead
Setups
132.

$ 40,000
120,000
60,000

RefertoFigure4-15.SetupcostsassignedtoModel22are

a.$36,000.
b.$35,000.
c.$28,000.
d.$25,000.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$60,000/12,000=$5$57,000=$35,000
133.

RefertoFigure4-15.Labor-relatedoverheadcostsassignedtoModel21are

a.$60,000.
b.$58,000.
c.$54,400.
d.$48,000.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$120,000/20,000=$6$68,000=$48,000

Figure4-16
SamsonCompanyrecentlyinstalledanactivitybasedrelationaldatabase.Usingtheinformationcontainedintheactivityrelationaltable,thefollowingpoolrateswerecompu
ted:
$400perpurchaseorder
$24permachinehour,Process1
$30permachinehour,Process2
$80perengineeringhour
TwoproductsareproducedbySpecialProducts:LandM.Theplanthastwomanufacturingprocesses,Process1andProcess2.
Otherprocessesincludeengineering,producthandling,andprocurement.ProductLgoesthroughProcess1whileProductM
goesthroughProcess2.TheproductrelationaltableforSpecialProductsisasfollows:
ProductL
Activity Driver#
1
2
3
4

Name
Units
PurchaseOrders
MachineHours
EngineeringHours

ActivityUsage
200,000
250
80,000
1,250

ProductM
ActivityDriver#
1
2
3
4
134.
Purchase orders (125 $400)

Name
Units
PurchaseOrders
MachineHours
EngineeringHours

ActivityUsage
25,000
125
10,000
1,500

RefertoFigure4$ 50,000 16.WhatistheunitcostofProductM?

a.$18.80

Machine hours (10,000 $30)

Engineering hours (1,500 $80)

300,000 b.$504.00
c.$10.60
d.$12.00
120,000
ANSWER:

Total costs

$470,000 RATIONALE:SUPPORTING
CALCULATIONS:

Units

25,000

Unit cost

$ 18.80

135.
RefertoFigure416.HowmuchpurchasingoverheadcostwillbeassignedtoProductLusingthenumberofpurchaseorders?
a.$100,000
b.$50,000
c.$80,000,000
d.$133,500
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:250$400=$100,000
136.
RefertoFigure4-16.HowmuchengineeringoverheadcostwillbeassignedtoProductMusingengineeringhours?a.
$100,000
b.$120,000
c.$2,000,000
d.$801,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:1,500$80=$120,000
137.

RefertoFigure4-16.HowmuchmachineoverheadcostwillbeassignedtoProductLusingProcess1?

a.$2,400,000
b.$4,800,000
c.$1,920,000
d.$240,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:80,000$24=$1,920,000

138.

RefertoFigure4-16.HowmuchmachineoverheadcostwillbeassignedtoProductMusingProcess2?

a.$2,400,000
b.$1,920,000
c.$240,000
d.$300,000
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:10,000$30=$300,000

139.

RefertoFigure4-16.WhatistheunitcostofProductL?

a.$9.42
b.$504.00
c.$10.60
d.$7.52
ANSWER:
a
RATIONALESUPPORTING CALCULATIONS:

Purchase orders (250 $400)

$ 100,000

Machine hours (80,000 $24)

1,920,000

Engineering hours (1,250 $80)

100,000

Total costs

$2,120,000

Units

200,000

$ 10.60

Unit costs

Figure4-17
XTREMECorporationhasthefollowingactivities:creatingbillsofmaterials(BOM),studyingmanufacturingcapabilit
ies,improvingmanufacturingprocesses,trainingemployees,anddesigningtooling.Thegeneralledgeraccountsrevea
lthefollowingexpendituresformanufacturingengineering:
Salaries
Equipment
Supplies
Total

$ 75,000
40,000
10,000
$125,000

Theequipmentisusedfortwoactivities:improvingprocessesanddesigningtooling.Thirtyfivepercentoftheequipment'stimeisusedforimprovingprocessesand65percentisusedfordesigningtools.Thesalar
iesarefortwoengineers.Oneispaid$50,000,whiletheotherearns$25,000.The$50,000engineerspends40percento
fhistimetrainingemployeesinnewprocessesand60percentofhistimeonimprovingprocesses.Theremainingengin
eerspendsequaltimeonallactivities.Suppliesareconsumedinthefollowingproportions:
CreatingBOMs
Studyingcapabilities

25
%
10
%

Improvingprocesses
Trainingemployees
Designingtooling
140.

20
%
25
%
20
%

RefertoFigure4-17.WhatisthecostassignedtothecreatingBOMsactivity?

a.$31,250
b.$43,750
c.$7,500
d.$125,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:(0.20$25,000+0.25 $10,000)=$7,500
141.

RefertoFigure4-17.Whatisthecostassignedtotheimprovingprocessesactivity?

a.$250,000
b.$25,000
c.$43,750
d.$51,000
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
(0.35$40,000+0.20$25,000+0.60$50,000+0.20$10,000)=$51,000

142.

Referto4-17.Whatisthecostassignedtothetrainingemployeesactivity?

a.$125,000
b.$81,250
c.$31,250
d.$27,500
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
(0.40$50,000+0.20 $25,000+0.25$10,000)=$27,500
143.

Referto4-17.Whatisthecostassignedtothedesigningtoolingactivity?

a.$81,250
b.$33,000
c.$25,000
d.$125,000
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
(0.65$40,000+0.20 $25,000+0.20$10,000)=$33,000

144.

Whichofthefollowingquantitiesisanexampleofanactivitydriverinactivity-basedcosting?

a. numberofdirectlaborhours
b. numberoflabortransactions
c. numberofmachinehours
d. allofthese
ANSWER: d
145.

Ifactivity-basedcostingisused,materialshandlingwouldbeclassifiedasa

a. unit-levelactivity.
b. batch-levelactivity.
c. product-levelactivity.
d. facility-levelactivity.
ANSWER: b

146.

Ifactivity-basedcostingisused,securityisanexampleofa

a. unit-levelactivity.
b. batch-levelactivity.
c. product-levelactivity.
d. facility-levelactivity.
ANSWER: d
147.
Ifactivitybasedcostingisused,modificationsmadebyengineeringtotheproductdesignofseveralproductswouldbeclassifiedas
a
a. product-levelactivity.
b. batch-levelactivity.
c. unit-levelactivity.
d. facility-levelactivity.
ANSWER: a
148.

Ifactivity-basedcostingisused,insuranceontheplantwouldbeclassifiedasa

a. unit-levelactivity.
b. batch-levelactivity.
c. product-levelactivity.
d. facility-levelactivity.
ANSWER: d
149.

Ifactivity-basedcostingisused,set-upswouldbeclassifiedasa

a. unit-levelactivity.
b. batch-levelactivity.
c. product-levelactivity.
d. facility-levelactivity.
ANSWER: b
150.

Ifactivity-basedcostingisused,set-upswouldbeclassifiedasa

a. unit-levelactivity.
b. product-levelactivity.
c. batch-levelactivity.
d. facility-levelactivity.
ANSWER: c

151.

Maintenanceoftheproductionequipmentwouldbeclassifiedasa

a. unit-levelactivity.
b. product-levelactivity.
c. cell-levelactivity.
d. facility-levelactivity.
ANSWER: a

Figure4-18
MarionManufacturingusesanactivitybasedcostingsystem.ThecompanyproducesModelXandModelY.Informationrelatingtothetwoproductsisasfollo
ws:

Model X Model Y

Units produced

20,000

40,000

Machine hours

8,000

10,000

14,000

16,000

1,000

1,400

40

60

Direct labor hours

Engineering labor (hours)

Setups

The following costs are reported:

Engineering

$ 48,000

Setups

100,000

Machine-related overhead

144,000

152.

RefertoFigure4-18.Machine-relatedoverheadwouldbeclassifiedasa

a. unit-levelactivity.
b. batch-levelactivity.

c. product-levelactivity.
d. facility-levelactivity.
ANSWER: a
153.

RefertoFigure4-18.Setupswouldbeclassifiedasa

a. unit-levelactivity.
b. batch-levelactivity.
c. product-levelactivity.
d. facility-levelactivity.
ANSWER: b

Figure4-19
AttractionCorporationproducesspeciallymachinedparts.Thepartsareproducedinbatchesinonecontinuousmanufacturing
process.Eachpartiscustomproducedandrequiresspecialengineeringdesignactivity(basedoncustomerspecifications).O
ncethedesigniscompleted,theequipmentcanbesetupforbatchproduction.Oncethebatchiscompleted,asampleistakenan
dinspectedtoseeifthepartsarewithinthetolerancesallowed.Thus,themanufacturingprocesshasfouractivities:engineerin
g,setups,machining,andinspecting.Inaddition,thereisasustainingprocesswithtwoactivities:providingutilities(plantwid
e)andprovidingspace.Costshavebeenassignedtoeachactivityusingdirecttracingandresourcedrivers:
Engineering
Setups
Machining
Inspection
Providingspace
Providingutilities

$1,000,00
0
900,000
2,000,00
0
800,000
250,000
180,000

Activitydriversforeachactivityhavebeenidentifiedandtheirpracticalcapacitieslisted:
Machinehours
Setups
Engineeringhours

25,000
200
5,000

Inspectionhours

2,500

Thecostsoffacility-levelactivitiesareassignedusingmachinehours.
154.

Referto4-19.Whatis(are)thefacility-levelactivity(ies)?

a. set-ups
b. inspecting
c. providingspace
d. bothaandb
ANSWER: c
155.

RefertoFigure4-19.Whatis(are)theproduct-levelactivity(ies)?

a. engineering
b. setups
c. inspecting
d. alloftheabove
ANSWER: a

156.

RefertoFigure4-19.Whatis(are)theunit-levelactivity(ies)?

a. engineering
b. setups
c. providingspace
d. machining
ANSWER: d
157.

Batch-levelcostsareassignedusing

a. non-unit-basedactivitydrivers.
b. unit-basedactivitydrivers.
c. costpools.
d. departmentalrates.
ANSWER: a
158.

Ifactivity-basedcostingisused,electricityusagewouldbeanexampleofa

a. batch-levelactivity.
b. unit-levelactivity.
c. product-levelactivity.
d. facility-levelactivity.
ANSWER: b

Figure4-20
QuasiTechCorporationproducesspeciallymachinedparts.Thepartsareproducedinbatchesinonecontinuousmanufacturingpro
cess.Eachpartiscustomproducedandrequiresspecialengineeringdesignactivity(basedoncustomerspecifications).Once
thedesigniscompleted,theequipmentcanbesetupforbatchproduction.Oncethebatchiscompleted,asampleistakenandin
spectedtoseeifthepartsarewithinthetolerancesallowed.Thus,themanufacturingprocesshasfouractivities:engineering,s
etups,machining,andinspecting.Costshavebeenassignedtoeachactivityusingdirecttracingandresourcedrivers:
Activity
Engineering
Setups
Machining
Inspection

Expected Cost
$1,000,000
$ 900,000
$2,000,000
$ 800,000

Activity Driver
engineering hours
setups
machine hours
inspection hours

Activity Capacity
5,000 hours
200 setups
25,000 machine hours
2,500 inspection hours

Owensproducestwomodels:ModelXandModelY.Thefollowingtableshowshowthetwoproductsconsumeactivity.
Unitscompleted
Engineeringhours
Setups
Machinehours
Inspectionhours

159.

ModelC
300,000
1,000
80
20,000
1,500

ModelD
200,000
4,000
120
5,000
1,000

RefertoFigure4-20.HowmuchoverheadisassignedtoModelCusingthe4activitydrivers?

a.$2,820,000
b.$2,640,000
c.$2,060,000
d.$560,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Activityrates:Engineering$1,000,000/5000=$200eng.hr.
Setups$900,000/200=$4500persetupMachining$2,000,000/25,000=$80mach.hr.Inspection
$800,000/2500=$320insphr.Assignactivitycoststoproducts:

Engineering
Setups
Machining
Inspection
Totalcostassigned
Units
Overheadperunit

Poolrate
$200
$4,500
$80
$320

ActivityforC
1,000
80
20,000
1,500

CostforC
$200,000
$360,000
$1,600,000
$480,000
$2,640,000
300,000
$8.80

ActivityforD
4,000
120
5,000
1,000

CostforD
$1,000,000
$900,000
$2,000,000
$800,000
$2,060,000
200,000
$10.30

160.

RefertoFigure4-20.HowmuchoverheadisassignedtoModelDusingthe4activitydrivers?

a.$560,000
b.$2,060,000
c$2,640,000
d.$2,820,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Activityrates:Engineering$1,000,000/5000=$200eng.hr.
Setups$900,000/200=$4500persetupMachining$2,000,000/25,000=$80mach.hr.Inspection
$800,000/2500=$320insphr.Assignactivitycoststoproducts:
Engineering
Setups
Machining
Inspection
Totalcostassigned
Units
Overheadperunit

Poolrate
$200
$4,500
$80
$320

ActivityforC
1,000
80
20,000
1,500

CostforC
$200,000
$360,000
$1,600,000
$480,000
$2,640,000
300,000
$8.80

ActivityforD
4,000
120
5,000
1,000

CostforD
$1,000,000
$900,000
$2,000,000
$800,000
$2,060,000
200,000
$10.30

161.
RefertoFigure420.DeterminetheengineeringcostsassignedtomodelCusingthetwomostexpensiveactivitiesforcostpools.Thecostsofthe
tworelativelyinexpensiveactivitiesareallocatedtothetwomostexpensiveactivitiesinproportiontotheircosts.
(Roundtotwodecimalplaces.)TheengineeringcostassignedtomodelCwouldbe
a.$2,819,930
b.$1,566,666.67
c.$566,666.67
d.$313,330
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Activityrates:
Engineering$1,000,000/5000=$200eng.hr.Setups$900,000/200=$4500persetupMachining$2,000,000/25,
000=$80mach.hr.Inspection$800,000/2500=$320insphr.
Assignactivitycoststo
Engineering
Setups
Machining
Inspection
Totalcostassigned
Units
Overheadperunit

products:
Poolrate
$200
$4,500
$80
$320

ActivityforC
1,000
80
20,000
1,500

CostforC
$200,000
$360,000
$1,600,000
$480,000
$2,640,000
300,000
$8.80

ActivityforD
4,000
120
5,000
1,000

CostforD
$1,000,000
$900,000
$2,000,000
$800,000
$2,060,000
200,000
$10.30

Inexpensiveactivitiesaresetupsandinspection=$900,000+$800,000=$1,700,000
Costpoolsforthetwomostexpensiveactivities:
engineering1,000,000+[(1,000,000/3,000,000)1,700,000]=1,566,666.67
machining2,000,000+[(2,000,000/3,000,000) 1,700,000]=3,133,333.33
Costpoolratesforthetwomostexpensiveactivities:engineering1,566,666.67/5,000eng.hrs.=313.33pereng.
hr.
machining3,133,333.33/25,000mach.hrs.=125.33permach.hr.

Engineering
Machining
Totalcostassigned

Poolrate
$313.33
$125.33

ActivityforX
1,000
20,000

CostforX
$313,330
$2,506,600
$2,819,930

Activity for Y
4,000
5,000

Costfor Y
$1,253,320
$626,650
$1,879,970

162.
RefertoFigure420.FirstdeterminetheoverheadcostsassignedtomodelDusingthetwomostexpensiveactivitiesforcostpools.Thecostso
fthetworelativelyinexpensiveactivitiesareallocatedtothetwomostexpensiveactivitiesinproportiontotheircosts.
(Roundtotwodecimalplaces.)TheengineeringcostassignedtomodelDwouldbe
a.$626,650.
b.$1,253,320.
c.$1,879,970.
d.$3,133,333.33.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Activityrates:
Engineering$1,000,000/5000=$200eng.hr.Setups$900,000/200=$4500persetupMachining$2,000,000/
25,000=$80mach.hr.Inspection$800,000/2500=$320insphr.
Assignactivitycoststo
Engineering
Setups
Machining
Inspection
Totalcostassigned
Units
Overheadperunit

products:
Poolrate
$200
$4,500
$80
$320

ActivityforC
1,000
80
20,000
1,500

CostforC
$200,000
$360,000
$1,600,000
$480,000
$2,640,000
300,000
$8.80

ActivityforD
4,000
120
5,000
1,000

CostforD
$1,000,000
$900,000
$2,000,000
$800,000
$2,060,000
200,000
$10.30

Inexpensiveactivitiesaresetupsandinspection=$900,000+$800,000=$1,700,000
Costpoolsforthetwomostexpensiveactivities:
engineering1,000,000+[(1,000,000/3,000,000)1,700,000]=1,566,666.67
machining2,000,000+[(2,000,000/3,000,000)1,700,000]=3,133,333.33
Costpoolratesforthetwomostexpensiveactivities:engineering1,566,666.67/5,000eng.hrs.=313.33peren
g.hr.
machining3,133,333.33/25,000mach.hrs.=125.33permach.hr.

Engineering
Machining
Totalcostassigned

Poolrate
$313.33
$125.33

ActivityforX
1,000
20,000

CostforX
$313,330
$2,506,600
$2,819,930

Activity for Y
4,000
5,000

Costfor Y
$1,253,320
$626,650
$1,879,970

163.
RefertoFigure420.First,determinetheoverheadcostsassignedtomodelDusingthetwomostexpensiveactivitiesforcostpools.Thecosts
ofthetworelativelyinexpensiveactivitiesareallocatedtothetwomostexpensiveactivitiesinproportiontotheircosts.
(Roundtotwodecimalplaces.)WhatistheerrorintheoverheadcostassignedtomodelDusingABC(4drivermodel)astheb
enchmark?
a.$180,030
b.$240,700
c.$313,330
d.$626,650
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Activityrates:
Engineering$1,000,000/5000=$200eng.hr.Setups$900,000/200=$4500persetupMachining$2,000,000/
25,000=$80mach.hr.Inspection$800,000/2500=$320insphr.
Assignactivitycoststoproducts:
Poolrate
Engineering
Setups
Machining
Inspection
Totalcostassigned
Units
Overheadperunit

$200
$4,500
$80
$320

Activityfor
C
1,00
80
20,00
1,50

Costfor
C
$200,000
$360,000
$1,600,000
$480,000
$2,640,000
300,000
$8.80

Activityfor
D
4,000
120
5,000
1,000

Costfor
D
$1,000,000
$900,000
$2,000,000
$800,000
$2,060,000
200,000
$10.30

Inexpensiveactivitiesaresetupsandinspection=$900,000+$800,000=$1,700,000
Costpoolsforthetwomostexpensiveactivities:
engineering
1,000,000+[(1,000,000/3,000,000)1,700,000]=1,566,666.67
machining
2,000,000+[(2,000,000/3,000,000)1,700,000]=3,133,333.33
Costpoolratesforthetwomostexpensiveactivities:
engineering
1,566,666.67/5,000eng.hrs.=313.33pereng.hr.machining
3,133,333.33/25,000mach.hrs.=125.33permach.hr.
Poolrate
Engineering
Machining
Totalcostassigned

$313.33
$125.33

ModelY--ABCbenchmark

ActivityforC
1,000
20,000

Costfor
C
$313,330
$2,506,600
$2,819,930

ActivityforD
4,000
5,000

Costfor
D
$1,253,320
$626,650
$1,879,970

$2,060,000
$1,879,970
Error $180,030.00

164.
RefertoFigure4-20.WhataretheglobalconsumptionratiosofModelCandDrespectively?
(roundtotwodecimalplaces)
a.0.20;0.80
b.0.42;0.58
c.0.56;0.44
d.0.84;0.16
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Activityrates:
Engineering$1,000,000/5000=$200eng.hr.Setups$900,000/200=$4500persetupMachining$2,000,000/
25,000=$80mach.hr.Inspection$800,000/2500=$320insphr.
Assignactivitycoststoproducts:
Activity for
C

Cost for
C

Activity for
D

$200

1,000

$200,000

4,000

$1,000,0
00

$4,500

80

$360,000

120

$900,000

Machining

$80

20,000

$1,600,00
0

5,000

$2,000,0
00

Inspection

$320

1,500

$480,000

1,000

$800,000

Pool rate

Engineering

Setups

Total cost
assigned

Units

Overhead per
unit

Cost for
D

$2,640,00
0

$2,060,0
00

300,000

200,000

$8.80

$10.30

Globalconsumptionratios:
X
$2,640,000
0.56

Y
$2,060,000
0.44

Total
$4,700,000
1.00

165.
RefertoFigure420.Usingtheactivityratiosforengineeringandmachining,whatistheoverheadcostassignedtotheengineeringpool?
(roundtotwodecimalplaces)
a.$1,880,000
b.$2,620,000
c.$2,740,000
d.$2,870,000
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Activityrates:
Engineering$1,000,000/5000=$200eng.hr.Setups$900,000/200=$4,500persetupMachining$2,000,000/25,
000=$80mach.hr.Inspection$800,000/2500=$320insphr.
Assignactivitycoststo products:
Poolrate
Engineering
$200
Setups
$4,500
Machining
$80
Inspection
$320
Totalcostassigned
Units
Overheadperunit

ActivityforX
1,000
80
20,000
1,500

CostforX
$200,000
$360,000
$1,600,00
$480,000
$2,640,00
300,000
$8.80

Activity for Y
4,000
120
5,000
1,000

Costfor Y
$1,000,000
$900,000
$2,000,000
$800,000
$2,060,000
200,000
$10.30

Globalconsumptionratios:
X
$2,640,000
0.56

Y
$2,060,000
0.44

Equations
1/5W1+4/5W2=0.56
4/5W11/5W2=0.44W1=0.4;W2=0.6
Machining4,700,0000.6=2,820,000/25,000mach.hrs.=112.8mach.hrs.
Engineering4,700,0000.4=$1,880,000

Total
$4,700,000
1.00

166.
RefertoFigure4-20.Usingtheactivityratiosforengineeringandmachining,whatistheoverheadrateformachining?
(roundtotwodecimalplaces)
a. $376
b.$541.50
c.$872.60
d.$112.80
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Activityrates:
Engineering$1,000,000/5000=$200eng.hr.Setups$900,000/200=$4500persetupMachining$2,000,000/25,0
00=$80mach.hr.Inspection$800,000/2500=$320insphr.
Assignactivitycoststoproducts:
Engineering
Setups
Machining
Inspection
Totalcostassigned
Units
Overheadperunit
Globalconsumptionratios:

Poolrate
$200
$4,500
$80
$320

Activityfor
X
1,00
80
20,00
1,50

X
$2,640,000
0.56

CostforX
$200,000
$360,000
$1,600,000
$480,000
$2,640,000
300,000
$8.80

Activity for
Y
4,000
120
5,000
1,000

Y
$2,060,000
0.44

Equations
1/5W1+4/5W2=0.56
4/5W11/5W2=0.44W1=0.4;W2=0.6
Machining4,700,0000.6=2,820,000/25,000mach.hrs.=112.8mach.hrs.

Costfor Y
$1,000,000
$900,000
$2,000,000
$800,000
$2,060,000
200,000
$10.30

Total
$4,700,000
1.00

Figure4-21
ApplebyManufacturingusesanactivitybasedcostingsystem.ThecompanyproducesModelFandModelG.Informationrelatingtothetwoproductsisasfollows:

Unitsproduced
Machinehours
Directlaborhours
Materialhandling(numberofmoves)
Setups
Purchaseorders
Inspections
Productlinevariations

ModelF
24,000
7,500
8,000
4,000
5,000

ModelG
30,000
8,500
12,000
6,000
7,000

30
10,000
8

40
14,000
12

Thefollowingoverheadcostsarereportedforthefollowingactivitiesoftheproductionprocess:
Materialhandling
Labor-relatedoverhead
Setups
Productdesign
Batchinspections
Centralpurchasing

$ 40,000
120,000
60,000
100,000
120,000
70,000

JonesmanufacturinghasusedactivitybasedcostingtoassigncoststoModelsFandGasgiveninthetablebelow:

Activity
Materialhandling
Laborrelatedoverhea
d
Setups
Productdesign
Batchinspections
Centralpurchasing
total

CostPool

Drive
r

$40,00
0
$120,00
0$60,00

10,00
0
20,00
012,00

$100,00

20

$120,00
0
$70,00
0

24,00
0
70

Pool
Rat

Model
F

$4

4,000

$6

8,000

$5
$5,00

5,000
8

$5

10,00
0
30

$1,00
0

ModelF
Cost
$16,00
0
$48,00
0$25,00

Model
G
6,000

Model
G

Total

12,00
07,000

$24,00
0
$72,00
0$35,00

$40,00
0
$120,00
0$60,00

$40,00

12

$60,00

$100,00

$50,00
0
$30,00
0
$209,00

14,00
0
40

$70,00
0
$40,00
0
$301,00

$120,00
0
$70,00
0
$510,00

ApplebyManufacturingwantstoimplementanapproximatelyrelevantABCsystembyusingthetwomostexpensiveactivities
forcostassignment.

167.

RefertoFigure4-21.Underthisnewapproach,whichtwoactivitieswouldbeselectedasthecostpools?

a. materialshandlingandlaborrelated
b. laborrelatedandbatchinspections
c. productdesignandbatchinspections
d. materialshandlingandcentralpurchasing
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Thetwoactivitiesthathavethehighestcostarelaborrelatedat$120,000
andbatchinspectionsat$120,000
168.

RefertoFigure4-21.Underthisnewapproach,whatcostwouldbeassignedtomaterialshandling?

a. 0
b.$40,000
c.$140,000
d.$290,000
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:Thetwoactivitiesthathavethehighestcostarelaborrelatedat$120,000
andbatchinspectionsat$120,000.Nocostswouldbeassignedtomaterialshandling.
169.

RefertoFigure4-21.Underthisnewapproach,whatcostwouldbeassignedtothelaborrelatedcostpool?

a. 0
b.$120,000
c.$255,000
d.$315,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Thetwoactivitiesthathavethehighestcostarelaborrelatedat$120,000andbatchinspectionsat
$120,000.Theremainingcostsintheotherpoolsamountto$270,000.
laborrelated=120,000+[120,000/240,000270,000]=255,000
batch=120,000+[120,000/240,000270,000]=255,000

170.
RefertoFigure421.Underthisnewapproachusingthenewrates,whatlaborcostisassignedtoModelFinthisapproximatelyrelevantABCsyst
em?
a.$60,000
b.$102,000
c.$153,000
d.$225,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Thetwoactivitiesthathavethehighestcostarelaborrelatedat$120,000andbatchinspectionsat
$120,000.Theremainingcostsintheotherpoolsamountto$270,000.
laborrelated=120,000+[120,000/240,000270,000]=255,000
batch = 120,000+ [120,000/240,000 270,000] =255,000
laborrelated=255,000/20,000labhr=$12.75perlabhr
batch=255,000/24,000=$10.625batch

labor related
costs
batch
inspections
total

171.

Pool Rate

Model F
activity

Model F
cost

$12.75

8000

102,000

$10.625

10,000

Model G
activity

RefertoFigure4-21.Underthisnewapproach,whatisthenewpoolrateforlaborrelatedcosts?

a. 0
b. $6
c.$8.225
d.$12.75
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Thetwoactivitiesthathavethehighestcostarelaborrelatedat$120,000andbatchinspectionsat
$120,000.Theremainingcostsintheotherpoolsamountto$270,000.
laborrelated=120,000+[120,000/240,000270,000]=255,000
batch=120,000+[120,000/240,000270,000]=255,000
laborrelated=255,000/20,000labhr=$12.75perlabhr
batch=255,000/24,000=$10.625batch

Model G
cost

172.

RefertoFigure4-21.Underthisnewapproach,whatisthenewpoolrateforbatchinspectioncosts?

a. 0
b. $5
c.$10.625
d.$15.525
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Thetwoactivitiesthathavethehighestcostarelaborrelatedat$120,000andbatchinspectionsat
$120,000.Theremainingcostsintheotherpoolsamountto$270,000.
laborrelated=120,000+[120,000/240,000270,000]=255,000
batch = 120,000+ [120,000/240,000 270,000] =255,000
laborrelated=255,000/20,000labhr=$12.75perlabhr
batch=255,000/24,000=$10.625batch
173.
RefertoFigure421.Underthisnewapproachusingthenewrates,whataretheoverheadcostsassignedtoModelGinthisapproximatelyrelevan
tABCsystem?
a.$120,000
b.$208,250
c.$255,000
d.$301,750
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Thetwoactivitiesthathavethehighestcostarelaborrelatedat$120,000andbatchinspectionsat
$120,000.Theremainingcostsintheotherpoolsamountto$270,000.
laborrelated=120,000+[120,000/240,000270,000]=255,000
batch=120,000+[120,000/240,000270,000]=255,000
laborrelated=255,000/20,000labhr=$12.75perlabhr
batch=255,000/24,000=$10.625batch

Pool Rate
labor related
$12.75
batch inspection
$10.625
total

Model F
activity
8000
10,000

Model F cost
102,000
106,250
208,250

Model G
activity
12,000
14,000

Model G cost
153,000
148,750
301,750

174.
RefertoFigure421.UsingABCasthebenchmark,whatisthepercentageerrorinthecostassignedtoModelGusingtheapproximatelyrelevant
ABCapproach?(roundto4decimalplaces)
a.0.25%
b.0.12%
c. 1.2%
d. 2.5%
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Thetwoactivitiesthathavethehighestcostarelaborrelatedat$120,000andbatchinspectionsat
$120,000.Theremainingcostsintheotherpoolsamountto$270,000.
laborrelated=120,000+[120,000/240,000270,000]=255,000
batch=120,000+[120,000/240,000270,000]=255,000
laborrelated=255,000/20,000labhr=$12.75perlabhr
batch=255,000/24,000=$10.625batch

$12.75

Model F
activity
8000

$10.625

10,000

Pool Rate
labor related
batch
inspections
total

102,000

Model G
activity
12,000

106,250

14,000

Model F cost

208,250

Model G cost
153,000
148,750
301,750

Model Y 301,000 -301,750 =750/301,000 = 0.0025

175.
RefertoFigure421.Underthisnewapproachusingconsumptionratiosforlaborrelatedandbatchinspections,whatsetofequationswouldbeus
edtocreateequallyaccuratereducedABCallocationrates(wherea=laborhoursandb=batchinspections)?
(roundto5decimalplaces)
a.0.40=0.8a+0.75b0.60=0.12a+0.85b
b.0.41=0.4a+0.41667b0.59=0.6a+0.58333b
c.0.50=0.4a+0.6b0.50=0.6a+0.4b
d.0.44=0.8a+0.75b0.56=0.12a+0.85b
ANSWER: b
176.
RefertoFigure421.UndertheequallyaccuratereducedABCsystem,usingconsumptionratiosforlaborrelatedandbatchinspections,whatall
ocationratewouldbeusedtoassignlaborrelatedcosts?(roundto5decimalplaces)a.0.375
b.0.60
c.0.625

d.0.40
ANSWER: a

177.
RefertoFigure421.UndertheequallyaccuratereducedABCsystem,whataretheglobalconsumptionratiosforModelFandModelGrespecti
vely?(roundto2decimalplaces)
a.0.41:0.59
b.0.44;0.56
c.0.40;0.60
d.0.50;0.50
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
ModelF
209,000
510,000
0.41

ModelG
301,000
510,000
0.59

178.
RefertoFigure421.UndertheequallyaccuratereducedABCsystem,usingconsumptionratiosforlaborrelatedandbatchinspections,theover
headassignedtolaborrelatedactivitieswouldbe?(roundto5decimalplaces)
a.$318,750
b.$204,000
c.$306,000
d.$191,250
ANSWER: d
179.
RefertoFigure421.UnderequallyaccuratereducedABCsystem,usingconsumptionratiosforlaborrelatedandbatchinspections,theoverhea
dcostassignedtoModelFwouldbe?(roundto5decimalplaces)
a.$204,000
b.$318,750
c.$306,000
d.$191,250
ANSWER: b
180.

Thecollecteddatasetsthatareorganizedandinterrelatedforusebyanorganization'sABCinformationsystemis(are):

a. Activitydriver
b. Activity-basedcostingdatabase
c. Costobjective
d. Bothaandc
ANSWER: b

Figure4-22
TheWellnessClinicisconsideringatime-drivenactivitybasedcostingsystem.Giventhefollowingdata:
Resources
supervision
supplies and uniforms
salaries
computer
monitor
Total
Total nursing hours
(practical capacity)

181.

$ 60,000
$ 80,000
$350,000
$ 10,000
$ 25,000
$525,000
15,000

Activities
treating patients
providing hygienic care
responding to requests
monitoring patients

time/activity
1.40 hr.
1.00 hr
0.60 hr
1.00 hr

RefertoFigure4-22.Whatisthecapacitycostrate?

a. $4
b. b.$25
c. c.$35
d.$105
ANSWER:
c
RATIONALE: $525,000/15,000=$35
182.

RefertoFigure4-22.Whatistheactivityratefortreatingpatients?

a.$35
b.$49
c.$21
d.$140
ANSWER:
b
RATIONALE: 525,000/15,000 = 35
35x1.40=$49perpatient
183.

RefertoFigure4-22.Whatistheactivityrateforrespondingtorequests?

a.$21
b.$35
c.$25
d.$50
ANSWER:
a
RATIONALE: $525,000/15,000= 35
35 x0.6=

184.

Thegroupingoflogicallyrelatedinformationiscalled:

a. activitydriver
b. dataset
c. costobjective
d. bothaandc
ANSWER: b
185.

WhichofthefollowingstatementsisTRUE?

a. AvitalattributeofanABCdatabaseisthecostofindividualdepartments.
b. Theultimateobjectiveofactivityclassificationistobuildhomogeneouscostpools.
c. WhenunbundlinggeneralledgercoststoanABCdatabase,wearemoreconcernedabout"Howarethedollarsspent?"tha
n"Whatisspent?"
d. Bothbandcaretrue.
ANSWER: d
186.

InanapproximatelyrelevantABCsystem

a. allactivitiesstillareseparatedintopools;theyareallocatedonestimatedactivitylevels.
b. onlythemostexpensiveactivitiesareallocatedusingappropriatecause-and-effectdrivers.
c. costpoolsarelimitedtoonlytwocostpools.
d. noneofthese.
ANSWER: b
187.

Inthetime-drivenABCsystems,managers

a. assignresourcestodepartments,thenactivities.
b. assignresourcecostsfirsttoactivities,thentoproducts.
c. directlyestimatetheresourcedemandsimposedbyeachproduct.
d. noneofthese.
ANSWER: c
188.
InatimedrivenABCsystem,oncethemanagersdeterminethecostofpertimeunitofsupplyingresourcestoactivities,thenextstepwoul
dbe
a. formanagerstodeterminehowlonganemployeetakestodoanactivity.
b. assigncostsofadepartmentsresourcestothecustomerwhousestheservices.
c. formanagerstodeterminethetimeittakestocarryoutoneunitofeachkindofactivity.
d. attempttoestimatepracticalcapacity.
ANSWER: c

189.

Ifoperationsrunonlessthanfullcapacity,whatistheresultoncostdriverrates?

a. Theyarenotaffected.
b. Theyaretoolow.
c. Theycanbeeithertoohighortoolow.
d. Theyaretoohigh.
ANSWER: b
190.

WhichofthefollowingisNOTanadvantageofatime-drivenABCsystem?

a. Therearemoreactivitypoolsusedtoallocatecosts
b. Managerscanreviewthecostsofunusedcapacity
c. Managerscandeterminehowtoreducethecostofsupplyingunusedresourcesinsubsequentperiods
d. Managerscanmonitoreffortstoreducecostswithunusedcapacity
ANSWER: a
191.
TheRoanokeplantoftheVirginiaCompanyhastwoproductiondepartments:ExtrusionandAssembly.Theplantpro
ducestwoproducts:PandQ.Costinformationfortheproductiondepartmentsisgivenbelow:
Extrusion
$360,000
Assembly
750,000
Thefollowingtablepresentsactivityinformationaboutthedepartmentsandproducts:
Extrusion
Directlaborhours:
P
Q
Total
Machinehours:
P
Q
Total

Assembly

Total

10,000
10,000
20,000

20,000
30,000
50,000

30,000
40,000
70,000

5,000
15,000
20,000

1,000
2,000
3,000

6,000
17,000
23,000

Required:
a. ComputethepredeterminedoverheadrateforeachdepartmentifExtrusionusesmachinehoursandAssemblyuseslaborh
ours.
b.Calculatetheperunitoverheadrateforeachproductif80,000unitsofPwereproducedand90,000unitsofQwereproduced
.
ANSWER:
a.

Extrusions
$360,000
Machinehours
20,000
Overheadrate
$18
Assembly

750,000

Laborhours
Overheadrate

50,000
$15

b.
P
units produced
80,000
overhead applied to production
Extrusion:
$18 x 5000
$ 90,000
$18 x 15,000
Assembly
$15 x 20,000
$300,000
$15 x 30,000
Total
$390,000
Overhead per Unit
$4.875

Q
90,000

$270,000
$450,000
$720,000
$8

192.
LavenderCompanyhasdecidedtouseapredeterminedratetoassignfactoryoverheadtoproduction.Thefollowingp
redictionshavebeenmadefor2016:
Total factory overheadcosts
$150,000
Directlaborhours
40,000hours
Direct labor costs
$200,000
Machinehours
60,000hours
Required:
a. Computethepredeterminedfactoryoverheadrateunderthreedifferentbases:(1)directlaborhours,
(2)directlaborcosts,and(3)machinehours.
b.Assumethatactualfactoryoverheadwas$152,500andthatLavenderelectedtoapplyfactoryoverheadtoWorkinProcess
basedondirectlaborhours.Ifactualdirectlaborwas42,000hoursfor2016,wasfactoryoverheadoverappliedorunderapp
lied?Byhowmuch?
c. LavenderCompanyfollowsthepolicyofwritingoffanyunderoroverappliedfactoryoverheadbalancetoCostofGoodsSoldattheendoftheyear.Maketheentrynecessaryattheendof
2016todisposeofthefactoryoverheadbalancedeterminedinPart(b).
ANSWER:
a.

(1)Directlaborhours:($150,000/40,000hours)=$3.75perDLH
(2)Directlaborcosts:($150,000/$200,000)=75%ofDLC
(3)Machinehours:($150,000/60,000hours)=$2.50perMH
b.

Overheadapplied(42,000$3.75)

$157,500

Actualoverhead

152,500

Overappliedoverheadby
c. Factory Overhead
Costof GoodsSold

$5,000
5,000
5,000

193.
TheCustomGuitarCompanyusesapredeterminedoverheadrateof$5permachinehourtoapplyover
head.
Duringtheyear,32,500machinehourswereworked.Actualmanufacturingoverheadcostfortheyearwas
$187,500.Companyrecordsshowedthefollowingaccountbalancesattheendoftheyear:
Materials
Workinprocess
Finishedgoods
Costofgoodssold

$22,500
37,500
50,000
112,500

Required:
a. Determinetheamountofunderappliedoroverappliedoverhead.
b.Assumingtheamountofunderappliedoroverappliedoverheadismaterial,determineunderappliedorovera
ppliedoverheadthatwouldbeallocatedtothefollowingaccountsiftheallocationismadeusingendingacco
untbalances:
WorkinProcess
FinishedGoods
CostofGoodsSold
c. Assumingtheamountofunderappliedoroverappliedoverheadismaterial,calculatethenewbalanceofthef
ollowingaccountsafterunderappliedoroverappliedoverheadhasbeenallocated:
WorkinProcess
FinishedGoods
CostofGoodsSold
d.DeterminethebalanceofCostofGoodsSoldifunderappliedoroverappliedoverheadisimmaterial.
ANSWER:
a. $25,000 underapplied

$187,500 - ($5 32,500)

$25,000 ($37,500/$200,000)
$25,000 ($50,000/$200,000)
$25,000 ($112,500/$200,000)

b.

Work in Process, $4,687.50

Finished Goods, $6,250.00
Cost of Goods Sold, $14,062.50

c.

Work in Process, $42,187.50 = $37,500 + $4687.50

Finished Goods, $56,250 = $50,000 + $6,250
Cost of Goods Sold, $126,562.50 = $112,500 + $14,062.50

d.

$137,500 = $112,500 + $25,000

194.
TheAnchorageplantoftheTundraCompanyproducestwocalculatorsandhastwoproductiondepart
ments:assemblyandpackaging.Informationfortheproductsisgivenbelow:

Unitsproduced
Primecosts
Directlaborhours
Numberofsetups
Machinehours
Inspectionhours
Numberofmoves

Deluxe

Regular

20,000
$160,000
20,000
60
10,000
2,000
180

200,000
$1,500,000
160,000
40
80,000
16,000
120

Total
$1,660,00
0
180,00
1000
90,00
0
18,00
3000

Thefollowingtablepresentsactivityinformationaboutthedepartmentsandproducts:

Direct labor hours:

Deluxe
Regular
Total
Machine hours:
Deluxe
Regular
Total
Overhead Costs:
Setting equipment
Moving material
Machining
Inspection
Total

Assembly

Packaging

Total

10,000
150,000
160,000

10,000
10,000
20,000

20,000
160,000
180,000

2,000
8,000
10,000

8,000
72,000
80,000

10,000
80,000
90,000

$120,000
60,000
20,000
16,000
$216,000

$120,000
60,000
180,000
144,000
$504,000

$240,000
120,000
200,000
160,000
$720,000

Required:
a. ComputethepredeterminedoverheadrateforeachdepartmentifAssemblyuseslaborhoursandPackagin
gusesmachinehours.
b.Calculatetheperunitcostforeachproductifdepartmentaloverheadratesareused.
(Roundto2decimalplaces)
c. Computethepredeterminedplant-wideoverheadratebasedondirectlaborhours.
d.Calculatetheperunitcostofeachproductifaplantwideoverheadrateisused.(Roundto2decimalplaces)
e. Calculatetheoverheadratesforeachoverheadactivity.
f. Calculatetheperunitcostofeachproductifactivityratesareusedtoassignoverhead.
(Roundto2decimalplaces)

ANSWER:
a. Assembly
Labor hours
Overhead rate

$ 216,000
160,000
$1.35

Packaging
Machine hours
Overhead rate

$504,000
80,000
$6.30

b.
Deluxe
Units
Prime costs
Overhead applied to
production
Assembly:
$1.35 10,000
$1.35 150,000
Packaging
$6.30 8,000
$6.30 72,000
Total
Overhead per Unit

20,000
$160,000

Regular
200,000
$1,500,000

13,500
202,500
50,400
$223,900
$11.20

453,600
$2,156,100
$10.78

c. $720,000/180,000 = $4 per labor hour

d.
Units
Prime costs
Overhead costs
$4 20,000
$4 160,000
Total costs
Unit cost
e.
Activity
Setting up equip
Moving material
Machining
Inspecting

Deluxe
20,000
$160,000

Regular
200,000
$1,500,000

80,000
640,000
$ 2,140,000
$10.70

$240,000
$12
Cost
$240,000
$120,000
$200,000
$160,000

Driver
100
300
90,000
18,000

Activity Rate
$2,400 per setup
$400 per move
$2.22 machine hour
$8.89 per inspection hours

f.
Deluxe
20,000
$160,000

Units
Prime costs
Overhead costs:
Setting up
$2,400 60
$2400 40
Moving materials
$400 180
$400 120
Machining
$2.22 10,000
$2.22 80,000
Inspecting
$8.89 2000
$8.89 16,000
Total costs
Unit cost

Regular
200,000
$1,500,000

144,000
96,000
72,000
48,000
22,200
177,600
17,780
142,240
$ 1,963,840
$9.82

$415,980
$20.80

195.
TuskerCorporationmanufacturestwoproducts(SandT).Theoverheadcostshavebeendividedintof
ourcostpoolsthatusethefollowingactivitydrivers:

Product
S
T

Number of
Setups
20
5

Number of
Orders
35
70

Machine
Hours
1,000
1,500

Packing
Orders
75
125

Cost per pool

$15,000

$8,400

$120,000

$40,000

a. Computetheallocationratesforeachoftheactivitydriverslisted.
b.AllocatetheoverheadcoststoProductsSandTusingactivity-basedcosting.
c. Computetheoverheadrateusingmachinehoursunderthefunctional-basedcostingsystem.
d.AllocatetheoverheadcoststoProductsSandTusingthefunctionalbasedcostingsystemoverheadratecalculatedinpart(c).
ANSWER:

a.
Cost per pool
Total
Allocation rate
b
.

Number of
Setups
$15,000
25
$ 600

Number of
Orders
$8,400
105
$ 80

Product S
Number of setups
Number of orders
Machine hours
Packing orders

20 $600 =
35 $80 =
1,000 $48 =
75 $200 =

Machine
Hours
$120,000
2,500
$ 48

Packing
Orders
$40,000
200
$ 200

Product T
$12,000
2,800
48,000
15,000
$77,800

5 $600 =
70 $80 =
1,500 $48 =
125 $200 =

$ 3,000
5,600
72,000
25,000
$105,600

c.

($15,000+$8,400+$120,000+$40,000)/2,500=$73.36perMH
d.

ProductS:1,000 $73.36=$73,360
ProductT:1,500$73.36=$110,040

196.
SimonsonCompanymanufacturestwoproducts(DDandEE).Theoverheadcostshavebeendividedi
ntofourcostpoolsthatusethefollowingactivitydrivers:
NumberofOrd
ers

Product
DD
EE

NumberofSetu
ps

60
20

NumberofLaborTransacti
ons

20
80

50
70

CostperpoolRequir
$16,000
$13,000
$2,400
ed:
a. Computetheallocationratesforeachoftheactivitydriverslisted.
b.AllocatetheoverheadcoststoProductsDDandEEusingactivity-basedcosting.
c. Computetheoverheadrateusinglaborhoursunderthefunctional-basedcostingsystem.
d.AllocatetheoverheadcoststoProductsDDandEEusingthefunctionalbasedcostingsystemoverheadratecalculatedinpart(c).

a.
Cost per pool
Total
Allocation rate
b.
Number of orders
Number of setups
No. of labor trans.
Labor hours

Number of
Orders
$16,000
80
$ 200

LaborHou
rs

Number of
Setups
$13,000
100
$ 130

Number of Labor
Transactions
$ 2,400
120
$ 20

Product DD
60 $200 =
$12,000
20 $130 =
2,600
50 $20 =
1,000
2,000 $8 =
16,000
$31,600

c.

($16,000 + $13,000 + $2,400 + $20,000)/2,500 = $20.56 per DLH

d.

Product DD: 2,000 $20.56 = $41,120

2,000
500
$20,000

Labor
Hours
$20,000
2,500
$ 8

Product EE
20 $200 =
80 $130 =
70 $20 =
500 $8 =

$ 4,000
10,400
1,400
4,000
$19,800

197.

Maroone,Inc.,hasidentifiedthefollowingoverheadcostsandactivitydriversfornextyear:

OverheadItem
Setupcosts
Orderingcosts
Maintenance
Power

ExpectedCost
$150,000
40,000
200,000
20,000

ActivityDriver
Numberofsetups
Numberoforders
Machinehours
Kilowatthours

ExpectedQty.
1,200
10,000
16,000
100,000

Thefollowingarethetwoproductmodelscompletedduringtheyear:

Directmaterials
Directlabor
Unitscompleted
Directlaborhours
Numberofsetups
Numberoforders
Machinehours
Kilowatthours

Model SS

Model TT

$2,250
3,000
375
90
6
8
180
90

$2,50
0
1,87
5
300
110
8
15
150
120

Thecompany'snormalactivityis20,000directlaborhours.
Required:
a. Determinetheunitcostforeachjobusingdirectlaborhourstoapplyoverhead.
b.Determinetheunitcostforeachjobusingthefouractivitydrivers.(Roundamountsto2decimalplaces.)
c. Whichmethodproducesthemoreaccuratecostassignment?Why?
ANSWER:
a.

Unit cost for Model SS:

Unit cost for Model TT:
Direct materials
Direct labor
Overhead assigned: ($20.50* 90)
Total cost
Unit cost ($7,095/375)

$18.92
$22.10
Model SS
$2,250
3,000
1,845
$7,095
$18.92

*($150,000 + $40,000 + $200,000 + $20,000)/20,000 = $20.50/DLH

Direct materials
Direct labor
Overhead assigned: ($20.50 110)
Total cost
Unit cost ($6,630/300)

Model TT
$2,500
1,875
2,255
$6,630
$22.10

b.

Unit cost for Model SS:

Unit cost for Model TT:
Setup:
Ordering:
Maintenance:
Power:
Direct materials
Direct labor
Overhead assigned:
$125 6
$4 8
$12.50 180
$0.20 90
Total cost
Unit cost ($8,300/375)
Direct material
Direct labor
Overhead assigned:
$125 8
$4 15
$12.50 150
$0.20 120
Total cost
Unit cost ($7,334/300)

c.

$22.13
$24.45
$150,000/1,200 = $125/setup
$40,000/10,000 = $4/order
$200,000/16,000 = $12.50/hour
$20,000/100,000 = $0.20/kilowatt hour
Model SS
$2,250
3,000
750
32
2,250
18
$8,300
$22.13
Model TT
$2,500
1,875
1,000
60
1,875
24
$7,334
$24.45

Activity-based costing produces more accurate cost information because overhead incurrence
is often related to many different activities rather than a single volume-based activity driver.

198.
ForestQueenManufacturinghasfourcategoriesofoverhead.Thefourcategoriesandexpectedoverh
eadcostsforeachcategoryfornextyearareasfollows:
Maintenance

$70,000

Materialshandling

30,000

Setups

25,000

Inspection

50,000

Currently,overheadisappliedusingapredeterminedoverheadratebaseduponbudgeteddirectlaborhours.50,0
00directlaborhoursarebudgetedfornextyear.
Thecompanyhasbeenaskedtosubmitabidforaproposedjob.Theplantmanagerfeelsthatobtainingthisjobwou
ldresultinnewbusinessinfutureyears.Usually,bidsarebaseduponfullmanufacturingcostplus30percent.
Estimatesfortheproposedjobareasfollows:
Directmaterials
Directlabor(750hours)
Numberofmachinehours

$2,500
$3,750
300

Numberofmaterialmoves
Numberofsetups
Numberofinspections

8
3
5

Inthepast,fullmanufacturingcosthasbeencalculatedbyallocatingoverheadusingavolumebasedactivitydriver,directlaborhours.Theplantmanagerhasheardofanewwayofapplyingoverheadthatus
escostpoolsandactivitydrivers.
Expectedactivityforthefouractivitydriversthatwouldbeusedare:
Machinehours
Materialmoves
Setups
Qualityinspections
Required:

16,000
4,000
2,000
8,000

a. Determinetheamountofoverheadthatwouldbeallocatedtotheproposedjobifdirectlaborhoursareusedas
thevolume-basedactivitydriver.
Determinethetotalcostoftheproposedjob.
Determinethecompany'sbidifthebidisbaseduponfullmanufacturingcostplus30percent.
b.Determinetheamountofoverheadthatwouldbeappliedtotheproposedprojectifactivitybasedcostingisused.
Determinethetotalcostoftheproposedjobifactivity-basedcostingisused.
Determinethecompany'sbidifactivitybasedcostingisusedandthebidisbaseduponfullmanufacturingcostplus30percent.

c. Whichproductcostingmethodproducesthemorecompetitivebid?
ANSWER:
a. $2,625
($70,000+$30,000+$25,000+$50,000)/50,000=$3.50/DLH
$3.50750DLH=$2,625
$8,875
$11,537.50
b.

($2,500 + $3,750 + $2,625)

($8,875130%)

$1,442.75
Maintenance:
Materialhandling:
Setups:
Inspection:

$70,000/16,000=$4.375
$30,000/4,000=$7.50
$25,000/2,000=$12.50
$50,000/8,000=$6.25

Overheadassigned:
$4.375300
$7.508
$12.503
$6.255
$7,691.25
$9,998.63

$1,312.50
60.00
37.50
31.25
$1,441.25
($2,500+$3,750+$1,441.25)
($7,691.25130%)

c. Activity-basedcostingproducesmoreaccuratecostinformationandamore
competitivebid.

199.

TheDataRetrievingCorporationprovidedthefollowingdataaboutitsresourcesandactivities.

Resources
Supervision
phoneandsupplies
salaries
computer
total

$140,000
80,000
250,000
20,000
$490,000

Activities
processingaccounts
issuingstatements
processingdata
answeringcustomerinquiries
total

clericalhours
10,000
2,000
10,000
3,000
25,000

Inaddition,computersareusedforissuingstatements(30percent)andprocessingdata(70percent).Phones,sup
plies,andansweringcustomerinquiriesare60percent,withtheother40percentdividedequallyamongtherem
ainingactivities,includingsupervision.Thesupervisorspends100percentofhis/hertimeonsupervision.Inad
ditiontothe25,000clericalhours,thereare2,000hoursofsupervisionused(thehoursusedbythesupervisingcl
erksactivitywhichisnotlistedabove)
Required:
Prepareaworkdistributionmatrixfortheprimaryactivities.
ANSWER:
Activity
processing accounts
issuing statements
processing data
answering customer inquiries
supervision

supervisor

100%

staff
40%
8%
40%
12%

10/25
2/25
10/25
3/25
2,000/2,000

200.
ElantraManufacturingusesanactivitybasedcostingsystem.ThecompanyproducesModelVandModelZ.Informationconcerningthetwoproductsi
sasfollows:
Unitsproduced
Directlaborhours
Engineeringlabor(hours)
Setups
Kilowatthours

ModelV
30,000
24,000
4,000
20
5,000

ModelZ
50,000
26,000
6,000
30
7,000

Thefollowingoverheadactivitiesandcostsar
ereported:
Power
Labor-relatedoverhead
Setups
Required:

$12,000
70,000
60,000

a. Classifythefollowingoverheadactivitiesasunit-levelactivities,batch-levelactivities,orproductlevelactivities:
Power
Engineering
Setups
b.Calculatethefollowing:
Activityrateforpower
Activityrateforsetups
Activityrateforengineering
c. Calculatethefollowing:
PowercostsassignedtoModelZ
SetupscostsassignedtoModelV
EngineeringcostsassignedtoModelV
d.CalculatethetotaloverheadcostperunitforModelVandZusingABC.
e. CalculatethetotaloverheadcostassignedtoModelVandZusingtheapproximatelyrelevantABCsystemb
asedononlythetwomostexpensiveactivities.Roundto2decimalplaces)
f. StatethesetofequationsusingtheequallyaccuratereducedABCsystembasedontheconsumptionratiosfo
rlaborrelatedcostsandsetups(roundto2decimalplaces).

ANSWER
a.

Power:
Engineering:
Setups:

Unit-level activity
Product-level activity
Batch-level activity

b.

$1.00/kwh
$1,200/setup
$7/hour

[$12,000/(5,000 + 7,000)] = $1.00

[$60,000/(20 + 30)] = $1,200
[$70,000/(4,000 + 6,000)] = $7

c.

$7,000
$24,000
$28,000

($1.00 7,000)
($1,200 20)
($7 4,000)

d. ABC
Model V
Overhead
Power
$1 5,000
$1 7,000
Setups
$1,200 20
$1,200 30
Engineering
$7 4,000
$7 6,000
Total overhead
Units
Overhead per unit

Model Z

$ 5000
$ 7000
24,000
36,000
28,000
42,000
$85,000
50,000
$1.70

$57,000
30,000
$1.90

e. approximately relevant ABC system

most expensive activities:
labor related $70,000 +[$70,000/$130,000 $12,000] = $76,461.54 /50,000 = $1.53
setups
$60,000 +[$60,000/$130,000 $12,000] = $65,538.46 /50 = $1,310.77
Model V
labor related $1.53 24,000 =
$36,720
setups
$1,310.77 20 = 26,215.40
total
$62,935.40

Model Z
$1.53 x 26,000 =
39,780
$1,310.77 x 30 = 39,323.10
79,103.10

f. global consumption ratios

Model V
$57,000/$142,000 = .40
Model Z
$85,000/$142,000 = .60
set of equations where x = labor hrs. and y = setups
.4 = .48x +.4y
.6 = .52x + .6y

201.
FunlandManufacturingCompanyproducesspeciallymachinedparts.Thepartsareproducedinbatch
esinonecontinuousmanufacturingprocess.Eachpartiscustomproducedandrequiresspecialengineeringdesi
gnactivity(basedoncustomerspecifications).Oncethedesigniscompleted,theequipmentcanbesetupforbat
chproduction.Oncethebatchiscompleted,asampleistakenandinspectedtoseeifthepartsarewithinthetolera
ncesallowed.Thus,themanufacturingprocesshasfouractivities:engineering,setups,machining,andinspectin
g.Inaddition,thereisasustainingprocesswithtwoactivities:providingutilities(plantwide)andprovidingspace.
Costshavebeenassignedtoeachactivityusingdirecttracingandresourcedrivers:
Engineering
Setups
Machining
Inspection
Providing space
Providing utilities

$125,000
112,500
250,000
100,000
31,250
22,500

Activitydriversforeachactivityhavebeenidentifiedandtheirpracticalcapacitieslisted:
Machine hours
Setups
Engineering hours
Inspection hours
Thecostofunit-levelactivitiesareassignedusingmachinehours
Thecostsofbatch-levelactivitiesareassignedusingnumberofsetups.Thecostsoffacilitylevelactivitiesareassignedusingmachinehours.

50,000
400
10,000
5,000

Required:
a. Identifytheactivitieswithineachprocessasunit-level,batch-level,product-level,orfacility-level.
b.Buildanactivityrelationaltable.
c. Computethepoolrates(roundtotwodecimalplaces).
ANSWER:
a.

Manufacturing process:
Unit-level:
Batch-level:
Product-level:
Sustaining process:
Facility-level:

b.
Activity
1
2
3
4
5
6
c.

Activity
Name
Machining
Engineering
Setup
Inspecting
Prov. space
Prov. util.

Machining
Engineering, setups, and inspecting
None
Providing utilities, providing space
Process
Manufact.
Manufact.
Manufact.
Manufact.
Sustaining
Sustaining

Level
Unit
Batch
Batch
Batch
Facility
Facility

Pool rates:
Pool 1: $250,000/50,000 = $5.00 per machine hour
Pool 2: $337,500/400 = $843.75 per setup
Pool 3: $53,750/50,000 = $1.08 per machine hour

Activity
Driver
Mach. hrs.
# of setups
# of setups
# of setups
Mach. hrs.
Mach. hrs.

Capacity
50,000
400
400
400
50,000
50,000

Cost
$250,000
125,000
112,500
100,000
31,250
22,500

202.
HarrisonCorporationproducesspeciallymachinedparts.Thepartsareproducedinbatchesinonecont
inuousmanufacturingprocess.Eachpartiscustomproducedandrequiresspecialengineeringdesignactivity(b
asedoncustomerspecifications).Oncethedesigniscompleted,theequipmentcanbesetupforbatchproduction
.Oncethebatchiscompleted,asampleistakenandinspectedtoseeifthepartsarewithinthetolerancesallowed.
Thus,themanufacturingprocesshasfouractivities:engineering,setups,machining,andinspecting.Inaddition,
thereisasustainingprocesswithtwoactivities:providingutilities(plantwide)andprovidingspace.Costshaveb
eenassignedtoeachactivityusingdirecttracingandresourcedrivers:
Engineering

$250,000

Setups

225,000

Machining

500,000

Inspection

200,000

Providingspace

62,500

Providingutilities

45,000

Activitydriversforeachactivityhavebeenidentifiedandtheirpracticalcapacitieslisted:
Machinehours
Setups
Engineeringhours
Inspectionhours

25,000
200
5,000
2,500

Thecostofunit-levelactivitiesareassignedusingmachinehours
Thecostsofbatch-levelactivitiesareassignedusingnumberofsetups.Thecostsoffacilitylevelactivitiesareassignedusingmachinehours.
Required:
a. Identifytheactivitieswithineachprocessasunit-level,batch-level,product-level,orfacility-level.
b.Buildanactivityrelationaltable.
c. Computetheratesforeachactivity(roundto2decimalplaces).
ANSWER:
a.

Manufacturingprocess:
Unit-level:Machining
Batch-level:Engineering,setups,andinspecting
Product-level:None
Sustainingprocess:
Facility-level:Providingutilities,providingspace
b.
Activity
Activity
Name
Process
1
Machining
Manufact.
2
Engineering
Manufact.
3
Setup
Manufact.
4
Inspecting
Manufact.
5
Prov. space
Sustaining
6
Prov. util.
Sustaining

Level
Unit
Batch
Batch
Batch
Facility
Facility

Activity
Driver
Mach. hrs.
# of setups
# of setups
# of setups
Mach. hrs.
Mach. hrs.

Capacity
25,000
200
200
200
25,000
25,000

c. Activityrates:
machining$500,000/25,000=$20permachinehour
engineering:$250,000/200=$1250.00persetup
setup$225,000/200=$1,125persetup
inspecting$200,000/200=$1000persetup
providingspace$62,500/25,000=$2.50permachinehour
providingutilities:$45,000/25,000=$1.80permachinehour

203.
InventiveManufacturingCompanyhasthefollowingactivities:creatingbillsofmaterials(BOM),studyingmanufac
turingcapabilities,improvingmanufacturingprocesses,trainingemployees,anddesigningtooling.Thegeneralledgeraccount
srevealthefollowingexpendituresformanufacturingengineering:
Salaries
Equipment
Supplies
Total

$500,000
100,000
30,000
$630,000

Theequipmentisusedfortwoactivities:improvingprocessesanddesigningtooling.Fortypercentoftheequipment'stimeisuse
dforimprovingprocessesand60percentisusedfordesigningtools.Thesalariesareforfiveengineers,onewhoearns$160,0
00andfourwhoearn$85,000each.The$160,000engineerspends30percentofhistimetrainingemployeesinnewprocesses
and70percentofhistimeonimprovingprocesses.Oneengineerspends100percentofhertimeondesigningtoolingandanot
herengineerspends100percentofhistimeonimprovingprocesses.Theremainingtwoengineersspendequaltimeonallactiv
ities.Suppliesareconsumedinthefollowingproportions:
CreatingBOMs

15%

Studyingcapabilities

5%

Improvingprocesses

30%

Trainingemployees

30%

Designingtooling

20%

Required:
Usingtheresourcedriversanddirecttracing,calculatethecostofeachmanufacturingengineeringactivity.Whataretheresourc
edrivers?
ANSWER:
Activity
Creating BOMS
Studying capabilities
Improving processes
Training employees
Designing tooling
*
**
***
****
*****

Cost
$ 38,500
35,500
280,000
91,000
185,000
$630,000

*
**
***
****
*****

(0.20 $170,000 + 0.15 $30,000)

(0.20 $170,000 + 0.05 $30,000)
(0.40 $100,000 + 0.70 $160,000 + $85,000 + 0.20 $170,000 + 0.30 $30,000)
(0.30 $160,000 + 0.20 $170,000 + 0.30 $30,000)
(0.60 $100,000 + $85,000 + 0.20 $170,000 + 0.20 $30,000)

Resource drivers: Percent of machine usage, percent of effort, and percent of supply usage.
204.
BayviewManufacturingCompanyhasanaccountsreceivabledepartmentthatperformsthreeactivitieswithinthede
partment:processingcustomercreditapplications,invoicingcustomers,andperformingcollectionactivities.Duringintervie
ws,theemployeesurveyreportsthattheyspend15percentoftheirtimeprocessingcreditapplications,55percentoftheirtimei
nvoicingcustomers,and30percentoftheirtimeoncollectionactivities.Theaccountsreceivabledepartmentemploys10assoc

iatesforatotalcostof$200,000.Assumeeachassociateworks8hoursperday,20dayspermonth,butanestimateofpracticalca
pacityis80percent.Aftercloseobservationoftheemployeesdailywork,managersconcludethefollowing:
Processing a credit application:
Invoicing a Customer:
Collection activities:

35 minutes
10 minutes
20 minutes

Theestimatedmonthlyquantitiesofworkinthethreeactivitiesare500creditapplications,18,000invoices,and900collectionca
lls.
Required:
1. UnderatraditionalABCsystem,whatisthecostofoneunitofactivity?
2. Assumingthepracticalcapacityinformation,whatisthecostperminuteofsupplyingcapacity?
3. Undertime-drivenABC,whatarethecostdriverratesforeachactivity?
ANSWER: 1.
Activity
Processing Credit
Application
Processing
Invoices
Collection
Activities
Totals

% Time Spent
15%

Assigned Cost
$ 30,000

Activity Quantity
500

55%

$110,000

18,000

Cost-Driver Rate
$60 per credit
application
$6.11 per invoice

30%

$ 60,000

900

$66.66 per call

100%

$200,000

2. 1associate*8hoursperday*20days*60minutes=9,600minutesperassociate,permonth
At80percentcapacity,thatwouldbe9,600*80%=7,680*10associates=76,800minutesintotal.Therefore,theco
stperminuteofsupplyingcapacityis$2.60($200,000/76,800,roundedtothenearestcent)
3. Costratesperactivity:
ProcessingCreditApplications:$2.60perminute*35minutes=$91percreditapplicationProcessing Invoices:
$2.60perminute*10minutes=$26perinvoice
CollectionActivities:

$2.60perminute*20minutes=$52percollectioncall

205.
GreenMountainManufacturinghasrecentlyinstalledanactivitybasedrelationaldatabase.Usingtheinformationcontainedintheactivityrelationaltable,thefollowingpoolrateswerecomput
ed:
$400
$24
$30
$80

perpurchaseorder
permachinehour,ProcessR
permachinehour,ProcessS
perengineeringhour

$4perpackingorder
$200
persquarefoot
TwoproductsareproducedbyGreenMountain:NormalandExcellent.Eachproducthasanareaintheplantthatisdedicatedtoit
sproduction.Theplanthastwomanufacturingprocesses,theNormalprocess(ProcessR)andtheExcellentprocess(Proces
sS).Otherprocessesincludeengineering,producthandling,andprocurement.TheproductrelationaltableforGreenMount
ainisasfollows:

NormalProduct:
ActivityDriver#
1
2
3
4
5
6

Name
Units
Purchaseorders
Machinehours
Engineeringhours
Packingorders
Squarefootage

ExcellentProduct:
ActivityDriver#
Name
1
Units
2
Purchaseorders
3
Machinehours
4
Engineeringhours
5
Packingorders
6
Squarefootage

ActivityUsage
800,000
1,000
320,000
5,000
400,000
6,000

ActivityUsage
100,000
500
40,000
6,000
100,000
4,000

Required:
a. Identifytwodifferentconcatenatedkeys.Whatisthepurposeofconcatenatedkeys?
b.Usingthepoolratesandtheinformationfromtheproductrelationaltable,calculatetheunitoverheadcostforeachproduct.
c. Doestheproductrelationaltableindicatehowmanyactivitiesareineachpool?Isthisnecessaryforproductcosting?
Explain.

ANSWER:
a.

Firstkey:ProductNameandDriverName;Secondkey:ProductNameandDriverNumber.
Concatenatedkeysaretwoormorekeysthatuniquelyidentifyarecord.Thisisessentialforaccessingdataandus
ingitforproductcosting.

b.

Calculation of unit overhead costs:

Driver Assignment
Purchase order:
$400 1,000
$400 500
Machine hours:
$24 320,000
$30 40,000
Engineering hours:
$80 5,000
$80 6,000
Packing orders:
$4 400,000
$4 100,000
Square footage:
$200 6,000
$200 4,000
Total
Units
Unit overhead cost

Normal

Excellent

$ 400,000
$ 200,000
7,680,000
1,200,000
400,000
480,000
1,600,000
400,000
1,200,000
$11,280,000
800,000
$ 14.10

800,000
$3,080,000
100,000
$ 30.80

c.
Theproductrelationaltabledoesnotrevealtheactivitiesineachpool.Thisinformationwouldcomefromthea
ctivityrelationaltable.Forproductcosting,individualactivityinformationisnotneeded.Oncepoolratesarec
omputed,allthatisneededistheactivityusagebyeachproduct.

Chapter 5
1. Aproductionprocessmayyieldatangibleproductoraserviceandtheiruniquecharacteristicsdeterminethebestapproachforde
velopingacostmanagementsystem.
a. True
b. False
ANSWER: True
2. Manufacturingfirmsproduceintangibleproductsthatcannotbeinventoried.
a. True

b. False
ANSWER: False
3. Servicefirmsproduceintangibleproductsthatarenotseparablefromthecustomer.
a. True
b. False
ANSWER: True
4. Heterogeneitymeansthatservicescannotbeinventoriedandmustbeconsumedwhenperformed.
a. True
b. False
ANSWER: False
5. Inseparabilitymeansthatproductionandconsumptionareinseparableforservices.
a. True
b. False
ANSWER: True
6. Theuniquenessoftheproductsorunitsforcostaccountingpurposesrelatestotheircommoncosts.
a. True
b. False
ANSWER: False
7. Costaccumulationisthedeterminationofthedollaramountsofdirectmaterials,directlaborandoverheadcosts,andcostmeasu
rementistherecognitionandrecordingofcosts.
a. True
b. False
ANSWER: False

8. Costassignmentistheassignmentofcoststoproductsorservicesoncethecostshavebeenaccumulatedandmeasured.
a. True
b. False
ANSWER: True
9. Unitcostisacriticalpieceofinformationforamanufacturingbusinessaswellasaservicecompany.
a. True
b. False
ANSWER: True
10.
r.

Activitylevelistheaverageactivityusageoverthelongtermandnormalactivitylevelistheproductionlevelforoneyea
a. True
b. False

ANSWER: False
11.
Companiesoperatinginjoborderindustriesproduceawidevarietyofproductsorjobsthatarequitedifferentfromeachother.
a. True
b. False
ANSWER: True
12.

Thejob-ordercostsheetaccumulatesthecostofallthejobsproduced.
a. True
b. False

ANSWER: False
13.

Thecollectionofalljob-ordercostsheetsdefinesawork-in-processinventoryfile.
a. True
b. False

ANSWER: True
14.

Thesourcedocumentknownasatimeticketassignsthedirectoverheadtoeachparticularjob.
a. True
b. False

ANSWER: False

15.

Ajob-ordercostingprocesswouldbeapplicableforanairplanemanufacturer.
a. True
b. False

ANSWER: True
16.
Costflowfollowscostsfromthepointtheyareincurredtothepointtheyarerecognizedasanexpenseontheincomestat
ement.
a. True
b. False
ANSWER: True
17.

Whenmaterialsarepurchased,thecostsofthematerialsflowsintothematerialsinventoryaccount.
a. True
b. False

ANSWER: True
18.
Inajob-ordercostingsystem,directlaborcostsassignedtoajobaredifferentthanthecostsassignedtowork-inprocessinventory.
a. True
b. False
ANSWER: False
19.

Inajob-ordercostingsystem,actualoverheadcostsneverenterthework-in-processinventoryaccounts
a. True
b. False

ANSWER: True
20.
Thecostsofacompletedjobaretransferredfromthework-inprocessinventoryaccounttothefinishedgoodsinventoryaccount.
a. True
b. False
ANSWER: True
21.

Adebitbalanceinoverheadcontrolimpliesthatactualoverheadcostsexceedoverheadapplied.
a. True
b. False

ANSWER: True

22.

Injob-ordercosting,departmentaloverheadratesandactivity-basedcostingaffectonlytheapplicationofoverhead.
a. True
b. False

ANSWER: True
23.
Inanactivitybasedcostingsystemactivitycostisappliedtoeachjobbymultiplyingproductivityratebythejobsuseoftheassociateddriver.
a. True
b. False
ANSWER: True
24.

Costsofnormalspoilageareincludedinoverheadandappliedtoallgoodunitsproduced.
a. True
b. False

ANSWER: True
25.

Abnormalspoilageischargedtothejobthatcausedit.
a. True
b. False

ANSWER: True
26.

In

asingleproductisproducedonacontinuousbasis.

ANSWER: processproduction
27.

A serviceorganizationdoesnotuserawmaterialortangibleitemsforthecustomer.

ANSWER: pure
28.

meansthatservicescannotbeinventoriedbutmustbeconsumedwhenperformed.

ANSWER: Perishability
29.

istherecognitionandrecordingofcosts.

ANSWER: costaccumulation
30.

Determiningthedollaramountsofdirectmaterials,directlabor,andoverheadusedinproductioninvolves
__________.

ANSWER: costmeasurement
31.
withtheunitsproducediscalled

Theassociationofproductioncosts
.

ANSWER: costassignment
32.

The

activitylevelistheproductionlevelafirmexpectstoattainforthecomingyear.

ANSWER: expected
33.

The

costingsystemassignscostsbythejob.

ANSWER: job-order
34.

The

formindicatesthetypeandquantityofeachmaterialissuedtothefactory.

ANSWER: materialsrequisition
35.

A inventoryfileisafileofjob-ordercostsheets.

ANSWER: work-in-process
36.

The actual

costsarenotincludedonajob-ordersheet.

ANSWER: factoryoverhead
37.

Purchasesofdirectmaterialsarerecordedasadebittothe__________account.

ANSWER: materialsinventory
38.

Theentrythatcapturestheflowofmaterialfromthestoreroomtowork-in-processiscalledthe
inventoryaccount.

ANSWER: work-in-process
39.

arethesourceofinformationforpostingthelaborcostflows.

ANSWER: Timetickets
40.
overhead atagivenpointin timeisgivenby thecreditbalancein the

Thetotalapplied
controlaccount.

ANSWER: overhead
41.
transferredtoa

When ajobis completedthe totalcostsare

inventoryfile.

ANSWER: finishedgoods
42.
oacustomer,thefinishedjobcostbecomesthecostofthe

Whenajobisshippedt
sold.

ANSWER: goods
43.
Injob-ordercosting,departmentaloverheadratesandactivity-basedcostingaffectonlytheapplicationof
__________.
ANSWER: overhead
44.

Thedefectiveunitsexpectedduetothenatureofthetypicalproductionprocessarecalled__________.

ANSWER: normalspoilage
45.
actingnatureofaparticularjobiscalled
ANSWER: abnormalspoilage
46.

Whichofthefollowingisamanufacturedproduct?
a. bungeejumping
b. beautysalon
c. automobile
d. restaurant

ANSWER: c
47.

Manufacturersproducinguniqueorcustomizedproductswouldemploya(n)
a. processcostingsystem.
b. job-costingsystem.
c. homogeneouscostingsystem.
d. alloftheabove.

ANSWER: b
48.

Whichofthefollowingisapureservice?
a. bungeejumping
b. beautysalon
c. restaurant
d. software

ANSWER: a

Thedefectiveunitsduetotheex
.

Chapter 5: Product and Service Costing: Job-Order System

49.

Apureserviceorganizationhas
a. norawmaterials,noinventories,andadefiniteseparationbetweentheplantandthecustomer.
b. rawmaterials,tangibleitems,andnoseparationbetweentheplantandthecustomer.
c. norawmaterials,notangibleitems,andnoseparationbetweentheplantandthecustomer.
d. noneofthese.

ANSWER: c
50.

Inseparabilityreferstothe
a. nonphysicalnatureofservicesasopposedtoproducts.
b. factthatproductionandconsumptionareinseparableforservices.
c. greaterchancesforvariationintheperformanceofservicesthanintheproductionofproducts.
d. factthatservicescannotbeinventoriedbutmustbeconsumedwhenperformed.

ANSWER: b
51.

Heterogeneityreferstothe
a. nonphysicalnatureofservicesasopposedtoproducts.
b. factthatproductionandconsumptionareinseparableforservices.
c. greaterchancesforvariationintheperformanceofservicesthanintheproductionofproducts.
d. factthatservicescannotbeinventoriedbutmustbeconsumedwhenperformed.

ANSWER: c
52.

Intangibilityreferstothe
a. nonphysicalnatureofservicesasopposedtoproducts.
b. factthatproductionandconsumptionareinseparableforservices.
c. greaterchancesforvariationintheperformanceofservicesthanintheproductionofproducts.
d. factthatservicescannotbeinventoriedbutmustbeconsumedwhenperformed.

ANSWER: a
53.

Perishabilityreferstothe
a. nonphysicalnatureofservicesasopposedtoproducts.
b. factthatproductionandconsumptionareinseparableforservices.
c. greaterchancesforvariationintheperformanceofservicesthanintheproductionofproducts.
d. factthatservicescannotbeinventoriedbutmustbeconsumedwhenperformed.

ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

54.

Whichofthefollowingfirmswouldmakeextensiveuseofservicecosting?
a. Lawfirm
b. furnituremanufacturer
c. autodealer
d. automanufacturer

ANSWER: a
55.

WhichofthefollowingproductswouldNOTusejob-ordercosting?
a. houses
b. chemicals
c. ships
d. custom-builtfurniture

ANSWER: b
56.

Whichofthefollowingfirmswouldmakeextensiveuseofajob-ordercosting?
a. dentalandmedicalservices
b. cannedfoods
c. discountbrokers
d. petroleum

ANSWER: a
57.

Processcostingwouldbemostapplicablefor
a. custommachining.
b. anelectronicsproducer.
c. highrisebuildingconstruction.
d. CPAaudits.

ANSWER: b
58.

WhichofthefollowingwouldNOTuseaprocesscostingsystem?
a. electricalwire
b. cottonyarn
c. newsprint
d. satellites

ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

59.

Homogeneousproductsreferto
a. productssimilarinnature.
b. thenonphysicalnatureofservicesandopposedtoproducts.
c. greatvariationinthenatureproducts.
d. productsthatcanbeinventoried.

ANSWER: a
60.
?

Whichcostaccountingprocesswouldbemostappropriateforaccumulatingcostsofidentical,standardizedunits
a. job-ordercosting
b. processcosting
c. normalcosting
d. standardcosting

ANSWER: b
61.

Theprocesswhereasingleproductisproducedonacontinuousbasisiscalled:
a. processproduction
b. job-orderproduction
c. jobproduction
d. bothaandc

ANSWER: a
62.

Asourcedocument
a. isonlyanexternaldocument.
b. providestransactiondatathatcanberecordedinadatabase.
c. isonlyusedtorecordatransactionbetweenanorganizationandanoutsidevendor.
d. isonlyaninternaldocument.

ANSWER: b
63.

WhichofthefollowingcostsisusuallyNOTeasilytraceabletofinishedunitsofproduct?
a. directlabor
b. directmaterials
c. manufacturingoverhead
d. alloftheabove

ANSWER: c

Chapter 5: Product and Service Costing: Job-Order System

Chapter 5: Product and Service Costing: Job-Order System

64.

Manufacturingoverheadconsistsofall
a. costsotherthandirectmaterials.
b. manufacturingcostsotherthandirectmaterials.
c. costsotherthandirectmaterialsanddirectlabor.
d. manufacturingcostsotherthandirectmaterialsanddirectlabor.

ANSWER: d
65.

Therecognitionandrecordingofcostsiscalled:
a. Costassignment
b. Costmeasurement
c. Costaccumulation
d. Jobordercosting

ANSWER: c
66.

Determiningthedollaramountsofdirectmaterials,directlabor,andoverheadusedinproductioninvolves:
a. Jobordercosting
b. Costaccumulation
c. Costassignment
d. Costmeasurement

ANSWER: d
67.

Anactualoverheadratecanbecalculated
a. atthebeginningoftheyear.
b. attheendofeachmonth.
c. atthebeginningofeachmonth.
d. eitheratthebeginningoftheyearoratthebeginningofthemonth.

ANSWER: b
68.

Disadvantagesofactualcostinginclude
a. actualcostsystemscannotprovideaccurateunitcostinformationonatimelybasis.
b. actualcostsystemsproduceunitcoststhatfluctuatefromperiodtoperiod.
c. estimatesmustbeusedwhencalculatingtheactualoverheadrate.
d. bothaandb.

ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

69.

Theeffectofuniformproductionlevelsonunitproductioncostscanbeachieved
a. byusingafactoryoverheadratebasedonlong-runnormalproductionactivitylevel.
b. byusingafactoryoverheadratebasedonsellingprice.
c. byclosingthefactoryoverheadattheendoftheaccountingperiod.
d. byusingafactoryoverheadratebasedondifferentproductionlevelsforeachyear.

ANSWER: a
70.

Normalcostinguseswhichcostinworkinprocess?
a. applieddirectmaterials
b. actualoverhead
c. appliedoverhead
d. budgetedoverhead

ANSWER: c
71.

Anormalcostingsystemrecordswhichcostsinworkinprocess?
a. actualdirectmaterials,actualdirectlabor,actualmanufacturingoverhead
b. applieddirectmaterials,applieddirectlabor,appliedmanufacturingoverhead
c. appliedmaterialsandlaborandactualmanufacturingoverhead
d. actualmaterialsandlaborandappliedmanufacturingoverhead

ANSWER: d
72.

Thepredeterminedoverheadrateisusuallycalculatedatthe
a. endofeachmonth.
b. beginningofeachmonth.
c. beginningoftheyear.
d. endoftheyear.

ANSWER: c
73.

Whichofthefollowingcostingsystemsassignsactualcostsofmaterialstoinventory?
a. actualcostingsystem
b. normalcostingsystem
c. standardcostingsystem
d. bothaandb

ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

74.

Theprincipaldifficultywithnormalcostingisthat
a. theunitcostinformationisnotreceivedonatimelybasis.
b. itcanresultinfluctuatingper-unitoverheadcosts.
c. estimatedoverheadandestimatedactivityarelikelytodifferfromactualoverheadandactualcosts,resultinginundera
ppliedoroverappliedoverhead.
d. thereisnodifficultyassociatedwithusingnormalcosting.

ANSWER: c
75.

Unitcostinformationisneededfor
a. costinginventory.
b. financialreportingrequirements.
c. decisionmaking.
d. alloftheabove.

ANSWER: d
76.

Theassociationofproductioncostswiththeunitsproducediscalled:
a. Job-ordercosting
b. Costassignment
c. Costmeasurement
d. Costaccumulation

ANSWER: b
77.

Theproductionlevelthefirmexpectstoattainforthecomingyeariscalled:
a. Practicalactivitylevel
b. Normalactivitylevel
c. Theoreticalactivitylevel
d. Expectedactivitylevel

ANSWER: d
78.

Unitcostsarecriticalfor
a. valuinginventory.
b. determiningnetincome.
c. decisionstoenteranewproductline.
d. alloftheabove.

ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

79.
Indevelopingunitcosts,overheadcostsshouldbeassignedusingactivitydrivers.Whichwouldbethelikelyactivitydri
verforaproductionprocessusingalathe?
a. unitsproduced
b. directlaborhours
c. machinehours
d. directmaterialscost
ANSWER: c
80.

Unitcostisimportantinformationforwhichofthefollowing?
a. valuinginventory
b. determiningincome
c. decisionmaking
d. alloftheabove

ANSWER: d
81.

Theaverageactivitythatafirmexperiencesinthelongterm(morethanoneyear)iscalled:
a. Expectedactivitylevel
b. Normalactivitylevel
c. Theoreticalactivitylevel
d. Practicalactivitylevel

ANSWER: b
82.

Theabsolutemaximumproductionactivityofamanufacturingfirmiscalled:
a. Expectedactivitylevel
b. Normalactivitylevel
c. Theoreticalactivitylevel
d. Practicalactivitylevel

ANSWER: c
83.

Themaximumoutputthatcanberealizedifeverythingoperatesefficientlyisreferredtoas:
a. Expectedactivitylevel
b. Normalactivitylevel
c. Theoreticalactivitylevel
d. Practicalactivitylevel

ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

Chapter 5: Product and Service Costing: Job-Order System

84.

Thesystemwhichassign(s)costsbythejobistermed:
a. Theprocesscostingsystem
b. Thejob-ordercostingsystem
c. Theprojectcostingsystem
d. Bothaandc

ANSWER: b
85.

Ajob-ordercostingprocesswouldbemostapplicablefor
a. afoodprocessingplant.
b. naturalgasprocessing.
c. airplanemanufacturing.
d. fertilizerproduction.

ANSWER: c
86.

Thedocumentwhichindicatesthetypeandquantityofeachmaterialissuedtothefactoryiscalledthe:
a. controlaccount
b. materialsrequisitionform
c. productionlist
d. workticket

ANSWER: b
87.

Thecollectionofalljobcostsheetsdefinesa
a. materialsfile.
b. finishedgoodsfile.
c. costofgoodsfile.
d. work-in-processfile.

ANSWER: d
88.

Thedocumentthatidentifieseachjobandaccumulatesitsmanufacturingcostsiscalled:
a. job-ordercostsheet
b. controlaccount
c. productionorder
d. billofmaterials

ANSWER: a

Chapter 5: Product and Service Costing: Job-Order System

89.

Whichofthefollowingitemsisabasiccostingsystemrecordinajob-ordercostingsystem?
a. materialsrequisitionform
b. job-ordercostsheet
c. jobtimeticket
d. alloftheabove

ANSWER: d
90.

Thecostofdirectmaterialsisassignedtoajobbytheuseofasourcedocumentknownasa
a. jobcostsheet.
b. controlaccount.
c. materialsrequisitionform.
d. productionorder.

ANSWER: c
91.

Awork-in-processinventoryfileis
a. afileofelectronicjob-ordercostsheets.
b. afilecabinetwhereworkticketsarestored.
c. afileofelectronicmaterialsrequisitions.
d. noneofthese.

ANSWER: a
92.

Directlaborcostsareassignedtoindividualjobsusingasourcedocumentknownasa
a. job-ordercostsheet.
b. payrollcheck.
c. timesheet.
d. requisitionform.

ANSWER: c

Figure5-1
Directmaterialsplacedintoproduction

$9,000

Directlabor hoursworked

300hours

Direct laborrate perhour

Machinehours worked

$15
100hours

Factoryoverheadrateis$22.50permachinehour.JobX4Aconsistsof500units.

Chapter 5: Product and Service Costing: Job-Order System

93.

RefertoFigure5-1.One-halfofJobX4Awassoldfor$10,000.WhatisthetotalamountofcostsassignedtoJobX4A?
a.$20,250
b.$15,750
c.$13,500
d.$9,000

ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$9,000+$15(300)+$22.50(100)=$15,750

94.

RefertoFigure5-1.One-halfofJobX4Awassoldfor$10,000.WhatisthecostperunitforJobX4A?
a.$18
b.$31.50
c.$27
d.$40.50

ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$9,000+$15(300)+$22.50(100)=$15,750/500=$31.50

Figure5-2
TheCameronCorporationmanufacturescustom-madepurses.ThefollowingdatapertainstoJobXY5:
Directmaterialsplacedintoproduction
Directlabor hoursworked
Direct laborrate perhour
Machinehours worked

$4,000
50hours
$15
100hours

Factoryoverheadisappliedusingaplant-wideratebasedondirectlaborhours.Factoryoverheadwasbudgetedat
$80,000fortheyearandthedirectlaborhourswereestimatedtobe20,000.JobXY5consistsof50units.
95.

RefertoFigure5-2.WhatisoverheadcostassignedtoJobXY5?
a.$200
b.$400
c.$750
d.$1,500

ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$80,000/20,000=$4;$4x50=$200

Chapter 5: Product and Service Costing: Job-Order System

Chapter 5: Product and Service Costing: Job-Order System

96.

RefertoFigure5-2.WhatisthematerialscostperunitforJobXY5?
a.$267
b.$80
c.$40
d.$4

ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$4,000/50=$80
97.

RefertoFigure5-2.WhatisthelaborcostperunitforJobXY5?
a. $4
b. $15
c.$0.80
d.$40

ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$15x50=$750/50=$15
98.

RefertoFigure5-2.WhatthetotalcostassignedtoJobXY5?
a.$5,150
b.$4,400
c.$4,200
d.$4,950

ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$80,000/20,000=$4;$4x50=$200;$4,000+($15x50)+$200=$4,950
99.

WhichofthefollowingcostsisNOTincludedonajob-ordercostsheet?
a. directmaterialcosts
b. appliedfactoryoverheadcosts
c. directlaborcosts
d. actualfactoryoverheadcosts

ANSWER: d
100.

AdebittoMaterialsInventoryindicatesmaterialswere

a. ordered.
b. requisitioned.
c. putintoproduction.
d. purchased.

Chapter 5: Product and Service Costing: Job-Order System

ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

Figure5-3
RobinsonCorporationconstructsnewhomes.AssumethatRobinsonusesajobcostingsystem.DuringJuly2016,thefollowi
ngtransactionsoccurred:
Robinsonpurchased$4,500oflumberonaccount.
Robinsonused$3,750oflumberinproductionandincurred50hoursofdirectlaborhoursat$15perhour.Depreciationof$1,50
0onequipmentusedtobuildnewhouseswasrecorded.
Ahousethatwascompletedlastperiodatacostof$150,000wassoldfor$180,000incash.
101.

RefertoFigure5-3.ThejournalentrytorecordtherequisitionoflumberforRobinsonwouldincludea

a. debittoWork-in-Processof$4,500.
b. debittoMaterialsInventoryof$3,750.
c. credittoFinishedGoodsof$3,750.
d. debittoWork-in-Processof$3,750.
ANSWER: d
102.

RefertoFigure5-3.ThejournalentrytorecordlaborforRobinsonwouldincludea

a. debittoFinishedGoodsof$750.
b. debittoWagesPayableof$750.
c. credittoFinishedGoodsof$750.
d. debittoWork-in-Processof$750.
ANSWER:
d
RATIONALE: LaborisrecordedasadebittoWork-in-Process$15x50=$750

Figure5-4
LanyardCompanyusesajob-ordercostingsystemtoaccountforproductcosts.Thefollowinginformationpertainsto2016:
Materialsplacedintoproduction
Indirectlabor
Directlabor(10,000hours)
Depreciationoffactorybuilding
Otherfactoryoverhead
Increaseinwork-in-processinventory
Factoryoverheadrateis$18perdirectlaborhour.

$140,000
40,000
160,000
60,000
100,000
30,000

Chapter 5: Product and Service Costing: Job-Order System

103.

RefertoFigure5-4.WhatisthetotalamountcreditedtoMaterialsInventoryforLanyardin2016?

a.$480,000
b.$170,000
c.$140,000
d.$110,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:Materialsusedinproduction=$140,000
104.

RefertoFigure5-4.WhatisthetotalamountdebitedtoFinishedGoodsInventoryin2011?

a.$490,000
b.$510,000
c.$450,000
d.$550,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$140,000+$160,000+($18 10,000)-$30,000=$450,000
105.

AjournalentrydebitingWork-in-ProcesswouldnormallyNOTbeaccompaniedbyacreditto

a. MaterialsInventory.
b. FinishedGoods.
c. OverheadControl.
d. WagesPayable.
ANSWER: b
106.

Ifthereisadebitbalanceinoverheadcontrol,thatimplies

a. appliedoverheadexceedsactualoverhead.
b. actualoverheadcostsexceedoverheadapplied.
c. actualoverheadhasnotbeenclosedtocostofgoodssold.
d. noneoftheabove.
ANSWER: b
107.

Foramanufacturer,thethreeinventoryaccountsonthebalancesheetare

a. Materials,FinishedGoods,andCostofGoodsSold.
b. Materials,Overhead,andCostofGoodsSold.
c. Materials,DirectLabor,andOverhead.
d. Materials,Work-in-Process,andFinishedGoods.
ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

Chapter 5: Product and Service Costing: Job-Order System

108.

Inatraditionalenterprise,theflowofcoststhroughthesystemis

a. materialsinventory,work-in-processinventory,finishedgoodsinventory,costofgoodssold.
b. materialsinventory,work-in-processinventory,costofgoodssold,finishedgoodsinventory.
c. work-in-processinventory,materialsinventory,finishedgoodsinventory,costofgoodssold.
d. work-in-processinventory,materialsinventory,finishedgoods.
ANSWER: a
109.

Whennormalcostingisused,actualoverheadcostsare

a. recordedinthework-in-processaccount.
b. recordedintheoverheadcontrolaccount.
c. recordedinthefinishedgoodsaccount.
d. notrecorded.
ANSWER: b
110.
CollossalCompanyusesapredeterminedratetoapplyoverhead.Atthebeginningoftheyear,Collossalestimateditso
verheadcostsat$240,000,directlaborhoursat40,000,andmachinehoursat10,000.Actualoverheadcostsincurredwere$249,
280,actualdirectlaborhourswere41,000,andactualmachinehourswere11,000.
Ifthepredeterminedoverheadrateisbasedonmachinehours,whatisthetotalamountcreditedtothefactoryoverheadaccoun
tfortheyearforCollossal?
a.$249,280
b.$246,000
c.$240,000
d.$264,000
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$240,000/10,000MH=$24$2411,000=$264,000
111.
OnMarch9,2016,JobXX4wascompleted.Thejobcostsheetshowedatotalof$6,000indirectmaterialsand
$8,000indirectlaboratarateof$20perdirectlaborhour.Factoryoverheadisappliedat$30perdirectlaborhour.
ThedebittoFinishedGoodsInventorytorecordthecompletionofJobXX4is
a.$17,000.
b.$11,000.
c.$6,000.
d.$26,000.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$6,000+$8,000+$30($8,000/$20)=$26,000

Chapter 5: Product and Service Costing: Job-Order System

Figure5-5
TonneauCorporationhadthefollowinginformationavailableforOctober2016:
WorkinProcess,October1
Materialsplacedintoproduction,October
Directlabor,October

$20,000
27,500
37,500

Factoryoverheadrateis150percentofdirectlaborcosts.Jobcostsheetshadthefollowingbalances:
JobZ1
JobZ2
JobZ3
JobZ4

$32,500
55,000
35,000
18,750

JobsZ3andZ4werenotcompletedattheendofDecember.
112.

RefertoFigure5-5.WhatisthebalanceinWork-in-ProcessforTonneauattheendofOctober?

a.$85,000
b.$87,500
c.$56,250
d.$53,750
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$35,000+$18,750=$53,750
113.

RefertoFigure5-5.WhatisthecostofgoodsfinishedduringOctoberforTonneauCorporation?

a.$85,000
b.$87,500
c.$56,250
d.$53,750
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$32,500+$55,000=$87,500

Figure5-6
IntheMonroeCompany,thefollowingJobcardsweretotaledattheendofthemonth:Job243$5,750
Job244$4,980
Job245$3,675
Job246$4,250
Job247$5,100
Job248$3,800

Chapter 5: Product and Service Costing: Job-Order System

Jobs243and244wereinFinishedGoodsInventoryatthebeginningofthemonth.Jobs245and246wereinWork-inprocessatthebeginningofthemonth.Jobs247and248werestartedduringthemonth.Attheendofthemonth,Jobs243and247
weresenttocustomers;jobs245,247,and248werecompletedandsenttofinishedgoods.

Chapter 5: Product and Service Costing: Job-Order System

114.

RefertoFigure5-6.Whatisthecostofgoodssoldforthemonth?

a.$10,730
b.$10,850
c.$12,575
d.noneofthese
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Jobs243and247weresenttocustomersandsold.$5,750+
$5,100=$10,850
115.

RefertoFigure5-6.Whatistheendingwork-in-processinventoryforthemonth?

a.$10,730
b.$4,250
c.$12,575
d.noneofthese
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Jobs245,247,and248werefinishedsoJob246isstillinprocess.=$4,250
116.

RefertoFigure5-6.Whatisthecostofgoodsmanufacturedforthemonth?

a.$10,730
b.$10,850
c.$12,575
d.noneofthese
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:Jobs245,247,and248werecompleted.$3,675+$5,100+
$3,800=$12,575

Chapter 5: Product and Service Costing: Job-Order System

117.

CanmoreCompanyhasthefollowingdatapertainingto2016:

Beginningmaterialsinventory
Beginningwork-in-processinventory
Beginningfinishedgoodsinventory
Materialsplacedintoproduction
Materialspurchasedonaccount
Directlaborincurred(10,000hours)
Costofgoodscompleted(JobBB8)

$ 50,000
-0-0125,000
137,500
62,500
25,000

Factoryoverheadrateis125percentofdirectlaborcosts.
WhatistheendingmaterialsinventorybalanceforCanmorein2016?
a.$50,000
b.$62,500
c.$12,500
d.$37,500
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$50,000+$137,500-$125,000=$62,500
118.
SamuelsonCompanyhasthefollowingselecteddebitbalanceaccountsattheendofthecurrentyear:Work-inProcess,$25,000;FinishedGoods,$12,500;CostofGoodsSold,$37,500;andFactoryOverhead,$6,000.TheproratedamountchargedtoCostofGoodsSoldforfactoryoverheadwillbe
a.$25,000.
b.$3,000.
c.$37,500.
d.$6,000.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$37,500/($25,000+$12,500+$37,500)$6,000=$3,000
119.

Undernormalcosting,whichofthefollowingstatementsistrueregardingfactoryoverhead?

a. Thebalanceinfactoryoverheadattheendoftheaccountingperiodisclosed.
b. Differentoverheadratesareusedfordifferentquantitiesofpredictedactivity.
c. Thebalanceinfactoryoverheadattheendoftheaccountingperiodiskeptopen.
d. Theimmaterialbalanceinfactoryoverheadattheendoftheaccountingperiodisallocatedtothecostofgoodssoldandinven
toryaccounts.
ANSWER: a

Chapter 5: Product and Service Costing: Job-Order System

120.

Totalmanufacturing-relatedcostsincurredforAnhauserCompanyinAugustforalljobsisasfollows:

Directmaterials
Insurance-factorybuilding
Directlabor
Propertytaxes-factorybuilding
Otherfactoryoverheadcosts
Factoryoverheadapplied

$900
150
1,200
400
1,450
1,650

AssumingAnhauserusesanormalcostingsystemandappliesoverheadbasedonapredeterminedrate,whatisthe
credittoOverheadControltoclosetheaccountattheendoftheyear?
a.$900
b.$350
c.$1,450
d.$1,650
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Actualoverhead=$150+$400+$1,450=$2,000Appliedoverhead=$1,650
Underapplied=$350
121.
Whichofthefollowingtransactionsinajob-ordercostingsystemrequirestheprocedureofmerelymovingajobordercostsheetfromonefiletoanother?
a. applyingfactoryoverheadtojobs
b. closingoverappliedfactoryoverhead
c. deliveringacompletedjobtoacustomer
d. movingthejobfromoneproductiondepartmenttoanother
ANSWER: c

Figure5-7
ThefollowinginformationisavailablepertainingtotheProductionDivisionofClarksonEnterprises:

Overhead costs
Direct labor hours
Machine hours

Assembly Dept.
$7,500
7,500
2,500

Finishing Dept.
$22,500
2,500
7,500

Total
$30,000
10,000
10,000

Finishing Dept.
$-0-0-0-0-

Total
$1,250
250
-0500

Production information pertaining to Job 4X5:

Prime costs
Direct labor hours
Machine hours
Units produced

Assembly Dept.
$1,250
250
-0500

Chapter 5: Product and Service Costing: Job-Order System

Chapter 5: Product and Service Costing: Job-Order System

122.

RefertoFigure5-7.Whatistheplantwideoverheadratebasedondirectlaborhours?

a.$1.00
b.$1.50
c.$3.00
d.$9.00
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$30,000/10,000=$3perDLH
123.

RefertoFigure5-7.UsingtheplantwideoverheadratebasedondirectlaborhourswhatisthecostofJob4X5?a.$1,250

b.$2,000
c.$8,750
d.$31,250
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
$30,000/10,000=$3
perDLHprimecost$1,250
moh(250 x $3)750
total$2,000
124.

RefertoFigure5-7.WhatistheoverheadratefortheFinishingDepartmentbasedonmachinehours?

a.$9.00
b.$3.00
c.$2.25
d.$1.00
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$22,500/7,500=$3perMH
125.
RefertoFigure5-7.Basedondepartmentaloverheadrates,whatisthecostofJob4X5?
DepartmentaloverheadratesfortheAssemblyDepartmentarebasedondirectlaborhours,whiledepartmentaloverheadrates
fortheFinishingDepartmentarebasedonmachinehours.
a.$31,250
b.$8,750
c.$2,000
d.$1,250
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
$22,500/7,500=$3

Chapter 5: Product and Service Costing: Job-Order System

perMHprimecost
dhl(250x3)
total

$1,250
750
$2,000

126.
RefertoFigure57.WhatarethetotaloverheadcostsassignedtoJob4X5,assumingtheAssemblyandFinishingDepartmentsusedirectlaborho
ursandmachinehoursfortheirbases,respectively?
a.$62.50
b.$250.00
c.$750.00
d.$1,500.00
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:($7,500/7,500)250=$250
127.
Inajobordercostingsystem,ifcostsareincurredtoreworkajobduetoinadequatetrainingofpersonnel,thesecostswouldbe
a. debitedtothejob.
b. debitedtomanufacturingoverheadcontrol.
c. creditedtomanufacturingoverheadcontrol.
d. creditedtothecostofgoodssold.
ANSWER: b

Figure5-8
LamourCorporationisajobordercostingcompanythatusesactivitybasedcostingtoapplyoverheadtojobs.Thefollowingoverheadactivitieswerebudgetedfortheyear.
Activity
setups
purchasing
otheroverhead

Cost
$240,000
160,000
300,000

Driver
numberofsetups
numberofparts
directlaborhours

ThefollowinginformationaboutthejobswasgivenforApril.

Balance4/1
directmaterials
directlabor
numberofsetups
numberofparts
directlaborhours

Job101 Job102 Job103 Job104

$64,900
$40,770
$30,500
0
54,000
37,900
25,000
11,000
80,000
38,500
43,000
21,000
40
10
30
200
300
80
400
500
5,000
2,400
5,200
1,200

Amountofdriver
6,000
20,000
80,000

Chapter 5: Product and Service Costing: Job-Order System

ByApril30,Jobs102and103werecompletedandsold.Theremainingjobswerestillinprocess.

Chapter 5: Product and Service Costing: Job-Order System

128.
RefertoFigure5-8.Whatistheactivityrateforpurchasing?
a.$1.25
b.$8
c.$3.75
d.$40
ANSWER:
b
RATIONALE: $160,000/20,000=$8
129.

RefertoFigure5-8.Whatisthecostofjob102?

a.$86,440
b.$127,210
c.$117,170
d.noneoftheabove
ANSWER:
b
RATIONALE: Job102=BI$40,770
DM 37,900
DL 38,500
MOH
setups10$40=
purch80$8=
other2,400$3.75
totalcost 127,210
130.

400
40
9,000

RefertoFigure5-8.Whatisthecostofgoodsmanufactured?

a.$144,400
b.$215,670
c.$178,340
d.$249,610
ANSWER:
d
RATIONALE:
CGM = Job 102 + Job 103
Job 102 = BI
$40,770
Job 103
DM
37,900
DL
38,500
MOH
setups 10 $40
400
30 $40
purch 80 $8
640
400 $8
other
2,400 $3.75 9,000 5,200 $3.75
total cost
$127,210 +

$ 30,500
25,000
43,000
1,200
3,200
19,500
$122,400 = $249,610

Chapter 5: Product and Service Costing: Job-Order System

Chapter 5: Product and Service Costing: Job-Order System

131.

RefertoFigure5-8.Theendingworkinprocesswouldconsistofthecostsofwhatjobs?

a. Job102 + Job 103

b. Job101 + Job 104
c. Job101 + Job 102 +Job 103 + Job 104
d. Job 101 + Job 102 + Job103
ANSWER:
b
RATIONALE: Jobs101+Job104
132.

RefertoFigure5-8.Thecostofgoodssoldwouldconsistofthecostsofwhatjobs?

a. Job102 + Job 103

b. Job101 + Job 104
c. Job101 + Job 102 +Job 103 + Job 104
d. Job 101 + Job 102 + Job103
ANSWER:
a
RATIONALE: Jobs102+Job103

Figure5-9
TheOmegaCompanymanufacturescustomizedmotorsonajob-orderbasis.Job492isanorderfor100units.Itrequiresthefollowing:
directmaterials
directlabor($10/hr)
overhead(150%DL$)

$3,000
1,000
1,500

Afterinspection,2unitsrequiredreworkwhichrequired8additionaldirectlaborhoursand$60ofmaterials.
133.

RefertoFigure5-9.Ifthespoilagewasconsiderednormal,whatisthecostofjob492?

a.$5,500
b.$5,640
c.$5,760
d.$3,000
ANSWER:

RATIONALE: DM $3,000
DL 1,000
MOH

1,500

totalcost $5,500
reworkischargedtoMOH

Chapter 5: Product and Service Costing: Job-Order System

Chapter 5: Product and Service Costing: Job-Order System

134.

RefertoFigure5-9.Ifthereworkisconsiderednormalspoilage,whatisthejournalentryforoverheadcontrol?

a. nojournalentryisneeded
b. materials

$60

payroll

$80
overhead control

c. overheadcontrol

$140
$140

materials

$60

payroll
d.noneoftheabove

$80

ANSWER:
c
RATIONALE: overheadcontrol$140
materials$60
payroll $80
135.

RefertoFigure5-9.Ifthereworkisconsideredabnormalspoilage,whatisthejournalentryforoverheadcontrol?

a. nojournalentryisneeded
b. materials

$60

payroll

$80
overhead control

c. overheadcontrol

$140
$140

materials

$60

payroll
d.noneoftheabove

$80

ANSWER:
a
RATIONALE: overheadcontrol$140
materials$60
payroll $80
136.

RefertoFigure5-9.Ifthereworkisconsideredabnormalspoilage,whatisthecostofjob492?

a.$5,500
b.$5,760
c.$3,140
d.$5,640
ANSWER:
b
RATIONALE: DM$3,000+$60= $3,060
DL$1,000+$80=1,080
MOH$1,500+$120=$1,620

Chapter 5: Product and Service Costing: Job-Order System

Total $5,760

Chapter 5: Product and Service Costing: Job-Order System

137.

Thecostofspoilageisaddedtoajobwhenitisconsideredtobe

a. aresultoftheprocess,nomatterwhatjobisbeingworkedon.
b. anormalconsequenceofworkingonthatjob.
c. abnormal.
d. allofthese.
ANSWER: c
138.
Whatisthemostimportantfactorthatcausesservicefirmstogenerallyranklowerincustomersatisfactionthanmanuf
acturingfirms?
ANSWER:
Employeesarekeytocustomerservices.Servicefirmshaveagreaterheterogeneityoflaborduetodifferentskillsan
dabilitiesforinteractingwithcustomersandeachother.Employeesmaynotevenbehavethesamefromonedaytoa
nother,creatinginconsistencyinthelevelofservice.Inmanufacturing,employeesareinteractingwithmachineryi
nmoreroutinetasks.Performanceismoreconsistent.
139.
.

Compareandcontrastperishabilityandintangibilityinanautomobileoillubricationshopandarchitecturaldesignfirms

ANSWER:
Intangibilityreferstothenonphysicalnatureofservices.Therecanbenoinventoryofservices.Bothlubejobsandar
chitecturaldesignsmustbeperformeduponthedemandofthecustomertomeetthespecificationsofthecar,land,etc.Perishabilityalsomeansthatservicescannotbeinventoriedbecausetheyareconsumedwhenth
eyareperformed.Theconsumptionofservicemeansthatcustomersmayneedrepeatedtreatments.Oillubesarem
uchmoreperishablethanarchitecturaldesigns.Thereisamorefrequentneedforlubejobsthandesignjobs.
140.

Whyareunitcostsimportant?Whydofull-costunitcostschangefromaccountingperiodtoaccountingperiod.

ANSWER: Unitcostsareimportantforvaluinginventory,calculatingtheCOGSandnetincome,andformakingdecisions.Fullcostunitcostsconsistofdirectmaterials,directlaborandmanufacturingoverhead.Iftherearechangesinproductio
nvolume,thefixedmanufacturingoverheadwillbespreadoverdifferentnumbersofunitscausingunitcoststochan
ge.
141.

Whyarefirmsreluctanttouseactualcosting?Howdoesnormalcostingsolvetheproblems?

ANSWER:
Actualcostingsystemsdonotprovideaccurateunitcostinformationonatimelybasisbecausemanufacturingoverh
eadcostsareindirectcoststhatmayfluctuatedramaticallyfrommonthtomonthandmaybeincurredindependentof
nonuniformproductionlevels.Normalcostingaveragesoverheadovertheentireyearandappliesitasproductionta
kesplace.

Chapter 5: Product and Service Costing: Job-Order System

142.

Explainwhyactualcostingsystemsarerarelyusedinpractice.

ANSWER:
Actualcostingsystemsarerarelyusedinpracticebecausetheydonotprovideaccurateunitcostinformationonati
melybasis.Actualperunitoverheadcostscanvarydramaticallyfromperiodtoperiodbecause(1)actualcostsvaryfromperiodtoperiodan
d/or(2)thenumberofunitsproducedmayvaryfromperiodtoperiod.Thus,whenactualcostingisused,aunitproduc
edduringalow-volumemonthmaybeassignedahighercostthanaunitproducedduringahighvolumemonth,eventhoughtheunitsareidentical.
Toavoidfluctuationsinperunitcostsusingactualoverheadcosts,itisnecessarytowaituntiltheendoftheperiodandusetotalactualoverheadco
stsfortheyeartocalculateperunitamounts.However,thatinformationisreceivedtoolatetobeusedthroughouttheyearforplanning,control,and
decisionmaking.Usinganormalcostingsystemandapredeterminedoverheadrateavoidstheproblemsassociated
withanactualcostingsystem.
143.
Whatarethesourcedocumentsusedinajob-ordercostingsystem?
Howdothesourcedocumentsrelatetothejobcostsheet?Howdothesedocumentsinformworkinprocess?
ANSWER: Thematerialsrequisitionformandjobtimeticketsarethesourcedocumentsformaterialsandlabor.
Thematerialsrequisitionformisusedtobringmaterialsneededforproductiontotheproductionfloorfordifferentjo
bs.Thejobtimeticketiskeptforeachlaborer.Itreportsthetimespentworkingondifferentjobs.Thesesourcedocum
entsareusedtoassignmaterialsandlaborcoststojobcostsheets.Thejobcostsheetcollectsallthematerials,labor,a
ndoverheadappliedtoeachjob.ThejobcardsarereadandsummarizedtocreatetheWIPaccount.

Chapter 5: Product and Service Costing: Job-Order System

144.
SoundofThunderCompanyhasajobcostingsystem.ThefollowingitemsappearedintheWork-inProcessaccountduringApril2016:
April1,2016,balance
Materialsplacedintoproduction
Directlabor(4,000hours)
Factoryoverheadapplied
Costofgoodsmanufactured
April30,2016,balance

$20,000
?
$120,000
$96,000
$400,000
$16,000

SoundofThunderappliesoverheadtoproductiononthebasisofdirectlaborhours.JobXX,theonlyjobinprocessonApril30
,hasbeencharged$10,600materialscostandhas100laborhoursofdirectlabortimeassignedtoit.
Required:
a. DeterminethepredeterminedfactoryoverheadrateforSoundofThunderCompany.
b. Determinetheamountsofmaterials,directlabor,andfactoryoverheadincludedintheApril30,2016,workinprocess.
c. DeterminetheamountofmaterialsplacedintoproductionduringApril2016.
ANSWER: a.Factoryoverheadrate=$96,000/4,000=$24perdirectlaborhour
b. Costs assigned to Job XX:
materials
$10,600
direct labor (100 $30*)
3,000
factory overhead applied (100 $24)
2,400
work in process, April 30, 2014 $16,000
*$120,000/4000=$30perhour
c.$X +$120,000 +$96,000+ $20,000 -$16,000 =$400,000
X=$180,000

Chapter 5: Product and Service Costing: Job-Order System

145.
MatriarchIncorporatedusesajobordercostingsystemandapredeterminedoverheadratebasedonmachinehours.
Atthebeginningoftheyear,thecompanyestimatedmanufacturingoverheadfortheyearwouldbe$240,000andmachineh
ourswouldbe8,000.
ThefollowinginformationpertainstoNovemberofthecurrentyear:

Work-in-process,Nov.1
Novemberproductionactivity:
Materialsrequisitioned
Directlaborcost
Machinehours
Laborhours

Job10
$16,000

Job11
$26,000

Job12
$38,000

Total
$80,000

$4,000
$2,400
400
120

$4,800
$3,600
700
180

$7,200
$4,000
900
200

$16,000
$10,000
2,000
500

ActualmanufacturingoverheadcostincurredinNovemberwas$61,000.
Required:
a. Computethepredeterminedoverheadapplicationrate.
b. Determinethetotalcostassociatedwitheachjob.
c. Ifjobs10and12werecompleted,preparedthejournalentrytomovethecost.
d. Ifjob10wasdeliveredtocustomersthatpaid$50,000cash,preparethejournalentries.Whatisthegrossprofitforjob10?
e. Assumingnobeginningworkinprocess,whatisthecostassignedtoendingworkinprocess?
f. Assumingnobeginningfinishedgoodswhatisthecostassignedtoendingfinishedgoods?
g. Howmuchwasoverheadover/underapplied?

Chapter 5: Product and Service Costing: Job-Order System

ANSWER: a.$240,000/8,000=$30
b.

Work-in-process,Nov.1
Novemberproductionactivity:
Materialsrequisitioned
Directlaborcost
Overheadapplied:
Machinehours
400$30
700$30
900 $30
Total

Job10
$16,000

Job11
$26,000

Job12
$38,000

Total
$80,000

$4,000
$2,400

$4,800
$3,600

$7,200
$4,000

$16,000
$10,000

$12,000
$21,000
34,400

55,400

$27,000
76,200

c. Finishedgoods$110,600
Workinprocess$110,600
job10+job12=34,400+76,200=$110,600(thecostofgoodsmanufactured)
d. recordasaleCash$50,000
Sales$50,000
Costofgoodssold$34,400
Finishedgoods$34,400
Sales
CGS
GrossProfit

$50,000
34,400
$15,600

e. Job11is stillin production= $55,400

f. Finished goodshasonejob-job12=$76,200
g. .Actualoverhead$61,000
Appliedoverhead
(12,000 + 21,000 +27,000 ) =$60,000
Underappliedoverhead
$1,000

Chapter 5: Product and Service Costing: Job-Order System

146.

SelectedaccountbalancesofSamaritanCompanyfor2016areasfollows:

Work in Process
FinishedGoods
CostofGoodsSold
Factory Overhead

$35,000Debit
$65,000Debit
$100,000Debit
$22,000Debit

Required:
a. Werefactoryoverheadcostsunderappliedoroverappliedin2016?Explain.
b.Preparethejournalentrytodisposeofthefactoryoverheadbalanceassumingtheamountisimmaterial.
c. Preparethejournalentrytodisposeofthefactoryoverheadbalanceusingtheallocationmethod.
ANSWER:
a.

Underappliedby$22,000
Theactualcostswere$22,000greaterthanthoseappliedtowork-in-process.

b.

CostofGoodsSold

22,000
FactoryOverhead

c.

WorkinProcess(35,000/200,000)
FinishedGoods(65,000/200,000)
CostofGoodsSold(100,000/200,000)
FactoryOverhead

22,000
3,850
7,150
11,000
22,000

Chapter 5: Product and Service Costing: Job-Order System

147.

CoyoteCompanyhadthefollowingselectedaccountbalancesattheendof2016:

WorkinProcess
FinishedGoods
CostofGoodsSold
FactoryOverhead(overapplied)

$120,000
150,000
180,000
63,000

Required:
a. PreparethejournalentrytodisposeofthefactoryoverheadbalanceassumingitiswrittenofftoCostofGoodsSold.
b.PreparethejournalentrytodisposeofthefactoryoverheadbalanceassumingitisallocatedamongWorkinProcess,Finis
hedGoods,andCostofGoodsSoldbasedonendingbalances.
c. Whichmethodofdisposingofunder-oroverappliedfactoryoverheadcostismoreaccurate?
Explain.
ANSWER:
a.

Factory Overhead

63,000
CostofGoods Sold

b.

c.

Factory Overhead

63,000
63,000

Work inProcess (120/450)

16,800
FinishedGoods(150/450)
21,000
CostofGoodsSold(180/450)
25,200
Whentheamountofoverappliedorunderappliedoverheadisimmaterial,writingitofftoCostofGoodsSoldissufficient.Ifthe
amountismaterial,allocatingtheamounttothetwoinventories(WIPandFG)andCostofGoodsSoldispreferable.

Chapter 5: Product and Service Costing: Job-Order System

148.

ThefollowinginformationwastakenfromthejobcostsheetforJob101forMcDonaldManufacturingCompany:

Datestarted:
Date completed:

Date
12-05-14
12-15-14
12-17-14
12-22-14
01-01-15
01-21-15

December5,2016
January21,2017

Direct
Materials
$3,000

Direct
Labor

Applied
Factory
Overhead

$ 900

$450

1,350

675

600

300

Job
Total

1,500
1,500

Job101wassoldonaccountonJanuary25,2017,for160percentofitscost.Factoryoverheadisappliedonthebasisofdirectl
aborcosts.
Required:
a. PreparethejournalentriestorecordthecostsincurredforJob101in20162017fordirectmaterials,directlabor,andfactoryoverhead.
b.PreparethejournalentrytorecordthecompletionofJob101.
c. WhatisthepredeterminedfactoryoverheadrateforMcDonaldManufacturing?
d.PreparethejournalentriestorecordthesaleofJob101.
ANSWER: a.

b.

Work-in-Process
Materials

6,000

Work-in-Process
Wages Payable

2,850

Work-in-Process
FactoryOverhead

1,425

6,000
2,850
1,425

FinishedGoods 10,275
Work-in-Process

c.

$1,425/$2,850=50%ofdirectlaborcosts

d.

AccountsReceivable
Sales
CostofGoodsSold
FinishedGoods

10,275

16,440
16,440
10,275
10,275

Chapter 5: Product and Service Costing: Job-Order System

149.
StainlessSteelCompanyhastwoproductiondepartments:AandB.StainlessSteelhasfollowingbudgetedo
verheadcostsandactivity:
Overheadcosts
$ 50,000
175,000
$225,000

DepartmentA
DepartmentB
Total

Directlaborhours
10,000
5,000
15,000

Machinehours
5,000
25,000
30,000

Productiondataforjob20and21aregivenbelow:

Primecosts
Directlaborhours
Machinehours

Unitsproduced
Required:

Job20
Dept.A
$7,000
50
10
Job20
100

Dept.B
12,000
5
40

Job21
Dept.A
$22,000
60
10

Dept.B
$30,000
5
50

Job21
100

a. ComparethecostsperunitofJob20ifStainlessSteeluses
1. aplantwideratebasedondirectlaborhours;
2. aplantwideratebasedonmachinehours;
3. departmentalrateswithDepartmentAbasedondirectlaborhoursandDepartmentBusingmachinehours.
(roundto2decimalplaces)
b. Whyistheresuchavariationinthecostperunit?Whichmethodprovidesthebestcostassignment?
ANSWER:
a.OverheadratesifStainlessSteeluses
1. aplantwideratebasedondirectlaborhours;
$225,000/15,000=$15.00DLH
2. aplantwideratebasedonmachinehours;
$225,000/30,000=$7.50MH
3. departmentalrateswithdepartmentAbasedondirectlaborhoursanddepartmentBusingmachinehours.
A$50,000/10,000=$5DLH
B$175,000/25,000=$7MH
b.Thevariationinthecostperunitisduetothevariationinconsumption.

Chapter 5: Product and Service Costing: Job-Order System

150.
SalazarCompanycompletedthefollowingtransactionswithrespecttoitsmanufacturingoperationsdurin
gOctober2016:
a. Materialscosting$140,000andindirectmaterialscosting$16,800werepurchasedonaccount.
Assumeindirectmaterialswasdebitedtomaterials.
b.Atotalof$70,000ofmaterialswasrequisitionedtothefactoryformanufacturingoperationsconductedduring
October.
c. Manufacturingpayrollforthemonthconsistedof2,000hoursofdirectlaborand500hoursofindirectlabor,both
at$14perhour.
d.Indirectmaterialscosting$7,000wererequisitioned.
e. Depreciationonthefactorybuildingandequipmentwas$14,000.
f. Miscellaneousfactoryoverheadexpensestotaled$5,600forOctober.
g.Factoryoverheadcostwasappliedtoworkinprocessattherateof125percentofdirectlaborcosts.
h.Unitsofproductwithatotalmanufacturingcostof$84,000werecompletedandtransferredtothefinishedgood
swarehouse.
i. Finishedgoodscosting$49,000weresoldduringOctoberfor$77,000cash.
Required:
PreparejournalentriesforeachofthetransactionsthatoccurredduringOctober2016.
ANSWER: a.
b.
c.

d.

Materials
AccountsPayable

156,800

Work-in-Process
Materials

70,000

WorkinProcess(2,000$14)
FactoryOverhead(500$14)
Wages Payable

28,000
7,000

FactoryOverhead

156,800
70,000

35,000
7,000

Materials
e.

FactoryOverhead

7,000
14,000

AccumulatedDepreciation
f.

FactoryOverhead

14,000
5,600

Various Accounts
g.
h.
i.

WorkinProcess(28,000125%)
FactoryOverhead

FinishedGoods 84,000
Work-in-Process
Cash

77,000
Sales

5,600
35,000
35,000
84,000
77,000

Chapter 5: Product and Service Costing: Job-Order System

CostofGoodsSold
49,000
Finished Goods Inventory
151.
LowlandCorporationisajobordercostingcompanythatusesactivitybasedcostingtoapplyoverheadtojobs.Thefollowingoverheadactivitieswerebudgetedfortheyear.
Activity
setups
purchasing
otheroverhead

Cost

Driver

Amountofdriver

$120,000
80,000
150,000

numberofsetups
numberofparts
directlaborhours

6,000
20,000
75,000

49,000

ThefollowinginformationaboutthejobswasgivenforSeptember.

Balance9/1
directmaterials
directlabor
numberofsetups
numberofparts
directlaborhours

Job1001 Job1002 Job1003 Job1004

$44,900
$60,700
$30,500
0
54,000
37,000
25,000
41,000
80,000
38,500
43,000
71,000
40
10
30
200
300
180
400
500
5,000
2,400
5,200
1,200

BySeptember30,Jobs1001and1003werecompletedandsold.Theremainingjobswerestillinprocess.
Required:
1. Calculatetheactivityratesforeachoverheadactivity.
2. CalculatethecostofeachjobforSeptember30.
3. WhatisthebeginningworkinprocessonSeptember1andOctober1?
4. Whatisthecostofgoodsmanufactured?
5. Whatisthecostofgoodssold?
6. DrawtheTaccountforworkinprocess.
(includealldebitsandcredits)PreparetheStatementoftheCostofGoodsManufactured.

Chapter 5: Product and Service Costing: Job-Order System

ANSWER: 1.
Activity
setups
purchasing
otheroverhead

Cost
$120,000
80,000
150,000

AmountofDriver

Activityrate
6,000
20,000
75,000

$20
4
2

2.
Balance9/1
dm
dl
#setups$20
#parts$4
dlhours$2
TOTAL

Job1001
$44,900
54,000
80,000
(40) 800
(300)1,200
(5,000)10,000
$190,900

Job1002
$60,700
37,000
38,500
(10)200
(180)720
(2,400)4,800
$141,920

Job1003
$30,500
25,000
43,000
(30)600
(400)1,600
(5,200)10,400
$111,100

Job1004
Total
0
136,100
41,000
157,000
71,000
232,500
(200)4,000
5,600
(500)2,000
5,520
(1,200)2,400 27,600
$120,400 $564,320

3.BWIP=$136,100
EWIP 9/30 =BWIP 10/1= jobs1002 +1004 = $141,920+ $120,400= $262,320
4.CGM= jobs1001+ 1003=$190,900 +$111,100= $302,000
5.CGS=jobs1001 +1003=$190,900 +$111,100=$302,000
6.
BI
DM
DL
MOH
EI

WIP
302,000

136,100
157,000
232,500
38,720
262,320

STATEMENTOFCOSTOFGOODSMANUFACTURED
LowlandCorporationMonthofSeptember
Directmaterialsusedinproduction
Directlabor
Manufacturingoverheadapplied
Totalmanufacturingcostsadded
Add:beginningworkinprocess
Less:endingworkinprocess
CostofGoodsmanufactured

$157,000
232,500
38,720
428,220
136,100
262,320
302,000

Figure5-4
LanyardCompanyusesajobordercostingsystemtoaccountforproductcosts.Thefollowinginformationpertainsto2016:

Chapter 5: Product and Service Costing: Job-Order System

Materialsplacedintoproduction
Indirectlabor
Directlabor(10,000hours)
Depreciationoffactorybuilding
Otherfactoryoverhead
Increaseinwork-in-processinventory

$140,000
40,000
160,000
60,000
100,000
30,000

Factoryoverheadrateis$18perdirectlaborhour.
152.

RefertoFigure5-4.WhatisthetotalamountcreditedtoMaterialsInventoryforLanyardin2016?

a.$480,000
b.$170,000
c.$140,000
d.$110,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:Materialsusedinproduction=$140,000
153.

RefertoFigure5-4.WhatisthetotalamountcreditedtoMaterialsInventoryforLanyardin2016?

a.$480,000
b.$170,000
c.$140,000
d.$110,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:Materialsusedinproduction=$140,000
154.

RefertoFigure5-4.WhatisthetotalamountcreditedtoMaterialsInventoryforLanyardin2016?

a.$480,000
b.$170,000
c.$140,000
d.$110,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:Materialsusedinproduction=$140,000

Chapter 6
1. Aprocessisaseriesofactivitiesoroperations,whicharelinkedtoperformaspecificobjective.
a. True

Chapter 5: Product and Service Costing: Job-Order System

b. False
ANSWER: True
2. Thecostflowsforaprocess-costingsystemaretotallydifferentfromthoseofajobordercostingsystem.
a. True
b. False
ANSWER: False
3. Processsystemsarecharacterizedbyalargernumberofhomogeneousproductspassingthroughaseriesof
processes.
a. True
b. False
ANSWER: True
4. Theproductionreportisthedocumentthatsummarizesthemanufacturingactivitythattakesplaceinawork-inprocessdepartment.
a. True
b. False
ANSWER: False
5. Manyserviceorganizationsandjust-in-time(JIT)manufacturingfirmsoperateinanenvironmentwithoutworkin-processinventories.
a. True
b. False
ANSWER: True
6. Servicesthatarebasicallyhomogeneousandrepetitivecannottakeadvantageofaprocess-costingapproach.
a. True
b. False
ANSWER: False
7. InJITmanufacturing,workcellsarecreatedthatproduceaproductfromstarttofinish.
a. True
b. False
ANSWER: True

Chapter 5: Product and Service Costing: Job-Order System

8. Infirmswithendingwork-in-processinventories,outputismeasuredusingequivalentunits.
a. True
b. False
ANSWER: True
9. Equivalentunitsaretheincompleteunitsthatcouldhavebeenproducedgiventhetotalamountofeffortexpended.
a. True
b. False
ANSWER: False
10.
Inaprocess-costingsystem,work-inprocessinventory,materialsareaddeduniformlysothatmultiplecalculationsofequivalentunitsareneededforea
chtypeofinput.
a. True
b. False
ANSWER: False
11.
TheFIFOcostingmethodrecognizesthattheworkandcostscarriedoverfromthepriorperiodlegitimatel
ybelongtothatperiod.
a. True
b. False
ANSWER: True
12. FIFOfollowsthejob-ordercostingprinciple.
a. True
b. False
ANSWER: False
13. TheFIFOmethodunitcostsareusedtovalueoutputthatisrelatedtofutureperiods.
a. True
b. False
ANSWER: False
14.
Theweightedaveragemethodtreatstheequivalentoutputandcostsinbeginningwork-inprocessinventoriesasiftheybelongtothecurrentperiodwhencalculatingunitcost.
a. True
b. False
ANSWER: True

Chapter 5: Product and Service Costing: Job-Order System

15.
Inaprocesscostingsystem,thecostingofgoodstransferredoutinBWIPinventoryisdifficultbecausetherearemultiplecate
goriesofcompletedunits.
a. True
b. False
ANSWER: False
16.
Themajorbenefitoftheweightedaveragemethodissimplicity.Themajordisadvantageisthatacc
uracyandperformancemeasurementsareimpaired.
a. True
b. False
ANSWER: True
17. Transferred-ingoods,mustbeconvertedtotheunitsofmeasureusedbythecurrentdepartment.
a. True
b. False
ANSWER: True
18.
Forthereceivingdepartmentofaprocess-costingmanufacturer,transferredingoodsarematerialsthatareaddedattheendoftheprocess.
a. True
b. False
ANSWER: False
19.
Incalculatingequivalentunitsofproductionusingtheweightedaveragemethod,thetransferredingoodsaretreatedasmaterialsaddedatthebeginningoftheprocess.
a. True
b. False
ANSWER: True
20.
Whenmanufacturingcompaniesexhibitcharacteristicsofbothjobandprocessenvironments,the
yusebatchproductionprocesses.
a. True
b. False
ANSWER: True
21.
Operationcostingusesablendofjob-orderandprocesscostingprocedureswheneverbatchesofdissimilarproductsareproduced.
a. True
b. False

Chapter 5: Product and Service Costing: Job-Order System

ANSWER: False
22.
Inoperationcosting,joborderproceduresareusedtoassigndirectmaterialscostsandprocessproceduresareusedtoassignconversion
costs.
a. True
b. False
ANSWER: True
23.
Whenspoilageisassumedtobenormal,itisnottrackedseparately,itissimplyincludedinthetotalcosto
fgoodunits.
a. True
b. False
ANSWER: True
24. Spoilageinaprocesscostingprocessmeansthatmoreunitsentertheprocessthanleaveit.
a. True
b. False
ANSWER: True
25. Abnormalspoilagecostsaretreatedthesameasnormalspoilageforprocesscosting.
a. True
b. False
ANSWER: False
26.
Theaccountingsystemwhichaccumulatesproductioncostsbyproces
sandusesawork-in-processaccountforeachprocessiscalled .
ANSWER: processcosting
27.
Thebasiccharacteristicsofprocesscostinginclude:costflows,journ
alentries,andthe__________report.
ANSWER: costofproduction
28.

Akeyinputtothecostofproductionreportis
costs.

ANSWER: unit
29.
notuse
ANSWER: work-in-process

Companiesusing JIT manufacturingdo

inventoriesfortheirprocesscosting.

Chapter 5: Product and Service Costing: Job-Order System

30. Ina__________costingsystem,productioncostsareaccumulatedbyprocess.
ANSWER: process

Chapter 5: Product and Service Costing: Job-Order System

31.

Inprocesscosting, costingcanbeusedtoassignsharedoverheadtoprocesses.

ANSWER: activity-based
32. Theunitsthatcouldhavebeenproducedinaperiodgiventheamountofmanufacturinginputsusedarecalled
__________.
ANSWER: equivalentunitsofoutput
33.
Theprocessthatdeterminestheequalityofthecostsinbeginningworkinprocessan
dthecostsincurredduringtheperiodiscalled.
ANSWER: costreconciliation
34.
materialsarenot addeduniformlyusinga work-in-processsystem,

When

ofequivalentunitsareneeded,oneforeachtypeofinput.
ANSWER: multiplecalculations
35.
Theunit-costingmethodthatexcludespriorperiodworkandcostsincomputingcurrent-periodunitworkandcostsis calledthe

costingmethod.

ANSWER: FIFO
36.

FIFO follows the principle.

ANSWER: process-costing
37. Forbeginningwork-in-processcategoryusingFIFO,themanufacturingcostisthesumofthecurrent-period
__________andthecurrent__________tocompletetheBWIP.
ANSWER: costs;cost
38.
The
methodisaunit-costingmethodthatmergespriorperiodworkandcostswithcurrentperiodworkandcosts.
ANSWER: weightedaverage
39.
up

The weightedaverage costingmethodpicks

inventorycostsandoutputsandtreatsthemasiftheybelonginthecurrentperiod.
ANSWER: beginning
40.
heweightedaveragecostingmethod,thecostingofgoodstransferredoutis

Usingt

Chapter 5: Product and Service Costing: Job-Order System

sincethereisonlyonecategoryofcompletedunits.
ANSWER: simplified

Chapter 5: Product and Service Costing: Job-Order System

41.
priorprocessiscalledthe

Thecostassignedtogoodsfroma
cost.

ANSWER: transferred-in
42.
ent,transferredingoodsareaddedatthe

Forthereceivingdepartm
oftheprocess.

ANSWER: beginning
43.
Theusualapproachinprocessmanufacturingistotreattransferredingoodsasaseparatematerialcategorywhencalculating
.
ANSWER: equivalentunits
44.
Thecostingsystemthatusesjoborderprocedurestoassigndirectmaterialcoststobatchesandprocessprocedurestoassignconversio
ncostsiscalled
costing.
ANSWER: operation
45.
Inoperationcosting,theprocesswhichproducesbatchesofdiffer
entproductswhichareidenticalinmanywaysbutdifferinothersiscalled
process
ANSWER: batchproduction
46.
Thedocumentsusedtocollectproductioncostsforeachbatchinoperationcostingarecalled
.
ANSWER: workorders
47.

Manufacturingfirmsthathavecharacteristicsofbothjobandprocessenvironmentsoftenuse
processes.

ANSWER: batchproduction
48.
isacostingsystemthatblendsjob-orderandprocesscostingproceduresappliedtobatchesofhomogeneousproducts.
ANSWER: Operationcosting
49.

ANSWER: normal

Whenspoilage is assumed to be
itisembeddedinthetotalcostofgoodunits.

Chapter 5: Product and Service Costing: Job-Order System

50.
due to the exacting nature of a particular job it is called
ANSWER: abnormal

When spoilage is
spoilage.

Chapter 5: Product and Service Costing: Job-Order System

51.
Whatsystemwouldamanufacturerofuniquespecialordersorbatchprocessesmostlikelyusetoac
cumulatecosts?
a. contractcosting
b. variablecosting
c. processcosting
d. job-ordercosting
ANSWER: d
52. Inprocesscosting,costsareaccountedforby
a. job.
b. batch.
c. process.
d. year.
ANSWER: c
53. Theappropriatecostaccountingsystemtousewheninventoryitemsareproducedonanassemblylineis
a. weightedaverage.
b. job-ordercosting.
c. processcosting.
d. perpetualmethod.
ANSWER: c
54.
Theprocessthataccumulatesproductioncostsbyprocessandusesawork-inprocessaccountforeachprocessiscalled:
a. Processcosting
b. Jointcosting
c. Variablecosting
d. Job-ordercosting
ANSWER: a

Chapter 5: Product and Service Costing: Job-Order System

Figure6-1
TheAllenCompanyhasthefollowinginformationfortheAssemblyDepartmentforOctober2016:
Materialspurchased
Materialsused
Directlabor
Actualmanufacturingoverhead
CostofgoodscompletedandtransferredtotheFinishingDept.

$45,000
49,000
30,000
56,000
125,000

Overheadrateis200percentofdirectlaborcosts.
AllenCompanyusesaprocesscostingsystemfortheAssemblyDepartment.
55. RefertoFigure6-1.Thejournalentrytorecordmaterialspurchasedwouldincludea
a. debittoMaterialsInventoryfor$45,000.
b. debittoMaterialsInventoryfor$49,000.
c. credittoAccountsPayablefor$49,000.
d. bothbandc.
ANSWER: a
56.
RefertoFigure6-1.WhatisthetotalamountofdebitstoWorkinProcessAssemblyDepartmentforOctober?
a.$125,000
b.$131,000
c.$139,000
d.$109,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$49,000+$30,000+($30,0002)=$139,000
57.
RefertoFigure61.ThejournalentrytorecordgoodscompletedandtransferredoutoftheAssemblyDepartmentwouldincludea
a. debittoFinishedGoodsInventoryfor$125,000.
b. credittoMaterialsInventoryfor$125,000.
c. debittoWorkinProcess-AssemblyDepartmentfor$125,000.
d. debittoWorkinProcess-FinishingDepartmentfor$125,000.
ANSWER: d

Chapter 5: Product and Service Costing: Job-Order System

58. Whenproductsandtheircostsaremovedfromoneprocesstothenextprocess,thesecostsarereferredtoas
a. unitcosts.
b. transferred-incosts.
c. WIPinventorycosts.
d. equivalentunitcosts.
ANSWER: b
59. WhichisNOTadifferencebetweenthejob-ordercostingsystemandtheprocesscostingsystem?
a. Theyaccumulatetheircoststodifferentcostobjectives.
b. Thenumberofwork-in-processaccountsisdifferent.
c. Onedoesnotusethefinishedgoodsaccount.
d. alloftheabove.
ANSWER: c

Figure6-2
LeandroCorp.manufactureswoodendesks.Productionconsistsofthreeprocesses:cutting,assembly,andfinishi
ng.ThefollowingcostsaregivenforApril:

directmaterials
directlabor
appliedoverhead

Cutting
$7,000
3,000
4,000

Assembly
$10,000
14,000
5,000

Finishing
$3,000
2,000
6,000

Therewerenoworkinprocessinventoriesand1,000podiumswereproduced.

Chapter 5: Product and Service Costing: Job-Order System

60.
RefertoFigure62.Whatisthecosttransferredoutoftheassemblydepartment.
a.$43,000
b.$54,000
c.$29,000
d.$14,000
e.noneoftheabove
ANSWER:
a
RATIONALE:

DM
DL
MOH
Total
Transferred-in
Transferred-out

Cutting
$7,000
3,000
4,000
$14,000
$14,000

Assembly
$10,000
14,000
5,000
$29,000
$14,000
$43,000

Finishing
$3,000
2,000
6,000
$11,000
43,000
$54,000

Chapter 5: Product and Service Costing: Job-Order System

61. RefertoFigure6-2.Recordthejournalentriestorecordthetransferofgoodsfromprocesstoprocess.
a. WorkinProcess-Assembly 14,000
WorkinProcessCutting14,000WorkinProcess-Finishing43,000
WorkinProcessAssembly43,000FinishedGoods54,000
WorkinProcess-Finishing54,000
b. WorkinProcess-Assembly29,000
WorkinProcessCutting29,000WorkinProcess-Finishing11,000
WorkinProcessAssembly11,000FinishedGoods54,000
WorkinProcess-Finishing54,000
c. WorkinProcess-Cutting14,000
RawMaterials14,000
WorkinProcess-Assembly29,000
Rawmaterials29,000
WorkinProcess-Finishing11,000
RawMaterials11,000
d.noneoftheabove
ANSWER: a
RATIONALE:

Cutting
DM
DM
DL
MOH
Total
Transferred-in
Transferred-out

$7,000
3,000
4,000
$14,000
0
$14,000

Assembly
$10,000
14,000
5,000
$29,000
$14,000
$43,000

Finishing
$3,000
2,000
6,000
$11,000
43,000
$54,000

Chapter 6: Process Costing

62.

RefertoFigure6-2.ThejournalentrytoassigncoststotheAssemblyprocesswouldbe

a. RawMaterials10,00
0Payroll14,000
OverheadControl5,000
WorkinProcess-Assembly29,000
b. RawMaterials20,00
0Payroll19,000
OverheadControl15,000
WorkinProcess-Assembly54,000
c. WorkinProcess-Assembly29,000
RawMaterials10,000
Payroll14,000
OverheadControl5,000
d. WorkinProcess-Assembly54,000
RawMaterials20,000
Payroll19,000
OverheadControl15,000
e. noneoftheabove
ANSWER:

RATIONALE:

Cutting
DM
DL
MOH
Total
Transferred-in
Transferred-out

$7,000
3,000
4,000
$14,000
0
$14,000

Assembly

Finishing

$10,000
14,000
5,000
$29,000
$14,000
$43,000

$3,000
2,000
6,000
$11,000
43,000
$54,000

63. Inaprocesscostingsystem,whichofthefollowingwouldbeTRUE?
a. Thereisnoneedtousetimeticketstoassigncoststoprocesses.
b. Thereisnoneedtotrackmaterialstoprocesses.
c. Aprocesscostingsystemismoreexpensivetomaintainbecauseithasmorework-in-processaccounts.
d. alloftheabovearetrue.
ANSWER: a
64. Asproductionoccurs,materials,directlabor,andappliedmanufacturingoverheadarerecordedin
a. costofgoodssold.
b. workinprocess.

Chapter 6: Process Costing

c. materials.
d. finishedgoods.
ANSWER: b

Chapter 6: Process Costing

65. WhichisTRUEaboutservices?
a. Someservicesmayrequirethatasequenceofuniformprocessesbeperformed.
b. Servicescanneverbehomogeneousandrepetitivelyproduced.
c. Servicescannothavework-in-processinventories.
d. Allservicesrequirejob-ordercosting.
ANSWER: a
66. WhichisNOTafeatureofaprocesscostingsystem?
a. Standardizedproductspassthroughstandardizedprocesses.
b. Eachunitistreateduniquelyinreceivingaprocess.
c. Manufacturingcostsareaccumulatedbyaprocessforagiventimeperiod.
d. Unitcostsarecalculatedforeachdepartment.
ANSWER: b

Figure6-3
JamieHopen,CPA,preparestaxreturns.TheproductioncostsandthenumberoftaxreturnspreparedforthemonthofSept
emberareasfollows:
Directmaterials
CPAstaffsalaries
Overhead
Total
Numberoftaxreturns300

$200
4,000
1,800
$6,000

67. Whatistheunitcostpertaxreturn?
a.$0.67b.
$15.00
c.
$20.00
d.
$3.33
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Directmaterials

$200

CPAstaffsalaries

4,000

Overhead

1,800

Total

$6,000

Chapter 6: Process Costing

Numberoftaxreturns300
$6,000/300=$20

Chapter 6: Process Costing

68.
RefertoFigure63.Whatisthecostofservicessold?a.$1,800
b.$4,000
c.$200d.
$6,000
ANSWER:

RATIONALE:
Direct materials
CPA staff salaries
Overhead
Total

$ 200
4,000
1,800
$6,000

69. Inordertodetermineproductcosts,JITfirmsareusuallystructuredsotheycanuse:
a. job-ordercosting
b. processcosting
c. jointcosting
d. variablecosting
ANSWER: b
70. JITmanufacturingemphasizes
a. continuousimprovement.
b. eliminationofwaste.
c. reductionofwork-in-processinventories.
d. alloftheabove.
ANSWER: d
71. Activity-basedcostingmighthavearoleinprocesscostingsettingsunderwhatconditions?
a. undernoconditions
b. whenthereareproductsproducedwithhomogeneousprocessesandlittlediversity
c. whenmultipleproductsarebeingproduced.
d. whenonlyoneproductisbeingproduced
ANSWER: c
72.
led:

Thewholeunitsthatcouldhavebeenproducedinaperiodgiventheamountofmanufacturinginputsusedis(are)cal

a. FIFOcosting
b. Transferred-incost
c. Weightedaveragecost

Chapter 6: Process Costing

d. Equivalentunitsofoutput
ANSWER: d

Chapter 6: Process Costing

73.
Thatwhichdetermine(s)whetherthecostsassignedtounitstransferredoutandtounitsinendingworkin
processareequaltothecostsinbeginningworkinprocess,plusthemanufacturingcostsincurredinthecurrentperi
odis(are)called:
a. Equivalentunitofoutput
b. Costreconciliation
c. Batchproductionprocess
d. Transferred-incosts
ANSWER: b
74. Equivalentunitsexpressesallactivityoftheperiodintermsof
a. directlaborhours.
b. partiallycompletedunits.
c. fullycompletedunits.
d. unitsofinput.
ANSWER: c
75.
Thetermgiventounitsthatrepresentsthenumberofcompletedunitsthatisequal,intermsofproductioni
nputs,toagivennumberofpartiallycompletedunitsis:
a. Unitscompleted
b. Equivalentunits
c. Unitsstartedandcompleted
d. Totalunitsinproduction
ANSWER: b

Figure6-4
ThefollowinginformationisavailablefromtherecordsofDiamondCut,Inc.:
DirectMaterials-AssemblyDepartment
DirectMaterials-FinishingDepartment
DirectLabor-AssemblyDepartment
DirectLabor-FinishingDepartment
AppliedOverhead-AssemblyDepartment
AppliedOverhead-FinishingDepartment
ActualOverhead-AssemblyDepartment
ActualOverhead-FinishingDepartment

$10,000
15,000
11,000
20,000
11,000
20,000
12,500
17,500

Chapter 6: Process Costing

76. RefertoFigure6-4.Whatarethe"totalcoststoaccountfor"intheAssemblyDepartment?
a.
$32,000
b.
$44,500
c.
$21,000
d.
$10,000
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Directmaterials

$10,000

Directlabor

11,000

Appliedoverhead

11,000

Total

$32,000

77. RefertoFigure6-4.WhataretheconversioncostsintheFinishingDepartment?
a.
$35,000
b.
$37,500
c.
$40,000
d.
$57,500
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$20,000+$20,000=$40,000
78. Whenconversioncostsareuniform,
a. materials,labor,andoverheadareappliedatdifferentratesthroughouttheprocess.
b. materials,labor,andoverheadareaddedthroughouttheprocessatthesamerate.
c. laborandoverheadareaddedatthesameratebutdifferentmaterialsareaddedatadifferentpoint.
d. materialsandlaborareaddedatthesameratebutoverheadisapplieduniformly.
ANSWER: c

Figure6-5
MaynardInc.manufacturesdesks.ThefollowingdatawasgivenforproductioninFebruary:units,beginni
ngworkinprocess
0
unitsstarted
200
unitscompleted
?
units,endingworkinprocess(40%complete)
50
79. Refertofigure6-5.Whatwerethetotalnumberofunitstoaccountfor?
a. 50
b. 150
c. 200
d. 400
e. noneoftheabove
ANSWER:
c
RATIONALE:
BI0
started
totalunitstoaccountfor

200
200

80. RefertoFigure6-5.Howmanyunitswerecompleted?
a. 400
b. 200
c. 150
d. 50
e. noneoftheabove
ANSWER:
c
RATIONALE:
BI

0 Completed

started

200

EI

unitsaccountedfor

200

Totalunitsaccountedfor

150
0
150

81. RefertoFigure6-5.Whataretheequivalentunits?
a. 200
b. 170
c. 180
d. 150
e. noneoftheabove
ANSWER:
b
RATIONALE:
EQU
BI0
started

Completed
200

EI

150

150

50 .4 =

20
170

82. RefertoFigure6-5.Ifatotalof$11,050inproductioncostswereincurred,whatistheunitcostinFebruary?
a. $65
b.
$55.25
c.
$73.67
d. $221
e. noneoftheabove
ANSWER:

RATIONALE:

Completed
EI50 .4 =

Units

EQU

150

150

20
170

$11,050/170 = $65per unit

83.
RefertoFigure65.Ifatotalof$11,050inproductioncostswereincurred,howmuchcostisassignedtotheunitscompleted?
a.
$11,050
b.
$3.250
c.
$8,287.50
d.$9,750
e.noneoftheabove
ANSWER:
d
RATIONALE:

Completed
EI50 0.4

Units

EQU

150

150

20
170

$11,050/170 = $65per unit

150$65=$9,750
84. "Totalcoststoaccountfor"doesNOTincludewhichofthefollowingcosts?
a. directmaterialsrequisitionedforthedepartment
b. priordepartmentcoststransferredin
c. endingwork-in-processbalance
d. beginningwork-in-processbalance
ANSWER: c

Figure6-6
MannassassCompanymanufactureschairs.Thefollowinginformationwasgivenforthecompany:
units,beginningworkinprocess
unitsstarted
unitscompleted
units,endingworkinprocess
costofdirectmaterials
costofconversion

0
20,000
?
5,000
$440,000
$64,000

Materialsintheendinginventorywere100percentcompleteandconversionintheendinginventorywas20percentcomplete.
85. RefertoFigure6-6.Whataretheunitsstartedandcompleted?
a.20,000
b.10,000
c.15,000
d.40,000
e.noneoftheabove
ANSWER:
c
RATIONALE:
completed
-BI
startedandcompleted

15,00
0 0
15,00
0

86. RefertoFigure6-6.Whataretheequivalentunitsformaterialsandconversionrespectively?
a.20,000;20,000
b.20,000;16,000
c.15,000;15,000
d.15,000;14,000
e.noneoftheabove
ANSWER:
b
RATIONALE:
EQUM
units,beginningworkinprocess

unitsstarted

20,000

totalunitstoaccountfor

20,000

unitscompleted

15,000

fromBI
started and completed
units, endingwork inprocess

15,000

15,000

0
15,000
5,000(100%)

total
totalunitsaccountedfor

EQUC

20,000

5,000(20%)

1,000

20,000

16,000

87.
RefertoFigure6-6.Whatarethecostsperunitformaterialsandconversionrespectively?
a.$22;$4
b.$29.33;$4.27c.
$11;$1.60
d.$88;$64
e.noneoftheabove
ANSWER:

a
EQUM

EQUC

15,000
0

15,000

5,000 (20%)

1,000

20,000

16,000

RATIONALE:
units,beginningworkinprocess
0
unitsstarted
20,000
totalunitstoaccountfor
20,000
unitscompleted
fromBI

15,000

startedandcompleted
units,endingworkinprocess
total
totalunitsaccountedfor
materials
conversion

15,000
5,000(100%)
20,000

$440,000/20,000=$22
$64,000/16,000=$4

88.
RefertoFigure66.Whatcostisassignedtoendingworkinprocess?a.$110,000
b.
$126,000
c.
$130,000
d.
$114,000
e.noneoftheabove
ANSWER:

d
EQUM

EQUC

15,000
0

15,000

5,000 (20%)

1,000

20,000

16,000

units,beginningworkinprocess
0
unitsstarted
20,000
totalunitstoaccountfor
20,000
unitscompleted
fromBI
startedandcompleted
units,endingworkinprocess
total
totalunitsaccountedfor
RATIONALE:
materials$440,000/20,000=$22conver
sion$64,000/16,000=$4EWIP(m)5,
000$22=$110,000
(c)1,000$4=$4,000
totalcost$114,000

15,000
15,000
5,000(100%)
20,000

89. ThefollowinginformationpertainstoFirewireCorporation:
Work inprocess,November1(20%complete)
StartedinNovember
Materialsareaddedatthebeginningoftheprocess.

Units
3,000
24,000

If18,000unitswerecompletedduringthemonth,endingworkinprocessatNovember30is
a. 9,000units.
b. 6,000units.
c. 3,000units.
d. 15,000units.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Workinprocess,November1
Unitsstarted
Lessunitscompleted
Endingworkinprocess
90. Thetwomethodsusedtodetermineequivalentunitsofproductionare
a. FIFOandLIFO.
b. weightedaverageandLIFO.
c. weightedaverageandFIFO.
d. FIFOandspecificidentification.
ANSWER: c

3,000
24,000
27,000
18,000
9,000

Figure6-7
EdelsteinCompanyhadthefollowingdatafor2016:
Unitsinprocessatthebeginningofthemonth
Unitsin process at the end of the month
Unitsstartedduringthemonth

4,000
10,000
40,000

Materialsareaddedatthebeginningoftheprocess.Beginningworkinprocesswas40percentcompleteastoconversion.
Endingworkinprocesswas70percentcompleteastoconversion.
91. RefertoFigure6-7.Whatisthenumberofunitscompletedandtransferredoutduringtheperiod?
a. 34,000units
b. 54,000units
c. 44,000units
d. 40,000units
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:4,000+40,000-10,000=34,000
92. RefertoFigure6-7.HowmanyequivalentunitsformaterialswouldtherebeusingtheFIFOmethod?
a. 44,000units
b. 30,000units
c. 40,000units
d. 39,400units
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
BeginningWIP(4,0000%)

-0-

Startedandcompleted(30,000100%)

30,000

EndingWIP(10,000100%)

10,000
40,000

93.
Theunit-costingmethodthatexcludesprior-periodworkandcostsincomputingcurrentperiodunitworkandcostsiscalled:
a. Transferred-incostmethod
b. FIFOcostingmethod
c. Weightedaveragemethod
d. Equivalentunitsmethod
ANSWER: b

94.
UnitcostofmaterialsforadepartmentusingtheFIFOmethodofprocesscostingisfoundbytakingthetotalcostofm
aterialsissuedtothedepartmentduringtheyeardividedby
a. unitsinprocess.
b. unitsstartedandcompleted.
c. totalunitsmanufactured.
d. equivalentunitsofoutput.
ANSWER: d

Figure6-8
ThunderRoadsEnterprisesmakesthefollowinginformationavailable:
Unitsinprocess atthe beginningofthe month
Units in process at the end of the month
Unitsstartedduringthemonth

2,000
4,000
30,000

Materialsareaddedatthebeginningoftheprocess.
95.
RefertoFigure68.Beginningandendingunitswere60percentcompleteastoconversioncosts.Whatisthenumberofunitsstartedandco
mpleted?
a. 36,000units
b. 30,000units
c. 28,000units
d. 26,000units
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:30,000-4,000=26,000

96.
RefertoFigure68.Beginningandendingunitswere60percentconverted.Howmanyequivalentunitsformaterialswouldtherebeusi
ngtheFIFOmethod?
a. 36,000units
b. 34,000units
c. 30,000units
d. 29,200units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
BeginningWIP(2,0000%)
Startedandcompleted(26,000100%)

-026,000

EndingWIP(4,000100%)

4,000
30,000

Figure6-9
AnzaloneCorporationaddsrawmaterialstoproductionatthebeginningoftheprocessintheAssemblyDepartme
nt.MaterialsdataforthisdepartmentforMay2016areasfollows:

Workinprocess,May1
StartedduringMay
Workinprocess,May31

Units
25,000
100,000
10,000

Costs
Materials
$68,750
300,000

Conversion
$167,650
903,350

Beginninginventorywas70percentcomplete.Endinginventorywas40percentcomplete.
97.
RefertoFigure69.HowmanyequivalentunitsformaterialswouldtherebeforAnzaloneCorporationinMayusingtheFIFOmethod?
a. 110,000units
b. 100,000units
c. 125,000units
d. 119,000units
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
BeginningWIP(25,0000%)

-0-

Startedandcompleted(90,000100%)

90,000

EndingWIP(10,000100%)

10,000
100,000

98.
RefertoFigure69.HowmanyequivalentunitsforconversioncostswouldtherebeforAnzaloneCorporationinMayusingtheFIFOmethod
?
a. 100,000units
b. 111,500units
c. 125,000units
d. 101,500units
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
BeginningWIP(25,00030%)

7,500

Startedandcompleted(90,000100%)

90,000

EndingWIP(10,00040%)

4,000
101,500

99.
Ifbeginninginventorycontained3,000unitsofproductthatwerejudgedtobe60percentcompleteastolabor,theeq
uivalentunitsofproductionforlaborduringthecurrentperiodundertheFIFOmethodforthese3,000unitsare
a. 3,000units.
b. 1,200units.
c. 1,800units.
d. 500units.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:3,0000.40=1,200
100.
LaylaCompanybeganmakingmascarainNovember2016usingasinglestepprocess.Laylaincurred$42,000formaterialsand$48,640forconversionduringthemonth.Therewere21,000casesof
mascarastartedinNovemberand3,000casesunfinished(40percentcomplete)attheendoftheperiod.Allmaterialsweread
dedatthebeginningoftheproductionprocess.
WhatistheunitcostformaterialsforLaylausingtheFIFOmethod?
a.
$2.00
b.
$2.03
c.
$4.53
d.noneoftheabove
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:$42,000/21,000=$2

Figure6-10
JuliusCorporation'smixingdepartmentbeganJanuary2016with10,000gallonsofproduct(40percentcompleted)inprocess.
DuringJanuary,Juliusstarted100,000gallonsofnewproduct,ofwhich15,000gallonsremainedinendinginventory(70pe
rcentcompleted).
101.
RefertoFigure610.Ifmaterialswereaddedatthebeginningoftheprocess,howmanyequivalentunitsofproductionforconversioncos
tswouldtherebeforJuliususingtheFIFOcostingmethod?
a. 101,500units
b. 110,000units
c. 105,500units
d. 116,500units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:

BeginningWIP(10,00060%)

6,000

Startedandcompleted(85,000100%)

85,000

EndingWIP(15,00070%)

10,500
101,500

102.
RefertoFigure610.Ifmaterialswereaddedwhentheunitsare50percentcomplete,howmanyequivalentunitsofproductionformaterialswo
uldtherebeforJuliusCorporationusingtheFIFOcostingmethod?
a. 101,500units
b. 105,500units
c. 110,000units
d. 85,000units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
BeginningWIP(10,000100%)

10,000

Startedandcompleted(85,000100%)

85,000

EndingWIP(15,000100%)

15,000
110,000

103.

ThefollowinginformationpertainstotheSpringfieldCompany:
Units
20,000
50,000

Work-in-processinventory,June1(30%complete)
Units transferred in
Work-in-process inventory, June 30 (60% complete)
16,000Materialsareaddedatthestartoftheprocess.
HowmanyequivalentunitsforconversioncostswouldtherebeusingtheFIFOmethod?
a. 49,600units
b. 70,000units
c. 50,000units
d. 57,600units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
BeginningWIP(20,00070%)

14,000

Startedandcompleted(34,000100%)

34,000

EndingWIP(16,00060%)

9,600
57,600

Figure6-11
Rawlings,Inc.manufacturesaproductthatpassesthroughtwoprocesses:mixingandmolding.Allmanufacturingcostsarea
ddeduniformlyintheMixingDepartment.InformationfortheMixingDepartmentforJanuaryfollows:
Workinprocess,January1:
Units(35%complete)
Directmaterials
Directlabor
Overhead

7,500
$36,000
$45,000
$15,000

DuringJanuary,26,750unitswerecompletedandtransferredtotheMoldingDepartment.Thefollowingcostswereincurredbyt
heMixingDepartmentduringJanuary:
Directmaterials
Directlabor
Overhead(applied)

$133,050
180,000
45,000

104.
RefertoFigure6-11.Therewere2,500unitsthatwere80percentcompleteremaininginMixingatJanuary31.
Theamountoftotalcoststoaccountforis
a.
$454,050.
b.
$396,000.
c.
$360,000.
d.noneoftheabove.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Coststoaccountfor:
Materials

Conversion

Total

Beginningworkinprocess

$36,000

$60,000

$96,000

Incurredduringperiod

133,050

225,000

358,050

$169,050

$285,000

$454,050

Totalcosts toaccount for

105.
RefertoFigure6-11.Therewere3,750unitsthatwere80percentcompleteremaininginMixingatJanuary31.
TotalcostperequivalentunitofproductionusingtheFIFOmethodis
a.$12.16.
b.$13.20.
c.$9.76.
d.noneoftheabove.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Equivalentunits

= (7,500 0.65) + (26,750 7,500) + (3,750 0.80)

=27,125units

Coststoaccountfor:
Current costs to accountfor

Materials
Conversion
$133,050
$225,000
$358,050Costperequivalentunit

($358,050/27,125)

$13.20

Total

106.
RefertoFigure611.ThecostofJanuary'sendingworkinprocessfortheMixingDepartmentusingtheFIFOmethodis
a.
$26,250.
b.
$50,400.
c.
$63,000.
d.noneoftheabove.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:3,7500.80$13.20*=$39,600
*costperequivalentunitsof13.20arecalculatedbydividingtotalcostsbyequivalentunitsasfollows:
Equivalentunits

= (7,500 0.65)+ (26,750 7,500)+ (3,750 0.80)

=27,125units

Coststoaccountfor:
Materials
Current costs to account for
$358,050Costperequivalentunit($358,050/27,125)

$133,050
$13.20

Conversion
$225,000

Total

107.
RefertoFigure6-11.Therewere3,750unitsthatwere80percentcompleteremaininginMixingatJanuary31.
ThecostofgoodstransferredtotheMoldingDepartmentduringJanuaryusingtheFIFOmethodis
a.
$414,450.
b.
$391,575.
c.
$323,400.
d. noneoftheabove.
ANSWER:

RATIONALE: SUPPORTING CALCULATIONS:

Beginningworkinprocess:
Beginningbalance($36,000+$45,000+$15,000)

$ 96,000

Add:(7,5000.65$13.20*)

64,350

Startedandcompleted(19,250$13.20*)

254,100

$414,450

Total

*costperequivalentunitsof13.20arecalculatedbydividingtotalcostsbyequivalentunitsasfollows:
Equivalentunits

= (7,500 0.65) + (26,750 7,500) + (3,750 0.80)

=27,125 units

Coststoaccountfor:
Materials
Current costs to account for
Costperequivalentunit($358,050/27,125)

$133,050
$13.20

Conversion

Total

$225,000

$358,050

108.
Beginninginventoryconsistedof1,000unitswithcostsof$31,000.Allmaterialsand60percentoflaborandoverhead
wereaddedinthepriorperiod.Inaddition,another8,000unitswerestartedandcompleted.Unitcostsarematerials,
$8.00;labor,$20.00;overhead,$9.00.WhatisthetotalcostofgoodstransferredoutusingFIFO?
a.
$296,000
b.
$338,600
c.
$332,400
d.
$338,000
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Beginningworkinprocess:
Beginningbalance

$ 31,000

Labor(400$20)

8,000

Overhead(400$9)

3,600
$ 42,600

Startedandcompleted(8,000$37)

296,000
$338,600

Total
109.
PhantomEnterprisesaddsmaterialstoproductionatthebeginningoftheprocessintheProductionDepartment.Itus
esasingle-stepprocess.DataonmaterialforthisdepartmentforJuly2016areasfollows:
Productiondata(units):
Inprocess,beginningofJuly
StartedduringJuly
CompletedandtransferredoutduringJuly
Manufacturingcost:
Workinprocess,beginning
Materialsusedin July
ThecompanyusestheFIFOinventorymethod.
ThematerialscostinWorkinProcessonJuly31isa.
$37,500.
b.
$31,000.
c.
$39,000.

10,000
60,000
55,000

$39,000
$186,000

d.
$46,500.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$186,000/60,000=$3.1015,000$3.10=$46,500

Figure6-12
TwinningsCorporationmanufacturesSchedulingBooks.Therearetwoprocesses:printingandbinding.Thefollowing
informationisgivenfortheprintingdepartmentforSeptember.
Units:
units,beginningworkinprocess
started
completed
units,endingworkinprocess
Costs:
beginningworkinprocess
currentcosts
totalcosts

40,000
?
50,000
Materials
$6,080
$220,875
$226,955

(20% complete for materials, 60% complete for

conversion)
300,000
(25% complete for materials, 80% complete for
conversion)
Conversion
$2,160
$30,600
$32,760

Total
$8,240
$251,475
$259,715

ThecompanyusesFIFOinventoryassumption.
110.

RefertoFigure6-12.WhataretheFIFOequivalentunitsformaterials?

a.304,500
b.294,500
c.302,500
d.262,500
e. noneoftheabove
ANSWER:

RATIONALE: 40,0000.80=
250,0001.00=
50,0000.25=

32
250,000
12,500
$294,500

111.
RefertoFigure612.WhataretheFIFOequivalentunitsforconversion?a.306,000
b.340,000
c.316,000
d.300,000
e.noneoftheabove
ANSWER:

a
RATIONALE:
40,000.40=16,000
250,000 1.00= 250,000
50,000 .80=40,000
306,000

112.

RefertoFigure6-12.WhataretheFIFOcostperunitforconversion?

a.$0.90
b.$0.11
c.$0.66
d.$0.10
e.noneoftheabove
ANSWER:
d
RATIONALE: $30,600/306,000=$.10
113.

RefertoFigure6-12.WhataretheFIFOcostperunitformaterials?

a.$1.00
b.$0.77
c.$0.75
d.$0.65
e.noneoftheabove
ANSWER:
c
RATIONALE: $220,875/294,500=$.75
114.

RefertoFigure6-12.Whatisthejournalentryforthecostofgoodssenttobinding?
a. workinprocess-binding$246,500
workinprocess-printing$246,500
b. workinprocess-printing$246,340
workinprocess-binding$246,340
c. workinprocess-binding$246,340
workinprocess-printing$246,340
d. workinprocess-printing$246,500
workinprocess-binding$246,500
e. noneoftheabove

ANSWER:

RATIONALE: materials$220,875/294,500=$0.75
conversion$30,600/306,000=$0.10
assigncoststocompletedandtransferredoutunits
BI$8,240
finishbeginninginv
entory(m)
finishbeginninginv
entory(c)

32,000.75

24,000

16,000.10

1,600

startedandcompleted

115.

250,000.85
212,500totalcosttransferredout
$246,340

Theunit-costingmethodthatmergesprior-periodworkandcostswithcurrent-periodworkandcostsiscalled:
a. Operatingcosting
b. Transferred-incost
c. FIFOcostingmethod
d. Weightedaveragemethod

ANSWER: d
116.
Whencomputingequivalentunitsofproduction,themethodthatcombinespartiallycompletedunitsinbeginning
inventorywithcurrentperiodproductionis
a. theFIFOmethod.
b. theLIFOmethod.
c. thespecificidentificationmethod.
d. theweightedaveragemethod.
ANSWER: d

117.
Beginninginventoryconsistedof10,000units(20percentconverted)andendinginventoryconsistedof20,000units(
40percentconverted).Inaddition,60,000unitswerestartedduringtheperiod.Howmanyequivalentunitsforconversioncost
swereproducedusingtheweightedaveragemethod?
a. 50,000units
b. 56,000units
c. 70,000units
d. 58,000units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Transferredout(50,000100%)
EndingWIP(20,00040%)

50,000
8,000
58,000

118.

Thefollowinginformationisavailable:

Unitsin process,November1(60%converted)
Units in process, November 30 (60% converted)
Unitsstartedduringthemonth

2,000units
4,000units
30,000units

Materialsareaddedatthebeginningoftheprocess.
HowmanyequivalentunitsforconversionwouldtherebeinNovemberusingtheweightedaveragemethod?
a. 30,400units
b. 36,000units
c. 32,000units
d. 33,200units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Transferredout(28,000100%)
EndingWIP(4,00060%)

28,000
2,400
30,400

Figure6-13
WonderPaintsCorporation'sMixingDepartmentbeganAugust2016with10,000gallonsofproduct(40percentcompleted)inp
rocess.DuringAugust,WonderPaintsstarted100,000gallonsofnewproduct,ofwhich15,000gallonsremainedinendinginv
entory(70percentcompleted).
119.
RefertoFigure613.Ifmaterialswereaddedatthebeginningoftheprocess,howmanyequivalentunitsofproductionforconversioncostsw
ouldtherebeforWonderPaintsusingtheweightedaveragecostingmethod?
a. 120,500units
b. 110,000units
c. 105,500units
d. 99,500units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Transferredout(95,000100%)

95,000

EndingWIP(15,00070%)

10,500
105,500

120.
RefertoFigure613.Ifmaterialswereaddedwhentheunitswere80percentcomplete,howmanyequivalentunitsofproductionformaterialsw
ouldtherebeforWonderPaintsusingtheweightedaveragecostingmethod?
a. 95,000units
b. 110,000units
c. 107,000units
d. 105,500units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Transferredout(95,000100%)
EndingWIP(15,0000%)

95,000
-095,000

121.

ThefollowinginformationpertainstoMcintoshCompa
ny:

Work-in-processinventory, February1(30% complete)

Units transferred in
Work-in-processinventory, February 29 (60% complete)

20,000units
50,000units

16,000unitsMaterialsareaddedatthestartoftheprocess.
Howmanyequivalentunitsformaterialswouldtherebeusingtheweightedaveragemethod?
a. 86,000units
b. 70,000units
c. 50,000units
d. 57,600units
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Transferredout(54,000100%)

54,000

EndingWIP(16,000100%)

16,000
70,000

122.
Beginninginventoryforthemonthcontained3,000unitsthatwere35percentcompletewithrespecttomaterials.
55,000unitswerecompletedandtransferredoutduringthemonth.5,500unitswereinendinginventory,10percentcompletewit
hrespecttomaterials.Theweightedaverageequivalentunitsofproductionformaterialsforthemonthwouldbe
a. 55,000uni
ts.
b. 55,550uni
ts.
c. 56,500uni
ts.
d. 57,550uni
ts.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Unitscomplete
Endingworkinprocess(5,50010%)
Equivalentunitsofproduction
123.

55,000
550
55,550

Thecostsincludedinthecostperequivalentunitusingtheweightedaveragemethodare
a. currentcosts.

b. beginningworkinprocess.
c. endingworkinprocess.
d. bothaandb.
ANSWER: d

124.

ThefollowinginformationpertainstoSouthlandCompany:

Workin process, April1 (20% complete)

Started in January
Workinprocess,April30
Materialsareaddedatthebeginningoftheprocess.

Units
8,000
40,000
12,000

Ifequivalentunitsofproductionforconversionusingtheweightedaveragemethodwas39,000,endingworkinprocessatA
pril30musthavebeen
a. 15.0%complete.
b. 25.0%complete.
c. 30.0%complete.
d. 97.5%complete.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Equivalentunitsofproduction

39,000

Unitscompleted(8,000+40,000-12,000)

36,000

EquivalentunitsofproductionfromendingWIP

3,000

EndingWIPmustbe(3,000/12,000),or25.0%complete.
125.

Thematerialcostperequivalentunitusingtheweightedaveragemethodiscalculatedas
a. totalmaterialcoststoaccountfor/equivalentunitsformaterials.
b. materialcostsaddedduringtheperiod/equivalentunitsformaterials.
c. totalmaterialcoststoaccountfor/numberofpartiallycompletedunitsformaterials.
d. materialcostsaddedduringtheperiod/numberofpartiallycompletedunitsformaterials.

ANSWER: a
126.

WhichisNOTadisadvantageoftheweightedaveragecostingassumptioninprocesscosting?

a. Thereisapossibilityoferrorswheninputcostsarechangingsignificantlyfromoneperiodtothenext.
b. Thecumulativeeffectofanerrormightproduceasignificantdistortioninthecostofthefinalproduct.
c. Theperformanceofthecurrentperiodiscombinedwiththeperformanceofthecurrentperiodmakingitdifficultt
ocomparecostsbetweenperiods.
d. Unitcostsaresimplertocalculate.
ANSWER: d

Figure6-14
ThefollowinginformationisavailableforDepartmentCforthemonthofJune:

Workinprocess,June1(70%complete)
Directmaterials
Directlabor
Manufacturingoverhead
Totalworkinprocess,June1
StartedinproductionduringJune
Costsadded:Direct
materials
Directlabor
Manufacturingoverhead
TotalcostsaddedduringJune
Workinprocess,June30(80%complete)

Units
10,000

Cost
$36,000
18,000
24,000
$78,000

40,000
$108,000
48,000
60,600
$216,600
4,000

Materialsareaddedatthebeginningoftheprocess.Roundunitcoststotwodecimalplaces.
127.

RefertoFigure6-14.Thecostperequivalentunitofproductionformaterialsusingtheweightedaveragemethodis

a.
$2.70.
b.
$2.88
c.
$3.12.
d.$3.60.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Materials
Units completed (10,000 + 40,000 - 4,000)
Ending work in process
Equivalent units of production

Costs to account for:

46,000
4,000
50,000

Materials

Beginning work in process

$ 36,000

Incurred during period

108,000

Total costs to account for

Costperequivalentunit($144,000/50,000)$2.88

$144,000

128.

RefertoFigure6-14.Thecostperequivalentunitofproductionforconversionusingtheweightedaveragemethodis

a.$3.54.
b.$3.06.
c.$2.55.
d.$2.19.
ANSWER:

RATIONALE: SUPPORTING CALCULATIONS:

Unitscompleted(10,000+40,000-4,000)
Endingworkinprocess(4,00080%)
Equivalentunitsofproduction

Conversion
46,000
3,200
49,200

Conversion
Beginningworkinprocess(18,000+24,000)
Incurredduringperiod(48,000+60,600)

$ 42,000
108,600

Totalcoststoaccountfor

$150,600

Costperequivalentunit($150,600/49,200)

129.

$3.06

RefertoFigure6-14.Thecostofgoodstransferredoutusingtheweightedaveragemethodis

a.
$273,600.
b.
$241,500.
c.
$273,240.
d.noneoftheabove.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Unitstransferredout=($2.88*+$3.06**)46,000=$273,240
*Materialscost per equivalent unit ($144,000/50,000)

$2.88

**Conversioncost per equivalentunit ($150,600/49,200)

$3.06

130.

RefertoFigure6-14.Thecostofendingworkinprocessusingtheweightedaveragemethodis

a.$23,760.
b.$21,312.
c.$16,992.
d. noneoftheabove.
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Endingworkinprocess:
Materials($2.88*4,000)

$11,520

Conversion($3.06**3,200)

9,792
$21,312

*Materialscostperequivalentunit($144,000/50,000)

$2.88

**Conversioncostperequivalentunit($150,600/49,200)

$3.06

131.
MortimerCompanymanufacturesaproductthatpassesthroughtwoprocesses:MixingandMolding.Allmanufac
turingcostsareaddeduniformlyintheMixingDepartment.InformationfortheMixingDepartmentforMayfollows:
Workinprocess,May1:
Units(35%complete)
Directmaterials
Directlabor
Overhead

7,500
$36,000
$45,000
$15,000

DuringMay,37,500unitswerecompletedandtransferredtotheMoldingDepartment.Thefollowingcostswere
incurredbytheMixingDepartmentduringMay:
Directmaterials
Directlabor
Overhead

$135,000
180,000
45,000

Therewere3,750unitsthatwere80percentcompleteremaininginmixingatMay31.Theequivalentunitsof
productionusingtheweightedaveragemethodis
a. 43,125units
b. 40,500units
c. 30,000units
d. 34,500units
ANSWER:
b
RATIONALE:
SUPPORTING CALCULATIONS:
Unitscompleted
Endingworkinprocess(3,75080%)
Equivalentunitsofproduction

37,500
3,000
40,500

132.

Transferred-incostsareaccountedforinthesamemanneras
a. materialsaddedatthebeginningoftheprocess.
b. materialsaddedattheendoftheprocess.
c. conversioncosts.
d. laborcosts.

ANSWER: a

Figure6-15
TheDavidsonCompanyusesaweightedaverageprocesscostingsystem.ThefollowinginformationwasreportedfortheAss
emblyProcessforJanuary.Materialsareaddedatthebeginningoftheprocessandare100%.

Units:
workinprocess,1/1
started
workinprocess,1/31

units
60,000
105,000
40,000

%completeforconvers
ions
15%
20%

Costs:
beginningworkinprocess
currentcosts
133.

Materials
$16,500
$643,500

Conversion
$33,250
$332,500

RefertoFigure6-15.Whataretheequivalentunitsformaterials?

a.133,000
b.100,000
c.165,000
d.125,000
e. noneoftheabove
ANSWER:
c
RATIONALE: 125 100 = 125
40 100 = 40
165
134.
RefertoFigure615.Whataretheequivalentunitsforconversion?a.133,000
b.165,000
c.125,000
d.100,000
e.noneoftheabove
ANSWER:
a
RATIONALE: 125 100 = 125

40 0.20 =

8
133

135.
RefertoFigure615.Whatisthecostperunitforconversion?a.$2.79
b.
$2.75
c.
$2.50
d.
$2.22
e.noneoftheabove
ANSWER:
b
RATIONALE: $33,250+$332,500=$365,750
$365,750/133,000=$2.75
136.
RefertoFigure615.Whatisthecostperunitformaterials?a.$4.00
b.
$3.90
c.
$4.96
d.
$2.75
e.noneoftheabove
ANSWER:
a
RATIONALE: $16,500+ $643,500 =$660,000
$660,000/165,000=$4.00
137.

RefertoFigure6-15.Whatisthecostassignedtotheunitscompletedandtransferredtofinishing?

a.
$843,750
b.
$708,750
c.
$777,500
d.
$976,000
e.noneoftheabove
ANSWER:
a
RATIONALE: 125,000$4.00=$500,000
125,000$2.75=$343,750
$843,750
138.

Whichofthefollowingprocesscostingmethodsissimplertouse?
a. weightedavera
ge

b. LI
F
O
c. FI
F
O
d. specificidentificati
on
ANSWER: a

Figure6-16
RamsesCorporationproducesaproductthatpassesthroughtwoprocesses.DuringApril,thefirstdepartmenttransferred
19,000unitstotheseconddepartment.Thecostoftheunitstransferredwas$30,000.Materialsareaddeduniformlyinth
esecondprocess.Thefollowinginformationisprovidedabouttheseconddepartment'soperationsduringOctober:
Units,beginningworkinprocess
Units,endingwork inprocess
139.

4,000
5,500

RefertoFigure6-16.ThenumberofunitsstartedintheseconddepartmentduringAprilis
a. 15,000units.
b. 13,500units.
c. 19,000units.
d. 23,000units.

ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:Unitsstartedequalthenumberofunitstransferredin19,000.
140.

RefertoFigure6-16.ThenumberofunitscompletedintheseconddepartmentduringAprilis
a. 17,500units.
b. 9,500units.
c. 23,000units.
d. 28,500units.

ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:
Beginningworkinprocess
Transferredin

4,000
19,000
23,000

Less:Endingworkinprocess

5,500
17,500

141.

RefertoFigure6-16.ThenumberofunitsstartedandcompletedintheseconddepartmentduringAprilis
a. 13,500units.
b. 17,500units.
c. 8,500units.
d. 26,500units.

ANSWER:
a
RATIONALE:
SUPPORTING CALCULATIONS:
Unitscompleted
Less:Beginningworkinprocess
Unitsstartedandcompleted

17,500
4,000
13,500

142.
Materialsareaddedtoasecondproductiondepartmentandwillnotincreasethenumberofunitsproducedinthisde
partment.Addingmaterialstotheseconddepartmentwill
a. decreasetotalendingworkinprocess.
b. changetheamountoffactoryoverheadincludedintheendingworkinprocess.
c. increasetotalunitcost.
d. notchangethedollaramounttransferredoutofthedepartment.
ANSWER: c

Figure6-17
LoganberyCorporationproducesaproductthatpassesthroughtwoprocesses.DuringJanuary,thefirstdepartmenttransferre
d20,000unitstotheseconddepartment.Thecostoftheunitstransferredwas$60,000.Materialsareaddeduniformlyinthese
condprocess.Thefollowinginformationisprovidedaboutthefirstdepartment'soperationsduringJanuary:
Units, beginning work in process (1/3 complete)
6,000Units, ending workin process(1/2 complete)

4,000

143.
RefertoFigure617.Theequivalentunitsforthosetransferredinfromthepriordepartmentusingweightedaverageis
a. 16,000units.
b. 20,000units.
c. 14,000units.
d. 26,000units.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:22,000+4,000=26,000

144.

RefertoFigure6-17.Theequivalentunitsforconversionusingweightedaverageis
a. 10,000units.
b. 16,000units.
c. 26,000units.
d. 24,000units.

ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:22,000+2,000=24,000
145.

RefertoFigure6-17.TheequivalentunitsforthosetransferredinfromthepriordepartmentusingFIFOwouldbe
a. 10,000units.
b. 20,000units.
c. 26,000units.
d. 22,000units.

ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:0+16,000+4,000=20,000
146.

RefertoFigure6-17.TheequivalentunitsforconversionusingFIFOwouldbe
a. 10,000units.
b. 12,000units.
c. 26,000units.
d. 22,000units.

ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:16,000+4,000+2,000=22,000
147.

Thecostassignedtogoodsfromapriorprocessistermed:
a. Operatingcosting
b. Transferred-incost
c. Weightedaveragemethod
d. FIFOcostingmethod

ANSWER: b

Figure6-18
TheRoundTableCompanymakescarpenter'ssquaresandusesaprocesscostingsystem.Thereisnospoilage.Manufacturin
ggoesthroughthreedepartments:Forming,Finishing,andPacking.Unitdataforthesedepartmentsaregivenbelow:

Beginninginventoryunits
(80%complete)
Units started
Endinginventoryunits
(20%complete)

Forming

Finishing

Packing

1,000
8,000

2,000
?

3,000
?

3,000

4,000

1,000

TheFinishingDepartmentaddsmaterialsatthepointwhereprocessingis50percentcomplete.
148.

RefertoFigure6-18.TheequivalentunitsformaterialsintheFinishingDepartmentis

WeightedAverage

FIFO

a. 4,000

2,000

b. 4,800
c. 6,000
d. 8,000

3,200
3,000
8,000

e.noneoftheabove
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Startedinfinishing:
1,000+8,000-3,000=6,000
Transferredout:

2,000+6,000-4,000=4,000

Weightedaverage:

4,000+0=4,000

Startedandcompleted:

4,000-2,000=2,000

Nomaterialsneededtofinishbeginninginventoryandnomaterialsinendinginventory.FIFO:
0+2,000+0 =2,000

Figure6-19
MountainsideIndustriesmanufacturesspecializedplasticboxesintwoprocesses:MoldingandPackaging.InthePackaging
Department,materialsareaddedattheendoftheprocess.Thefollowingdataaregiven:
Costs

Workinprocess,July1
TransferredinduringJuly
CompletedduringJuly
Workinprocess,July31
CostsaddedduringJuly

Units
30
?
105
15

Trans.-in
$1,590

Materials
$-0-

Conv.
$513

$4,410

$1,050

$1,767

Theconversionprocessonthebeginninginventoryis70percentcompletedandtheendinginventoryis60percentcompleted.
149.

RefertoFigure6-19.Mountainside'sequivalentunitsforconversionusingFIFOwouldbe
a. 114.
b. 105.
c. 93.
d. 9.

ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:105+9=114-21=93OR9+75+9=93
150.

RefertoFigure6-19.Mountainside'sequivalentunitsformaterialsusingweightedaveragewouldbe
a. 15.
b. 90.
c. 105.
d. 120.

ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:105+0=105
151.
RefertoFigure6-19.Mountainside'sequivalentunitsfortransferredinunitsusingFIFOwouldbea.15.
b. 90.
c. 105.
d. 120.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:105+15=120-30=90OR0+75+15=90

152.
RefertoFigure6-19.Mountainside'sequivalentunitsfortransferredinunitsusingweightedaveragewouldbea.15.
b. 90.
c. 105.
d. 120.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:105+15=120
153.
RefertoFigure6-19.Roundedtotwodecimalplaces,Mountainside'sconversioncostperunitusingFIFOwouldbea.
$15.50.
b.$19.00.
c.$20.00.
d.$24.52.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$1,767/93=$19
154.
RefertoFigure619.Roundedtotwodecimalplaces,Mountainside'scostperequivalentunitforconversionusingweightedaveragewouldbe
a.$15.50.
b.$19.00.
c.$20.00.
d.$24.52.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$2,280/114=$20($513+$1,767=$2,280))
155.
RefertoFigure6-19.Roundedtotwodecimalplaces,Mountainside'scostperequivalentunitsfortransferredincostsusingweightedaveragewouldbe
a.$49.00.
b.$50.00.
c.$57.14.
d.$66.67.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$6,000/120=$50($1,590+$4,410=$6,000)

156.
RefertoFigure619.Roundedtotwodecimalplaces,Mountainside'scoststransferredoutusingweightedaveragewouldbe
a.$6,000.
b.$8,190.
c.$8,400.
d.$9,330.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:($6,000/120)+($1,050/105)+($2,280/114)=$80$80105
=$8,400
157.
Thecostingsystemthatusesjobordercostingtoassignmaterialcostsandprocesscostingtoassignconversioncostsiscalled:
a. Batchproductionprocess
b. Costreconciliation
c. Operationcosting
d. Equivalentunitofoutput
ANSWER: c
158.
Whenjobordercostingisusedtoassignmaterialcostsandprocesscostingisusedtoassignconversioncosts,itiscalled
a. matrixcosting.
b. blendcosting.
c. operationcosting.
d. variablecosting.
ANSWER: c

Figure6-20
OutrageousCupsCorp.manufacturescups.Thecompany'smanufacturingoperationsandcostsappliedtoproductsforAprilwe
re:

Directlabor
Factoryoverhead
Total

Molding
$25,000
30,000
$55,000

Heat-treat
$12,500
17,500
$30,000

Finishing
$7,500
12,600
$20,100

ThreetypesofcupswereproducedinApril.Thequantitiesanddirectmaterialscostswere:
Type
Casts
Cups
Mugs

Quantity
5,000
7,000
8,000

DirectMaterials
$15,000
22,470
32,500

CastsareproducedintheMoldingDepartment.CupspassthroughtheMoldingandFinishingDepartments.Mugs
passthroughallthreedepartments.Anoperationscostingsystemisused.
159.
RefertoFigure6-20.WhatisOutrageousCups'conversioncostperunitfortheheattreatoperation,roundedtotwodecimalplaces?
a.
$1.50
b.
$2.00
c.
$2.50
d.
$3.75
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$30,000/8,000=$3.75

160.

RefertoFigure6-20.WhatisOutrageousCups'totalcostforCastsinApril?

a.$13,750
b.$26,275
c.$28,750
d.$70,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$55,000/
(5,000+7,000+8,000)=$2.75$15,000+(5,000$2.75)=$28,750
161.
$4.09

RefertoFigure6-20.WhatisOutrageousCups'totalcostperunitforCupsinApril?a.

b.$7.30c.
$7.84d.
$11.05
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$55,000/(5,000+7,000+8,000)=$2.75$20,100/(7,000+8,000)= $1.34
$22,470+ (7,000$2.75)+(7,000$1.34) = $51,100/7,000 =$7.30
162.

Theprocessthatproducesbatchesofdifferentproductswhichareidenticalinmanywaysbutdifferinothersiscalled:

a. Operatingcosting
b. Batchproductionprocess
c. Costreconciliation
d. Equivalentunitofoutput
ANSWER: b

Figure6-21
GoldenRingCompanyproducestwotypesofproduct:LargeandLarger.Twoworkordersfortwobatchesoftheproductsares
hownbelow,alongwithsomeadditionalcostinformation:

Directmaterials(actualcosts)
Appliedconversioncosts:
Mixing
Cooking
Bottling
Batchsize(bottles)

LargeWor
kOrder10
$45,000

LargerWor
kOrder11
$75,000

?
$12,000
$10,000

?
$12,000
$15,000

5,000

5,000

IntheMixingDepartment,conversioncostsareappliedonthebasisofdirectlaborhours.Budgetedconversioncostsforthe
departmentfortheyearwere$50,000forlaborand$125,000foroverhead.Budgeteddirectlaborhourswere2,500.Itta
kesthreeminutestomixtheingredientsneededforeachbottle.
Large(WorkOrder10)andLarger(WorkOrder11)flowthroughtheMixingDepartmentfirst,thenthroughtheCookingand
Bottlingdepartments.
163.
RefertoFigure621.WhatareGoldenRingCompany'sconversioncostsappliedtoLarge(WorkOrder10)fromtheMixingDepartmentforea
chbatch?
a.$35,000
b.$35
c.
$175,000
d.
$17,500
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:Conversioncostrate(Mixing)=($125,000+$50,000)/2,500=
$70perDLHAppliedconversioncosts=$705,0003/60=$17,500

164.
RefertoFigure621.WhatisGoldenRingCompany'samounttransferredfromtheMixingDepartmenttotheCookingDepartmentforW
orkOrder10?
a.
$45,000
b.
$62,500
c.

$39,500
d.
$84,500
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Directmaterials
$45,000
Conversioncosts
17,500
$62,500

165.
RefertoFigure621.WhatisGoldenRingCompany'samounttransferredfromtheBottlingDepartmenttoFinishedGoodsforWorkO
rder10?
a.
$45,000
b.
$39,500
c.
$84,500
d.
$67,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Directmaterials
Appliedconversioncosts:
Mixing
Cooking
Bottling
Total
166.

$45,000
17,500
12,000
10,000
$84,500

RefertoFigure6-21.WhatisGoldenRingCompany'sunitcostofLarge?

a.$3.50b.
$16.90
c.
$23.90
d.
$70.00
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Directmaterials
Appliedconversioncosts:
Mixing
Cooking
Bottling
Total
$84,500/5,000=$16.90

$45,000
17,500
12,000
10,000
$84,500

167.

RefertoFigure6-21.WhatisGoldenRingCompany'sunitcostofLarger?

a.$3.50b.
$16.90
c.
$23.90
d.
$20.40
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Directmaterials
$ 75,000
Appliedconversioncosts:
Mixing
17,500
Cooking
12,000
Bottling
15,000
Total
$119,500
$119,500/5,000=$23.90
168.
RefertoFigure621.WhatisGoldenRingCompany'sjournalentrytorecordmaterialsusedintheMixingDepartmentforWorkOrder
10?
a. Materials45,000
WorkinProcess-Mixing45,000
b. WorkinProcessMixing17,500ConversionCostsCont
rol17,500
c. ConversionCostsControl17,500Wor
kinProcess-Mixing17,500
d. WorkinProcess-Mixing45,000
Materials45,000
ANSWER: d
169.
RefertoFigure621.WhatisGoldenRingCompany'sjournalentrytoapplyconversioncostsintheMixingDepartmentforWorkOrder
10?
a. Materials45,000
WorkinProcess-Mixing45,000
b. WorkinProcessMixing17,500ConversionCostsContr
ol17,500
c. ConversionCostsControl17,500Wor
kinProcess-Mixing17,500
d. WorkinProcess-Mixing45,000

Materials45,000
ANSWER: b

170.

WhichofthefollowingwouldNOTbetruewhenthereisspoilage?
a. Normalandabnormalspoilagearedistinguished.
b. Thetotalunitsaccountedforaregreaterthanthetotalunitstoaccountforindicatingspoilage.
c. Theunitstoaccountforaregreaterthanthetotalunitsaccountedforindicatingspoilage.
d. Equivalentunitsmustbecalculatedforspoiledunits.

ANSWER: b

Figure6-22
ThefollowinginformationisavailableforDepartmentCforthemonthofAugust:

Work in process,August1(70% complete)

Directmaterials
Directlabor
Manufacturingoverhead
Totalworkinprocess,August1
StartedinproductionduringAugust
Costsadded:Direct
materials
Directlabor
Manufacturingoverhead
TotalcostsaddedduringAugust
Workinprocess,August31(80%complete)
Unitscompletedandtransferredout

Units
10,000

Cost
$36,000
18,000
24,000
$78,000

40,000
$108,000
48,000
61,040
$217,040
4,000
42,000

Materialsareaddedatthebeginningoftheprocess.Inspectiontakesplaceatthe50percentpointintheconversion
processtodeterminespoiledunits.Roundunitcoststotwodecimalplaces.Thecompanyusestheweightedaveragecostf
lowassumption.
171.
RefertoFigure622.DepartmentC'sequivalentunitsofproductionformaterialsusingtheweightedaveragemethodis
a.44,800.
b.47,200.
c.50,000.
d.54,000.
ANSWER:
c
RATIONALE: SupportingCalculations

UnitsCompleted
EndingWorkinProcess
Spoilage
EquivalentUnitsofProduction

Conversion
42,000
4,000
4,000
50,000

172.

RefertoFigure6-22.DepartmentC'scostperunitformaterialsusingtheweightedaveragemethodis

a.$2.16.
b.$2.88.
c.$3.43.
d.$3.60.
ANSWER:

RATIONALE: SUPPORTING CALCULATIONS:

Unitscompleted
Endingworkinprocess
Spoilage
Equivalentunitsofproduction

Conversion
42,000
4,000
4,000
50,000

Conversion
Coststoaccountfor:
Beginningworkinprocess
Incurredduringperiod

$ 36,000
108,000

Totalcoststoaccountfor

$144,000

Costperequivalentunit
($144,000/50,000)

$2.88

173.

RefertoFigure6-22.DepartmentC'sconversioncostperunitusingtheweightedaveragemethodis

a.$2.18.
b.$2.22.
c.$2.31.
d.$3.20.
ANSWER:

RATIONALE: SUPPORTING CALCULATIONS:

Unitscompleted
Endingworkinprocess
Spoilage(4,0000.50)
Equivalentunitsofproduction

Conversion
42,000
3,200
2,000
47,200

Conversion
Coststoaccountfor:
Beginningworkinprocess
Incurredduringperiod
Totalcoststoaccountfor

Costperequivalentunit($151,040/47,200)

$ 42,000
109,040
$151,040

$3.20

174.
RefertoFigure622.DepartmentC'sequivalentunitsofproductionforconversionusingtheweightedaveragemethodis
a.44,800.
b.47,200.
c.50,000.
d.54,000.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:42,000+(4,0000.80)+(4,0000.50)=47,200
175.

Abnormalspoilageistreateddifferentlyfromnormalspoilageinwhatway?
a. Equivalentunitsarecalculatedforabnormalspoilagebutnotfornormalspoilage.
b. Equivalentunitsarecalculatedfornormalspoilagebutnotforabnormalspoilage.
c. Normalspoilageisabsorbedaspartoftheproductcostbutabnormalspoilagecostsaretreatedseparately.
d. Abnormalspoilageisnotassignedcostsbutnormalspoilageis.

ANSWER: c

176.

Spoilageinaprocesscostingprocessmeans
a. fewerunitsleavetheprocessthanenterit.
b. fewerunitsenteraprocessthanleaveit.
c. aprocessisnolongerviable.
d. productsarereceivingtoomuchattention.

ANSWER: a

177.
BanzaiCorporationproducescalculatorsonanassemblylineinasinglestepprocess.Factroryoverheadisappliedbasedondirectlaborcost.ThefollowingdatapertainstoSeptember2016:
Currentmanufacturingcosts:
Materialspurchased
Materialsissuedtoproduction
Directlabor
Factoryoverhead

$150,000
120,000
40,000
30,000

Finishedgoodsforperiod
Beginningworkinprocess

180,000
-0-

Endingworkinprocess:
Materials
Directlabor
Factoryoverhead

3,000
?
?

Required:
a. PreparetraditionaljournalentriesforthefollowingeventsinSeptember:
1. Purchaseofmaterialsonaccount
2. Requisitionofmaterialsintoproduction
3. Usageofdirectlabor
4. Applicationofoverhead
5. Completionoffinishedgoods
b. Whatistheamountofdirectlaborinendingworkinprocess?
ANSWER:
a. 1.

b.

Materials
AccountsPayable
2. Work in Process
Materials Inventory
3. Work-in-ProcessInventory
WagesPayable
4. Work in Process
FactoryOverhead

150,000

5.

180,000

FinishedGoods
WorkinProcess

Ending WIP

150,000
120,000
120,000
40,000
40,000
30,000
30,000

= $0 + $120,000 + $40,000 + $30,000 - $180,000

= $10,000

OH rate = ($30,000/$40,000) = 75% of DLC

Let X = Direct labor cost
$3,000 + X + 0.75X = 10,000
1.75X = $7,000
X = $4,000

180,000

178.
ThelocalUSPSofficesortslettersbyzipcode.DuringthemonthofMarch,200,000lettersweresorted.Thecosto
fsortingincludesthefollowing:
Directlabor
Overhead
Total
Required:

$12,000
8,000
$20,000

a. Explainwhyprocesscostingisappropriateforthisoperation.
b. Calculatethecostperletterforthisoperation.
c. Therearenodirectmaterialsusedforthesortingoperation.Istheabsenceofdirectmaterialstypicalof
services?Ifnot,provideexamplesofservicesthatusedirectmaterials.
ANSWER:
a.
Aprocesscostingapproachcanbeusedforthesortingoperationbecauseitisarepetitive,homoge
neousservice.
b. Costperletteris$0.10.($20,000/200,000)
c.
Althoughmanyservicesmaynotusedirectmaterials,itwouldbedifficulttoarguethatitistypical.Fore
xample,dentists,doctors,andfuneraldirectorsallusedirectmaterialsinprovidingservices.Insomeca
ses,thecostofmaterialscanbesignificant.
179.
TheTolstoyCorporationusesJITmanufacturing.Thereareseveralmanufacturingcellssetupwithinoneofit
sfactories.Oneofthecellsmakeswelders.ThecostofproductionforthemonthofDecemberisasfollows:
Celllabor
Directmaterials
Overhead
Total

$10,000
25,000
20,000
$55,000

DuringDecember,TolstoyCorporationproducedandsold500welders.
Required:
a. Whycanprocesscostingbeusedtocomputethecostofthewelders?
b. Calculatetheunitcostofawelder..
ANSWER:
a.

Theweldersareahomogeneous,massproducedproduct.Eachproductproducedreceivesthesamedoseofmanufacturingcosts.

b. Unitcost=$110($55,000/500)

180.
SuburbiaCompanymanufacturesaproductthroughacontinuoussinglestepprocess.Allmaterialsareaddedatthebeginningofprocessing.ProductionandcostdataforthecompanyforFebruary2
016areasfollows:
Productiondata:
In process, beginning of month (20% converted)
StartedduringFebruary
Completedand transferred to finished goods
In process,endofmonth(60%converted)

1,000units
5,000units
4,500units

1,500unitsManufacturingcosts:
Workinprocess,beginning
Materials
Directlaborcost
Factoryoverheadcost
Required:

$14,730
$45,000
$102,960
$51,480

PrepareacostofproductionreportforFebruary2016.UseFIFOprocesscosting.
ANSWER:
Summaryofunitsinprocess:
Beginning
Unitsstarted
Inprocess
Completed
Ending

1,000
5,000
6,000
(4,500)
1,500

Equivalentunitsinprocess:
Unitscompleted
Add:Eq.unitsinend.inv.
Equivalentunitsinprocess
Less:Eq.unitsinbeg.inv.
Equivalentunitsmanufactured
Total costs to be accounted for:
BeginningWIP
Currentcosts
Totalcostsinprocess
Costsperequivalentunit

Materials
4,500
1,500
6,000
1,000
5,000

Conversion
4,500
900
5,400
200
5,200

Materials

Conversion

$45,000

$154,440

$9.00

$29.70

Total
$ 14,730
199,440
$214,170
$38.70

Accountingfortotalcosts:Tran
sferredout:
BeginningWIP:
Beginningbalance
Add:Conversion(800$29.70)
Startedandfinished(3,500$38.70)
Totaltransferredout
EndingWIP:
Materials(1,500$9.00)
Conversion(900$29.70)
EndingWIP

$14,730
23,760
$38,490
135,450
$173,940
$13,500
26,730
40,230

Totalcostaccountedfor

$214,170

181.
XavierCorporationmanufacturesaplastictoyproductinatwostageproductionprocess.PlasticmaterialisbroughtintotheFormingDepartmentwhereitisshaped.Shapedproducts
arethenmovedtotheFinishingDepartmentwheremetalisadded.ThefollowingdataisgivenfortheFormingDepart
mentforNovember:
UnitsforNovember:
Workinprocess,beginninginventoryNovember1
300unitsDirectmaterials(100%complete)
Conversion(40%complete)
UnitsstartedinNovember:
Workinprocess,endinginventoryNovember30

2,200units

500unitsDirectmaterials(100%complete)
Conversion(25%)
CostsforNovember:
Workinprocess,beginninginventory
Directmaterials
Conversion

$7,100
$4,525

CostsaddedduringNovember:
Directmaterials
Conversion
Roundtotwodecimalplaces.

$70,400
$40,100

Required:
a. HowmanyunitsweretransferredtoFinishing?
b. HowmanyunitswerestartedandcompletedduringNovember?
c. Howmanyequivalentunitsofconversiondoesittaketocompletethebeginninginventoryinthecurrentpe
riod?
d. WhatistheFIFOcostassignedtotheendinginventory?
e. WhatistheFIFOcostassignedtotheunitstransferredout?
f. ShowtheT-accountfortheformingprocess.

(WeightedAverage)

Forming

ANSWER:
a. 2,500-500=2,000
b.

Unitsstartedandcompleted=UnitstransferredoutBeginninginventoryTransferredout=300+2,200-500=2,000
Startedandcompleted=2,000-300=1,700

c. 300 -120=180(60%)
d. (500 $32*)+ (125 $20*) =$18,500
*calculationofcostperunit
Equivalentunitsinprocess:

Unitscompleted
Add:Eq.unitsinend.inv.
Equivalentunitsinprocess
Less:Eq.unitsinbeg.inv.
Equivalentunitsmanufactured
Totalcoststobeaccountedfor:
BeginningWIP
Currentcosts
Totalcostsinprocess
Costsperequivalentunit
e. $11,625+(180$20)+(1,700$52)=$103,625
f. Forming
Beg.11,625
DM70,400
Conv40,100
End18,500

Transfer103,625

Materials

Conversion

2,000
500
2,500
300
2,200

2,000
125
2,125
120
2,005

Materials

Conversion

$70,400

$40,100

$32.00

$20.00

Total
$11,625
110,500
$122,125
$52.00

182.
TritonManufacturingCompanybeganJune2016with10,000unitsofinventoryinprocess,20percentcompleted.
Duringtheperiod,50,000unitswerecompletedandtransferredtothefinishedgoodswarehouse.Endinginventoryconsistedo
f5,000units,70percentcompleted.Materialswereaddedatthebeginningoftheprocess.
Required:
Calculatetheequivalentunitsfor:
a. Materialscostsundertheweightedaverageprocesscostmethod.
b. Conversioncostsundertheweightedaverageprocesscostmethod.
c. MaterialscostsundertheFIFOprocesscostmethod.
d. ConversioncostsundertheFIFOprocesscostmethod.
ANSWER:
a.andb.
Unitscompleted
Add: Equiv. units inend. inv.

Materials
Conversion
50,000
50,000
5,000
3,500Equivalentunits
(a)55,000
(b)53,500

c.andd.
Equivalentunitsinprocess
Less:Equiv.unitsinbeg.inv.

55,000
53,500
10,000
2,000Equivalentunits
(c)45,000
(d)51,500

183.
Victory,Inc.,manufacturesaproductthatpassesthroughtwoprocesses:MixingandPackaging.Allmanufacturingc
ostsareaddeduniformlyintheMixingDepartment.InformationfortheMixingDepartmentforOctoberfollows:
Workinprocess,October1:
Units(30%complete)
Directmaterials
Directlabor
Overhead

7,500
$2,000
$1,500
$1,188

DuringOctober,150,000unitswerecompletedandtransferredtoPackaging.Thefollowingcostswereincurredby
theMixingDepartmentduringOctober:
Directmaterials
Directlabor
Overhead

$25,000
15,000
6,000

Therewere12,000unitsthatwere70percentcompleteremainingintheMixingDepartmentatOctober31.Use
theweightedaveragemethodandroundunitcoststotwodecimalplaces.
Required:
a. DeterminetheequivalentunitsofproductionforOctober.
b. DeterminethetotalcoststoaccountforinOctober.
c. Determinethetotalcostperequivalentunitofproduction.
d. CalculatethecostofgoodstransferredtothePackagingDepartment.
e. CalculatethecostofOctober'sendingworkinprocessfortheMixingDepartment.
ANSWER:
a. 158,400
Unitsaccountedfor:

UnitsinEWIP(70%complete)
Totalunitsaccountedfor
b.

12,000
162,000

8,400
158,400

$50,688
Coststoaccountfor:
Beginningworkinprocess
Costsadded
Totalcoststoaccountfor

c.
d.
e.

PhysicalFlow
Equiv.UnitsUnitscompleted
150,000
150,000

$0.32
$48,000
$2,688

ManufacturingCosts
$4,688
46,000
$50,688
($50,688/158,400)
(150,000$0.32)
(8,400$0.32)

184.
GanMaolingCorporationproducesaproductthatpassesthroughtwodepartments.ForMay,thefollowing
equivalentunitschedulewaspreparedforthefirstdepartment:
Unitscompleted
Units,EWIPpercentagecomplete:
15,000100%
15,00040%
Equivalentunitsofoutput
Costsassignedtobeginningworkinprocess:
Materials:
Conversion:

Materials
180,000
15,000
195,000
$51,000
$24,750

Manufacturingcostsincurredduringthemonth:
Materials:
$56,250
Conversion:
$45,000
Required:
a. ComputetheunitcostforMayusingtheweightedaveragemethod.
b. Determinethecostofgoodstransferredout.
c. Determinethecostofendingworkinprocess.
ANSWER:
a.

Conversion
180,000

Costperequivalentunit:
Materials=($51,000+$56,250)/195,000=$0.55
Conversion=($24,750+
$45,000)/186,000=$0.375Totalunitcost=$0.925pereq
uivalentunit
b. Costofgoodstransferredout=$0.925180,000=$166,500
c. Costofendingworkinprocess
=(15,000$0.55)+(6,000$0.375)
=$8,250+$2,250=$10,500

6,000
186,000

185.
CountryviewCompanymanufacturesaproductthatpassesthroughtwoprocesses.Thefollowinginformationis
availableforthefirstdepartmentforJune:
Allmaterialsareaddedatthebeginningoftheprocess.
Beginningworkinprocessconsistedof7,000unitsthatwere90percentcompletewithrespecttoconversion.
Endingworkinprocessconsistedof3,000unitsthatwere40percentcompletewithrespecttoconversion.
Therewere35,000unitsstartedinprocessduringthemonth.Required:
a. Prepareaphysicalflowschedule.
b. Computeequivalentunitsusingtheweightedaveragemethod.
ANSWER:
a. Physical flow schedule:
Units to account for:
Units, beginning work in process

7,000

Units started
35,000
Total units to account for
42,000
Units accounted for:
Units completed and transferred
out:
32,000

Started and completed

From beginning work in process

7,000

39,000

Units, ending work in process

Total units accounted for

b.

Equivalentunits:
Unitscompleted
UnitsEWIPfractioncomplete:
Materials(3,000100%)
Conversion(3,00040%)
Equivalentunitsofoutput

Materials
39,000

3,000

42,000

Conversion
39,000

3,000
42,000

1,200
40,200

186.
XanaduCompanymanufacturesaproductthatpassesthroughtwodepartments,AssemblyandFinishing.IntheFinis
hingDepartment,materialsareaddedattheendoftheprocess.Conversioncostsareincurreduniformlythroughouttheprocess.
DuringthemonthofJanuary,theFinishingDepartmentreceived60,000unitsfromtheAssemblyDepartment.Thetransferredincostofthe60,000unitswas$69,900.
CostsaddedbyFinishingduringJanuaryincludedthefollowing:
Directmaterials
Directlabor
Overhead

$35,200
56,000
25,600

OnJanuary1,theFinishingDepartmenthad10,000unitsininventorythatwere30percentcompletewithrespectto
conversioncosts.OnJanuary31,12,000unitswereininventory,onethirdcompletewithrespecttoconversioncosts.Thecostsassociatedwiththe10,000unitsinbeginninginventorywerea
sfollows:
Transferredin
Directlabor
Overhead
Required:

$11,650
8,750
4,000

Prepareacostofproductionreportusingtheweightedaveragemethod.

ANSWER:
XanaduCompanyFinishi
ngDepartment
FortheMonthofJanuary
UnitInformation
Unitstoaccountfor:U
nits,BWIP
Unitsstarted
Unitstoaccountfor

10,000
60,000
70,000

Unitsaccountedfor:
Unitscompleted
Units,EWIP
Unitsaccountedfor

Phys.flow
58,000
12,000
70,000

EquivalentUnits
Trans.in
Materials Conversion
58,000
58,000
58,000
12,000
4,000
70,000
58,000
62,000

CostInformation
Coststoaccountfor:
BWIP
Costsaddedindept.
Coststoacctfor

Trans.-in
$11,650
69,900
$81,550

Materials
$35,200
$35,200

Conversion
$12,750
81,600
$94,350

Total
$ 24,400
186,700
$211,100

Costperequiv.unit

$1.165

$0.607

$1.522

$3.294

Trans.out

EWIP

Total

$191,052

$191,052

$13,980
6,088
$20,068

13,980

Costsaccountedfor:
Goodstransferredout:
(58,000$3.294)
Endingworkinprocess:
Trans.in(12,000$1.165)
Conversion(4,000$1.522)
Totalcostsaccountedfor
*Differenceduetorounding.

$191,052

6,088
$211,120*

187.
LakesideCorporationproducestwotypesofproduct:NormalandExtra.Twoworkordersfortwobatchesofthepr
oductsareshownbelow,alongwithsomeadditionalcostinformation:

Directmaterials(actualcosts)
Appliedconversioncosts:
Mixing
Cooking
Bottling
Batchsize(bottles)

Normal
WorkOrder5
$180,000

Extra
WorkOrder6
$300,000

?
$48,000
$40,000

?
$48,000
$30,000

5,000

5,000

IntheMixingDepartment,conversioncostsareappliedonthebasisofdirectlaborhours.Budgetedconversioncostsforthe
departmentfortheyearwere$200,000forlaborand$600,000foroverhead.Budgeteddirectlaborhourswere5,000.Itta
kes6minutestomixtheingredientsneededforeachbottle.
NormalandExtraflowthroughtheMixingDepartment,followedbytheCookingandBottlingdepartments.
Required:
a. WhataretheconversioncostsappliedtoNormalandExtrafromtheMixingDepartmentforeachbatch
?
b. CalculatethecostperbottleforNormalandExtra.
c. Preparethejournalentriesthatrecordthecostsofabatchof5,000bottlesofNormal.
ANSWER:
a.

($200,000+
$600,000)/5,000=$160perDLHNormal=$160
5,0006/60=$80,000Extra= $160 5,000
6/60= $80,000

b.

Normal
$180,000
$300,000Mixing
80,000

Directmaterials

Cooking
Bottling

Costperbottle
WorkinProcess-Mixing
WorkinProcess-Mixing
ConversionCosts-Control

80,000

48,000
40,000
$348,000

48,000
30,000
$458,000

$69.60

$91.60

180,000
Materials

Extra

180,000
80,000
80,000

Work inProcess-Cooking
WorkinProcess-Mixing

260,000

260,000(180,000+80,000=260,000coststransferredtocooking)
Work inProcess-Cooking
ConversionCosts-Control

48,000
48,000

Work inProcess-Bottling
308,000
Workin Process-Cooking
308,000
(180,000+80,000+48,000=308,000coststransferredtobottling)
Work inProcess-Bottling
ConversionCosts-Control

40,000
40,000

FinishedGoods
348,000
Workin Process-Bottling
348,000
180,000+80,000+48,000+40,000=348,000coststransferredtofinishedgoo
ds)

188.

ThePaintingDepartmentofSalaciousCompanyreportedthefollowinginformationforthemonthofSeptember:
Conversion
PercentageCompleted

Units
28,000
27,000
10,000
8,000

Unitsstarted
Completedandtransferred
Workinprocess,9/1
Workinprocess,9/30

80%
30%
Labor and
Overhead

Materials
Transferred-In
Costs for September:
Work in process, 9/1
$ 51,720
$ 65,048
$ 80,624
Added during the month
$145,880
$194,224
$234,320
Allmaterialsareaddedatthebeginningoftheprocess.Inspectionoccurs60percentofthewaythroughtheprocess.Norm
alspoilageis10percentofthegoodunitscompleted.(Roundtotwodecimalplaces.)
Required:
a. Whataretheweightedaverageequivalentunitsformaterials,transferred-inandconversion?
b. WhataretheFIFOequivalentunitsformaterials,transferred-in,andconversion?
c. Whatistheweightedaveragecostperunitforconversion?
d. Whatistheweightedaveragecostperunitformaterials?
e. Whatisthecostassignedtoendingworkinprocessusingweightedaverage?
f. Whatisthecostassignedtotransferredoutusingweightedaverage?
g. ShowtheentriestothefollowingT-account:

WorkinProcess-Painting
(WeightedAverage)

ANSWER:
Spoilage = 10,000 + 28,000 - 27,000 - 8,000 = 3,000
Normal spoilage = 27,000 0.10 = 2,700;
Abnormal spoilage = 3,000 - 2,700 = 300
Transferred out
Ending inventory
Normal spoilage
Abnormal spoilage
Total

b.

27,000
8,000
2,700
300
38,000

T-I
27,000
8,000
2,700
300
38,000

Materials
27,000
8,000
2,700
300
38,000

Conversion
27,000
2,400 (8,000 0.30)
1,620 (2,700 0.60)
180 (300 0.60)
31,200

T-I

Materials

Conversion

Transferred out
Ending inventory
Normal spoilage
Abnormal spoilage
Total
Beginning inventory
Current units

27,000
8,000
2,700
300
38,000
10,000
28,000

27,000
8,000
2,700
300
38,000
10,000
28,000

27,000
8,000
2,700
300
38,000
10,000
28,000

c.

Conversion = $65,048 + $194,224 = $259,272/31,200 = $8.31

d.

Materials = $51,720 + $145,880 = $197,600/38,000 = $5.20

e.

EI:
Transferred in
Materials
Conversion
Total

27,000
2,400 (8,000 0.30)
1,620 (2,700 0.60)
180 (300 0.60)
31,200
8,000 (10,000 0.80)
23,200

(8,000 $8.288*)
(8,000 $5.20)
(2,400 $8.31)

$ 66,304
41,600
19,944
$127,848

*Transferred in = $80,624 + $234,320 = $314,944/38,000 = $8.288

f.
Transferred out
Normal spoilage

(27,000 $21.798*)
(2,700 $8.288)
(2,700 $5.20)
(1,620 $8.31)

Total
* Transferred = $8.31 + $5.20 + $8.288 = 21.798
g.
B
TI
M
C
E

Work in Process-Painting
197,392
638,425.80
234,320
5,542.20*
145,880
(Weighted Average)
194,224
127,848

Abnormal spoilage = Recorded separately

(300 8.288)
$2,486.40
(300 5.20)
$1,560.00
(180 8.31)
$1,495.80
Total
$5,542.20

Chapter 7
1. Commoncostsaremutuallybeneficialcosts,usedintheoutputoftwoormoreservicesorproducts.
a. True
b. False
ANSWER: True
2. Allocationincreasestotalcosts.
a. True
b. False

$588,546.00
22,377.60
14,040.00
13,462.20
$638,425.80

ANSWER: False
3. Producingdepartmentscreateproductsandservicestomakeandsell.
a. True
b. False
ANSWER: True
4. Producingdepartmentsprovideessentialservicesforsupportdepartments.
a. True
b. False
ANSWER: False
5. Causalfactorsarevariablesoractivitieswithinaproducingdepartmentthatstimulatetheincurrenceofsupportcosts.
a. True
b. False
ANSWER: True
6. Asinglechangingrateusesthefixedcostsofthesupportdepartment.
a. True
b. False
ANSWER: False
7. Theuseofamultiplechargingrateisneeded,oneforvariablecosts,andoneforfixedcosts.
a. True
b. False
ANSWER: True

8. Dualratescombinethefixedandvariablecosts.
a. True
b. False
ANSWER: False
9. Supportdepartmentfixedcostsareallocatedonthebasisoforiginalcapacity.
a. True
b. False
ANSWER: True
10. Budgetedratesareallocatedbasedonoriginalcapacity.
a. True
b. False
ANSWER: False
11. Thethreemethodsofallocatingsupportcentercoststoproducingdepartmentsarethedirect,sequential,andreciprocalmetho
ds.
a. True
b. False
ANSWER: True
12. Thedirectmethodisthemostdifficultwaytoallocatecoststothesupportdepartments.
a. True
b. False
ANSWER: False
13. Thesequentialmethodallocatescostsinrankingorderofsupportdepartments.
a. True
b. False
ANSWER: True
14. Thereciprocalmethodofallocationrecognizesonlysomeofthesupportdepartmentsinteractions.
a. True
b. False
ANSWER: False
15. AllocationisnotnecessarywhenusingJITmanufacturing.
a. True
b. False
ANSWER: True

16. Theoverheadratemaybecomputedonceallocationfromsupportservicecosttoproducingdepartmenthasbeenperformed.
a. True
b. False
ANSWER: True
17. Departmentaloverheadrateiscomputedbydividingthebudgetedbasebythetotaloverheadinaproducingdepartment.
a. True
b. False
ANSWER: False
18. Departmentaloverheadisappliedtoproductspassingthroughthedepartment.
a. True
b. False
ANSWER: True
19. Thechoiceofallocationmethoddependsonanevaluationofcostsandbenefits,andcircumstances.
a. True
b. False
ANSWER: True
20. Jointproductionprocessesresultintheoutputoftwoormoreproductsproducedsimultaneously.
a. True
b. False
ANSWER: True
21. Jointproductsaretwoormoreproductsproducedsimultaneouslybythesameprocess.
a. True
b. False
ANSWER: True
22. Thesplit-offpointistheendingpointofajointproductprocess.
a. True
b. False
ANSWER: False

23. Coststhatareeasilytracedtoindividualproductsarecalledseparablecosts.
a. True
b. False
ANSWER: True
24. Underthephysicalunitsmethod,jointcostsaredistributedtoproductsonthebasisofsomephysicalmeasure.
a. True
b. False
ANSWER: True
25. Theweightfactoraddressestheadvantagesofthephysicalunitsmethod.
a. True
b. False
ANSWER: False
26.

aremutuallybeneficialcoststojointproductcosting.

ANSWER: Commoncosts
27. Activitiesorvariableswithinaproducingdepartmentthatprovoketheincurrenceofsupportcostsarecalled
__________.
ANSWER: causalfactors
28.

The

chargingratecombinesvariableandfixedcostsofsupportdepartments.

ANSWER: single
29.

Support department

costsareallocatedonthebasisoforiginalcapacity.

ANSWER: fixed
30.

The

methodofallocatingcosts,allocatescostsfromsupporttoproducingdepartments.

The

methodofallocatingcostsassumesstepdowninterdepartmentalservices.

ANSWER: direct
31.

ANSWER: sequential
32. Afterallocation,totaloverheadinproducingdepartmentisdividedbythebudgetedmeasureofactivitytogetthe
__________overheadrate.
ANSWER: departmental
33.
ANSWER: overhead

Departmental isappliedtoproductspassingthroughthedepartment.

34.
ultaneouslybythesameprocessuptoapointarecalled

Productsproducedsim
products.

ANSWER: joint
35. Asecondaryproductrecoveredduringthemanufacturingofaprimaryproductduringajointprocessiscalleda(n):
__________.
ANSWER: by-product
36. Supportdepartmentcosttotheproducingdepartmentsis(are)called:
a. directmaterials
b. directlabor
c. activitydriver
d. commoncost
ANSWER: d
37. Acommoncostoccurs
a. whenonlyoneproductorserviceisbenefited.
b. whendifferentresourcesareusedtoproduceoneoutput.
c. whenthesameresourceisusedintheoutputoftwoormoreoutputs.
d. whenaresourceisusedbytwoormorecompanies.
ANSWER: c
38. Supportdepartments
a. areresponsibleformanufacturingtheproductssoldtocustomers.
b. workdirectlyontheproductsofthefirm.
c. provideservicesdirectlytocustomers.
d. provideessentialservicestotheproducingdepartments.
ANSWER: d
39. ExamplesofsupportdepartmentsincludeallofthefollowingEXCEPT
a. maintenance.
b. personnel.
c. machining.
d. dataprocessing.
ANSWER: c

40. WhichofthefollowingdepartmentsisNOTasupportdepartment?
a. foodservices
b. bottling
c. healthservices
d. security
ANSWER: b
41. Theactivitiesorvariableswithinaproducingdepartmentthatprovoketheincurrenceofsupportcostsarecalled:
a. Causalfactors
b. Commoncosts
c. Costobjectives
d. Activityoutput
ANSWER: a
42. ExamplesofproducingdepartmentsincludeallofthefollowingEXCEPT
a. mixing.
b. molding.
c. packaging.
d. accounting.
ANSWER: d
43. Supportdepartmentcostsareaccountedforinwhichoneofthefollowingways?
a. Theyareallocateddirectlytounitsofproduct.
b. Theyareallocatedtoproducingdepartmentsandthenallocatedtounitsofproduct.
c. Theyareallocatedtounitsofproductandthenallocatedtotheproducingdepartments.
d. Theyareexpensedasincurred.
ANSWER: b
44. Whichofthefollowingwouldbethemostappropriatebaseforallocatingthecostsofthehousekeepingdepartment?
a. machinehours
b. directlaborhours
c. squarefeet
d. numberofemployees
ANSWER: c

45. Whichofthefollowingwouldbethemostappropriatebaseforallocatingthecostsofthemaintenancedepartment?
a. machinehours
b. directlaborhours
c. numberofemployees
d. squarefeet
ANSWER: a
46. Apossiblecausalfactortousewhenallocatingcafeteriacostswouldbe
a. numberofsquarefeet.
b. numberofdirectlaborhours.
c. numberofemployees.
d. appraisedvalueofsquarefootage.
ANSWER: c
47. Themajorobjective(s)ofallocationsare
a. tomotivatemanagers.
b. tocomputeproductlineprofitability.
c. tovalueinventory.
d. alloftheabove.
ANSWER: d
48. WhichofthefollowingisNOTamajorobjectiveofallocationasidentifiedbytheIMA?
a. todetectfraud
b. toobtainamutuallyagreeableprice
c. tocomputeproduct-lineprofitability
d. tovalueinventory
ANSWER: a
49. Whichofthefollowingcostcategorieswouldmostlikelyusemachinehoursasitsactivitydriver?
a. personnel
b. maintenance
c. purchasing
d. bothaandb
ANSWER: b

50. Whichofthefollowingcostcategorieswouldmostlikelyusethenumberofemployeesornewhiresasitsactivitydriver?
a. maintenance
b. purchasing
c. personnel
d. accounting
ANSWER: c
51. WhichofthemajorobjectivesofallocationasidentifiedbytheIMAwouldNOTberelevantinaserviceorganization?
a. toobtainamutuallyagreeableprice
b. tocomputeproduct-lineprofitability
c. topredicttheeconomiceffectsofplanningandcontrol
d. alloftheaboveareobjectivesofallocation
ANSWER: d
52. TheRulingCompanyassignsplantadministrationcoststotheproductiondepartmentsbasedonthenumberofemployees.Wh
ichofthefollowingwouldNOTbeagoodcombinationofcommoncostswithanactivitydriver?
a. personneldepartmentcostsbasedonnumberofemployees
b. purchasingdepartmentcostsbasedonmachinehours
c. cafeteriacostsbasedonmealsserved
d. warehousecostsbasedonthevalueofmaterialsstored
ANSWER: b
53. IfthecostsofsupportdepartmentsareNOTallocatedtoproducingdepartments,
a. productcostswouldbeunderstated.
b. GAAPrequirementswouldnotbemet.
c. managersofproducingdepartmentsmaytendtooverconsumeservices.
d. alloftheabove.
ANSWER: d
54. Rulesoffinancialreporting(GAAP)require
a. thatdirectmanufacturingcostsandafairshareofindirectmanufacturingcostsbeassignedtoproducts.
b. thatonlyproducingdepartmentcostsbeassignedtoproducts.
c. thatonlydirectmanufacturingcostsbeassignedtoproducts.
d. thatonlyindirectmanufacturingcostsbeassignedtoproducts.
ANSWER: a

Chapter 7: Allocating Costs of Support Departments and Joint Products

55. WhatisoneofthepotentialdisadvantagesofNOTallocatingsupportdepartmentcoststoproductiondepartments?
a. totalcostswouldnotbeaccumulated
b. managersmaytendtooverconsumetheseservices
c. thiswouldencouragemanagerstomonitorsupportdepartmentperformance
d. managerswilluseasupportserviceatamoreefficientlevel
ANSWER: b
56. WhichofthefollowingisNOTabenefitofthecostsofsupportdepartmentsbeingallocatedtoproductiondepartments?
a. Theallocationassistsproducingdepartmentsuseofsupportdepartmentsatamoreefficientlevel.
b. Allocationofsupportdepartmentcostsencouragesmanagersofproductiondepartmentstomonitorperformanceofthesu
pportdepartment.
c. Theallocationhelpseachdepartmentselectthecorrectlevelofsupportserviceconsumption.
d. Managementwillusetheinformationtosupportout-sourcingallsupportservices.
ANSWER: d
57. WhatisthemostlikelyactiontobetakenbyacompanywhenasupportdepartmentisNOTascosteffectiveasanoutsidesource?
a. Thecompanymayforcemanagerstousetheinternalsupportdepartment.
b. Thecompanymayforcemanagerstouseanexternalsourcefortheservice.
c. Thecompanymayelectnottosupplytheserviceinternally.
d. alloftheabove
ANSWER: c

Figure7-1
LuxuriousDepartmentStoreincurred$6,000ofindirectadvertisingcostsforitsoperations.Thefollowingdatahasbeencollected
for2016foritsthreedepartments:

Sales
Directadvertisingcosts
Newspaperadspace

Sportswear
$160,000
$7,000
62%

Lingerie
$120,000
$12,000
20%

Appliances
$120,000
$3,000
18%

58. RefertoFigure7-1.HowmuchoftheindirectadvertisingcostswillbeallocatedtotheSportswearDepartmentif
newspaperadspaceistheactivitydriver?
a.$6,000
b.$4,340
c.$3,720
d.$2,280

Chapter 7: Allocating Costs of Support Departments and Joint Products

ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:62%$6,000=$3,720

Chapter 7: Allocating Costs of Support Departments and Joint Products

59. RefertoFigure71.HowmuchoftheindirectadvertisingcostswillbeallocatedtotheLingerieDepartmentifdirectadvertisingcostsistheactivityd
river?(Roundtothenearestdollarifnecessary)
a.$3,000
b.$3,273
c.$6,000
d.$12,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:[12,000/(7,000+12,000+3,000)]$6,000=$3,273
60. Ifasupportdepartment'scostswerebudgetedtobe$150,000andactualcostsincurredbythesupportdepartmentwere$200,00
0,thetotalamountofthesupportdepartment'scoststhatshouldbeallocatedtootherdepartmentsis
a.$350,000.
b.$200,000.
c.$150,000.
d.$50,000.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:Budgetedcostsof$150,000

Figure7-2
LongDistanceCompanystraveldepartmenthadthefollowingbudgetedcostsforthecomingyear:
Variablecosts
Fixed costs

$34pertrip
$143,360

WestSalesTerritory
MidwestSalesTerritory
SouthernSalesTerritory
EasternSalesTerritory

YearlyTrips
110trips
170trips
150trips
130trips

Theactualusageisgivenbelow:
WestSales Territory
Midwest Sales Territory
SouthernSalesTerritory
EasternSalesTerritory

100trips
150trips
160trips
140trips

MonthlyPeakTrips5
12
15
8

Chapter 7: Allocating Costs of Support Departments and Joint Products

61. RefertoFigure7-2.Usingasinglechargingrate,determinetheratepertrip.
a.$256
b.$290
c.$295
d.$261
e.$34
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
VC$34560=
FC=
totalcost=
$162,400/560=

$19,040
$143,360
$162,400
$290pertrip

62. RefertoFigure7-2.Usingasinglechargingrate,howmuchwillbechargedtotheWestSalesTerritory?
a.$29,000
b.$31,900
c.$29,500
d.$28,160
e.noneoftheabove
ANSWER:
a
RATIONALE: 100$290=$29,000
63. RefertoFigure72.Usingbothafixedandvariablerate,whataretherespectiveratesforfixedandvariablepertripfortheWestSalesTerritory?
Fixedcostsareallocatedonthebasisofmonthlypeaktrips.
a.12.5%;$34
b.19.6%;$34
c.18.2%;$34
d.19%;$34
e.noneoftheabove
ANSWER:

a
RATIONALE: VC FC

$34

W
MW

5
12

5/40=.125
12/40 = .3

S
E
Total

15
8
40

15/40=.375
8/40= .2

Chapter 7: Allocating Costs of Support Departments and Joint Products

Chapter 7: Allocating Costs of Support Departments and Joint Products

64. RefertoFigure72.Usingbothafixedandvariableratewithfixedcostsallocatedonthebasisofmonthlypeaktrips,whatwilltheWestSalesTerritor
ybechargedfortheyear?(roundtothenearestdollar)
a.$31,498
b.$21,320
c.$29,492
d.$30,638
e.noneoftheabove
ANSWER:
b
RATIONALE:
VC$34100=
FC 5/40=0.125$143,360=
W=

$3,400
$17,920
$21,320

65. Iftheallocationisforproductcosting,theallocationofvariablesupportdepartmentcostswouldbecalculatedas
a. ActualrateActualusage.
b. ActualrateBudgetedusage.
c. BudgetedrateActualusage.
d. BudgetedrateBudgetedusage.
ANSWER: d

Figure7-3
HanoverandTrust,alargelawfirm,utilizesaninternalcentralizedprintingcentertoserveitsthreedepartments:Individuals,Corp
orate,Trust.Thecostsoftheprintingdepartmentincludefixedcostsof$69,190andvariablecostsof$0.04perpage.Totalestim
atedprintpagesareestimatedtobe330,000pages.Individualsareestimatedtouse130,000;Corporatewilluse165,000and35,
000fromthetrustarea.
66. RefertoFigure7-3.Assumingasinglechargingrateisused,whatwouldbethechargeperpage?(roundtothenearestcent)
a. $.04
b. $.25
c. $.21
d. noneoftheaboveamounts
ANSWER:
b
RATIONALE:$69,190 + ($0.04 330,000) = $82,390/330,000 = $.24966= $.25

Chapter 7: Allocating Costs of Support Departments and Joint Products

Chapter 7: Allocating Costs of Support Departments and Joint Products

67. RefertoFigure73.Assumingasinglechargingrateisused,iftheCorporateDepartmentused190,000pages,whatwouldbetheprintingchargesfo
rtheCorporateDepartment?(Roundtothenearestcent.)
a.$47,500
b.$39,900
c.$7,600
d.$42,195
ANSWER:
a
RATIONALE:$69,190 + ($0.04 330,000)= $82,390/330,000 =$.24966 =$.25$.25 190,000= $47,500
68. RefertoFigure73.Assumingasinglechargingrateisused,ifthetotalpagesprintedwere340,000,whichofthefollowingstatementsiscorrect?
a. Theprintingcostsallocatedtoalldepartmentswouldbe$85,000.
b. Theprintingdepartmentwouldexpecttoincurcostsof$82,790.
c. Anyextraamountchargedisduetothefixedcostsbeingchargedasiftheywerevariablecosts.
d. alloftheabove.
ANSWER: d
69. Iftheallocationisforperformanceevaluation,theallocationofvariablesupportdepartmentcostswouldbecalculatedas
a. ActualrateActualusage.
b. ActualrateBudgetedusage.
c. BudgetedrateActualusage.
d. BudgetedrateBudgetedusage.
ANSWER: c

FIGURE7-4
CopiesPlusPrintoperatesacopybusinessattwodifferentlocations.CopiesPlusPrinthasonesupportdepartmentthatisrespons
ibleforcleaning,service,andmaintenanceofitscopyingequipment.Thecostsofthesupportdepartmentareallocatedtoeach
copycenteronthebasisoftotalcopiesmade.
Duringthefirstmonth,thecostsofthesupportdepartmentwereexpectedtobe$200,000.Ofthisamount,
$60,000isconsideredafixedcost.Duringthemonth,thesupportdepartmentincurredactualvariablecostsof$128,000andact
ualfixedcostsof$72,000.
Normalandactualactivity(copiesmade)areasfollows:

Normalactivity(copies)

CopyCenter1
600,000

CopyCenter2
400,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

Actualactivity(copies)

500,000

440,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

70. RefertoFigure7-4.Forpurposesofperformanceevaluation,fixedcostsallocatedtoCopyCenter1are
a.$36,000.
b.$37,600.
c.$30,000.
d.$32,800.
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$60,000(600,000/1,000,000)=$36,000
71. RefertoFigure7-4.Forpurposesofperformanceevaluation,fixedcostsallocatedtoCopyCenter2are
a.$28,800.
b.$60,000.
c.$51,200.
d.$24,000.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$60,000(400,000/1,000,000)=$24,000
72. RefertoFigure7-4.SupportdepartmentcostsNOTallocatedtothetwocopycentersare
a.$22,000.
b.$9,840.
c.$8,400.
d.$6,000.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Fixedoverheadnotallocatedtocopycenters
($72,000-$60,000)

$12,000

Variablecostsnotallocated
[$128,000(($140,000/1,000,000)940,000)]

(3,600)
$8,400

Chapter 7: Allocating Costs of Support Departments and Joint Products

73. Acompanyincurred$40,000ofcommonfixedcostsand$60,000ofcommonvariablecosts.ThesecostsaretobeallocatedtoDe
partmentsAandB.Dataoncapacityprovidedandcapacityusedareasfollows:
CapacityProvided
inHours
800
480

Department
A
B

CapacityUsed
inHours
640
640

AssumethatcommonfixedcostsaretobeallocatedtoDepartmentsAandBonthebasisofcapacityprovidedandthatcommonva
riablecostsaretobeallocatedtoDepartmentsAandBonthebasisofcapacityused.ThefixedandvariablecostsallocatedtoDe
partmentAare
Fixed
a.$20,000
b.$20,000
c.$25,000
d.$25,000

Variable
$37,500
$30,000
$30,000
$37,500

ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Fixed:
800/1280 $40,000=$25,000
Variable:

640/1280 $60,000=$30,000

FIGURE7-5
Stronghold,Inc.,operatesabrochurebusinessattwodifferentlocations.Stronghold,Inc.,hasonesupportdepartmentthatisresp
onsibleforcleaning,service,andmaintenanceofitsprintingequipment.Thecostsofthesupportdepartmentareallocatedtoea
chbrochurecenteronthebasisoftotalbrochuresmade.
Duringthefirstmonth,thecostsofthesupportdepartmentwereexpectedtobe$400,000.Ofthisamount,
$120,000isconsideredafixedcost.Duringthemonth,thesupportdepartmentincurredactualvariablecostsof$256,000anda
ctualfixedcostsof$144,000.
Normalandactualactivity(brochuresmade)areasfollows:

Normalactivity(brochures)
Actualactivity(brochures)

BrochureCenter1
1,200,000
1,000,000

74. RefertoFigure7-5.Forpurposesofperformanceevaluation,fixedcostsallocatedto
BrochureCenter1are
a.$60,000.
b.$72,000.

BrochureCenter2
800,000
880,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

c.$65,600.
d.$75,200.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$120,000(1,200,000/2,000,000)=$72,000

75. RefertoFigure7-5.Forpurposesofperformanceevaluation,fixedcostsallocatedtoBrochureCenter2are
a.$57,600.
b.$120,000.
c.$48,000.
d.$102,400.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$120,000(800,000/2,000,000)=$48,000
76. RefertoFigure7-5.SupportdepartmentcostsNOTallocatedtothetwobrochurecentersare
a.$16,800.
b.$19,680.
c.$44,000.
d.$8,000.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:Variablerate=($400,000-$120,000)/(1,200,000+800,000)=
$0.14
Fixedoverheadnotallocatedtobrochurecenters
($144,000-$120,000)

$24,000

Variablecostsnotallocated
[$256,000($0.141,880,000)]

(7,200)
$16,800

77. Acompanyincurred$80,000ofcommonfixedcostsand$120,000ofcommonvariablecosts.ThesecostsaretobeallocatedtoD
epartmentsAandB.Dataoncapacityprovidedandcapacityusedareasfollows:
CapacityProvided
inHours
400
240

Department
A
B

CapacityUsed
inHours
320
320

Assumethatbothfixedandvariablecostsareallocatedonthebasisofcapacityused.ThefixedandvariablecostsallocatedtoDep
artmentAare
Fixed

Variable

Chapter 7: Allocating Costs of Support Departments and Joint Products

a.$40,000

$60,000

b.$50,000

$60,000

c.$40,000

$75,000

d.$50,000

$75,000

ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Fixed:
320/640 $80,000=$40,000
Variable:

320/640 $120,000=$60,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

78. Acompanyincurred$120,000ofcommonfixedcostsand$180,000ofcommonvariablecosts.Thesecostsaretobeallocatedto
DepartmentsXXandYY.Dataoncapacityprovidedandcapacityusedareasfollows:
CapacityProvided
inHours
500
300

Department
XX
YY

CapacityUsed
inHours
400
400

AssumethatcommonfixedcostsaretobeallocatedtoDepartmentsXXandYYonthebasisofcapacityprovided
andthatcommonvariablecostsaretobeallocatedtoDepartmentsXXandYYonthebasisofcapacityused.Thefixedandvariabl
ecostsallocatedtoDepartmentXXare
Fixed

Variable

a.$75,000

$112,500

b.$75,000

$90,000

c.$60,000

$112,500

d.$60,000

$90,000

ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Fixed:
500/800 $120,000=$75,000
Variable:

400/800 $180,000=$90,000

79. Acompanyincurred$120,000ofcommonfixedcostsand$180,000ofcommonvariablecosts.Thesecostsaretobeallocatedto
DepartmentsXXandYY.Dataoncapacityprovidedandcapacityusedareasfollows:
CapacityProvided
inHours
500
300

Department
XX
YY

CapacityUsed
inHours
400
400

Assumethatbothfixedandvariablecostsareallocatedonthebasisofcapacityused.Thefixedandvariablecosts
allocatedtoDepartmentXXare
Fixed

Variable

a.$75,000

$112,500

b.$75,000

$90,000

c.$60,000

$112,500

d.$60,000

$90,000

ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Fixed:
400/800 $120,000 =$60,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

Variable:

400/800 $180,000=$90,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

80. Ifasupportdepartment'scostswerebudgetedtobe$75,000andactualcostsincurredbythesupportdepartmentwere$70,00
0,thetotalamountofthesupportdepartment'scoststhatshouldbeallocatedtootherdepartmentsis
a.$145,000.
b.$75,000.
c.$70,000.
d.$5,000.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Budgetedcostsof$75,000
81. Basicguidelinesthatshouldbefollowedwhenallocatingsupportdepartmentcostsinclude
a. actualcostsshouldalwaysbeusedforallocations.
b. budgetedcosts,notactualcosts,shouldbeallocated.
c. servicedepartmentcostsshouldneverbeallocatedatthebeginningoftheperiod.
d. bothaandb.
ANSWER: b
82. Fixedsupportdepartmentcostsshouldbeallocatedbasedon
a. currentactualusageofservice.
b. currentbudgetedusageofservice.
c. practicalcapacityofuserdepartments.
d. alloftheabove.
ANSWER: c
83. Whichofthefollowingmethodsallocatessupportdepartmentcosts?
a. directallocationmethod
b. reciprocalallocationmethod
c. sequentialallocationmethod
d. alloftheabove
ANSWER: d

Chapter 7: Allocating Costs of Support Departments and Joint Products

84. ThefollowinginformationpertainstoFamousCompany:

Budgeted overhead
Direct labor hours
Machine hours
Number of employees

Support Departments
Personnel
Maintenance
$40,000
$72,000
2,000
2,500
4
5

Producing Departments
Fabrication
Assembly
$140,000
$160,000
8,000
10,000
12,000
8,000
15
25

FamousCompanydoesnotdividecostsintofixedandvariablecomponents.Personnelcostsareallocatedbasedonthenumberof
employees,andmaintenancecostsareallocatedbasedonmachinehours.
Predeterminedoverheadratesforfabricationandassemblyarebasedondirectlaborhours.
WhatistheamountofmaintenancecostsallocatedtotheAssemblyDepartmentusingthedirectmethod?
(Roundamountstodollars.)
a.$14,400.
b.$48,000.
c.$28,800.
d.$38,160.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:$72,000[8,000/(12,000+8,000)]=$28,800

Chapter 7: Allocating Costs of Support Departments and Joint Products

85. ThefollowinginformationpertainstoLongboatCompany:
SupportDepartments
Personnel
$40,000
2,000
4

Budgetedoverhead
Directlaborhours
Machinehours
Numberofemployees

ProducingDepartments
Maintenance
Fabrication
Assembly
$72,000
$140,000
$160,000
2,500
8,000
10,000
12,000
8,000
5
15
25

LongboatCompanydoesnotdividecostsintofixedandvariablecomponents.Personnelcostsareallocatedbasedonthenumbero
femployees,andmaintenancecostsareallocatedbasedonmachinehours.
Predeterminedoverheadratesforfabricationandassemblyarebasedondirectlaborhours.(Roundamountstodollars.)
Ifthedirectmethodisusedtoallocatesupportdepartmentcosts,thepredeterminedoverheadratefortheFabricationDepartment
(roundedtotwodecimalplaces)wouldbe
a.$28.80.
b.$24.78.
c.$7.28.
d.$5.40.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Fabrication
Personnel $40,000 (15/40)
Maintenance $72,000 (12,000/20,000)
Total
Direct labor hours
Overhead rate

$140,000
15,000
43,200
$198,200
8,000 hours
$24.775

86. FairfieldCompanyallocatescommonBuildingDepartmentcoststoproducingdepartments(P1andP2)basedonspaceoccupie
d,anditallocatescommonPersonnelDepartmentcostsbasedonthenumberofemployees.Spaceoccupancyandemployeedata
areasfollows:
Spaceoccupied
Employees

Building
2,000ft.
6

Personnel
10,000ft.
10

Dept.P1
120,000ft.
80

Dept.P2
70,000ft.
50

IfFairfieldCompanyusesthedirectallocationmethod,theratiorepresentingtheportionofbuildingcostsallocatedtoDepartment
P1is
a.190,000/202,000.
b.2,000/120,000.
c.120,000/202,000.
d.120,000/190,000.

Chapter 7: Allocating Costs of Support Departments and Joint Products

ANSWER: d

Chapter 7: Allocating Costs of Support Departments and Joint Products

87. EvergreenCompanyhastwosupportdepartments(S1andS2)andtwoproducingdepartments(P1andP2).
DepartmentS1costsareallocatedonthebasisofnumberofemployees,andDepartmentS2costsareallocatedonthebasisofspac
eoccupiedexpressedinsquarefeet.
Dataondirectdepartmentcosts,numberofemployees,andspaceoccupiedareasfollows:

Directdept.costs
Numberofemployees
Spaceoccupied(sq.ft.)

S1
$7,500
10
1,000

S2
$11,000
5
500

P1
$27,500
20
1,500

P2
$30,000
25
2,500

IfEvergreenusesthedirectmethod,theratiorepresentingtheportionofDepartmentS2allocatedtoP1is
a.1,500/5,000.
b.1,500/4,000.
c.1,500/5,500.
d.1,500/2,000.
ANSWER: b

Figure7-6
GoldenLeavesCompanyhastwosupportdepartments,MaintenanceDepartment(MD)andPersonnelDepartment(PD),andt
woproducingdepartments,P1andP2.TheMaintenanceDepartmentcostsof$30,000areallocatedonthebasisofstandardse
rviceused.ThePersonnelDepartmentcostsof$4,500areallocatedonthebasisofnumberofemployees.ThedirectcostsofDe
partmentsP1andP2are$9,000and$15,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standard service hours used

Number of employees
Direct labor hours

MD
100
10

PD
50
20

P1
300
90

P2
150
90

50

50

250

250

88. RefertoFigure7-6.Usingthedirectmethod,thecostoftheMaintenanceDepartmentallocatedtoDepartmentP1
is
a.$15,000.
b.$10,000.
c.$20,000.
d.$30,000.
ANSWER:
c
RATIONALE:

Chapter 7: Allocating Costs of Support Departments and Joint Products

SUPPORTINGCALCULATIONS:300/450$30,000=$20,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

89. RefertoFigure7-6.Usingthedirectmethod,thecostofthePersonnelDepartmentallocatedtoDepartmentP1is
a.$2,250.
b.$4,500.
c.$2,132.
d.$2,700.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:90/180$4,500=$2,250
90. RefertoFigure76.Usingthesequentialmethod,ifthesupportdepartmentwiththehighestpercentageofinterdepartmentalserviceisallocatedfir
st,thecostofthesupportdepartmentsallocatedtoDepartmentP1is
a.$12,750.
b.$24,000.
c.$21,750.
d.$20,295.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Maintenance(300/500$30,000)
Personnel[90/180($4,500+$3,000)]

$18,000
3,750
$21,750

91. RefertoFigure76.Usingthesequentialmethod,ifthesupportdepartmentwiththehighestpercentageofinterdepartmentalserviceisallocatedfir
st,thecostoftheMaintenanceDepartmentallocatedtoDepartmentP1is
a.$20,000.
b.$30,000.
c.$4,500.
d.$18,000.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:AllocateMaintenanceDepartmentfirst.Therefore,300/500$30,000=
$18,000
92. RefertoFigure76.Whatisthecombinedtotaldepartmentcostsfortheproducingdepartmentsafterallocationofthesupportdepartments?
a.$24,000
b.$34,500

Chapter 7: Allocating Costs of Support Departments and Joint Products

c.$58,500
d.$26,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$30,000+$4,500+$9,000+$15,000=$58,500

Chapter 7: Allocating Costs of Support Departments and Joint Products

93. RefertoFigure76.WhatarethetotaloverheadcostsassociatedwithP2afterallocatingtheMaintenanceandPersonnelDepartmentsusingthedir
ectmethod?
a.$37,250
b.$27,250
c.$25,000
d.$15,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
DirectcostsP2
MaintenanceDepartment($30,000150/450)
PersonnelDepartment($4,50090/180)

$15,000
10,000
2,250
$27,250

94. Andover,Inc.,hastwoproducingdepartments.Eachproducingdepartmentisheldresponsibleforashareofthecostsofasuppor
tdepartment.
Actualandbudgeteddataareasfollows:Supportdepartmenthoursused:
DepartmentX
DepartmentY
Totalhours

12,000
4,000
16,000

Supportdepartmentcosts:
Actualsupportdepartmentcosts
Budgetedfixeddepartmentcosts
Budgetedvariablerateperhour

$48,000
$20,000
$2.50

Normalsupportdepartmentusageis8,000hourseachforDepartmentXandDepartmentY.Assumingthedirectmethodisuseda
ndthepurposeisperformanceevaluation,supportdepartmentcostsallocatedtoDepartmentXare
a.$45,000.
b.$36,400.
c.$40,000.
d.$36,000.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Fixedcostsallocated[$20,000(8,000/16,000)]
Variablecostsallocated($2.5012,000)

$10,000
30,000
$40,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

95. Andover,,Inc.,hastwoproducingdepartments.Eachproducingdepartmentisheldresponsibleforashareofthecostsofasuppo
rtdepartment.
Actualandbudgeteddataareasfollows:
Supportdepartmenthoursused:
DepartmentL
DepartmentM
Totalhours

12,000
4,000
16,000

Supportdepartmentcosts:
Actualsupportdepartmentcosts
Budgetedfixeddepartmentcosts
Budgetedvariablerateperhour

$48,000
$20,000
$2.50

Normalsupportdepartmentusageis8,000hourseachforDepartmentLandDepartmentM.Assumingthedirectmethodisuseda
ndthepurposeisproductcosting,supportdepartmentcostsallocatedtoDepartmentLare
a.$30,000.
b.$20,400.
c.$24,800.
d.$20,000.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Fixedcostsallocated[$20,000(8,000/16,000)]
Variablecostsallocated($2.508,000)

$10,000
20,000
$30,000

96. AstoriaSavings&LoansofNewYorkhasthreerevenuegeneratingdepartments:Consumeraccounts,Commercialaccounts,andLoans.Thebankalsohasthreeserviceareas:administ
ration,personnel,andaccounting.Thedirectcostspermonthandtheinterdepartmentalservicestructureareshownbelow:

Dept.
Administration
Personnel
Accounting
Consumer
Commercial
Loans

Costs
$40,000
23,000
30,000
41,000
25,000
16,000

Admin.
10
10

Pers.
10
10

PercentageofServiceUsedby
Acctg.
Consumer
10
40
10
20
20

Comml
20
40
20

Loans
20
20
40

HowmuchcostwouldbeallocatedtotheCommercialaccountareafromadministrationusingthedirectmethod?
a.$40,000
b.$5,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

c.$10,000
d.$20,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:1/4$40,000=$10,000
97. Whichofthefollowingallocationmethodsassumesstepdowninterdepartmentalservices?
a. directmethod
b. sequentialmethod
c. reciprocalmethod
d. alloftheabove
ANSWER: b
98. WhichofthefollowingwouldNOTbeacriteriausedtorankdepartmentstodetermineorderofallocationunderthesequentialm
ethod?
a. Rankthesupportingdepartmentsinorderoftheamountofservicerendered,fromthegreatesttotheleast.
b. Rankthesupportingdepartmentsinorderofthesupportservicesrendered,measuredbythedirectcostsofeachsupportdep
artmentwiththedepartmentwiththehighestcostrenderingthegreatestservice.
c. Determinethetotalcostofasupportdepartment,bothdirectandallocatedfromothersupportdepartments,beforeranking.
d. Rankthesupportingdepartmentsbasedonapercentageofservicetheyrendertootherservicedepartments.
ANSWER: c
99. LennonCompanyhastwosupportdepartments,MaintenanceDepartmentandPersonnelDepartment,andtwoproducingdep
artments,XandY.TheMaintenanceDepartmentcostsof$30,000areallocatedonthebasisofstandardserviceused.ThePersonn
elDepartmentcostsof$6,000areallocatedonthebasisofnumberofemployees.ThedirectcostsofDepartmentsXandYare$18,
000and$30,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standardservicehoursused
Numberofemployees
Directlaborhours

Maint.
Dept.
100
5

Person.
Dept.
50
10

Dept.
X
300
45

Dept.
Y
150
45

50

50

250

250

PredeterminedoverheadratesforDepartmentsXandY,respectively,arebasedondirectlaborhours.
WhatistheoverheadrateforDepartmentXassumingthedirectmethodisused?
a.$47.00
b.$82.00
c.$152.00d.$164.00

Chapter 7: Allocating Costs of Support Departments and Joint Products

ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Directcosts,Dept.X
MaintenanceDepartment($30,000300/450)
PersonnelDepartment($6,00045/90)

$18,000
20,000
3,000
$41,000

$41,000/250=$164
100.

Whichofthefollowingallocationmethodsfullyrecognizesservicesthatsupportdepartmentsprovidetoeachother?
a. reciprocalmethod
b. sequentialmethod
c. directmethod
d. alloftheabove

ANSWER: a
101.
TheSavingsBankofSarasotahasthreerevenuegeneratingdepartments:checkingaccounts,savingsaccounts,andloans.Thebankalsohasthreeserviceareas:administration,
personnel,andaccounting.Thedirectcostspermonthandtheinterdepartmentalservicestructureareshownbelow:
PercentageofServiceUsedby
Pers.
Acctg.
Check.
10
10
40
10
20
10
20

Dept.
Costs
Admin.
Sav.
Loans
Administration
$40,000
20
20
Personnel
23,000
10
40
20
Accounting
30,000
10
20
40
Checking
41,000
Savings
25,000
Loans
16,000
TheSavingsBankofSarasotausesthesequential(step)methodandtheservicedepartmentsareallocatedinthefollowingorder:
administration,personnel,andaccounting.Howmuchcostwouldbeallocatedtotheloanareafromthepersonneldepartmentu
singthesequential/stepmethod?(Roundtotwodecimalplaces.)
a.$4,600.00
b.$6,000.00
c.$5,111.11
d.$7,666.67
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:[(0.1 $40,000)+$23,000]=$27,0002/9$27,000
=$6,000.00

Chapter 7: Allocating Costs of Support Departments and Joint Products

102.
Tec-ProCompanyhastwosupportdepartments(S1andS2)andtwoproducingdepartments(P1andP2).
DepartmentS1costsareallocatedonthebasisofnumberofemployees,andDepartmentS2costsareallocatedonthebasisofspac
eoccupiedexpressedinsquarefeet.
Dataondirectdepartmentcosts,numberofemployees,andspaceoccupiedareasfollows:
Directdept.costs
Numberofemployees
Spaceoccupied(sq.ft.)

S1
$7,500
10
1,000

S2
$11,000
5
500

P1
$27,500
20
1,500

P2
$30,000
25
2,500

WhenTecProusesthesequentialmethod,thesupportdepartmentallocatedfirstistheonewiththehighestpercentageofinterdepartment
alservice.ThechoiceofthedepartmentallocatedfirstisdeterminedbythecomparisonofthefollowingratioforS1andS2,resp
ectively:
a.5/50;1,000/5,000
b.5/60;1,000/5,500
c.10/50;1,000/5,000
d.10/55;500/4,500
ANSWER: a
103.
McHughCompanyallocatescommonBuildingDepartmentcoststoproducingdepartments(P1andP2)basedonspac
eoccupied,anditallocatescommonPersonnelDepartmentcostsbasedonthenumberofemployees.Spaceoccupancyandempl
oyeedataareasfollows:

Spaceoccupied
Employees

Building
2,000ft.
6

Personnel
10,000ft.
10

Dept.P1
120,000ft.
80

Dept.P2
70,000ft.
50

IfMcHughCompanyusesthesequentialallocationmethodandthesupportdepartmentwiththehighestpercentage
ofinterdepartmentalservicesisallocatedfirst,theratiorepresentingtheportionofPersonnelDepartmentcostsallocatedtoDepa
rtmentP2is
a.50/130.
b.90/140.
c.50/140.
d.50/146.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:AllocateBuildingDepartmentfirst,therefore,50/130

Chapter 7: Allocating Costs of Support Departments and Joint Products

104.
RodriguezManufacturingpricesitsproductsatfullcostplus40percent.Thecompanyoperatestwosupportdepartme
ntsandtwoproducingdepartments.Budgetedcostsandnormalactivitylevelsareasfollows:

Overhead costs
Square feet
Number of employees
Direct labor hours
Machine hours

Support Departments
A
B
$20,000
$50,000
2,000
2,400
20
30
-

Producing Departments
C
D
$90,000
$120,000
4,000
12,000
60
40
10,000
6,400
6,000
10,800

SupportDepartmentA'scostsareallocatedbasedonsquarefeet,andSupportDepartmentB'scostsareallocatedbasedonnum
berofemployees.DepartmentCusesdirectlaborhourstoassignoverheadcoststoproducts,whileDepartmentDusesmachi
nehours.
Oneoftheproductsthecompanyproducesrequires4directlaborhoursperunitinDepartmentCandnotimeinDepartmentD.Di
rectmaterialsfortheproductcost$45perunit,anddirectlaboris$20perunit.
Ifthesequentialmethodofallocationisusedandthecompanyfollowsitsusualpricingpolicy,thesellingpriceoftheproductwoul
dbe(roundserviceallocationstothenearestwholedollarandthecostsperunittotwodecimalplaces)
a.$113.52.
b.$159.38.
c.$108.46.
d.$162.52.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:DepartmentBisallocatedfirstbecauseithasthelargestservicedepart
mentcost,$50,000.

Allocate service department costs

Dept. B {$50,000 [60/(20 + 60 + 40)]}
Dept. A {($20,000 + $8,333) [4,000/(4,000 + 12,000)]}
Predetermined overhead rate ($122,083/10,000)
Product selling price:
Direct materials
Direct labor
Overhead ($12.21 4 DLH)
Cost per unit
Selling price ($113.84 140%) = $159.38

Producing Dept. C
$ 90,000
25,000
7,083
$122,083
$12.21 per DLH
$ 45.00
20.00
48.84
$113.84

Chapter 7: Allocating Costs of Support Departments and Joint Products

105.
OxideCompanyhastwosupportdepartments(S1andS2)andtwoproducingdepartments(XandY).DepartmentS1se
rvesDepartmentsS2,X,andYinthefollowingpercentages,respectively:10%,35%,55%.DepartmentS2servesDepartmentsS
1,X,andYinthefollowingpercentages,respectively:6%,50%,and44%.DirectdepartmentcostsforS1,S2,X,andYare$15,000
,$8,000,$105,000,and$97,500,respectively.
WhatisS1'scostequation?
a.S1=$8,000+0.10S2
b.S1=$8,000+0.06S2
c.S1=$15,000+0.10S2
d.S1=$15,000+0.06S2
ANSWER: d
106.
OxideCompanyhastwosupportdepartments(S1andS2)andtwoproducingdepartments(XandY).DepartmentS1se
rvesDepartmentsS2,X,andYinthefollowingpercentages,respectively:10%,35%,55%.DepartmentS2servesDepartmentsS
1,X,andYinthefollowingpercentages,respectively:6%,50%,and44%.DirectdepartmentcostsforS1,S2,X,andYare$15,000
,$8,000,$105,000,and$97,500,respectively.
WhatisS2'scostequation?
a.S2=$8,000+0.10S1
b.S2=$8,000+0.06S1
c.S2=$15,000+0.10S1
d.S2=$15,000+0.06S1
ANSWER: a
107.
HunghiCompanyhasthreesupportdepartmentswhosedirectdepartmentcostsare$35,000,$45,000,and$55,000,res
pectively,andtwoproducingdepartmentswhosedirectdepartmentcostsare$400,000and$360,000,respectively.Thecombine
dtotaldepartmentcostfortheproducingdepartmentsafterallocationofthesupportdepartmentsis
a.$360,000.
b.$760,000.
c.$895,000.
d.$135,000.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$35,000+$45,000+$55,000+$400,000+$360,000
=$895,000

Chapter 7: Allocating Costs of Support Departments and Joint Products

108.
HowardCompanyhastwosupportdepartments(S1andS2)andtwoproducingdepartments(P1andP2).
DepartmentS1costsareallocatedonthebasisofnumberofemployees,andDepartmentS2costsareallocatedonthebasisofspa
ceoccupiedexpressedinsquarefeet.
Dataondirectdepartmentcosts,numberofemployees,andspaceoccupiedareasfollows:

Directdept.costs
Numberofemployees
Spaceoccupied(sq.ft.)

S1
$7,500
10
1,000

S2
$11,000
5
500

P1
$27,500
20
1,500

P2
$30,000
25
2,500

IfHowardusedthereciprocalmethod,thealgebraicequationexpressingthetotalcostsallocatedfromS1is
a.S1 =$7,500+ 0.10S2.
b.S1 =$7,500 +0.20S2.
c.S1 =$10,000 + 0.20S2.
d.S1 = $10,000+ 0.10S2.
ANSWER: b
109.
AboundCompanyhastwosupportdepartments(S1andS2)andtwoproducingdepartments(XandY).
DepartmentS1servesDepartmentsS2,X,andYinthefollowingpercentages,respectively:10%,35%,55%.DepartmentS2ser
vesDepartmentsS1,X,andYinthefollowingpercentages,respectively:6%,50%,and44%.DirectdepartmentcostsforS1,S
2,X,andYare$15,000,$8,000,$105,000,and$97,500,respectively.
WhatarethetotalcoststobeallocatedfromDepartmentS1?
a.$15,573
b. $800
c. $9,500
d.$15,000
ANSWER:
a
RATIONALE:
S1 = $15,000 + 0.06S2
S2 = $8,000 + 0.10S1
S1 = $15,000 + 0.06($8,000 + 0.10S1)
S1 = $15,480 + 0.006
S1 0.994S1 = $15,480
S1 = $15,573

SUPPORTING CALCULATIONS:

Chapter 7: Allocating Costs of Support Departments and Joint Products

110.
AboundCompanyhastwosupportdepartments(S1andS2)andtwoproducingdepartments(XandY).
DepartmentS1servesDepartmentsS2,X,andYinthefollowingpercentages,respectively:10%,35%,55%.DepartmentS2ser
vesDepartmentsS1,X,andYinthefollowingpercentages,respectively:6%,50%,and44%.DirectdepartmentcostsforS1,S
2,X,andYare$15,000,$8,000,$105,000,and$97,500,respectively.
WhatarethetotalcoststobeallocatedfromDepartmentS2?
a.$8,000
b.$9,557
c. $900
d.$15,573
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:S2=$8,000+0.10($15,573)=$9,557

111.

ThefollowinginformationpertainstoAmonSchrockCorporation:

Budgetedoverhead
Directlaborhours
Machinehours
Numberofemployees

SupportDepartments
Personnel
Maintenance
$80,000
$144,000
4,000
5,000
16
20

ProducingDepartments
Fabrication
Assembly
$280,000
$320,000
16,000
20,000
24,000
16,000
60
100

AmonSchrockCorporationdoesnotdividecostsintofixedandvariablecomponents.Personnelcostsareallocatedbasedonthe
numberofemployees,andmaintenancecostsareallocatedbasedonmachinehours.
Predeterminedoverheadratesforfabricationandassemblyarebasedondirectlaborhours.
Ifthedirectmethodisusedtoallocatesupportdepartmentcosts,thepredeterminedoverheadratefortheFabricationDepartmen
t(roundedtotwodecimalplaces)is
a.$28.80.
b.$24.78.
c.$7.28.
d.$5.40.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Fabrication
$280,000
Maintenance (24,000/40,000 144,000)
86,400
Personnel (60/160 80,000)
30,000
Total
396,400
Direct labor hours
16,000 hours
Overhead rate
$24.78

Chapter 7: Allocating Costs of Support Departments and Joint Products

112.
ElyCompanyhastwosupportdepartments,MaintenanceDepartmentandPersonnelDepartment,andtwoprodu
cingdepartments,XandY.TheMaintenanceDepartmentcostsof$60,000areallocatedonthebasisofstandardservicehours
used.ThePersonnelDepartmentcostsof$9,000areallocatedonthebasisofnumberofemployees.ThedirectcostsofDepart
mentsXandYare$18,000and$30,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standardservicehoursused
Numberofemployees
Directlaborhours

Maint.
Dept.
100
5
50

Person.
Dept.
50
10
50

Dept.
X
300
45
250

Dept.
Y
150
45
250

PredeterminedoverheadratesforDepartmentsXandY,respectively,arebasedondirectlaborhours.
WhatistheoverheadrateforDepartmentYassumingthedirectmethodisused?
a.$109.00
b.$120.00
c.$250.00
d.$218.00
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Directcosts,DepartmentY
MaintenanceDepartment($60,000150/450)
PersonnelDepartment($9,00045/90)
$54,500/250=$218

$30,000
20,000
4,500
$54,500

Chapter 7: Allocating Costs of Support Departments and Joint Products

113.
MortonManufacturingCompanyhastwosupportdepartments,MaintenanceDepartmentandPersonnelDepartment
,andtwoproducingdepartments,XandY.TheMaintenanceDepartmentcostsof$90,000areallocatedonthebasisofstandardse
rvicehoursused.ThePersonnelDepartmentcostsof$13,500areallocatedonthebasisofnumberofemployees.Thedirectcostso
fDepartmentsXandYare$27,000and$45,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standardservicehoursused
Numberofemployees
Directlaborhours

Maint.
Dept.
200
25
250

Person.
Dept.
150
50
250

Dept.
X
1,200
75
1,000

Dept.
Y
600
75
500

PredeterminedoverheadratesforDepartmentsXandY,respectively,arebasedondirectlaborhours.
WhatistheoverheadrateforDepartmentXassumingthedirectmethodisused?
a.$27.00
b.$81.00
c.$46.88
d.$93.75
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Directcosts,Dept.X
MaintenanceDepartment($90,0001,200/1,800)
PersonnelDepartment($13,50075/150)
$93,750/1,000=$93.75

$27,000
60,000
6,750
$93,750

Chapter 7: Allocating Costs of Support Departments and Joint Products

114.
AllianceManufacturingCompanyhastwosupportdepartments,MaintenanceDepartmentandPersonnelDepartme
nt,andtwoproducingdepartments,XandY.TheMaintenanceDepartmentcostsof$90,000areallocatedonthebasisofstandard
servicehoursused.ThePersonnelDepartmentcostsof$13,500areallocatedonthebasisofnumberofemployees.Thedirectcost
sofDepartmentsXandYare$27,000and$45,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standardservicehoursused
Numberofemployees
Directlaborhours

Maint.
Dept.
200
25
250

Person.
Dept.
150
50
250

Dept.
X
1,200
75
1,000

Dept.
Y
600
75
500

PredeterminedoverheadratesforDepartmentsXandY,respectively,arebasedondirectlaborhours.
WhatistheoverheadrateforDepartmentYassumingthedirectmethodisused?
a.$90.00
b.$163.50
c.$187.50
d.$81.75
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Directcosts,Dept.Y
MaintenanceDepartment($90,000600/1,800)
PersonnelDepartment($13,50075/150)
$81,750/500=$163.50

$45,000
30,000
6,750
$81,750

Chapter 7: Allocating Costs of Support Departments and Joint Products

115.
SantiagoManufacturingpricesitsproductsatfullcostplus40percent.Thecompanyoperatestwosupportdepartmen
tsandtwoproducingdepartments.Budgetedcostsandnormalactivitylevelsareasfollows:

Overhead costs
Square feet
Number of employees
Direct labor hours
Machine hours

Support Departments
A
B
$20,000
$50,000
2,000
2,400
20
30
-

Producing Departments
C
D
$90,000
$120,000
4,000
12,000
60
40
10,000
6,400
6,000
10,800

SupportDepartmentA'scostsareallocatedbasedonsquarefeet,andSupportDepartmentB'scostsareallocatedbasedonnum
berofemployees.DepartmentCusesdirectlaborhourstoassignoverheadcoststoproducts,whileDepartmentDusesmachi
nehours.
Oneoftheproductsthecompanyproducesrequires4directlaborhoursperunitinDepartmentCandnotimeinDepartmentD.Di
rectmaterialsfortheproductcost$45perunit,anddirectlaboris$20perunit.
Ifthedirectmethodofallocationisusedandthecompanyfollowsitsusualpricingpolicy,thesellingpriceoftheproductwouldbe
a.$102.00.
b.$111.00.
c.$115.00.
d.$161.00.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
ProducingDept.C
Overheadcosts
Dept.A[$20,000(4,000/16,000)]
Dept.B[$50,000(60/100)]

$ 90,000
5,000
30,000
$125,000

Predeterminedoverheadrate($125,000/10,000)

$12.50perDLH

Productsellingprice:
Directmaterials
Directlabor
Overhead($12.504DLH)
Costperunit
Sellingprice ($115140%)=$161.00

$45.00
20.00
50.00
$115.00

116.
GravityCompanyhastwosupportdepartments,MaintenanceDepartment(MD)andPersonnelDepartment(PD),a
ndtwoproducingdepartments,P1andP2.TheMaintenanceDepartmentcostsof$120,000areallocatedonthebasisofstandard
servicehoursused.ThePersonnelDepartmentcostsof$18,000areallocatedonthebasisofnumberofemployees.Thedirectcos
tsofDepartmentsP1andP2are$36,000and$60,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standard service hours used

Number of employees
Direct labor hours

Maint.
Dept.
400
20
200

Person.
Dept.
200
40
200

Dept.
P1
1,200
180
1,000

Dept.
P2
600
180
1,000

WhatarethetotaloverheadcostsassociatedwithP1afterallocatingtheMaintenanceandPersonnelDepartmentsusingthedirec
tmethod?
a.$120,000
b.$125,000
c.$36,000
d.$18,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Directcosts,P1
MaintenanceDepartment($120,0001,200/1,800)
PersonnelDepartment($18,000180/360)

$ 36,000
80,000
9,000
$125,000

117.
HotchkissCompanyhastwosupportdepartments,MaintenanceDepartment(MD)andPersonnelDepartment(PD)
,andtwoproducingdepartments,P1andP2.TheMaintenanceDepartmentcostsof$90,000areallocatedonthebasisofstandar
dservicehoursused.ThePersonnelDepartmentcostsof$9,000areallocatedonthebasisofnumberofemployees.Thedirectcos
tsofDepartmentsP1andP2are$36,000and$60,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standard servicehoursused
Numberofemployees
Directlaborhours

Maint
.Dept
.

Person.
Dept.

400
20
200

200
40
200

Dept.
P1

Dept.
P2

1,200
180
1,000

600
180
1,000

WhatarethetotaloverheadcostsassociatedwithP2afterallocatingtheMaintenanceandPersonnelDepartmentsusingthedirec
tmethod?
a.$48,000
b.$90,000
c.$94,500
d.$99,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Directcosts,P2
MaintenanceDepartment($90,000600/1,800)
PersonnelDepartment($9,000180/360)

$ 60,000
30,000
4,500
$94,500

118.
DianesPotteryManufacturingCompanyhastwosupportdepartments,MaintenanceDepartmentandPersonnelD
epartment,andtwoproducingdepartments,XandY.TheMaintenanceDepartmentcostsof$30,000areallocatedonthebasiso
fstandardservicehoursused.ThePersonnelDepartmentcostsof$4,500areallocatedonthebasisofnumberofemployees.The
directcostsofDepartmentsXandYare$9,000and$15,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standardservicehoursused
Numberofemployees
Directlaborhours

Maint.
Dept.
100
50
125

Person.
Dept.
75
100
125

Dept.
X
600
150
500

Dept.
Y
300
150
250

WhatarethetotaloverheadcostsassociatedwithDepartmentXafterallocatingtheMaintenanceandPersonnel
Departmentsusingthedirectmethod?
a.$31,250
b.$29,000
c.$11,250
d.$9,000
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Directcosts,DeptX
MaintenanceDepartment($30,000600/900)
PersonnelDepartment($4,500150/300)

$9,000
20,000
2,250
$31,250

119.
DianesPotteryManufacturingCompanyhastwosupportdepartments,MaintenanceDepartmentandPersonnelD
epartment,andtwoproducingdepartments,XandY.TheMaintenanceDepartmentcostsof$30,000areallocatedonthebasiso
fstandardservicehoursused.ThePersonnelDepartmentcostsof$4,500areallocatedonthebasisofnumberofemployees.The
directcostsofDepartmentsXandYare$9,000and$15,000,respectively.
Dataonstandardservicehoursandnumberofemployeesareasfollows:

Standardservicehoursused
Numberofemployees
Directlaborhours

Maint.
Dept.
100
50
125

Person.
Dept.
75
100
125

Dept.
X
600
150
500

Dept.
Y
300
150
250

WhatarethetotaloverheadcostsassociatedwithDepartmentYafterallocatingtheMaintenanceandPersonnel
Departmentsusingthedirectmethod?
a.$15,000
b.$27,250
c.$25,000
d.$17,250
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Directcosts,DeptY
MaintenanceDepartment($30,000300/900)
PersonnelDepartment($4,500150/300)

$15,000
10,000
2,250
$27,250

120.
JuliusManufacturingpricesitsproductsatfullcostplus30percent.Thecompanyoperatestwosupportdepartmentsa
ndtwoproducingdepartments.Budgetedcostsandnormalactivitylevelsareasfollows:

Overhead costs
Square feet
Number of employees
Direct labor hours
Machine hours

Support Departments
A
B
$40,000
$100,000
1,000
1,200
20
30
-

Producing Departments
C
D
$180,000
$240,000
2,000
6,000
60
40
10,000
6,400
6,000
10,800

SupportDepartmentA'scostsareallocatedbasedonsquarefeet,andSupportDepartmentB'scostsareallocatedbasedonnum
berofemployees.
DepartmentCusesdirectlaborhourstoassignoverheadcoststoproducts,whileDepartmentDusesmachinehours.
Oneoftheproductsthecompanyproducesrequires4directlaborhoursperunitinDepartmentCandnotimeinDepartmentD.Di
rectmaterialsfortheproductcost$180perunit,anddirectlaboris$80perunit.
Ifthedirectmethodofallocationisusedandthecompanyfollowsitsusualpricingpolicy,thesellingpriceoftheproductwouldbe
a.$260.00.
b.$431.60.
c.$468.00
d.$332.00.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
ProducingDept.C

Overheadcosts

$180,000

Dept.A[$40,000(2,000/8,000)]
Dept.B[$100,000(60/100)]

10,000
60,000
$250,000

Predeterminedoverheadrate($250,000/10,000)
Productsellingprice:
Directmaterials
Directlabor
Overhead($25.004DLH)
Costperunit
Sellingprice($360130%)=$468

$25.00perDLH
$180
80
100
$360

121.
Productswithsubstantialvaluewhichareproducedsimultaneouslybythesameprocessuptoasplitoffpointarecalled:
a. Jointproducts
b. Minorproducts
c. By-products
d. Bothaandb
ANSWER: a
122.

Thecostofcrudeoilusedinproducinggasolineproductsisanexampleof
a. jointcosts.
b. aby-product.
c. jointproducts.
d. commoncostallocation.

ANSWER: a
123.

Jointcostsare
a. separable.
b. allocatedonthebasisofcauseandeffectrelationships.
c. allocatedarbitrarily.
d. alloftheabove.

ANSWER: c
124.

Thesplit-offpointcanbestbedefinedas
a. thepointatwhichasecondaryproductisrecoveredinthecourseofmanufacturingaprimaryproduct.
b. thepointatwhichjointproductsbecomeseparateandidentifiable.
c. thepointintheproductionprocesswherenofurtherprocessingisneeded.
d. thepointatwhichyoucangetmoreofoneproductandlessofanotherproduct.

ANSWER: b
125.

Jointcostsareallocatedbecauseof
a. financialreportingrequirements.
b. taxreportingrequirements.
c. IMArequirements.
d. bothbanda.

ANSWER: d

126.

Asecondaryproductrecoveredinthecourseofmanufacturingaprimaryproductduringajointprocessiscalleda:
a. mainproduct
b. jointproduct
c. by-product
d. bothaandc

ANSWER: c
127.

Whichofthefollowingisaby-product?
a. lumber
b. freshfish
c. wholemilk
d. sawdust

ANSWER: d
128.

Whichofthefollowingwouldgenerallybeaby-product?
a. cannedfish
b. hamburger
c. cowhides
d. pineapples

ANSWER: c
129.

Whichofthefollowingmethodsallocatesjointproductioncostsbasedonthepoundsofproductproduced?
a. sales-value-at-split-offmethod
b. physicalunitsmethod
c. constantgrossmarginpercentagemethod
d. replacementcostmethod

ANSWER: b
130.
Ajointcostallocationmethodthatwouldassignthesameamountofcostperunittotwojointproductsthatsellfor
$10and$40,respectively,isthe
a. sales-value-at-split-offmethod.
b. directallocationmethod.
c. netrealizablevaluemethod.
d. physicalunitmethod.
ANSWER: d

131.

Whichjointcostallocationmethodisdescribedbythefollowingstatement?

Jointcostisproratedtotheproductsonthebasisofeachproduct'sshareofunits.
a. physicalunitsmethod
b. weightedaveragemethod
c. sales-value-at-split-offmethod
d. netrealizablevaluemethod
ANSWER: a
132.
LaredoCorporation,whichmanufacturesproductsW,X,Y,andZthroughajointprocesscosting$24,000,hasthefoll
owingdatafor2016:

Product
W
X
Y
Z

UnitsProduced
10,000
6,000
16,000
8,000

TotalSalesValue
atSplit-Off
$5,000
2,500
3,000
4,500

WhatistheamountofjointcostsassignedtoproductWusingthephysicalunitsmethod?
a.$6,000
b.$8,000
c.$16,000
d.$18,000
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:10,000/40,000$24,000=$6,000
133.
RestaurantProductsproducestwoproducts,XandY,inasingleprocess.In2011,thejointcostsofthisprocesswere$25
,000.Inaddition,4,000unitsofXand6,000unitsofYwereproduced.SeparableprocessingcostsbeyondthesplitoffpointwereX-$10,000;Y-$20,000.Xsellsfor$10.00perunit;Ysellsfor$7.50perunit.
WhatamountofjointcostswillbeallocatedtoProductXusingthephysicalunitsmethod?
a.$-0b.$10,000
c.$25,000
d.$15,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:4,000/10,000$25,000=$10,000

134.
DeliProductsproducestwoproducts,XandY,inasingleprocess.In2011,thejointcostsofthisprocesswere
$25,000.Inaddition,4,000unitsofXand6,000unitsofYwereproducedandsold.Separableprocessingcostsbeyondthesplitoffpointwere:X-$10,000;Y-$20,000.Xsellsfor$10.00perunit;Ysellsfor$7.50perunit.
WhatisthegrossprofitofproductYassumingthephysicalunitsmethodisused?
SUPPORTINGCALCULATIONS:Jointcostallocation(6,000/10,000$25,000)=$15,000Grossprofit[(6,000$7.50)$20,000-$15,000]=$10,000
a.$25,000
b.$-0c.$10,000
d.$15,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:Jointcostallocation(6,000/10,000$25,000)=$15,000Grossprofit
[(6,000$7.50)-$20,000-$15,000]=$10,000
135.

Whichjointcostallocationmethodisdescribedbythefollowingstatement?

Eachproductisassignedaweightingfactorwhichismultipliedbythenumberofunits.Jointcostisproratedtotheproductsontheb
asisofeachproduct'sshareoftotalweightedunits.
a. physicalunitsmethod
b. weightedaveragemethod
c. sales-value-at-split-offmethod
d. netrealizablevaluemethod
ANSWER: b
136.
Supposethatasawmillprocesseslogsintofourgradesoflumbertotaling500,000boardfeetasfollowsatajointcostof$
300,000:
Grade
Firstandsecond
No.1common
No.2common
No.3common

BoardFeet
75,000
200,000
100,000
125,000

FinalSalesValue
$56,250
180,000
105,000
127,500

Whatamountofjointcostswillbeallocatedtofirstandsecondusingthephysicalunitsmethod?
a.$300,000
b.$45,000
c.$36,000
d.$225,000
ANSWER:

RATIONALE: SUPPORTINGCALCULATIONS:(75,000/500,000)$300,000=$45,000

137.
ImpactoCorporationproducesfourproductsinajointprocessfor$650,000.Thefollowinginformationisavailableo
ntotalsalesandproductioninunits:
Products
I
L
E
S

Sales
1,000
2,000
3,000
4,000

Production
4,000
5,000
7,000
8,000

WhatamountofjointcostswillbeallocatedtoIbasedonthephysicalunitsmethod?
a.$100,000
b.$650,000
c.$108,355
d.$300,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:4,000/24,000=0.16670.1667$650,000=$108,355
138.

Thesales-value-at-split-offmethodallocatesjointproductioncostsbasedoneachproduct'sshareof
a. salesvaluerevenueshavenotbeenrealizedatthesplit-offpoint.
b. costsrealizedatthesplit-offpoint.
c. finalsalesvaluelessfurtherprocessingcostsafterthesplit-offpoint.
d. unitsproducedatthesplit-offpoint.

ANSWER: a
139.

HibernationCompanyincurred$500,000tomanufacturethefollowingproductsinajointprocess:

Product
I
J
K
L

UnitsProduced
1,250
2,500
3,750
5,000

WeightperUnit
8 lbs.
6 lbs.
4 lbs.
2 lbs.

SellingPrice
perUnit
$5
10
10
5

HowmuchjointcostwouldbeallocatedtoProductIbasedonthephysicalunitsmethod?
a.$50,000
b.$450,000
c.$33,333
d.$500,000
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:1,250/12,500$500,000=$50,000

140.
CumadinCorporation,whichmanufacturesproductsW,X,Y,andZthroughajointprocesscosting$18,000,hasthe
followingdatafor2016:

Product
W
X
Y
Z

Units Produced
10,000
6,000
16,000
8,000

Sales Value
at Split-Off
$5,000
2,500
3,000
4,500

WhatistheamountofjointcostsassignedtoProductXusingthesales-value-at-split-offmethod?
a.$18,000
b.$3,000
c.$10,000
d.$2,700
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$2,500/$15,000$18,000=$3,000

141.
CumadinCorporation,whichmanufacturesProductsW,X,Y,andZthroughajointprocesscosting$18,000,hasthe
followingdatafor2016:
Sales Value
Product
Units Produced
at Split-Off
W
10,000
$5,000
X
6,000
2,500
Y
16,000
3,000
Z
8,000
4,500
WhatistheamountofjointcostsassignedtoProductYusingthesales-value-at-split-offmethod?
a.$3,600
b.$7,200
c.$18,000
d.$1,200
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:$3,000/$15,000$18,000=$3,600

142.

FosterCompanyincurred$200,000tomanufacturethefollowingproductsinajointprocess:
Selling Price
Product
Units Produced
Weight per Unit
per Unit
I
500
8 lbs.
$5
J
1,000
6 lbs.
10
K
1,500
4 lbs.
10
L
2,000
2 lbs.
5

HowmuchjointcostwouldbeallocatedtoProductKbasedonthetotalsalesvaluemethod?
a.$13,334
b.$80,000
c.$26,666
d.$60,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
I:
J:
K:
L:

500 $5 =
1,000 $10 =
1,500 $10 =
2,000 $5 =

$ 2,500
10,000
15,000
10,000
$37,500

($15,000/$37,500)$200,000=$80,000
143.
SupposethataPlywoodmanufacturerprocesseswoodpulpintofourgradesofPlywoodtotaling500,000boardfeetasf
ollowsatajointcostof$450,000:
Grade
Firstandsecond
No.1common
No.2common
No.3common

BoardFeet
75,000
200,000
100,000
125,000

FinalSalesValue
$56,250
180,000
105,000
127,500

WhatamountofjointcostswillbeallocatedtoNo.1commonusingthefinalsalesvaluemethod?
a.$172,800
b.$450,000
c.$80,000
d.$24,000
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:($180,000/$468,750)$450,000=$172,800

144.
Whichofthefollowingmethodsallocatesjointproductioncostsbasedontheirproportionateshareofeventualrevenue
lessfurtherprocessingcosts?
a. sales-value-at-split-offmethod
b. netrealizablevaluemethod
c. physicalunitsmethod
d. replacementcostmethod
ANSWER: b
145.
AlgonquinProductsproducestwoproducts,XandY,inasingleprocess.In2011,thejointcostsofthisprocesswere$25
,000.Inaddition,4,000unitsofXand6,000unitsofYwereproduced.Separableprocessingcostsbeyondthesplitoffpointwere:X-$10,000;Y-$20,000.Xsellsfor$10.00perunit;Ysellsfor$7.50perunit.
WhatamountofjointcostswillbeallocatedtoproductXusingthenetrealizablevaluenetrealizablevaluemethod?a.$11,765
b.$40,000
c.$39,000
d.$13,636
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
X: (4,000 $10.00) $10,000 =
Y: (6,000 $7.50) $20,000=

$30,000
25,000
$55,000

$30,000/$55,000$25,000=$13,636
146.
AlgonquinProductsproducestwoproducts,XandY,inasingleprocess.In2011,thejointcostsofthisprocesswere$25
,000.Inaddition,4,000unitsofXand6,000unitsofYwereproduced.SeparableprocessingcostsbeyondthesplitoffpointwereX-$10,000;Y-$20,000.Xsellsfor$10.00perunit;Ysellsfor$7.50perunit.
WhatisthegrossprofitofproductYassumingthenetrealizablevaluemethodisused?
a.$45,000
b.$16,364
c.$13,636
d.$30,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
Jointcostallocation:($25,000/$55,000$25,000)=$11,364
Grossprofit:[(6,000$7.50)-$20,000-$11,364]=$13,636

147.
?

Whichofthefollowingmethodsallocatesajointcostsuchthateachproducthasthesamecostofgoodssoldpercentage
a. constantgrossmarginpercentagemethod
b. netrealizablevaluemethod
c. physicalunitsmethod
d. replacementcostmethod

ANSWER: a
148.

Whichjointcostallocationmethodisdescribedbythefollowingstatement?

Overallsalesrevenueminusoverallcosts(jointplusfurtherprocessingcosts)iscalculatedtoyieldgrossprofitandthegrossprofi
tpercentage.Eachproductisthenassignedthesamecostofgoodssoldpercentage.
a. constantgrossmarginmethod
b. weightedaveragemethod
c. sales-value-at-split-offmethod
d. netrealizablemethod
ANSWER: a

Figure7-7
GardenofEdenCompanymanufacturestwoproducts,BrightsandDulls,fromajointprocess.Aproductionruncosts$50,000an
dresultsin250unitsofBrightsand1,000unitsofDulls.Bothproductsmustbeprocessedpastthesplitoffpoint,incurringseparablecostsforBrightsof$60perunitand$40perunitforDulls.Themarketpriceis
$250forBrightsand$200forDulls.
149.

RefertoFigure7-7.WhatistheamountofjointcostsallocatedtoBrightsusingthenetrealizablevaluemethod?

a.$11,446
b.$11,906
c.$50,000
d.$-0ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Brights[250($250-$60)]
Dulls [1,000($200$40)]
($47,500/$207,500)$50,000=$11,446

$ 47,500
160,000
$207,500

150.

RefertoFigure7-7.WhatisthegrossprofitforBrightsassumingthephysicalunitsmethodisused?

a.$62,500
b.$12,500
c.$37,500
d.$47,500
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:250/1,250$50,000=$10,000250($250-$60)-$10,000
=$37,500
151.

RefertoFigure7-7.WhatisthegrossprofitforBrightsassumingthenetrealizablevaluemethodisused?

a.$36,054
b.$11,446
c.$47,500
d.$62,500
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:250($250-$60)-$11,446=$36,054
152.

RefertoFigure7-7.WhatistheamountofjointcostsallocatedtoDullsusingthephysicalunitsmethod?

a.$50,000
b.$160,000
c.$38,554
d.$40,000
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:1,000/1,250$50,000=$40,000

153.
RefertoFigure77.WhatistheamountofjointcostsallocatedtoDullsusingtheconstantgrossmarginpercentagemethod?
a.$15,000
b.$10,000
c.$50,000
d.$40,000
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Revenues:
(250$250)+ (1,000$200)=$262,500
Costs:

(250$60)+(1,000$40)+$50,000=$105,000

COGSPercentage=$105,000/$262,500=40%(1,000 $200 40%)-$40,000=$40,000

154.

RefertoFigure7-7.WhatisthegrossprofitforDullsassumingtheconstantgrossmarginpercentagemethodisused?

a.$120,000
b.$150,000
c.$37,500
d.$200,000
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Revenues(1,000 $200)

$200,000

COGS($200,00040%)

80,000

GrossProfit

$120,000

155.
CarsonWoodProductsprocesseslogsintofourgradesoflumbertotaling500,000boardfeetasfollowsatajointcostof
$300,000:
Grade
Firstandsecond
No.1common
No.2common
No.3common

BoardFeet
75,000
200,000
100,000
125,000

FinalSalesValue
$56,250
180,000
105,000
127,500

WhatamountofjointcostswillbeallocatedtoNo.2commonusingtheconstantgrossmarginpercentagemethod?
a.$300,000
b.$67,200
c.$37,800
d.$192,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Revenues:
$468,750
Costs:

$300,000

COGSpercentage:($300,000/$468,750)=64%
$105,0000.64=$67,200

156.
CarsonWoodProductsprocesseslogsintofourgradesoflumbertotaling500,000boardfeetasfollowsatajointcost
of$300,000:
Grade
Firstandsecond
No.1common
No.2common
No.3common

BoardFeet
75,000
200,000
100,000
125,000

FinalSalesValue
$56,250
180,000
105,000
127,500

WhatisthegrossprofitofNo.3commoniftheconstantgrossmarginpercentagemethodisused?
a.$135,000
b.$81,600
c.$45,900
d.$168,750
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
COGSPercentage($300,000/$468,750)=64%
$127,5000.36=$45,900
157.

Somesupportdepartmentstypicallyfoundinmanufacturingandnonmanufacturingorganizationsareasfollows:

Cafeteria
Personnel
Maintenance
Purchasing
Accounting
Required:
Foreachoftheprecedingsupportdepartments,indicatepotentialbasesthatcouldbeusedtoallocatecoststotheproducingdep
artments.
ANSWER: Cafeteria:

Numberofemployeesineachdepartment
Numberofemployeesineachdepartmentthatusethecafeteria

Personnel:

Numberofemployees Numberoffiringsorlayoffs Numberofnewhires

Directlaborcosts

Maintenance:

Numberofrepairorders
Numberofmachinehours Maintenancehours

Purchasing:

Numberofordersplaced
Costoforders Accounting: Numberoftransactions

158.

Describethedifferencesbetweensupportandproducingdepartments.Givethreeexamplesofeach.

ANSWER:Supportdepartmentsprovideessentialsupportservicesforproducingdepartments.Thesedepartmentsareindirectl
yconnectedwithanorganization'sservicesorproducts.Examples:Maintenance,Grounds,Engineering,Houseke
eping,andPersonnel.
Producingdepartmentsaredirectlyresponsibleforcreatingtheproductsorservicessoldtocustomers.Examples:Mix
ing,Grinding,Assembly,Finishing,andCooking.
159.
ConsequencePrintingoperatesaGraphicsbusinessattwodifferentlocations.ConsequencePrintinghasonesupportd
epartmentthatisresponsibleforcleaning,service,andmaintenanceofitsprintingequipment.Thecostsofthesupportdepartmen
tareallocatedtoeachGraphicsCenteronthebasisoftotalprintsmade.
Duringthefirstmonth,thecostsofthesupportdepartmentwereexpectedtobe$100,000.Ofthisamount,
$30,000isconsideredafixedcost.Duringthemonth,thesupportdepartmentincurredactualvariablecostsof$64,000andactu
alfixedcostsof$36,000.
Normalandactualactivity(printsmade)areasfollows:

Normalactivity(graphics)
Actualactivity(graphics)
Required:

GraphicsCenter1
3,000,000
2,500,000

GraphicsCenter2
2,000,000
2,200,000

a. Forpurposesofperformanceevaluation,calculatethefixedcostsallocatedtoGraphicsCenter1.
b. Forpurposesofperformanceevaluation,calculatethefixedcostsallocatedtoGraphicsCenter2.
c. CalculatethesupportdepartmentcostsnotallocatedtothetwoGraphicsCenters.
ANSWER:
a. $30,000(3,000,000/5,000,000)=$18,000
b. $30,000(2,000,000/5,000,000)=$12,000
c.

Fixed overhead not allocated to copy centers:

($36,000 - $30,000)
Variable costs not allocated:
$70,000/(3,000,000 + 2,000,000) = $0.014
[$64,000 - ($0.014 4,700,000)]

$6,000
(1,800)
$4,200

160.
SilverChariotsTruckingCompanyincurred$5,000ofindirectadvertisingcostsforitsoperations.Thefollowingd
atahavebeencollectedfor2016foritsthreedepartments:

Sales
Direct advertising costs
Newspaper ad space

New Trucks
$50,000
$2,500
60%

Used Trucks
$35,000
$2,000
35%

Parts and Service

$15,000
$500
5%

ethecostsassignedtoeachdepartmentusingthefollowingactivitydrivers:
a. Sales
b. Directadvertisingcosts
c. Newspaperadspace
Direct Newspaper

ANSWER:

Sales
NewTrucks
UsedTrucks
Parts&services

Total
$50,000
35,000
15,000
$100,000

%
50%
35%
15%
100%

Advertising
Total
$2,500
2,000
500
$5,000

%
50%
40%
10%
100%

a.

NewTrucks
UsedTrucks
Partsandservices

$5,0000.50=
5,000 0.35=
5,000 0.15=

$2,500
1,750
750
$5,000

b.

NewTrucks
UsedTrucks
Partsandservice

$5,0000.50=
5,000 0.40=
5,000 0.10=

$2,500
2,000
500
$5,000

c.

NewTrucks
UsedTrucks
Partsandservice

$5,0000.60=
5,000 0.35=
5,000 0.05=

$3,000
1,750
250
$5,000

Space
%
60%
35%
5%
100%

Determin

161.
CitizensBankhastwobanklocations:MainandSuburbs.Thecentralofficeprovidescheckprocessingservicesforthetwobanks.Informationpertainingtothebanksisasfollows:

Budgetedfixedcosts
Budgetedvariablerateperhour
Normalusageinhours
Actualfixedcosts
Actualvariablecosts
Actualusageinhours
Required:

CheckProcessing
$100,000
$20
-

Main
600

$107,500
$ 17,500
-

550

Suburbs
400
25

a. Usethedirectmethodtoallocatethecheckprocessingcentercoststoeachbanktoprovideinformationforsettingservicecharges.
b. Usethedirectmethodtoallocatethecheckprocessingcentercoststoeachbankforperformanceevaluationpurposes.
c. DeterminethecostsofthecheckprocessingcenterNOTallocatedtothetwobanks.Whywerethesecostsnotallocatedtotheoperatingunits?
ANSWER:
a.

Main
Variablecostsallocated:
($20 600hours)
($20 400hours)

Suburbs

$12,000
$8,000

Fixedcostsallocated:
[(600hours/1,000hours) $100,000]
[(400hours/1,000hours)$100,000]

60,000
$72,000

b.

Main
Variablecostsallocated:
($20 550hours)
($20 250hours)

40,000
$48,000
Rural

$11,000
$5,000

Fixedcostsallocated:
[(600hours/1,000hours)$100,000]
[(400hours/1,000hours)$100,000]

60,000
$71,000

40,000
$45,000

c.
Actualcostsincurred

($107,500+$17,500)
($71,000+$45,000)

$125,000Totalcostsallocated
116,000
$9,000

Thesupportdepartmentischargedwith$9,000sothattheinefficienciesofthesupportdepartmentarenotpassedontoo
therdepartments.

162.
Describethedifferencesbetweenthedirect,sequentialandreciprocalmethodsofallocatingsupportdepartmentco
ststoproductiondepartments.
ANSWER:
Thedirectmethodofallocationallocatessupportdepartmentcostsonlytoproducingdepartments;noconsidera
tionismadeoftheinteractionofthesupportdepartments.Itisthesimplestandmoststraightforwardmethod,ho
weverthedegreeofinteractionbetweensupportdepartmentsmayaffecttheresultsusingthismethodology.
Underthesequentialmethod,interactionamongthesupportdepartmentsisrecognized.Costallocationsareperfor
medinastepdownfashion,followingapredeterminedrankingprocedure.First,thehighestrankingsupportdep
artmentisallocatedtoalltheremainingsupportdepartmentsandproductiondepartments.Thenthenexthighestr
ankingsupportdepartmentisallocatedtoalltheremainingdepartments.Thiscontinuesuntilallsupportdepartm
entshavebeenallocated.Thismethoddoesnotfullyrecognizesupportdepartmentinteraction.
Thereciprocalmethodrecognizesallsupportdepartmentinteractions.Theusageofonesupportdepartmentbyano
therisusedtodeterminethetotalcostofeachsupportdepartment.Thereciprocalmethodmaybetheoreticallyth
emostprecise,butifresultsdonotdiffersignificantlyfromresultsachievedusingothermethods,itmaynotbewo
rththeextracostandeffort.
163.
ArcticTundraCompanyhastwosupportdepartments(S1andS2)andtwoproducingdepartments(P1andP2).
Estimateddirectcostsandpercentagesofservicesusedbythesedepartmentsareasfollows:
Used by Department
Support Dept.
S1
S2
P1
P2
10%
40%
50%
S1
20%
50%
30%
S2
$4,500
$8,000
$10,000
$15,000
Direct costs
a. Prepareascheduleallocatingthesupportdepartmentcoststotheproducingdepartmentsusingthedirectallocationmeth
od.
b. Prepareascheduleallocatingthesupportdepartmentcoststotheproducingdepartmentsusingthesequentialallocation
method.
ANSWER:
a. Support Dept.
S1
S2
P1
P2
Direct costs
$4,500
$8,000
$10,000
$15,000
S1 allocation*
(4,500)
2,000
2,500
S2 allocation**
(8,000)
5,000
3,000
$ -0$ -0$17,000
$20,500
* 4/9 to P1, 5/9 to P2
** 5/8 to P1, 3/8 to P2
b.

Support Dept.
Direct costs
S2 allocation*
S1 allocation**

S1
$ 4,500
1,600
(6,100)
$ -0-

* 0.20 to S1, 0.50 to P1, and 0.30 to P2

** 4/9 to P1, 5/9 to P2

S2
$8,000
(8,000)
$ -0-

P1
$10,000
4,000
2,711
$16,711

P2
$15,000
2,400
3,389
$20,789

164.
Albemarle,Inc.,hastwoproducingdepartments.Eachproducingdepartmentisheldrespo
nsibleforashareofthecostsofasupportdepartment.
Actualandbudgeteddataareasfollows:
2011
Support department hours used:
Department X
Department Y
Total hours

8,000
16,000
24,000

Support department costs:

Actual support department costs
Budgeted fixed
a. service center costs
Budgeted variable rate per hour
Variable costs allocated:
Normalsupp
($20 600 hours)
s12,000ho
ntXandDe

Main

ortdepartmentusagei
urseachforDepartme
partmentY.

$12,000

($20 400 hours)

Required:
a.
eisprodu
costsoft
tusingth
b.
eistoeva
ocatethe
partmen

$72,000
$24,000
Suburbs
$3.00

$ 8,000

Fixed costs allocated:

[(600 hours/1,000 hours) $100,000]

60,000

[(400 hours/1,000 hours) $100,000]

ANSWER:

Assumingthepurpos
ctcosting,allocatethe
hesupportdepartmen
edirectmethod.
Assumingthepurpos
luateperformance,all
40,000 costsofthesupportde
t.

$72,000

$48,000

Main

Rural

b.
Variable costs allocated:
($20 550 hours)
c.

($20 250 hours)

Actual costs incurred

$11,000

$ 5,000

($107,500 + $17,500)

$125,000
Fixedcosts
costsallocated
allocated:
Total

($71,000 + $45,000)

[(600 hours/1,000 hours) $100,000]

60,000

116,000

$ 9,000
40,000

[(400 hours/1,000 hours) $100,000]

$71,000

$45,000

The support department is charged with $9,000 so that the inefficiencies of

the support department are not passed on to other departments.
165.
ChromeEnterpriseshastwosupportdepartments(S1andS2)andtwoproducing(AandB).Th
edistributionofservicesbythesupportdepartmentsisasfollows:
Services Provided to
Services Provided from
S1
S2
A
8%
74%
S1
21%
47%
S2
Totaldepartmentcostsforthesupportandproducingdepartmentsareasfollows:
S1
S2
A
B
Required:

B
18%
32%

$58,000
124,000
712,000
568,000

FindtheamountoftotalcostsforAandBusingthereciprocalmethod.
ANSWER: S1 =$58,000 +0.21S2
S1=$58,000+0.21($124,000+0.08S1)
0.9832S1=$84,040
S1=$85,476
S2 =$124,000 +0.08S1
S2=$124,000+0.08($85,476)
S2= $130,838
S1
$58,000
(85,476)
27,476
$ -0-

Direct costs
Allocate S1
Allocate S2

S2
$124,000
6,838
(130,838)
$ -0-

A
$712,000
63,252
61,494
$836,746

B
$568,000
15,386
41,868
$625,254

166.
EagleCompanyappliesfactoryoverheadinitstwoproducingdepartmentsusingapredeterminedratebasedonbudge
tedmachinehoursintheBlendingDepartmentandbasedonbudgetedlaborhoursintheContainerizingDepartment.Variablecaf
eteriacostsareallocatedtotheproducingdepartmentsbasedonbudgetednumberofemployees,andfixedcostsareallocatedba
sedonthecapacitynumberofemployees.Variablemaintenancecostsareallocatedonthebudgetednumberofdirectlaborhours
,andfixedcostsareallocatedonlaborhourcapacity.Thedataconcerningnextyear'soperationsareasfollows:

Budgetedcosts:
Variablecosts
Fixedcosts

SupportDepartments
Cafeteria
Maintenance
$60,000
$84,000
18,000
30,000

Other data:
Direct labor hours (capacity)
Direct labor hours (budgeted)
Number of employees (capacity)
Number of employees (budgeted)

ProducingDepartments
Blending
Containerizing
$300,000
$324,000
120,000
140,000

10,000
8,000
30
20

20,000
16,000
60
40

Machine hours (capacity)

Machine hours (budgeted)

33,000
20,000

66,000
60,000

Required:
a. Prepareascheduleshowingtheallocationofbudgetedsupportdepartmentcoststoproducingdepartments.
b. Determinethepredeterminedoverheadratefortheproducingdepartments.
ANSWER:
a.
Budgeted costs:
Variable costs

Support Departments
Cafeteria
Maintenance
$60,000

Producing Departments
Blending
Containerizing

$84,000

$300,000

$324,000

Var. cost allocations:

Cafeteria:
$60,000 (20/60)
$60,000 (40/60)
Maintenance:
$84,000 (8/24)
$84,000 (16/24)
Fixed costs

(60,000)
20,000
40,000
(84,000)
28,000
56,000
18,000

30,000

120,000

140,000

Fixed cost allocations:

Cafeteria:
$18,000 (30/90)
$18,000 (60/90)
Maintenance:
$30,000 (10/30)
$30,000 (20/30)
Total budgeted OH
after allocations

(18,000)
6,000
12,000
(30,000)
10,000
20,000
$ -0-

$ -0-

$484,000

$592,000

b.
1.

Budgetedproducingdept.overhead

ProducingDepartments
Blending
Containerizing
$484,000
$592,000

2.

Budgetedactivitylevel

20,000MH

16,000DLH

3.

Budgetedoverheadrate(1)/(2)

$24.20/MH

$37.00/DLH

167.
McDuffCompanyusesajobordercostingsystemtocomputeproductcosts.Therearetwoproducingdepartments(P1andP2)andtwosupportdepartments(
S1andS2).ThecostsincurredinS1andS2areallocatedto
DepartmentsAandBandincludedintheirfactoryoverheadratesforcostingproducts.S1costsareallocatedbasedonthenumbe
rofemployees,S2costsareallocatedbasedondirectlaborhours,andtheproductiondepartmentaloverheadratesarealsobase
dondirectlaborhours.Thefollowingdataareavailableforarecentperiod:
S1
$12,000
8
450

S2
$18,000
12
325

P1
$70,000
48
2,250

P2
$117,500
72
1,800

Directdepartmentcosts
Numberofemployees
Directlaborhours
Required:
a. Prepareascheduleallocatingthesupportdepartmentcoststotheproducingdepartmentsusingthesequentialallocationme
thod.Thedepartmentwiththegreatestpercentageofinterdepartmentalservicesshouldbeallocatedfirst.
b. DeterminetheoverheadratesperdirectlaborhourforP1andP2.
c. JobA2wascompletedduringtheperiodatacostof$26,000fordirectmaterialsanddirectlaborcosts.Thisjobrequired21dir
ectlaborhoursinDepartmentP1and15directlaborhoursinDepartmentP2.WhatwasthetotalcostofJobA2?

a.

ANSWER:
Determination of order of allocation:
S1 = 12/(12 + 48 + 72) = 9.09%
S2 = 450/(450 + 2,250 + 1,800) = 10%
S2 is allocated first.
S2 allocation:
Total
4,500
100%
$18,000

Allocation base (DLH)

Percent of total base
Cost allocation

S1
450
10%
$1,800

P1
2,250
50%
$9,000

P2
1,800
40%
$7,200

48
40%
$5,520

72
60%
$8,280

S1 allocation:
Alloc. base
(# employed)
Percent of total base
Cost allocation

120
100%
$13,800

Cost allocation summary:

Dept. costs
Cost allocations:
S2
S1
Department costs
after allocation

S1
$12,000

S2
$18,000

P1
$70,000

P2
$117,500

Total
$217,500

1,800
(13,800)

(18,000)
-

9,000
5,520

7,200
8,280

$84,520

$132,980

$217,500

-0-

-0-

b.

Total (1)
Allocation base (DLH) (2)
Factory overhead per DLH ((1)/(2))

$84,520
2,250
$ 37.56

c.

Direct materials and direct labor

Department A factory overhead (21 hours $37.56)
Department B factory overhead (15 hours $73.88)
Total cost of Job A2

$132,980
1,800
$ 73.88
$26,000.00
788.76
1,108.20
$27,896.96

168.
MainstreamCorporationmanufacturestwoproducts,IandII,fromajointprocess.Aproductionruncosts$20,000and
resultsin500unitsofIand2,000unitsofII.
Bothproductsmustbeprocessedpastthesplitoffpoint,incurringseparablecostsof$5perunitforIand$10perunitforII.Themarketpriceis$25forIand$20forII.
Required:
a. Allocatejointproductioncoststoeachproductusingthephysicalunitsmethod.
b. Allocatejointproductioncoststoeachproductusingthenetrealizablevaluemethod.
c. Allocatejointproductioncoststoeachproductusingtheconstantgrossmarginpercentagemethod.
ANSWER:
a.
I
II

b.
I
II

Units
500
2,000
2,500
Sales
$12,500
40,000

Fraction
5/25 $20,000 =
20/25 $20,000 =
Sep. Costs
$ 2,500
$20,000

I: $10,000/$30,000 $20,000 = $6,667

II: $20,000/$30,000 $20,000 = $13,333
c.

Sales (500 $25) + (2,000 $20) = $52,500

Costs (500 $5) + (2,000 $10) + $20,000 = $42,500
COGS Percentage = $42,500/$52,500 = 80.9524%
I: (500 $25 80.9524%) - $2,500 = $7,619.05
II: (2,000 $20 80.9524%) - $20,000 = $12,380.96

Allocation
$ 4,000
$16,000
NRV
$10,000
$20,000

Fraction
$10,000/$30,000
$20,000/$30,000

169.
SoyProductsproducestwoproducts,SoyburgersandSoysteaks,inasingleprocess.In2016,thejointcostsofthi
sprocesswere$36,000.Inaddition,20,000poundsofsoyburgersand10,000poundsofsoysteakswereproduced.Separab
leprocessingcostsbeyondthesplit-offpointwere:soyburgers,$7,500;soysteaks,
$4,500.Soyburgerssellsfor$2perpound;Soysteakssellsfor$4perpound.
Required:
a. Allocatethejointcostsusingthenetrealizablevaluemethod.
b. Allocatethejointcostsusingthephysicalunitsmethod.
ANSWER:
a.
Soyburgers
Soy Steaks

Sales
$40,000
$40,000

Sep. Costs
$7,500
$4,500

NRV
$32,500
35,500
$68,000

Fraction
$32,500/$680,000
$35,500/$680,000

Soyburgers ($32,500/$68,000) $36,000 = $17,206

Soy Steaks ($35,500/$68,000) $36,000 = $18,794
b.
Soyburgers
Soy Steaks

Units
20,000
10,000
30,000

Fraction
20,000/30,000 $36,000 =
10,000/30,000 $36,000 =

Allocation
$24,000
$12,000

170.
HendersonCompanypaysaflatfeeof$500fortherighttoretrievestraygolfballsfromlakesandpondsatgolfand
countryclubs.Therecoveredballsarethencleaned,gradedastoquality(birdie,bogey,orduffer),andsoldtosportinggood
sstoresatthefollowingpricesperdozen:birdiequality,$5;bogeyquality,$4;anddufferquality,
$3.Lastmonth$8,000ofcostwasincurredretrievingthefollowingquantitiesofgolfballs:birdiequality,1,000dozen;boge
yquality,3,000dozen;anddufferquality,2,000dozen.
Required:(Calculaterelativequantitytothreedecimalpoints.)
a. Determinethecostandgrossprofitpercentforeachtypeofgolfballusingthephysicalunitsmethodofjointcostallocat
ion.
b. Repeatpart(a)usingthesales-value-at-split-offmethodofjointcostallocation.
c. Thecompanyhasanopportunitytosellbogeyqualityballsfor$4.50perdozentoacompanythatoperatesgolfdrivingr
anges;however,theballswillhavetobepaintedandstriped.Thecompanyestimatesthatthecostofpaintingandstripi
ngwillbe60centsperdozen.Assumingthephysicalunitmethodisusedtoallocatejointcosts,shouldtheofferbeacce
pted?
ANSWER:
a.

Product
Birdies
Bogeys
Duffers
Total

(Dozens)
1,000
3,000
2,000
6,000

Quantity
0.167
0.500
0.333
1.000

Birdies

Bogeys

JointCost
$8,000 =
$8,000 =
$8,000 =

Allocation
$1,336
4,000
2,664
$8,000

Duffers

Total

Unitsales(dozens)

1,000

3,000

2,000

Salesprice/dozen

$5.00

$4.00

$3.00

$5,000
1,336
$3,664

$12,000
4,000
$8,000

$6,000
2,664
$3,336

73.28%

66.67%

55.60%

Sales
Jointcosts
Grossprofit
Grossprofit%
b.

Relative
Sales Value
$ 5,000
12,000
6,000
$23,000

Sales Value
0.22
0.52
0.26
1.00

Joint Cost
$8,000 =
$8,000 =
$8,000 =

Sales
Joint costs
Gross profit

Birdies
$5,000
1,760
$3,240

Bogeys
$12,000
4,160
$ 7,840

Duffers
$6,000
2,080
$3,920

Total
$23,000
8,000
$15,000

Gross profit %

64.800%

65.333%

65.333%

65.217%

Product
Birdies
Bogeys
Duffers

Allocation
$1,760
4,160
2,080
$8,000

c.
Thedecisiontoaccepttheofferisnotaffectedbytheallocationofjointcosts,onlytherelevantrevenuesa
ndcostsaftersplit-off.Sincetherelevantrevenuefromfurtherprocessingis50cents($4.50$4.00)perunitandtherelevantcostis60centsperunitforpaintingandstriping,thenetcostoffurtherproc
essingis10centsperdozen.Theoffershouldnotbeaccepted.
171.

Compareandcontrastthevariousmethodsofaccountingforjointproductcosts.

ANSWER: Jointproductsaretwoormoreproductsproducedsimultaneouslybythesameprocessuptoaspitoffpoint.Thisisthepointwherejointproductsbecomeseparableandidentifiable.Separablecostsaftersplitoffcanbeeasilytracedtoindividualproducts.Allocationofjointproductioncostsmustbeallocatedforfinanci
alreportingpurposes.Allocationmethodsforjointproductioncostsmustbemadeonareasonablebasisi.e.ph
ysicalunitsmethod,weightedaveragemethod,salesvalueatsplitoffmethod,thenetrealizablevaluemethodandtheconstantgrossmarginmethod.
Inthephysicalunitsmethodallocationismadeinproportiontosomephysicaluniti.e.pounds,gallons,tons,feet.T
hismethodassumesthateachunitofmaterialinthefinalproductcostsjustasmuchtoproduceasanyother.Th
eweightedaveragemethodtriestoovercomethisbyassigningweightfactors.Theotherallocationmethodsa
ssumethatjointproductioncostsshouldbeallocatedtoindividualproductsaccordingtotheirabilitytoabsorbj
ointcosts.Thesalesatsplit-offallocatesjointproductioncostsbasedontheproportionvalueatsplitoff.Whenthesalesvalueatsplitoffisnotknown,thenetrealizablevaluecanbecalculated.Thenetrealizablemethoddistributesthejointprod
uctioncostsinproportiontothenetrealizablevalue.Theconstantgrossmarginmethodallocatesjointcostsso
thatthegrossmarginpercentageisthesameforeachproduct.Ithastheadvantageofnotmakingoneproductm
oreprofitablethananother.
172.

SaturnCompanymanufacturesproductsX,Y,andZinajointprocess.Thefollowinginformationisavailable:

Units produced
Sales value
at split-off
Joint costs
Sales value if
processed further
Additional cost if
processed further

X
12,000

Products
Y
?

Z
?

Total
24,000

?
$48,000

?
?

$50,000
?

$200,000
$150,000

$110,000

$90,000

$60,000

$260,000

$18,000

$14,000

$10,000

$42,000

Jointproductcostsareallocatedusingthesalesvalueatsplit-offapproach.
Required:
a. Whatisthesales-value-at-split-offforProductX?
b. WhatistheamountofjointcostsallocatedtoProductYusingthesales-value-at-split-offmethod?
c. Ifthecompanyusedthephysicalunitsmethodtoallocatejointcost,howmuchjointcostwouldbeallocatedtoProduct
X?
ANSWER:

a. $48,000/$150,000$200,000=$64,000
b. {$150,000-$48,000-[($50,000/$200,000)$150,000]}=$64,500
c. 12,000/24,000$150,000=$75,000
173.
Vladimir,Inc.beganthecurrentperiodwithnoinventories.Duringtheperiod,itprocessed50,000poundsofmat
erialscosting$450,000.Conversioncostsincurredduringtheperiodamountedto$660,000.Thefirmendedtheperiodwith
nowork-inprocess.Duringtheperiod,thefirmproduced16,000,24,000,and10,000unitsofX,Y,andZ,respectively.Allcostsarecon
sideredjointcosts.Thefirmsold12,000unitsofX,16,000unitsofY,and9,000unitsofZ.Xsellsfor$30perunit,Yfor$44pe
runit,andZfor$4perunit.Thefirmusesthenetrealizablevaluemethodforcostallocation.Zisconsideredaby-product.
Required:
a. Discussthefollowingmethodstoaccountforby-products:
otherincome
replacementcost
jointcostproration
b. Givethreeexamplesofby-products.
ANSWER:
Otherincomeisanoncostmethodinwhichanyrevenuefromthesaleofthebyproductisshownontheincomestatementas"otherincome."
Replacementcostisacostmethodusedwhenthebyproductcansubstituteforanotherresourceusedinproduction.Thebyproductiscostedatthevalueoftheresourcereplaced.
Jointcostprorationiswhenoneofthejointcostallocationmethodsisusedtoallocateaportionofjointcoststo
theby-product.
Sawdust,cowhides,fertilizers,etc.

174.
MandalaInc.obtainstwoproductsandaby-productfromitsproductionprocess.Byproductrevenuesaretreatedasotherincomeandanoncostapproachisusedtoassigncoststothem.Duringtheperiod,1,20
0unitswereprocessedatacostof$12,000formaterialsandconversioncosts,resultinginthefollowing:

Product
X
Y
By-product

Sales Value
Units
200
400
150

Costs after
at Separation
$4,000
5,000
500

Final
Separation
$2,000
6,000
500

Value
$10,000
12,000
1,500

Required:
a. Accountforallcostsusingaphysicalbasisforallocation.
b. Accountforallcostsusingnetrealizablevalueasthebasisforallocation.
c. Accountforallcostsusingfinalsalesvalueasthebasisforallocation.
d. Howmuchjointcostsshouldbeallocatedtotheby-product?
ANSWER:
a.

b.

c.

Product
X
Y

Units
200
400

Fraction
2/6
4/6

Allocation
$ 4,000
8,000

Product
X
Y

Allocation
$ 4,000
8,000
$12,000

Sep. Costs
$2,000
6,000

Total
$ 6,000
14,000
$20,000

Product
X
Y

Sales
$10,000
12,000
$22,000

Sep. Costs
$2,000
6,000
$8,000

NRV
$ 8,000
6,000
$14,000

Product
X
Y

Allocation
$ 6,857
5,143
$12,000

Sep. Costs
$2,000
6,000
$8,000

Total
$ 8,857
11,143
$20,000

Product
X
Y

Sales
$10,000
$12,000

Fraction
10/22
12/22

Allocation
$5,455
6,545

Product
X
B

d.

Allocation
Sep. Costs
Total
$ 5,455
$2,000
$ 7,455
6,545
6,000
12,545
$12,000
$20,000
None of the cost of the joint costs should be assigned to the by-product.

Chapter 8
1. Abudgetisafinancialplanforthefutureusedforplanning,controlling,anddecisionmaking.
a. True
b. False

Fraction
8/14
6/14

ANSWER: True
2. Budgetingmeanstosetstandards,receivefeedback,andexecutingcorrectiveaction.
a. True
b. False
ANSWER: False
3. Thebudgetdirectorisresponsiblefordirectingandcoordinatingthebudgetingprocess.
a. True
b. False
ANSWER: True
4. Themasterbudgetiscomposedoftheoperationsbudgetandthefuturebudget.
a. True
b. False
ANSWER: False
5. Acontinuousbudgetisamovingtwelve-monthbudget.
a. True
b. False
ANSWER: True
6. Thesalesforecastisthebasisforthesalesbudget.
a. True
b. False
ANSWER: True
7. Thesalesbudgetshowstheexpectedsalesquantityandpriceofeachproductorservice.
a. True
b. False
ANSWER: True
8. Thefirstsectionofthemasterbudgetisthefinancialbudget.
a. True
b. False
ANSWER: False

9. Theproductionbudgetdescribeshowmanyunitsmustbeproducedinordertomeetsalesandinventoryneeds.
a. True
b. False
ANSWER: True
10. Inafor-profitservicefirm,thesalesbudgetisalsotheproductionbudget.
a. True
b. False
ANSWER: True
11. Oncealltheoperatingbudgetshavebeencompleted,thenetincomecanbeestimated.
a. True
b. False
ANSWER: False
12. Thecapitalexpendituresbudgetisalong-termfinancialplan.
a. True
b. False
ANSWER: True
13. Thecashbudgetistheleastprioritybudgetinthemasterbudget.
a. True
b. False
ANSWER: False
14. Thecashexcessordeficiencysectionofthecashbudgetcomparesexpectedavailablecashtotheexpectedcashneeded.
a. True
b. False
ANSWER: True
15. Thebudgetedincomestatementdependspartlyoninformationinthebudgetsinthemasterbudget.
a. True
b. False
ANSWER: False
16. Astaticbudgetisonedevelopedforasinglelevelofactivity.
a. True
b. False
ANSWER: True

17. Staticbudgetsshowcostsforvaryinglevelsofactivities.
a. True
b. False
ANSWER: False
18. Aflexiblebudgetissometimesreferredtoasavariablebudget.
a. True
b. False
ANSWER: True
19. Aflexiblebudgetcomparesactualcoststobudgetedcosts.
a. True
b. False
ANSWER: True
20. Activity-basedbudgetingrecognizesinterdependenciesamongdepartments.
a. True
b. False
ANSWER: True
21. Theactivity-basedbudgetbeginswithoutputandthendeterminestheresourcesnecessarytocreatethatoutput.
a. True
b. False
ANSWER: True
22. Anidealbudgetingsystemisonethatachievesgoalsandencouragesmanagerstoachievegoalsethically.
a. True
b. False
ANSWER: True
23. Feedbackisnotimportanttomanagersasameasuringtooloftheirperformance.
a. True
b. False
ANSWER: False
24. Incentivesarethemeansusedtoencouragemanagerstoachievegoals.
a. True
b. False
ANSWER: True

25. Participativebudgetingdetractsfromamanagerssenseofresponsibilityandcreativity.
a. True
b. False
ANSWER: False
26. Thequantitativeexpressionsofplansstatedineitherphysicalorfinancialtermsarecalle
d__________.
ANSWER: budgets
27. Theprocessofsettingstandards,receivingfeedback,andtakingcorrectiveactionwheneverperformancedeviatesfro
mstandardsiscalled__________.
ANSWER: control
28. Thebodyresponsibleforreviewingthebudget,providingpolicyguidelinesandbudgetarygoals,resolvingdiff
erencesthatmayarise,andapprovingthefinalbudgetisthe__________committee.
ANSWER: budget
29. Thecomprehensivefinancialplansmadeupofdepartmentalandactivitybudgetsareth
e__________.
ANSWER: masterbudgets
30. The

incomestatementistheculminationoftheoperatingbudget.

ANSWER: budgeted
31. Operatingexpensebudgetsincludethemarketingexpensebudgetandthe__________expensebudget.
ANSWER: administrative
32. The

budgetshowstheprojectedsalesandprices.

ANSWER: sales
33. Cashdisbursementsandcashexcessordeficiencyarecomponentsofthe__________budget.
ANSWER: cash
34. Theaccountsreceivableagingscheduleaidsindeterminingthetimingofcash__________.
ANSWER: receipts
35. Thebudgeted
period.

showsprojectedassets,liabilities,andshareholdersequityoftheendofthebudget

ANSWER: balancesheet
36. A

budgetisdevelopedaroundoneparticularlevelofactivity.

ANSWER: static

37. Volumevariancesexaminedifferencesbetweenthe

budgetandthe__________budget.

ANSWER: flexible;static
38. The budgetingthatrecognizesinterdependenciesamongdepartmentsiscalled

budgeting.

ANSWER: activity-based
39. Activity-basedbudgetsalsofocuson__________processes.
ANSWER: business
40. Whenmanagersintentionallyunderestimateoroverestimaterevenuesandcostsitiscalledbu
dgetary__________.
ANSWER: slack
41. Thequantitativeexpressionofaplanstatedineitherphysicalorfinancialtermsorbothiscalleda:
a. Costofgoodssoldstatement
b. Financialstatement
c. Budget
d. Costofgoodsmanufacturedstatement
ANSWER: c
42. WhichofthefollowingisNOTacomponentofthemasterbudget?
a. SalesBudget
b. CapitalBudget
c. CostofGoodsSoldBudget
d. BudgettoActualVarianceAnalysis
ANSWER: d
43. Whichofthefollowingstatementiscorrectregardingacontinuousbudget?
a. Thebudgetispreparedforaoneyearperiodthatcorrespondstothecompanysfiscalyear.
b. Acontinuousbudgetisamonthlybudget.
c. Asamonth/periodexpiresinthebudget,anadditionalmonth/periodinthefutureisaddedsothecompanyalwayshasa1
2-monthbudgetonhand.
d. Noneofthese
ANSWER: c
44. Controlcanbedefinedas
a. theprocessofsettingstandards,receivingfeedbackonactualperformance,andtakingcorrectiveactionwhenevera
ctualperformancedeviatessignificantlyfromplan.
b. aquantificationofplans,statedineitherphysicalorfinancialterms,orboth.
c. identificationofcorporateobjectives.

d. acomprehensivefinancialplan.
ANSWER: a

45. Whichofthefollowingisthemostcommonstartingpointintheinformationgatheringprocessforbudgeting?
a. thepersonnelforecast
b. thesalesforecast
c. theproductionforecast
d. theprojectedincomestatement
ANSWER: b
46. WhichofthefollowingisNOTanadvantageofbudgeting?
a. Itforcesmanagerstoplan.
b. Itprovidesresourceinformationthatcanbeusedtoimprovedecisionmaking.
c. Itaidsintheuseofresourcesandemployeesbysettingabenchmarkthatcanbeusedforthesubsequentevaluationofper
formance.
d. Itprovidesorganizationalindependence.
ANSWER: d
47. Theprocessofsettingstandards,receivingfeedbackonactualperformance,andtakingcorrectiveactionwheneveractu
alperformancedeviatessignificantlyfromplannedperformance.
a. Control
b. Monitoring
c. Eyeballing
d. Comparing
ANSWER: a
48. WhichofthefollowingfactorsisNOTanadvantageofpreparingoperatingbudgets?
a. Itprovidesresourceinformationthatcanbeusedtoimprovedecisionmaking.
b. Itimprovescommunicationandcoordination.
c. Itaidsintheuseofresourcesandemployeesbysettingabenchmarkthatcanbeusedforthesubsequentevaluati
onofperformance.
d. Itsavestimeandresources.
ANSWER: d
49. Thebudgetcommittee
a. hastheresponsibilitytoreviewthebudget.
b. resolvesdifferencesthatmayariseasthebudgetisprepared.
c. preparesfinancialstatementsfortheauditor.
d. bothaandb
ANSWER: d

50. Thebodythathastheresponsibilitytoreviewthebudget,providepolicyguidelinesandbudgetarygoals,resolvedifferen
cesthatmayariseasthebudgetisprepared,approvethefinalbudget,andmonitortheactualperformanceoftheorganizat
ionastheyearunfoldsiscalledthe:
a. budgetdirector
b. budgetcommittee
c. controller
d. president
ANSWER: b
51. Thebudgetsthatarecomprehensivefinancialplansmadeupofvariousindividualdepartmentalandactivitybudgetsaret
he:
a. Operatingbudgets
b. Masterbudgets
c. Financialbudgets
d. Continuousbudgets
ANSWER: b
52. Thebudgetsthatareconcernedwiththeincome-generatingactivitiesofafirmarecalledthe:
a. Operatingbudgets
b. Masterbudgets
c. Financialbudgets
d. Continuousbudgets
ANSWER: a
53. Thebudgetsthatareconcernedwiththeinflowsandoutflowsofcashandwithfinancialpositionarecalledthe:
a. Operatingbudgets
b. Masterbudgets
c. Financialbudgets
d. Continuousbudgets
ANSWER: c
54. Operatingbudgetsare
a. aforecastofexpectedoperatingexpenses.
b. aforecastofoperatingexpensesandrelatedrevenues.
c. aforecastofunitsofproduction.
d. concernedwiththeincome-generatingactivitiesofafirm.
ANSWER: d

55. Thefollowingisresponsiblefordirectingandcoordinatingtheoverallbudgetingprocess:
a. budgetcommittee
b. budgetdirector
c. president
d. treasurer
ANSWER: b
56. WheelingCompanyproducesandsellsbikes.Itexpectstosell20,000bikesinApril2016andhad1,200bikesinfinishedgo
odsinventoryattheendofMarch2016.WheelingCompanywouldliketocompleteoperationsinAprilwithatleast1,500co
mpletedbikesininventory.Thebikessellfor$100each.
WhatwouldbethetotalsalesforApril2016?
a. $1,150,000
b. $1,850,000
c. $2,000,000
d. $1,730,000
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:20,000$100=$2,000,000
57. WheelingCompanyproducesandsellsbikes.Itexpectstosell20,000bikesinApril2016andhad1,200bikesinfinished
goodsinventoryattheendofMarch2016.WheelingCompanywouldliketocompleteoperationsinAprilwithatleast1,5
00completedbikesininventory.Thebikessellfor$100each.
HowmanybikeswouldbeproducedinApril2016?
a. 20,000bikes
b. 20,300bikes
c. 19,700bikes
d. 18,800bikes
ANSWER:b
RATIONALE:SUPPORTINGCALCULATIONS:20,000+1,5001,200=20,300bikes
58. Thetypeofbudgetthatisamovingtwelve-monthbudgetiscalledthe:
a. zero-basedbudget
b. flexiblebudget
c. continuousbudget
d. bothaandb
ANSWER: c

59. Whichofthefollowingisanoperatingbudget?
a. budgetedstatementofcashflows
b. capitalexpendituresbudget
c. budgetedincomestatement
d. cashbudget
ANSWER: c
Figure8-1
ArmandoCompanyproducesandsellsmattresses.Itexpectstosell10,000mattressesintheyear2017andhad1,000matt
ressesinfinishedgoodsinventoryattheendof2016.Armandowouldliketocompleteoperationsintheyear2017withatl
east1,250completedmattressesininventory.Thereisnoendingwork-inprocessinventory.Themattressessellfor$300each.
60. RefertoFigure8-1.Whatwouldbethetotalsalesfortheyear2017?
a. $3,375,000
b. $3,675,000
c. $3,000,000
d. $3,300,000
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:10,000$300=$3,000,000
61. RefertoFigure8-1.Howmanymattresseswouldbeproducedintheyear2015?
a. 10,000mattresses
b. 11,000mattresses
c. 11,250mattresses
d. 10,250mattresses
ANSWER:d
RATIONALE:SUPPORTINGCALCULATIONS:10,000+1,2501,000=10,250mattresses
62. WhichofthefollowingisNOTaresponsibilityofthebudgetcommittee?
a. prepareactualfinancialstatements
b. providepolicyguidelines
c. providebudgetinggoals
d. resolvedifferencesthatmayariseasthebudgetisprepared
ANSWER: a

Figure8-2
AsianLampCompanymanufactureslamps.Theestimatednumberoflampsalesforthelastthreemonthsof2016areasfoll
ows:
Month
October
November
December

Sales
10,000
14,000
13,000

FinishedgoodsinventoryattheendofSeptemberwas3,000units.Endingfinishedgoodsinventoryisbudgetedtoequal25
percentofthenextmonth'ssales.AsianLampexpectstosellthelampsfor$25each.January2016salesisprojectedat16
,000lamps.
63. RefertoFigure8-2.WhatistheexpectedsalesrevenueforDecember?
a. $250,000
b. $350,000
c. $325,000
d. $100,000
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:13,000$25=$325,000
64. RefertoFigure8-2.HowmanylampsshouldbeproducedinNovember?
a. 11,000lamps
b. 10,500lamps
c. 14,000lamps
d. 13,750lamps
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:(13,000 .25)+14,000(14,000.25)=13,750lamps
65. RefertoFigure82.Ingoingfromthesalesbudgettotheproductionbudget,adjustmentstothesalesbudgetneedtobemadefor
a. finishedgoodsinventories.
b. cashreceipts.
c. factoryoverheadcosts.
d. sellingexpenses.
ANSWER: a

66. RefertoFigure8-2.HowmanylampsshouldbeproducedinOctober?
a. 10,000lamps
b. 14,000lamps
c. 9,500lamps
d. 10,500lamps
ANSWER:d
RATIONALE:SUPPORTINGCALCULATIONS:(14,000 .25)+10,0003,000=10,500lamps
67. MolinaCompanyhasthefollowingsalesforecastforthenextquarter:April,20,000units;May,24,000units;June,28,000
units.Salestotaled16,000unitsinMarch.TheMarchfinishedgoodsinventorywas4,000units.End-ofmonthfinishedgoodsinventorylevelsareplannedtobeequalto20percentofthenextmonth'splannedsales.
TheplannedendinginventoryoffinishedgoodsforMayis
a. 5,600units.
b. 4,000units.
c. 5,000units.
d. 3,200units.
ANSWER:a
RATIONALE:SUPPORTINGCALCULATIONS:28,0000.20=5,600units
68. MolinaCompanyhasthefollowingsalesforecastforthenextquarter:April,20,000units;May,24,000units;June,28,000
units.Salestotaled16,000unitsinMarch.TheMarchfinishedgoodsinventorywas4,000units.End-ofmonthfinishedgoodsinventorylevelsareplannedtobeequalto20percentofthenextmonth'splannedsales.
TheplannedproductionforBenCompanyforAprilis
a. 19,200units.
b. 20,800units.
c. 21,200units.
d. 24,800units.
ANSWER:b
RATIONALE:SUPPORTINGCALCULATIONS:20,000+(0.2024,000)4,000=20,800units

69. ThefollowingforecastedsalespertaintoAliciaCompany:
Month
April
May
June
July

Sales
$200,000
250,000
150,000
100,000

Finishedgoodsinventory asof March31

4,000units

Thecompanyhasasellingpriceof$20perunitandexpectstomaintainendinginventoriesequalto20percentofthenextm
onth'ssales.
HowmanyunitsareexpectedtobeproducedinApril?
a. 8,500units
b. 12,500units
c. 14,500units
d. 10,500units
ANSWER:a
RATIONALE:SUPPORTINGCALCULATIONS:($200,000/$20)+[($250,000/$20)0.2]4,000=8,500units
70. ThefollowingforecastedsalespertaintoRapidCity:
Month
June
July
August
September

Sales
$160,000
200,000
120,000
80,000

Finishedgoods inventory asofMay31

6,000units

RapidCityhasasellingpriceof$5perunitandexpectstomaintainendinginventoriesequalto25percentofnextmonth'ss
ales.
HowmanyunitsareexpectedtobeproducedinJune?
a. 36,000units
b. 50,000units
c. 82,000units
d. 42,000units
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:$160,000/$5+[($200,000/$5)0.25]6,000=36,000units

71. AlanaCompanymanufacturesbooks.Manufacturingabooktakes10unitsofA1and1unitofA2.Scheduledproduction
ofbooksforthenexttwomonthsis1,000and1,200units,respectively.Beginninginventoryis4,000unitsofA1and30unitso
fA2.TheendinginventoryofA1isplannedtodecrease500unitsineachofthenexttwomonths,andtheA2inventoryisexp
ectedtoincrease5unitsineachofthenexttwomonths.
HowmanyunitsofA1doesAlanaCompanyexpecttouseinproductionduringthesecondmonth?
a. 12,000units
b. 12,500units
c. 10,000units
d. 10,750units
ANSWER:a
RATIONALE:SUPPORTINGCALCULATIONS:1,20010=12,000units
72. AlanaCompanymanufacturesbooks.Manufacturingabooktakes10unitsofA1and1unitofA2.Scheduledproduction
ofbooksforthenexttwomonthsis1,000and1,200units,respectively.Beginninginventoryis4,000unitsofA1and30unitso
fA2.TheendinginventoryofA1isplannedtodecrease500unitsineachofthenexttwomonths,andtheA2inventoryisexp
ectedtoincrease5unitsineachofthenexttwomonths.
HowmanyunitsofA2areexpectedintherawmaterialinventoryattheendofthesecondmonth?
a. 30units
b. 45units
c. 40units
d. 35units
ANSWER:c
RATIONALE:SUPPORTINGCALCULATIONS:30+5+5=40units
73. AlanaCompanymanufacturesbooks.Manufacturingabooktakes10unitsofA1and1unitofA2.Scheduledproduction
ofbooksforthenexttwomonthsis1,000and1,200units,respectively.Beginninginventoryis4,000unitsofA1and30unitso
fA2.TheendinginventoryofA1isplannedtodecrease500unitsineachofthenexttwomonths,andtheA2inventoryisexp
ectedtoincrease5unitsineachofthenexttwomonths.
Basedonthisinformation,thenumberofunitsofA1thatneedstobepurchasedbyAlanaduringthefirstmonthis
a. 9,500units.
b. 10,000units.
c. 1,000units.
d. 10,500units.
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:(1,000 10)+3,5004,000=9,500units

74. ForemostCorporationmanufacturesboxes.Theestimatednumberofboxessoldforthefirstthreemonthsof2016are:
Month
January
February
March

Sales
3,000
4,200
3,900

FinishedgoodsinventoryattheendofDecemberwas900units.Endingfinishedgoodsinventoryisequalto20
percentofthenextmonth'ssales.GeneralCorporationexpectstoselltheboxesfor$5each.April2016salesisprojectedat
4,500boxes.
WhatistheexpectedsalesrevenueforMarch?
a. $15,000
b.
$
2
1,
0
0
0
c.
$19,5
00
d.
$4,50
0
ANSWER:c
RATIONALE:SUPPORTINGCALCULATIONS:3,900$5=$19,500
75. ForemostCorporationmanufacturesboxes.Theestimatednumberofboxessoldforthefirstthreemonthsof2016areasf
ollows:
Month
January
February
March

Sales
3,000
4,200
3,900

FinishedgoodsinventoryattheendofDecemberwas900units.Endingfinishedgoodsinventoryisequalto20
percentofthenextmonth'ssales.GeneralCorporationexpectstoselltheboxesfor$5each.April2016salesisprojectedat
4,500boxes.
HowmanyboxesshouldbeproducedinFebruary?

a. 4,140boxes
b. 4,200boxes
c. 4,260boxes
d. 3,900boxes
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:4,200+(0.203,900)(0.204,200)=4,140boxes

76. ForemostCorporationmanufacturesboxes.Theestimatednumberofboxessoldforthefirstthreemonthsof2016areasf
ollows:
Month
January
February
March

Sales
3,000
4,200
3,900

FinishedgoodsinventoryattheendofDecemberwas900units.Endingfinishedgoodsinventoryisequalto20
percentofthenextmonth'ssales.GeneralCorporationexpectstoselltheboxesfor$5each.April2016salesisprojectedat
4,500boxes.
HowmanyboxesshouldbeproducedinJanuary?
a. 3,060boxes
b. 2,940boxes
c. 3,000boxes
d. 3,840boxes
ANSWER:b
RATIONALE:SUPPORTINGCALCULATIONS:(0.20 4,200)+3,000900=2,940boxes

Figure8-3
RoamingVehiclesCompanymanufacturesbuggies.Manufacturingabuggytakes20unitsofwoodand1unitofsteel.Sch
eduledproductionofbuggiesforthenexttwomonthsis500and600units,respectively.Beginninginventoryis4,000un
itsofwoodand30unitsofsteel.Theendinginventoryofwoodisplannedtodecrease500unitsineachofthenexttwomo
nths,andthesteelinventoryisexpectedtoincrease5unitsineachofthenexttwomonths.
77. RefertoFigure8-3.Howmanyunitsofwoodareexpectedtobeusedinproductionduringthesecondmonth?
a. 12,500units
b. 10,000units
c. 15,000units
d. 12,000units
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:60020=12,000units
78. RefertoFigure8-3.Howmanyunitsofsteelareexpectedinthematerialinventoryattheendofthesecondmonth?
a. 30units
b. 45units
c. 40units
d. 35units
ANSWER: c

RATIONALE:SUPPORTINGCALCULATIONS:30+5+5=40units

79. RefertoFigure83.WhatisthenumberofunitsofwoodthatneedtobepurchasedbyRoamingVehiclesCompanyduringthefirstm
onth?
a. 1,000units
b. 9,500units
c. 500units
d. 10,000units
ANSWER:b
RATIONALE:SUPPORTINGCALCULATIONS:(500 20)+3,5004,000=9,500units
80. OlgasCompanyhasasalesbudgetfornextmonthof$150,000.Costofgoodssoldisexpectedtobe40percentofsales.All
goodsarepurchasedinthemonthusedandpaidforinthemonthfollowingpurchase.Thebeginninginventoryofmerchandi
seis$5,000,andanendinginventoryof$6,000isdesired.Beginningaccountspayableis
$38,000.
HowmuchmerchandiseinventorywillOlgasneedtopurchasenextmonth?
a. $61,000
b. $60,000
c. $65,000
d. $59,000
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:$60,000+$6,000$5,000=$61,000
81. OlgasCompanyhasasalesbudgetfornextmonthof$150,000.Costofgoodssoldisexpectedtobe40percentofsales.All
goodsarepurchasedinthemonthusedandpaidforinthemonthfollowingpurchase.Thebeginninginventoryofmerchandi
seis$5,000,andanendinginventoryof$6,000isdesired.Beginningaccountspayableis
$38,000.
Thecostofgoodssoldfornextmonthisexpectedtobe
a. $40,000.
b. $60,000.
c. $90,000.
d. $89,000.
ANSWER:b
RATIONALE:SUPPORTINGCALCULATIONS:$150,0000.40=$60,000

82. MoriahManufacturingCompanyexpectstoincurthefollowingperunitcostsfor1,000unitsofproduction:
Direct materials

3 lb. @ $5 = $15

Direct labor

1 hr @ $6 = $6

Variable overhead

75% of directlabor costs

Fixed overhead

50% of directlabor costs

Whatisthetotalamountofdirectlaborincludedinthedirectlaborbudget?
a. $6,000
b.$28,500
c. $6
d.$7,500
ANSWER:a
RATIONALE:SUPPORTINGCALCULATIONS:$61,000=$6,000
83.
1,000unitsofproduction:
Direct materials
Direct labor
Variable overhead
Fixed overhead

MoriahManufacturingCompanyexpectstoincurthefollowingperunitcostsfor

3 lb. @ $5 = $15
1 hr @ $6 = $6
75% of directlabor costs
50% of directlabor costs

Whatisthetotalamountofoverheadincludedintheoverheadbudget?
a. $4,500
b. $3,000
c. $11,250
d. $7,500
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:$6,000(0.75+0.50)=$7,500
84. AlphaBetaCompanyhasasalesbudgetfornextmonthof$50,000.Costofgoodssoldisexpectedtobe60percentofsales.
Allgoodsarepurchasedinthemonthusedandpaidforinthemonthfollowingtheirpurchase.Thebeginninginventoryofm
erchandiseis$1,500andanendinginventoryof$2,000isdesired.Beginningaccountspayableis$13,000.
HowmuchmerchandiseinventorywillAlphaBetaCompanyneedtopurchasenextmonth?
a. $29,000
b. $29,500
c. $30,000
d. $30,500
ANSWER:d
RATIONALE:SUPPORTINGCALCULATIONS:($50,0000.60)+$2,000$1,500=$30,500

85. AlphaBetaCompanyhasasalesbudgetfornextmonthof$50,000.Costofgoodssoldisexpectedtobe60percentofsales.
Allgoodsarepurchasedinthemonthusedandpaidforinthemonthfollowingtheirpurchase.Thebeginninginventoryofm
erchandiseis$1,500andanendinginventoryof$2,000isdesired.Beginningaccountspayableis$13,000.
Thecostofgoodssoldfornextmonthisexpectedtobe
a. $29,500.
b. $30,500.
c. $50,000.
d. $30,000.
ANSWER:d
RATIONALE:SUPPORTINGCALCULATIONS:$50,0000.60=$30,000
86. ThefollowingforecastedsalespertaintoShankarCompany:
Month
May
June
July
August

Sales
$200,000
250,000
150,000
100,000

Finished goods inventoryasof April 30

4,000units

Thecompanyhasasellingpriceof$10perunitandexpectstomaintainendinginventoriesequalto30percentofthenextmon
th'ssales.
WhatisthebudgetedbeginningbalanceinunitsforfinishedgoodsinventoryonJuly1?
a. 4,000units
b. 3,500units
c. 5,500units
d. 4,500units
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:($150,000/$10)0.30=4,500units

87. ColoradoCorporationhasthefollowingsalesforecastforthenextquarter:
July,4,000units;August,4,800units;September,5,600units
Salestotaled3,200unitsinJune.TheJuneendingfinishedgoodsinventorywas800units.End-ofmonthfinishedgoodsinventorylevelsareplannedtobeequalto30percentofnextmonth'splannedsales.
TheplannedproductionforColoradoCorporationforJulyis
a. 3,360units.
b. 4,640units.
c. 1,440units.
d. 5,440units.
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:4,000+(0.304,800)800=4,640units
88. ColoradoCorporationhasthefollowingsalesforecastforthenextquarter:
July,4,000units;August,4,800units;September,5,600units
Salestotaled3,200unitsinJune.TheJuneendingfinishedgoodsinventorywas800units.End-ofmonthfinishedgoodsinventorylevelsareplannedtobeequalto30percentofthenextmonth'splannedsales.
TheplannedendinginventoryoffinishedgoodsforAugustis
a. 1,200units.
b. 1,680units.
c. 1,460units.
d. 3,200units.
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:5,6000.30=1,680units
89. ColoradoCorporationhasthefollowingsalesforecastforthenextquarter:
July,4,000units;August,4,800units;September,5,600units
Salestotaled3,200unitsinJune.TheJuneendingfinishedgoodsinventorywas800units.End-ofmonthfinishedgoodsinventorylevelsareplannedtobeequalto30percentofthenextmonth'splannedsales.Recordssho
wedthateachunitisbudgetedat2poundsofmaterialscosting$3perpound.Directlaborwasbudgetedat.5directlaborho
ursperunitatawageof$20perhour.Budgetedvariableoverheadis$1.50perdirectlaborhour.Fixedoverheadisbudgete
dat$250,000fortheyear,and50,000unitsareexpectedtobeproduced.

AfterpreparingafinishedgoodsinventorybudgetforAugust,whatisthetotalendinginventorycost?
a. $26,100
b. $31,755
c. $69,600
d. $36,540
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:
5,600 0.30=1,680units$21.75=$36,540
DM2$3
DL.5$20

$6.00

$5.00
$21.75

=
$10.00
VOH.5$1.50
=
$0.75
FOH$250,000/50,000
Totalunitcost

90. ColoradoCorporationhasthefollowingsalesforecastforthenextquarter:
July,4,000units;August,4,800units;September,5,600units
Salestotaled3,200unitsinJune.TheJuneendingfinishedgoodsinventorywas800units.End-ofmonthfinishedgoodsinventorylevelsareplannedtobeequalto30percentofthenextmonth'splannedsales.Recordssho
wedthateachunitisbudgetedat2poundsofmaterialscosting$3perpound.Directlaborwasbudgetedat.5directlaborho
ursperunitatawageof$20perhour.Budgetedvariableoverheadis$1.50perdirectlaborhour.Fixedoverheadisbudgete
dat$250,000fortheyear,and50,000unitsareexpectedtobeproduced.
Thebeginningfinishedinventoryisvaluedat$31,320.
AfterpreparingafinishedgoodsinventorybudgetforAugust,whatisthecostofgoodssoldforAugust?
a. $104,400
b.
$109,
620
c.
$67,8
60
d.

$140,
940
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:
DM2$3
=
DL.5$20
=
VOH.5$1.50
=
FOH$250,000/50,000
=
Totalunitcost
4800$21.75

$6.00
$10.00
$0.75
$5.00
$21.75

$104,400

91. ThefollowingforecastedsalespertaintoRapidCity:
Month
June
July
August
September

Sales
$160,000
200,000
120,000
80,000

Finishedgoodsinventoryasof May 31
6,000units
RapidCityhasasellingpriceof$5perunitandexpectstomaintainendinginventoriesequalto25percentofnextmonth'ss
ales.
WhatisthebudgetedbeginningbalanceinunitsforfinishedgoodsinventoryonAugust1?
a. 8,000units
b. 6,000units
c. 10,000units
d. 6,400units
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:($120,0000.25)/$5=6,000units
92. Dali,Inc.isconstructingitsmarketingbudget.

Sales
Production

1stquarter
30,000
35,000

2ndquarter
40,000
45,000

3rdquarter
50,000
55,000

4thquarter
60,000
65,000

Commissionsare$3perunitsold.Salespersonsalariesare$100,000perquarter.Depreciationis$25,000perquarter.Tra
velis$10,000perquarter.Advertisingis$50,000inthefirstquarter;$40,000inthesecondquarter;
$60,000inthethirdquarter;and$55,000inthefourthquarter.Whatisthebudgetedmarketingexpenseforthethirdqua
rter?
a. $795,000
b. $735,000
c. $360,000
d. $345,000
ANSWER: d
RATIONALE:
Commissions$3$50,000
Salaries
Depreciation
Travel
Advertising
MarketingBudget

3rdQuarter
$150,000
$100,000
$25,000
$10,000
$60,000
$345,000

93. Inamerchandisingorganization,themerchandisepurchasesbudgetreplaceswhatbudgetfromamanufacturingfirm?
a. theadministrativeexpensebudget
b. thepro-formaincomestatement
c. theproductionbudget
d. thecostofgoodssoldbudget
ANSWER: c
94. Whatistheformulausedtocomputetheunitstobeproduced?
a. Unitsproduced=Unitssold
b. Unitsproduced=Unitssold+Unitsinbeginninginventory+Unitsinendinginventory
c. Unitsproduced=Unitssold+UnitsinbeginninginventoryUnitsinendinginventory
d. UnitsProduced=UnitssoldUnitsinbeginninginventory+Unitsinendinginventory
ANSWER: d
95. Whichofthefollowingisafinancialbudget?
a. capitalexpendituresbudget
b. salesbudget
c. budgetedincomestatement
d. overheadbudget
ANSWER: a
96. WhichofthefollowingisNOTacomponentoftheCashBudget?
a. Salesforecast
b. CashDisbursements
c. Financing
d. Cashexcessordeficiency
ANSWER: a
97. Whichofthefollowingisafinancialbudget?
a. costofgoodssoldbudget
b. budgetedbalancesheet
c. marketingexpensebudget
d. productionbudget
ANSWER: b

98. MikhailCorporationhasthefollowingsalesforecastsforthefirstthreemonthsof2016:
Month
January
February
March

Sales
$36,000
24,000
40,000

Sixty-fivepercentofsalesarecollectedinthemonthofthesaleandtheremainderarecollectedinthefollowing
month.Mikhailwillborrowfromitsbanktomaintainitsminimumcashbalance.
Accounts receivable balance (January 1, 2016)
Cashbalance (January1, 2016)
Minimumcashbalanceneeded

$16,000
12,000
20,000

WhatisthecashbalanceattheendofJanuary,assumingthatcashisreceivedonlyfromcustomersandthat
$48,000ispaidoutduringJanuary?
a. $19,400
b. $23,400
c. $20,000
d. $21,000
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:
$12,000+ $16,000 + (0.65$36,000)$48,000=
Amountborrowedtomeetminimum
Total

$3,400
20,000
$23,400

99. MikhailCorporationhasthefollowingsalesforecastsforthefirstthreemonthsof2016:
Month
January
February
March

Sales
$36,000
24,000
40,000

Sixty-fivepercentofsalesarecollectedinthemonthofthesaleandtheremainderarecollectedinthefollowing
month.
Accountsreceivablebalance(January1,2016)
$16,000Cashbalance(January1,2016)
12,000
Minimumcashbalanceis$20,000.Cashcanbeborrowedin$1,000incrementsfromthelocalbank(assumenointerestchar
ges).
HowmuchcashwouldbecollectedinMarchfromsales?
a. $32,000
b. $58,400

c. $48,000
d. $34,400
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:($40,0000.65)+($24,0000.35)=$34,400

Figure8-4
DiscusProductionsneedstoknowitsanticipatedcashinflowsforthenextquarterbymonth.Cashsalesare10percentofto
talsaleseachmonth.Historically,salesonaccounthavebeencollectedasfollows:60percentinthemonthofsale,30per
centinthemonthafterthesale,andtheremaining10percenttwomonthsafterthesale.Salesforthequarterareprojected
asfollows:April,$120,000;May,$100,000;andJune,$80,000.AccountsreceivableonMarch31were$60,000.
100.
RefertoFigure8-4.TheexpectedcashcollectionsofDiscusProductionsforJuneare
a. $48,000.
b. $98,000.
c. $68,000.
d. $89,000.
ANSWER:d
RATIONALE:SUPPORTINGCALCULATIONS:($80,0000.10)+($80,0000.900.60)+
($100,0000.900.30) + ($120,000 0.90 0.10)=$89,000
101.
RefertoFigure84.DiscusProductionswouldexpecttohaveanaccountsreceivablebalanceonJune30ofa.$37,800.
b.
$
4
2,
0
0
0.
c.
$
3
2,
0
0
0.
d.
$
2
8,
8
0
0.
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:($80,0000.900.40)+($100,0000.900.10)=$37,800
102. ShillerCorporationhasthefollowingsalesforecastsfortheselectedthree-monthperiodin2016:
Month

Sales

July
August
September

$24,000
14,000
16,000

Allsalesareonaccount.Seventypercentofsalesarecollectedinthemonthofthesale,andtheremainderarecollectedinthef
ollowingmonth.
Accountsreceivable balance (July 1, 2016)
Cashbalance(July1,2016)

$20,000
10,000

Minimumcashbalanceis$10,000.Cashcanbeborrowedin$1,000incrementsfromthelocalbank(assumenointerestchar
ges).
HowmuchcashwouldbecollectedinSeptemberfromsales?
a. $15,400
b. $17,000
c. $16,000
d. $20,000
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:($16,0000.70)+($14,0000.30)=$15,400

103. ShillerCorporationhasthefollowingsalesforecastsfortheselectedthree-monthperiodin2016:
Month
July
August
September

Sales
$24,000
14,000
16,000

Allsalesareonaccount.Seventypercentofsalesarecollectedinthemonthofthesale,andtheremainderare
collectedinthefollowingmonth.
Accountsreceivable balance (July 1,2016)
Cashbalance(July1,2016)

$20,000
10,000

Minimumcashbalanceis$10,000.Cashcanbeborrowedin$1,000incrementsfromthelocalbank(assumenointerestchar
ges).
WhatisthecashbalanceattheendofJuly,assumingthatcashisreceivedonlyfromcustomersandthat$40,000ispaidoutduri
ngJuly?
a. $20,000
b. $16,800
c. $6,800
d. $10,800
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:
$10,000+$20,000+($24,0000.70)$40,000=$6,800
Amount borrowed to meet minimum 4,000
Total $10,800
104.
NatashaCompanyhasasalesbudgetfornextmonthof$150,000.Costofgoodssoldisexpectedtobe40perce
ntofsales.Allgoodsarepurchasedinthemonthusedandpaidforinthemonthfollowingpurchase.Thebeginninginvento
ryofmerchandiseis$5,000,andanendinginventoryof$6,000isdesired.Beginningaccountspayableis
$38,000.
ForNatashaCompany,theendingaccountspayableshouldbe
a. $39,000.
b. $61,000.
c. $89,000.
d. $91,000.
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:($150,0000.40)+$6,000$5,000=$61,000

105.
QuicksandCorporationhasasalesbudgetfornextmonthof$50,000.Costofgoodssoldisexpectedtobe60perc
entofsales.Allgoodsarepurchasedinthemonthusedandpaidforinthemonthfollowingtheirpurchase.Thebeginninginv
entoryofmerchandiseis$1,500andanendinginventoryof$2,000isdesired.Beginningaccountspayableis$13,000.
TheendingaccountspayableforQuicksandCorporationshouldbe
a. $30,500.
b. $30,000.
c. $13,000.
d. $29,500.
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:($50,0000.60)+$2,000$1,500=$30,500

Figure8-5
ThefollowingforecastedsalespertaintoSpywareCorporation:
Month
Sales
September
$40,000
October
50,000
November
30,000
December
20,000
Collection pattern:
65percentinmonthofsale
35percentinmonthfollowingsale
Accounts receivable as of August 31
FinishedgoodsinventoryasofAugust31

$7,000
1,500units

SpywareCorporationhasasellingpriceof$2.50perunitandexpectstomaintainendinginventoriesequalto25percentofthe
nextmonth'ssales.
106.
RefertoFigure85.HowmanydollarsareexpectedtobecollectedinSeptember?
a. $7,000
b. $40,000
c. $33,000
d. $21,000
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:($40,0000.65)+$7,000=$33,000
107.
RefertoFigure85.HowmanydollarsareexpectedtobecollectedinDecember?
a. $30,500
b.

$37,
000
c.
$26,
500
d.
$23,
500
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:(0.65$20,000)+(0.35$30,000)=$23,500

Figure8-6
TherecordsofMorgantown,Inc.showthefollowingforecastedsales:
Month
September
October
November
December

Sales
$400,000
500,000
300,000
200,000

Collection pattern:
60percentinmonthofsale
40percentinmonthfollowingthesale
AccountsreceivableasofAugust31
$70,000FinishedgoodsinventoryasofAugust31
8,000units
Thecompanyhasasellingpriceof$10perunitandexpectstomaintainendinginventoriesequalto20percentofnextmonth'
ssales.
108.
RefertoFigure86.HowmanydollarsareexpectedtobecollectedinOctober?
a. $420,000
b. $460,000
c. $240,000
d. $510,000
ANSWER:b
RATIONALE:SUPPORTINGCALCULATIONS:($500,0000.60)+($400,0000.40)=$460,000
109.
RefertoFigure86.HowmuchisAccountsReceivableasofOctober31?
a. $420,000
b.
$460,
000
c.
$240,
000
d. noneoftheabove
ANSWER:d
RATIONALE:SUPPORTINGCALCULATIONS:($500,0000.40)=$200,000

110.
FireflyManufacturingCompanyneedstoknowitsanticipatedcashinflowsforthenextquarterbymonth.Cash
salesare20percentoftotalsaleseachmonth.Historically,salesonaccounthavebeencollectedasfollows:50percentinth
emonthofthesale,35percentinthemonthafterthesale,andtheremaining15percenttwomonthsafterthesale.Salesforth
equarterareprojectedasfollows:January,$60,000;February,$30,000;andMarch,
$90,000.
AccountsreceivableonDecember31were$45,000.

TheexpectedcashcollectionsofFireflyManufacturingCompanyforMarchare
a. $90,000.
b. $69,600.
c. $64,500.
d.
$114,
600.
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:($90,0000.20)+($90,0000.800.50)+
($30,000 0.800.35) + ($60,000 0.80 0.15)=$69,600
111.
FireflyManufacturingCompanyneedstoknowitsanticipatedcashinflowsforthenextquarterbymonth.Cash
salesare20percentoftotalsaleseachmonth.Historically,salesonaccounthavebeencollectedasfollows:50percentinth
emonthofthesale,35percentinthemonthafterthesale,andtheremaining15percenttwomonthsafterthesale.Salesforth
equarterareprojectedasfollows:January,$60,000;February,$30,000;andMarch,
$90,000.
AccountsreceivableonDecember31were$45,000.
FireflyManufacturingCompanywouldexpecttohaveanaccountsreceivablebalanceonMarch31of
a. $45,000.
b. $55,500.
c. $39,600.
d. $90,000.
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:($30,0000.80 0.15)+($90,0000.800.50)=$39,600

Figure8-7
MacheskiCompany,animporterandretailerofPolishpotteryandkitchenware,preparesamonthlymasterbudget.Dataf
ortheJulymasterbudgetaregivenbelow:
TheJune30thbalancesheetfollows:
Cash
Accountsreceivable
Inventory
Buildingandequipment(net)

$ 25,000
110,000
54,000
250,000

Accountspayable
Capitalstock
Retainedearnings

$ 45,000
300,000
94,000

ActualsalesforJuneandbudgetedsalesforJuly,August,andSeptemberaregivenbelow:
June
July
August
September

$137,500
360,000
400,000
320,000

Salesare20percentforcashand80percentoncredit.Allcreditsalesarecollectedinthemonthfollowingthe
sale.Therearenobaddebts.

Thegrossmarginpercentageis40percentofsales.Thedesiredendinginventoryisequalto25percentofthefollowi
ngmonth'ssales.Onefourthofthepurchasesarepaidforinthemonthofpurchaseandtheothersarepurchasedona
ccountandpaidinfullthefollowingmonth.
Themonthlycashoperatingexpensesare$43,000,andthemonthlydepreciationexpensesare$7,000.
112.
RefertoFigure87.WhatisthebalanceoftheaccountsreceivableattheendofJuly?a.$110,000
b.
$2
88,
00
0c.
$3
60,
00
0d.
$3
98,
00
0
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:80%360,000=$288,000
113.
RefertoFigure87.WhatisthebalanceoftheaccountspayableattheendofJuly?
a. $55,500
b. $93,000
c. $120,000
d. $166,500
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:Purchases=$216,000+(0.25$240,000)-$54,000=
$222,0000.75 $222,000=$166,500
114.
RefertoFigure87.WhatisthebalanceoftheinventoryaccountattheendofJuly?
a. $54,000
b. $60,000
c. $124,000
d. $216,000
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:0.25(0.60$400,000)=$60,000

115.
RefertoFigure87.Whatisthebalanceofthebuildingandequipment(net)accountattheendofJuly?
a. $243,000
b. $250,000
c. $257,000
d. $300,000
ANSWER:a
RATIONALE:SUPPORTINGCALCULATIONS:$250,000-$7,000=$243,000
116.
RefertoFigure87.WhatisthebalanceoftheretainedearningsaccountattheendofJuly?
a. $94,000
b. $188,000
c. $360,000
d. $398,000
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:$94,000+($360,000-$216,000-$43,000-$7,000)=$188,000
117.
RefertoFigure87.WhatisthebalanceofthecashaccountattheendofJuly?
a. $8,500
b. $15,500
c. $62,500
d. $114,000
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:$25,000+$72,000+$110,000$45,00056,50043,000
=$62,500
118.

RefertoFigure8-7.WhatarethetotalassetsattheendofJuly?

a. $439,000
b. $446,500
c. $515,500
d. $653,500
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:$62,500+$288,000+$60,000+$243,000=$653,500
119. Abudgetthatisdevelopedaroundoneparticularlevelofactivityis
a. astaticbudget.
b. acontinuousbudget.
c. anincrementalbudget.
d. noneofthese.
ANSWER: a

120. Whenbudgetsareusedforcontrol,
a. budgetedamountsfromdifferentyearsarecompared.
b. actualamountsfromdifferentyearsarecompared.
c. budgetedamountsarecomparedtoactualamounts.
d. noneofthese.
ANSWER: c

Figure8-8
Rammazzotti,Inc.,islookingforfeedbackoncompanyperformance.Thecompanycomparesthebudgetfortheyearwitht
heactualcosts.Datahavebeencollectedbelow:
RammazzottiInc.,hadthefollowingbudgeteddata:
Unitsalesfor2016
Unitproductionfor2016

26,000
26,000

Budgetedfixedoverheadfor2016:
Supervision
Depreciation
Rent

$800
2,000
100

Budgetedvariablecostsperunit:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power

$0.15
0.20
0.02
0.05
0.02

Thefollowingactuallyoccurred:
Actualunitsalesfor2016
Actualunitproductionfor2016

24,000
28,000

Actualfixedoverheadfor2016:
Supervision
Depreciation
Rent

$850
2,000
100

Actualvariablecosts:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power
121.
RefertoFigure88.Thetotalbudgetedcostsfor2016were
a. $11,440.
b. $13,510.

$3,500
4,900
530
1,250
470

c. $14,340.
d. $13,460.
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:
FC:
$800+$2,000+$100=
VC: $3,900+$5,200+$520+$1,300+$520=
TC:
122.

RefertoFigure8-8.Thebudgetedcostfordirectlaborfor2016was

a. $1,200.
b. $1,300.
c. $4,800.
d. $5,200.
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:26,000$0.20=$5,200

$2,900
11,440
$14,340

123. RefertoFigure8-8.Thestaticbudgetvarianceforrentis
a. $100F.
b. $100U.
c. $-0-.
d. $50U.
ANSWER:c
RATIONALE:
SUPPORTINGCALCULATIONS:

124.

Actual

$100

Budget
Variance

100
$-0-

RefertoFigure8-8.Theactualcostfordirectmaterialsfor2016was

a. $3,600.
b. $3,900.
c. $4,500.
d. $3,500.
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:$3,500isgiven.
125.

RefertoFigure8-8.Thestaticbudgetvariancefortotalfixedoverheadis

a. $50U.
b. $50F.
c. $-0-.
d. $100U.
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
$2,950
Budget
Variance
126.

2,900

$50U
RefertoFigure8-8.Thestaticbudgetvariancefordirectmaterialsis

a. $100F.
b. $100U.
c. $400F.
d. $400U.
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
$3,500

Budget

3,900

Variance

$ 400F

127.
a.
b.
c.
d.

RefertoFigure8-8.Thestaticbudgetvariancefortotalvariablecostsis
$90U.
$180U.
$790F.
$880F.

ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
$10,650

128.
a.
b.
c.
d.

Budget

11,440

Variance

790F

RefertoFigure8-8.Thetotalflexiblebudgetedcostsfor2016are
$10,560.
$13,460.
$13,510.
$15,220.

ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:$2,900+($0.4428,000)=$15,220
129.

RefertoFigure8-8.Theflexiblebudgetfordirectmaterialscostin2016is

a. $3,500.
b. $3,600.
c. $3,900.
d. $4,200.
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:28,000$0.15=$4,200
130.
a.
b.
c.
d.

RefertoFigure8-8.Theflexiblebudgetvarianceforindirectlaborfor2016is
$1,250F.
$50F.
$150F.
$1,200U.

ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
$1,250

131.
a.
b.
c.
d.

Budget ($0.05 28,000)

1,400

Variance

$ 150F

RefertoFigure8-8.Theflexiblebudgetforrentin2016is
$100.
$200.
$2,900.
$2,950.

ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:$100isgiven.

132.
a.
b.
c.
d.

RefertoFigure8-8.Theflexiblebudgetvarianceforsupervisionfor2016is
$67F.
$67U.
$50F.
noneofthese.

ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
$850
Budget

800

Variance

$50U

133.
RefertoFigure88.Theflexiblebudgetvariancefortotalcostfor2016is
a. $90F.
b. $140F.
c. $1,620F.
d. $50F.
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:
Actual$10,650+$2,950

$13,600

Budget ($0.44 28,000) + $2,900

15,220

Variance

$ 1,620F

134.
RefertoFigure88.Thetotalactualcostsfor2016were
a. $13,550.
b. $10,650.
c. $13,600.
d. $13,510.
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:$3,500+$4,900+$530+$1,250+$470+$850+$2,000+
$100=$13,600
135.
RefertoFigure88.Thestaticbudgetvarianceforsupervisionis
a. $50U.
b. $50F.
c. 100U.
d. 100F.
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
$850
Budget

800

Variance

$ 50 U

136.
RefertoFigure88.Thestaticbudgetvarianceforsuppliesis
a. $10U.
b. $10F.
c. $50U.
d. $50F.
ANSWER:a
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
$530
Budget
Variance

520
$ 10U

137. Thebudgetmostappropriateforcontrolpurposesisthe
a. staticbudget.
b. flexiblebudget.
c. continuousbudget.
d. incrementalbudget.
ANSWER: b
138.
Laramie,Inc.,hasanoperatingenvironmentwithconsiderableuncertainty.Thecompanypreparesthebudgetf
orseveraldifferentvolumelevels.
Laramiehadthefollowingbudgeteddata:Budgetedvariablecostsperunit:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power

$7.00
10.00
1.00
0.50
0.05

Budgetedfixedoverheadfor2016:
Supervision
Depreciation
Rent

$4,000
3,000
2,000

Whatarethebudgetedcostsformaterialsif5,000unitswereproduced?
a. $9,000
b. $4,000
c. $50,000
d. $35,000
ANSWER: d
RATIONALE:SUPPORTING CALCULATIONS: 5,000 $7 = $35,000

139.
Laramie,Inc.,hasanoperatingenvironmentwithconsiderableuncertainty.Thecompanypreparesthebudgetf
orseveraldifferentvolumelevels.
Laramiehadthefollowingbudgeteddata:Budgetedvariablecostsperunit:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power

$7.00
10.00
1.00
0.50
0.05

Budgetedfixedoverheadfor2016:
Supervision
Depreciation
Rent

$4,000
3,000
2,000

Whatarethebudgetedcostsforrentif5,000unitswereproduced?
a. $2,000
b. $100,000
c. $9,000
d. $45,000
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:$2,000isgiven.
140.
Laramie,Inc.,hasanoperatingenvironmentwithconsiderableuncertainty.Thecompanypreparesthebudgetf
orseveraldifferentvolumelevels.
Laramiehadthefollowingbudgeteddata:Budgetedvariablecostsperunit:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power

$7.00
10.00
1.00
0.50
0.05

Budgetedfixedoverheadfor2016:
Supervision
Depreciation
Rent

$4,000
3,000
2,000

Whatarethetotalbudgetedcostsfor5,000units?
a. $9,000
b. $92,750
c. $101,750
d. $110,000
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:($18.555,000)+$9,000=$101,750

141.
Laramie,Inc.,hasanoperatingenvironmentwithconsiderableuncertainty.Thecompanypreparesthebudgetf
orseveraldifferentvolumelevels.
Laramiehadthefollowingbudgeteddata:Budgetedvariablecostsperunit:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power

$7.00
10.00
1.00
0.50
0.05

Budgetedfixedoverheadfor2016:
Supervision
Depreciation
Rent

$4,000
3,000
2,000

Whatisthedifferenceintotalbudgetedcostsbetweenthevolumerangeof4,000and5,000units?
a. $-0b. $18,550
c. $1,000
d. $9,000
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:1,000$18.55=$18,550
142.
Laramie,Inc.,hasanoperatingenvironmentwithconsiderableuncertainty.Thecompanypreparesthebudgetf
orseveraldifferentvolumelevels.
Laramiehadthefollowingbudgeteddata:Budgetedvariablecostsperunit:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power

$7.00
10.00
1.00
0.50
0.05

Budgetedfixedoverheadfor2016:
Supervision
Depreciation
Rent

$4,000
3,000
2,000

Whatarethetotalbudgetedcostsfor3,000units?
a. $3,000
b. $55,650
c. $64,650
d. $27,000
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:($18.553,000)+$9,000=$64,650

143.
Ifthestaticbudgetvarianceformaterialsis$250Fandthebudgetedcostformaterialsis$52,000,thentheactualc
ostofmaterialsis
a. $51,950
b. $52,150.
c. $51,150.
d. $51,750.
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:
Budget
$52,000
Variance
Actual

250F
$51,750

144.
Thestaticbudgetvarianceformaterialsis$250Fandthebudgetedcostformaterialsis$52,000.Ifthebudgetedv
olumeis13,000andtheactualvolumeis13,500,thentheflexiblebudgetvarianceis
a. $2,250F.
b. $3,050F.
c. $2,050F.
d. $1,850F.
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:
Budget
Variance
Actual

$52,000
250F
$51,750

Flexible budget ($52,000/13,000) 13,500

54,000

Variance

$ 2,250F

145. Abudgetthatisdevelopedaroundoneparticularlevelofactivityis
a. astaticbudget.
b. acontinuousbudget.
c. anincrementalbudget.
d. noneofthese.
ANSWER: a
146.
Ifproductionwasbudgetedat400unitsandtheactualproductionwas420units,whatwouldbethestaticbudget
varianceformaterialsiftheactualcostofmaterialswas$4,150andthebudgetedcostperunitis$10?
a. $50F
b. $200U
c. $100F
d. $150U
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
$4,150

Budget (400 $10)

4,000

Variance

$ 150U

147.
Ifproductionwasbudgetedat400unitsandtheactualproductionwas420units,whatwouldbetheflexiblebudg
etvarianceformaterialsiftheactualcostofmaterialswas$4,150andthebudgetedcostperunitis$10?
a. $50F
b. $200U
c. $100F
d. $150U
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:
Actual

$4,150

Budget

4,200

Variance

50F

148. FlexiblebudgetsdoNOTprovide
a. expectedcostsforarangeofactivity.
b. budgetedcostsfortheactuallevelofactivity.
c. budgetedcostsforapredeterminedlevelofactivity.
d. expectedcostsfortheactualperformancelevel.
ANSWER: c
149.
Ifastaticbudgetforecasted100,000unitstobesoldinthefiscalyearandactualunitssoldamountedto120,000
,whatassumptioncouldbemadeunderaflexiblebudgetprocess?
a. Sincetheactualvolumeexceedsthebudgetedvolume,thereisanunfavorablevolumevarianceforoutput.
b. Fixedcostswouldincreaseintheflexiblebudgetduetothevolumechange.
c. Theeffectivenessofthemanagerisinquestion.
d. Variablecostswillbehigherthanprojectedinthestaticbudgetduetothevolumevariance.
ANSWER: d
150. Volumevariancesexaminedifferencesbetween
a. thestaticbudgetandactualcosts.
b. theflexiblebudgetandstaticbudget.
c. thestaticbudgetandtherollingbudget.
d. noneofthese.
ANSWER: b
151. Activity-basedbudgets
a. usetheknowledgeofcostbehaviortosplitthefunctionalbasedlineitemsintofixedandvariablecomponents.
b. startwithoutputandthendeterminetheresourcesnecessarytocreatethatoutput.
c. relyontheuseoffunctional-basedlineitems.
d. workinenvironmentswheretheproductsarehomogenousandtheproductionprocessissimple.

ANSWER: b

152. Activity-basedbudgetingismostusefulwhen
a. outputishomogeneous.
b. productionprocessesaresimple.
c. diverseproductsareproduced.
d. volumelevelsarestable.
ANSWER: c
153. Withanactivityflexiblebudget,abudgetvarianceiscalculated
a. basedonaflexiblebudgetbasedoncostforactualunitsproduced.
b. basedonaflexiblebudgetbasedonvariousactivitydriversforactualunitsproduced.
c. basedonaflexiblebudgetbasedonflexiblemanufacturing.
d. basedonaflexiblebudgetbasedoncommittedresourcesforactualunitsproduced.
ANSWER: b
154. WhichisNOToneofthefourstepsneededtobuildanactivity-basedbudget?
a. Determineoutputlevel.
b. Determinetheactivitiesandtheirdriversneededtoproduceoutput.
c. Estimatethedemandforeachactivitytoproducetheoutput.
d. Estimatethecommittedcapacity.
ANSWER: d
155. Activity-basedbudgetscomparecostsforitemsbasedonactivitiessuchas
a. directmaterial.
b. directlabor.
c. setups.
d. power.
ANSWER: c
156. Aflexible-basedbudgetingsystem
a. usesfunctional-basedlineitems.
b. splitscostsintovariableandfixedcomponents.
c. preparesbudgetsforarangeofactivitylevels.
d. allofthese.
ANSWER: d
157. Afunctional-basedapproachtobudgetingcomparescostsforfunctionallineitemssuchas
a. setups.
b. directmaterials.
c. ordering.
d. inspections.

ANSWER: b

158.
Walterboro,Inc.,hasdoneacostanalysisforitsproductionofdecals.Thefollowingactivitiesandcostdriversha
vebeendeveloped:
Activity
Maintenance
Machining
Setups
Purchasing

CostFormula
$11,000+$0.11permachinehour
$25,000+$0.50permachinehour
$50perbatch
$200+$45perpurchaseorder

Followingaretheactualcostsofproducing85,000decals:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Setups
Purchasing

$11,500
28,300
550
1,000

Whatisthebudgetedcostperdecal?(Roundtothreedecimalplaces.)
a. $0.468
b. $0.478
c. $0.486
d. $0.487
ANSWER:b
RATIONALE:SUPPORTINGCALCULATIONS:($11,000+$550+$25,000+$2,500+$500+
$200+$900)/85,000=$0.478$40,650/85,000=$0.478
159.
Walterboro,Inc.,hasdoneacostanalysisforitsproductionofdecals.Thefollowingactivitiesandcostdriversha
vebeendeveloped:
Activity
Maintenance
Machining
Setups
Purchasing

CostFormula
$11,000+$0.11permachinehour
$25,000+$0.50permachinehour
$50perbatch
$200+$45perpurchaseorder

Followingaretheactualcostsofproducing85,000decals:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Setups
Purchasing

$11,500
28,300
550
1,000

Whatisthebudgetvarianceforsetupsinanactivity-basedperformancereport?
a. $50F
b. $50U
c. $800U
d. noneofthese
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:
Actual

$550

Budget

500

Variance

$ 50U

160.
Walterboro,Inc.,hasdoneacostanalysisforitsproductionofdecals.Thefollowingactivitiesandcostdriversha
vebeendeveloped:
Activity
Maintenance
Machining
Setups
Purchasing

CostFormula
$11,000+$0.11permachinehour
$25,000+$0.50permachinehour
$50perbatch
$200+$45perpurchaseorder

Followingaretheactualcostsofproducing85,000decals:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Setups
Purchasing

$11,500
28,300
550
1,000

Whatisthebudgetvarianceformaintenanceinanactivity-basedperformancereport?
a. $50F
b. $50U
c. $550U
d. $550 F
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:
Actual

$11,500

Budget $11,000 + (5,000 $0.11)

11,550

Variance

50F

161.
Walterboro,Inc.,hasdoneacostanalysisforitsproductionofdecals.Thefollowingactivitiesandcostdriversha
vebeendeveloped:
Activity
Maintenance
Machining
Setups
Purchasing

CostFormula
$11,000+$0.11permachinehour
$25,000+$0.50permachinehour
$50perbatch
$200+$45perpurchaseorder

Followingaretheactualcostsofproducing85,000decals:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Setups
Purchasing

$11,500
28,300
550
1,000

Whatisthebudgetvarianceformachininginanactivity-basedperformancereport?
a. $50F
b. $50U
c. $800U
d. $800 F
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
Budget $25,000 + (5,000 $0.50)
Variance

$28,300
27,500
$

800U

162.
SilverFaces,Inc.,hasdoneacostanalysisforitsproductionofreflectors.Thefollowingactivitiesandcostdriv
ershavebeendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$15,000+$4permachinehour
$35,000+$1permachinehour
$60,000+$750perbatch
$1,000perbatch
$50,000 +$10perpurchase order

Whatisthebudgetedmaintenancecostiftherewasproductionof50,000reflectorsthatwillrequire8,000machinehours,2
5batches,and15,000purchaseorders?
a. $15,000
b. $32,000
c. $47,000
d. $79,000
ANSWER:c

RATIONALE:SUPPORTINGCALCULATIONS:$15,000+($48,000)=$47,000

163.
SilverFaces,Inc.,hasdoneacostanalysisforitsproductionofreflectors.Thefollowingactivitiesandcostdrive
rshavebeendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$15,000+$4permachinehour
$35,000+$1permachinehour
$60,000+$750perbatch
$1,000perbatch
$50,000 +$10perpurchase order

Whatisthebudgetedinspectioncostiftherewasproductionof50,000reflectorsthatwillrequire8,000machinehours,25b
atches,and15,000purchaseorders?
a. $18,750
b. $60,000
c. $66,000
d. $78,750
ANSWER:d
RATIONALE:SUPPORTINGCALCULATIONS:$60,000+($75025)=$78,750
164.
SilverFaces,Inc.,hasdoneacostanalysisforitsproductionofreflectors.Thefollowingactivitiesandcostdrive
rshavebeendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$15,000+$4permachinehour
$35,000+$1permachinehour
$60,000+$750perbatch
$1,000perbatch
$50,000+$10perpurchaseorder

Whatisthebudgetedsetupcostsiftherewasproductionof50,000reflectorsthatwillrequire8,000machinehours,25batch
es,and15,000purchaseorders?
a.
$1
,0
00
b.
$2
5,
00
0
c.
$8,00
0,000
d.
$15,0

00,00
0
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:25$1,000=$25,000

165.
SilverFaces,Inc.,hasdoneacostanalysisforitsproductionofreflectors.Thefollowingactivitiesandcostdriver
shavebeendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$15,000+$4permachinehour
$35,000+$1permachinehour
$60,000+$750perbatch
$1,000perbatch
$50,000 +$10perpurchase order

Whatisthebudgetedpurchasingcostiftherewasproductionof50,000reflectorsthatwillrequire8,000machinehours,25
batches,and15,000purchaseorders?
a. $150,000
b. $200,000
c. $100,000
d. noneofthese
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:$50,000+($1015,000)=$200,000
166.
SilverFaces,Inc.,hasdoneacostanalysisforitsproductionofreflectors.Thefollowingactivitiesandcostdriver
shavebeendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$15,000+$4permachinehour
$35,000+$1permachinehour
$60,000+$750perbatch
$1,000perbatch
$50,000+$10perpurchaseorder

Whatisthemachiningcostforproductionof50,000reflectorsthatwillrequire8,000machinehours,25batches,and15,00
0purchaseorders?
a. $47,000
b. $43,000
c. $38,410,000
d. noneofthese
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:$35,000+($18,000)=$43,000

167.
SilverFaces,Inc.,hasdoneacostanalysisforitsproductionofreflectors.Thefollowingactivitiesandcostdriver
shavebeendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$15,000+$4permachinehour
$35,000+$1permachinehour
$60,000+$750perbatch
$1,000perbatch
$50,000+$10perpurchaseorder

Whatisthetotalcostforproductionof50,000reflectorsthatwillrequire8,000machinehours,25batches,and15,000p
urchaseorders?
a. $393,750
b. $933,410
c. $3,937,500
d. $38,410,000
ANSWER: a
RATIONALE:SUPPORTINGCALCULATIONS:$15,000+$32,000+$35,000+$8,000+$60,000+$18,750+
$25,000 + $50,000 +$150,000 =$393,750
168.
SilverFaces,Inc.,hasdoneacostanalysisforitsproductionofreflectors.Thefollowingactivitiesandcostdriver
shavebeendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$15,000+$4permachinehour
$35,000+$1permachinehour
$60,000+$750perbatch
$1,000perbatch
$50,000+$10perpurchaseorder

Whatisthebudgetformaintenanceif20,000reflectorsweremadethatrequired3,500machinehours,12batches,and5,00
0purchaseorders?
a. $3,500
b. $15,000
c. $29,000
d. $14,000
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:$15,000+($43,500)=$29,000

169.
Bienestar,Inc.,hasdoneacostanalysisforitsproductionofvests.Thefollowingactivitiesandcostdrivershave
beendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$11,000+$2permachinehour
$55,000+$3permachinehour
$70,000+$500perbatch
$2,000perbatch
$80,000+$150perpurchaseorder

Followingaretheactualcostsofproducing75,000vests:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Inspection
Setups
Purchasing

$20,000
73,000
73,000
18,000
82,000

Whatisthebudgetvarianceformaintenanceinanactivity-basedperformancereport?
a. $1,000U
b. $3,000U
c. $3,000F
d. noneofthese
ANSWER: d
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
Budget $11,000 + (5,000 $2)
Variance

$20,000
21,000
$ 1,000 F

170.
Bienestar,Inc.,hasdoneacostanalysisforitsproductionofvests.Thefollowingactivitiesandcostdrivershave
beendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$11,000+$2permachinehour
$55,000+$3permachinehour
$70,000+$500perbatch
$2,000perbatch
$80,000+$150perpurchaseorder

Followingaretheactualcostsofproducing75,000vests:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Inspection
Setups
Purchasing

$20,000
73,000
73,000
18,000
82,000

Whatisthebudgetvarianceformachininginanactivity-basedperformancereport?
a. $1,000U
b. $2,000U
c. $3,000U
d. noneofthese
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
Budget $55,000 + (5,000 $3)
Variance

$73,000
70,000
$ 3,000 U

171.
Bienestar,Inc.,hasdoneacostanalysisforitsproductionofvests.Thefollowingactivitiesandcostdrivershave
beendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$11,000+$2permachinehour
$55,000+$3permachinehour
$70,000+$500perbatch
$2,000perbatch
$80,000+$150perpurchaseorder

Followingaretheactualcostsofproducing75,000vests:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Inspection
Setups
Purchasing

$20,000
73,000
73,000
18,000
82,000

Whatisthebudgetvarianceforinspectioninanactivity-basedperformancereport?
a. $1,000 F
b. $2,000 F
c. $3,000F
d. noneofthese
ANSWER:
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
Budget $70,000 + (10 $500)
Variance

$73,000
75,000
$ 2,000 F

172.
Bienestar,Inc.,hasdoneacostanalysisforitsproductionofvests.Thefollowingactivitiesandcostdrivershave
beendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$11,000+$2permachinehour
$55,000+$3permachinehour
$70,000+$500perbatch
$2,000perbatch
$80,000+$150perpurchaseorder

Followingaretheactualcostsofproducing75,000vests:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Inspection
Setups
Purchasing

$20,000
73,000
73,000
18,000
82,000

Whatisthebudgetvarianceforsetupsinanactivity-basedperformancereport?
a. $1,000 F
b. $2,000 F
c. $3,000F
d. noneofthese
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
Budget ($2,000 10)
Variance

$18,000
20,000
$ 2,000 F

173.
Bienestar,Inc.,hasdoneacostanalysisforitsproductionofvests.Thefollowingactivitiesandcostdrivershave
beendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$11,000+$2permachinehour
$55,000+$3permachinehour
$70,000+$500perbatch
$2,000perbatch
$80,000+$150perpurchaseorder

Followingaretheactualcostsofproducing75,000vests:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Inspection
Setups
Purchasing

$20,000
73,000
73,000
18,000
82,000

Whatisthebudgetvarianceforpurchasinginanactivity-basedperformancereport?
a. $1,000U
b. $2,000U
c. $3,000U
d. noneofthese
ANSWER:d
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
Budget $80,000 + (20 $150)
Variance

$82,000
83,000
$ 1,000 F

174.
Bienestar,Inc.,hasdoneacostanalysisforitsproductionofvests.Thefollowingactivitiesandcostdrivershave
beendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$11,000+$2permachinehour
$55,000+$3permachinehour
$70,000+$500perbatch
$2,000perbatch
$80,000+$150perpurchaseorder

Followingaretheactualcostsofproducing75,000vests:5,000machinehours;10batches;20purchaseorders
Maintenance
Machining
Inspection
Setups
Purchasing

$20,000
73,000
73,000
18,000
82,000

Whatisthebudgetvariancefortotalcostsinanactivity-basedperformancereport?
a. $1,000 F
b. $2,000 F
c. $3,000F
d. noneofthese
ANSWER: c
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
Budget $21,000 +$70,000 +$75,000 +$20,000 +$83,000
Variance

$266,000
269,000
$ 3,000 F

175.
Villanova,Inc.,hasdoneacostanalysisforitsproductionofrubberstamps.Thefollowingactivitiesandcostd
rivershavebeendeveloped:
Activity
Design
Machining
Setups
Purchasing

CostFormula
$5,000+$0.05permachinehour
$25,000+$0.01permachinehour
$35per batch
$50 +$15 perpurchase order

Followingaretheactualcostsofproducing35,000rubberstamps:1,000machinehours;5batches;30purchaseorders
Design
Machining
Setups
Purchasing

$5,080
?
?
$600

Thefollowingvariancesweregivenintheactivityperformancereport:
Design
Machining
Setups
Purchasing

?
$40F
15F
?

Whatistheactualcostofmachining?
a. $24,970
b. $25,010
c. $25,050
d. noneofthese
ANSWER:a
RATIONALE:SUPPORTINGCALCULATIONS:
Variance
Budget$25,000+(1,000$0.01)
Actual

$40F
25,010
$24,970

176.
Villanova,Inc.,hasdoneacostanalysisforitsproductionofrubberstamps.Thefollowingactivitiesandcostd
rivershavebeendeveloped:
Activity
Design
Machining
Setups
Purchasing

CostFormula
$5,000+$0.05permachinehour
$25,000+$0.01permachinehour
$35per batch
$50 +$15 perpurchase order

Followingaretheactualcostsofproducing35,000rubberstamps:1,000machinehours;5batches;30purchaseorders
Design
Machining
Setups
Purchasing

$5,080
?
?
$600

Thefollowingvariancesweregivenintheactivityperformancereport:
Design
Machining
Setups
Purchasing

?
$40F
$15F
?

Whatistheactualcostofsetups?
a. $160
b. $190
c. $300
d. noneofthese
ANSWER:a
RATIONALE:SUPPORTINGCALCULATIONS:
Variance
Budget $35 5
Actual

$ 15 F
175
$160

177.
Villanova,Inc.,hasdoneacostanalysisforitsproductionofrubberstamps.Thefollowingactivitiesandcostd
rivershavebeendeveloped:
Activity
Design
Machining
Setups
Purchasing

CostFormula
$5,000+$0.05permachinehour
$25,000+$0.01permachinehour
$35perbatch
$50+$15perpurchaseorder

Followingaretheactualcostsofproducing35,000rubberstamps:1,000machinehours;5batches;30purchaseorders
Design
Machining
Setups
Purchasing

$5,080
?
?
$600

Thefollowingvariancesweregivenintheactivityperformancereport:
Design
Machining
Setups
Purchasing

?
$40F
$15F
?

Whatistheactivityvariancefordesign?
a. $40F
b. $30U
c. $15F
d. d.
$100
U
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:
Actual
Budget$5,000+(1,000$0.05)
Variance

$5,080
5,050
$30 U

178.
Villanova,Inc.,hasdoneacostanalysisforitsproductionofrubberstamps.Thefollowingactivitiesandcostd
rivershavebeendeveloped:
Activity
Design
Machining
Setups
Purchasing

CostFormula
$5,000+$0.05permachinehour
$25,000+$0.01permachinehour
$35perbatch
$50+$15perpurchaseorder

Followingaretheactualcostsofproducing35,000rubberstamps:1,000machinehours;5batches;30purchaseorders
Design
Machining
Setups
Purchasing

$5,080
?
?
$600

Thefollowingvariancesweregivenintheactivityperformancereport:
Design
Machining
Setups
Purchasing

?
$40 F
$15 F
?

Whatistheactivityvarianceforpurchasing?
a. $500U
b. $100U
c. $50U
d. none of these
ANSWER: b
RATIONALE: SUPPORTINGCALCULATIONS:
Actual
Budget$50+(30$15)
Variance
179. Goalcongruencemeans
a. thereisalignmentoforganizationalandmanagerialgoals.
b. theorganizationisalignedtotheneedsoftheenvironment.
c. theorganizationisalignedtoshareholdergoals.
d. thereisnodivergencebetweenorganizationandstockholdergoals.
ANSWER: a

$600
500
$100 U

180. Theidealbudgetsystemcreates
a. extremecautioninmanagers.
b. driveandriskavoidanceinmanagers.
c. driveandgoalcongruenceinmanagers.
d. noneofthese.
ANSWER: c
181. Whenbudgetsareusedtoevaluateperformance,whichfactormightNOThaveasignificantbehavioraleffect?
a. concernforstatus
b. concernforfinancialmatters
c. concernforcareer
d. concernforcompanyprofit
ANSWER: d
182. Analysisthatfostersmanagementbyexceptionis
a. valueanalysis.
b. processanalysis.
c. sensitivityanalysis.
d. varianceanalysis.
ANSWER: d
183.
Whenthereactiontoabudgetisnegative,resultinginmanagerialbehaviorthatisnegativefortheorganization,th
eresultingbehaviorisknownas
a. dysfunctionalbehavior.
b. psychopathicbehavior.
c. congruentbehavior.
d. sociopathicbehavior.
ANSWER: a
184. WhichofthefollowingisNOTakeyfeatureofanidealbudgetarysystem?
a. participation
b. incentives
c. accountabilityfornoncontrollablecosts
d. feedbackonperformance
ANSWER: c
185. WhichofthefollowingisNOTakeyfeatureofanidealbudgetarysystem?
a. controllablecosts
b. singlemeasureforperformance
c. incentives
d. frequentfeedback

ANSWER: b

186. WhichofthefollowingisNOTanadvantageofparticipativebudgeting?
a. encouragesincrementalism
b. encouragescommunication
c. encouragesresponsibility
d. encouragescreativity
ANSWER: a
187. Myopicbehavioroccurswhen
a. actionsimprovebudgetaryperformanceintheshort-runbutareharmfulinthelongrun.
b. thereisuncertainty.
c. thereisfocusonimmediatecosts.
d. actionsimprovebudgetaryperformanceinthedistanttimehorizon.
ANSWER: a
188. Anexampleofanegativeincentiveis
a. promotion.
b. nonfinancialincentive.
c. feedbackreports.
d. terminationofemployment.
ANSWER: d
189. WhichofthefollowingisNOTapotentialdisadvantageofparticipativebudgeting?
a. pseudoparticipation
b. performancefeedback
c. unrealisticstandards
d. budgetaryslack
ANSWER: b
190. Participativebudgetinghaswhichofthefollowingpotentialproblems?
a. buildingslackintoabudget
b. encouragesindividualbehaviorthatisinbasicconflictwiththegoalsoftheorganization
c. usingbudgetsasapartofperformanceevaluationscouldleadtounethicalbehavior
d. managerstakeactionthatwillimproveperformanceintheshortrunbuthaslong-termconsequences
ANSWER: a
191.
Theconditionthatexistswhenmanagersdeliberatelyunderestimaterevenuesoroverestimatecoststoprovidef
lexibilityiscalled:
a. Realisticstandards
b. Monetaryincentives
c. Budgetaryslack
d. Managementbyexception

ANSWER: c

192. Realisticbudgetsreflect
a. actuallevelsofactivity,fullcapacityusage,efficiencies,andgeneraleconomictrends.
b. actuallevelsofactivity,seasonalvariations,efficiencies,andgeneraleconomictrends.
c. ideallevelsofactivity,fullcapacityusage,efficiencies,andgeneraleconomictrends.
d. ideallevelsofactivity,fullcapacityusage,andefficiencies.
ANSWER: b
193. Controllablecostsarethosethatamanager
a. hasnoauthorityover.
b. cannotavoid.
c. doesnotparticipateinauthorizing.
d. caninfluencethroughdecisionmaking.
ANSWER: d
194.
Definebudgetingandcontrol.Howarebudgetsusedinplanning?Howarebudgetsusedtocontrol?
Whataresomeofthereasonsforbudgeting?
ANSWER:
Budgetsarethequantitativeexpressionsofplans.Budgetsareusedtotranslatethegoalsandstrategiesofano
rganizationintooperationalterms.
Controlistheprocessofsettingstandards,receivingfeedbackonactualperformance,andtakingcorrectiveac
tionwheneveractualperformancedeviatessignificantlyfromplannedperformance.Budgetsarethestan
dards,andtheyarecomparedwithactualcostsandrevenuestoprovidefeedback.
Budgetingforcesmanagerstoplan,providesresourceinformationfordecisionmaking,setsbenchmarksforc
ontrolandevaluation,andimprovesthefunctionsofcommunicationandcoordination.
195. Thisproblemcanbebrokenintocomponents
a. Giventhefollowinginformation,prepareaquarterlysalesbudgetandproductionbudget,inunits:
Lastyearsales=500,000units.Theorganizationisplanninga10percentincreaseinsalesfortheyear2012.Thecompanyi
saretailorganizationthatseeshighersalesduetotheholidaysinthe4thquarter.40percentofthesalesoccurinthe4thquar
terandtheremainingunitsaresoldequallyovertheotherthreequarters.
Thebeginninginventoryfortheyearamountsto20,000units.Theestimatedsalesforthefirstquarterof2013amountto11
5,000units.Thecompanyrequiresanendinginventoryof20percentofthenextquarterssales.

b. Giventheschedulesabove,iftheprojectedsalespriceis$50perunit,whatistheexpectedrevenueperquarter?
Also,giventhefollowinginformation,whatistheestimatedcostsofproduction?
Materials:Eachunitrequires1yardoffabricand1/2poundoffiberfillstuffing.Fabriccanbepurchasedat$9.00peryardan
dfiberfillsellsfor$4.00perpound.Inventoriesofmaterialsarelistedasfollows:
Qtr1
17,000
5,000

Fabric/yds
Fiberfill/lbs

Qtr2
20,000
6,700

Qtr3
18,000
8,000

Qtr4
19,000
8,500

Beginninginventoryoffabricis16,000yardsand6,000lbsoffiberfill.
Ittakesanestimatedtimeof.25hourstoproduceoneunitofoutput.Thelaborcostperhouris$25perhourandthetaxesandb
enefitloadis25percent.
ANSWER: a
Salesandproductionbudgets:
Sales Lastyear

500,000

10% increase

550,000

Sales Budget

Qtr 1
Units
Selling Price
Projected Revenue

110,000
$50.00
$5,500,000

Qtr 2
110,000
$50.00
$5,500,000

Qtr 3
110,000
$50.00
$5,500,000

Qtr 4
220,000
$50.00
$11,000,000

Total
550,000
$50.00
$27,500,000

Production Budget

Qtr 1

Qtr 2

Qtr 3

Qtr 4

Desired El
Salesunits

22,000
110,000

22,000
110,000

44,000
110,000

23,000
220,000

Units needed
Less: Beg Invty

132,000
20,000

132,000
22,000

154,000
22,000

243,000
44,000

Projected Revenue

112,000

110,000

132,000

199,000

*Desired El is
20% of next
qtr sales

Q12013
(next Qtr)
115,000

ANSWER:b
Materials Budget
Required:

1yrdoffabricperunit@
0.5lb of fiberfill per unit @
0.25 hours of direct labor @

$9.00peryard
$4.00perpound
$31.25 per hour(includesload)

Fabric
Qtr1

Qtr2

Qtr3

Qtr4

17,000

20,000

18,000

19,000

givenfrom
production

budget*
Yards required for units purchased

112,000

110,000

132,000

199,000

1 yrd per unit

Yards needed in production

129,000

130,000

150,000

218,000

16,000

17,000

20,000

18,000

113,000

113,000

130,000

200,000

$9.00

$9.00

$9.00

$9.00

$1,017,000 $1,017,000

$1,170,000

$1,800,000

Desired El inyards

Beginning inventory in yards

Yardsneededtopurchase
Costperyard
Amount of purchase

$5,004,000

Fiberfill
Qtr1

Qtr2

Qtr3

Qtr4

5,000

6,700

8,000

8,500

givenfrom
production

Lbs. required for units purchased

budget*
56,000
55,000

66,000

99,500

.5 lb per unit

Lbs. needed inproduction

61,000

61,700

74,000

108,000

Beginninginventory-in lbs

6,000

5,000

6,700

8,000

55,000

56,700

67,300

100,000

$4.00

$4.00

$4.00

$4.00

$220,000

$226,800

$269,200

$400,000

112,000

110,000

132,000

199,000

0.25

0.25

0.25

0.25

Hours required

28,000

27,500

33,000

49,750

Costperhour

$31.25

$ 31.25

$31.25

$31.25

$875,000

$859,375

$1,031,250

$1,554,688

Desired El inyards

Lbs. needed topurchase

Costperyard
Amountofpurchase
Directlabor
UnitstoProduce
Hoursperunit

DLbudget

$1,116,000

196. ModernGoodsCorporationhasthefollowingbudgetedsalesfortheselectedsix-monthperiod:
Month
January
February
March
April
May
June

UnitSales
15,000
20,000
35,000
25,000
30,000
20,000

Therewere7,500unitsoffinishedgoodsininventoryatthebeginningofJanuary.Plansaretohaveaninventoryof
finishedproductequalto20percentoftheunitsalesforthenextmonth.
Threepoundsofmaterialsarerequiredforeachunitproduced.Eachpoundofmaterialcosts$20.Inventorylevelsformat
erialsequal30percentoftheneedsforthenextmonth.MaterialsinventoryonJanuary1was5,000pounds.
Required:
a. PrepareproductionbudgetsinunitsforFebruary,March,andApril.
b. PrepareapurchasesbudgetinpoundsanddollarsforFebruary,March,andApril.
ANSWER:
a.
Sales
Add:Desiredendinginventory
Totalneeds
Less:Beginninginventory
Unitstobeproduced

February

March

April

20,000
7,000
27,000
4,000
23,000

35,000
5,000
40,000
7,000
33,000

25,000
6,000
31,000
5,000
26,000

b.
February
Unitstobe Produced
Desiredendinginventory*
Productionneeds***
Total Needs
Less:Beginninginventory
Purchasesneededinlbs.
Cost($20 per lb.)
Total purchasecost
*0.30timesnextmonth'sneeds
** (30,000+4,000-6,000)3 0.30
***3lbs.timesunitstobeproduced
****23,000 3 .3

March

23,000
33,000
29,700
23,400
69,000
99,000
98,700
122,400
20,700 **** 29,700
78,000
92,700
$20
$20
$20
$1,560,000
$1,854,000

April
26,000
25,200 **
78,000
103,200
23,400
79,800

$1,596,000

197.
Harlanmanufacturespictureframes.SalesforJulyareexpectedtobe10,000unitsofvarioussizes.Historically,t
heaverageframerequiresfivefootofframing,onesquarefootofglass,andonesquarefootofbacking.Beginninginventor
yincludes7,000feetofframing,1,500squarefeetofglass,and2,500squarefeetofbacking.Currentpricesare$0.90perfoo
tofframing,
$4.50persquarefootofglass,and$1.50persquarefootofbacking.Endinginventoryshouldbe150percentofbeginningin
ventory.Purchasesarepaidforinthemonthacquired.
Required:
a. Determinethequantityofframing,glass,andbackingthatistobepurchasedduringJuly.
b. DeterminethetotalamountofcashneededforJulypurchases.
ANSWER:
a.
Desiredendinginventory
Productionneeds(10,000units)
Totalneeds
Less:Beginninginventory
Directmaterialstobepurchased
b. Cashneed:
Framing
Glass
Backing
Total

Framing

Glass

Backing

10,500
50,000
60,500
7,000
53,500

2,250
10,000
12,250
1,500
10,750

3,750
10,000
13,750
2,500
11,250

(53,500$0.90)
(10,750$4.50)
(11,250$1.50)

$ 48,150
48,375
16,875
$113,400

198. LumbertonCompanyhasthefollowingprojectedaccountbalancesforJune30,2016:
Accountspayable
Accountsreceivable
Depreciation,factory
Inventories(5/31)
Inventories(6/30)
Materialsused
Officeexpenses
Insurance,factory
Factorywages
Bondspayable

$20,000
50,000
12,000
90,000
90,000
100,000
40,000
2,000
70,000
80,000

Required:
a. PrepareabudgetedincomestatementforJune2016.
b. PrepareabudgetedbalancesheetasofJune30,2016.

Sales
Capitalstock
Retainedearnings
Maintenance,factory
Cash
Equipment,net
Buildings,net
Utilities,factory
Sellingexpenses

$400,000
200,000
????
14,000
28,000
120,000
200,000
8,000
30,000

ANSWER: a.
LumbertonCompanyBud
getedIncomeStatementF
ortheMonthofJune2016
Sales
Costofgoodssold:
Beginninginventory
Materialsused
FactoryWages
FactoryDepreciation
FactoryInsurance
FactoryMaintenance
FactoryUtilities
Endinginventory
Grossmargin

$400,000
$90,000
100,000
70,000
12,000
2,000
14,000
8,000
(90,000)

Operatingexpenses:
Sellingexpenses
Officeexpenses
Netincome

$30,000
40,000

206,000
$194,000

70,000
$124,000

b.
LumbertonCompanyBudgetedBalanceSheetJune30,2016
Assets
Cash
Accountsreceivable,net
Inventories
Equipment,net
Buildings,net
Total

$ 28,000
50,000
90,000
120,000
200,000
$488,000

Liabilities.andOwners'Equity
Accountspayable
$ 20,000
Bondspayable
80,000
Capitalstock
200,000
Retainedearnings
188,000
0
Total
$488,000

199. HighLifeCorporationhasthefollowingsalesbudgetforthelastfourmonthsof2016:
Month
September
October
November
December

Sales
$400,000
320,000
440,000
360,000

Historically,thefollowingtrendhasbeenestablishedregardingcashcollectionofsales:
65percentinmonthofsale
25percentinmonthfollowingsale
8percentinsecondmonthfollowingsal
e2percentuncollectible

Thecompanyallowsa2percentcashdiscountforpaymentsmadebycustomersduringthemonthofthesale.JulyandAugus
tsaleswere$400,000and$240,000,respectively.
Required:
PrepareascheduleofbudgetedcashcollectionsfromsalesforSeptember,October,andNovember.
ANSWER:
July
August
September
October
November
Totalcashcollections

($400,000)
($240,000)
($400,000)
($320,000)
($440,000)

September
$ 32,000
60,000
254,800
$346,800

October
$ 19,200
100,000
203,840
$323,040

November
$ 32,000
80,000
280,280
$392,280

200.
SalesforOctober,November,andDecemberareexpectedtobe$200,000,$180,000,and$220,000,respectivel
y,fortheGurumaiCompany.Allsalesareonaccount(terms2/15,net30days)andarecollected50percentinthemonthofs
aleand50percentinthefollowingmonth.Onehalfofallsalesdiscountsaretakenontheaverage.Materialsarepurchasedonemonthbeforebeingneeded,andallpurchas
esandexpensesarepaidforasincurred.Activitiesforthequarterareexpectedtobe:

Materialsused
Salaries
Maintenanceandrepairs
Depreciation
Utilitiesandother
Dividendspaid
Paymentonbonds

October
$40,000
70,000
18,000
36,000
14,000
-08,000

November
$36,000
68,000
18,000
36,000
14,000
10,000
8,000

December
$44,000
72,000
18,000
36,000
14,000
-08,000

Required:
Usingthegiveninformation,prepareacashbudgetforNovember.
ANSWER:
Cashrecei
pts:Sal
es:
October($200,0000.50 0.99*)
November($180,0000.500.99*)
Total
Cashdisbursements:
Materials
Salariesandwages
Maintenanceandrepairs
Utilitiesandother
Dividends
Paymentonbonds
Netcashinflow(outflow)
*Averagediscountis1%(2%1/2)

$99,000
89,100
$188,100

$44,000
68,000
18,000
14,000
10,000
8,000

162,000
$ 26,100

201.
ThunderboltCorporationisintheprocessofpreparingitsbudgetfornextyear.Costofgoodssoldhasbeenestim
atedat60percentofsales.Merchandisepurchasesaretobemadeduringthemonthprecedingthemonthofthesales.Thun
derboltpays60percentinthemonthofpurchase,and40percentinthemonthfollowing.Wagesareestimatedat20percento
fsalesandarepaidduringthemonthofsale.Otheroperatingcostsamountingto10percentofsalesaretobepaidinthemont
hfollowingthesale.TheaccountspayablebalanceonJune30was
$48,000.
Month
June
July
August
September
October
November

Sales
$170,000
200,000
120,000
150,000
160,000
100,000

Required:
PrepareascheduleofcashdisbursementsforJuly,August,andSeptember.
ANSWER:

Sales
Cost of Goods Sold

July
October
$200,000
0.60
$120,000

July
CashPaidtoSuppliers
June
July ($72,000)
August ($90,000)
September ($96,000)
Total cash paid to suppliers
Cash paid for wages
Cash paid for operating cost
Total cash disbursements

August

September

$120,000
0.60
$ 72,000

$150,000
0.60
$ 90,000

August
$ 48,000
43,200

$160,000
0.60
$ 96,000

September

$ 28,800
54,000

$91,200

$82,800

$36,000
57,600
$93,600

40,000
17,000
$148,200

24,000
20,000
$126,800

30,000
12,000
$135,600

202.
Edison,Inc.,aretailerofspecialtyartsupplies,preparesamonthlymasterbudget.DatafortheSeptembermas
terbudgetaregivenbelow:
a. TheAugust31stbalancesheet:
Cash
Accountsreceivable
Inventory
Buildingandequipment(net)

$25,500
90,000
28,800
200,000

Accountspayable
Capitalstock
Retainedearnings

$ 53,760
265,000
25,540

b. ActualsalesforAugustandbudgetedsalesforSeptember,October,andN
ovemberaregivenbelow:
August
September
October
November

$120,000
360,000
200,000
180,000

c. Salesare25percentforcashand75percentoncredit.Allcreditsalesarecollectedinthemonthfollowingthes
ale.Therearenobaddebts.
d. Thegrossmarginpercentageis60percentofsales.Thedesiredendinginventoryisequalto20percentofthefollow
ingmonth'scostofgoodssold.Onefifthofthepurchasesarepaidforinthemonthofpurchaseandtheothersarepurc
hasedonaccountandpaidinfullthefollowingmonth.
e. Themonthlycashoperatingexpensesare$80,000,includingthemonthlydepreciationexpenseof$7,000.
f. DuringSeptember,Edison,Inc.,willpurchasenewofficeequipmentfor$17,000cash.
g. Dividendsof$13,500weredeclaredandpaidinSeptember.
h. Thecompanymustmaintainaminimumcashbalanceof$25,000.Alineofcreditisusedtomaintainthisbalance.B
orrowingwillbemadeinincrementsof$1,000.Allborrowingisdoneatthebeginningofthemonthandrepayment
saremadeattheendofthemonth.Theannualinterestrateis12percent,paidwhentheloanisrepaid(ignoreaccrual
ofinterest).
Required:
Prepareabalancesheet,incomestatement,andcashbudgetforthemonthofSeptember.
ANSWER:
BalanceSheet:
Cash
Accountsreceivable
Inventory
Buildingandequipment(net)

Income Statement:
Revenue
COGS
Gross margin
Operating expenses
Net income

$ 25,000
270,000
16,000
210,000
$521,000

Accountspayable
Loanspayable
Capitalstock
Retainedearnings

$360,000
144,000
$216,000
80,000
$136,000

$104,960
3,000
265,000
148,040
$521,000

Cash budget:
Beginning cash balance
Cash receipts:
September
August
Cash available
Cash disbursements:
Purchases-August (Accounts Payable)
Purchases-September
Cash expenses
Equipment purchase
Dividends
Total disbursements

$ 25,500
90,000
90,000
$205,500
$ 53,760
26,240
73,000
17,000
13,500

Excess of cash

183,500
$ 22,000

Borrow
Repay
Interest

3,000
-0-0-

Ending cash balance

$ 25,000

203. ThecityofCharlestonhadthefollowingsalesofwaterfortheselectedmonthsof2016:
Month
February
March
April
May
June
July

Sales
$50,000
45,000
60,000
42,500
70,000
120,000

Allsalesareoncredit.Historically,50percentiscollectedinthemonthofsale,35percentduringthefirstmonth
followingthesale,and15percentinthesecondmonthfollowingthesale.
Costofwateraverages75percentofsales.Waterispurchasedinthemonthofsale.Allpurchasesarepaidduringthemonth
followingthepurchase.
Operatingcostsof$10,000arepaideachmonth.
TheApril1cashbalanceisexpectedtobetheminimumbalanceof$5,000.
Moneycanbeborrowedfromalocalbankinincrementsof$1,000.(Donotincludeinterestchargesinyourbudget.)
Required:
PrepareacashbudgetforApril,May,andJune

ANSWER:
April

May

June

Total

Beginning cash balance

Plus: Cash collections:
Month of sale (0.50)
Month following (0.35)
Second mo.following (0.15)
Total cash available

$ 5,000

$14,500

$ 8,500

$ 5,000

30,000
15,750
7,500
$58,250

21,250
21,000
6,750
$63,500

35,000
14,875
9,000
$67,375

86,250
51,625
23,250
$166,125

Less disbursements:
Water
Operating costs
Total disbursements
Ending cash balance

$33,750
10,000
$43,750
$14,500

$45,000
10,000
$55,000
$8,500

$31,875
10,000
$41,875
$25,500

$110,625
30,000
$140,625
$ 25,500

204.
Ruger,Inc.,islookingforfeedbackonperformance.Thecompanycomparesthebudgetfortheyearwiththe
actualcosts.
Rugerhadthefollowingbudgeteddata:
Budgetedvariablecostsperunit:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power

$11.00
15.00
0.80
1.00
0.10

Budgetedfixedoverheadfor2016:
Supervision
Depreciation
Rent

$9,000
13,000
12,000

Required:
Prepareaflexiblebudgetforproductioncostsforthefollowingrangeofactivity:2,500units;4,000units;6,000units.
ANSWER:
Directmaterials
Directlabor
Supplies
Indirectlabor
Power

$11.00
15.00
0.80
1.00
0.10

Budgetedfixedoverheadfor2016:
Supervision
Depreciation
Rent
Totalcosts

2,500Units
$ 27,500
37,500
2,000
2,500
250

9,000
13,000
12,000
$103,750

4,000Units 6,000Units
$ 44,000
$ 66,000
60,000
90,000
3,200
4,800
4,000
6,000
400
600

9,000
13,000
12,000
$145,600

9,000
13,000
12,000
$201,400

205.
Missoula,Inc.,islookingforfeedbackonperformance.Thecompanycomparesthebudgetfortheyearwiththe
actualcosts.
Missoula,Inc.,hadthefollowingbudgeteddata:
Unit sales for 2016
Unit production for 2016
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power

10,000
10,000
$18,000
20,000
10,000
$18.00
25.00
0.20
1.00
0.10

The following actually occurred:

Actual unit sales for 2016

11,000

Actual unit production for 2016

12,000

Actual fixed overhead for 2016:

Supervision
Depreciation
Rent

$17,850
20,000
10,000

Actual variable costs for 2016:

Direct materials
Direct labor
Supplies
Indirect labor
Power

$214,000
320,000
2,500
10,000
1,500

Required:
a. Prepareaperformancereportforallcostsshowingstaticbudgetvariances.
b. Prepareaperformancereportforallcostsshowingflexiblebudgetvariances.

ANSWER:
a. Actual
Fixed costs:
Supervision
Depreciation
Rent

Budgetfor10,000

Variance

$ 17,850
20,000
10,000

$ 18,000
20,000
10,000

$150 F
-0-0-

Variable costs:
Direct materials
Direct labor
Supplies
Indirect labor
Power

$214,000
320,000
2,500
10,000
1,500

$180,000
250,000
2,000
10,000
1,000

$34,000
70,000
500
-0500

Total costs

$595,850

$491,000

$104,850 U

Fixed costs:
Supervision
Depreciation
Rent

Actual
$ 17,850
20,000
10,000

Budget for 12,000

$ 18,000
20,000
10,000

Variable costs:
Direct materials
Direct labor
Supplies
Indirect labor
Power

$214,000
320,000
2,500
10,000
1,500

$216,000
300,000
2,400
12,000
1,200

$ 2,000
20,000
100
2,000
300

Total costs

$595,850

$579,600

$16,250 U

U
U
U
U

b.
Variance
$150 F
-0-0-

F
U
U
F
U

206. Compareandcontraststaticbudgets,flexiblebudgets,andactivity-basedbudgets.
ANSWER:
Astaticbudgetisabudgetdevelopedforonelevelofactivity.Onceasalesnumberiscalculated,theproductio
n,marketing,andadministrativebudgetsarebasedonthatsalesnumber.Astaticbudgetdoesnottakeintocon
siderationfluctuationsinactualdemandandsalesforanorganization.Sinceactualactivityrarelyequalsabu
dgetedlevel,staticbudgetsarenotusuallyrelevantwhenperformancereportsareneeded.Theyareusefulfor
planningpurposes.
Aflexiblebudgetcanprovidecostestimatesforarangeofactivitylevelsorbudgetedcostsforanactuallevelofa
ctivity.Flexiblebudgetsareusefulinplanningandperformancereviews.Thisisbecauseaflexiblebudgetca
nbeusedtocomputewhatthecostsshouldhavebeenforanactuallevelofactivity.Inorderforflexiblebudget
ingtobesuccessful,thecostbehaviorofeachbudgetitemneedstobedetermined.
Activitybasedbudgetsbeginwiththeoutputdesiredanddeterminetheresourcesnecessarytocreatethatoutput.Ea

chdepartmentadoptsanactivity-basedapproachtobudgetinginordertoachievethis.Theactivitybasedbudgetworksbackwardsfromactivitiesandtheirdriverstotheunderlyingcosts.

207.
Collibri,Inc.,hasdoneacostanalysisforitsproductionofbanners.Thefollowingactivitiesandcostdrivershave
beendeveloped:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing

CostFormula
$13,000+$2permachinehour
$45,000+$6permachinehour
$70,000+$500perbatch
$2,000perbatch
$80,000+$150perpurchaseorder

Followingaretheactualcostsofproducing75,000banners:
1,000machinehours;15batches;10purchaseorders
Maintenance
Machining
Inspection
Setups
Purchasing
Required:

$14,000
50,000
70,000
32,000
82,000

Prepareanactivity-basedperformancereport.
ANSWER:

Maintenance
Machining
Inspection
Setups
Purchasing

Actual
$ 14,000
50,000
70,000
32,000
82,000

Budget75,000
$ 15,000
51,000
77,500
30,000
81,500

Variance
$1,000 F
1,000F
7,500F
2,000U
500U

Total

$248,000

$255,000

$7,000F

208.
Ringwold,Inc.,hasdoneacostanalysisforitsproductionofbaseballcards.Thefollowingactivitiesandcostdri
vershavebeendeveloped:
Activity
Photography
Printing
Setups
Purchasing

CostFormula
$50 +$35perlaborhour
$25,000+$0.01permachinehour
$25perbatch
$25+$25perpurchaseorder

Followingaretheactualcostsofproducing35,000cards:
60laborhours;500machinehours;5batches;30purchaseorders
Photography
Printing
Setups
Purchasing

?
$25,000
?
$770

Thefollowingvariancesweregivenintheactivityperformancereport:
Photography
PrintingSetu
psPurchasin
g

$10F
?
$20U
?

Required:
Findthemissingvalues.
Prepareanactivity-basedperformancereportingoodform.
ANSWER:

Photography
Printing
Setups
Purchasing
Total costs

Actual
$2,140
25,000
145
770

Budget
$2,150
25,005
125
775

$28,055

$28,055

Variance
$10F
5F
20U
5F
$-0-

209.
Splendor,Inc.,hasdoneacostanalysisforitsproductionofmotorcycl
elights.
Thefollowingactivitiesandcostdrivershavebeendeveloped:
Activity
CostFormula
Maintenance
$5,000+$8permachinehour
Machining
$25,000+$4permachinehour
Inspection
$90,000+$1,000perbatch
Setups
$5,000perbatch
Purchasing
$100,000+
$100perpurchaseorderRequired:
Prepareanactivity-basedbudgetforthefollowing:

60,000units:
100,000units:

10,000machinehours;30batches;20,000purchaseorders
18,000machinehours;40batches;30,000purchaseorders

ANSWER:

Maintenance
Machining
Inspection
Setups
Purchasing

60,000Units
$ 85,000
65,000
120,000
150,000
2,100,000

100,000Units
$149,000
97,000
130,000
200,000
3,100,000

Total costs

$2,520,000

$3,676,000

210. Discuss the features of an ideal budgetary process.

ANSWER: An ideal budgetary system is one that achieves complete goal congruence and simultaneously
creates adrive in managers to achieve the organizations goals in an ethical manner. While an
ideal budgetarysystem probably does not exist, companies may put into effect some key features
that promote areasonable degree of positive behavior. These features include frequent feedback
on performance,which provides managers with timely performance reports and gives them time
to correct and changeplans as necessary; monetary and nonmonetary incentives, which can
positively encourage managers toachieve the companys goals; and participation, or, the giving
of responsibility to help managers feelmore in control of the making of the budgetary system.

Chapter 9
1. Developingstandardsforinputpricesandquantitiesallowsforamoredetailedunderstandingofflexiblebudgetvariances.
a. True
b. False
ANSWER: True
2. Pricestandardsspecifyamountsandquantitystandardsspecifyprices.
a. True
b. False
ANSWER: False
3. Standardcostsaretheamountthatshouldbespenttoproduceaproductorservice.
a. True
b. False
ANSWER: True
4. Standardcostingisusedinprocessindustriesbecauseitsmoredifficulttoutilize.
a. True
b. False
ANSWER: False
5. Bothmanufacturingandservicefirmsmayusestandardcostingsystems.
a. True
b. False
ANSWER: True
6. Thestandardcostsheetshowscostsneededtomakemanyunitsofoutput.
a. True
b. False
ANSWER: False

7. Theunitquantitystandardscanbeusedtocomputethetotalamountofinputsallowedfortheactualoutput.
a. True
b. False
ANSWER: True

8. Incomputingefficiencyvariances,managerscomputethestandardquantityofmaterialsusedandthestandardhoursallo
wed.
a. True
b. False
ANSWER: True
9. Allvariancesaccountsareclosedoutattheendoftheyear.
a. True
b. False
ANSWER: True
10. Thetotalbudgetvariancesarecategorizedintopricevariancesandusagevariances.
a. True
b. False
ANSWER: True
11. Unfavorablevariancesoccurwheneveractualpricesorusagearelessthanstandardpricesorusage,andtheopposi
teforafavorablevariance.
a. True
b. False
ANSWER: False
12. Thedirectmaterialspricevarianceisthedifferencebetweenactualandstandardpricing.
a. True
b. False
ANSWER: True
13. Thedirectmaterialsusagevarianceisthesumoftheactualquantitiesandthestandardquantitiesofunits.
a. True
b. False
ANSWER: False
14. Themostdetailedmethodtocomputeoverheadvariancesisthefour-variancemethod.
a. True
b. False
ANSWER: True
15. Thethree-variancemethodrequiresdividingcostsintofixedandvariableamounts.
a. True
b. False
ANSWER: False

16. Thevariableoverheadefficiencyvariancemeasuresthechangeinvariableoverheadconsumptionduetoefficientorinef
ficientuseoftheactivitydriverusedtoassignoverheadcoststoproducts.
a. True
b. False
ANSWER: True
17. Instandardcosting,overheadisappliedtoaproductbydebitingworkinprocessandcreditingvariableandfixedoverhead
controlaccounts.
a. True
b. False
ANSWER: True
18. thedirectmaterialsmixvarianceisthedifferenceinthestandardcostofactualinputsandthestandardcostsofinputsthats
houldhavebeenused.
a. True
b. False
ANSWER: True
19. Amixvarianceiscreatedwhenevertheactualmixofinputsisequaltothestandardmix.
a. True
b. False
ANSWER: False
20. Ayieldvarianceoccurswhentheactualoutputisthesameasthestandardoutput.
a. True
b. False
ANSWER: False
21. Theconditionwhereeverythingoperatesperfectlyanddemandsmaximumefficiencyiscall
ed__________.
ANSWER: idealstandards
22. Thefactorswhereactualperformancediffersfromplannedarecalled:

ANSWER: variances
23.

standardsarethestandardsusedforcontinuousimprovement.

ANSWER: Kaizen
24. Thecostingthatestablishespriceandquantitystandardsforinputsiscalled
ANSWER: standard

costing.

25. Thedocumentthatshowstheamountandcostofdirectmaterials,directlabor,andoverheadtomakeaunitofoutputiscal
ledthestandard__________.
ANSWER: costsheet
26.
Thevariancesthatfocusonthedifferencebetweenactualquantityandsta
ndardquantityarecalledthe
variances.
ANSWER: usage
27. Allvariancesaccountsare

attheendoftheoperatingyear.

ANSWER: closed
28. Thesumofthestandardplusallowabledeviationiscalledtheupper

ANSWER: controllimit
29.

Aproduction

wouldmostlikelyberesponsibleforanunfavorablevariableoverheadefficiencyvariance.
ANSWER: supervisor
30.

The
varianceshowsthedifferencebetweenactualoutputandexpectedoutputforagivenamountofinput.

ANSWER: yield
31. Thefollowingconditionwhichdemandsmaximumefficiencyandcanbeachievedonlyifeverythingoperatesperfe
ctlyiscalled:
a. Idealstandards
b. Currentlyattainablestandards
c. Budgetstandards
d. Personnelstandards
ANSWER: a
32. Variancesindicate
a. thecauseofthevariance.
b. whoisresponsibleforthevariance.
c. thatactualperformanceisnotgoingaccordingtoplan.
d. whenthevarianceshouldbeinvestigated.
ANSWER: c
33. Theunitstandardcostis
a. theproductofthestandardpricetimesthestandardquantityforeachunit.
b. thepricestandardforeachunit.
c. theactualcostforastandardproduct.
d. theamountofactualcosttoproduceaunitinastandardizedprocess.

ANSWER: a

34. Insettingpricestandards,thepurchasingmanagermustconsider
a. freight.
b. quality.
c. discounts.
d. allofthese.
ANSWER: d
35. Pricestandardsaretheresponsibilityof
a. accounting.
b. purchasing.
c. personnel.
d. allofthese.
ANSWER: d
36. AllofthefollowingaretrueofcurrentlyattainablestandardsEXCEPT
a. Currentlyattainablestandardsarebasedonanefficientlyoperatingworkforce.
b. Currentlyattainablestandardsarebasedonidealconditions.
c. Currentlyattainablestandardsallowfordowntimeandrestperiods.
d. Currentlyattainablestandardsarebasedonpresentproductionprocessesandtechnology.
ANSWER: b
37. WhichofthefollowingisNOTtrueaboutKaizenStandards?
a. Kaizenstandardsarethestandardsusedforcontinuousimprovement.
b. Kaizenstandardsareacurrentlyattainablestandardthatreflectsplannedimprovement.
c. Kaizenstandardsareconstantlychanging.
d. Kaizenstandardsarethestandardsusedintraditionalcostingsystems.
ANSWER: d
38. Quantitypricestandards
a. arestandardpricemultipliedbystandardquantity.
b. specifyhowmuchofthequantityofinputshouldbeusedforthestandardprice.
c. specifyhowmuchshouldbepaidforthequantityofinputtobeused.
d. specifyhowmuchofthequantityofinputshouldbeusedfortheactualprice.
ANSWER: c
39. ThestandardcostsheetincludesallofthefollowingEXCEPT
a. thestandardquantityperunit.
b. thestandardmaterialcostsperunit.
c. thestandardcostperunit.
d. thestandardlaborhoursallowedforactualproduction.

ANSWER: d

40. ThestandardcostsheetincludesallofthefollowingEXCEPT
a. thestandardcostperunit.
b. thestandardquantityallowedforactualproduction.
c. thestandardprice.
d. thestandardquantityperunit.
ANSWER: b
41. Standardcosting
a. establishespriceandquantitystandardsforinputs.
b. providesjournalentrysupport.
c. isnotusedinunitcosting.
d. noneofthese.
ANSWER: a
42. RowingCompanyhasdevelopedthefollowingstandardsforoneofitsproducts:
Directmaterials:

7pounds$8perpound

Directlabor:

2hours$12.50perhour

Variablemanufacturingoverhead:

2.5hours$7perhour

ThefollowingactivityoccurredduringthemonthofMarch:
Materialspurchased:

5,000poundscosting$42,500

Materialsused:

3,600pounds

Unitsproduced:

500units

Directlabor:

1,150hoursat$11.80/hour

Actualvariable manufacturingoverhead:

$7,500

Thecompanyrecordsmaterialspricevariancesatthetimeofpurchase.
Thevariablestandardcostperunitis
a. $81.00
b. $91.00
c. $98.50
d. $42.50
ANSWER:c
RATIONALE:
SUPPORTINGCALCULATIONS:
Directmaterials(7pounds$8)
Directlabor(2hours$12.50)

$56.00
25.00

Variableoverhead(2.5hours $7)

17.50
$98.50

43. Whichofthefollowingequationsmeasuresthetotalbudgetvariance?
a. AQ(APSP)
b. SP(AQSQ)
c. SQ(APSP)
d. (AQAP)(SQSP)
ANSWER: d
44. Whichofthefollowingequationsmeasuresapricevariance?
a. AQ(APSP)
b. SP(AQSQ)
c. SQ(APSP)
d. (AQSQ)(APSP)
ANSWER: a
45. Theusagevariancesfocusonthedifferencebetween
a. actualquantityusedandstandardquantityallowedforactualproduction.
b. actualcostsofinputsandstandardcostsofinputs.
c. actualquantityusedandstandardquantityallowedforbudgetedproduction.
d. bothaandb.
ANSWER: a
46. DuringNovember,10,000unitswereproduced.Thestandardquantityofmaterialallowedperunitwas10poundsatasta
ndardcostof$3perpound.Iftherewasanunfavorableusagevarianceof$18,750forNovember,theactualquantityofmat
erialsusedmustbe
a. 23,438pounds.
b. 93,750pounds.
c. 31,875pounds.
d. 106,250pounds.
ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
10,00010 $3=$300,000
$300,000+$18,750=$318,750
$318,750/$3=106,250pounds
47. DuringSeptember,12,000poundsofmaterialswerepurchasedatacostof$8perpound.Iftherewasanunfavor
abledirectmaterialspricevarianceof$6,000forJune,thestandardcostperpoundmustbe
a.$8.50.
b.$8.00.
c.$7.00.

d.$7.50.

ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
(12,000$8)$6,000=$90,000
$90,000/12,000pounds=$7.50
48. Price/ratevariancesfocusonthedifferencesbetween
a. actualandstandardinputsmultipliedbyactualprices.
b. actualandstandardunitpricesofaninputmultipliedbytheactualquantityofinputs.
c. actualandstandardinputsmultipliedbystandardprices.
d. actualandstandardunitpricesofaninputmultipliedbythebudgetedquantityofinputs.
ANSWER: b
49. FirecrackerCompanyhasdevelopedthefollowingstandardsforoneofitsproducts.
Directmaterials:

15pounds$16perpound

Directlabor:

4hours $24perhour

Variablemanufacturingoverhead:

4hours $14perhour

ThefollowingactivityoccurredduringthemonthofOctober:
Materialspurchased:

10,000poundscosting$170,000

Materialsused:

7,200pounds

Unitsproduced:

500units

Directlabor:

2,300hoursat$23.60/hour

Actualvariable manufacturing overhead:

$30,000

Thecompanyrecordsmaterialspricevariancesatthetimeofpurchase.
Thedirectmaterialspricevarianceis
a. $50,000favorable.
b. $50,000unfavorable.
c. $10,000favorable.
d. $10,000unfavorable.
ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
$170,000(10,000$16)=$10,000unfavorable

Figure9-1
BenderCorporationproduced100unitsofProductAA.Thetotalstandardandactualcostsformaterialsanddirectlaborfor
the100unitsofProductAAareasfollows:
Materials:
Standard:
Actual:

210 pounds at $3.00 per pound

240 pounds at $2.85 per pound

Direct labor:
Standard:
Actual:

400 hours at $15.00 per hour

368 hours at $16.50 per hour

Standard
$630

Actual
$684

6,000
6,072

50. RefertoFigure9-1.WhatisthematerialusagevarianceforBenderCorporation?
a.$90(F)
b.$90(U)
c.$36(F)
d.$36(U)
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
(240210) $3=$90(U)
51. RefertoFigure9-1.WhatisthematerialpricevarianceforBenderCorporation?a.
$30(U)
b.$90(F)
c.$36(U)
d.$36(F)
ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
240($3.00$2.85)=$36(F)
52. DuringSeptember,40,000unitswereproduced.Thestandardquantityofmaterialallowedperunitwas5poundsatastan
dardcostof$2.50perpound.Iftherewasafavorableusagevarianceof$25,000forSeptember,theactualquantityofmater
ialsusedmusthavebeen
a. 210,000pounds.
b. 190,000pounds.
c. 105,000pounds.
d. 95,000pounds.

ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
40,0005$2.50=$500,000
$500,000$25,000=$475,000
$475,000/$2.50=190,000pounds
53. MontanaCompanyusesastandardcostingsystem.Thefollowinginformationpertainstodirectlaborcostsforthemont
hofFebruary:
Standarddirect labor rateper hour

$15.00

Actualdirect laborrate per hour

$13.50

Laborratevariance

$18,000favorable

Actualoutput

1,000units

Standardhoursallowedforactualproduction

10,000hours

HowmanyactuallaborhourswereworkedduringFebruaryforMontanaCompany?
a. 10,000
b. 12,000
c. 1,200
d. 2,000
ANSWER: b
RATIONALE:SUPPORTINGCALCULATIONS:
$18,000/($15.00$13.50)=12,000actualhours
54. MontanaCompanyusesastandardcostingsystem.Thefollowinginformationpertainstodirectlaborcostsforthemonth
ofFebruary:
Standarddirect labor rateper hour

$15.00

Actualdirect laborrate per hour

$13.50

Laborratevariance

$18,000favorable

Actualoutput

1,000units

Standardhoursallowedforactualproduction
10,000hours
WhatisthetotallaborbudgetvarianceforMontanaCompany?
a.$18,000(F)
b.$12,000(U)
c.$18,000(U)
d.$12,000(F)

ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
$18,000/($15.00$13.50)=12,000actualhours
(12,000$13.50)(10,000$15)=$12,000(U)
55. Whichofthefollowingequationsmeasuresthedirectlaborratevariance?
a. (SRAH)(SRSH)
b. (ARSH)(SRAH)
c. (ARAH)(SRAH)
d. noneofthese
ANSWER: c
56. MalkovichCompanyusesastandardcostingsystem.Thefollowinginformationpertainstodirectmaterialsforthemont
hofJuly:
Standardpriceperlb.

$18.00

Actual purchaseprice perlb.

$16.50

Quantitypurchased

3,100lbs.

Quantityused

2,950lbs.

Standardquantityallowedforactualoutput

3,000lbs.

Actualoutput

1,000units

MalkovichCompanyreportsitsmaterialpricevariancesatthetimeofpurchase.Whatisthestandardquantityofdirectmate
rialsperunitforMalkovichCompany?
a. 3.50lbs.
b. 3.00lbs.
c. 3.10lbs.
d. 3.25lbs.
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:3,000/1,000=3.00lbs.

57. MalkovichCompanyusesastandardcostingsystem.Thefollowinginformationpertainstodirectmaterialsforthemont
hofJuly:
Standardpriceperlb.

$18.00

Actual purchaseprice perlb.

$16.50

Quantitypurchased

3,100lbs.

Quantityused

2,950lbs.

Standardquantityallowedforactualoutput

3,000lbs.

Actualoutput

1,000units

MalkovichCompanyreportsitsmaterialpricevariancesatthetimeofpurchase.WhatisthematerialusagevarianceforMal
kovichCompany?
a.$2,850(F)
b.$1,950(F)
c.$900(F)
d.$900(U)
ANSWER: c
RATIONALE:
SUPPORTINGCALCULATIONS:
(2,9503,000)$18=$900(F)
58. MalkovichCompanyusesastandardcostingsystem.Thefollowinginformationpertainstodirectmaterialsforthemont
hofJuly:
Standardpriceperlb.

$18.00

Actual purchaseprice perlb.

$16.50

Quantitypurchased

3,100lbs.

Quantityused

2,950lbs.

Standardquantityallowedforactualoutput

3,000lbs.

Actualoutput

1,000units

MalkovichCompanyreportsitsmaterialpricevariancesatthetimeofpurchase.Whatisthejournalentrytorecordmaterial
purchases?
a. Materials

55,800

MaterialsPriceVariance

4,650

AccountsPayable
b. AccountsPayable

51,150
55,800

Materials
c. Materials
AccountsPayable

55,800
55,800
55,800

d. Materials
MaterialsPriceVariance
4,650
AccountsPayable
55,800
ANSWER: a

51,150

59. Iftheactuallaborrateexceedsthestandardlaborrateandtheactuallaborhoursexceedthenumberofhoursallowed,t
helaborratevarianceandlaborefficiencyvariancewillbe
LaborRateVariance

LaborEfficiencyVariance

a. Favorable

Favorable

b. Favorable

Unfavorable

c. Unfavorable

Favorable

d. Unfavorable

Unfavorable

ANSWER: d
60. DuringJanuary,7,175directlaborhourswereworkedatastandardcostof$20perhour.Ifthedirectlaborratevariancef
orJanuarywas$17,500favorable,theactualcostperdirectlaborhourmustbe
a.$20.50.
b.$25.50.
c.$23.00.
d.$17.56.
ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
7,175$20=$143,500
$143,500$17,500=$126,000
$126,000/7,175=$17.56
61. DuringOctober,10,000directlaborhourswereworkedatastandardcostof$10perhour.Ifthedirectlaborratevariancef
orOctoberwas$4,000unfavorable,theactualcostperdirectlaborhourmustbe
a.$10.40.
b.$10.00.
c.$9.60.
d.$9.20.
ANSWER: a
RATIONALE:
SUPPORTINGCALCULATIONS:
10,000$10=$100,000
$100,000 +$4,000 =$104,000
$104,000/10,000=$10.40

Figure9-2
BodaciousCorporationproduced100unitsofProductAA.Thetotalstandardandactualcostsformaterialsanddirectlabo
rforthe100unitsofProductAAareasfollows:
Materials:
Standard:
Actual:

200 pounds at $3.00 per pound

220 pounds at $2.85 per pound

Direct labor:
Standard:
Actual:

400 hours at $15.00 per hour

368 hours at $16.50 per hour

Standard
$600

$627
6,000
6,072

62. Referto9-2.WhatisthelaborefficiencyvarianceforBodaciousCorporation?
a.$480(U)
b.$480(F)
c.$552(U)
d.$552(F)
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
(368400)$15=$480(F)
63. RefertoFigure9-2.Whatisthejournalentrytorecordlaborvariances?
a. Work in Process
6,072
Payroll
b. Payroll
6,072
Work in Process
c. Work in Process
6,000
Labor Rate Variance
552
Labor Efficiency Variance
Payroll
d. Work in Process
6,000
Labor Efficiency Variance
552
Labor Rate Variance
Payroll
ANSWER: c
64. Asageneralrule,aninvestigationofavarianceshouldbeundertakenonlyifthe
a. varianceisisolated
b. anticipatedbenefitsaregreaterthantheexpectedcosts.
c. varianceisnegative.
d. varianceispositive.
ANSWER: b

Actual

6,072
6,072
480
6,072
480
6,072

65. Thestandardplustheallowabledeviationiscalledthe:
a. standardquantity
b. standardprice
c. uppercontrollimit
d. totalbudgetvariance
ANSWER: c
66. AmaterialspricevariancewouldNOTbecausedby
a. orderingthewrongqualityofmaterials.
b. orderingfromthewrongsupplier.
c. nottakingaquantitydiscount.
d. requiringlaborerstoworkovertime.
ANSWER: d
67. Whichofthefollowingfactorswouldcauseanunfavorablematerialquantityvariance?
a. usingpoorlymaintainedmachinery
b. usinghigherqualitymaterials
c. usingmorehighlyskilledworkers
d. receivingdiscountsforpurchasinglargerthannormalquantities
ANSWER: a
68. Whichofthefollowingfactorswouldcauseanunfavorablelaborratevariance?
a. usinghigherqualitymaterials
b. usinglow-efficiencyworkers
c. usingmoreunskilledworkers
d. usingmorehighlyskilledworkers
ANSWER: d
69. Usingmorehighlyskilleddirectlaborersmightaffectwhichofthefollowingvariances?
a. directmaterialsusagevariance
b. directlaborefficiencyvariance
c. variablemanufacturingoverheadefficiencyvariance
d. allofthese
ANSWER: d
70. Afive-percentwageincreaseforallfactoryemployeeswouldaffectwhichofthefollowingvariances?
a. directmaterialspricevariance
b. directlaborratevariance
c. directlaborefficiencyvariance

d. variablemanufacturingoverheadefficiencyvariance
ANSWER: b

71. WhichisNOTanacceptablemethodofdisposingofvariances?
a. closingthemtocostofgoodssold
b. closingthemtorawmaterials,work-in-process,andfinishedgoods
c. closingthemtowork-in-process,finishedgoods,andcostofgoodssold
d. allareacceptablemethods
ANSWER: b
72. Thestandardoverheadcostassignedtoeachunitofproductmanufacturediscalledthe
a. totalmanufacturingcost.
b. predeterminedoverheadcost.
c. appliedoverheadcost.
d. estimatedoverheadcost.
ANSWER: c
73. Anunfavorablevariableoverheadspendingvariancemaybecausedby
a. theuseofexcessivequantitiesofvariableoverheaditems.
b. thepaymentoflowerpricesforvariableoverheaditemsused.
c. theuseofexcessivequantitiesofthevariableoverheadallocationbase.
d. bothaandb.
ANSWER: a
74. ColinaProductionCompanyusesastandardcostingsystem.Thefollowinginformationpertainsto2016.Directlaborho
ursisthedriverusedtoassignoverheadcoststoproducts.
Actualproduction
Actualfactory overhead costs ($16,500 is fixed)
Actualdirectlaborcosts(11,250hours)

5,500units
$40,125
$131,625

Standarddirectlaborfor5,500units:
Standardhoursallowed
Laborrate

11,000hours
$12.00

Thefactoryoverheadrateisbasedonanactivitylevelof10,000directlaborhours.Standardcostdatafor5,000unitsisasfoll
ows:
Variablefactoryoverhead
Fixedfactoryoverhead
Totalfactoryoverhead
WhatisthevariableoverheadefficiencyvarianceforColinaProductionCompany?
a.$562.50(F)
b.$3,000.00(U)

$22,500
13,500
$36,000

c.$1,687.50(F)
d.$562.50(U)

ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
(11,25011,000)($22,500/10,000)=$562.50(U)
75. ColinaProductionCompanyusesastandardcostingsystem.Thefollowinginformationpertainsto2016.Directlaborh
oursisthedriverusedtoassignoverheadcoststoproducts.
Actualproduction

5,500units

Actual factory overhead costs($16,500 is fixed)

$40,125

Actualdirectlaborcosts(11,250hours)
$131,625Standarddirectlaborfor5,500units:
Standardhoursallowed

11,000hours

Laborrate

$12.00

Thefactoryoverheadrateisbasedonanactivitylevelof10,000directlaborhours.Standardcostdatafor5,000unitsisasf
ollows:
Variablefactoryoverhead
Fixedfactoryoverhead
Totalfactoryoverhead

$22,500
13,500
$36,000

WhatisthefixedoverheadvolumevarianceforColinaProductionCompany?
a.$3,600(F)
b.$1,350(F)
c.$4,125(U)
d.$1,350(U)
ANSWER:b
RATIONALE:
SUPPORTINGCALCULATIONS:
$13,500(11,000($13,500/10,000))=$1,350(F)
76. Ifvariablemanufacturingoverheadisappliedbasedondirectlaborhoursandthereisanunfavorabledirectlaborefficienc
yvariance
a. thedirectmaterialsusagevariancewillbeunfavorable.
b. thedirectlaborratevariancewillbefavorable.
c. thevariablemanufacturingoverheadefficiencyvariancewillbeunfavorable.
d. thevariablemanufacturingoverheadspendingvariancewillbeunfavorable.
ANSWER: c

77. HarrangueCompany'sstandardvariableoverheadrateis$6perdirectlaborhour,andeachunitrequires2standarddirect
laborhours.DuringMarch,Harryrecorded6,000actualdirectlaborhours,
$37,000actualvariableoverheadcosts,and2,900unitsofproductmanufactured.
WhatisthetotalvariableoverheadvarianceforMarchforHarrangue?a.
$2,200(U)
b.$600(U)
c.$1,000(U)
d.$1,200(U)
ANSWER: a
RATIONALE:
SUPPORTINGCALCULATIONS:
$37,000(2,900$62)=$2,200(U)
78. HarrangueCompany'sstandardvariableoverheadrateis$6perdirectlaborhour,andeachunitrequires2standarddirect
laborhours.DuringMarch,Harryrecorded6,000actualdirectlaborhours,
$37,000actualvariableoverheadcosts,and2,900unitsofproductmanufactured.
WhatisthevariableoverheadefficiencyvarianceforMarchforHarrangue?a.
$2,200(U)
b.$2,200(F)
c.$1,200(U)
d.$600(U)
ANSWER: c
RATIONALE:
SUPPORTINGCALCULATIONS:
[6,000(2,9002)]$6=$1,200(U)

79. BiscuitCompanyhasdevelopedthefollowingstandardsforoneofitsproducts.Directlaborhoursisthedriverusedtoassi
gnoverheadcoststoproducts.
Directmaterials:

10pounds $3perpound

Directlabor:

2.5hours $8perhour

Variablemanufacturingoverhead:

2.5hours$2perhour

ThefollowingactivityoccurredduringthemonthofJune:
Materialspurchased:

125,000poundsat$2.60perpound

Materialsused:

110,000pounds

Unitsproduced:

10,000units

Directlabor:

24,000hoursat$7.50perhour

Actual variable manufacturing overhead:

$51,000

Thecompanyrecordsmaterialspricevariancesatthetimeofpurchase.
Thedirectlaborratevarianceis
a. $12,000favorable.
b. $8,000favorable.
c. $12,000unfavorable.
d. $8,000unfavorable.
ANSWER: a
RATIONALE:
SUPPORTINGCALCULATIONS:
(24,000$7.50)(24,000$8)=$12,000favorable
80. BiscuitCompanyhasdevelopedthefollowingstandardsforoneofitsproducts.Directlaborhoursisthedriverusedtoassi
gnoverheadcoststoproducts.
Directmaterials:

10pounds $3perpound

Directlabor:

2.5hours $8perhour

Variablemanufacturingoverhead:

2.5hours $2perhour

ThefollowingactivityoccurredduringthemonthofJune:
Materialspurchased:

125,000poundsat$2.60perpound

Materialsused:

110,000pounds

Unitsproduced:

10,000units

Directlabor:

24,000hoursat$7.50perhour

Actual variablemanufacturing overhead:

$51,000

Thecompanyrecordsmaterialspricevariancesatthetimeofpurchase.
Thevariablemanufacturingoverheadefficiencyvarianceis
a. $1,000favorable.
b. $2,000favorable.
c. $1,000unfavorable.
d. $3,000unfavorable.

ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
(24,000$2)(10,0002.5$2)=$2,000favorable
81. BiscuitCompanyhasdevelopedthefollowingstandardsforoneofitsproducts.Directlaborhoursisthedriverusedtoassi
gnoverheadcoststoproducts.
Directmaterials:

10pounds $3perpound

Directlabor:

2.5hours $8perhour

Variablemanufacturingoverhead:

2.5hours$2perhour

ThefollowingactivityoccurredduringthemonthofJune:
Materialspurchased:

125,000poundsat$2.60perpound

Materialsused:

110,000pounds

Unitsproduced:

10,000units

Directlabor:

24,000hoursat$7.50perhour

Actual variable manufacturing overhead:

$51,000

Thecompanyrecordsmaterialspricevariancesatthetimeofpurchase.
Thedirectlaborefficiencyvarianceis
a. $8,000unfavorable.
b. $8,000favorable.
c. $20,000unfavorable.
d. $20,000favorable.
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
(24,000$8)(10,0002.5$8)=$8,000favorable
82. Whichofthefollowingpeopleismostlikelyresponsibleforanunfavorablevariableoverheadefficiencyvariance?
a. productionsupervisor
b. accountant
c. personneldirector
d. supplier
ANSWER: a
83. Avariableoverheadefficiencyvariancecouldbecausedby
a. usingapoorqualitymaterialthatneedsmorelabortimetomeetproductionstandards.

b. nottakingaquantitydiscount.
c. payingmorethanthestandardrateforlabor.
d. priceincreasesonthematerials.
ANSWER: a

84. Ifacompanyproducesfewerunitsthanexpected,therewillbe
a. afavorablebudgetvariance.
b. anunfavorablespendingvariance.
c. afavorablevolumevariance.
d. anunfavorablevolumevariance.
ANSWER: d
85. Totalfixedoverheadbudgetvarianceisalwaysequalto
a. fixedoverheadvolumevariance.
b. fixedoverheadvolumevarianceplusfixedoverheadspendingvariance.
c. totalvariableoverheadbudgetvarianceplusfixedoverheadspendingvariance.
d. totalvariableoverheadbudgetvariance.
ANSWER: b
86. CroissantCompany'sstandardfixedoverheadcostis$6perdirectlaborhourbasedonbudgetedfixedcostsof
$600,000.Thestandardallowsonedirectlaborhourperunit.During2016,Crawfordproduced110,000unitsofproduct,
(withintherelevantrangeofactivity)incurred$630,000offixedoverheadcosts,andrecorded212,000actualhoursofdi
rectlabor.
WhatisCroissant'sfixedoverheadspendingvariancefor2016?a.
$60,000(F)
b.$24,000(F)
c.$30,000(U)
d.$36,000(U)
ANSWER: c
RATIONALE:
SUPPORTINGCALCULATIONS:
$630,000$600,000=$30,000(U)
87. SomalianCorporationusesastandardcostingsystem.InformationforthemonthofMayisasfollows:
Actualmanufacturing overhead costs ($26,000 isfixed)
$80,000Directlabor:
Actual hours worked

12,000hrs.

Standard hours allowed for actualproduction

10,000hrs.

Average actuallaborcostper hour

$18

Thefactoryoverheadrateisbasedonanormalvolumeof12,000directlaborhours.Standardcostdataat12,000directlaborh
ourswereasfollows:
Variablefactoryoverhead
Fixedfactoryoverhead
Totalfactoryoverhead

$48,000
24,000
$72,000

WhatisthevariableoverheadefficiencyvarianceforSomalian?
a.$2,000(U)
b.$20,000(U)
c.$4,000(U)
d.$8,000(U)

ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
(12,00010,000)($48,000/12,000)=$8,000(U)
88. SomalianCorporationusesastandardcostingsystem.InformationforthemonthofMayisasfollows:
Actualmanufacturing overhead costs ($26,000 is fixed)
$80,000Directlabor:
Actual hours worked

12,000hrs.

Standard hours allowed for actual production

10,000hrs.

Average actuallaborcostper hour

$18

Thefactoryoverheadrateisbasedonanormalvolumeof12,000directlaborhours.Standardcostdataat12,000directlaborh
ourswereasfollows:
Variablefactoryoverhead
Fixedfactoryoverhead
Totalfactoryoverhead

$48,000
24,000
$72,000

WhatisthefixedoverheadspendingvarianceforSomalian?
a.$4,000(U)
b.$8,000(U)
c.$2,000(U)
d.$20,000(U)
ANSWER: c
RATIONALE:
SUPPORTINGCALCULATIONS:
$26,000$24,000=$2,000(U)
89. CroissantCompany'sstandardfixedoverheadcostis$6perdirectlaborhourbasedonbudgetedfixedcostsof
$600,000.Thestandardallows1directlaborhourperunit.During2016,Croissantproduced110,000unitsofproduct,incurr
ed$630,000offixedoverheadcosts,andrecorded212,000actualhoursofdirectlabor.
WhatisthestandardactivitylevelonwhichCroissantbaseditsfixedoverheadrate?
a. 100,000directlaborhours
b. 105,000directlaborhours
c. 110,000directlaborhours
d. 50,000directlaborhours
ANSWER: a
RATIONALE:

SUPPORTINGCALCULATIONS:
$600,000/$6=100,000DLH

90. CroissantCompany'sstandardfixedoverheadcostis$6perdirectlaborhourbasedonbudgetedfixedcostsof
$600,000.Thestandardallows1directlaborhourperunit.During2016,Croissantproduced110,000unitsofproduct,inc
urred$630,000offixedoverheadcosts,andrecorded212,000actualhoursofdirectlabor.
WhatisCroissant'sfixedoverheadvolumevariancefor2016?
a.$60,000(U)
b.$24,000(F)
c.$36,000(U)
d.$60,000(F)
ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:$600,000(110,0001$6)=$60,000(F)
91. Ifactualfixedmanufacturingoverheadwas$55,000andtherewasa$1,400unfavorablespendingvarianceanda
$1,000unfavorablevolumevariance,budgetedfixedmanufacturingoverheadmusthavebeen
a.$57,400.
b.$53,600.
c.$54,000.
d.$51,700.
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
$55,000$1,400=$53,600
92. Fixedmanufacturingoverheadwasbudgetedat$200,000,and25,000directlaborhourswerebudgeted.Ifthefixedover
headvolumevariancewas$8,000favorableandthefixedoverheadspendingvariancewas$6,000unfavorable,fixedman
ufacturingoverheadappliedmustbe
a.$208,000.
b.$206,000.
c.$202,000.
d.$194,000.
ANSWER:a
RATIONALE:
SUPPORTINGCALCULATIONS:
$200,000+$8,000=$208,000
93. Fixedmanufacturingoverheadwasbudgetedat$105,000,and25,000directlaborhourswerebudgeted.Ifthefixedover
headvolumevariancewas$4,000unfavorableandthefixedoverheadspendingvariancewas$1,500favorable,fixedman
ufacturingoverheadappliedmustbe
a.$109,000.
b.$106,500.
c.$106,500.
d.$101,000.

ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
$105,000$4,000=$101,000

94. Theformulaforthefixedoverheadspendingvarianceis:
a. StandardfixedoverheadrateStandardHours
b. AFOHBFOH
c. Appliedfixedoverheadbudgetedfixedoverhead
d. (AHSH)SVOR
ANSWER: b

Figure9-3
AlumniManufacturingCompanyhasthefollowinginformationpertainingtoanormalmonthlyactivityof10,000units:
Standardfactoryoverheadratesarebasedonanormalmonthlyvolumeofonestandarddirecthourperunit.Standardfactory
overheadratesperdirectlaborhourare:
Fixed
Variable

$6.00
10.00

Unitsactuallyproducedincurrentmonth
Actualfactoryoverheadcostsincurred(inclu
des$70,000fixed)
Actualdirectlaborhours

$16.00
9,000units

$156,000
9,000hours

95. RefertoFigure9-3.WhatisthevariableoverheadspendingvarianceforAlumni?
a. $0
b.$4,000(F)
c.$86,000(U)
d.$10,000(F)
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
$156,000$70,000($109,000)=$4,000(F)
96. RefertoFigure9-3.WhatisthefixedoverheadspendingvarianceforAlumni?
a.$10,000(U)
b.$6,000(U)
c.$4,000(F)
d.$-0ANSWER: a
RATIONALE:
SUPPORTINGCALCULATIONS:$70,000(10,000$6)=$10,000(U)

97. RefertoFigure9-3.WhatisthefixedoverheadvolumevarianceforAlumni?
a.$10,000(F)
b.$-0c.$4,000(F)
d.$6,000(U)
ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
($6 10,000)($69,0001)=$6,000(U)
98. FormidableCompanycollectedthefollowinginformation:
Standardcostsperunit:
Variableoverhead
Fixedoverhead

4machinehours@$6permachinehour
4machinehours@$10permachinehour

Actualoutput

20,000units

Denominator (normal capacity)output

21,000units

Actualmachinehours

79,000machinehours

Actual variable overhead cost

Actual fixed overhead cost
Usingthetwovariancemethod,whatisthebudgetvariance?
a.$70,000(U)
b.$30,000(F)
c.$30,000(U)
d.$70,000(F)
ANSWER: c
RATIONALE:
SUPPORTINGCALCULATIONS:
($540,000+$810,000)[($2420,000)+($4021,000)]=$30,000(U)

$540,000

99. FormidableCompanycollectedthefollowinginformation:
Standardcostsperunit:
Variableoverhead
Fixedoverhead

4machinehours@$6permachinehour
4machinehours@$10permachinehour

Actualoutput

20,000units

Denominator (normal capacity)output

21,000units

Actualmachinehours

79,000machinehours

Actual variable overhead cost

$540,000

Actual fixed overhead cost

Usingthetwovariancemethod,whatisthetotalvariance?
a.$30,000(U)
b.$70,000(U)
c.$70,000(F)
d.$30,000(F)
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
($540,000+810,000)[($2420,000)+($40 20,000)]=$70,000(U)
100. FormidableCompanycollectedthefollowinginformation:
Standardcostsperunit:
Variableoverhead
Fixedoverhead

4machinehours@$6permachinehour
4machinehours@$10permachinehour

Actualoutput

20,000units

Denominator (normal capacity)output

21,000units

Actualmachinehours
Actual variable overhead cost
Actual fixed overhead cost
Usingthetwovariancemethod,whatisthevolumevariance?
a.$6,000(F)
b.$40,000(F)
c.$40,000(U)
d.$6,000(U)
ANSWER: c

79,000machinehours
$540,000

RATIONALE:
SUPPORTINGCALCULATIONS:
[($2420,000)+(21,000$40)][($2420,000)+ ($4020,000)] =$40,000(U)

101. FormidableCompanycollectedthefollowinginformation:
Standardcostsperunit:
Variable overhead
Fixed overhead

4machinehours@$6permachinehour
4machinehours@$10permachinehour

Actualoutput

20,000units

Denominator(normal capacity)output

21,000units

Actualmachinehours

79,000machinehours

Actualvariable overhead cost

$540,000

Actualfixed overhead cost

Usingthethreevariancemethod,whatisthespendingvariance?
a.$36,000(F)
b.$30,000(U)
c.$36,000(U)
d.$30,000(F)
ANSWER: c
RATIONALE:
SUPPORTINGCALCULATIONS:
($540,000+$810,000)[($679,000)+($40 21,000)]=$36,000(U)
102.
FormidableCompanycollectedthefollowinginfor
mation:
Standardcostsperunit:
Variableoverhead
Fixedoverhead

4machinehours@$6permachinehour
4machinehours@$10permachinehour

Actualoutput

20,000units

Denominator (normal capacity)output

21,000units

Actualmachinehours
Actual variable overhead cost
Actual fixed overhead cost
Usingthethreevariancemethod,whatisthebudgetvariance?
a.$24,000(U)
b.$24,000(F)
c.$6,000(U)
d.$6,000(F)

79,000machinehours
$540,000

ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
[($679,000)+(21,000$40)][($680,000) +(21,000$40)]=$6,000(F)

103. Amixvarianceis
a. createdwhenevertheactualmixofinputsdiffersfromthestandardmix.
b. thedifferenceinthestandardcostoftheactualmixofinputsusedandthestandardcostofthemixofinputsthatshouldh
avebeenused.
c. bothaandbarecorrect.
d. noneofthesearecorrect.
ANSWER: c

Figure9-4
SanFranciscoCorporationusestwomaterialsintheproductionofitsproduct.Thematerials,XandY,havethefollowing
standards:
Material
X
Y

StandardMix
3,500units
1,500units

Yield

StandardUnitPrice
$1.00perunit
3.00perunit

StandardCost
$3,500
$4,500

4,000units

DuringApril,thefollowingactualproductioninformationwasprovided:
Material
X
Y

ActualMix
30,000units
20,000units

Yield

36,000units

104. RefertoFigure9-4.Whatisthematerialsmixvariance?
a.$10,000(U)
b.$5,000(F)
c.$10,000(F)
d.$15,000(F)
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
SM(X)=3,500/5,000(30,000+20,000)=35,000
SM(Y)=1,500/5,000 (30,000+20,000)=15,000
Material

AQ

SM

AQSM

SP

X 30,000

35,000

(5,000)

$1.00

$(5,000)

Y 20,000

15,000

5,000

3.00

15,000
$10,000

(AQSM)SP

(U)

105. RefertoFigure9-4.Whatisthematerialsusagevariance?
a.$18,000(U)
b.$ 8,000(U)
c.$8,000(F)
d.$10,000(U)
ANSWER: a
RATIONALE:
SUPPORTINGCALCULATIONS:
MUV

=Mixvariance+Yieldvariance
=$10,000(U)+$8,000(U)=$18,000(U)

MixVariance
SM(X)=3500/5000(30,000+20,000)=35,000
SM(Y)=1500/5000(30,000+20,000)=15,000
Material
X
Y

AQ
30,000
20,000

SM
35,000
15,000

AQSM
(5,000)
5,000

SP
$1.00
3.00

(AQSM)SP
$(5,000)
15,000
$10,000 (U)

YieldVarianceSTANDARDYIELD=(4,000/5,000) 50,000= 40,000

(40,00036,000)($8,000/4,000)=$8,000(U)
106. RefertoFigure9-4.Whatisthematerialsyieldvariance?
a.$4,000(F)
b.$4,000(U)
c.$8,000(F)
d.$8,000(U)
ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
Labor Type
Mixing
Bottling

AQ
4,500
3,000

SM
5,000
2,500

Materialsyieldvariance:
(4,500+3,000)(4,000/(3,500+1,500)=40,000
(40,00036,000)($8,000/4,000)=$8,000(U)

AQ SM
(500)
500

SP
$10.00
5.00

(AQ SM)SP
$(5,000)
2,500
$2,500 (F)

107.
TheSanJoseCorporationusestwomaterialsintheproductionofitsproduct.Thematerials,GandH,havethe
followingstandards:
Material
G
H

StandardMix
5,250units
2,250units

StandardUnitPrice
$1.50perunit
4.50perunit

StandardCost
$7,875
$10,125

Yield
6,000units
DuringJune,thefollowingactualproductioninformationwasprovided:
Material
G
H

ActualMix
45,000units
30,000units

Yield

54,000units

Whatisthematerialsmixvariance?
a.$18,000(F)
b.$18,000(U)
c.$22,500(F)
d.$22,500(U)
ANSWER: d
RATIONALE:
SUPPORTINGCALCULATIONS:
SM(G)=5,250/7,500(45,000+30,000)=52,500
SM(H)=2,250/7,500 (45,000+30,000)=22,500
Material
G
H

AQ
45,000
30,000

SM
52,500
22,500

AQSM
(7,500)
7,500

SP
$1.50
4.50

(AQSM)SP
$(11,250)
33,750
$22,500 (U)

108.
TheSanJoseCorporationusestwomaterialsintheproductionofitsproduct.Thematerials,GandH,havethefoll
owingstandards:
Material
G
H

StandardMix
5,250units
2,250units

Yield

StandardUnitPrice
$1.50perunit
4.50perunit

StandardCost
$7,875
$10,125

6,000units

DuringJune,thefollowingactualproductioninformationwasprovided:
Material
G
H

ActualMix
45,000units
30,000units

Yield

54,000units

Whatisthematerialsyieldvariance?
a.$6,000(F)
b.$6,000(U)
c.$18,000(U)
d.$18,000(F)
ANSWER: c
RATIONALE:
SUPPORTING CALCULATIONS:
(6,000/7,500) 75,000 = 60,000
(60,000 54,000) ($18,000/6,000) = $18,000 (U)
109.
ArtigasEnterprisesusestwomaterialsintheproductionofitsproduct.Thematerials,LandM,havethefollowin
gstandards:
Material
L
M

Standard Mix
1,750 units
750 units

Yield

2,000 units

Standard Unit Price

$0.50 per unit
1.50 per unit

DuringJanuary,thefollowingactualproductioninformationwasprovided:
Material
L
M

ActualMix
15,000units
10,000units

Yield

18,000units

Whatisthematerialsmixvariance?
a.$2,500(U)
b.$2,000(F)

Standard Cost
$ 875
$1,125

c.$2,500(F)
d.$2,000(U)

ANSWER: a
RATIONALE:
SUPPORTINGCALCULATIONS:
SM(L)=1,750/2,500(15,000+10,000)=17,500
SM(M)=750/2,500(15,000+ 101,000) = 7,500
Material
L
M

AQ
15,000
10,000

SM
17,500
7,500

AQ SM
(2,500)
2,500

SP
$0.50
1.50

(AQ SM)SP
$(1,250)
3,750
$2,500 (U)

110.
ArtigasEnterprisesusestwomaterialsintheproductionofitsproduct.Thematerials,LandM,havethefollowin
gstandards:
Material
L
M
Yield

StandardMix
1,750units
750units

StandardUnitPrice
$0.50perunit
1.50perunit

StandardCost
$875
$1,125

2,000units

DuringJanuary,thefollowingactualproductioninformationwasprovided:
Material
L
M

ActualMix
15,000units
10,000units

Yield

18,000units

Whatisthematerialsyieldvariance?
a.$2,500(U)
b.$2,000(U)
c.$2,500(F)
d.$2,000(F)
ANSWER: b
RATIONALE:
SUPPORTING CALCULATIONS:
(2,000/2,500) 25,000 = 20,000
(20,000 18,000) ($2,000/2,000) = $2,000 (U)

111. Thefollowinginformationisprovidedaboutthreematerialsutilizedintheproductionofaproduct:
Material
X
Y
Z

StandardMix
1,250units
750units
500units

StandardUnitPrice
$3.00perunit
5.00perunit
4.00perunit

StandardCost
$3,750
$3,750
$2,000

Yield2,250units
DuringMay,thefollowingactualproductioninformationwasprovided:
Material

ActualMix

X 10,000units
Y
Z

5,000units
2,500units

Yield

15,000units

CalculatetheMaterialmixvariance.
a.$1,500(U)
b.$1,500(F)
c.$1,250(U)
d.$1,250(F)
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
SM(X)=(1,250/2,500)(10,000+5,000+2,500)=8,750
SM(Y)=(750/2,500)(10,000+5,000+2,500)=5,250
SM(Z)=(500/2,500)(10,000+5,000+2,500)=3,500
Material
X
Y
Z

AQ
10,000
5,000
2,500

SM
8,750
5,250
3,500

AQ SM
1,250
(250)
(1,000)

SP
$3.00
5.00
4.00

(AQ SM)SP
$ 3,750
(1,250)
(4,000)
$1,500 (F)

112. The following information is provided about three materials utilized in the production of a product:
Material
X
Y
Z
Yield

StandardMix
1,250units
750units
500units

StandardUnitPrice
$3.00perunit
5.00perunit
4.00perunit

StandardCost
$3,750
$3,750
$2,000

2,250units

DuringMay,thefollowingactualproductioninformationwasprovided:
Material

ActualMix

X 10,000units
Y
Z

5,000units
2,500units

Yield

15,000units

WhatistheMaterialyieldvariance.
a.$3,167(F)
b.$3,167(U)
c.$6,333(F)
d.$6,333(U)
ANSWER: b
RATIONALE:
SUPPORTINGCALCULATIONS:
(10,000+5,000+2,500)(2,250/1,250+750+500)=15,750
(15,750-15,000) ($9,500/2,250) =$3,167(U)
113.
MontecinoCorporationusestwodifferenttypesoflabortomanufactureitsproduct.Thetypesoflabor,Cutting
andSetup,havethefollowingstandards:
LaborType
Cutting
Setup
Yield

StandardMix
500hours
125hours

StandardUnitPrice
$7.50perunit
5.00perunit

3,125units

DuringJuly,thefollowingactualproductioninformationwasprovided:
LaborType

ActualMix

Cutting

4,375hours

Setup

1,875hours

StandardCost
$3,750
$625

Yield

28,125units

WhatistheLabormixvariance?
a.$3,750(F)
b.$3,750(U)
c.$1,563(F)
d.$1,563(U)
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
SM(Cutting)=(500/625)(4,375+1,875)=5,000
SM(Setup)= (125/625)(4,375+1,875)=1,250
Labor Type
Cutting
Setup

AH
4,375
1,875

SM
5,000
1,250

AH SM
(625)
625

SP
$7.50
5.00

(AQ SM)SP
$(4,688)
3,125
$1,563 (F)

114. Howarestandardsdeveloped?Whatisthedifferencebetweenidealandcurrentlyattainablestandards?
ANSWER:
Historicalexperience,engineeringstudies,andinputfromoperatingpersonnelarethreepotentialsources
ofquantitativestandards.
Idealstandardsarestandardsthatdemandmaximumefficiencyandcanbeachievedonlyifeverythingoperates
perfectly.Nomachinebreakdowns,slack,orlackofskillareallowed.
Currentlyattainablestandardscanbeachievedunderefficientoperatingconditions.Allowanceismadefornor
malbreakdowns,interruptions,lessthanperfectskill,andsoon.
115.
TheAwesomeSystemsCompany,whichusesdirectlaborhourstoassignoverheadcoststoproducts,develop
edthefollowingstandardcostforoneoftheirproducts:
STANDARDCOSTCARDPERUNIT
Materials:10pounds$8perpound

$80.00

Directlabor: 3hours$32perhour

96.00

Variablemanufacturingoverhead:$20perdirectlaborhour
?
Fixedmanufacturingoverhead
?
Totalstandardcostperunit

Thefollowinginformationisavailableregardingthecompany'soperationsfortheperiod:
Unitsproduced:

15,000

Materialspurchased:

180,000pounds@$7.20perpound

Materialsused:

160,000pounds

Directlabor:

18,000hours@$37.00perhour

Manufacturingoverheadincurred:
Variable
Fixed

$880,000
$2,560,000

Budgetedfixedmanufacturingoverheadfortheperiodis$4,800,000,andexpectedcapacityfortheperiodis60,000directl
aborhours.
Required:
a. Calculatethestandardfixedmanufacturingoverheadrate.
b. Completethestandardcostcardfortheproduct.
ANSWER:
a. $80 per DLH
b.

$4,800,000/60,000

STANDARD COST CARD PER UNIT

Material: 10 pounds $8/pound

$ 80.00

Direct labor: 3 hours $32/hour

96.00

Variable overhead: 3 hours $20/hour

60.00

Manufacturing overhead: 3 hours $80/hour

Total standard cost per unit

240.00
$476.00

116. ThefollowingstandardcostsweredevelopedforoneoftheproductsofRazzmatazzCorporation:
STANDARDCOSTCARDPERUNIT
Materials:4feet$14.25perfoot
Directlabor:8hours $10perhour
Variableoverhead:8directlaborhours$8perhour 64.00
Fixedoverhead:8directlaborhours$12perhour 96.00
Totalstandardcostperunit

$57.00
80.00
$297.00

Thefollowinginformationisavailableregardingthecompany'soperationsfortheperiod:
Unitsproduced:

11,000

Materialspurchased:

52,000feet@$13.95perfoot

Materialsused:

40,000feet

Directlabor:

84,000hourscosting$840,000

Manufacturingoverheadincurred:
Variable
Fixed

$756,000
$1,000,000

Budgetedfixedmanufacturingoverheadfortheperiodis$960,000,andthestandardfixedoverheadrateisbasedonexpect
edcapacityof80,000directlaborhours.

Required:
a. Calculatethematerialspricevariance.
b. Calculatethematerialsusagevariance.
c. Calculatethedirectlaborratevariance.
d. Calculatethedirectlaborefficiencyvariance.
e. Calculatethevariablemanufacturingoverheadspendingvariance.
f. Calculatethevariablemanufacturingoverheadefficiencyvariance.
g. Calculatethefixedmanufacturingoverheadspendingvariance.
h. Calculatethefixedmanufacturingoverheadvolumevariance.
ANSWER:
a.
b.
c.
d.
e.
f.
g.
h.

$15,600F
$57,000F
$-0$40,000F
$84,000U
$32,000F
$40,000U
$96,000F

52,000($13.95$14.25)
(40,000$14.25)(11,0004$14.25)
$840,000(84,000$10)
(84,000 $10)(11,0008 $10)
$756,000(84,000$8)
(84,000 $8)(11,000 8$8)
($1,000,000$960,000)
$960,000(11,0008$12)

117. SparinglyManufacturinghasdevelopedthefollowingstandardsforoneofitsproducts.
STANDARDVARIABLECOSTCARD
OneUnitofProduct
Materials:5yards $6peryard
Directlabor:2hours$8perhour
Variablemanufacturingoverhead:2hours$5perhour
Totalstandardvariablecostperunit

$30.00
16.00
10.00
$56.00

Thecompanyrecordsmaterialspricevariancesatthetimeofpurchase.
ThefollowingactivityoccurredduringthemonthofDecember:
Materialspurchased:

5,200yardscosting$29,900

Materialsused:

4,750yards

Unitsproduced:

1,000units

Directlabor:

2,100hourscosting$17,850

Required:
a. Calculatethedirectmaterialspricevariance.
b. Calculatethedirectmaterialsusagevariance.
c. Calculatethedirectlaborratevariance.
d. Calculatethedirectlaborefficiencyvariance.

ANSWER:
a. $1,300F$29,900 (5,200$6)
b. $1,500 F$6(4,7501,0005)
c. $1,050U$17,850 (2,100$8)
d. $800 U $8 (2,1001,0002)
118. BarbaroProductionCompanyhasdevelopedthefollowingstandardsforoneofitsproducts.
STANDARDVARIABLECOSTCARD
OneUnitofProduct
Materials:30squarefeet$5persquarefoot
Directlabor:16hours$7perhour
Variablemanufacturingoverhead:16directlaborhours$5perhour
Totalstandardvariablecostperunit

$150.00
112.00
80.00
$342.00

Thecompanyrecordsmaterialspricevariancesatthetimeofpurchase.Thefollowingactivityoccurredduringthemontho
fApril:
Materialspurchased:

80,000sq.feetat$5.30persq.foot

Materialsused:

74,000squarefeet

Unitsproduced:

2,500units

Directlabor:

42,000hoursat$6.70perhour

Actual variable manufacturing overhead:

$228,000

Required:
a. Calculatethedirectmaterialspricevariance.
b. Calculatethedirectmaterialsusagevariance.
c. Calculatethedirectlaborratevariance.
d. Calculatethedirectlaborefficiencyvariance.
e. Calculatethevariableoverheadspendingvariance.
f. Calculatethevariableoverheadefficiencyvariance.
ANSWER:
a.
b.
c.
d.
e.
f.

$24,000U
$5,000 F
$12,600F
$14,000U
$18,000U
$10,000U

80,000 ($5.30$5.00)
$5 (74,00025,0003)
42,000 ($6.70$7.00)
$7 (42,0002,50016)
$228,000(42,000$5)
$5 (42,0002,50016)

119.
MulliganCompanyusesstandardcostingfordirectmaterialsanddirectlabor.Managementwouldliketo
usestandardcostingforvariableandfixedoverhead.
Thefollowingmonthlycostfunctionsweredevelopedformanufacturingoverheaditems:
OverheadItem

CostFunction

Indirectmaterials

$1.00perDLH

Indirectlabor

$1.25perDLH

Utilities

$0.50perDLH

Insurance

$10,000

Depreciation

$40,000

Thecostfunctionsareconsideredreliablewithinarelevantrangeof20,000to40,000directlaborhours.Thecompanyexpec
tstooperateat25,000directlaborhourspermonth.
InformationforthemonthofJuneisasfollows:
Actualoverheadcostsincurred:Indirectmaterials
Indirect labor
Utilities
Insurance
Depreciation
Total
Actual direct labor hours worked:
Standard direct labor hours allowed for production achieved:

$ 20,000
30,000
12,000
11,000
40,000
$113,000
24,000
27,000

Required:
a. Calculatethefollowingstandardmanufacturingoverheadratesbaseduponexpectedcapacity:
Variablemanufacturingoverhead
Fixedmanufacturingoverheadrate
Totalmanufacturingoverheadrate
b. Calculatethefollowingvariances:
Variableoverheadspendingvariance
Variableoverheadefficiencyvariance
Fixedoverheadspendingvariance
Fixedoverheadvolumevariance
c. Preparethejournalentriestorecordandapplyoverheadcosts.

ANSWER:
a.

SVOR:$2.75/DLH
SFOR:$2.00/DLH
Totalmfg.oh.rate:$4.75/DLH

($1.00+$1.25+$0.50)
($10,000+$40,000)/25,000
($2.75+$2.00)

b.

Variablemanufacturingoverheadspendingvariance
($20,000+$30,000+$12,000)(24,000$2.75)=$4,000F
Variablemanufacturingoverheadefficiencyvariance
(24,000 $2.75)(27,000$2.75)=$8,250F
Fixedmanufacturingoverheadspendingvariance
($51,000$50,000) =$1,000U
Fixedmanufacturingoverheadvolumevariance
[$50,000(27,000$2.00)]=$4,000F

c.
WorkinProcess
Variableoverheadcontrol
Fixedoverheadcontrol

$128,250
$74,250
$54,000

Variableoverheadcontrol
Fixedoverheadcontrol
Variousaccounts

$62,000
$51,000

Fixedoverheadspendingvariance
Variableoverheadcontrol
Fixedoverheadcontrol
Fixedoverheadvolumevariance
Variableoverheadspendingvariance
Variableoverheadefficiencyvariance

$1,000
$12,250
$3,000

CGS

$113,000

$4,000
$4,000
$8,250
$1,000

Fixedoverhead spending variance

Fixedoverheadvolumevariance
Variableoverheadspendingvariance
Variableoverheadefficiencyvariance
CGS

$1,000
$4,000
$4,000
$8,250
$16,250

120.
UnitedCarborundumCompanymanufactures100poundbagsofchemicalsthathavethefollowingunitstandardcostsfordirectmaterialsanddirectlabor:
Directmaterials(100lbs.@$1.00perlb.)
Directlabor(0.5hoursat$24perhour)
Totalstandarddirectcostper100lb.bag

$100.00
12.00
$112.00

ThefollowingactivitieswererecordedforOctober:
1,000bagsweremanufactured.
95,000lbs.ofmaterialscosting$76,000werepurchased.
102,500lbs.ofmaterialswereused.
$12,000waspaidfor475hoursofdirectlabor.
Therewerenobeginningorendingwork-in-processinventories.
Required:
a. Computethedirectmaterialsvariances.
b. Computethedirectlaborvariances.
c. Givepossiblereasonsfortheoccurrenceofeachoftheprecedingvariances.
ANSWER:
a.

Materialpricevariance:
[$76,000(95,000$1.00)]=$19,000F
Materialusagevariance
[102,5001,000(100)] $1.00=$2,500U

b.

Laborratevariance
[$12,000(475hrs.$24)]=$600U
Laborefficiencyvariance
[(0.5 1,000)475hrs.]$24=600F

c.

Allofthematerialpricevariancescouldbecausedbyout-ofdateorinappropriatestandards.Otherpotentialreasonscouldbethatthefirmcouldbepurchasingi
nlargerquantities(largerquantitydiscounts),purchasinglowergradematerials,orthatthesupplie
rcouldbeforcedtoofferalowerpriceduetotheeconomicsoftheirproduct.
Materialusagevariance:
Low-qualitymaterials;lowerskilledworkers;lessefficientmachines;lowemployeemorale.
Laborratevariance:
Higherskilledworkers;longertenuredworkerswithhigherwages.
Laborefficiencyvariance:

Thefirmcouldbeusingamoreexperiencedworkforcethandesired.

121. GlenvilleCompanymanufacturesasingleproductthathasastandardmaterialscostof$20(4unitsofmaterialsat$5peru
nit),standarddirectlaborcostof$9(1hourperunit),andstandardvariableoverheadcostof$4(basedondirectlaborhours
).Fixedoverheadisbudgetedat$17,000permonth.ThefollowingdatapertaintooperationsforMay2016:
Materials purchased:
Materials used in production of 1,500 units of finishedproduct:
Direct labor used:

8,000 units costing $39,400

6,200 units of materials
1,500 hours costing $15,000

Variable overhead costs incurred:

$5,960

Fixed overhead costs incurred:

$17,500

Required:
a. PrepareaperformancereportforGlenvilleforMayusingthefollowingheadings:
1. ActualProductionCosts
2. FlexibleBudgetCosts
3. FlexibleBudgetVariances
b. Computethefollowingvariances(showcalculations):
1. Materialsusagevariance
2. Laborratevariance
3. Laborefficiencyvariance
4. Variableoverheadspendingvariance
5. Variableoverheadefficiencyvariance
6. Fixedoverheadbudgetvariance
c. Giveonepossibleexplanationforeachofthesixvariancescomputedinpart(b).
ANSWER:
a.
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total

Actual
Production Costs
$31,000
15,000
5,960
17,500
$69,460

Flexible
Budget Costs
$30,000
13,500
6,000
17,000
$66,500

Flexible
Budget Variances
$1,000
1,500
40
500
$2,960

b.
1.

Materialsusage variance:
Std. cost of materials used (6,200 units $5)
Std. cost of materials allowed (1,500 4 $5)
Material usage variance

2.

$31,000
30,000
$ 1,000 (U)

Labor rate variance:

Actual labor costs

$15,000

Std. cost of actual labor hours (1,500 $9)

13,500

Labor rate variance

$ 1,500 (U)

(U)
(U)
(F)
(U)
(U)

3.

4.

5.

6.

Labor efficiency variance:

Standard cost of actual hours (1,500 $9)
Standard labor cost allowed (1,500 1 $9)
Labor efficiency variance

$13,500
13,500
$ -0-

Variable overhead spending variance:

Actual variable overhead costs
Std. variable overhead cost for actual hours (1,500 $4)
Variable overhead spending variance

$5,960
6,000
$ 40 (F)

Variable overhead efficiency variance:

Std. variable overhead cost for actual hours
Std. variable overhead cost allowed(1,500 1 $4)
Variable overhead efficiency variance

$6,000
6,000
$ -0-

Fixed overhead budget variance:

Actual fixed overhead
Budgeted fixed overhead
Fixed overhead budget variance

$17,500
17,000
$ 500 (U)

c.
1. Low-qualitymaterials;lowerskilledworkers;lessefficientmachines;lowemployeemorale.
2. Higherskilledworkers;longertenuredworkerswithhigherwages.
3. Normalefficienciesoflaborforce(novariance).
4. Savingsinconsumptionofvariableoverheadcostitemsduetocarefulwork;paymentoflowerpricesforva
riableoverheadcostitems.
5. Causedbysamefactorsthatcausedlaborefficiencyvariance.(seeitem3)
6. Excessive consumption of fixed overhead cost items due to negligence, waste,and poorly
maintained machines; payment of excessive prices for fixedoverhead cost items.
Note:Anyoftheprecedingvariancesalsocouldhaveresultedfromout-of-dateorinappropriatestandards.

122.
StammerCompanyusesthreematerialsintheproductionoftheirproduct.Thematerials,A,B,andC,havethefo
llowingstandards:
Material
A
B
C

Standard Mix
5,000 units
3,000 units
2,000 units

Yield

9,000 units

Standard Unit Price

$2.00 per unit
4.00 per unit
3.00 per unit

Standard Cost
$10,000
$12,000
$ 6,000

During April, the following actual production information was provided:

Material
A
B
C

ActualMix
40,000units
20,000units
10,000units

Yield60,000units
Required:
Calculatethematerialsusage,mix,andyieldvariances.
ANSWER: Materialsmixvariance:
SM(A)=(5,000/10,000)(40,000 + 20,000 + 10,000) = 35,000
SM(B)=(3,000/10,000)(40,000 + 20,000 + 10,000) = 21,000
SM(C)=(2,000/10,000)(40,000 + 20,000 + 10,000) = 14,000
Material
A
B
C

AQ
40,000
20,000
10,000

SM
35,000
21,000
14,000

AQ - SM
5,000
(1,000)
(4,000)

Materialsyieldvariance:
(40,000+20,000+10,000)9,000/(5,000+3,0000+2,000)=63,000
(63,000-60,000) ($28,000/9,000)=$9,333(U)
Materialsusagevariance:
MUV

=Mixvariance+Yieldvariance
=$6,000(F)+$9,333(U)=$3,333(U)

SP
$2.00
4.00
3.00

(AQ - SM)SP
$10,000
(4,000)
(12,000)
$ 6,000 (F)

123. Compareandcontrastmixandyieldvariances.
ANSWER:
Substitutingdirectmaterialsordirectlaborproducesmixandyieldvariances.Amixvarianceiscreatedwhe
nevertheactualmixofinputsdiffersfromthestandardmix.Ayieldvarianceoccurswhenevertheactualyiel
doroutputdiffersfromthestandardyield.Fordirectmaterials,thesumofthemixandyieldvariancesequalst
hedirectmaterialsusagevariance;fordirectlabor,thesumisthedirectlaborefficiencyvariance.Themixva
rianceisthedifferenceinthestandardcostoftheactualmixofinputsusedandthestandardcostofthemixofin
putsthatshouldhavebeenused.Usingaformula,thestandardmixquantitycanbedescribedasSM=Standar
dmixproportionTotalactualinputquantity.Then,themixvariancewillbecomputedas(AQ
SM)SPforeachcomponentofdirectmaterials.Theyieldvarianceiscalculatedby(standardyield
actualyield)
SP.Standardyieldequalstheyieldratiomultipliedbytotalactualinputs.Thedirectlabormixandyieldvarian
cesarecomputedinthesamemannerasthedirectmaterialsmixandyieldvariances.
124.
LaPointeCorporationusestwodifferenttypesoflabortomanufactureitsproduct.Thetypesoflabor,Cuttingan
dSetup,havethefollowingstandards:
LaborType
Cutting
Setup

StandardMix
800hours
200hours

Yield

StandardUnitPrice
$12.00perunit
8.00perunit
5,000units

DuringJanuary,thefollowingactualproductioninformationwasprovided:
LaborType

ActualMix

Cutting

7,000hours

Setup

3,000hours

Yield

45,000units

Required:
Calculatethelaborefficiencyandmixandyieldvariances.

StandardCost
$9,600
$1,600

ANSWER: Labormixvariance:
SM(Cutting)=(800/1,000)(7,000+ 3,000)= 8,000
SM(Setup)=(200/1,000)(7,000 + 3,000) = 2,000
Labor Type
Cutting
Setup

AH
7,000
3,000

SM
8,000
2,000

AH - SM
(1,000)
1,000

SP
$12.00
8.00

(AQ - SM)SP
$(12,000)
8,000
$ 4,000 (F)

Laboryieldvariance:
(7,000+3,000)5,000/(800 + 200) =
50,000(50,000-45,000)
($11,200/5,000)=$11,200(U)
Laborefficiencyvariance:
LEV

=Mixvariance+Yieldvariance
=$4,000(F)+$11,200(U)=$7,200(U)

125. Thefollowinginformationisprovidedaboutthreematerialsutilizedintheproductionofaproduct:
Material
X
Y
Z
Yield

StandardMix
2,500units
1,500units
1,000units

StandardUnitPrice
$3.00perunit
5.00perunit
4.00perunit

4,500units

DuringMay,thefollowingactualproductioninformationwasprovided:
Material
X
Y
Z

Actual Mix
20,000 units
10,000 units
5,000 units

Yield30,000units
Required:
Calculatethematerialsmixandyieldvariances.

StandardCost
$7,500
$7,500
$4,000

ANSWER: Materialsmixvariance:
SM(X) =(2,500/5,000)(20,000+ 10,000 +5,000) =17,500
SM(Y)=(1,500/5,000)(20,000 +10,000 +5,000) =10,500
SM(Z)=(1,000/5,000)(20,000+10,000 +5,000)= 7,000
Material
X
Y
Z

AQ
20,000
10,000
5,000

SM
17,500
10,500
7,000

AQ - SM
2,500
(500)
(2,000)

SP
$3.00
5.00
4.00

(AQ - SM)SP
$7,500
(2,500)
(8,000)
$ 3,000 (F)

Materialsyieldvariance:
(20,000+10,000+5,000)4500/(2,500+1,500+1,000)=31,500
(31,500-30,000) ($19,000/4,500)=$6,333(U)
126.
OrganicsCorporationusestwodifferenttypesoflabortomanufactureitsproduct.Thetypesoflabor,Cuttingan
dSetup,havethefollowingstandards:
LaborType
Cutting
Setup

StandardMix
400hours
100hours

StandardUnitPrice
$6.00perunit
4.00perunit

Yield2,500units
DuringJuly,thefollowingactualproductioninformationwasprovided:
LaborType

ActualMix

Cutting

3,500hours

Setup

1,500hours

Yield22,500units
Required:
Calculatethelabormixandyieldvariances.

StandardCost
$2,400
$400

ANSWER: Labormixvariance:
SM(Cutting)=(400/500)(3,500 + 1,500) = 4,000
SM(Setup)=(100/500)(3,500+ 1,500)= 1,000

Labor Type
Cutting
Setup

AH
3,500
1,500

SM
4,000
1,000

AH - SM
(500)
500

SP
$6.00
4.00

(AQ - SM)SP
$(3,000)
2,000
$ 1,000 (F)

Laboryieldvariance:
(3,500+1,500)2,500/(400 + 100) =
25,000(25,000-22,500) ($2,800/2,500)
=$2,800(U)
127. ProductionofaproductutilizesmaterialsD,E,andF.Thefollowingaretheirstandards:
Material
D
E
F

StandardMix
6,000units
4,000units
2,000 units

StandardUnitPrice
$1.00perunit
2.00perunit
1.50 per unit

Yield 8,000 units

DuringAugust,thefollowingactualproductioninformationwasprovided:
Material
D
E
F

ActualMix
37,000units
17,000units
7,000units

Yield50,000units
Required:
Calculatethematerialsmix,yield,andusagevariances.

StandardCost
$6,000
$8,000
$3,000

ANSWER: Materialsmixvariance:
SM(D)=(6,000/12,000)(37,000 +17,000 + 7,000) = 30,500
SM(E)=(4,000/12,000)(37,000+ 17,000 + 7,000)= 20,333
SM(F)=(2,000/12,000)(37,000 + 17,000 +7,000) = 10,167
Material
D
E
F

AQ
37,000
17,000
7,000

SM
30,500
20,333
10,167

AQ - SM
6,500
(3,333)
(3,167)

SP
$1.00
2.00
1.50

(AQ - SM)SP
$ 6,500
(6,666)
(4,751)
$ 4,917 (F)

Materialsyieldvariance:
(37,000+17,000+7,000)(8,000/6,000+4,000+2,000)=40,667
(40,667-50,000)($17,000/8,000)=$19,833(F)
Materialsusagevariance:
MUV
=Mixvariance+Yieldvariance
= $4,917(F) +$19,833(F) =$24,750(F)
128.
MozambiqueIndustriesusestwodifferenttypesoflabortomanufactureitsproduct.Thetypesoflabor,Cutting
andSetup,havethefollowingstandards:
LaborType
Cutting
Setup

StandardMix
200hours
800hours

StandardUnitPrice
$12.00perunit
8.00perunit

Yield4,000units
DuringSeptember,thefollowingactualproductioninformationwasprovided:
LaborType

ActualMix

Cutting

7,000hours

Setup

3,000hours

Yield42,000units
Required:
Calculatethelabormixandyieldvariances.

StandardCost
$2,400
$6,400

ANSWER: Labormixvariance:
SM(Cutting)=(200/1,000)(7,000+ 3,000)= 2,000
SM(Setup)=(800/1,000)(7,000 + 3,000) = 8,000
Labor Type
Cutting
Setup

AH
7,000
3,000

SM
2,000
8,000

AH - SM
5,000
(5,000)

SP
$12.00
8.00

(AQ - SM)SP
$ 60,000
$(40,000)
$ 20,000 (U)

Laboryieldvariance:
(7,000+3,000)4,000/(200 + 800) =
40,000(40,000-42,000)($8,800/4,000)
=$4,400(F)
129.
TheStrongholdCorporationusestwomaterialsandtwotypesoflabortomanufactureaproduct.Thefollowing
aretheirstandards:
Material
P
Q
Yield

StandardUnitPrice
$2.00perunit
5.00perunit

Standard Mix
300 hours
150hours

Standard Unit Price

$8.00 per unit
6.00perunit

6,000units

DuringthemonthofNovember,thefollowingactualproductioninformationwasprovided:

P
Q

StandardCos
t
$8,000
$22,500

5,000units

Labor Type
Grinding
Polishing
Yield

StandardMix
5,500units
4,500units

Material
30,000 units
20,000 units

Actual Mix

Yield

30,000 units

Labor Type

Actual Mix

Grinding

4,500 hours

Polishing

2,500 hours

Yield

30,000 units

Required calculations:
a. Material mix variance
b. Materialyieldvariance

Standard Cost
$2,400
$900

c. Labormixvariance
d. Laboryieldvariance

ANSWER: a.Materialmixvariance:
SM(P)=(5,500/10,000)(30,000+20,000) =27,500
SM(Q)=(4,500/10,000)(30,000+20,000)= 22,500
Material
P
Q

AQ
30,000
20,000

SM
27,500
22,500

AQ-SM
2,500
$(2,500)

SP
$2.00
5.00

(AQ-SM)SP
$5,000
(12,500)
$ 7,500 (F)

SP
$8.00
6.00

(AQ - SM)SP
$(1,336)
1,002
$ 334 (F)

b. Materialsyieldvariance:
(30,000 + 20,000)(5,000/5,500+4,500)= 25,000
(25,000-30,000)($30,500/5,000)=$30,500(F)
c. Labormixvariance:
SM(Grinding) =(300/450) (4,500 +2,500) =4,667
SM(Polishing)=(150/450)(4,500+ 2,500)= 2,333

Labor Type
Grinding
Polishing

AH
4,500
2,500

SM
4,667
2,333

AH - SM
(167)
167

d. Laboryieldvariance:
(4,500+2,500)6,000/(300 + 150) = 93,333
(93,333-30,000) ($3,300/6,000)=$34,833(U)

Chapter 16
1. Cost-volume-profitanalysisfocusesonthebreak-evenpointandtheimpactofchangesinfixedcostsandprice.
a. True
b. False
ANSWER: True
2. Thebreak-evenpointisthepointwheretotalcostsequalsalesrevenues.
a. True
b. False
ANSWER: True
3. Thetermnetincomeisusedtomeanoperatingincomebeforeincometaxes.
a. True
b. False

ANSWER: False
4. Toearnatargetprofit,totalcostsplustheamountoftargetprofitmustequaltotalsalesrevenue.
a. True
b. False
ANSWER: True
5. Unitstoearntargetprofitequaltotalfixedcostsplustargetprofitdividedbythecontributionmarginratio.
a. True
b. False
ANSWER: False
6. Salesrevenuetoearntargetprofitsequalstotalfixedcostsplustargetprofitdividedbythecontributionmargin.
a. True
b. False
ANSWER: False
7. Incometaxesaregenerallycalculatedasapercentageofincome.
a. True
b. False
ANSWER: True
8. Whenusingeithertheequationorthecontributionmarginapproach,theafter-taxprofitmustbeconvertedtoabeforetaxprofittarget.
a. True
b. False
ANSWER: True

Chapter 16: Cost-Volume-Profit Analysis

9. Inmultiple-productanalysis,thebreak-evenunitsforeachproductwillchangeasthesalesmixchanges.
a. True
b. False
ANSWER: True
10. Increasedsalesofhighcontributionmarginproductsincreasethebreak-evenpoint.
a. True
b. False
ANSWER: False
11. Increasesinsalesoflowcontributionmarginproductsdecreasethebreak-evenpoint.
a. True
b. False
ANSWER: False
12. InaCVPgraph,theintersectionofthetotalcostslineandthetotalsalesrevenuelineisthebreak-evenpointinunits.
a. True
b. False
ANSWER: True
13. Theprofit-volumegraphdepictstherelationshipamongcost,volume,andprofit.
a. True
b. False
ANSWER: False
14. Thecost-volume-profitgraphportraystherelationshipbetweenprofitsandsalesvolume.
a. True
b. False
ANSWER: False
15. CVPanalysisisashort-rundecision-makingtoolsincesomecostsarefixed.
a. True
b. False
ANSWER: True
16. Multiple-productbreak-evenanalysisrequiresaconstantsalesmix,whichisdifficulttopredictwithcertainty.
a. True
b. False
ANSWER: True

Chapter 16: Cost-Volume-Profit Analysis

17. Uncertaintyregardingcosts,prices,andsalesmixaffectthebreak-evenpoint.
a. True
b. False
ANSWER: True
18. Theoperatingleverageshowshowfarthecompanysactualsalesorunitsarefromthebreakevenpoint.
a. True
b. False
ANSWER: False
19. Sensitivityanalysisisawhat-iftechniquethatexaminestheimpactofchangesinassumptions.
a. True
b. False
ANSWER: True
20. UnderABC,costdriversareseparatedintounit-basedandnon-unit-baseddrivers.
a. True
b. False
ANSWER: True
21. The

iswheretotalrevenuesequaltotalcosts.

ANSWER: break-evenpoint
22. The

ratioexpressesvariablecostsintermsofsalesdollars.

ANSWER: variablecost
23. Incost-volume-profitanalysisincometaxes

thebreakevenpoint.

ANSWER: raise
24. Targetafter-taxprofitmustbeconvertedinto

profittocalculateunitsorrevenueneeded.

ANSWER: before-tax
25. Inmultiple-productanalysis,directfixedcostscanbe

toeachsegment.

ANSWER: traced
26. Increasedsalesofhighcontributionmarginitems

thebreak-evenpoint.

ANSWER: decrease
27. Onaprofit-volumegraph, the

lineintersectsthehorizontalaxisatthebreak-evenpoint.

Chapter 16: Cost-Volume-Profit Analysis

ANSWER: profit
28. When acompanysellsmoreunitsthanthebreak-evenpoint,the

arepositive.

ANSWER: profits
29. Ifallelseisthesame,ifthebreakevenpointincreases,thenthevariablecostperunitmusthave__________.
ANSWER: increased
30. Theuseoffixedcoststoincreasethepercentagechangesinprofitsassalesactivitieschangeiscalledthe
__________leverage.
ANSWER: operating
31. Thebreak-evenpointis
a. thevolumeofactivitywhereallfixedcostsarerecovered.
b. wherefixedcostsequaltotalvariablecosts.
c. wheretotalrevenuesequaltotalcosts.
d. wheretotalcostsequaltotalcontributionmargin.
ANSWER: c
32. Thebreak-evenpointinunitscanbecalculatedusingthecontributionmarginapproachintheformula
a. TotalCosts/UnitContributionMargin.
b. TotalCosts/FixedCosts.
c. FixedCosts/SellingPriceperunit.
d. FixedCosts/UnitContributionMargin.
ANSWER: d
33. WhichofthefollowingequationsisCORRECT?
a. Salesrevenues=Variableexpenses-(Fixedexpenses+Operatingincome)
b. Salesrevenues-Variableexpenses-Fixedexpenses=Operatingincome
c. Salesrevenues+Variableexpenses+Fixedexpenses=Operatingincome
d. Salesrevenues-Fixedexpenses=Variableexpenses-Operatingincome
ANSWER: b
34. Thevariablecostratio
a. expressesvariablecostsasapercentageoftotalcosts.
b. expressestheproportionbetweenfixedcostsandvariablecosts.
c. expressesvariablecostintermsofsalesdollars.

Chapter 16: Cost-Volume-Profit Analysis

d. expressestheproportionofsalesdollarsavailabletocoverfixedcostsandprovideforaprofit.
ANSWER: c

Chapter 16: Cost-Volume-Profit Analysis

35. SalesContributionMarginisashort-cutofwhatformula?
a. Sales(VariablecostratioSales)
b. Sales(FixedCosts+VariableCosts)
c. Sales/FixedCosts
d. FixedCosts/UnitContributionMargin
ANSWER: a
36. WhichofthefollowingisNOTauseofCVP(Cost-Volume-Profit)analysis?
a. theabilitytoconductsensitivityanalysisofcostorpricechanges
b. theidentificationofpriceandefficiencyvariances
c. howmanyunitsmustbesoldtobreakeven
d. whatistheimpactonthebreak-evenpointofanincreaseordecreaseinfixedcosts
ANSWER: b
37. BiscuitCompanysellsitsproductfor$50.Inaddition,ithasavariablecostratioof45percentandtotalfixedcostsof$
6,875.Whatisthebreak-evenpointinunitsforBiscuitCompany?
a. 250units
b. 3,600units
c. 375units
d. 2,400units
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$6,875/($500.55)=250units
38. BiscuitCompanysellsitsproductfor$50.Inaddition,ithasavariablecostratioof55percentandtotalfixedcostsof$
6,875.Howmanyunitsmustbesoldinordertoobtainabefore-taxprofitof$12,000?
a. 480units
b. 240units
c. 600units
d. 839units
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:($6,875+$12,000)/$22.50=838.889units

Chapter 16: Cost-Volume-Profit Analysis

39. BiscuitCompanysellsitsproductfor$50.Inaddition,ithasavariablecostratioof45percentandtotalfixedcostsof$
6,875.Whatisthebreak-evenpointinsalesdollarsforBiscuitCompany?
a.$2,750
b.$3,125
c.$6,875
d.$12,500
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$6,875/0.55=$12,500
40. Totalcontributionmarginiscalculatedbysubtracting
a. costofgoodssoldfromtotalrevenues.
b. fixedcostsfromtotalrevenues.
c. totalmanufacturingcostsfromtotalrevenues.
d. totalvariablecostsfromtotalrevenues.
ANSWER: d
41. WhichofthefollowingitemswouldNOTbeconsideredincost-volume-profitanalysis?
a. unitsofproduction
b. fixedcosts
c. productmix
d. grossprofitmargin
ANSWER: d
42. Thecontributionmarginatthebreak-evenpoint
a. equalstotalfixedcosts.
b. iszero.
c. plustotalfixedcostsequalstotalrevenues.
d. isgreaterthanvariablecosts.
ANSWER: a
Figure16-1
TheCumberlandCompanyprovidesthefollowinginformation:
Sales(250,000units)
Manufacturingcosts:
Variable

$625,000
212,500

Chapter 16: Cost-Volume-Profit Analysis

Fixed
Sellingandadministrativecosts:
Variable
Fixed
43. RefertoFigure16-1.Whatisthebreak-evenpointinunitsforCumberland?
a. 41,668units
b. 50,000units
c. 125,000units
d. 250,000units
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:($37,500+$25,000)/[($625,000-$212,500$100,000)/250,000]=50,000units
44. RefertoFigure16-1.WhatisthevariablecostperunitforCumberland?
a.
$1.25
b.
$0.85
c.
$0.40
d.
$0.75
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:($212,500+$100,000)/250,000]=$1.25perunit
45. RefertoFigure16-1.WhatisthevariableproductcostperunitforCumberland?a.$2.50
b.
$1.25
c.
$0.40
d.
$0.85
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:($212,500/250,000]=$0.85perunit
46. RefertoFigure16-1.WhatisthecontributionmarginperunitforCumberland?a.$1.25
b.$0.85

37,500
100,000
25,000

Chapter 16: Cost-Volume-Profit Analysis

c.
$2.50
d.
$1.65
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
SP$2.50
-VC$1.25
CM$1.25

Chapter 16: Cost-Volume-Profit Analysis

47. RefertoFigure16-1.WhatisthecontributionmarginratioforCumberland?
a.0.16
b.0.76
c.0.50
d.0.34
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
SP$2.50
-VC$1.25
CM$1.25/$2.50=.5
48. RefertoFigure16-1.WhatisthetotalcontributionmarginforCumberland?a.
$312,500
b.
$250,000
c.
$625,000
d.
$50,000
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
SP$2.50
-VC$1.25
CM$1.25250,000 =312,500
49. RefertoFigure16-1.WhatistheoperatingincomeforCumberland?
a.
$625,000
b.
$312,500
c.
$250,000
d.
$62,500
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
SP$2.50

Chapter 16: Cost-Volume-Profit Analysis

-VC$1.25
CM$1.25250,000 =312,500
-FC
NI

62,500
$250,000

Chapter 16: Cost-Volume-Profit Analysis

50. RefertoFigure16-1.Whatisthebreak-evenpointinsalesdollarsforCumberland?
a.
$125,000
b.
$100,000
c.
$37,500d
.
$300,000
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:CMrate=($625,000-$212,500-$100,000)/$625,000=0.5($37,500+
$25,000)/0.5=$125,000
51. TheincomestatementforSymbiosisManufacturingCompanyfor2016isasfollows:
Sales(10,000units)
Variableexpenses
Contributionmargin
Fixedexpenses
Operatingincome

$120,000
72,000
$48,000
36,000
$12,000

Whatisthecontributionmarginperunit?
a.
$7.20
b.
$1.20
c.
$4.80
d.$120,000
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:$48,000/10,000=$4.80
52. SummersvilleProductionCompanyhadthefollowingprojectedinformationfor2016:
Sellingpriceperunit
Variablecostperunit
Totalfixedcosts
Whatisthebreak-evenpointinunits?
a. 2,000units
b. 5,000units
c. 3,333units
d. 60,000units

$150
$90
$300,000

Chapter 16: Cost-Volume-Profit Analysis

ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
$300,000/($150-$90)=5,000units

Chapter 16: Cost-Volume-Profit Analysis

53. SummersvilleProductionCompanyhadthefollowingprojectedinformationfor2016:
Sellingpriceperunit
Variablecostperunit
Totalfixedcosts

$150
$90
$300,000

Whatistheprofitwhenoneunitmorethanthebreak-evenpointissold?
a.$60b.$150
c.$1,500,150d.$600,060
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$150-$90=$60
54. SummersvilleProductionCompanyhadthefollowingprojectedinformationfor2016:
Sellingpriceperunit
Variablecostperunit
Totalfixedcosts

$150
$90
$300,000

Whatisthecontributionmarginratio?a.0.400
b.1.667
c.2.500
d.0.600
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:
($150-$90)/$150=.40
55. SummersvilleProductionCompanyhadthefollowingprojectedinformationfor2016:
Sellingpriceperunit
Variablecostperunit
Totalfixedcosts

$150
$90
$300,000

Whatlevelofsalesdollarsisneededtoobtainatargetbefore-taxprofitof$75,000?
a.
$375,000
b.
$625,000
c.
$750,000
d.
$937,500
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:CMrate=($150-$90)/$150=40%
($300,000+$75,000)/0.4=$937,500

Chapter 16: Cost-Volume-Profit Analysis

Chapter 16: Cost-Volume-Profit Analysis

56. TheDesMarisCompanyhadthefollowingincomestatementforthemonthofNovember2016:
DesMarisCompanyInc
omeStatement
FortheMonthofNovember2016
Sales($6010,000)
Costofgoodssold:
Directmaterials($1210,000)
Directlabor($910,000)
Variablefactoryoverhead($7.50 10,000)
Fixedfactoryoverhead
Grossprofit
Sellingandadministrativeexpenses:
Variable($1.50 10,000)
Fixed
Operatingincome
DesMarisCompany'sbreak-evensalesvolumeis
a. 7,000units.
b. 20,000units.
c. 11,211units.
d. 10,000units.
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
($120,000+$90,000)/($60-$12-$9-$7.50-$1.50)=7,000units

$600,000
$120,000
90,000
75,000
120,000

$ 15,000
90,000

405,000
$195,000

105,000
$90,000

Chapter 16: Cost-Volume-Profit Analysis

57. TheDesMarisCompanyhadthefollowingincomestatementforthemonthofNovember2016:
DesMarisCompanyInc
omeStatement
FortheMonthofNovember2016
Sales($6010,000)
Costofgoodssold:
Directmaterials($1210,000)
Directlabor($910,000)
Variablefactoryoverhead($7.50 10,000)
Fixedfactoryoverhead
Grossprofit
Sellingandadministrativeexpenses:
Variable($1.50 10,000)
Fixed
Operatingincome

$600,000
$120,000
90,000
75,000
120,000

$ 15,000
90,000

405,000
$195,000

105,000
$90,000

Whatisthesalesvolumerequiredtoearnanoperatingprofitof$9,000?
a. 3,300units
b. 10,000units
c. 4,300units
d. 7,300units
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
[$120,000+$90,000+$9,000]/$30=7,300units
58. Assumethefollowinginformation:
Sellingpriceperunit
Contributionmarginratio
Totalfixedcosts
Howmanyunitsmustbesoldtogenerateabefore-taxprofitof$54,000?
a. 4,000units
b. 2,750units
c. 3,570units
d. 3,750units
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
($270,000+$54,000)/($1800.48)=3,750units

$180
48%
$270,000

Chapter 16: Cost-Volume-Profit Analysis

59. Jamie Quinn, a sole proprietor, has the following projected figures for next year:
Selling price per unit
Contribution margin per unit
Total fixed costs

$150.00
$45.00
$630,000

Howmanyunitsmustbesoldtoobtainatargetbefore-taxprofitof$270,000?
a. 6,000units
b. 20,000units
c. 8,572units
d. 14,000units
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
($630,000+$270,000)/$45=20,000units
60. Jamie Quinn, a sole proprietor, has the following projected figures for next year:
Selling price per unit
Contribution margin per unit
Total fixed costs

$150.00
$45.00
$630,000

What is the contribution margin ratio?a. 0.300

b. 1.429
c. 0.429
d. 3.333
ANSWER:
a
RATIONALE: SUPPORTING CALCULATIONS:
$45/$150 = .30
61. Jamie Quinn, a sole proprietor, has the following projected figures for next year:
Selling price per unit
Contribution margin per unit
Total fixed costs
What is the break-even point in dollars?
a. $426,000b.
$900,000c.
$189,000d.
$2,100,000
ANSWER:
d
RATIONALE:
SUPPORTING CALCULATIONS: CM rate = $45/$150 = .30

$150.00
$45.00
$630,000

Chapter 16: Cost-Volume-Profit Analysis

$630,000/0.3 = $2,100,000

Chapter 16: Cost-Volume-Profit Analysis

62. TheincomestatementforSymbiosisManufacturingCompanyfor2016isasfollows:
Sales(10,000units)
Variableexpenses
Contributionmargin
Fixedexpenses
Operatingincome

$120,000
72,000
$ 48,000
36,000
$12,000

Whatisthecontributionmarginratio?
a.30%
b.60%
c.100%
d.40%
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$48,000/$120,000=40%
63. In2016,Samantha'sBathandBodyShophadvariablecostsof$27,000,fixedcostsof$18,000,andanetlossof
$4,500.
Samantha's2016break-evensalesvolumewas
a.$36,000.
b.$54,000.c.
$49,500.d
.$37,500.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:X-$27,000-$18,000=($4,500)
X=$40,500
CMrate=($40,500-$27,000)/$40,500=33.33%
$18,000/33.33%=$54,000
64. In2016,SamanthasBathandBodyShophadvariablecostsof$27,000,fixedcostsof$18,000,andanetlossof
$4,500.
TheannualsalesvolumerequiredforSamanthastohaveabeforetaxincomeof$18,000is
a.$126,000.b.
$84,000.
c.$73,500.
d.$42,000.
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:CMrate=($40,500-$27,000)/$40,500=33.33%

Chapter 16: Cost-Volume-Profit Analysis

($18,000+$24,000)/33.33%=$126,013

Chapter 16: Cost-Volume-Profit Analysis

65. Assumethefollowinginformation:
Variablecostratio
Totalfixedcosts
Whatvolumeofsalesdollarsisneededtobreakeven?

80%
$60,000

a.$75,000
b.$300,000c.
$48,000
d.$12,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:($60,000/0.2)=$300,000
66. WhichofthefollowingequationsisTRUE?
a. Contributionmargin=SalesrevenueVariablecostratio
b. Contributionmarginratio=Contributionmargin/Variablecosts
c. Contributionmargin=Fixedcosts
d. Contributionmarginratio=1-Variablecostratio
ANSWER: d
67. NonesuchCompanysellsonlyoneproductataregularpriceof$7.50perunit.Variableexpensesare60percentofsalesandfixe
dexpensesare$30,000.Managementhasdecidedtodecreasethesellingpriceto$6.00inhopesofincreasingitsvolumeofsales.
Whatisthecontributionmarginratiowhenthesellingpriceisreducedto$6perunit?
a.40%
b.25%
c.75%
d.60%
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:($6.00-$3.60)/$6.00=40%
68. NonesuchCompanysellsonlyoneproductataregularpriceof$7.50perunit.Variableexpensesare60percentofsalesandfixe
dexpensesare$30,000.Managementhasdecidedtodecreasethesellingpriceto$6.00inhopesofincreasingitsvolumeofsales.
Whatisthesalesdollarslevelrequiredtobreakevenattheoldpriceof$7.50?
a.
$50,000
b.
$12,000
c.
$18,000

Chapter 16: Cost-Volume-Profit Analysis

d.
$75,000
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:$30,000/0.4=$75,000

Chapter 16: Cost-Volume-Profit Analysis

69. HologramPrintingCompanyprojectedthefollowinginformationfornextyear:
Sellingpriceperunit
Contributionmarginperunit
Totalfixedcosts
Taxrate

$75.00
$30.00
$120,000
40%

Howmanyunitsmustbesoldtoobtainanafter-taxprofitof$67,500?
a. 3,750units
b. 5,167units
c. 5,625units
d. 7,750units
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:($120,000+$67,500/0.6)/$30=7,750units
70. HologramPrintingCompanyprojectedthefollowinginformationfornextyear:
Sellingpriceperunit
Contributionmarginperunit
Totalfixedcosts
Taxrate

$75.00
$30.00
$120,000
40%

Whatisthebreak-evenpointindollars?
a.$200,000
b.$120,000
c.$300,000
d.$500,000
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:CMratio=$30/$75=40%$120,000/0.40=$300,000
71. TiramisuCompanyprojectedthefollowinginformationfornextyear:
Sellingpriceperunit
Contributionmarginperunit
Totalfixedcosts
Taxrate
Howmanyunitsmustbesoldtoobtainanafter-taxprofitof$40,000?
a. 3,750units
b. 5,625units
c. 5,000units
d. 5,167units

$60.00
$30.00
$100,000
20%

Chapter 16: Cost-Volume-Profit Analysis

ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:($100,000+$40,000/0.8)/$30=5,000units

Chapter 16: Cost-Volume-Profit Analysis

72. Inthecost-volume-profitanalysis,incometaxes
a. aretreatedasafixedcost.
b. increasethesalesvolumerequiredtobreakeven.
c. increasethesalesvolumerequiredtoearnadesiredprofit.
d. aretreatedasafixedcost.
ANSWER: c
73. AssumethefollowingcostbehaviordataforGraphicArtsCompany:
Sales price
Variable costs
Fixedcosts
Taxrate

$18.00perunit
$13.50perunit
$22,500
40%

Whatvolumeofsalesdollarsisrequiredtoearnabefore-taxincomeof$27,000?
a.$90,000
b.$180,000
c.$198,000
d.$270,000
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
CMrate=($18.00-$13.50)/$18.00=25%
($22,500+$27,000)/0.25=$198,000
74. AssumethefollowingcostbehaviordataforGraphicArtsCompany:
Sales price
Variable costs
Fixedcosts
Taxrate

$18.00perunit
$13.50perunit
$22,500
40%

Whatvolumeofsalesdollarsisrequiredtoearnanafter-taxincomeof$40,500?
a.$360,000
b.$90,000
c.$252,000
d.$495,000
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
[$22,500+($40,500/0.6)]/0.25=$360,000

Chapter 16: Cost-Volume-Profit Analysis

Chapter 16: Cost-Volume-Profit Analysis

75. WhichofthefollowingisaTRUEstatementaboutsalesmix?
a. Profitsmaydeclinewithanincreaseintotaldollarsofsalesifthesalesmixshiftstosellmoreofthehighcontributionmarginp
roduct.
b. Profitsmaydeclinewithanincreaseintotaldollarsofsalesifthesalesmixshiftstosellmoreofthelowercontributionmarginp
roduct.
c. Profitswillremainconstantwithanincreaseintotaldollarsofsalesifthetotalsalesinunitsremainsconstant.
d. Profitswillremainconstantwithadecreaseintotaldollarsofsalesifthesalesmixalsoremainsconstant.
ANSWER: b
76. Salesmixrefersto
a. thedifferentvolumeofsalesachievedduringtheyear.
b. thecontributionmarginsachievedonthedifferentproductsduringtheyear.
c. therelativeproportionsofdifferentproductsthatconstitutetotalsales.
d. themixofvariableandfixedcosts.
ANSWER: c
77. VictoriaCompanyproducestwoproducts,XandY,whichaccountfor60percentand40percent,respectively,oftotalsalesdol
lars.Contributionmarginratiosare50percentforXand25percentforY.Totalfixedcostsare
$120,000.WhatisPatricia'sbreak-evenpointinsalesdollars?
a.
$328,767
b.
$300,000
c.
$342,856
d.
$375,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
AverageCMrate=(0.6)(0.5)+(0.4)(0.25)=0.40
$120,000/0.4=$300,000
78. Inmultiple-productanalysis,directfixedcostsare
a. fixedcoststhatarenottraceabletothesegmentsandwouldremainevenifoneofthesegmentswereeliminated.
b. fixedcostswhichcanbetracedtoeachsegmentandwouldremainevenifoneofthesegmentswereeliminated.
c. fixedcoststhatarenottraceabletothesegmentsandwouldbeavoidedifthesegmentdidnotexist.
d. thefixedcostswhichcanbetracedtoeachsegmentandwouldbeavoidedifthesegmentdidnotexist.
ANSWER: d

Chapter 16: Cost-Volume-Profit Analysis

79. InformationabouttheHarmoniousCompany'stwoproductsincludes:

Unitsellingprice
Unitvariablecosts:
Manufacturing
Selling
Total
Monthlyfixedcostsareasfollows:
Manufacturing
Sellingandadministrative
Total

ProductX
$11.25

ProductY
$11.25

$5.25
.75
$6.00

$6.75
.75
$7.50

$82,500
45,000
$127,500

Whatisthetotalmonthlysalesvolumeinunitsrequiredtobreakevenwhenthesalesmixinunitsis70percent
ProductXand30percentProductY?
a. 4,333units
b. 26,563units
c. 8,667units
d. 28,667units
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
AverageCMperunit=[0.7($11.25-$6.00)]+[0.3($11.25$7.50)]=$4.80$127,500/$4.80=26,562.5units

Chapter 16: Cost-Volume-Profit Analysis

80. InformationabouttheHarmoniousCompany'stwoproductsincludes:

Unit selling price

Unit variable costs:
Manufacturing
Selling
Total

Product X
$11.25

Product Y
$11.25

$5.25
.75
$6.00

$6.75
.75
$7.50

Monthly fixed costs are as follows:

Manufacturing
Selling and administrative
Total

$82,500
45,000
$127,500

If the sales mix in units is 50 percent Product X and 50 percent Product Y, the monthly break-even total sales
dollars is
a. $75,000.
b. $318,746.
c. $275,000.
d. $315,000.
ANSWER:
b
RATIONALE:
SUPPORTING CALCULATIONS:
Average CM per unit = [0.5 ($11.25 - $6.00)] + [0.5 ($11.25 - $7.50)] = $4.50
$127,500/$4.50 = 28,333 units 28,333 $11.25 = $318,746
81. Product 1 has a contribution margin of $6.00 per unit, and Product 2 has a contribution margin of $7.50 per unit.
Total fixed costs are $300,000. Sales mix and total volume varies from one period to another. Which of the
following is TRUE?
a. At a sales volume in excess of 25,000 units of 1 and 25,000 units of 2, operations will be profitable.
b. The ratio of net profit to total sales for 2 will be larger than the ratio of net profit to total sales for 1.
c. The contribution margin per unit of direct materials is lower for 1 than for 2.
d. The ratio of contribution to total sales always will be larger for 1 than for 2.
ANSWER: a

Chapter 16: Cost-Volume-Profit Analysis

82. ThefollowingdatapertaintothethreeproductsproducedbyCuldesacCorporation:

Sellingpriceperunit
Variablecostsperunit
Contributionmarginperunit
Fixedcostsare$90,000permonth.

A
$5.00
4.00
$1.00

B
$7.00
5.00
$2.00

C
$6.00
3.00
$3.00

60%ofallunitssoldareProductA,30percentareProductB,and10percentareProductC.Whatisthemonth
lybreak-evenpointfortotalunits?
a. 60,000units
b. 36,000units
c. 45,000units
d. 180,000units
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
AverageCMperunit=(0.6$1)+(0.3 $2)+(0.1$3)=$1.50
$90,000/$1.50=60,000units
83. Onaprofit-volumegraph,theprofitlineintersectsthehorizontalaxisat
a. theorigin.
b. thebreak-evenpoint.
c. avolumeof1,000units.
d. apointwhereprofitisgreaterthanzero.
ANSWER: b
84. Inacost-volume-profitgraph,
a. thetotalrevenuelinecrossesthehorizontalaxisatthebreak-evenpoint.
b. beyondthebreak-evensalesvolume,profitsaremaximizedatthesalesvolumewheretotalrevenuesequaltotalcosts.
c. anincreaseinunitvariablecostswoulddecreasetheslopeofthetotalcostline.
d. anincreaseintheunitsellingpricewouldshiftthebreak-evenpointinunitstotheleft.
ANSWER: d
85. WhichofthefollowingstatementsisTRUEinacost-volume-profitgraph?
a. Theslopeofthetotalcostlineisdependentonthevariablecostperunit.
b. Thetotalcostlinenormallybeginsatzero.
c. Thetotalrevenuelinetypicallybeginsabovezero.
d. Theslopeofthetotalrevenuelineisthecontributionmarginperunit.

Chapter 16: Cost-Volume-Profit Analysis

ANSWER: a

Chapter 16: Cost-Volume-Profit Analysis

86. Inacost-volume-profitgraph,thetotalrevenuelineriseswithaslopeequalto
a. thesellingprice.
b. thecontributionmargin.
c. thevariablecostperunit.
d. noneoftheabove.
ANSWER: a
87. Inacost-volume-profitgraph,theslopeofthetotalrevenuelinerepresents
a. thesellingpriceperunit.
b. thecontributionmarginperunit.
c. thevariablecostperunit.
d. totalcontributionmargin.
ANSWER: a
88. Thefollowingdiagramisacost-volume-profitgraphforamanufacturingcompany:

Selecttheanswerthatbestdescribesthelabeleditemonthediagram.
a. AreaCDErepresentstheareaofnetloss.
b. LineACgraphstotalfixedcosts.
c. PointDrepresentsthepointatwhichthecontributionmarginperunitincreases.
d. LineACgraphstotalcosts.
ANSWER: d

Chapter 16: Cost-Volume-Profit Analysis

89. Thefollowingdiagramisacost-volume-profitgraphforamanufacturingcompany:

ThedifferencebetweenlineABandlineAC(areaBAC)isthe
a. contributionratio.
b. totalvariablecost.
c. contributionmarginperunit.
d. totalfixedcost.
ANSWER: b
90. Thefollowingdiagramisacost-volume-profitgraphforamanufacturingcompany:

TheformulatodeterminetheY-axisvalue($)atpointDonthegraphis
a. Fixedcosts+(Variablecostsperunit Numberofunits).
b. XYbX.
c. Fixedcosts/Unitcontributionmargin.
d. Fixedcosts/Contributionmarginratio.
ANSWER: d
91. Whenacompanysellsmoreunitsthanthebreak-evenpoint,
a. itmovesabovetherelevantrange.
b. profitsarepositive.
c. therearenonewvariablecostsincurred.
d. profitsarenegative.

Chapter 16: Cost-Volume-Profit Analysis

ANSWER: b

Chapter 16: Cost-Volume-Profit Analysis

92. Inacost-volume-profitgraph,theslopeofthetotalcostlinerepresents
a. thesellingpriceperunit.
b. thecontributionmarginperunit.
c. thevariablecostperunit.
d. totalcontributionmargin.
ANSWER: c
93. Onaprofit-volumegraph,theintersectionoftheprofitlinewiththeverticalaxisprovidesa
a. profitof$1,000.
b. profitequaltozero.
c. profitequaltofixedcosts.
d. lossequaltofixedcosts.
ANSWER: d
94. Aprofit-volumegraph
a. measuresprofitorlossonthehorizontalaxis.
b. illustratestotalrevenues,totalcost,andprofitsatvarioussalesvolumes.
c. isnotsubjecttothesamelimitingassumptionsascost-volume-profitgraphs.
d. illustratestherelationshipbetweenvolumeandprofits.
ANSWER: d
95. Inaprofit-volumegraph,theslopeoftheprofitlinerepresents
a. thesellingpriceperunit.
b. thecontributionmarginperunit.
c. thevariablecostperunit.
d. totalcontributionmargin.
ANSWER: b
96. Cost-volume-profitmodelsassumethat
a. thesalesmixmayvaryamongmultipleproducts.
b. unitsellingpricesareconstant.
c. inventoriesaredynamicandsubjecttochange.
d. thetotalcostfunctionisquadratic.
ANSWER: b

Chapter 16: Cost-Volume-Profit Analysis

97. WhichofthefollowingassumptionsdoesNOTpertaintocost-profit-volumeanalysis?
a. Salespriceperunitremainsconstant.
b. Thesalesmixisconstant.
c. Inventoriesinamanufacturingentitymaygoupordown.
d. Fixedexpensesareconstantatallvolumesofactivitieswithintherelevantrange.
ANSWER: c
98. WhichofthefollowingassumptionsdoesNOTpertaintocost-volume-profitanalysis?
a. Theunitsproducedwillequaltheunitssold.
b. Inventoriesareconstant.
c. Allcostsareclassifiedasfixedorvariable.
d. Salesmixmayvaryduringtherelatedperiod.
ANSWER: d
99. WhichofthefollowingassumptionsisNOTnecessaryforcost-volume-profitanalysis?
a. totalvariablecostsarelinear
b. totalrevenuesincreasewhentotalcostsincrease
c. inventoriesareconstant
d. theproductsalesmixisconstant
ANSWER: b
100.

Assumingallotherthingsarethesame,iftherewasadecreaseinthebreak-evenpoint,sellingpriceperunitmusthave:

a. decreased
b. increased
c. remainedthesame
d. increasedfirst,thendecreased
ANSWER: b
101. Assumingallotherthingsareequal,iftherewasadecreaseinthebreak-evenpoint,fixedcostsmusthave:
a. decreased
b. increasedfirst,thendecreased
c. increased
d. remainedthesame
ANSWER: a

Chapter 16: Cost-Volume-Profit Analysis

102. TheincomestatementforSymbiosisManufacturingCompanyfor2016isasfollows:
Sales(10,000units)
Variableexpenses
Contributionmargin
Fixedexpenses
Operatingincome

$120,000
72,000
$ 48,000
36,000
$12,000

Ifsalesincreaseby1,000units,whatwillhappentoprofit?
a. increaseby$1,200
b. increaseby$4,800
c. increaseby$7,200
d. increaseby$12,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
Contributionmarginperunit=$48,000/10,000=$4.80
1,000$4.80=$4,800
103. TheincomestatementforSymbiosisManufacturingCompanyfor2016isasfollows:
Sales(10,000units)
Variableexpenses
Contributionmargin
Fixedexpenses
Operatingincome

$120,000
72,000
$ 48,000
36,000
$12,000

Ifsalesincreaseby$60,000,whatwillhappentoprofit?
a. increaseby$60,000
b. increaseby$36,000
c. increaseby$6,000
d. increaseby$24,000
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
$60,0000.4=$24,000
104. Usingcost-volume-profitanalysis,wecanconcludethata20percentreductioninvariablecostswill
a. reducethebreak-evensalesvolumeby20percent.
b. reducetotalcostsby20percent.
c. reducetheslopeofthetotalcostlineby20percent.
d. notaffectthebreak-evensalesvolumeifthereisanoffsetting20percentincreaseinfixedcosts.

Chapter 16: Cost-Volume-Profit Analysis

ANSWER: c

Chapter 16: Cost-Volume-Profit Analysis

105.

Assumingallotherthingsarethesame,iftherewasanincreaseinthebreak-evenpointvariablecostperunitmusthave:

a. increasedfirst,thendecreased
b. increased
c. remainedthesame
d. dependsonthecircumstances
ANSWER: b
106. Adecreaseinthesalespriceinthebasiccost-volume-profitmodelwould
a. requirearecomputationofthegrossprofitperunit.
b. beoffsetbyanincreaseinunitcosts.
c. decreasethebreak-evenvolume.
d. increasethebreak-evenvolume.
ANSWER: d
107. TheDesMarisCompanyhadthefollowingincomestatementforthemonthofNovember2016:
DesMarisCompanyInc
omeStatement
FortheMonthofNovember2016
Sales($6010,000)
Costofgoodssold:
Directmaterials($1210,000)
Directlabor($910,000)
Variablefactoryoverhead($7.50 10,000)
Fixedfactoryoverhead
Grossprofit
Sellingandadministrativeexpenses:
Variable($1.50 10,000)
Fixed
Operatingincome

$600,000
$120,000
90,000
75,000
120,000

$15,000
90,000

405,000
$195,000

105,000
$90,000

Ifthemonthlysalesvolumeincreasesby450units,DesMarisCompany'smonthlyprofitswillincreaseby
a.$13,500.00.
b.$1,282.50.
c.$9,450.00.
d.$14,175.00.
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
450($60.00-$12.00-$9.00-$7.50-$1.50)=$13,500

Chapter 16: Cost-Volume-Profit Analysis

108.
NonesuchCompanysellsonlyoneproductataregularpriceof$7.50perunit.Variableexpensesare60percentofsale
sandfixedexpensesare$30,000.Managementhasdecidedtodecreasethesellingpriceto$6.00inhopesofincreasingitsvolum
eofsales.
Whatsalesdollarlevelisneededtoobtainabefore-taxprofitof$60,000whenthesellingpriceis$6.00perunit?
a.$90,000
b.$120,00c.
$72,000d.
$360,000
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
Variablecostperunit=$7.500.6=$4.50'
CMrate=($6.00-$4.50)/$6.00=25%
($30,000+$60,000)/0.25=$360,000
109.
NonesuchCompanysellsonlyoneproductataregularpriceof$7.50perunit.Variableexpensesare60percentofsale
sandfixedexpensesare$30,000.Managementhasdecidedtodecreasethesellingpriceto$6.00inhopesofincreasingitsvolum
eofsales.
Whatisthenewbreak-evenpointinunitsforNonesuchCompanywhenthesellingpriceis$6.00?
a. 10,000units
b. 20,000units
c. 4,000units
d. 6,667units
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
Variablecostperunit=$7.500.6=$4.50
Newcontributionmarginperunit=$6.00-$4.50=$1.50
$30,000/$1.50=20,000units

Chapter 16: Cost-Volume-Profit Analysis

110. JamieQuinn,asoleproprietor,hasthefollowingprojectedfiguresfornextyear:
Sellingpriceperunit
Contributionmarginperunit
Totalfixedcosts

$150.00
$45.00
$630,000

Whatsellingpriceperunitisneededtoobtainabefore-taxprofitof$270,000atavolumeof4,000units?
a.$150.00b.
$105.00c.
$225.00d.
$330.00
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
Totalcontributionmargin=$630,000+$270,000=$900,000
Contributionmarginperunit=$900,000/4,000=$225
Price= $225+($150-$45)=$330
111. TheMildmannerCorporationhasthefollowingdatafor2016:
Sellingpriceperunit
Variablecostperunit
Fixedcosts
Unitssold

$15
$9
$45,000
10,000units

Ifsalesdecreaseto7,500unitsin2017,Mildmanner'soperatingleveragewillbe
a.0.25.
b.2.00.
c.4.00.
d.undefined.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
Sales
Variableexpenses
Contributionmargin
Fixedexpenses
Operatingincome
$45,000/$0=undefined

$112,500
67,500
$ 45,000
45,000
$-0-

Chapter 16: Cost-Volume-Profit Analysis

112. TheMildmannerCorporationhasthefollowingdatafor2016:
Sellingpriceperunit
Variablecostperunit
Fixedcosts
Unitssold

$15
$9
$45,000
10,000units

Themarginofsafetyinunitswillbe(roundtothenearestwholeunit)
a.667.
b.2,500.
c.4,000.
d.7,500.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
Sales
Variableexpenses

$15
9

Contributionmargin

$6

Fixedexpenses
Breakevenunits($45,000/$6)Actualu
nitssold
Marginofsafety(10,000-7,500)

$45,000
7,500units
10,000
2,500units

Chapter 16: Cost-Volume-Profit Analysis

113. TheMildmannerCorporationhasthefollowingdatafor2016:
Sellingpriceperunit
Variablecostperunit
Fixedcosts
Unitssold
Themarginofsafetyexpressedinsalesrevenuewillbe
a.
$75,000.
b.
$37,500.
c.
$45,000.
d.
$112,500

$15
$9
$45,000
10,000units

ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
Sales

$15

Variableexpenses

Contributionmargin

$6

Contributionmarginratio($6/$15)

40%

Fixedexpenses

$45,000

Breakevenrevenues ($45,000/0.4)

$112,500

Actualsales ($15x 10,000)

$150,000
$37,500

Marginofsafety($150,000-112,500)
114.
CampFunskieshasannualfixedoperatingcostsof$150,000andvariablecostsof$550percamper.Totalfeeschar
gedtocampersamountto$500each.Thecampexpects350campersnextsummer.Projectedgovernmentgrantsare$95,00
0.HowmuchmustCampFunskiesraisefromothersourcestobreakeven?
a.
$45,000
b.
$37,500
c.
$97,500
d.
$72,500
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:

Chapter 16: Cost-Volume-Profit Analysis

Totalcosts=$150,000+($550 350)=$342,500
$342,500-$95,000- ($500350)=$72,500

Chapter 16: Cost-Volume-Profit Analysis

115.
Assumingallotherthingsarethesame,iftherewasanincreaseinthebreakevenpoint,contributionmarginperunitmusthave:
a. remainedthesame
b. increasedfirst,thendecreased
c. decreased
d. increased
ANSWER: c
116. JuliusCorporationhadthefollowingincomestatementfor2016:

Sales
Variableexpenses
Contributionmargin
Fixedexpenses
Operatingincome

$80,000
56,000
$24,000
16,000
$8,000

WhatisthedegreeofoperatingleverageforJuliusCorporationfor2016?
a.3.000
b.2.000
c.0.333
d.2.333
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$24,000/$8,000=3.000
117. TheSolemnCompanyhasanoperatingleverageof2.Salesfor2016are$100,000withacontributionmarginof
$50,000.Salesareexpectedtobe$150,000in2017.Operatingincomefor2017canbeexpectedtoincreasebywhatamounto
ver2016?
a.
$50,000
b.
$25,000
c.200%
d.40%
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:250%=100%increaseinprofit,or$50,000

Chapter 16: Cost-Volume-Profit Analysis

118. CainCompanyandAbelCorporationhavethefollowingincomestatementsfor2016:

Sales
Variableexpenses
Contributionmargin
Fixedexpenses
Operatingincome

CainCompany
$50,000
10,000
$40,000
25,000
$15,000

AbelCorporation
$50,000
25,000
$25,000
10,000
$15,000

WhatisthedegreeofoperatingleverageforCainCompanyfor2016?
a.2.667
b.0.375
c.1.667
d.1.250
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
$40,000/$15,000=2.667
119. Themarginofsafetyis
a. thenumberofunitsthatneedtobesoldtoachieveaprofittarget.
b. theamountofunitsexpectedtobesoldabovethebreak-evenlevel.
c. thesalesdollarsneededtocoverfixedcosts.
d. theuseoffixedcoststoextracthigherpercentagechangesinprofitsassalesvolumechanges.
ANSWER: b
120. Averyhighdegreeofoperatingleverageindicatesafirm
a. hashighfixedcosts.
b. hasahighnetincome.
c. hashighvariablecosts.
d. isoperatingclosetoitsbreak-evenpoint.
ANSWER: a

Chapter 16: Cost-Volume-Profit Analysis

121.
Bugatti,Inc.decidedtoinstituteanadvertisingcampaignthatwouldcost$75,000.Variablecostswillremainat$15per
unit.Bugattiiscurrentlyselling100,000unitsofitsproductat$25perunit.Themarketingdepartmentisestimatingthattherewill
bea10percentincreaseinsalesvolume.Withallelseremainingthesame,whatwillbetheresultofthisdecision?
a. Anincreaseinsalesof$25,000
b. Adecreaseinoperatingincomeof$75,000
c. Anincreaseinoperatingincomeof$25,000
d. noneoftheabove
ANSWER:
c
RATIONALE:Supportingcalculations:
10%100,000units=10,000additionalunits
Additionalcontributionmargin=10,000units ($25$15)=$100,000AdditionalIncome$100,000-$75,000=$25,000

122. SymbiosisCompanyhadthefollowinginformation:
ActivityDriverUnits
sold
Setups
Engineeringhours
Otherdata:
Totalfixedcosts(traditional)
Totalfixedcosts(ABC)
Unitsellingprice
Whatisthebreak-evenpointinunitsusingABC?
a. 15,000units

UnitVariableCost
$20
1,000
60

$800,000
$400,000
$40

b. 45,000units
c. 30,000units
d. 75,000units
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
[$400,000+($1,00080)+($602,000)]/($40-$20)=30,000units

LevelofActivityDriver
-80
2,000

Chapter 16: Cost-Volume-Profit Analysis

123. SymbiosisCompanyhadthefollowinginformation:
ActivityDriverUnits
sold
Setups
Engineeringhours
Otherdata:
Totalfixedcosts(traditional)
Totalfixedcosts(ABC)
Unitsellingprice

UnitVariableCost
$20
1,000
60

LevelofActivityDriver
-80
2,000

$800,000
$400,000
$40

Howmanyunitsneedtobesoldtoproduceabefore-taxprofitof$120,000usingABC?
a. 36,000units
b. 51,000units
c. 21,000units
d. 81,000units
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
($400,000+$80,000+$120,000+$120,000)/$20=36,000units
124. SymbiosisCompanyhadthefollowinginformation:
ActivityDriverUnits
sold
Setups
Engineeringhours
Otherdata:
Totalfixedcosts(traditional)
Totalfixedcosts(ABC)
Unitsellingprice

UnitVariableCost
$20
1,000
60

LevelofActivityDriver
-80
2,000

$800,000
$400,000
$40

SupposeSymbiosiscouldreducesetupcostsby$500persetupandcouldreducethenumberofengineeringhours
neededto1,216.66hours.Howmanyunitsmustbesoldtobreakeveninthiscase?
a. 30,000units
b. 25,050units
c. 11,250units
d. 25,650units
ANSWER:
d
RATIONALE:

Chapter 16: Cost-Volume-Profit Analysis

SUPPORTINGCALCULATIONS:
[$400,000+($50080)+($601,216.66]/$20=25,650units

Chapter 16: Cost-Volume-Profit Analysis

125. FantasmasIncorporatedhadthefollowinginformation:
ActivityDriverUnits
sold
Setups
Engineeringhours

UnitVariableCost
$20
1,200
52

Otherdata:
Totalfixedcosts(traditional)

LevelofActivityDriver
-60
1,500

$600,000

Totalfixedcosts(ABC)
Unitsellingprice

$360,000
$60

Whatisthebreak-evenpointinunitsusingABC?
a. 6,325units
b. 8,500units
c. 12,750units
d. 19,125units
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
[$360,000+($1,20060)+($521,500)]/($60-$20)=12,750units
126. FantasmasIncorporatedhadthefollowinginformation:
ActivityDriverUnits
sold
Setups
Engineeringhours
Otherdata:
Totalfixedcosts(traditional)
Totalfixedcosts(ABC)
Unitsellingprice

UnitVariableCost
$20
1,200
52

LevelofActivityDriver
-60
1,500

$600,000
$360,000
$60

SupposeFantasmascouldreducesetupcostsby$300persetupandcouldreducethenumberofengineeringhours
neededto1,400hours.Howmanyunitsmustbesoldtobreakeveninthiscase?
a. 7,243units
b. 24,340units
c. 12,170units
d. 8,554units
ANSWER:
c
RATIONALE:

Chapter 16: Cost-Volume-Profit Analysis

SUPPORTINGCALCULATIONS:
[$360,000+($90060)+($521,400)]/$40=12,170units

Chapter 16: Cost-Volume-Profit Analysis

127. FantasmasIncorporatedhadthefollowinginformation:
ActivityDriverUnits
sold
Setups
Engineeringhours
Otherdata:
Totalfixedcosts(traditional)
Totalfixedcosts(ABC)
Unitsellingprice

UnitVariableCost
$20
1,200
52

$600,000
$360,000
$60

Howmanyunitsneedtobesoldtoproduceabefore-taxprofitof$80,000usingABC?
a. 8,350units
b. 12,800units
c. 15,580units
d. 14,750units
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
($360,000+$72,000+$78,000+$80,000)/$40=14,750units

LevelofActivityDriver
-60
1,500

Chapter 16: Cost-Volume-Profit Analysis

128.
TheBarristerMugCompanymanufacturesplasticmugsthatselltowholesalersfor$4.60each.Variableandfixedcos
tsareasfollows:
Variable Costs per Unit
Manufacturing:
Direct materials
$0.69
Direct labor
0.81
Factory overhead
0.57
Selling and adm.
Total

Fixed Costs per Month

$2.07
0.46
$2.53

Factory overhead
Selling and adm.
Total

$ 9,200
6,900
$16,100

BarristerMugproducedandsold11,500cupsduringApril2016.Therewerenobeginningorendinginventories.
Required:
a. DetermineBarristerMug'smonthlybreak-evenpointinunits.
b. Ifmonthlysalesincreaseby575cups,whatwillbethechangeinmonthlyprofits?
c. IfBarristerMugisnowsubjecttoanincometaxof40percent,whatdollarsalesvolumeisrequiredtoearn
amonthlyafter-taxnetincomeof$13,800?
ANSWER:
a.

Unitsellingprice
Unitvariablecosts
Unitcontributionmargin

$4.60
2.53
$2.07

Break-evenpoint=$16,100/$2.07=7,777.7units,or7,778units
b.

c.

Increaseinsales
Unitcontributionmargin
Increaseinmonthlyprofits
Desiredbefore-taxprofit=$13,800/(1.000.40)=$23,000Contributionmarginpercentage=$2.07/4.60=45
%Requiredsalesvolume=($16,100+$23,000)/0.45=$86,889

575units
$2.07
$1,190.25

Chapter 16: Cost-Volume-Profit Analysis

129. TheLeonardoCompanyhadthefollowingfunctionalincomestatementforthemonthofJuly2016:
Sales($2020,000units)
Costsofgoodssold:
Directmaterials
Directlabor
Variablefactoryoverhead
Fixedfactoryoverhead
Grossprofit
Sellingandadministrativeexpenses:
Variable
Fixed
Operatingincome
Therewerenobeginningandendinginventories.

$400,000
$ 60,000
40,000
120,000
50,000

$ 20,000
50,000

270,000
$130,000

70,000
$60,000

Required:
a. Calculatethecontributionmarginperunit.
b. Calculatethecontributionmarginratio.
c. Whatisthebreak-evenpointinunits?
d. Whatistheamountofsalesindollarsneededtoobtainabefore-taxprofitof$40,000?
ANSWER:
a. $160,000/20,000units=$8perunitb.
$160,000/$400,000=40%
c. ($50,000+$50,000)/$8=12,500units
d. ($50,000+$50,000+$40,000)/0.4=$350,000

Chapter 16: Cost-Volume-Profit Analysis

130.
Atapriceof$48,theestimatedmonthlysalesofaproductare18,000units.Variablecostsincludemanufacturingcost
sof$27anddistributioncostsof$9.Fixedcostsare$60,000permonth.
Required:
Determineeachofthefollowingvalues:
a. Unitcontributionmargin
b. Monthlybreak-evenunitsalesvolume
c. Before-taxmonthlyprofit
d. Monthlymarginofsafetyinunits
ANSWER:
a.

Sellingprice
Variablecosts:
Manufacturing
Distribution
Unitcontributionmargin

b.

Monthlybreak-evenpoint=$60,000/$12=5,000units

c.

Monthlycontribution=($12 18,000)
Monthlyfixedcosts
Monthlybefore-taxmonthlyprofit

d.

Monthlysalesvolume
MonthlybreakevensalesvolumeMonthlymargino
fsafety

$48
$27
9

36
$12

$216,000
60,000
$156,000
18,000units
5,000units13,0
00units

Chapter 16: Cost-Volume-Profit Analysis

131.
ChowMeinCompanyistheexclusiveMontanadistributoroflawnmowersforasmallmanufacturingcompany.Itsell
sonlyonemodelat$600perunitandforwhichChowMeinpays$250.ChowMein'sothervariablecostsamountto$50perunit.Fix
edcostsare$2,000.InApril,ChowMeinsold15lawnmowersanditsold20inMay.
Required:
Calculatethefollowingvalues:
a. Monthlybreak-evenpointinsalesdollars
b. Monthlybreak-evenpointinunits
c. MonthlyincomeforApril
d. MonthlyincomeforMay
e. MarginofsafetyforApril
ANSWER:
a. $2,000/[($600-$250-$50)/$600]=$4,000
b. $2,000/($600- $250 -$50) =6.67or7mowersc.
(15$300)- $2,000=$2,500
d. (20$300)- $2,000=$4,000
e. $9,000-$4,000=$5,000,or9mowers
132. Atamonthlyvolumeof$31,250,acompanyincursvariablecostof$23,750andfixedcostsof$7,500.
Required:
Determineeachofthefollowingvalues:
a. Variablecostratio
b. Contributionmarginratio
c. Monthlybreak-evendollarsalesvolume
d. Monthlymarginofsafetyindollars
ANSWER:
a.
b.
c.
d.

Variable cost ratio = $23,750/$31,250 = 0.76

Contribution margin ratio = 1.00 - 0.76 = 0.24
Monthly break-even dollar sales volume = $7,500/0.24 = $31,250
Monthly sales volume
Monthly break-even sales volume
Monthly margin of safety

$31,250
31,250
$ -0-

Chapter 16: Cost-Volume-Profit Analysis

133. TheOldTowneManufacturingCompanyproducesthefollowingthreeproducts:

Sellingpriceperunit
Variablecostsperunit
Contributionperunit
Fixedcostsare$76,000peryear.

Saws
$40
28
$12

Knives
$16
12
$4

MeasuringTapes
$50
30
$20

50%ofallsalesinunitsareSaws,30percentareKnives,and20percentareMeasuringTapes..
Required:
Calculatethefollowingvalues:
a. Break-evenpointintotalunits
b. NumberofSawsthatwillbesoldatbreak-even
c. Totalsalesinunitstoobtainabefore-taxprofitof$19,000
ANSWER:
a. Ave.CM/unit=($12 0.5)+($40.3)+($20 0.2)=$11.20
$76,000/$11.20 =6,786unitsofhammers,screwdrivers,andsawsb.
6,7860.5=3,393hammers
c. ($76,000+$19,000)/$11.20=8,482units

Chapter 16: Cost-Volume-Profit Analysis

134. RandolphPlumbingCompanyhasthefollowinginformationfor2016:
Sellingpriceperunit
Variablecostsperunit
Fixedcosts

$10
$7
$1,500

Required:
Prepareaprofit-volumegraphidentifyingthefollowingitems:
a. Profitline
b. Intersectionofprofitlineandverticalaxis
c. Break-evenpoint
d. Profitarea
e. Lossarea
ANSWER:

*Thebreak-evenpointis500units.

135. BreadlineCorporationhasthefollowinginformationfor2016:
Sellingpriceperunit
Variablecostsperunit
Fixedcosts

$10
$6
$1,000

Required:
Prepareacost-volume-profitgraphidentifyingthefollowingitems:
a. Totalcostsline
b. Totalfixedcostsline
c. Totalvariablecostsline
d. Totalrevenuesline
e. Break-evenpointinsalesdollars
f. Break-evenpointinunits
g. Profitarea
h. Lossarea

ANSWER:
136. IntheCost-Volume-Profitanalysis,whataretwowaysmanagementcandealwithriskanduncertainty?
ANSWER:TwoconceptsthatareconsideredmeasuresofriskinCVPanalysisaremarginofsafetyandoperatingleverage.Marg
inofSafetyrepresentsthenumberofunitssoldorexpectedtobesoldabovethebreakevenpoint.Indollars,itistherevenueearnedorexpectedtobeearnedabovebreak-evenrevenue.
Whilemarginofsafetyisasimplisticmeasureofrisk,ahighermarginofsafetydoesprovideanorganizationanoperati
ngincomecushionintheeventofunforeseenevents.Operatingleverageisconcernedwiththeproportionoffixedc
ostsinanorganizationtovariablecosts.Ifgreaterfixedcostscanbeusedtoreducethevariablecostperunit,operatin
gincomewillincreaseassalesincrease.
However,theflipsideisalsotrue
assalesdecrease,ifanorganizationhasahigheroperatingleverage,greaterreductionsinprofitscanbeexpected.T
hedegreeofleveragecanbecalculatedforagivenlevelofsalesbydividingcontributionmarginbyprofit.
137. GigondasIncorporatedhadthefollowinginformation:

ActivityDriverUnits
sold
Setups
Engineeringhours

UnitVariableCost
$20
1,000
60

Otherdata:
Totalfixedcosts(traditional)

LevelofActivityDriver
-40
1,000

$100,000

Totalfixedcosts(ABC)
Unitsellingprice

$50,000
$40

Required:
a. Calculatethebreak-evenpointinunitsusingthetraditionalapproachtoCVPanalysis.
b. Calculatethebreak-evenpointinunitsusingtheactivity-basedcostingapproachtoCVPanalysis.
c. Calculatethenumberofunitsusingtheactivity-basedcostingapproach,thatmustbesoldtoearnabeforetaxprofitof$40,000.
d. SupposeGilbertcouldreducesetupcostsby$300persetupandcouldreducethenumberofengineeringhoursneeded
to900.Howmanyunitsmustbesoldtobreakeveninthiscase?
ANSWER:
a. $100,000/($40-$20)=5,000units
b. [$50,000+($1,00040)+($60$1,000)]/$20=7,500unitsc.($50,000 + $40,000+
$60,000+ $40,000)/$20=9,500unitsd. [$50,000+($700 40)+($60900)]/
$20=6,600units
138. PeytonPlaceCorporationhadthefollowingincomestatementfor2016:
Sales
Variableexpenses
Contributionmargin
Fixedexpenses
Operatingincome

$27,500
16,500
$11,000
4,400
$6,600

Required:
a. Calculatetheoperatingleverageratio.
b. Ifsalesincreaseby20percent,whatwillbethepercentagechangeinincome?
c. Ifsalesincreaseby$16,500,howmuchwillincomeincrease?
ANSWER:
a. $11,000/$6,600=1.6667
b. 1.66670.2=0.33334,or33.33%increasec.
$16,5000.4=$6,600

Chapter 17
1. Tacticaldecisionmakingconsistsofchoosingamongalternativeswithanimmediateorlimitedendinview.
a. True

b. False
ANSWER: True
2. Soundtacticaldecisionmakingislimitedtoachievesmallobjectives.
a. True
b. False
ANSWER: False
3. Thefirstofthesixstepsofthetacticaldecisionmodelistorecognizeanddefinetheproblem.
a. True
b. False
ANSWER: True
4. Thelastofthesixstepsofthetacticaldecisionmodelistochoosethequickestwaytosolvetheproblem.
a. True
b. False
ANSWER: False
5. Tacticalcostanalysisusescostdatatoidentifythechoicethatwillbringtheorganizationthemostbenefit.
a. True
b. False
ANSWER: True
6. Relevantcostsandrevenuesarepresentcostsandrevenuesthatdifferacrossalternatives.
a. True
b. False
ANSWER: False
7. Asunkcostisirrelevantbecauseithasnoinfluenceoverfuturedecisions,soitisdepreciated.
a. True
b. False
ANSWER: True
8. Anirrelevantcostisonethatisthesameformorethanonealternativeandhasnobearingonfuturedecisions.
a. True
b. False
ANSWER: True
9. Atariffisataxonexportsleviedbythefederalgovernment.
a. True
b. False
ANSWER: False

10.
ForeigntradezonesaresetupbytheU.S.governmenttofacilitatewarehousingand/ormanufacturingforco
mpanies.
a. True
b. False
ANSWER: True
11.
Theactivityresourceusagemodelfocusesonsortingoutthebehaviorofvariousactivitycostsandassesstheirrele
vancy.
a. True
b. False
ANSWER: True
12.
Forflexibleresources,ifthedemandforanactivitychangesacrossalternatives,thenresourcespendingwillremainth
esameandcostsarerelevant.
a. True
b. False
ANSWER: False
13. Committedresourcesareacquiredinadvanceofusage,throughimplicitcontracting.
a. True
b. False
ANSWER: True
14.
Changesincostofanactivitycanoccurifthedemandfortheresourceexceedsthesupplyorifthedemandfortheresour
cedrops.
a. True
b. False
ANSWER: True
15. Flexibleresourcesareacquiredwayaheadoftime.
a. True
b. False
ANSWER: False

16. Tacticaldecisionmakingincludesdecisionstomakeorbuyacomponent.
a. True
b. False
ANSWER: True
17. Outsourcingreferstothemoveofabusinessfunctiontoanothercompany,eitherinoroutoftheU.S.
a. True
b. False
ANSWER: True
18. Choosingtomakeorbuymayreducethecostofproducingthemainproductandincreasethequality.
a. True
b. False
ANSWER: True
19.
Akeep-ordropdecisionusesirrelevantcostanalysistodeterminewhethertocontinueordiscontinueasegmentorlineofbusiness.
a. True
b. False
ANSWER: False
20. Aspecial-orderdecisionfocusesonwhetheraspeciallypricedordershouldbeacceptedorrejected.
a. True
b. False
ANSWER: True
21.
Decisionsconsistingofselectingamongalternativeswithimmediateend
sinviewsarecalled decisions.
ANSWER: tactical
22. Futurecostswhichdifferacrossalternativesarecalled

costs.

ANSWER: relevant
23. A

modelisasetofproceduresthat,iffollowed,willleadtoadecision.

ANSWER: decision
24. Pastcost
ANSWER: depreciation

representsanallocationofacostalreadyincurred.

25.
AreasthatarephysicallyonU.S.soilbutconsideredtobeoutsideU.S.co
mmercearecalled zones.
ANSWER: foreigntrade
26. Thecostofacquiringactivitycapacityiscalled

spending.

ANSWER: resource
27. Leasingorbuyinga buildingareexamplesof

resources.

ANSWER: committed
28. Adoctorchoosingbetweenbuyinglaboratorytestsexternallyorperformingthetestsinhouseisanexampleofa
decision.
ANSWER: make-or-buy
29. In a keep-or-dropdecision,the

incomeorlossdetermineswhetherasegmentiskeptordropped.

ANSWER: traceable
30.

Adecisiontoacceptorrejectaspeciallypricedorderisanexampleofa
decision.

ANSWER: special-order
31. Thechoosingamongalternativeswithanimmediateorlimitedendinviewconsistsof:
a. Tacticaldecisionmaking
b. Long-rundecisionmaking
c. Universaldecisionmaking
d. alloftheabove
ANSWER: a
32. Tacticaldecisionmakingrelies
a. onlyonrelevantcostinformation.
b. onlyonqualitativefactors.
c. onrelevantcostsaswellasotherqualitativefactors.
d. onneitherrelevantcostsnorqualitativedecisions.
ANSWER: c

33. Thestepsinthetacticaldecisionmakingprocessare:
I.
Comparingrelevantcostsandrelatingtostrategicgoals
II.
Identifyingfeasiblealternatives
III.
Identifyingcostsandbenefitsandeliminatingirrelevantcosts
IV.
Selectingbestalternative
V.
Definingtheproblem
Whatisthepropersequenceofsteps?
a. I,II,V,III,IV
b. II,I,V,III,IV
c. V,II,III,I,IV
d. V,III,II,IV,I
ANSWER: c
34. WhichofthefollowingisNOTastepinthetacticaldecision-makingprocess?
a. Comparefullcostsandbenefitsforalternatives.
b. Identifyfeasiblealternatives.
c. Selectthebestalternative.
d. Recognizeanddefinetheproblem.
ANSWER: a
35. Whichofthefollowingstatementistrueconcerningthenatureoftacticaldecisions?
a. Tacticaldecisionsareoftensmall-scaleactions.
b. Tacticaldecisionsoftenhaveanimmediateorlimitedendinview.
c. Tacticaldecisionsshouldsupportalternativesthatresultinlong-termcompetitiveadvantage.
d. alloftheabovestatementsaretrue.
ANSWER: d
36. Soundtacticaldecisionmaking
a. onlyconcernstheshortrun.
b. consistsoflargescaleactionsthatserveabroadpurpose.
c. consistsofsupportingthestrategicobjectivesofthefirm.
d. onlyconcernsthelongrun.
ANSWER: c
37. Qualitativefactorsthatshouldbeconsideredwhenevaluatingamake-or-buydecisionare
a. thequalityoftheoutsidesupplier'sproduct.
b. whethertheoutsidesuppliercanprovidetheneededquantities.
c. whethertheoutsidesuppliercanprovidetheproductwhenitisneeded.
d. alloftheabove.

ANSWER: d
38.
es

Theuseofrelevantcostdatatoidentifythealternativethatprovidesthegreatestbenefittotheorganizationdescrib

a. targetcostanalysis.
b. functionalcostanalysis.
c. activitycostanalysis.
d. tacticalcostanalysis.
ANSWER: d
39. Animportantqualitativefactortoconsiderregardingaspecialorderisthe
a. variablecostsassociatedwiththespecialorder.
b. avoidablefixedcostsassociatedwiththespecialorder.
c. effectthesaleofspecial-orderunitswillhaveonexistingcustomers.
d. incrementalrevenuefromthespecialorder.
ANSWER: c
40. Futurecoststhatdifferacrossalternativesdescribe
a. relevantcosts.
b. targetcost.
c. fullcosts.
d. activity-basedcosts.
ANSWER: a
41.
Apurchasingagenthastwopotentialfirmsfromwhichtobuymaterialsforproduction.Ifbothfirmschargethesamepr
ice,thematerialcostisa(n)
a. irrelevantcost.
b. relevantcost.
c. sunkcost.
d. opportunitycost.
ANSWER: a
42. Relevantcostsare
a. pastcosts.
b. futurecosts.
c. fullcosts.
d. costdrivers.
ANSWER: b

43. Thefuturecoststhatdifferacrossalternativesarecalled
a. Sunkcosts
b. Irrelevantcosts
c. Relevantcosts
d. Pastcosts
ANSWER: c
44. Inorderforcostsorbenefitstoberelevant,whatmustbetrue?
a. Alldecisionsmustrelatetofuture.
b. Identifyingrelevantcostsandbenefitsisaneasyprocess.
c. Relevancywillrelatebothtothefutureandthepast.
d. alloftheabovearetruestatements.
ANSWER: a
45. Sunkcostsare
a. futurecoststhathavenobenefit.
b. relevantcoststhathaveonlyshort-runbenefits.
c. targetcosts.
d. alwaysirrelevant.
ANSWER: d
46. WhichitemisNOTanexampleofasunkcost?
a. materialsneededforproduction
b. purchasecostofmachinery
c. depreciation
d. allaresunkcosts
ANSWER: a
47.

OneofMaerskcargoshipshitanicebergandsank.Indecidingwhetherornottosalvagetheship,itsbookvalueisa(n)

a. relevantcost.
b. discretionarycost.
c. opportunitycost.
d. sunkcost.
ANSWER: d

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
48. WhichofthefollowingstatementsisTRUEwhenmakingadecisionbetweentwoalternatives?
a. Variablecostsmaynotberelevantwhenthedecisionalternativeshavethesameactivitylevels.
b. Variablecostsarenotrelevantwhenthedecisionalternativeshavedifferentactivitylevels.
c. Sunkcostsarealwaysrelevant.
d. Fixedcostsareneverrelevant.
ANSWER: a
49.
MaldovarCompanyisconsideringpurchasinganewmachinetoreplaceamachinepurchasedoneyearagothati
snotachievingtheexpectedresults.Thefollowinginformationisavailable:
Expectedmaintenancecostsofnewmachine$12,000 per year
Purchas price of existing machine$150,000
Expectedcostsavings of newmachine$20,000 per year
Expectedmaintenancecostsofexistingmachine$8,000peryear
Resale value of existing machine$35,000
WhichoftheseitemsisIRRELEVANT?
a. Expectedmaintenancecostsofnewmachine
b. Expectedmaintenancecostsofexistingmachine
c. Purchasecostofexistingmachine
d. Expectedresalevalueofexistingmachine
ANSWER: c
50. WhichofthefollowingcostsisNOTrelevanttoaspecial-orderdecision?
a. thedirectlaborcoststomanufacturethespecial-orderunits
b. thevariablemanufacturingoverheadincurredtomanufacturethespecial-orderunits
c. theportionofthecostofleasingthefactorythatisallocatedtothespecialorder
d. alloftheabovecostsarerelevant
ANSWER: c
51. WhichofthefollowingcostsisNOTrelevanttoamake-or-buydecision?
a. $20,000ofdirectlaborusedtomanufacturetheparts
b. $25,000inrentfromleasingtheproductionspacetoanothercompanyifthepartispurchasedfromanoutsides
upplier
c. thesupervisor'ssalaryof$35,000thatwillbeavoidedifthepartispurchasedfromanoutsidesupplier
d. $40,000ofdepreciationontheplantusedtomanufacturetheparts
ANSWER: d

Chapter 17: Activity Resource Usage Model and Tactical Decision Making

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
52.
WhichofthefollowingcostsisNOTrelevanttoadecisiontosellaproductatsplitofforprocesstheproductfurtherandthenselltheproduct?
a. jointcostsallocatedtotheproduct
b. thesellingpriceoftheproductatsplit-off
c. theadditionalprocessingcostsaftersplit-off
d. thesellingpriceoftheproductafterfurtherprocessing
ANSWER: a
53. WhichofthefollowingcostsisNOTrelevantforspecialdecisions?
a. incrementalcosts
b. sunkcosts
c. avoidablecosts
d. alloftheabovecostsarerelevantforspecialdecisions
ANSWER: b
54. Whichofthefollowingcostsisrelevanttoamake-or-buydecision?
a. originalcostoftheproductionequipment
b. annualdepreciationoftheequipment
c. theamountthatwouldbereceivediftheproductionequipmentweresold
d. thecostofdirectmaterialspurchasedlastmonthandusedtomanufacturethecomponent
ANSWER: c
55. WhichofthefollowingisNOTawaythatcompaniesmightreducetariffs?
a. Altermaterialstoincreasethedomesticcontent.
b. Restricttheamountofimportedmaterials.
c. Increasetheamountofimportedmaterials.
d. Utilizeforeigntradezones.
ANSWER: c
56. TheU.S.governmenthassetupforeigntradezones(FTZ)that
a. arelocatedonU.S.soilbutareconsideredtobeoutsideofU.S.commercefortariffpurposes.
b. arelocatedinforeigncountriesanddesignedtoexporttotheUnitedStates.
c. arelocatedinforeigncountriesandaredesignedtoimportfromtheUnitedStates.
d. arelocatedintheUnitedStatesandareconsideredpartoftheUnitedStatesfortariffpurposes.
ANSWER: a

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
57. Forflexibleresources,whichofthefollowingstatementsistrue?
a. Achangeinresourcespendingwillonlyoccurifthedemandforaresourcedropspermanentlyandexceedsdemandeno
ughsotheactivitycapacitywillbereduced.
b. Often,resourcesareacquiredinadvanceformultipleperiodsandarethereforeirrelevant.
c. Decisionsoftenaffectmulti-periodcapabilities.
d. Ifthedemandforanactivitychangesacrossalternatives,thenresourcespendingwillchangeandthecostoftheactivity
willberelevanttothedecision.
ANSWER: d
58. WhichofthefollowingwouldbeTRUE?
Category
of Cost
a.
Flexible
b.
Flexible
c.
Committed
d.

Committed

Relationships
Demand changes
Demand constant
Demand increase >
Unused capacity
Demand increase <
Unused capacity

Relevancy
Irrelevant
Irrelevant
Not relevant
Relevant

ANSWER: b
59. Thecostofacquiringactivitycapacityis(are)
a. Jointcosts
b. Variablecosting
c. Absorptioncosting
d. Resourcespending
ANSWER: d
60.
SantaLuciaIndustriesemploys500workersinthefactory.Theseworkersproduced85,000unitsin2016.Dueto
aspecialorder,theunitsproducedin2017increasedto95,000units.However,SantaLuciaproducedtheseunitswithouta
ddingworkers.Howisthatpossible?
a. Thelaborcostassociatedwiththeadditionalunitssoldwillbearelevantcost.
b. Theemployeeswereaflexibleresourceinthissituation.
c. Theplanthadsomeunusedactivitycapacity.
d. noneoftheabove
ANSWER: c

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
61. Upfrontresourcespending
a. isalwaysrelevantbecauseitrelatestothefuture.
b. isalwaysrelevantbecauseitcouldreducefuturecosts.
c. isasunkcostandthereforeneverrelevant.
d. isalwaysrelevantbecauseupfrontresourcespendingwillgeneratefuturerevenuesorbenefits.
ANSWER: c
62. Intheactivityresourcemodel,flexibleresourcesare
a. resourcesacquiredinadvanceofusage.
b. resourcesacquiredasusedandneeded.
c. usuallyacquiredinlumpyamounts.
d. arenormallyfixedormixedcosts.
ANSWER: b
63. Whichofthefollowingitemswouldbeclassifiedascommittedresources(short-term)?
a. salariedemployees
b. depreciationonbuilding
c. fueltogenerateelectricityinternally
d. leaseonmachinery
ANSWER: a
64. Whichofthefollowingitemswouldbeclassifiedasflexibleresources?
a. salariedemployees
b. depreciationonbuilding
c. fueltogenerateelectricityinternally
d. leaseonmachinery
ANSWER: c
65. Whichofthefollowingitemswouldbeclassifiedascommittedresources(long-term)?
a. salariedemployees
b. depreciationonbuilding
c. leaseonmachinery
d. bothbandc
ANSWER: d

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
66.
YanktonIndustriesmanufactures20,000componentsperyear.Themanufacturingcostofthecomponentswasd
eterminedasfollows:
Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead
Total

$140,000
230,000
80,000
120,000
$570,000

Anoutsidesupplierhasofferedtosellthecomponentfor$23.50.
WhatistheeffectonincomeifYanktonIndustriespurchasesthecomponentfromtheoutsidesupplier?
a. $20,000increase
b. $20,000decrease
c. $80,000decrease
d. $80,000increase
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
Make:
Direct materials
Direct labor
Variable overhead
Total

$(140,000)
(230,000)
(80,000)
$(450,000)

Buy:
Purchase price (20,000 $23.50)
$470,000 - $450,000 = $20,000 decrease in income

$(470,000)

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
67.
YanktonIndustriesmanufactures20,000componentsperyear.Themanufacturingcostofthecomponentswasd
eterminedasfollows:
Directmaterials
Directlabor
Inspectingproducts
Providingpower
Providingsupervision
Settingupequipment
Movingmaterials
Total

$140,000
230,000
60,000
30,000
40,000
60,000
20,000
$580,000

IfthecomponentisnotproducedbyYankton,inspectionofproductsandprovisionofpowercostswillonlybe10
percentoftheproductioncosts;movingmaterialscostsandsettingupequipmentcostswillonlybe50percentoftheproductionco
sts;andsupervisioncostswillamounttoonly40percentoftheproductionamount.Anoutsidesupplierhasofferedtoselltheco
mponentfor$23.50.
WhatistheeffectonincomeifYanktonIndustriespurchasesthecomponentfromtheoutsidesupplier?
a. $25,000increase
b. $45,000increase
c. $80,000decrease
d. $80,000increase
ANSWER:RA b
TIONALE:
SUPPORTINGCALCULATIONS:
Make:
Directmaterials
Directlabor

$(140,000)
(230,000)

Inspectingproducts(avoid90%)

(54,000)

Providingpower(avoid90%)

(27,000)

Providingsupervision(avoid60%)

(24,000)

Settingupequipment(avoid50%)

(30,000)

Movingmaterials(avoid50%)
Total

(10,000)
$(515,000)

Buy:
Purchaseprice(20,000$23.50)
$470,000- $515,000 =$45,000increaseinincome

$(470,000)

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
68.
YanktonIndustriesmanufactures20,000componentsperyear.Themanufacturingcostofthecomponentswasd
eterminedasfollows:
Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead
Total

$140,000
230,000
80,000
120,000
$570,000

Anoutsidesupplierhasofferedtosellthecomponentfor$23.50.
YanktonIndustriescanrentitsunusedmanufacturingfacilitiesfor$45,000ifitpurchasesthecomponentfromtheoutsidesupplier.
WhatistheeffectonincomeifYanktonpurchasesthecomponentfromtheoutsidesupplier?
a. $25,000increase
b. $45,000increase
c. $75,000decrease
d. $105,000increase
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
Make:
Directmaterials
Directlabor

$(140,000)
(230,000)

Variableoverhead

(80,000)

Total

$(450,000)

Purchaseprice(20,000$23.50)

$(470,000)

Buy:
Rentalincome
Total

45,000
$(425,000)

$450,000- $425,000 =$25,000increaseinincome

69. Adecisiontomakeacomponentinternallyversuspurchasingfromasupplierisa
a. special-orderdecision.
b. keep-or-dropaproduct-linedecision.
c. make-or-buydecision.
d. bothaandc.
ANSWER: c

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
70.
ConciergeIndustriesmanufactures40,000componentsperyear.Themanufacturingcostofthecomponentswasdet
erminedasfollows:
Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead
Total

$75,000
120,000
45,000
60,000
$300,000

Anoutsidesupplierhasofferedtosellthecomponentfor$12.75.
WhatistheeffectonincomeifConciergeIndustriespurchasesthecomponentfromtheoutsidesupplier?
a. $30,000increase
b. $30,000decrease
c. $270,000increase
d. $270,000decrease
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
Make:
Directmaterials

$(75,000)

Directlabor

(120,000)

Variableoverhead

(45,000)

Total

$(240,000)

Buy:
Purchaseprice(40,000$12.75)
$510,000- $240,000 =$270,000decreaseinincome

$(510,000)

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
71.
ConciergeIndustriesmanufactures40,000componentsperyear.Themanufacturingcostofthecomponentswasd
eterminedasfollows:
Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead
Total

$75,000
120,000
45,000
60,000
$300,000

Anoutsidesupplierhasofferedtosellthecomponentfor$12.75.
ConciergeIndustriescanrentitsunusedmanufacturingfacilitiesfor$45,000ifitpurchasesthecomponentfromtheoutsidesupplier.
WhatistheeffectonincomeifConciergepurchasesthecomponentfromtheoutsidesupplier?
a. $195,000increase
b. $165,000decrease
c. $225,000decrease
d. $135,000increase
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
Make:
Directmaterials

$(75,000)

Directlabor

(120,000)

Variableoverhead

(45,000)

Total

$(240,000)

Purchaseprice(40,000$12.75)

$(510,000)

Buy:
Rentalincome
Total
$465,000- $240,000 =$225,000decreaseinincome

45,000
$(465,000)

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
72.
HobartCompanyproducesspeakersforPAsystems.Thespeakersaresoldtoretailmusicstoresfor$30.Ma
nufacturingandothercostsareasfollows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total

$ 9.00
4.50
3.00
1.50
$18.00

Fixed costs per month:

Factory overhead
Selling and admin.
Total

$120,000
60,000
$180,000

Thevariabledistributioncostsarefortransportationtotheretailmusicstores.Thecurrentproductionandsales
volumeis20,000peryear.Capacityis25,000unitsperyear.
AMemphismanufacturingfirmhasofferedaoneyearcontracttosupplyspeakerpartsatacostof$6.00perunit.IfHobartCompanyacceptstheoffer,itwillbeabletoreducevaria
blecostsby30percentandrentunusedspacetoanoutsidefirmfor$18,000peryear.Allotherinformationremainsthesameasth
eoriginaldata.WhatistheeffectonprofitsifHobartCompanybuysfromtheMemphisfirm?
a. decreaseof$19,000
b. increaseof$19,000
c. increaseof$6,000
d. increaseof$13,000
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
Costtobuy($620,000)

$120,000

Costtomake:
Variablecosts[($18.000.30)20,000]
Opportunitycosts
Profitwillincreaseby

$108,000
18,000

126,000
$6,000

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
73.
HobartCompanyproducesspeakersforhomestereounits.Thespeakersaresoldtoretailmusicstoresfor$30.Ma
nufacturingandothercostsareasfollows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total

$ 9.00
4.50
3.00
1.50
$18.00

Fixed costs per month:

Factory overhead
Selling and admin.
Total

$120,000
60,000
$180,000

Thevariabledistributioncostsarefortransportationtotheretailmusicstores.Thecurrentproductionandsales
volumeis20,000peryear.Capacityis25,000unitsperyear.
AMemphismanufacturingfirmhasofferedaoneyearcontracttosupplyspeakerpartsatacostof$17.00perunit.IfHobartCompanyacceptstheoffer,itwillbeabletorentunused
spacetoanoutsidefirmfor$18,000peryear.Allotherinformationremainsthesameastheoriginaldata.Whatistheeffectonpro
fitsifHobartCompanybuysfromtheMemphisfirm?
a. decreaseof$19,000
b. increaseof$38,000
c. increaseof$19,000
d. decreaseof$6,000
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
Costtobuy($1720,000)

$340,000

Costtomake:
Variablecosts[($18.0020,000]

$360,000

Opportunitycosts

18,000

Profitwillincreaseby

378,000
$ 38,000

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
74.
HobartCompanyproducesspeakersforPAsystems.Thespeakersaresoldtoretailmusicstoresfor$30.Ma
nufacturingandothercostsareasfollows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total

$ 9.00
4.50
3.00
1.50
$18.00

Fixed costs per month:

Factory overhead
Selling and admin.
Total

$120,000
60,000
$180,000

Thevariabledistributioncostsarefortransportationtotheretailmusicstores.Thecurrentproductionandsales
volumeis20,000peryear.Capacityis25,000unitsperyear.
Thespeakersarecurrentlyunpackaged.Packagingthemindividuallywouldincreasecostsby$1.20perunit.However,theunitsco
uldthenbesoldfor$33.00.Allotherinformationremainsthesameastheoriginaldata.WhatistheeffectonprofitsifHobartCom
panypackagesthespeakers?
a. nochange
b. decreaseof$24,000
c. decreaseof$36,000
d. increaseof$36,000
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
NewunitCM=$33$19.20=$13.80OldunitCM = $30 $18.00 =$12.00
IncreaseinUnitCM=$1.80
$1.8020,000=$36,000

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
75.
CompositeCompanyuses5,000unitsofpartAA1eachyear.ThecostofmanufacturingoneunitofpartAA1att
hisvolumeisasfollows:
Directmaterials
Directlabor
Variableoverhead
Fixedoverhead
Total

$11.00
15.00
6.00
4.00
$36.00

AnoutsidesupplierhasofferedtosellCompositeCompanyunlimitedquantitiesofpartAA1ataunitcostof
$32.00.IfCompositeCompanyacceptsthisoffer,itcaneliminate50percentofthefixedcostsassignedtopartAA1.Further
more,thespacedevotedtothemanufactureofpartAA1wouldberentedtoanothercompanyfor$24,000peryear.IfCom
positeCompanyacceptstheofferoftheoutsidesupplier,annualprofitswill
a. increaseby$17,000.
b. increaseby$24,000.
c. increaseby$34,000.
d. increaseby$3,500.
ANSWER:
c
RATIONALE:
SUPPORTING CALCULATIONS:
Cost to buy (5,000 $32) + ($2.00 5,000)
Cost to make (5,000 $36) + $24,000
Profits increase by

$170,000
204,000
$34,000

Figure17-1
ThefollowingdatapertainstotheMontroseCompany'sthreeproducts:

Unit sales per month

Selling price per unit
Variable costs per unit
Unit contribution margin
Batches
Setups
Direct fixed costs
Advertising
Supervision
Common fixed costs
Inspecting products ($10,000)
Materials handling ($4,000)
Customer service ($5,000)
Plant depreciation ($6,000)
General administration ($8,000)

M
9,000

N
14,000

O
8,000

$6.00
3.00
$3.00
5
6

$11.25
9.00
$ 2.25
10
3

$ 7.50
7.00
$ 0.50
5
1

$3,000
5,000

$2,000
5,000

$1,000
5,000

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
76. RefertoFigure17-1.WhenMontroseconvertedovertoABCitdiscoveredthefollowing:
inspecting products

materials handling

customer service

plant depreciation
general administration

20 percent of the inspection activity was

unused. The inspections used were based on the
number of batches produced.
10 percent of the materials handling activity
was unused. The materials handling activity
used was based on the number of production
runs.
50 percent of the customer service activity was
unused. The usage was given as follows: M
1,000, N 1,000, O 500
facility level cost
facility level cost

The operating income for Montrose would be

a.$8,500.
b.$9,000.c.
$19,000.d.
$27,000.

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
ANSWER:

RATIONALE:
SUPPORTINGCALCULATIONS:

TOTAL

Unitsalespermonth

9,000

14,000

8,000

Sellingpriceperunit
Variablecostsperunit

$6.00
3.00

$11.25
9.00

$7.50
7.00

Unitcontributionmargin

$3.00

$2.25

$0.50

$271,500
209,000

$54,000
27,000

$157,500
126,000

$60,000
56,000

62,500

27,000

31,500

4,000

Advertising

6,000

3,000

2,000

1,000

Supervision

15,000

5,000

5,000

5,000

Inspectingproducts

8,000

2,000

4,000

2,000

Materialshandling

3,600

2,160

1,080

360

Customerservice

2,500

1,000

1,000

500

27,400

13,840

18,420

(4,860)

Sales
Variablecosts
Contributionmargin
Lesstraceablecosts

Productmargin
Commoncosts:
Unusedactivity:
Inspectingproducts

2,000

Materialshandling

400

Customerservice

2,500

Facilitylevel
Plantdepreciation($6,000)

6,000

Generaladministration($8,000)

8,000

OperatingIncome

8,500

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
77. RefertoFigure17-1.WhenMontroseconvertedovertoABCitdiscoveredthefollowing:
Inspecting products

20%oftheinspectionactivitywasunused.The
inspectionsusedwerebasedonthenumberofbatchesproduced.

Materialshandling

10%ofthematerialshandlingactivitywasunused.
Thematerialshandlingactivityusedwasbasedonthenumberofproduction
runs.

Customerservice

Plantdepreciation
Generaladministration

50%ofthecustomerserviceactivitywasunused.The
usagewasgivenasfollows:M1,000,N1000,O500
facilitylevelcost
facilitylevelcost

TheproductmarginforproductMusingABCwouldbe
a.$9,000.b.
$19,000.c.
$13,840.d.
$27,000.

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
ANSWER:

RATIONALE:
SUPPORTINGCALCULATIONS:

TOTAL

Unitsalespermonth

9,000

14,000

8,000

Sellingpriceperunit
Variablecostsperunit

$6.00
3.00

$11.25
9.00

$7.50
7.00

Unitcontributionmargin

$3.00

$2.25

$0.50

$271,500
209,000

$54,000
27,000

$157,500
126,000

$60,000
56,000

62,500

27,000

31,500

4,000

Advertising

6,000

3,000

2,000

1,000

Supervision

15,000

5,000

5,000

5,000

Inspectingproducts

8,000

2,000

4,000

2,000

Materialshandling

3,600

2,160

1,080

360

Customerservice

2,500

1,000

1,000

500

Productmargin

27,400

13,840

18,420

(4,860)

Sales
Variablecosts
Contributionmargin
Lesstraceablecosts

Commoncosts:
Unusedactivity:
Inspectingproducts

2,000

Materialshandling

400

Customerservice

2,500

Facilitylevel
Plantdepreciation($6,000)

6,000

Generaladministration($8,000)

8,000

OperatingIncome

8,500

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
78. RefertoFigure17-1.TheproductmarginforproductMusingfunctional-basedcostingwouldbe
a.
$41,500.b.
$19,000.c.
$13,840.d.
$9,000.
ANSWER:RA b
TIONALE:
SUPPORTINGCALCULATIONS:

TOTAL

Unitsalespermonth

9,000

14,000

8,000

Sellingpriceperunit
Variablecostsperunit

$6.00
3.00

$11.25
9.00

$7.50
7.00

Unitcontributionmargin

$3.00

$2.25

$0.50

$271,500
209,000

$54,000
27,000

$157,500
126,000

$60,000
56,000

62,500

27,000

31,500

4,000

Advertising

6,000

3,000

2,000

1,000

Supervision

15,000

5,000

5,000

5,000

Productmargin

41,500

19,000

24,500

(2,000)

Sales
Variablecosts
Contributionmargin
Lesstraceablecosts

Commoncosts:
Inspectingproducts

10,000

Materialshandling

4,000

Customerservice

5,000

Plantdepreciation

6,000

Generaladministration

8,000

OperatingIncome

8,500

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
79.
TheoperationsofCaliforniaCorporationaredividedintotheMendocinoDivisionandtheNapaDivision.Projectionsf
orthenextyearareasfollows:

Sales
Variablecosts
Contributionmargin
Directfixedcosts
Segmentmargin
Allocatedcommoncosts
Operatingincome(loss)

Mendocino
Division
$430,000
147,000
$283,000
126,000
$157,000
63,000
$94,000

Napa
Division
$252,000
115,500
$136,500
105,000
$31,500
47,250
$(15,750)

Total
$682,000
262,500
$419,500
231,000
$188,500
110,250
$78,250

OperatingincomeforCaliforniaCorporationasawholeiftheNapaDivisionweredroppedwouldbe
a.$46,750.
b.$94,000.
c.$78,250.
d.$109,750.
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$157,000-$110,250=$46,750
80.
SanAntonioCorporationmanufacturersapartforitsproductioncycle.Thecostsperunitfor5,000unitsofthispartarea
sfollows:
Directmaterials
Directlabor
Variableoverhead
Fixedoverhead
Total

$32
40
16
32
$120

AmarilloCompanyhasofferedtosellSanAntonioCorporation5,000unitsofthepartfor$112perunit.IfSan
AntonioCorporationacceptsAmarilloCompany'soffer,totalfixedcostswillbereducedto$60,000.Whatalternativeismoredes
irableandbywhatamountisitmoredesirable?
Alternative
a.Buy
$100,000
b.Buy
$40,000
c.Make

Amount

Chapter 17: Activity Resource Usage Model and Tactical Decision Making
$20,000
d.Make

$120,000

ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
Make($1205,000)

$600,000

Buy[($1125,000) + $60,000]

620,000

Makeincreasesprofitsby

$20,000

81. Adecisiontomakeoreliminateanunprofitableproductisa
a. special-orderdecision.
b. make-or-buydecision.
c. keep-or-dropaproduct-linedecision.
d. bothbandc.
ANSWER: c
82.
TheoperationsofSmithsonianCorporationaredividedintotheManhattanDivisionandtheBronxDivision.P
rojectionsforthenextyearareasfollows:

Sales
Variablecosts
Contributionmargin
Directfixedcosts
Segmentmargin
Allocatedcommoncosts
Operatingincome(loss)

Manhattan
Division
$250,000
90,000
$160,000
75,000
$85,000
35,000
$50,000

Bronx
Division
$180,000
100,000
$ 80,000
62,500
$17,500
27,500
$(10,000)

Total
$430,000
190,000
$240,000
137,500
$102,500
62,500
$40,000

OperatingincomeforSmithsonianCorporationasawholeiftheBronxDivisionweredroppedwouldbe
a.$40,000.b.
$22,500.c.
$50,000.d.
$60,000.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:$85,000-$62,500=$22,500

83. ThefollowinginformationpertainstoDallasChurningCompany'sthreeproducts:

Unit sales per month

Selling price per unit
Variable costs per unit
Unit contribution margin

D
900

E
1,400

F
800

$6.00
3.00
$3.00

$11.25
9.00
$ 2.25

$ 7.50
7.80
$(0.30)

AssumethatproductFisdiscontinuedandthespaceusedtoproduceproductFisrentedfor$600permonth.
Monthlyprofitswill
a. increaseby$360.
b. increaseby$840.
c. increaseby$600.
d. decreaseby$5,400.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:(800$0.30)+$600=$840
84. ThefollowinginformationpertainstoDallasChurningCompany'sthreeproducts:
D
E
Unit sales per month
900
1,400
Selling price per unit
Variable costs per unit
Unit contribution margin

$6.00
3.00
$3.00

$11.25
9.00
$ 2.25

F
800
$ 7.50
7.80
$(0.30)

AssumethatproductFisdiscontinuedandthespaceisusedtoproduceE.ProductE'sproductionisincreasedto2,200unitsper
month,butE'ssellingpriceofallunitsofEisreducedto$10.20.Monthlyprofitswill
a. decreaseby$2,070.
b. increaseby$1,200.
c. increaseby$2,640.
d. decreaseby$270.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:[2,200($10.20-$9.00)]+(800$0.30)-(1,400
$2.25)=$270decrease

85. ThefollowinginformationpertainstotheDallasChurningCompany'sthreeproducts:
D
E
Unit sales per month
900
1,400
Selling price per unit
Variable costs per unit
Unit contribution margin

$6.00
3.00
$3.00

$11.25
9.00
$ 2.25

F
800
$ 7.50
7.80
$(0.30)

AssumethatthesellingpriceofproductFisincreasedto$8.25withareductioninmonthlysalesto400units.Monthlyprofits
will
a. increaseby$420.
b. decreaseby$60.
c. increaseby$180.
d. increaseby$2,070.
ANSWER:

RATIONALE:
SUPPORTINGCALCULATIONS:[400($8.25-$7.80)]+(800$0.30)=$420increase
86. ThefollowinginformationpertainstoSalamandreCompany'sthreeproducts:
A
Unit sales per year
250
Selling price per unit
Variable costs per unit
Unit contribution margin
Contribution margin ratio

$9.00
3.60
$5.40
60%

B
400
$12.00
9.00
$ 3.00
25%

C
250
$ 10.00
11.00
$(1.00)
(10)%

AssumethatproductCisdiscontinuedandtheextraspaceisrentedfor$300permonth.Allotherinformation
remainsthesameastheoriginaldata.Annualprofitswill
a. remainthesame.
b. increaseby$250.
c. decreaseby$250.
d. increaseby$550.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:(250$1.00)+$300=$550

Figure17-2
WannabeeCompanymanufacturesaproductwiththefollowingcostsperunitattheexpectedproductionlevelof84,000units:
Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead

$12
36
18
24

Thecompanyhasthecapacitytoproduce90,000units.Theproductregularlysellsfor$120.
87. RefertoFigure17-2.Awholesalerhasofferedtopay$110aunitfor7,500units.
Ifthespecialorderisaccepted,theeffectonoperatingincomewouldbea
a. $249,000increase.
b. $429,000increase.
c. $495,000increase.
d. $75,000decrease.
ANSWER:
a
RATIONALE:
SUPPORTING CALCULATIONS:
Incremental revenue (7,500 $110)
Lost revenue from regular sales (1,500 $120)
Incremental costs:
Direct materials (6,000 $12)
Direct labor (6,000 $36)
Variable overhead (6,000 $18)
Incremental profit

$ 825,000
(180,000)
$ 72,000
216,000
108,000

(396,000)
$ 249,000

88.
RefertoFigure172.Ifawholesalerofferedtobuy4,500unitsfor$100each,theeffectofthespecialorderonincomewouldbea
a. $45,000increase.
b. $153,000increase.
c. $450,000increase.
d. $90,000decrease.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
Incremental revenue (4,500$100)
$450,000Incrementalcosts:
Direct materials(4,500$12)

$54,000

Direct labor (4,500 $36)

162,000

Variableoverhead(4,500$18)

81,000

(297,000)
$153,000

Incrementalprofit

89. Adecisionthatfocusesonwhetheraspeciallypricedordershouldbeacceptedorrejectedisa
a. special-orderdecision.
b. keep-or-dropaproduct-linedecision.
c. make-or-buydecision.
d. bothaandc.
ANSWER: a
90. Firmsmaybeaskedtoacceptaspecialorderoftheirproductforareducedpriceif
a. itcanbeconcealedfromthegovernment.
b. excesscapacityexists.
c. theorderissmall.
d. theplantisproducingatmaximumcapacity.
ANSWER: b

91. ThefollowinginformationrelatestoaproductproducedbyMalkovichCompany:
Directmaterials
Directlabor
Variableoverhead
Fixedoverhead
Unitcost

$24
15
30
18
$87

Fixedsellingcostsare$500,000peryear,andvariablesellingcostsare$12perunitsold.Althoughproduction
capacityis600,000unitsperyear,thecompanyexpectstoproduceonly400,000unitsnextyear.Theproductnormallysellsfor
$120each.Acustomerhasofferedtobuy60,000unitsfor$90each.
Theincrementalcostperunitassociatedwiththespecialorderisa.$64.
b.$69.
c.$81.
d.$84.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
Directmaterials

$24

Directlabor

15

Variableoverhead

30

Variablesellingandadministrative

12
$81

92. ThefollowinginformationrelatestoaproductproducedbyMalkovichCompany:
Directmaterials
Directlabor
Variableoverhead
Fixedoverhead
Unitcost

$24
15
30
18
$87

Fixedsellingcostsare$500,000peryear,andvariablesellingcostsare$12perunitsold.Althoughproduction
capacityis600,000unitsperyear,thecompanyexpectstoproduceonly400,000unitsnextyear.Theproductnormallysellsfor
$120each.Acustomerhasofferedtobuy60,000unitsfor$90each.
Ifthefirmproducesthespecialorder,theeffectonincomewouldbea
a. $360,000increase.
b. $360,000decrease.
c. $540,000decrease.
d. $540,000increase.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
Incrementalrevenue(60,000$90)

$5,400,000

Less:Incrementalcosts(60,000 $81)

4,860,000

Incrementalprofit

$540,000

93. ZildjianCorporationmanufacturesasingleproductwiththefollowingunitcostsfor1,250units:
Directmaterials
Directlabor
Factoryoverhead(30%variable)
Sellingexpenses(50%variable)
Administrativeexpenses(10%variable)
Totalperunit

$2,300
960
1,800
900
840
$6,800

Recently,acompanyapproachedZildjianCorporationaboutbuying100unitsfor$5,100each.Currently,themodels
aresoldtodealersfor$7,900.ZildjianCorporation'scapacityissufficienttoproducetheextra100units.Noadditionalsellingexpens
eswouldbeincurredonthespecialorder.
WhatistheprofitearnedbyZildjianCorporationontheoriginal1,250units?
a.$6,800,000b.
$7,875,000c.
$2,750,000d.
$1,375,000
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:1,250($7,900-$6,800)=$1,375,000
94. ZildjianCorporationmanufacturesasingleproductwiththefollowingunitcostsfor1,250units:
Directmaterials
Directlabor
Factoryoverhead(30%variable)
Sellingexpenses(50%variable)
Administrativeexpenses(10%variable)
Totalperunit

$2,300
960
1,800
900
840
$6,800

Recently,acompanyapproachedZildjianCorporationaboutbuying100unitsfor$5,100each.Currently,themodels
aresoldtodealersfor$7,900.ZildjianCorporation'scapacityissufficienttoproducetheextra100units.Noadditionalsellingexpens
eswouldbeincurredonthespecialorder.
Howmuchwillincomechangeifthespecialorderisaccepted?
a. nochange
b. increaseby$121,600
c. decreaseby$180,000
d. increaseby$76,600
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:100 ($5,100-$2,300-$960-($1,8000.30)($8400.10))=$121,600

95. ZildjianCorporationmanufacturesasingleproductwiththefollowingunitcostsfor1,250units:
Directmaterials
Directlabor
Factoryoverhead(30%variable)
Sellingexpenses(50%variable)
Administrativeexpenses(10%variable)
Totalperunit

$2,300
960
1,800
900
840
$6,800

Recently,acompanyapproachedZildjianCorporationaboutbuying100unitsfor$5,100each.Currently,themodels
aresoldtodealersfor$7,900.ZildjianCorporation'scapacityissufficienttoproducetheextra100units.Noadditionalsellingexpens
eswouldbeincurredonthespecialorder.
IfZildjianCorporationwantstoincreaseitsprofitby$18,000onthespecialorder,whatistheminimumpriceitshouldchargeperu
nit?
a.$4,064b.
$4,514c.
$5,100d.
$6,900
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$2,300+$960+$540+$84+(18,000/100)=$4,064

96. ZildjianCorporationmanufacturesasingleproductwiththefollowingunitcostsfor1,250units:
Directmaterials
Directlabor
Factoryoverhead(30%variable)
Sellingexpenses(50%variable)
Administrativeexpenses(10%variable)
Totalperunit

$2,300
960
1,800
900
840
$6,800

Recently,acompanyapproachedZildjianCorporationaboutbuying100unitsfor$5,100each.Currently,themodels
aresoldtodealersfor$7,900.
Assumethereisadditionalcapacityfor60moreunitsandthefirmhastoreduceregularcustomersalesby40unitsinordertocontractt
hespecialorder.Therearesellingexpensesononlythesalestotheregularcustomers.Whatisthenetincomeifthespecialorderof
100unitsisaccepted?
a.$1,353,960b.
$894,960c.
$1,029,600d.
$918,000
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
Sales

(1210$7,900)
(100$5,100)

$9,559,000
510,000

$10,069,000

Costs:
Variablecosts-Regular(1210 $4,334*)

$5,244,140

Variable costs-Special(100 $3,884**)

388,400

Fixedcosts[1,250($1,260+$450+$756]
Netincome
*$2,300+$960+($1,8000.30)+($9000.50)+($8400.10)=$4,334
**$2,300+$960+($1,8000.30)+($8400.10) = $3,884

3,082,500

8,715,040
$1,353,960

97.
NoreasterCompanyproducesaproductthathasaregularsellingpriceof$360perunit.Atatypicalmonthlyprodu
ctionvolumeof2,000units,theproduct'saverageunitcostofgoodssoldamountsto$270.Includedinthisaverageis$120,0
00offixedmanufacturingcosts.Allsellingandadministrativecostsarefixedandamountto$30,000permonth.
NoreasterCompanyhasjustreceivedaspecialorderfor1,000unitsat$240perunit.Thebuyerwillpaytransportation,andthere
gularsellingpricewillnotbeaffectedifNoreasteracceptstheorder.
AssumingNoreasterCompanyhasexcesscapacity,theeffectonprofitsofacceptingtheorderwouldbea
a. $30,000increase.
b. $30,000decrease
c. $60,000increase.
d. $60,000decrease..
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:1,000[$240-($270-$120,000/2,000)]=$30,000increase
98.
NoreasterCompanyproducesaproductthathasaregularsellingpriceof$360perunit.Atatypicalmonthlyprodu
ctionvolumeof2,000units,theproduct'saverageunitcostofgoodssoldamountsto$270.Includedinthisaverageis$120,0
00offixedmanufacturingcosts.Allsellingandadministrativecostsarefixedandamountto$30,000permonth.
NoreasterCompanyhasjustreceivedaspecialorderfor1,000unitsat$240perunit.Thebuyerwillpaytransportation,andthere
gularsellingpricewillnotbeaffectedifNoreasteracceptstheorder.
AssumingNoreasterCompanyisoperatingatcapacityandacceptingtheorderwouldrequireanoffsettingreductioninregular
sales,theeffectonprofitsofacceptingtheorderwouldbea
a. $240,000decrease.
b. $120,000decrease.
c. $150,000decrease.
d. $30,000increase.
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:($360-$240)1,000=$120,000
99. Ifthereisexcesscapacity,theminimumacceptablepriceforaspecialordermustcover
a. variablecostsassociatedwiththespecialorder.
b. variableandfixedmanufacturingcostsassociatedwiththespecialorder.
c. variableandincrementalfixedcostsassociatedwiththespecialorder.
d. variablecostsandincrementalfixedcostsassociatedwiththespecialorderplusthecontributionmarginusuallyear
nedonregularunits.
ANSWER: c

100. Ifafirmisatfullcapacity,theminimumspecialorderpricemustcover
a. variablecostsassociatedwiththespecialorder.
b. variableandfixedmanufacturingcostsassociatedwiththespecialorder.
c. variableandincrementalfixedcostsassociatedwiththespecialorder.
d. variablecostsandincrementalfixedcostsassociatedwiththespecialorderplusforegonecontributionmarginonregularu
nitsnotproduced.
ANSWER: d
101.
ts:

GandolphCompanymanufacturesaproductwiththefollowingcostsperunitattheexpectedproductionof30,000uni

Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead

$4
12
6
8

Thecompanyhasthecapacitytoproduce40,000units.Theproductregularlysellsfor$40.Awholesalerhas
offeredtopay$32aunitfor2,000units.
Ifthefirmisatcapacityandthespecialorderisaccepted,theeffectonoperatingincomewouldbea.$-0-.
b. a$4,000increase.
c. a$16,000decrease.
d. a$20,000increase.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:2,000($40-$32)=$16,000decrease

102.
WallyworldCompanymanufacturesaproductwiththefollowingcostsperunitattheexpectedproductionlevelof84,
000units:
Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead

$12
36
18
24

Thecompanyhasthecapacitytoproduce90,000units.Theproductregularlysellsfor$120.Awholesalerhas
offeredtopay$110aunitfor7,500units.
Ifthespecialorderisaccepted,theeffectonoperatingincomewouldbea
a. $75,000decrease.
b. $429,000increase.
c. $249,000increase.
d. $495,000increase.
ANSWER:
c
RATIONALE:
SUPPORTING CALCULATIONS:
Incremental revenue (7,500 $110)
Lost revenue from regular sales (1,500 $120)
Incremental costs:
Direct materials (6,000 $12)
Direct labor (6,000 $36)
Variable overhead (6,000 $18)
Incremental profit

$ 825,000
(180,000)
$ 72,000
216,000
108,000

(396,000)
$ 249,000

103.
WallyworldCompanymanufacturesaproductwiththefollowingcostsperunitattheexpectedproductionlevelof84,
000units:
Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead

$12
36
18
24

Thecompanyhasthecapacitytoproduce90,000units.Theproductregularlysellsfor$120.
Ifawholesalerofferedtobuy4,500unitsfor$100each,theeffectofthespecialorderonincomewouldbea
a. $450,000increase.
b. $45,000increase.
c. $153,000increase.
d. $90,000decrease.
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
Incremental revenue (4,500$100)
$450,000Incrementalcosts:
Direct materials(4,500$12)

$ 54,000

Direct labor (4,500 $36)

162,000

Variableoverhead(4,500$18)

81,000

(297,000)
$153,000

Incrementalprofit
104. RosarioManufacturingCompanyhadthefollowingunitcosts:
Directmaterials
Directlabor
Variablefactoryoverhead
Fixedfactoryoverhead(allocated)

$24
8
10
18

Aonetimecustomerhasofferedtobuy2,750unitsataspecialpriceof$49perunit.Assumingthatsufficientunusedproductioncapacit
yexiststoproducetheorderandnoregularcustomerswillbeaffectedbytheorder,howmuchadditionalprofit(loss)willbegener
atedbyacceptingthespecialorder?
a. $134,750profit
b. $19,250profitc
.$84,000lossd.
$16,500loss

ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:2,750($49-$42)=$19,250

105.
ModestoCompanyproducesCDPlayersforhomestereounits.TheCDPlayersaresoldtoretailstoresfor$30.Man
ufacturingandothercostsareasfollows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total

$ 9.00
4.50
3.00
1.50
$18.00

Fixed costs per month:

Factory overhead
Selling and admin.
Total

$120,000
60,000
$180,000

Thevariabledistributioncostsarefortransportationtotheretailstores.Thecurrentproductionandsalesvolumeis
20,000peryear.Capacityis25,000unitsperyear.
ASanDiegowholesalerhasproposedtoplaceaspecialonetimeorderof10,000unitsatareducedpriceof$24perunit.Thewholesalerwouldpayalldistributioncosts,buttherewouldbea
dditionalfixedsellingandadministrativecostsof$3,000.Allotherinformationremainsthesameastheoriginaldata.Whatist
heeffectonprofitsifthespecialorderisaccepted?
a. increaseof$12,000
b. increaseof$57,000
c. increaseof$75,000
d. decreaseof$168,000
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:
Additionalrevenues(10,000$24)
$240,000Additionalcosts:
Variable (10,000$16.50)
Fixed
Opportunitycost(5,000$12)

$165,000
3,000
60,000

228,000
$12,000

Profitsincreaseby

106.
YosemiteCompanyproducesBlu-RayPlayersforhomestereounits.TheBluRayPlayersaresoldtoretailstoresfor$30.Manufacturingandothercostsareasfollows:
Variable costs per unit:
Direct materials
Direct labor
Factory overhead
Distribution
Total

$ 9.00
4.50
3.00
1.50
$18.00

Fixed costs per month:

Factory overhead
Selling and admin.
Total

$120,000
60,000
$180,000

Thevariabledistributioncostsarefortransportationtotheretailstores.Thecurrentproductionandsalesvolumeis
20,000peryear.Capacityis25,000unitsperyear.
AnAtlantawholesalerhasproposedtoplaceaspecialonetimeorderfor7,000unitsataspecialpriceof$25.20perunit.Thewholesalerwouldpayalldistributioncosts,buttherewouldbea
dditionalfixedsellingandadministrativecostsof$6,000.Inaddition,assumethatovertimeproductionisnotpossibleandthatall
otherinformationremainsthesameastheoriginaldata.Whatistheeffectonprofitsifthespecialorderisaccepted?
a. increaseof$30,900
b. increaseof$54,900
c. increaseof$36,900
d. increaseof$176,400
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:

Additional revenues (7,000 $25.20)

Additional costs:
Variable (7,000 $16.50)
Fixed
Opportunity cost (2,000 $12)
Profits increase by

$176,400
$115,500
6,000
24,000

145,500
$ 30,900

107. MenagerieProductshadthefollowingunitcosts:
Directmaterials
Directlabor
Variablefactoryoverhead
Fixedfactoryoverhead(allocated)

$24
10
8
18

Aone-timecustomerhasofferedtobuy900unitsataspecialpriceof$47perunit.Assumingthatsufficient
unusedproductioncapacityexiststoproducetheorderandnoregularcustomerswillbeaffectedbytheorder,howmuchadditionalpr
ofit(loss)willbegeneratedfromthespecialorder?
a. $6,000loss
b. $4,500profit
c. $12,500profit
d. $42,300profit
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:900($47-$42)=$4,500
108. AlbatrossProductshadthefollowingunitcosts:
Directmaterials
Directlabor
Variablefactoryoverhead
Fixedfactoryoverhead(allocated)

$24
10
8
18

Aone-timecustomerhasofferedtobuy2,000unitsataspecialpriceof$48perunit.Becauseofcapacity
constraints,1,000unitswillneedtobeproducedduringovertime.Overtimepremiumis$8perunit.Howmuchadditionalprofit(loss)
willbegeneratedbyacceptingthespecialorder?
a.$30,000loss
b.$4,000profitc.
$24,000loss
d.$4,000loss
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
1,000 ($48-$42)=

$6,000

1,000 ($48-$50)=

(2,000)
$4,000

109.
CellestialManufacturingCompanyproducesProductsA1,B2,C3,andD4throughajointprocess.Thejointcostsa
mountto$200,000.
IfProcessedFurther
Product
A1
B2
C3
D4

SalesValue
atSplit-Off
$10,000
30,000
20,000
40,000

UnitsProduced
3,000
5,000
4,000
6,000

Additional
Costs
$2,500
3,000
4,000
6,000

SalesValue
$15,000
35,000
25,000
45,000

IfProductB2isprocessedfurther,profitswill
a. increaseby$2,000.
b. decreaseby$3,000.
c. increaseby$32,000.
d. increaseby$30,000.
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:$35,000-$30,000-$3,000=$2,000increase
110.
CellestialManufacturingCompanyproducesProductsA1,B2,C3,andD4throughajointprocess.Thejointcostsa
mountto$200,000.

Product
A1
B2
C3
D4

UnitsProduced
3,000
5,000
4,000
6,000

SalesValue
atSplit-Off
$10,000
30,000
20,000
40,000

IfProcessedFurther
Additional
Costs
SalesValue
$2,500
$15,000
3,000
35,000
4,000
25,000
6,000
45,000

Whichproduct(s)shouldbesoldatsplit-offtomaximizeprofitsintheshortrun?
a. ProductA1
b. ProductB2
c. ProductD4
d. ProductsA1andD4
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:
Additional
Additional
Product
Revenues
Costs
A1
$5,000
$2,500
B2
$5,000
$3,000
C3
$5,000
$4,000
D4
$5,000
$6,000

Differences
$2,500
$2,000
$1,000
($1,000)

Decision
Processon
Processon
Processon
Sellnow

111.
DavidianCompanyusesajointprocesstoproduceproductsW,X,Y,andZ.Eachproductmaybesoldatitssplitoffpointorprocessedfurther.Additionalprocessingcostsofspecificproductsareentirelyvariable.Jointprocessingcostsfor
asinglebatchofjointproductsare$120,000.Otherrelevantdataareasfollows:
SalesValue
atSplit-Off
$ 40,000
$ 12,000
$ 20,000
$ 28,000
$100,000

Product
W
X
Y
Z

Additional
ProcessingCosts
$ 60,000
$4,000
$ 32,000
$ 20,000
$116,000

SalesValueof
FinalProduct
$ 80,000
$ 20,000
$120,000
$ 32,000
$252,000

WhichproductsshouldDavidianprocessfurther?
a. all
b. none
c. allexceptZ
d. XandY
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:
Additional
Revenues
$40,000
$8,000
$100,000
$4,000

Product
W
X
Y
Z

Additional
Costs
$60,000
$4,000
$32,000
$20,000

Differences
($20,000)
$4,000
$68,000
($16,000)

Decision
Sellnow
Processon
Processon
Sellnow

112.
DavidianCompanyusesajointprocesstoproduceproductsW,X,Y,andZ.Eachproductmaybesoldatitssplitoffpointorprocessedfurther.Additionalprocessingcostsofspecificproductsareentirelyvariable.Jointprocessingcostsfor
asinglebatchofjointproductsare$120,000.Otherrelevantdataareasfollows:

Product
W
X
Y
Z

SalesValue
atSplit-Off
$ 40,000
$ 12,000
$ 20,000
$28,000
$100,000

ProcessingYfurtherwillcauseprofitsto
a. increaseby$68,000.
b. increaseby$52,000.
c. decreaseby$32,000.
d. increaseby$120,000.
ANSWER:
a
RATIONALE:

Additional
ProcessingCosts
$ 60,000
$4,000
$ 32,000
$ 20,000
$116,000

SalesValueof
FinalProduct
$ 80,000
$ 20,000
$120,000
$32,000
$252,000

SUPPORTINGCALCULATIONS:$120,000-$20,000-$32,000=$68,000increase

113. Informationaboutthreejointproductsfollows:

Anticipatedproduction
Sellingprice/lb.atsplit-off
Additionalprocessingcosts/lb.
aftersplit-off(allvariable)
Sellingprice/lb.afterfurther
processing

A
5,000lbs.
$10

B
1,000lbs.
$30

C
2,000lbs.
$16

$6

$12

$24

$20

$40

$50

Thecostofthejointprocessis$60,000.Whichofthejointproductsshouldbesoldatsplit-off?
a. A
b. B
c. C
d. bothAandB
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:
Split-Off
ProcessFurther
A
$10
$20- $6=$14
B*
$30
$40 -$12=$28*Sellnow
C
$16
$50-$24=$26
114. Informationaboutthreejointproductsfollows:
Anticipatedproduction
Sellingprice/lb.atsplit-off
Additionalprocessingcosts/lb.
aftersplit-off(allvariable)
Sellingprice/lb.afterfurther
processing

X
12,000lbs.
$16

Y
8,000lbs.
$26

Z
7,000lbs.
$48

$8

$20

$20

$20

$40

$70

Thecostofthejointprocessis$140,000.Whichofthejointproductsshouldbeprocessedfurther?
a. X
b. Y
c. Z
d. bothXandY
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:
Split-Off ProcessFurther
X
$16
$20- $8=$12
Y
$26
$40-$20=$20
Z*
$48
$70-$20=$50

*Processon

115. Informationaboutthreejointproductsfollows:
Anticipatedproduction
Sellingprice/lb.atsplit-off
Additionalprocessingcosts/lb.
aftersplit-off(allvariable)
Sellingprice/lb.afterfurther
processing

X
12,000lbs.
$16

Y
8,000lbs.
$26

Z
7,000lbs.
$48

$8

$20

$20

$20

$40

$70

Thecostofthejointprocessis$140,000.
Ifthefirmiscurrentlyprocessingallthreeproductsbeyondsplit-off,thefirm'sincomewouldbea.$736,000.
b.$654,000.c.
$596,000.d.
$514,000.
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
X

(12,000$12)

$144,000

(8,000$20)

160,000

(7,000$50)

350,000
$654,000

Less:Jointcosts

140,000
$514,000

116. Informationaboutthreejointproductsfollows:
Anticipatedproduction
Sellingprice/lb.atsplit-off
Additionalprocessingcosts/lb.
aftersplit-off(allvariable)
Sellingprice/lb.afterfurther
processing

X
15,000lbs.
$16

Y
10,000lbs.
$26

Z
8,750lbs.
$48

$8

$20

$20

$20

$40

$70

Thecostofthejointprocessis$140,000.
Assumingallofthesellnoworprocessfurtherdecisionswerecorrectlymade,whatwillbethefirm'sincome?a.$562,960
b.$500,240c.
$455,875d.
$797,500
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:
X

(15,000$16)

$240,000

(10,000$26)

260,000

(8,750$50)

437,500
$937,500

Less:Jointcosts

140,000
$797,500

117.
Describethestepsinthedecision-makingprocess.Whatistheroleofqualitativefactorsintacticaldecisionmaking?
ANSWER: Thedecision-makingprocessconsistsof5steps:
1)
Definetheproblem.
2) Identifyalternativesthatarefeasible.
3) Identifythecost/benefitofeachfeasiblealternative.
4) Comparetherelevantcostsandbenefitsforeachalternative,incorporatingimportantqualitative
factors,andfitwithstrategy.
5) Selectthealternativethathasthegreatestcost/benefitandsupportsthestrategy.
Notallcostsarereadilyquantifiablesoqualitativeinformationmustbeincorporatedintotheprocess.Reliability,qual
ity,andstrategicfitareexamplesofthingsthatmustbeweighedintothedecision-makingprocess.
118. Whatarerelevantcosts?Howdotheyrelatetodecisionmaking?
ANSWER:
Relevantcostsarefuturecoststhatwoulddifferamongalternatives.Theyareimportanttodecisionmakingbecaus
eonlyrelevantcostsshouldbeconsidered.Decisionsareaboutsomethingthatwilltakeplaceinthefuture.Coststhat
arepastcostsorthatdonotdifferbetweenalternativesshouldnotbeconsideredindecisionmaking.

119. ThefollowingthreesituationsaregivenforGioulisArchitects:
I.

II.

III.

GioulisArchitectsemploys10architectswhocansupplyacapacityof18,000billable
hoursperyear.Thecostsrelatedtothese10architectsamountsto
$900,000or$50perhour.Lastyear,thefirmbilled17,800hours.Nextyear,thefirmestimate
sbillinghourstotakeaslightdownturnto17,000hours.However,Gioulisplanstoretainal
l10architects.
GioulisArchitectsalsoemployssurveyorsonacontractbasis.Lastyear,Giouliscontract
edwith8surveyorstoprovidesurveysforexistingprojects.Duetotheexpecteddownturn
fornextyear,Giouliswillonlycontractservicesof7surveyorsasneeded.
Giouliscurrentlyleasesspaceinabuildingatthecostof$36,000peryear.Theyareoutgro
wingtheirspaceandcontemplatingadecisiontodesignandbuildtheirownbuildingataco
stof$250,000.Thenewbuildingwouldhavespaceforatleast18architects.

Identifywhichresourcecategoryrelatestoeachsituationundertheactivityresourceusagemodelandexplainyourchoice.
ANSWER:
SituationIisanexampleofacommittedresource.Committedresourcesareacquiredinadvanceofusage,usuallyi
nlumps.Theunderstandingthatafirmwillmaintainemploymentlevelseventhoughtheremaybetemporarydow
nturnsindemandindicatesacommittedresource.Thecompanycanthentakeadvantageofexcesscapacitybypos
siblyacceptingspecialjobsororders.
SituationIIisanexampleofaflexibleresource.Inthisinstance,thecostoftheactivityreducesduetoachangeinactivit
ylevel.
SituationIIIisanexampleofalongertermdecisionthatwouldaffectthecompanysmultiperiodcapabilities.Thiswouldbeanexampleofacapitaldecisionandisnotintherealmoftacticaldecisionmaking.
120.
Howisunderstandingofcommittedresourcesandflexibleresourcesimportanttotheactivityresourceusage
model?Howdoesthisrelatetorelevance?
ANSWER:
Theactivityresourceusagemodelisusefulforunderstandinghowcostsbehave.Therearetwocategoriesofactivit
yresources:flexibleandcommitted.Flexibleresourcesareresourcespurchasedwhenneededsotheresourcesuse
dequalstheresourcessupplied.Committedresourcesarethosethatareacquiredinadvancesotheusagemayorma
ynotbeequaltothesupply.Thesedistinctionsareimportantforunderstandingrelevanceandcoststhatcanbeavoid
ed.

121.
SeniorCompanycurrentlybuys35,000unitsofapartusedtomanufactureitsproductat$40perunit.Rece
ntlythesupplierinformedSeniorCompanythata20percentincreasewilltakeeffectnextyear.Seniorhassomeadd
itionalspaceandcouldproducetheunitsforthefollowingper-unitcosts(basedon35,000units):
Directmaterials
Directlabor
Variableoverhead
Fixedoverhead
Total

$16
12
12
10
$50

Iftheunitsarepurchasedfromthesupplier,
$200,000offixedcostswillcontinuetobeincurred.Inaddition,theplantcanberentedoutfor$20,000peryearifthepar
tsarepurchasedexternally.
Required:
ShouldSeniorCompanybuythepartexternallyormakeitinternally?
ANSWER: Produceinternally;itsaves$110,000.($1,860,000-$1,750,000)

If purchased externally:
Purchase price (35,000 $40 1.20)
Fixed costs
Rent received
Net cost to purchase

$1,680,000
200,000
(20,000)
$1,860,000

If produced internally:
Cost to produce (35,000 $50)

$1,750,000

122. MysticalCorporationmanufacturesasingleproductwiththefollowingunitcostsfor5,000units:
Directmaterials
Directlabor
Factoryoverhead(40%variable)
Sellingexpenses(60%variable)
Administrativeexpenses(20%variable)
Totalperunit

$60
30
90
30
15
$225

Recently,acompanyapproachedMysticalCorporationaboutbuying1,000unitsfor$225.Currently,themodelsare
soldtodealersfor$412.50.Mystical'scapacityissufficienttoproducetheextra1,000units.Noadditionalsellingexpense
swouldbeincurredonthespecialorder.
Required:
a. WhatistheprofitearnedbyMysticalCorporationontheoriginal5,000units?
b. ShouldMysticalacceptthespecialorderifitsgoalistomaximizeshort-runprofits?
Howmuchwillincomebeaffected?
c. DeterminetheminimumpriceMysticalwouldwanttoreceiveinordertoincreaseprofitsby
$7,500onthespecialorder.
d. Whenmakingaspecialorderdecision,whatqualitativeaspectsofthedecisionshouldMystical
Corporationconsider?
ANSWER:
a.

b.

Sales (5,000 $412.50)

Less: costs (5,000 $225)
Net income

$2,062,500
1,125,000
$ 937,500

Yes, profit will increase by:

Increase in sales (1,000 $225)
Less:
Increase in direct materials (1,000 $60)
Increase in direct labor (1,000 $30)
Increase in var. overhead (1,000 $90 0.40)
Increase in var. selling (1,000 $30 0.60)
Increase in var. adm. (1,000 $15 0.20)
Increase in profits

c.

$60 + $30 + ($90 0.40) + ($30 0.60) + ($15 0.20) +

($7,500/1,000) = $154.50 per unit

d.

What is the impact on regular customers?

Will regular customers demand a similar price?
Do we have the capacity to produce the extra units?
Will we lose some regular customers?
Will we be penetrating new markets?
Will we be violating the Robinson-Patman Act?

$225,000
(60,000)
(30,000)
(36,000)
(18,000)
(3,000)
$ 78,000

123.
MortimerCompanymanufacturesthreejointproducts:X,Y,andZ.Thecostofthejointprocessis$30,000.Inf
ormationaboutthethreeproductsfollows:

Anticipatedproduction
Sellingprice/lb.atsplit-off
Additionalprocessingcosts/lb.
aftersplit-off(allvariable)
Sellingprice/lb.after
furtherprocessing
Allocatedjointcosts
Required:

X
5,600lbs.
$2.00

Y
10,000lbs.
$1.00

Z
2,500lbs.
$3.00

$1.50

$1.25

$.75

$2.50
$12,000

$3.75
$10,500

$6.25
$7,500

a. Determinewhethereachproductshouldbesoldatsplitofforprocessedfurther.Showallsupportingcalculationsingoodform.
b. Determinethefirm'sincomeifthefirmprocessedallthreeproductsbeyondsplit-off.
ANSWER:
a.

Sellat
ProcessFurther
Split-Off
ThenSell
DecisionX
$11,200
$14,000
(8,400)Sell at split-off
$5,600
Y $10,000

$37,500
(12,500)Processfurther
$25,000

Z $7,500

$15,625
(1,875)Processfurther
$13,750

Thejointcostsarenotrelevanttothedecision.
b. $14,350($13,750 + $25,000 +$5,600 - $30,000)

124.
Akaramasa,Inc.,usesajointprocesstoproduceProductsW,X,Y,Z.Eachproductmaybesoldatitssplitoffpointorprocessedfurther.Additionalprocessingcostsofspecificproductsareentirelyvariable.Jointprocessingcost
sforasinglebatchofjointproductsare$200,000.Otherrelevantdataareasfollows:
SalesValue
atSplit-off
$ 40,000
16,000
20,000
24,000
$100,000

Product
W
X
Y
Z

Additional
ProcessingCosts
$24,000
10,000
10,000
16,000
$60,000

SalesValueof
FinalProduct
$ 70,000
20,000
48,000
36,000
$174,000

Required:
a. Determinewhichproductsshouldbeprocessedfurther.
b. Howwillprocessingeachproductfurtheraffectprofits?
ANSWER:
Product
W
X
Y
Z

AdditionalSalesValue
$30,000
4,000
28,000
12,000

AdditionalCosts
$24,000
10,000
10,000
16,000

Difference
$6,000
(6,000)
18,000
(4,000)

Akaramasa,Inc.,shouldprocessproductsWandYfurtherbecausetheyincreaseprofitsby$6,000and$18,000,res
pectively.ProductsXandZshouldbesoldatthesplit-offpoint.

125.
TheoperationsofMouserCorporationaredividedintotheBoltDivisionandtheNutsDivision.Projectionsforthene
xtyearareasfollows:

Sales
Variablecosts
Contributionmargin
Directfixedcosts
Segmentmargin
Allocatedcommoncosts
Operatingincome(loss)
Required:

Bolt
Division
$60,000
20,000
$40,000
12,500
$27,500
10,000
$17,500

Nuts
Division
$ 40,000
15,000
$ 25,000
30,000
$(5,000)
7,500
$(12,500)

Total
$100,000
35,000
$ 65,000
42,500
$ 22,500
17,500
$5,000

a. DetermineoperatingincomeforMouserCorporationasawholeiftheNutsDivisionisdropped.
b. ShouldtheNutsDivisionbeeliminated?
ANSWER:
a.

Sales $60,000
Variablecosts
Contributionmargin
Directfixedcosts
Segmentmargin
Allocatedcommoncosts:
($10,000+$7,500)
Operatingincome

20,000
$40,000
12,500
$27,500
17,500
$10,000

b. Yes.TheNutsdivisionshouldbedropped,sinceithasanegativesegmentmarginof$5,000.Droppingt
heNutsDivisionincreasesthefirm'sincomeby$5,000.

126. BollingerCompany's2016incomestatementisasfollows:
Sales(5,000units$17)
Lessvariableexpenses:
Costofgoodssold:
Directmaterials
Directlabor
Variablefactoryoverhead
Sellingandadministrative
Contributionmargin
Lessfixedexpenses:
Factoryoverhead
Sellingandadministrative
Netincome(loss)

$85,000

$15,000
12,000
15,000
2,500

$10,000
15,000

44,500
$40,500

25,000
$15,500

Inanattempttoimprovethecompany'sprofitperformance,managementisconsideringanumberofalternative
actions.
Required:
Determinetheeffectofeachofthefollowingonmonthlyprofit.Eachsituationistobeevaluatedindependentlyofalltheothers.
a. Purchasingautomatedassemblyequipment.Thisactionshouldreducedirectlaborcostsby40percent.Itals
owillincreasevariableoverheadcostsby10percentandfixedfactoryoverheadby$2,500.
b. Reducingtheunitsellingpriceby$2perunit.Thisshouldincreasethemonthlysalesby5,000units.Fixedfa
ctoryoverheadwillincreaseby$1,500.
c. Increasefixedsellingandadministrativeexpensesby$1,000foradvertisingcosts.Thenumberofunitssold
willincreaseto8,000units.
ANSWER:
a.

Increase in variable overhead ($15,000 0.10)

Increase in fixed costs
Decrease in direct labor cost ($12,000 0.40)
Net decrease in costs (increase in profits)

$ 1,500
2,500
(4,800)
$ 800

b.

Increase in sales [($15 10,000) - $85,000]

Less:
Increase in variable expenses
[5,000 ($40,500/5,000)]
Increase in fixed overhead
Increase in net income

$65,000

c.

Increase in sales (3,000 $17)

Less:
Increase in variable expenses
[3,000 ($40,500/5,000)]
Increase in fixed S & A expenses
Net income

$40,500
1,500

42,000
$23,000
$51,000

$24,300
1,000

25,300
$25,700

127.
ThemanagementofVillanuevaIndustrieshasbeenevaluatingwhetherthecompanyshouldcontinuemanufacturing
acomponentorbuyitfromanoutsidesupplier.A$100costpercomponentwasdeterminedasfollows:
Directmaterials
Directlabor
Variablemanufacturingoverhead
Fixedmanufacturingoverhead
Total

$15
40
10
35
$100

VillanuevaIndustriesuses4,000componentsperyear.AfterSplendor,Inc.,submittedabidof$80percomponent,
somemembersofmanagementfelttheycouldreducecostsbybuyingfromoutsideanddiscontinuingproductionofthecomponent.
IfthecomponentisobtainedfromSplendor,Inc.,Villanueva'sunusedproductionfacilitiescouldbeleasedtoanothercompanyf
or$50,000peryear.
Required:
a. DeterminethemaximumamountperunitVillanuevashouldpayanoutsidesupplier.
b. Indicateifthecompanyshouldmakeorbuythecomponentandthetotaldollardifferenceinfavorofthata
lternative.
c. Assumethecompanycouldeliminateproductionsupervisorswithsalariestotaling$30,000ifthecomponent
ispurchasedfromanoutsidesupplier.Indicateifthecompanyshouldmakeorbuythecomponentandthetotal
dollardifferenceinfavorofthatalternative.
ANSWER:
a. $77.50[$15+$40+$10+($50,000/4,000)]
b.

$10,000differenceinfavorofmakingthecomponent
Outsidesupplier'sprice
($80 4,000)
Directmaterials
($15 4,000)
Directlabor
($40 4,000)
Variablemanufacturingoverhead

Buy
$(320,000)

$(60,000)
(160,000)

($10 4,000)
Fixedmanufacturingoverhead
($354,000)
Rentalrevenue
Totals

Make

(40,000)
(140,000)
50,000
$(410,000)

(140,000)
$(400,000)

Themakeorbuyalternativesalsocouldbeanalyzedasfollowsexcludingthefixedmanufacturin
goverhead:

Buy
$(320,000)

Outsidesupplier'sprice
Directmaterials
Directlabor
Variablemanufacturingoverhead
Rentalrevenue
Totals
c.

Make
$(60,000)
(160,000)
(40,000)

50,000
$(270,000)

$(260,000)

$20,000differenceinfavorofbuyingthecomponentfromtheoutsidesupplier
Outsidesupplier'sprice
Buy

Make

($80 4,000)
Directmaterials
($15 4,000)
Directlabor
($40 4,000)
Variablemanufacturingoverhead
($10 4,000)
Fixedmanufacturingoverhead
($354,000)
($140,000-$30,000)
Rentalrevenue
Totals

$(320,000)
$(60,000)
(160,000)
(40,000)
(140,000)
(110,000)
50,000
$(380,000)

$(400,000)

Theanalysiscouldbedoneincludingonlyavoidablefixedcosts:
Outsidesupplier'sprice
Buy
($80 4,000)
Directmaterials
($15 4,000)
Directlabor
($40 4,000)
Variablemanufacturingoverhead
($104,000)
Avoidablefixedmanufacturingoverhead
Rentalrevenue
Totals

Make
$(320,000)
$(60,000)
(160,000)
(40,000)
(30,000)
50,000
$(270,000)

$(290,000)

128. CampbellCompanyhasanannualcapacityof18,000units.Budgetedoperatingresultsfor2016areasfollows:
Revenues(16,000units@$60)
Variablecosts:
Manufacturing
Selling
Contributionmargin

$960,000
$384,000
128,000

Fixedcosts:
Manufacturing
Sellingandadministrative
Operatingincome

$160,000
120,000

512,000
$448,000

280,000
$168,000

Aforeignwholesalerwantstobuy1,000unitsatapriceof$40perunit.Allfixedcostswouldremainwithintherelevantrange.Var
iablesellingcostsonthespecialorderwouldbethesameasvariablesellingcostsforregularorders.
Required:
a. Determinetheeffectonoperatingincomeifthecompanyproducesthespecialorder.
b. Shouldthecompanyproducethespecialorder?
c. Determineoperatingincomeifthecustomerhadwantedaspecialorderof3,000unitsandthecompanypro
ducedthespecialorder.
d. Shouldthecompanyproducethe3,000-unitspecialorder?
e. Discussanynonquantitativefactorsthecompanymightwanttoconsiderwhenmakingthedecision.
ANSWER:
a.

$8,000increase
Incremental revenue ($401,000)
$40,000Incrementalcosts:
Variablemanufacturing($241,000)
Variableselling($81,000)
Incrementalcontributionmargin

(24,000)
(8,000)
$8,000

Sincethecompanywouldstillbeoperatingwithintherelevantrange,fixedc
ostswouldremainthesame.
b.

Yes,thecompanyshouldproducethespecialorder.c.
$164,000
Without
SpecialOrder

Revenues:

(16,000 $60)
Manufacturing:
(15,000 $60)
(16,000$24)
(3,000$40)
Variablecosts:
(18,000$24)
Selling:

With
SpecialOrder

$960,000
(384,000)

$900,000
120,000
(432,000)

(16,000$8)
(18,000 $8)
Contributionmargin
Fixedcosts:
Manufacturing
Sellingandadministrative
Operatingincome

(128,000)

$448,000

(144,000)
$444,000

(160,000)
(120,000)
$168,000

(160,000)
(120,000)
$164,000

d.

No.Ifthedecisionisbasedonquantitativefactors,thecompanyshouldnotproducethespecialor
der.

e.

Qualitativeconsiderationsmightinclude:

Thepossibilityofrepeatbusinesswiththespecial-ordercustomer.
Increasingthesellingpriceonsubsequentspecialorders.
Thereliabilityofregularcustomerrepeatbusiness.
Ifthespecialorderisproduced,thereactionofregularcustomerstothereducedpriceonthespecialorde
r.

129. BoniatilloCorporation,whichproducesoneproduct,hadthefollowingincomestatementforarecentmonth:
BoniatilloCorporationIncome
Statement
FortheMonthofMarch2016
Sales
Costofgoodssold
Grossprofit
Sellingandadministrative
Netincome

$30,000
27,000
$3,000
2,500
$500

Therewerenobeginningorendinginventoriesofwork-in-processorfinishedgoods.Boniatillo'smanufacturing
costswereasfollows:
Directmaterials(1,200units $5)
Directlabor(1,200units$8)
Variableoverhead(1,200units$4.50)
Fixedoverhead
Total
Averagecostperunit
Sellingandadministrativeexpensesareallfixed.

$6,000
9,600
5,400
6,000
$27,000
$22.50

BoniatillohasjustreceivedaspecialorderfromafirminChinatopurchase900unitsat$20each.Theorderwillnotaffectthesellin
gpricetoregularcustomers.
Required:
a. Prepareadifferentialanalysisoftherelevantcostsandrevenuesassociatedwiththedecisiontoacceptorr
ejectthespecialorder,assumingBoniatillohasexcesscapacity.
b. Determinethenetadvantageordisadvantage(profitincreaseordecrease)ofacceptingtheorder,ass
umingBoniatillodoesnothaveexcesscapacity.
ANSWER:
a.

Increase in revenues (900 $20)

$18,000
Increase in costs:
Direct materials (900 $5)
Direct labor (900 $8)
Variable overhead (900 4.50)
Increase in profits
$2,250

$4,500
7,200
4,050
15,750

b.

Contribution margin of special order

2,250
Opportunity cost:
Regular selling price
Variable costs ($5 + $8 + $4.50)
Regular unit contribution margin$ 7.50
Lost sales

$25.00
17.50
900
6,750

Net disadvantage
$4,500

Chapter 18
1. Therelationshipbetweensupplyanddemandhelpssetpricing.
a. True
b. False
ANSWER: True
2. Priceelasticityofdemandisthepercentchangeinpricedemandedforagivenpercentchangeinquantity.
a. True
b. False
ANSWER: False
3. Goodsthatarepriceelastichavefewsubstituteswhilethosethatareinelastichavemanysubstitutes.
a. True
b. False
ANSWER: False
4. Marketstructureaffectspriceaswellasthecostsnecessarytosupportthatprice.
a. True
b. False
ANSWER: True
5. Theperfectlycompetitivemarkethasmanybuyersandsellers,noneofwhicharelargeenoughtoinfluencethemarket.
a. True
b. False
ANSWER: False
6. Therearethreetypesofmarketstructure:monopoly,oligopoly,andperfectcompetition.
a. True
b. False

ANSWER: False
7. Manycompaniesbasepricesoncostwhileothercompaniesusetarget-costingstrategies.
a. True
b. False
ANSWER: True
8. Themarkupispureprofit,itdoesnotincludeallcostsnotincludedinthebasecost.
a. True
b. False
ANSWER: True

Chapter 18: Pricing and Profitability Analysis

9. Cost-basedpricinginvolvesthecalculatedproductcostplusthedesiredprofit.
a. True
b. False
ANSWER: True
10. Targetcostingsetscostsbasedonthepricethatcustomersarewillingtopay.
a. True
b. False
ANSWER: True
11. Thelegalsystemsupportsbusinesscompetitionbyallowinganopenpolicyonpricing.
a. True
b. False
ANSWER: False
12. Predatorypricinganddumpingareoutlawedpracticesthatsetpricesbelowcostintendingtoinjurecompetitors.
a. True
b. False
ANSWER: True
13. Pricediscriminationisthechargingofdifferentpricestodifferentcustomerstopromotefairercompetition.
a. True
b. False
ANSWER: False
14. Profitsaremeasuredtodeterminetheviabilityofafirmanditsadherencetogovernmentregulations,tomeasuremanagerial
performance,andtosignalthemarkettoencouragestockholders.
a. True
b. False
ANSWER: True
15. Absorptioncostingisusedtocalculatetwomeasuresofprofit:grossprofitandoperatingincome.
a. True
b. False
ANSWER: False
16. Unlikeabsorptioncosting,variablecostingonlyassignsunit-levelmanufacturingcoststoaproduct.
a. True
b. False

Chapter 18: Pricing and Profitability Analysis

ANSWER: True

Chapter 18: Pricing and Profitability Analysis

17. Profitrelatedvariancesfocusonthedifferencebetweenbudgetedandactualprices,volumes,andcontributionmargin
.
a. True
b. False
ANSWER: True
18. Thesalesvolumevariancecommunicatestheimpactthedifferencebetweenactualandexpectedunitssoldhasonr
evenues.
a. True
b. False
ANSWER: True
19. Theoverallsalesvarianceisthesumofthecontributionmarginandthesalespricevariance.
a. True
b. False
ANSWER: False
20. Thesalesvolumevarianceisthedifferencebetweenactualandexpectedvolumesoldmultipliedbytheexpectedp
rice.
a. True
b. False
ANSWER: True
21. Theproductlifecycledescribestheprofithistoryofaproductaccordingtoitsintroduction,growth,maturity,andd
eclinestages.
a. True
b. False
ANSWER: True
22. Product-levelcostsarehighestinthematurityphaseandfallthroughthedeclinephase.
a. True
b. False
ANSWER: False
23. Profitsarelowerintheintroductoryphasebecauserevenuesarelowandinvestmentandlearningmaybehigh.
a. True
b. False
ANSWER: True

Chapter 18: Pricing and Profitability Analysis

Chapter 18: Pricing and Profitability Analysis

24. Thebiggestlimitationtoprofitabilityanalysisisitsfocusonpast,notfutureperformance.
a. True
b. False
ANSWER: True
25. Firmsenjoygreatersuccesswhentheyincludetheimpactofprofitsontheiremployeesandthecommunity.
a. True
b. False
ANSWER: True
26. Thetwofactorsthatinfluencetheabilityofcompaniestoadjustpricearepriceelasticitya
nd__________structure.
ANSWER: market
27. Thepercentchangeinquantitydemandedforagivenpercentchangeinpriceiscalledpr
ice__________.
ANSWER: elasticity
28. Thepricingofa newproductata lowinitialpricetobuildmarketsharequicklyiscalled

ANSWER: penetrationpricing
29. Whencompanieswithmarketpowerpriceproductstoohighitscalledprice

ANSWER: gouging
30. Whenacompanychargesdifferentpricesforthesameproducttodifferentcustomersitisreferredtoasprice
__________.
ANSWER: discrimination
31. Anothertermforpredatorypricingintheinternationalmarketis

ANSWER: dumping
32.
dures,netincomewillbelessthan

Usingvariablecostingproce

whenproductionislessthansalesvolume.
ANSWER: profits
33. Theincomemeasurementrequiredforexternalfinancialreportingiscalled
ANSWER: absorption

costing.

Chapter 18: Pricing and Profitability Analysis

34. Thevariancethatcomparesactualvolumewithexpectedvolumemultipliedbyexpectedpricei
sthe__________variance.
ANSWER: salesvolume
35.
Thevariancesusedtoanalyzechangesinprofitfromone
periodtoanotherarecalled variances.
ANSWER: profit-related
36. The

varianceisthedifferencebetweenactualandbudgetedcontributionmargin.

ANSWER: contributionmargin
37. Theprofithistoryofaproductaccordingtofourstagesiscalledtheproduct

ANSWER: lifecycle
38. Thestagewhererevenuesalwaysdecreaseisthe

stage.

ANSWER: decline
39. One limitationto profitabilityanalysis isitsfocus on

performance.

ANSWER: past
40. Too muchemphasisonshort-runoptimization canleadto

problems.

ANSWER: ethical
41. Whichofthefollowingistrueregardingexpensesrelatedtospecificmarketstructuretypes?
a. Monopolisticcompetitionandoligopoliesaretheonlystructureswherecostsofdifferentiationhavea
nimpact.
b. Bothmonopoliesandmonopolisticcompetitionstructuresnormallymustexpendlegalandlobbyingcosts.
c. Inperfectcompetitionandmonopolisticcompetition,differentiationcostshaveanimpact.
d. Inperfectcompetitionandoligopolies,therearenospecialexpensesrelatedtothestructureofthe
organization.
ANSWER: a
42. WhichofthefollowingisNOTanexampleofamarketstructure?
a. oligopoly
b. monopoly
c. barriermarket
d. perfectlycompetitive
ANSWER: c
43. Monopolisticcompetitionisbestdefinedas

Chapter 18: Pricing and Profitability Analysis

a. astructurethathasmanybuyersandsellers,buttheproductsaredifferentiatedonsomebasis.
b. astructurewherecustomersarewillingtopayalittlemorefortheuniquefeaturethatappealstothem.
c. astructurethatcombinesperfectcompetitionandmonopoly,butisclosertoacompetitivesituation.
d. alloftheabove.
ANSWER: d
44. Whichtypeofexpensesdoesamonopolyusuallyincurthataredifferentfromtheothertypesofmarketstructures?
a. marketingcostssuchasadvertising,positioning,discounting,andcoupons
b. costsofdifferentiationsuchasadvertising,rebates,coupons
c. nospecialexpenses
d. legalandlobbyingexpenditures
ANSWER: d
45.
MarketStructureType
PerfectCompetition
MonopolisticCompetition
Oligopoly
Monopoly

#offirmsinindustry
Many
(b)
Few

Barrierstoentry
(a)
(c)
VeryHigh

Uniquenessofproduct
Notunique
Someuniquefeatures
(d)

Fillinthecorrectresponsesfortheblankswithletters:
a. (a)verylow,(b)many,(c)high,(d)veryunique
b. (a)verylow,(b)few,(c)high,(d)notunique
c. (a)veryhigh,(b)few,(c)low,(d)fairlyunique
d. (a)low,(b)one,(c)high,(d)veryunique
ANSWER: a
46. Whichofthefollowingcorrectlydescribestheslopeofthedemandandsupplycurves?
DemandCurve

SupplyCurve

a.upwardsloping
b.noslope

downwardsloping
upwardsloping

c.downwardsloping

noslope

d.downwardsloping

upwardsloping

ANSWER: d

Chapter 18: Pricing and Profitability Analysis

47. ThefollowinginformationpertainstothreedifferentproductsbeingsoldbyModularCompany:
Product
A
B
C

OldPrice
$10.00
20.00
30.00

NewPrice
$11.00
18.00
33.00

OldQuantity
2,000
4,000
6,000

NewQuantity
1,900
4,600
5,500

Whichproductshaveaninelasticdemandcurve?
a. ProductC
b. ProductB
c. ProductA
d. bothProductAandProductC
ANSWER: d
48. ThefollowinginformationpertainstothreedifferentproductsbeingsoldbyModularCompany:
Product
A
B
C

OldPrice
$10.00
20.00
30.00

NewPrice
$11.00
18.00
33.00

OldQuantity
2,000
4,000
6,000

NewQuantity
1,900
4,600
5,500

Whichproductshaveanelasticdemandcurve?
a. ProductB
b. ProductA
c. ProductC
d. bothaandc
ANSWER: a
49. Whichofthefollowingmarketsischaracterizedbythefollowing:manyfirmsintheindustry,asomewhatuniquep
roduct,fairlyeasyentryintotheindustry,andspendingfordifferentiationoftheproduct?
a. perfectlycompetitivemarket
b. monopolisticcompetition
c. monopoly
d. oligopoly
ANSWER: b

Chapter 18: Pricing and Profitability Analysis

50. Whichofthefollowingmarketsischaracterizedbythefollowing:onlyafewfirmsintheindustry,afairlyuniquepr
oduct,difficultentryintotheindustry,andspendingfordifferentiationoftheproduct?
a. perfectlycompetitivemarket
b. monopolisticcompetition
c. monopoly
d. oligopoly
ANSWER: d
51. Whichofthefollowingmarketsischaracterizedbythefollowing:manybuyersandsellers,ahomogeneousproduct,e
asyentryintoandexitfromtheindustry,andallfirmsarepricetakers?
a. perfectlycompetitivemarket
b. monopolisticcompetition
c. monopoly
d. oligopoly
ANSWER: a
52. Whichofthefollowingmarketsischaracterizedbythefollowing:asinglefirmintheindustry,auniqueproduct,anddif
ficultentryintotheindustry?
a. perfectlycompetitivemarket
b. monopolisticcompetition
c. monopoly
d. oligopoly
ANSWER: c

Chapter 18: Pricing and Profitability Analysis

Figure18-1
TheLancashireCorporationmanufacturesbottledwaterwithanaveragemanufacturingcostof$2percase(acase
contains24bottles).Bayviewsold1,000,000caseslastyeartothefollowingtypesofcustomers:
CUSTOMER
Drugstorechains
Gasstationchains
Supermarketchains
Localpharmacies

PRICEPERCASE
$5.00
$5.50
$6.50
$6.00

CASESSOLD
375,000
125,000
500,000
250,000

Thedrugstorechainshavespecialhandlingcostsof$0.20acaseandincreasedadministrativeassistancecosting$4
5,000peryear.
Thegasstationchainsrequirespecialmarketingpromotionsthatcost$50,000.Salescommissionsof10%arepaid.
ThesupermarketchainsorderelectronicallythroughEDIwhichcosts$25,000annually.Bayviewisresponsiblefor
shippingcosts,whichtotaled$0.50acaseandspeciallabelscosting$0.02perbottle
Localpharmacieshavespecialhandlingcostsof$0.10percaseandsalescommissionsarepaidtoagentscosting
$0.25percase.Baddebtexpenseaverages10%ofsales.
53. RefertoFigure18-1.Whatisthetotalcostpercasefordrugstorechains?
a. $2.12percase
b. $2.32percase
c. $2.20percase
d. $2.45percase
ANSWER:
b
RATIONALE:
Manufacturingcosts$2 375,000=$750,000
Administrativecosts45,000
Handlingcosts $0.20375,000= 75,000
$870,000/375,000cases=$2.32percase

Chapter 18: Pricing and Profitability Analysis

54. RefertoFigure18-1.Whatistheprofitpercasefordrugstorechains?
a. $5.00percase
b. $2.20percase
c. $2.68percase
d. $2.32percase
ANSWER:
c
RATIONALE:
Manufacturingcosts$2
375,000=$750,000Administrativecosts45,000Handli
ng costs
$0.20375,000 = 75,000
$870,000/375,000cases=$2.32percase
55. RefertoFigure18-1.Whatcustomertypehastheleasttotalcostpercase?
a. drugstorechains
b. gasstationchains
c. supermarketchains
d. localpharmacies
ANSWER:
a
RATIONALE:
Drugstorechains
Manufacturingcosts$2375,000=$750,000Administr
ativecosts45,000Handlingcosts $0.20375,000=
75,000
$870,000/375,000cases=$2.32 percase
Gasstationchains
Manufacturingcosts

Commissions

$2125,000
=$250,000Marketing
50,000
.1(125,000$5.50)

= 68,750
$368,750/125,000=$2.95

Supermarketchains
Manufacturingcosts$2 500,000
=$1,000,000Ordering
Shipping$0.50500,000= 250,000
Label

$0.02 500,00024

25,000
=

240,000
$1,515,000/500,000= $3.03

Localpharmacies

Chapter 18: Pricing and Profitability Analysis

Manufacturingcosts$2 250,000
=$500,000Handling
$0.10250,000
Commissions
$0.25250,000
62,500BadDebt
.10($6.00250,000)

= 25,000
=
= 150,000
$737,500/250,000=$2.95

Chapter 18: Pricing and Profitability Analysis

56. RefertoFigure18-1.Whatcustomertypeisthemostprofitable?
a. localpharmacies
b. drugstorechains
c. supermarketchains
d. gasstationchains
ANSWER:
c
RATIONALE:
Gas station chains
$5.00-2.32=$2.68
Manufacturingcosts$2375,000
=$750,000Administrativecosts
45,000
Handlingcosts
$0.20 375,000
= 75,000
$870,000/375,000cases=$2.32percase
Drugstorechains
$5.502.95=$2.55Manufacturingcosts$2 125,000
=$250,000Marketing
50,000
Commissions
.1 (125,000$5.50)= 68,750
$368,750/125,000=$2.95
Supermarketchains
$6.503.03=$3.47Manufacturingcosts$2500,000
=$500,000Ordering
25,000
Shipping
$0.50500,000
= 250,000
Label

$0.02500,00024= 240,000
$1,515,000/500,000=$3.03

Localpharmacies

$6.00-2.95=$3.05

Manufacturingcosts$2250,000
=$1,000,000Handling $0.10
250,000
25,000
Commissions
$0.25250,000
=
62,500BadDebt
.10($6.00250,000)= 150,000
$737,500/250,000=$2.95

Chapter 18: Pricing and Profitability Analysis

57. JohansonCompanyhadthefollowinginformation:
Revenues
Costofgoodssold:
Directmaterials
Directlabor
Overhead
Grossprofit
Sellingandadministrativeexpenses

$400,000
$100,000
50,000
50,000

Operatingincome
Whatisthemarkupbasedoncostofgoodssold?
a.100.0%

200,000
$200,000
75,000
$125,000

b.50.0%
c.37.5%
d.62.5%
ANSWER:
a
RATIONALE:
SUPPORTINGCALCULATIONS:($75,000+$125,000)/$200,000= 100%
58. JohansonCompanyhadthefollowinginformation:
Revenues

$400,000

Costofgoodssold:
Direct materials
$100,000Directlabor
Overhead
Grossprofit
Sellingandadministrativee
xpenses
Operatingincome

50,000
50,000

200,000
$200,000
75,000
$125,000

Whatisthemarkupbasedonprimecosts?
a.300.0%
b.166.7%
c.50.0%
d.133.3%
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:($75,000+$125,000+$50,000)/$150,000=166.7%

59. ScottishCompanymanufacturesavarietyoftoysandgames.JohnChisholm,president,isdisappointedinthesalesofanewboar
dgame.Thegamesoldonly10,000unitsin2016when30,000wereprojected.Salesfor2017looknobetter.At$100pergame,itisn
otahotseller.Directcostsoftheboardgameare$56variablecostand$100,000fixed.Johnisconsideringseveraloptions.Option
One:Cutthepriceto$70andperhapssell15,000units.OptionTwo:Cutthepriceto$60,reducematerialcostsby$10,andcutadver
tisingby$60,000.Anticipatedvolumeforthisoptionis10,000units.OptionThree:Cutthepriceto$80andincludea$10mailinrebateoffer.Itisanticipatedthat15,000unitscouldbesoldandonly30percentoftherebatecouponswouldberedeemed.
Whatistheprofit(loss)fromOptionOne?
a.
$1,050,000
b.
$110,000c.
$950,000d.
$210,000
ANSWER:

RATIONALE:
SUPPORTINGCALCULATIONS:
Revenues ($70 15,000)
Less:
Variable costs ($56 15,000)
Fixed costs
Profit

$1,050,000
$840,000
100,000

940,000
$ 110,000

60. ScottishCompanymanufacturesavarietyoftoysandgames.JohnChisholm,president,isdisappointedinthesalesofanewboar
dgame.Thegamesoldonly10,000unitsin2016when30,000wereprojected.Salesfor2017looknobetter.At$100pergame,itisn
otahotseller.Directcostsoftheboardgameare$56variablecostand$100,000fixed.Johnisconsideringseveraloptions.Option
One:Cutthepriceto$70andperhapssell15,000units.OptionTwo:Cutthepriceto$60,reducematerialcostsby$10,andcutadver
tisingby$60,000.Anticipatedvolumeforthisoptionis10,000units.OptionThree:Cutthepriceto$80andincludea$10mailinrebateoffer.Itisanticipatedthat15,000unitscouldbesoldandonly30percentoftherebatecouponswouldberedeemed.
Whatistheprofit(loss)fromOptionTwo?a.
($100,000)
b.
$600,000
c.
$100,000
d.
$40,000
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:
Revenues ($60 10,000)
Less:Variablecosts($4610,000)
Fixedcosts($100,000-$60,000)

$600,000
$460,000
40,000

500,000
$100,000

Profit

61. ScottishCompanymanufacturesavarietyoftoysandgames.JohnChisholm,president,isdisappointedinthesalesofanewboar
dgame.Thegamesoldonly10,000unitsin2016when30,000wereprojected.Salesfor2017looknobetter.At$100pergame,itisn
otahotseller.Directcostsoftheboardgameare$56variablecostand$100,000fixed.Johnisconsideringseveraloptions.Option
One:Cutthepriceto$70andperhapssell15,000units.OptionTwo:Cutthepriceto$60,reducematerialcostsby$10,andcutadver
tisingby$60,000.Anticipatedvolumeforthisoptionis10,000units.OptionThree:Cutthepriceto$80andincludea$10mailinrebateoffer.Itisanticipatedthat15,000unitscouldbesoldandonly30percentoftherebatecouponswouldberedeemed.
Whatistheprofit(loss)fromOptionThree?a.
$110,000
b.
$1,200,000
c.
$215,000d.
($60,000)
ANSWER:

RATIONALE:
SUPPORTINGCALCULATIONS:
Revenues($80 15,000)

$1,200,000

Less:Variablecosts($5615,000)
Rebatecosts[($1015,000).30]
Fixedcosts
Profit

$840,000
45,000
100,000

985,000
$215,000

62. ScottishCompanymanufacturesavarietyoftoysandgames.JohnChisholm,president,isdisappointedinthesalesofanewboar
dgame.Thegamesoldonly10,000unitsin2016when30,000wereprojected.Salesfor2017looknobetter.At$100pergame,itisn
otahotseller.Directcostsoftheboardgameare$56variablecostand$100,000fixed.Johnisconsideringseveraloptions.Option
One:Cutthepriceto$70andperhapssell15,000units.OptionTwo:Cutthepriceto$60,reducematerialcostsby$10,andcutadver
tisingby$60,000.Anticipatedvolumeforthisoptionis10,000units.OptionThree:Cutthepriceto$80andincludea$10mailinrebateoffer.Itisanticipatedthat15,000unitscouldbesoldandonly30percentoftherebatecouponswouldberedeemed.
Whichoptionispreferred?
a. OptionsOneandThreeareequallypreferred.
b. OptionThree
c. OptionTwo
d. OptionOne
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:OptionThreehasthehighestprofit.

63. WhichofthefollowingstatementsisFALSE?
a. Themarkupisapercentageappliedtobasecost.
b. Themarkupisanabsoluterule.
c. Amajoradvantageofmarkuppricingisthatstandardmarkupsareeasytoapply.
d. Themarkupcanbecalculatedusingavarietyofbases.
ANSWER: b
64. ConsolidatedCorporationhadthefollowinginformation:
Revenues
Costofgoodssold:
Directmaterials
Directlabor
Overhead
Grossprofit
Sellingandadministrativeexpenses
Operatingincome

$250,000
$50,000
37,500
62,500

150,000
$100,000
37,500
$ 62,500

Whatisthemarkupbasedonmaterials?
a.71.4%
b.185.7%
c.42.9%
d.400.0%
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:($62,500+$37,500+$62,500+$37,500)/$50,000=400%

65. ConsolidatedCorporationhadthefollowinginformation:
Revenues
Costofgoodssold:
Directmaterials
Directlabor
Overhead
Grossprofit
Sellingandadministrativeexpenses
Operatingincome

$250,000
$50,000
37,500
62,500

150,000
$100,000
37,500
$62,500

Whatwouldbethepriceforaproductthathasacostof$500,assumingthatthemarkupisbasedoncostofgoods
sold?
a.$65
b.$708
c.$834
d.$2,000
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:$500+(66.7%$500)=$834
66. SoloistCompanyhadthefollowinginformation:
Revenues
CostofGoodsSold
SellingandadministrativeexpensesWhatis
themarkuponCostofGoodssold?
a..1833

$900,000
60%
$195,000

b..3611
c..6667
d.noneoftheabove
ANSWER:
c
RATIONALE:SUPPORTING CALCULATIONS:CostofGoodsSold=.60$900,000=$540,000
OperatingIncome=$900,000 $540,000 $195,000 = $165,000
Markup on COGS = (selling and administrativeexpenses +operatingincome)/COGS
.6667=($195,000+$165,000)/$540,000

67. GirasolProductsisthinkingofexpandingtheirproductline.Theircurrentincomestatementisasfollows:
$600,000
Revenues
CostofGoodsSold:
$250,000
DirectMaterials
100,000
DirectLabor
80,000
430,000
Overhead
170,000
GrossProfit
70,000
SellingandAdministrative
$100,000
OperatingIncome
Thecostofthenewproductis$95perunitmadeupof$50ofdirectmaterials,
$35ofdirectlaborand$10ofoverheadperunit.WhatisthebidpriceassumingGirasolutilizesamark-upondirectmaterials?
a.
$119
b.
$133
c.
$70
d.$19.77
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:Markupondirectmaterials=DirectLabor+Overhead+SellingandAd
ministrative+OperatingIncome/DirectMaterials($100,000+$80,000+$70,000+$100,000)/
$250,000=1.41.4$50=$70
68. WhichofthefollowingisaFALSEstatementabouttargetcosting?
a. Targetcostingisamethodofdeterminingthecostofaproductorservicebasedonthepricethatcustomersarewillingtopa
y.
b. Thecostiscalculatedbysubtractingthedesiredprofitfromthetargetprice.
c. Targetcostingisaninteractiveprocess.
d. Targetcostingiscostdriven.
ANSWER: d

69. NewEnglandbusinessesweretryingtoselllumberfor50percentabovetheirregularpricesrightafter2011hurricaneIrenehit.T
hisisanexampleof:
a. predatoryprices.
b. pricegouging.
c. pricediscrimination.
d. penetrationpricing.
ANSWER: b
70. Priceskimmingoccursinwhichofthefollowinglife-cyclestages?
a. Introduction
b. Growth
c. Maturity
d. Decline
ANSWER: a
71. Thepricingofanewproductatalowinitialpricetobuildmarketsharequicklyiscalled:
a. Targetcosting
b. Predatorypricing
c. Priceskimming
d. Penetrationpricing
ANSWER: d
72. Whenahigherpriceischargedatthebeginningofaproduct'slifecycleitiscalled:
a. Penetrationpricing
b. Predatorypricing
c. Targetcosting
d. Priceskimming
ANSWER: d
73. Whenfirmswithmarketpowerpriceproducts"toohigh",companiesare:
a. Pricegouging
b. Pricediscrimination
c. Predatoryprices
d. Penetrationpricing
ANSWER: a

74. Thechargingofdifferentpricestodifferentcustomersforessentiallythesameproductiscalled:
a. Gouging
b. Penetrationpricing
c. Skimming
d. Pricediscrimination
ANSWER: d
75. TheRobinson-PatmanActallowspricediscriminationunderwhichofthefollowingcircumstances?
a. ifrevenuesjustifyit
b. ifthecompetitivesituationdemandsit
c. ifthecostsremainthesameforallcustomers
d. TheRobinson-PatmanActdoesnotallowpricediscriminationunderanysituation.
ANSWER: b
76. Dumpingintheinternationalmarketisaformof:
a. Pricediscrimination
b. Priceskimming
c. Predatorypricing
d. Penetrationpricing
ANSWER: c
77. LorillardCorporationhasthefollowinginformationforApril,May,andJune2016:

Unitsproduced
Unitssold

April
12,500
8,750

May
12,500
10,625

June
12,500
13,125

Productioncostsperunit(basedon12,500units)areasfollows:
Directmaterials
$15
Direct labor
Variable factory overhead
Fixed factory overhead
Variable selling and admin. expenses
Fixed selling and admin. expenses

10
7.50
5
12.50
5

TherewerenobeginninginventoriesforApril2016,andallunitsweresoldfor$50.Costsarestableoverthethreemonths.
WhatistheMayendinginventorycostforLorillardCorporationusingtheabsorptioncostingmethod?a.
$44,375.00
b.$35,625.00c.
$70,000.00d

.
$210,937.50
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:5,625($15+$10+$7.50+$5)=$210,937.50

78. LorillardCorporationhasthefollowinginformationforApril,May,andJune2016:
Unitsproduced
Unitssold

April
12,500
8,750

May
12,500
10,625

June
12,500
13,125

Productioncostsperunit(basedon12,500units)areasfollows:
Directmaterials
$15
Directlabor
10
Variablefactoryoverhead
7.50
Fixedfactoryoverhead
5
Variablesellingandadmin.expenses
12.50
Fixedsellingandadmin.expenses
5
TherewerenobeginninginventoriesforApril2016,andallunitsweresoldfor$50.Costsarestableoverthethree
months.
WhatistheAprilendinginventoryforLorillardCorporationusingthevariablecostingmethod?a.
$312,500
b.
$187,500
c.
$121,875
d.
$140,000
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:3,750($15+$10+$7.50)=$121,875

79. LorillardCorporationhasthefollowinginformationforApril,May,andJune2016:
April
12,500

Unitsproduced
Unitssold

8,750

May
12,500
10,625

June
12,500
13,125

Productioncostsperunit(basedon12,500units)areasfollows:
Directmaterials
Directlabor
Variablefactoryoverhead
Fixedfactoryoverhead
Variablesellingandadmin.expenses
Fixedsellingandadmin.expenses

$15
10
7.50
5
12.50
5

TherewerenobeginninginventoriesforApril2016,andallunitsweresoldfor$50.Costsarestableoverthethree
months.
WhatistheJuneendinginventorycostforLorillardCorporationusingthevariablecostingmethod?a.$75,000
b.
$125,000
c.
$162,500
d.
$187,500
ANSWER:
c
RATIONALE:

Unitsofbeginninginventory
Unitsproduced
Unitssold
Unitofendinginventory

5,000$32.50=$162,500

April
May
June
0
3,750
5,625
12,500 12,500 12,500
8,750 10,625 13,125
3,750 5,625
5,000

80. LorillardCorporationhasthefollowinginformationforApril,May,andJune2016:
Unitsproduced
Unitssold

April
12,500
8,750

May
12,500
10,625

June
12,500
13,125

Productioncostsperunit(basedon12,500units)areasfollows:
Directmaterials
$15
Directlabor
10
Variablefactoryoverhead
7.50
Fixedfactoryoverhead
5
Variablesellingandadmin.expenses
12.50
Fixedsellingandadmin.expenses
5
TherewerenobeginninginventoriesforApril2016,andallunitsweresoldfor$50.Costsarestableoverthethree
months.
WhatistheMayendinginventorycostforLorillardCorporationusingthevariablecostingmethod?a.
$182,812.50
b.
$187,500
c.
$312,500
d.
$162,500
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:5,625$32.50=$182,812.50
81. ThefollowinginformationpertainstoGuillotineCorporation:
Beginninginventory
1,000units
Endinginventory
6,000units
Directlaborperunit
$40
Directmaterialsperunit
20
Variableoverheadperunit
10
Fixedoverheadperunit
30
Variablesellingandadmin.costsperunit
6
Fixedsellingandadmin.costsperunit
14
Whatisthevalueoftheendinginventoryusingtheabsorptioncostingmethod?
a.
$240,000
b.
$360,000
c.
$420,000
d.
$600,000

ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:($40+$20+$10+$30)6,000=$600,000

82. ThefollowinginformationpertainstoGuillotineCorporation:
Beginninginventory
Endinginventory
Directlaborperunit
Directmaterialsperunit
Variableoverheadperunit
Fixedoverheadperunit
Variablesellingandadmin.costsperunit
Fixedsellingandadmin.costsperunit

1,000units
6,000units
$40
20
10
30
6
14

Howmuchgreaterorlessthanvariablecostingnetincomeistheabsorptioncostingnetincome?
a. $150,000lessthan
b. $150,000greaterthan
c. $240,000lessthan
d. $240,000greaterthan
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:
Fixedoverheadinbeginninginventory

$ 30,000

Fixedoverheadinendinginventory

180,000

Difference

$150,000

Sinceproductionexceedssales,absorptioncostingnetincomeislargerby$150,000.

83. ThefollowinginformationpertainstoGuillotineCorporation:
Beginninginventory
Endinginventory
Directlaborperunit
Directmaterialsperunit
Variableoverheadperunit
Fixedoverheadperunit
Variablesellingandadmin.costsperunit
Fixedsellingandadmin.costsperunit

1,000units
6,000units
$40
20
10
30
6
14

Whatisthevalueoftheendinginventoryusingthevariablecostingmethod?
a.
$240,000
b.
$420,000
c.
$360,000
d.
$350,000
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:($40+$20+$10)6,000=$420,000
84. Adisadvantageofabsorptioncostingis
a. thatitisnotausefulformatfordecisionmaking.
b. thatitmightencourageinventorybuildup.
c. bothaandb.
d. noneoftheabove.
ANSWER: c

85. OctagonalCompanyhasthefollowinginformationfor2016:
Selling price
Variable production costs
Variable selling and admin. expenses
Fixed production costs
Fixed selling and admin. expenses
Units produced
Units sold

$150 per unit

$40 per unit produced
$16 per unit sold
$200,000
$140,000
10,000 units
8,000 units

Therewerenobeginninginventories.
WhatistheendinginventoryforEastwoodusingtheabsorptioncostingmethod?
a.$300,000
b.$180,000
c.$120,000
d.$80,000
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:($40+$200,000/10,000)2,000=$120,000
86. OctagonalCompanyhasthefollowinginformationfor2016:
Sellingprice$150perunit
Variableproduction costs$40perunitproducedVariable selling and
admin.expenses$16perunitsoldFixedproductioncosts$200,000
Fixedsellingandadmin.expenses
$140,000Unitsproduced
Unitssold8,000units

10,000units

Therewerenobeginninginventories.
WhatisthenetincomeforOctagonalusingtheabsorptioncostingmethod?a.
$600,000
b.$480,000c.
$1,200,000
d.$452,000
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:[($150-$60)8,000]-$140,000-(8,000$16)=$452,000

87. OctagonalCompanyhasthefollowinginformationfor2016:
Sellingprice$150perunit
Variableproduction costs$40perunitproducedVariable selling and
admin.expenses$16perunitsoldFixedproductioncosts$200,000
Fixedsellingandadmin.expenses
$140,000Unitsproduced
Unitssold8,000units

10,000units

Therewerenobeginninginventories.
WhatisthecostofendinginventoryforOctagonalusingthevariablecostingmethod?a.$80,000
b.
$180,000
c.
$120,000
d.
$300,000
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:$402,000=$80,000
88. OctagonalCompanyhasthefollowinginformationfor2016:
Sellingprice

$150perunit

Variableproductioncosts

$40perunitproduced

Variableselling and admin. Expenses

$16perunitsold

Fixedproductioncosts
Fixedsellingandadmin.expenses

$200,000

$140,000Unitsproduced
Unitssold

10,000units
8,000units

Therewerenobeginninginventories.
WhatisthenetincomeforOctagonalusingthevariablecostingmethod?
a.$480,000
b.$412,000
c.$1,200,000
d.$600,000
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:[($150-$40-$16)8,000]-$340,000=$412,000

89. Absorptioncostingistogrossmarginasvariablecostingisto:
a. grossprofit
b. territorymargin
c. netincome
d. contributionmargin
ANSWER: d
90. KasawakiCompanyincurredthefollowingcostsinmanufacturingdigitalcameras:
Directmaterials
$14
Indirectmaterials(variable)
4
Directlabor
8
Indirectlabor(variable)
6
Othervariablefactoryoverhead
10
Fixedfactoryoverhead
28
Variablesellingexpenses
20
Fixedsellingexpenses
14
Duringtheperiod,thecompanyproducedandsold1,000units.
Whatistheinventorycostperunitusingabsorptioncosting?
a.$104
b.$70
c.$84
d.$32
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:$14+$4+$8+$6+$10+$28=$70

91. KasawakiCompanyincurredthefollowingcostsinmanufacturingdigitalcameras:
Directmaterials
$14
Indirectmaterials(variable)
4
Directlabor
8
Indirectlabor(variable)
6
Othervariablefactoryoverhead
10
Fixedfactoryoverhead
28
Variablesellingexpenses
20
Fixedsellingexpenses
14
Duringtheperiod,thecompanyproducedandsold1,000units.
Whatistheinventorycostperunitusingvariablecosting?
a.$52
b.$62
c.$42
d.$70
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:$14+$4+$8+$6+$10=$42
92. Whenmonthlyproductionvolumeisconstantandsalesvolumeislessthanproduction,netincomedeterminedwithvariablecost
ingprocedureswill
a. alwaysbegreaterthannetincomedeterminedusingabsorptioncosting.
b. alwaysbelessthannetincomedeterminedusingabsorptioncosting.
c. beequaltonetincomedeterminedusingabsorptioncosting.
d. beequaltocontributionmarginperunittimesunitssold.
ANSWER: b
93. BernardoCompanyreportedthefollowingunitsofproductionandsalesforAugustandSeptember2016:
Units
Month
August2016
September2016

Produced
100,000
100,000

Sold
90,000
105,000

NetincomeunderabsorptioncostingforAugustwas$40,000;netincomeundervariablecostingforSeptemberwas$50,00
0.Fixedmanufacturingcostswere$600,000foreachmonth.
HowmuchwasnetincomeforSeptemberusingabsorptioncosting?a.
$50,000
b.
$80,000
c.
$20,000
d.$40,000

ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:($600,000/100,000)5,000=$30,000Absorptioncostingis
lowerby$30,000.Therefore,$50,000less$30,000equalsaprofitof$20,000.
94. BernardoCompanyreportedthefollowingunitsofproductionandsalesforAugustandSeptember2016:
Units
Month
August2016100,00090,000
September2016100,000105,000

Produced

Sold

NetincomeunderabsorptioncostingforAugustwas$40,000;netincomeundervariablecostingforSeptemberwas$50,00
0.Fixedmanufacturingcostswere$600,000foreachmonth.
HowmuchwasnetincomeforAugustusingvariablecosting?a.
$40,000
b.$20,000
c.$(20,000)
d$(40,000)
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:($600,000/100,000)10,000=$60,000
Absorptioncostingishigherby$60,000.Therefore,$40,000less$60,000equalsalossof$20,000.
95. Underabsorptioncosting,whenproductionislessthansalesvolume,theprofits,usingvariablecostingprocedures,willbe:
a. lessthan
b. greaterthan
c. equalto
d. randomlydifferentthan
ANSWER: a
96. Inventoryvaluescalculatedusingvariablecostingasopposedtoabsorptioncostingwillgenerallybe
a. equal.
b. less.
c. greater.
d. twiceasmuch.
ANSWER: b

97. ThefollowinginformationpertainstoFonduelandCorporation:
Beginninginventory
Endinginventory
Directlaborperunit
Directmaterialsperunit
Variableoverheadperunit
Fixedoverheadperunit
Variablesellingcostsperunit
Fixedsellingcostsperunit

0units
5,000units
$20
16
4
10
12
16

Whatisthevalueofendinginventoryusingthevariablecostingmethod?
a.
$310,000
b.
$250,000
c.
$390,000
d.
$200,000
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:($20+$16+$4) 5,000=$200,000
98. WhichofthefollowingstatementsisTRUE?
a. Absorptioncostingnetincomeexceedsvariablecostingnetincomewhenunitsproducedandsoldareequal.
b. Variablecostingnetincomeexceedsabsorptioncostingnetincomewhenunitsproducedexceedunitssold.
c. Absorptioncostingnetincomeexceedsvariablecostingnetincomewhenunitsproducedarelessthanunitssold.
d. Absorptioncostingnetincomeexceedsvariablecostingnetincomewhenunitsproducedaregreaterthanunitssold.
ANSWER: d
99. AllofthefollowingcostsareincludedininventoryunderabsorptioncostingEXCEPT
a. directmaterials.
b. directlabor.
c. fixedsellingexpenses.
d. fixedfactoryoverhead.
ANSWER: c
100. Whatistheprimarydifferencebetweenvariableandabsorptioncosting?
a. inclusionoffixedsellingexpensesinproductcosts
b. inclusionofvariablefactoryoverheadinperiodcosts
c. inclusionoffixedsellingexpensesinperiodcosts
d. inclusionoffixedfactoryoverheadinproductcosts

ANSWER: d

101. Whichofthefollowingcouldbeconsideredasegment?
a. division
b. product-line
c. salesterritory
d. alloftheabove
ANSWER: d
102. NormandyCompanyhasthefollowinginformationpertainingtoitstwodivisionsfor2016:
DivisionX
Variablesellingandadmin.expenses
Directfixedmanufacturingexpenses
Sales
Directfixedsellingandadmin.expenses
Variablemanufacturingexpenses
Commonexpensesare$24,000for2016.

$70,000
35,000
200,000
30,000
40,000

Division
Y
$90,000
100,000
400,000
70,000
100,000

WhatisthesegmentmarginforDivisionY?a.
$310,000
b.$210,000
c.$240,000
d.$40,000
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:$400,000-$90,000-$100,000-$70,000-$100,000=$40,000

103. NormandyCompanyhasthefollowinginformationpertainingtoitstwodivisionsfor2016:

Variablesellingandadmin.expenses
Directfixedmanufacturingexpenses
Sales
Directfixedsellingandadmin.expenses

DivisionX
$70,000
35,000
200,000
30,000

DivisionY
$90,000
100,000
400,000
70,000

40,000

100,000

Variablemanufacturingexpenses
Commonexpensesare$24,000for2016.
WhatistheoperatingincomeforNormandyCompany?a.
$65,000
b.
$325,000
c.
$41,000d
.
$300,000

ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:$25,000+$40,000-$24,000=$41,000
104. Considerthefollowingportionofasegmentedincomestatementfortheyearjustended.AssumethatthefixedexpensesofD
ivisionXinclude$30,000ofdirectexpensesandthatthediscontinuanceofthedepartmentwillnotaffectthesalesoftheotherd
epartmentsnorreducethecommonexpenses.

Sales
Variablemanufacturingcosts
Grossprofit
Fixedexpenses(directandallocated)
Operatingincome(loss)

DivisionX
$100,000
60,000
$ 40,000
50,000
$(10,000)

WhatisX'sdivisionalsegmentmargin?a.
$(10,000)
b.$40,000
c.$10,000
d.$100,000
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:$40,000-$30,000=$10,000

105. SarandonCompanyhasthefollowinginformationpertainingtoitstwodivisionsfor2016:

Variablesellingandadmin.expenses
Directfixedmanufacturingexpenses
Sales
Directfixedsellingandadmin.expenses
VariablemanufacturingexpensesCommone
xpensesare$12,000for2016.

DivisionA

DivisionB

$35,000
17,500
100,000
15,000
20,000

$45,000
50,000
200,000
35,000
50,000

WhatisthesegmentmarginforDivisionB?a.
$155,000
b.$105,000
c.$55,000
d.$20,000
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:$200,000-$45,000-$50,000-$35,000-$50,000=$20,000
106. SarandonCompanyhasthefollowinginformationpertainingtoitstwodivisionsfor2016:

Variablesellingandadmin.expenses
Directfixedmanufacturingexpenses
Sales
Directfixedsellingandadmin.expenses
VariablemanufacturingexpensesCommon
expensesare$12,000for2016.

DivisionA
$35,000
17,500
100,000
15,000
20,000

DivisionB
$45,000
50,000
200,000
35,000
50,000

WhatistheoperatingincomeforSarandonCompany?a.
$300,000
b.$32,500c.
$150,000
d.
$20,500
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:$12,500+$20,000-$12,000=$20,500

107. DeepPitMiningminesthreeproducts.Goldoresellsfor$1,000perton,variablecostsare$600perton,andfixedminingcostsa
re$250,000.Thesegmentmarginfor2016was$(100,000).ThemanagementofDeepPitMiningwasconsideringdroppingth
eminingofgoldore.Onlyone-halfofthefixedexpensesaredirectandwouldbeeliminatedifthesegmentwasdropped.
Whatwerethesales(intons)for2016?
a. 1,000tons
b. 375tons
c. 250tons
d. 200tons
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:
Segmentmarginplusdirectfixedcostsequalscontributionmargin.Therefore,
($100,000)+$250,000=$150,000
$150,000/$400 =375tons
108. DivisionBearnsacontributionmarginof$200,000andhasadivisionalmarginof$70,000.IfDivisionBisclosed,allofthedirect
divisionalexpensesand$110,000ofcommonexpensescanbeeliminated.Thesefactsindicatethatclosingthedivisionwillcau
sethefirm'soperatingincometo
a. increaseby$90,000.
b. decreaseby$90,000.
c. increaseby$40,000.
d. decreaseby$40,000.
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:$110,000-$70,000=$40,000increase
109. TheCrestedButteCompanyrecordedthefollowingdataforaproductline:
Sales
Variablemanufacturingexpenses
Directfixedmanufacturingexpenses
Variablesellingandadministrativeexpenses
Directfixedsellingandadmin.expenses

$250,000
50,000
37,500
25,000
30,000

Whatisthecontributionmarginoftheproductline?a.
$175,000
b.$162,500
c.$142,500
d.$170,000
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:$250,000-$50,000-$25,000=$175,000

110. TheCrestedButteCompanyrecordedthefollowingdataforaproductline:
Sales
Variablemanufacturingexpenses
Directfixedmanufacturingexpenses
Variablesellingandadministrativeexpenses
Directfixedsellingandadmin.expenses

$250,000
50,000
37,500
25,000
30,000

Whatisthesegmentmarginoftheproductline?a.
$107,500
b.$162,500
c.$75,000
d.$175,000
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:$175,000-$67,500=$107,500
111. Commonsegmentcosts,whencontrastedwithdirectsegmentcosts,are
a. costsofallsegmentssuchasdirectlabor.
b. costsrelatedtomorethanonesegmentandnotdirectlytraceabletoaparticularsegment.
c. incurredatonelevelforthebenefitoftwoormoresegments.
d. bothbandc.
ANSWER: d
112. Considerthefollowingportionofasegmentedincomestatementfortheyearjustended.AssumethatthefixedexpensesofD
ivisionXinclude$30,000ofdirectexpensesandthatthediscontinuanceofthedepartmentwillnotaffectthesalesoftheotherd
epartmentsnorreducethecommonexpenses.
DivisionX
Sales
Variablemanufacturingcosts
Grossprofit
Fixedexpenses(directandallocated)
Operatingincome(loss)

$100,000
60,000
$40,000
50,000
$(10,000)

Whatwouldbetheeffectonthefirm'soperatingincomeifDivisionXwerediscontinued?
a. increase$10,000
b. decrease$40,000
c. decrease$100,000
d. decrease$10,000
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:$40,000-$30,000=$10,000

113. ThefollowinginformationpertainstoCumberlandCorporation:
Beginninginventory
Endinginventory
Directlaborperunit
Directmaterialsperunit
Variableoverheadperunit
Fixedoverheadperunit
Variablesellingcostsperunit
Fixedsellingcostsperunit

0units
6,000units
$20
16
4
10
12
16

Absorptioncostingnetincomewouldbehowmuchgreaterorlessthanthevariablecostingnetincome?
a. $80,000lessthan
b. $80,000greaterthan
c. $60,000greaterthan
d. $60,000lessthan
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:Thereis$60,000moreinfixedcostinendinginventoryrelativetobeg
inninginventory.Inaddition,productionexceedssales.Therefore,absorptioncostingnetincomeislar
gerby$60,000.
114. ThefollowinginformationpertainstoCumberlandCorporation:
Beginninginventory
Endinginventory
Directlaborperunit
Directmaterialsperunit
Variableoverheadperunit
Fixedoverheadperunit
Variablesellingcostsperunit
Fixedsellingcostsperunit

0units
6,000units
$20
16
4
10
12
16

Whatisthevalueofendinginventoryusingtheabsorptioncostingmethod?
a.
$410,000
b.
$300,000
c.
$600,000
d.
$216,000
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:($20+$16+$4+$10)6,000=$300,000

115. HammerholdCompanyhastwodivisionswiththefollowingsegmentmarginsforthecurrentyear:Northern,
$250,000;Southern,$450,000.Commonexpensesofthecompanyare$55,000.WhatisHammerholdCompany'snetincome?
a.
$165,000
b.
$700,000
c.
$645,000
d.
$750,000
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:$250,000+$450,000-$55,000=$645,000
116. TaylorCompany'sbudgetedsaleswere10,000unitsat$200perunit.Actualsaleswere9,200unitsat$210perunit.Taylor's
salespricevarianceis
a.$92,000(F).
b.$100,000(U).
c.$8,000(U).
d.$68,000(U).
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:($210-$200) 9,200=$92,000(F)
117. TaylorCompany'sbudgetedsaleswere10,000unitsat$200perunit.Actualsaleswere9,200unitsat$210perunit.Taylor's
salesvolumevarianceis
a.$68,000(U).
b.$8,000(U).
c.$160,000(U).
d.$168,000(U).
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:(9,200-10,000)$200=$160,000(U)
118. TaylorCompany'sbudgetedsaleswere10,000unitsat$200perunit.Actualsaleswere9,200unitsat$210perunit.Taylor'st
otalsalesvarianceis
a.$100,000(U).
b.$68,000(U).
c.$4,000(U).
d.$92,000(U).
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:(9,200$210)-(10,000$200)=$68,000(U)

119. FranklinCompanysexpectedsaleswere2,000unitsat$100perunit.During2016,ithadactualsalesof1,800units
at$110perunit.Budgetedvariablecostswere$60perunit.WhatisFranklin'ssalespricevariance?
a.$18,000(F)
b.$20,000(U)
c.$8,000(U)
d.$2,000(U)
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:($110$100) 1,800=$18,000(F)

120. FranklinCompanysexpectedsaleswere2,000unitsat$100perunit.During2016,ithadactualsalesof1,800units
at$110perunit.Budgetedvariablecostswere$60perunit.WhatisFranklin'ssalesvolumevariance?
a.$8,000(U)
b.$20,000(U)
c.$18,000(F)
d.$2,000(U)
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:(1,800-2,000)$100=$20,000(U)
121. FranklinCompanysexpectedsaleswere2,000unitsat$100perunit.During2016,ithadactualsalesof1,800units
at$110perunit.Budgetedvariablecostswere$60perunit.WhatisFranklin'stotalsalesvariance?
a.$8,000(U)
b.$20,000(U)
c.$18,000(F)
d.$2,000(U)
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:(1,800$110)-(2,000$100)=$2,000(U)
122. Thesalespricevarianceiscreatedbyadifferencebetween:
a. actualandstandardcontributionmargin.
b. actualandexpectedsalesprice.
c. expectedandstandardnetincome.
d. actualandexpectedsalesvolume.
ANSWER: b

123. Thecontributionmarginvarianceisthedifferencebetweentheactualcontributionmarginandthe:
a. actualunitprice
b. budgetedcontributionmargin
c. budgetedvariableexpenses
d. actualvariableexpenses
ANSWER: b
124. Thecontributionmarginvarianceisfavorableifthebudgetedcontributionmarginislessthanthe:
a. budgetedunitprice
b. actualunitprice
c. actualcontributionmargin
d. budgetedvariableexpenses
ANSWER: c
125. Thebudgetedcontributionmarginoftwoproductsis$1,000theactualcontributionmarginis$500andthetotalvariableex
pensesare$750.Thecontributionmarginvarianceis:
a.$500(F)
b.$500(U)
c.$750(F)
d.$750(U)
ANSWER:
b
RATIONALE:
SUPPORTINGCALCULATIONS:Contributionmarginvariance=ActualcontributionmarginBudgetedcontributionmargin=500-1,000=$500 (U)
126. Thebudgetedaverageunitcontributionmarginisthebudgetedtotalcontributionmargindividedbythe:
a. budgetedtotalunits
b. budgetedtotalprice
c. budgetedfixedexpenses
d. budgetedvariableexpenses
ANSWER: a
127. Thecontributionmarginvolumevarianceisthedifferencebetweentheactualandbudgetedquantitiessoldmultiplied
bythe:
a. budgetedsalesprice
b. actualcontributionmarginvariance
c. budgetedcontributionmarginvariance
d. budgetedaverageunitcontributionmargin
ANSWER: d

128. Thebudgetedquantitysoldofaproductis200units.Theactualquantitysoldis100units.Thebudgetedaverageunitcontribu
tionmarginis$3.00.Whatisthecontributionmarginvolumevariance?
a.$600(F)
b.$600(U)
c.$300(U)
d.$300(F)
ANSWER:
c
RATIONALE:
SUPPORTINGCALCULATIONS:Contributionmarginvolumevariance
=(ActualquantitysoldBudgetedquantitysold)Budgetedaverageunitcontributionmargin
=(100200)$3=$300(U)
129. Thesumofthechangeinunitsforeachproductmultipliedbythedifferencebetweenthebudgetedcontributionmarginand
thebudgetedaverageunitcontributionmarginiscalledthe:
a. marketsharevariance
b. salesmixvariance
c. overallsalesvariance
d. marketsizevariance
ANSWER: b
130. Thesalesmixvariancetellsmanagerswhatimpactadifferencebetweenactualandexpectedpercentagesofproductss
oldhason:
a. volumevariance
b. salesvariance
c. contributionmargin
d. marketshare
ANSWER: c
131. Inorderforaneffectofchangingsalesmixonprofittoexist,acompanymustproduce:
a. oneproduct
b. morethanoneproduct
c. morethanonelocation
d. evennumberofproducts
ANSWER: b

132. Themarketsharevarianceiscalculatedby
a. [(ActualindustrysalesinunitsBudgetedindustrysalesinunits)(Budgetedmarketsharepercentage)]
(Budgetedaverageunitcontributionmargin).
b. [(ActualmarketsharepercentageBudgetedmarketsharepercentage)Actualindustrysalesinunits]
Budgetedaverageunitcontributionmargin.
c. (ActualquantitysoldBudgetedquantitysold)Budgetedaverageunitcontributionmargin.
d. (ActualquantitysoldBudgetedquantitysold)Actualaverageunitcontributionmargin.
ANSWER: b
133. Themarketshareandmarketsizevariancesallowfirmstocomparetheirperformancewiththe:
a. marketasawhole
b. previousyearsresults
c. upcomingyearsprojections
d. innerworkingsofthecompany
ANSWER: a
134. Themarketsizevarianceisthedifferencebetweenactualandbudgetedindustrysalesinunits,multipliedbythebudgetedmark
etsharepercentage,timesthe:
a. actualmarketsharepercentage
b. budgetedmarketsharepercentage
c. actualaverageunitcontributionmargin
d. budgetedaverageunitcontributionmargin
ANSWER: d
135. Whenthemarketsharevarianceisunfavorable,itmeansthatthebudgetedshareofthemarketis:
a. lessthantheactualmarketshare
b. morethanthemarketsharepercentage
c. morethantheactualmarketshare
d. lessthanmarketthemarketsharepercentage
ANSWER: c
136. Themarketsizevarianceisfavorablewhenthebudgetedindustrysalesinunitsis:
a. morethantheactualunitssold
b. lessthantheactualunitssold
c. morethantheactualmarketsharepercentage
d. lessthanthebudgetedmarketsharepercentage
ANSWER: b

137. AccordingtoHansenandMowen,whichofthefollowingproductlifecyclestagescomesfirst?
a. Introduction
b. Growth
c. Development
d. Decline
ANSWER: a
138. Whichofthefollowingproductlifecyclestagesischaracterizedbyrapidincreasesinsalesandproduction?
a. Introduction
b. Growth
c. Maturity
d. Decline
ANSWER: b
139. Themajorityoftheproductcostis"lockedin"duringwhichofthefollowinglife-cyclestages?
a. Introduction
b. Growth
c. Development
d. Decline
ANSWER: a
140. Whichofthefollowingproductlifecyclestageshasrevenuesfortheentireindustrydecreasing?
a. Introduction
b. Growth
c. Maturity
d. Decline
ANSWER: d
141. WhichofthefollowingisNOTalimitationofprofitmanagement?
a. theemphasisonquantifiablemeasures
b. emphasisonvolumevariances
c. thefocusonpastperformance
d. ahigheremphasisonshort-runoptimization
ANSWER: b

142. Whatarethewaysemployeebehaviorchangesinrelationtoaprofitemphasis?
a. desiretoavoidlossesmayresultinshort-rundecisions
b. unethicalbehaviormaytakeplaceifrewardsorbonusesarebasedonprofits
c. ignoringthelessmeasurableoutcomesthatmaybenefitthecompany
d. alloftheabovearepotentialchanges
ANSWER: d
143. Asuccessfulfirm
a. placesappropriateemphasisonprofit,isawareofeconomicandenvironmentaltrendsoutsidethecompany,andmeasuresim
pactonthecommunityandemployees.
b. valuesnumericprofitandencourageemployeestodowhatisintheirpowertoincreaseprofits.
c. ensurestherearealwaysmonthly,quarterly,andannualprofitandloststatementsasthesolemeasureofsuccesssothatalle
mployeesareawareofthesuccessorfailureofaperiod.
d. noneoftheabove
ANSWER: a
144. Analternativetothelimitationoffocusingonprofitswouldbe
a. communicatingothermeasuresareimportantbutcontinuetobaserewardsonprofits.
b. overstatethevalueofendinginventoryinordertoreducecostofgoodssoldandimproveoperatingincomeperformance.
c. focusonlong-termobjectivesandappropriateemphasisonprofit.
d. analyzetheproductmix.
ANSWER: c
145. Answerthefollowing:
a. Discusseachofthefollowingeconomicmarketstructures(i.e.,numberoffirmsinindustry,barrierstoentry,unique
nessofproduct):
1. Perfectlycompetitivemarket
2. Monopolisticcompetition
3. Oligopoly
4. Monopoly
b. Matchthefollowingindustrieswiththeappropriateeconomicmarket:Restaurants
UnitedStatesPostOfficeCereal
WheatfarmerAutomotive

ANSWER:
a.

b.

Market
Structure
Type

Number of
Firms in
Industry

Barriers
to Entry

Uniqueness
of Product

Perfect
competition

Many

Very low

Not
unique

No special expense

Monopolistic
competition

Many

Low

Some
unique
features

Advertising,
coupons, costs
of differentiation

Oligopoly

Few

High

Fairly
Unique

Costs of
differentiation
advertising, rebates
coupons

Monopoly

One

Very High

Very
Unique

Legal and lobbying

expenditures

Perfectly competitive market:

Wheat farmer

Monopoly:

United States Post Office

Monopolistic competition:

Restaurants

Oligopoly:

Cereal
Automobile

Expenses
Related to
Structure Type

146. Compareandcontrastthevariouspricingpoliciesusedbycompanies.
ANSWER:
Costisanimportantdeterminantofsupplyand,sincesomuchofacompanysresourcesarefocusedonidentifyin
g,quantifying,andreportingcosts,manycompaniesbasepriceoncost.Pricesmustcovernotonlycosts,butalsopr
ofits,sooftenacompanywillstartwithcostandeitherapplyamarkuponcostofgoodssoldoramarkupondirectm
aterials.Themarkupisapercentageappliedtoabasecost;itincludesanydesiredprofitandanycostsnotincludedi
nthebase.WhenusingamarkupofCOGS,theformulais(Sellingandadministrativeexpenses+Operatingincom
e)/COGS
Whenusingmarkupbasedondirectmaterials,theformulachangesto:
(Directlabor+Overhead+Sellingandadministrativeexpenses+OperatingIncome)/DirectMaterialsAnotherpric
ingpolicyistheuseoftargetcosting.Targetcostingstartsatatargetpricebasedonwhatacustomeriswillingtopay
andworksbackwardstodetermineiftheproductcanbemadeatacostthatwouldstillensureaprofitforthefirm.Th
erearealsopoliciesofpenetrationpricing(pricinganewproductatalowinitialprice)andpriceskimming(ahigher
pricebeingchargedwhenaproductisfirstintroduced).

147. TheFurthurPhishCompanyhasrecordedthefollowingdataforthreeoftheirproducts:
Product
X
Y
Z
Required:

OldPrice

NewPrice

$14.75
19.25
24.50

$14.25
18.50
27.50

OldQuantity

NewQuantity

2,000
3,000
4,000

2,200
3,300
3,600

a. Determinethepriceelasticityofdemandforeachoftheproducts.
b. Whichproductshaveanelasticdemand?Inelasticdemand?
ANSWER:
a. X:[(2,200-2,000)/2,000]/[($14.75-$14.25)/$14.75]=2.95
Y:[(3,300-3,000)/3,000]/[($19.25-$18.50)/$19.25]=2.567
Z:[(4,000-3,600)/4,000]/[($24.50-$27.50)/$24.50]=0.81667
b. ProductsXandYareinelastic.ProductZisneitherinelasticnorelastic.
148. LilahFabulousoperatesacateringcompany.Lilahprovidesfoodandserversforparties.Shealsorentstables,chairs,dinner
ware,glassware,andlinens.JeffandJessicaMantoothcontactedLilahaboutcateringfortheirdaughter'swedding.Theyha
verequestedanopenbar,horsd'oeuvres(enoughfor300people),alargeweddingcake,andfortytableswithlinens,dinnerwa
re,andglassware.Lilahputtogetherthefollowingbid:
Food(300$7.50)
Weddingcake($150)
Beverages(300 $5)
Servers(124hours$10)
Bartender(13hours$12)
Rentalof:
Linens
Tables
Dinnerware
Glassware
Total
Required:

$2,250
150
1,500
480
36
80
200
80
80
$4,856

SupposethattheMantoothsblanchwhentheyseethebid.Mr.Mantoothsuggeststhattheyhadhopedtospendnomorethan$3,7
50orsoontheparty.HowcouldLilahworkwiththeHolmsestoachieveatargetcostofthatamount?
ANSWER:
LilahwillneedtositdownwiththeMantoothsanddeterminewhichfeaturesofthereceptionaremostimportanttoth
emandwhicharelessimportant.Forexample,perhapsthelargeweddingcakecouldbereplacedwithasmallweddi
ngcake,alongwithseveralsheetcakes.Thepartytimecouldbereducedfromthreehourstotwo.TheMantoothsco
uldprovidetheirowntablesandlinens.Inaddition,lessexpensivefoodandappetizerscouldbeoffered.

149. CorlisConstructionCompanybuildshouses.Eachjobrequiresabid.Corlis'biddingpolicyistoestimatethecostsofmaterials,di
rectlabor,andsubcontractor'scosts.Thesearetotaledandamarkupisappliedtocoveroverheadandprofit.Inthecomingyear,Co
rlisbelievesitwillbethesuccessfulbidderontenjobswiththefollowingtotalrevenuesandcosts:
Revenues
Materials
Directlabor
Subcontractors
Residual

$648,000
$200,000
250,000
150,000 600,000
$48,000

Theresidualwillcoveroverheadandprofits.
Required:
a. Whatisthemarkuppercentageontotaldirectcosts?
b. SupposeCorlisisaskedtobidonajobwithestimateddirectcostsof$57,500.Whatisthebid?
Ifthecustomercomplainsthattheprofitseemsprettyhigh,howmightCorliscounterthat?
ANSWER:
a. Markuppercentage=$48,000/$600,000=8%b. Bid
=$57,500 1.08=$62,100
Corlisshouldremindthecustomerthatthe8percentmarkupondirectcostsisnotpureprofit.Itincludesoverhe
adaswellasprofit.Inconstruction,an8percentoverheadplusprofitratemaybe a littlelow.

150. Whataresomeofthepricingpracticesregulatedbylaw?
ANSWER:
Lawshavebeenpassedregulatingthelevelandmanneroffirmpricing.Predatorypricingsetspricesbelowcostinord
ertodriveoutcompetition.
Manystateshavedifferinglawsonpredatorypricing.Pricediscriminationisoutlawedbyfederallaw.Pricediscriminati
onoccurswhendifferentpricesarechargedtodifferentcustomers.Thislawdoesnotapplytoservicefirms.

151. ThevariablecostingincomestatementforVamonosCompanyfor2016isasfollows:

Sales(5,000units)V
ariableexpenses:

$100,000

Costofgoodssold
Selling(10%ofsales)
Contributionmargin
Fixedexpenses:Manufacturi
ngoverhead

$30,000
10,000

Administrative
Operatingincome

14,400

40,000
$ 60,000

$24,000
38,400
$ 21,600

Selecteddatafor2016concerningtheoperationsofthecompanyareasfollows:
Beginninginventory
-0-units
Unitsproduced
Manufacturingcosts:
Directlabor

8,000units
$3.00perunit

Direct materials

1.60perunit

Variableoverhead

1.40perunit

Required:
Prepareanabsorptioncostingincomestatementfor2016.
ANSWER:
Sales
Lesscostofgoodssold:
{5,000 [$3.00+$1.60+$1.40+($24,000/8,000)]}
Grossprofit
Lessoperatingexpenses:
Sellingexpenses
Administrativeexpenses
Operatingincome

$100,000
45,000
$ 55,000
$ 10,000
14,400

24,400
$30,600

152. HornitosCompanyproduced30,000unitsandsold29,000unitsin2016.Beginninginventorywaszero.Duringtheperiod,thef
ollowingcostswereincurred:
Indirectlabor
Indirectmaterials
Other(variableoverhead)
Fixedmanufacturingoverhead
Fixedadministrativeexpenses
Fixedsellingexpenses
Variablesellingexpenses,perunit
Directlabor,perunit
Directmaterials,perunitR
equired:

$ 60,000
30,000
90,000
180,000
150,000
120,000
40
80
20

Computethedollaramountofendinginventoryusing:
a. Absorptioncosting
b. Variablecosting
ANSWER:
a.Variablecosts:
Directmaterials
Directlabor
Indirectlabor
Indirectmaterials
Othervariableoverhead
Variableproductcostsperunit
Fixedmanufacturingoverhead
Totalproductcostsperunit
Inventoryunits
Inventoryvalue

$20.00
80.00
2.00
1.00
3.00
$106.00
6.00
$112.00
1,000
$112,000

b.Variableproductcostsperunit
Inventoryunits
Inventoryvalue

$106.00
1,000
$106,000

153. AllisonManufacturingCompanyproducesthreeproducts:A,B,andC.Theincomestatementfor2016isasfollows:
Sales
Less:Variableexpenses
Contributionmargin
Lessfixedexpenses:
Manufacturing
Sellingandadministrative
Netincome

$200,000
127,000
$ 73,000
$20,000
14,000

34,000
$ 39,000

Thesales,contributionmarginratios,anddirectfixedexpensesforthethreetypesofproductsareasfollows:
A
$60,000
35%
$8,000

Sales
Contributionmarginratio
Directfixedexpensesofproducts

B
$40,000
30%
$5,000

C
$100,000
40%
$4,000

Required:
Prepareincomestatementssegmentedbyproducts.Includeacolumnfortheentirefirminthestatement.
ANSWER:
AllisonManufacturingCompanyInco
meStatement
FortheYear2016

A
Sales
Less:Variableexpenses
Contributionmargin
Less:Directfixedexp.
Productmargin
Less:Commonexpenses

$60,000
39,000
$21,000
8,000
$13,000

B
$40,000
28,000
$12,000
5,000
$ 7,000

C
$100,000
60,000
$ 40,000
4,000
$ 36,000

Total
$200,000
127,000
$ 73,000
17,000
$ 56,000
17,000
$ 39,000

154. TheLevinsonCompanyexpectedtoproduce23,000unitsat$190perunit.The2016actualfigureswere22,100unitswhich
soldat$200each.
Compute:
a. TheSalesPriceVariance
b. TheSalesVolumeVariance
c. TheOverall(total)SalesVarianceIndicatew
hetherFavorableorUnfavorable
ANSWER: a.SalesPriceVariance=(ActualPrice-ExpectedPrice)ctualVolume
=($200-190)22,100=$221,000(F)
b. SalesVolumeVariance=(ActualVolume-ExpectedVolume)ExpectedPrice
=22,100-23,000)190=$171,000(U)
c. Overall(Total)SalesVariance=SalesPriceVariance+SalesVolumeVariance
=221,000(F)=171,000(U)=$50,000(F)
155. TheSanQuintinCorporationmanufacturesautomobilehubcaps.In2016,itexpectedtoproduce385,000hubcapsat$6perunit
.The2016actualfigureswere432,100unitswhichsoldat$7each.
Compute:
a. TheSalesPriceVariance
b. TheSalesVolumeVariance
c. TheOverall(Total)SalesVarianceIndicate
whetherFavorableorUnfavorable
ANSWER: a.SalesPriceVariance=(ActualPrice-ExpectedPrice)ctualVolume
=($7-6)432,000=$432,100(F)
b. SalesVolumeVariance=(ActualVolume-ExpectedVolume)ExpectedPrice
=432,100-385,000)$6=$282,000(F)
c. Overall(Total)SalesVariance=SalesPriceVariance+SalesVolumeVariance
=432,000(F)+282,000(F)=$714,000(F)

156. CustomChromeEnterprisesproducesmagwheelsformotorcycles.During2016,CustomChromeexpectedtosel
l275,000magwheelsat$185each.Theactualsalesfor2016were333,500magwheelsat$179each.
1- Calculate:
a. SalesPriceVariance
b. SalesVolumeVariance
c. Overall(Total)SalesVariance
IndicatewhetherFavorableorUnfavorable.
2- Calculatethevariancesifactualsaleshadbeen266,000magwheelsat$150each.
ANSWER: 1a. SalesPriceVariance=(ActualPrice-ExpectedPrice)ctualVolume
=($179-185)333,500=$2,001,000(U)
b. SalesVolumeVariance=(ActualVolume-ExpectedVolume)ExpectedPrice
=(333,500-275,000)$185=$10,822,500(F)
c. Overall(Total)SalesVariance=SalesPriceVariance+SalesVolumeVariance
=2,001,000(U)+10,822,500(F)=$8,821,500(F)
2a. SalesPriceVariance=(ActualPrice-ExpectedPrice)ctualVolume
=($150-185)266,000=$9,310,000(U)
b. SalesVolumeVariance=(ActualVolume-ExpectedVolume)ExpectedPrice
=(266,000-275,000)$185=$1,665,000(U)
c. Overall(Total)SalesVariance=SalesPriceVariance+SalesVolumeVariance
=9,310,000(U)+1,665,000(U)=$10,975,000(U)

157. Hang10Inc.producestwotypesofsurfboards:basicanddeluxe.Thebasicsurfboardsellsfor$25andthedeluxese
llsfor$100.Hang10isbudgetingsalesfor2016of1,000basicsurfboardsand650deluxe.Variablecostsassociatedw
iththebasicsurfboardamountto$10and$40forthedeluxe.Actualunitssoldwere1,200basicand550deluxe.
Required:
a. Calculatethecontributionmarginvariance
b. Calculatethesalesmixvariance
ANSWER:
a.
Actual Qty Sold
(1,750

Budgeted Qty sold

*
1,650)
*

Budgeted Average Contribution margin

32.73
=
3,272

** Budgeted Average Contribution margin:

Basic
Deluxe
Sales
($25 1,000 ) =
$25,000
($100 650) =
$65,000
Variable Costs:
($10 1,000) =
10,000
($40 650) =
26,000
Contribution margin
$15,000
$39,000
Total units budgeted
Average CM per unit

Total

$90,000

36,000
$54,000
1,650
$32.73

b.
Sales mix variance =
(Basic actual units Basic budgeted units) (Basic budgeted unit Budgeted average

*
contribution margin
contribution margin)
(1,200
1,000)
* ($15.00
$32.73)

($3,546.00)

+
(Deluxe actual
units
(550

Deluxe budgeted
units) *
650)
*

** Actual Contribution margins:

Basic
Sales
($25 1,200 ) =
$30,000
($100 550) =
Variable Costs:
($10 1,200) =
12,000
($40 550) =
Actual CM
Budgeted CM

$18,000
15,000
Check
Figure

(Deluxe budgeted
unit contribution Budgeted average
margin
contribution margin)
($60.00
$32.73)
Deluxe

Total

$55,000

$85,000

22,000
34,000
$33,000
51,000
39,000
54,000
Contribution margin
var
(3,000)
3,272.73 - 3,546
- 2,727 =
(3,000.27)

($2,727.00)

158. MorgantownAvionicsproducestwotypesofaltimeters,anAnalogmodelandaDigitalmodel.Budgetedandactualdataforthet
womodelsareshownbelow:
BudgetedAmounts:
Analog Model
Sales:
($90 25,000)
($150 15,000)
Variable Expenses
Contribution Margin

Digital Model

Total

$2,250,000
500,000
$1,750,000

$2,250,000
750,000
$1,500,000

$4,500,000
$1,250,000
$3,250,000

ActualAmounts:
Analog Model
Sales:
($88 25,900)
($160 13,500)
Variable Expenses
Contribution Margin

Digital Model

Total

$2,279,200
518,000
$1,761,200

$2,160,000
675,000
$1,485,000

$4,439,200
1,193,000
$3,246,200

Calculate:
a. Contributionmarginvariance
b. Budgetedaverageunitcontributionmargin
c. Contributionmarginvolumevariance
ANSWER:
a.
ContributionMarginVariance=
ActualcontributionmarginBudgetedcontributionmargin
$3,246,200 $3,250,000=$3,800(U)
b.
BudgetedAverageUnitContributionMargin=
BudgetedTotalContributionMarginBudgetedTotalUnits
$3,250,000(25,000+15,000)=$81.25
c.
ContributionMarginVolumeVariance=
(ActualQtySoldBudgetedQtySold)
BudgetedAverageUnitContributionMargin(25,900+13,500) (25,000 + 15,000) $81.25
=$48,750 (U)

159. ThefollowinginformationaboutMorgantownAvionicstwoAltimetermodelsisprovided:

Analogmodelsalesinunits
Digitalmodelsalesinunits
Analogmodelbudgetedcontributionmargin
Digitalmodelbudgetedcontributionmargin
Budgetedaverageunitcontributionmargin
Totalcontributionmargin

Budgeted
25,000
15,000
$70
$100
$81.25
$3,250,000

Actual
25,900
13,500

$3,246,200

Calculatethesalesmixvariance.
ANSWER:
Salesmixvariance=
[(AnalogmodelactualunitsAnalogmodelbudgetedunits)(Analogmodelbudgetedcontribution
marginBudgetedaverageunitcontributionmargin)]
+
(DigitalmodelactualunitsDigitalmodelbudgetedunits) (Digitalmodelbudgetedcontribution
marginBudgetedaverageunitcontributionmargin)]
=
[(25,90025,000)(7081.25)+(13,50015,000)(10081.25)]=$38,250(U)

160. ThefollowinginformationaboutMorgantownAvionicstwoAltimetermodelsisprovided:

Analogmodelsalesinunits
Digitalmodelsalesinunits
Totalcontributionmargin
Budgetedaverageunitcontributionmargin

Budgeted
25,000
15,000
$3,250,000
$81.25

Actual
25,900
13,500

BudgetedunitsalesfortheentireAvionicsindustrywere2,500,000ofallmodeltypesandactualunitsalesfortheindustrywere2,
550,000.
Calculate:
a. Marketsharevariance(takepercentagesoutto4significantdigits)
b. Marketsizevariance
ANSWER:
a.
ActualMarketSharePercentage=Totalactualsalesinunits/Actualtotalunitsalesinindustry
=39,400/2,550,000=0.015451or1.545%
BudgetedMarketSharePercentage=
Totalbudgetedsalesinunits/Budgetedunitsforindustry
=40,000/2,500,000=0.016000or1.600%
MarketShareVariance=
[(Actualmarketsharepercentage
Budgetedmarketsharepercentage)Actualindustrysalesinunits]Budgetedaverageunitcontributionmargin
=[(0.01550.016000)2,550000]81.25=$103,594(U)(Rounded)
b.
MarketSizeVariance=
[(Actualindustrysalesinunits
Budgetedindustrysalesinunits)Budgetedmarketsharepercentage]Budgetedaverageunitcontributionmargi
n
= [(2,550,0002,500,000) 0.016]81.25=$65,000 (F)

161. CustomChoppers,Inc.producestwotypesofmotorcycles,astandardmodelwhichsellsfor$5,000,andacustomizedmod
elwhichsellsfor$10,000.Budgetedsalesfortheyearare300standardmodelsand100customizedmodels.Variableexpens
esare$1,500forthestandardmodeland$3,500forthecustomizedmodel.Actualsaleswere500standardmodelsat$6,000a
nd150customizedmodelsat$12,000.
Calculate:
a. ContributionMarginVariance
b. BudgetedAverageUnitContributionMargin
c. ContributionMarginVolumeVariance
IndicatewhetherFavorable(F)orUnfavorable(U)
ANSWER:
SUPPORTINGCALCULATIONS:
a.
BudgetedAmounts:
StandardModel
Sales:
(300 5,000)
(10010,000)
VariableExpenses
ContributionMargin

CustomizedModel

Total

$1,500,000
$1,000,000
350,000

$2,500,000
$800,000

$1,050,000

$650,000

$1,700,000

StandardModel

CustomizedModel

Total

450,000

ActualAmounts:

Sales:
(500 6,000)
(15012,000)
VariableExpenses
ContributionMargin

$3,000,000
750,000

$1,800,000
525,000

$4,800,000
1,275,000

$2,250,000

$1,275,000

$3,525,000

ContributionMarginVariance=ActualContributionMarginBudgetedContributionMargin
=$3,525,000$1,700,00=$1,825,000(F)
b.
BudgetedAverageUnitContributionMargin=
BudgetedTotalContributionMarginBudgetedTotalUnits
$1,700,000(300+100)=$4,250
c.
ContributionMarginVolumeVariance=
(ActualQtySoldBudgetedQtySold)BudgetedAverageUnitContributionMargin[(500+150)
(300 +100)]$4,250=$1,062,500 (F)

162. ThefollowinginformationaboutthetwomotorcyclemodelsproducedbyCustomChoppers,Inc.isgiven:

Standardmodelsalesinunits
Customizedmodelsalesinunits
Standardmodelbudgetedcontributionmargin
Customizedmodelbudgetedcontributionmargin
Budgetedaverageunitcontributionmargin
Totalcontributionmargin
Calculatethesalesmixvariance.

Budgeted
300
100
$3,500
$6,500
$4,250
$1,700,000

Actual
500
150

$3,525,000

ANSWER:
Salesmixvariance=
[(StandardmodelactualunitsStandardmodelbudgetedunits)(Standardmodelbudgeted
contributionmarginBudgetedaverageunitcontributionmargin)]
+
(CustomizedmodelactualunitsCustomizedmodelbudgetedunits)(Customizedmodelbudgeted
contributionmarginBudgetedaverageunitcontributionmargin)]
=[(500300)(3,5004,250)+(150100)(6,5004,250)]=$262,500 (F)

163. ThefollowinginformationaboutMorgantownAvionicstwoAltimetermodelsisprovided:

Standardmodelsalesinunits
Customizedmodelsalesinunits
Totalcontributionmargin
Budgetedaverageunitcontributionmargin

Budgeted
300
100
$1,700,000
$4,250

Actual
500
150

BudgetedunitsalesfortheentireMotorcycleChoppersindustrywere4,000ofallmodeltypesandactualunitsalesfor
theindustrywere4,600.
Calculate:
a. Marketsharevariance(takepercentagesoutto4significantdigits)
b. Marketsizevariance
ANSWER:
a.
ActualMarketSharePercentage=Totalactualsalesinunits/Actualtotalunitsalesinindustry
=650/4,600=0.14130or14.130%(Rounded)
BudgetedMarketSharePercentage=
Totalbudgetedsalesinunits/Budgetedunitsforindustry
=400/4,000=0.10or10%
MarketShareVariance=
[(Actualmarketsharepercentage
Budgetedmarketsharepercentage)Actualindustrysalesinunits]Budgetedaverageunitcontr
ibutionmargin
=[(0.14300.10)4,600]4,250=$840,650(F)
b.
MarketSizeVariance=
[(Actualindustrysalesinunits
Budgetedindustrysalesinunits)Budgetedmarketsharepercentage]Budgetedaverageunitcont
ributionmargin
= [(4,600 4,000) 0.00]4,250=$2,250,000 (F)
164. Manyproductshaveapredictableprofitorproductlifecy
cle.Describetheproductlifecyclefromthemarketingpers
pective.Inaddition,graphprofitversusthedifferentphase
s.
Finally,discusstheimpactoftheproductlifecycleonproducts,learningeffects,setups,purchasing,andmarketingex
penses.
ANSWER:
Theproductlifecycledescribestheprofithistoryoftheproductaccordingtofourstages;introduction,g
rowth,maturity,anddecline.Thegraphwouldlooklikethefollowing:

Theimpactoftheproductlifecycleoncostmanagementwouldbeasfollows:

Introduction

Growth

Maturity

Decline

Product:

Basic design,
few models

Some
improvements,
expanding
product line

Proliferation
of product
lines, extensive
differentiation

Minimal changes,
reduced number of
product lines

Learning
Effects:

High costs,
much learning,
but little
payoff

Still strong,
learning
begins to
reduce costs

Stable
production,
little to no
learning

No learning,
labor as
efficient as
it can be

Setups:

Few, but
new and
unfamiliar

More, as new
models are
introduced

Many,
as product
differentiation
occurs

Fewer, as
only best
selling lines
are produced

Purchasing:

May be high
as new
materials and
suppliers
are sought

Lower, reliable
suppliers found,
few materials
changes

May be high,
depending on
line changes

Fewer suppliers
and orders
as existing
inventories are
liquidated

Marketing
Expense:

Low selling
and distribution
cost to small
number of
target markets

Increased
advertising and
distribution

Supportive
advertising,
increased trade
discounts, high
distribution costs

Minimal
advertising,
distribution,
and promotion

165. Discussthelimitationofprofitmeasurement.
ANSWER:
Profitisanimportantmeasure.Itislimitedbecauseofitsfocusonpastresults,ratherthanfutureperform
ance.Itisaquantifiablemeasure,buttherearequalitativeaspectstoperformancethatarenotreflected.It

isasinglemeasureandcannotcapturethemultipledimensionsofperformance.Profitsareusedforeval
uatingperformanceandhaveanimpactonpeople'sbehavior.

Chapter 19
1. Capitalinvestmentdecisionsareconcernedwithplanning,settinggoals,arrangingfinancing,andtheselectionofl
ong-termassets.
a. True
b. False
ANSWER: True
2. Independentprojectsdirectlyaffectthecashflowsofotherprojectsonceacceptedorrejected.
a. True
b. False
ANSWER: False
3. Nondiscountingmodelsformakingcapitalinvestmentsexplicitlyconsiderthetimevalueofmoney.
a. True
b. False
ANSWER: False
4. Mutuallyexclusiveprojectsarethosewhichprecludetheacceptanceofallothercompetingprojects.
a. True
b. False
ANSWER: True
5. Discountingmodelsformakingcapitaldecisionsignorethetimevalueofmoney.
a. True
b. False
ANSWER: False
6. Thepaybackperiodisthetimerequiredforacompanytorecoveritsinitialinvestment.
a. True
b. False
ANSWER: True
7. Theaccountingrateofreturnconsiderstheprofitabilityofaprojectaswellasthetimevalueofmoney.
a. True
b. False
ANSWER: False

8. Discountedcashflowsareusedbydiscountingmodelswhicharefuturecashflowsexpressedintermsoftheirpre
sentvalue.
a. True
b. False
ANSWER: True
9. Netpresentvalue(NPV)isthedifferencebetweenthepresentvalueofcashinflowsandoutflowsassociatedwitha
project.
a. True
b. False
ANSWER: True
10. Inanindependentproject,therequiredrateofreturnisusedtocalculatethefuturevalueoffuturecashflows.
a. True
b. False
ANSWER: False
11. Ifthenetpresentvalueisgreaterthanzero,theinvestmentisprofitableandacceptable.
a. True
b. False
ANSWER: True
12. Theinternalrateofreturn(IRR)istheinterestratethatsetsthepresentvalueofcashinflowsofaprojectequalto
thepresentvalueofaprojectscost.
a. True
b. False
ANSWER: True
13. Iftheinternalrateofreturn(IRR)islessthanthecostofcapital,thentheinvestmentisacceptable.
a. True
b. False
ANSWER: False
14. Theinternalrateofreturn(IRR)isthemostwidelyusedcapitalinvestmenttechniquebecauseitsaneasily
understoodconcept.
a. True
b. False
ANSWER: True

15. NPVrevealsthewealth-maximizationofaprojectmoreconsistentlythanIRR.
a. True
b. False
ANSWER: True
16. NPVispreferredtoIRRbecauseitassumesthateachcashinflowisnotreinvestedattherequiredrateofreturn.
a. True
b. False
ANSWER: False
17. WhenconflictingsignalsarereceivedfromusingNPVandIRR,NPValwaysproducesthecorrectsignaltoinvest
.
a. True
b. False
ANSWER: True
18. Computationofcashflowsisthemostcriticalstepinthecapitalinvestmentprocess.
a. True
b. False
ANSWER: True
19. thetwowaystocomputeafter-taxcashflowsaretheincomemethodandthecompositionmethod.
a. True
b. False
ANSWER: False
20. Intodaysmarkets,longterminvestmentsintechnologyandpollutionpreventioncanprovidesignificantcompetitive
advantages.
a. True
b. False
ANSWER: True
21. Capitalinvestmentdecisionsareconcernedwithplanning,settinggoals,arrangingfinancing,andtheselectionof
__________ assets.
ANSWER: long-term
22. Mutuallyexclusiveprojectsdonotaffectthe
ANSWER: cashflows

ofotherprojects.

23. The

rateofreturnusesincomeinsteadofcashflows.

ANSWER: accountingrate
24. The time required bya firm to recover itsoriginal investment is calledthe

period.

ANSWER: payback
25. Thedifferencebetweenthepresentvalueoffuturecashflowsandtheinitialinvestmentoutlayiscalledthe
__________ value.
ANSWER: netpresent
26. The required

isusedtocalculatethepresentvalueoffuturecashflows.

ANSWER: rateofreturn
27. The
cost.

rateofreturnsetsthepresentvalueofcashinflowsequaltothepresentvalueofaprojects

ANSWER: internal
28. NVPmeasuresthe

inafirmswealthcausedbyaproject.

ANSWER: increase
29. Acceleratedmethodsof

arepreferredbecauseofthetaxbenefitscreated.

ANSWER: Depreciation
30. Investmentoutlaysmaybeaffectedbysubstantialresourcesrequiredby

items.

ANSWER: peripheral
31.
Decisionsconcernedwiththeprocessofplanning,settinggoalsandpriorities,arrangingfinancing,andus
ingcertaincriteriatoselectlong-termassetsarecalled:
a. Limitedresources
b. Capitalinvestment
c. Sellnoworprocessfurther
d. Make-or-buy
ANSWER: b
32. ProjectsthatifacceptedorrejecteddoNOTaffectthecashflowsofprojectsarecalled:
a. Dependentprojects
b. Mutuallyexclusiveprojects
c. Independentprojects
d. Bothbandc

ANSWER: c
33. Projectsthat,ifacceptedprecludetheacceptanceofallothercompetingprojectsarecalled:
a. Mutuallyexclusiveprojects
b. Independentprojects
c. Dependentprojects
d. Bothbandc
ANSWER: a
34. Whichofthefollowingisanexampleofanindependentproject?
a. Amanufacturingplantconsideringamajoroverhaulofanexistingmachineorreplacingtheexistingmach
inewithanewmodel.
b. AhospitalconsideringthepurchaseofanewMRImachineandanewcardiacmonitoringsystem.
c. Abankdecidingbetweenkeepingamanualchecksortingprocessoranautomatedsortprocess.
d. Aretailerdecidingbetweenaninventorymanagementsystemofferedbytwodifferentvendors.
ANSWER: b
35. WhichofthefollowingisNOTanexampleofinformationthepaybackperiodcanprovidetomanagement?
a. Minimizetheimpactofaninvestmentonafirmsliquidityperformance.
b. Helpcontroltherisksassociatedwiththeuncertaintyoffuturecashflows.
c. Helpcontroltheriskofobsolescence.
d. Helpsdeterminetheprojectstotalprofitability.
ANSWER: d
36. Whencomparingthepaybackmethodandtheaccountingrateofreturnmethods,whichofthefollowingistrue?
Profitability
Ignoredbybothmethods

I
II
III
IV

TimeValueofMoney
Ignoredbybothmethods
Usedinaccountingrateofreturn,ignoredbypaybackmeth
od

Ignoredbybothmethods
Consideredbyaccountingmethod,notbypa
Ignoredbybothmethods
yback
Consideredbyaccountingmethod,notbypa
Consideredbybothmethods
yback

a. IV
b. III
c. II
d. I
ANSWER: b

37. Theaccountingrateofreturnonoriginalinvestmentiscalculatedas
a. originalinvestment/netincome.
b. netincome/debt.
c. averageincome/originalinvestment.
d. assets/debt.
ANSWER: c
38.
RentitAllManagementServicesisconsideringaninvestmentof$60,000.Datarelatedtotheinvestmenta
reasfollows:
Year
1
2
3
4
5

CashFlow
$20,000
24,000
30,000
40,000
20,000

Costofcapitalis18percent.
Whatisthepaybackperiodinyearsapproximatedtotwodecimalpoints,assumingnotaxesarepaid?
a.3.00
b. 2.53
c. 2.00
d. 2.22
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:2+($16,000/$30,000)=

39.

LanguevilleManufacturingCompanyisconsideringthefollowinginvestmentpr
oposal:

Originalinvestment
Operations(peryearforfouryears):

$13,500

Cashreceipts
Cashexpenditures

$10,000
5,500

Salvagevalueofequipmentafterfouryears
Discountrate

$1,000
10%

Thefirmusesthestraight-linemethodofdepreciationwithnomid-yearconvention.
Whatisthepaybackperiodinyearsapproximatedtotwodecimalpoints,assumingnotaxesarepaid?
a.1.75
b. 1.50
c. 3.0
d. 3.5
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$13,500/$4,500=3.0
40. AzimuthCompanywasconsideringthepurchaseofequipment.Detailsontheequipmentareasfollows:
Year
0
1
2
3
4
5
6

OriginalInvestment
$200,000

CashFlow
$40,000
40,000
60,000
40,000
60,000
30,000

Whatisthepaybackperiodinyears,assumingnotaxesarepaid?
a. 4.33
b. 4.00
c. 5.00
d. 3.85
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:4+($20,000/$60,000)=4.33

41. BeduinServicesisconsideringaninvestmentof$25,000.Datarelatedtotheinvestmentareasfollows:
Year
1
2
3
4
5

CashFlow
$10,000
11,000
8,000
15,000
15,000

Costofcapitalis14percent.
Whatisthepaybackperiodinyearsapproximatedtotwodecimalpoints,assumingnotaxesarepaid?
a.2.12
b. 4.00
c. 3.00
d. 2.50
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:2+($4,000/$8,000)=2.50
42.
AlbertoCompanyisconsideringthepurchaseofanewmachinefor$110,000.Themachinegeneratesann
ualrevenuesof$68,750andannualexpensesof$41,250,whichincludes$8,250ofdepreciation.Whatisthepayba
ckperiodinyearsonthemachineapproximatedtoonedecimalpoint?
a. 1.6
b. 1.7
c. 3.1
d. 4.0
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$110,000/($68,750-$41,250+$8,250)=3.1

Chapter 19: Capital Investment

43.
EvaristoCorporationisconsideringaninvestmentinequipmentfor$45,000.Datarelatedtotheinvestmentareasf
ollows:
CashFlowbefore
Year
DepreciationandTaxes
1
$30,000
2
30,000
3
30,000
4
30,000
5
30,000
Costofcapitalis18percent.
Evaristousesthestraight-linemethodofdepreciationwithnomidyearconvention.Inaddition,itstaxrateis40percent,andthelifeoftheequipmentisfiveyearswithnosalvagevalue.
Whatisthepaybackperiodinyearsapproximatedtotwodecimalpoints?a.1.00
b. 0.67
c. 1.50
d. 2.08
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:($30,0000.60)+($45,000/50.40)=$21,600
$45,000/$21,600=2.08
44.
MilagrosCompanyisconsideringaninvestmentinequipmentfor$60,000.Milagrosusesthestraightlinemethodofdepreciationwithnomidyearconvention.Inaddition,itstaxrateis40percentandthelifeoftheequipmentisfiveyearswithnosalvagevalue.Theexpecte
dincomebeforedepreciationandtaxesisprojectedtobe$30,000peryear.
Whatisthepaybackperiodinyearsapproximatedtotwodecimalpoints?a.4.00
b. 2.63
c. 2.00
d. 1.00
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Cashflow=($30,0000.60)+($60,000/5 0.40)=$22,800
$60,000/$22,800=2.63

Chapter 19: Capital Investment

45.
AnselmoCorp.isconsideringthepurchaseofanewmachinefor$76,000.Themachinewouldgenerateanannualca
shflowof$23,214forfiveyears.Attheendoffiveyears,themachinewouldhavenosalvagevalue.Thecompany'scostofcapi
talis12percent.Thecompanyusesstraight-linedepreciationwithnomid-yearconvention.
Whatisthepaybackperiodinyearsforthemachineapproximatedtotwodecimalpoints,assumingnotaxesarepaid?
a. 3.00
b. 3.27
c. 9.48
d. 4.00
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$76,000/$23,214=3.27
46.
JoyousCorporationisconsideringaninvestmentinequipmentfor$25,000.Datarelatedtotheinvestmentareasf
ollows:
CashFlowbefore
Year

DepreciationandTaxes

1
$12,500
2
12,500
3
12,500
4
12,500
Joyoususesthestraight-linemethodofdepreciationwithnomidyearconvention.Inaddition,itstaxrateis40percentandthelifeoftheequipmentisfouryearswithnosalvagevalue.Co
stofcapitalis12percent.
Whatisthepaybackperiodinyearsapproximatedtotwodecimalpoints?a.2.00
b. 2.50
c. 3.33
d. 0.40
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Cashflow=($12,5000.60)+($25,000/4 0.40)=$10,000
$25,000/$10,000=2.50

Chapter 19: Capital Investment

47. GunslingerCompanyisconsideringthepurchaseofpipecuttingequipment.Dataontheequipmentareasfollows:
Originalinvestment
Netannualcashinflow
Expectedeconomiclifeinyears
Salvagevalueattheendoffiveyears

$35,000
$8,000
5
$3,500

Thecompanyusesthestraight-linemethodofdepreciationwithnomid-yearconvention.
Whatistheaccountingrateofreturnonoriginalinvestmentroundedtothenearestpercent,assumingnotaxesarepaid?
a.22.86%
b.2.86%
c.18%
d.4.86%
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:{$8,000-[($35,000-$3,500)/5)]}/$35,000=4.86%
48.
MelancholyCompanyisconsideringthepurchaseofproductionequipmentthatcosts$800,000.Theequipmentis
expectedtogenerateanannualcashflowof$250,000andhaveausefullifeoffiveyearswithnosalvagevalue.Thefirm'scos
tofcapitalis12percent.Thecompanyusesthestraight-linemethodofdepreciationwithnomidyearconvention.Therearenoincometaxes.
Thepaybackperiodinyearsfortheprojectis
a. 3.20years.
b. 3.25years.
c. 2.90years.
d. 4.20years.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:$800,000/$250,000=3.2years
49.
Davidson,Inc.,isconsideringthepurchaseofproductionequipmentthatcosts$300,000.Theequipmentisexpectedt
ogenerateanannualcashflowof$100,000andhaveausefullifeoffiveyearswithnosalvagevalue.Thefirm'scostofcapitalis1
4percent.Thecompanyusesthestraight-linemethodofdepreciationwithnomid-yearconvention.Ignoreincometaxes.
Paybackfortheprojectis
a. 3.00years.
b. 3.50years.
c. 5.00years.
d. 2.38years.

Chapter 19: Capital Investment

ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:$300,000/$100,000=3years

Chapter 19: Capital Investment

50.
Aprojectrequiresaninvestmentof$40,000inequipment.Annualcashflowsof$8,000areexpectedtooccurforthe
nexteightyears.Nosalvagevalueisexpected.Thecompanyusesthestraight-linemethodofdepreciationwithnomidyearconvention.Ignoreincometaxes.
Theaccountingrateofreturnontheoriginalinvestmentfortheprojectis
a.6.25%.
b.7.50%.
c.16.00%.
d.20.00%.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:[$8,000-($40,000/8)]/$40,000=7.5%
51.
SpanielCompanyisconsideringthepurchaseofanewmachinefor$80,000.Themachinewouldgenerateanan
nualcashflowbeforedepreciationandtaxesof$28,778forfiveyears.Attheendoffiveyears,themachinewouldhaven
osalvagevalue.Thecompany'scostofcapitalis12percent.Thecompanyusesstraight-linedepreciationwithnomidyearconventionandhasa40percenttaxrate.
Whatistheaccountingrateofreturnontheoriginalinvestmentinthemachineapproximatedtotwodecimalpoints?
a.9.58%
b.19.17%
c.15.97%
d.35.97%
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:Netincome=($28,778-$16,000) 0.60=$7,666.80
$7,666.80/$80,000 =9.58%
52.
HollisterCompanyisconsideringthepurchaseofanewmachinefor$60,000.Themachinewouldgenerateana
nnualcashflowbeforedepreciationandtaxesof$25,647forfouryears.Attheendoffouryears,themachinewouldhave
nosalvagevalue.Thecompany'scostofcapitalis12percent.Thecompanyusesstraight-linedepreciationwithnomidyearconventionandhasa40percenttaxrate.
Whatistheaccountingrateofreturnontheoriginalinvestmentinthemachineapproximatedtotwodecimalpoints?
a.17.75%
b.

12%

c.10.65%
d.25.65%
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:NI=($25,647-$15,000) 0.60=$6,388.20
$6,388.20/$60,000 =10.65%

Chapter 19: Capital Investment

Chapter 19: Capital Investment

53. Whichofthefollowingmethodsusesincomeinsteadofcashflows?
a. payback
b. accountingrateofreturn
c. internalrateofreturn
d. netpresentvalue
ANSWER: b
54.
LosGatosShopisconsideringthepurchaseofausedwide-formatprintercosting$9,600.Thewideformatprinterwouldgenerateanetcashinflowof$4,000peryearforthreeyears.Attheendofthreeyears,theprinterwouldha
venosalvagevalue.Thecompany'scostofcapitalis10percent.Thecompanyusesstraight-linedepreciationwithnomidyearconvention.
Whatistheaccountingrateofreturnontheoriginalinvestmentinthepresstothenearestpercent,assumingnotaxesarepaid
?
a.8.33%
b.41.67%
c.75.00%
d.10.00%
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:[$4,000-($9,600/3)]/$9,600=8.33%
55.
Afirmisevaluatingaprojectthathasanetpresentvalueof$0whenadiscountrateof8percentisused.Adiscou
ntrateof6percentwillresultina
a. negativenetpresentvalue.
b. positivenetpresentvalue.
c. netpresentvalueof$0.
d. thequestioncannotbeansweredbasedupontheinformationprovided.
ANSWER: b
56. Ifthenetpresentvalueispositive,itcouldsignal
a. areturninexcessoftheinitialinvestmentorrequiredrateofreturnhasbeenreceived.
b. therequiredrateofreturnhasnotbeenachieved.
c. theinitialinvestmenthasnotbeenrecovered.
d. adecreaseinwealthforthefirm.
ANSWER: a

Chapter 19: Capital Investment

57.
Afirmisevaluatingaprojectthathasanetpresentvalueof$0whenadiscountrateof9percentisused.Adiscou
ntrateof7percentwillresultina
a. negativenetpresentvalue.
b. positivenetpresentvalue.
c. netpresentvalueof$0.
d. thequestioncannotbeansweredbasedupontheinformationprovided.
ANSWER: b
58.
SansariffCompanyinvestsinanewpieceofequipmentcosting$40,000.Theequipmentisexpectedtoyieldthefo
llowingamountsperyearfortheequipment'sfour-yearusefullife:
Cashrevenues
Cashexpenses
Depreciationexpenses(straight-line)
Incomeprovidedfromequipment
Costofcapital

$ 60,000
(32,000)
(10,000)
14%

Whatisthenetpresentvalueofthisinvestmentinequipment,assumingnotaxesarepaid?
a.
$(4,480)
b.
$52,452
c.
$41,592
d.
$81,592
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:NPV=($60,000-$32,000)2.914$40,000=$41.592(PVAFn=4,14%)
59.
AvionicsCorp.isconsideringthepurchaseofanewmachinefor$76,000.Themachinewouldgenerateanannualca
shflowof$23,214peryearforfiveyears.Attheendoffiveyears,themachinewouldhavenosalvagevalue.Thecompany'sco
stofcapitalis12percent.Thecompanyusesstraight-linedepreciationwithnomid-yearconvention.
Whatisthenetpresentvalueforthemachine,assumingnotaxesarepaid?a.$-0b.$7,686c.
$76,000
d.$(185,500)
ANSWER:

Chapter 19: Capital Investment

RATIONALE: SUPPORTINGCALCULATIONS:NPV=(3.605 $23,214)$76,000=$7.686(PVAFn=5,12%)

Chapter 19: Capital Investment

60. EdmundoServicesisconsideringaninvestmentof$25,000.Datarelatedtotheinvestmentareasfollows:
Year
1
2
3
4
5

CashFlow
$10,000
11,000
8,000
15,000
15,000

Costofcapitalis14percent.
Whatisthenetpresentvalueoftheinvestment,assumingnotaxesarepaid?a.$14,825
b.
$14,294
c.
$25,000
d.
$39,294
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:($10,0000.877)+($11,0000.769)+($8,0000.675)+
($15,0000.592)+($15,0000.519)-$25,000=$14.294
61.
LosGatosShopisconsideringthepurchaseofausedwide-formatprintercosting$9,600.Thewideformatprinterwouldgenerateanetcashinflowof$4,000peryearforthreeyears.Attheendofthreeyears,theprinterwouldha
venosalvagevalue.Thecompany'scostofcapitalis10percent.Thecompanyusesstraight-linedepreciationwithnomidyearconvention.
Whatisthenetpresentvalueforthepress,assumingnotaxesarepaid?a.$2,400
b.$9,948
c. $348d.
$9,600
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:NPV=($4,0002.487)$9,600=$348(PVAFn=3,10%)

Chapter 19: Capital Investment

62. SomozasManufacturingCompanyisconsideringthefollowinginvestmentproposal:
Originalinvestment

$12,500

Operations(peryearforfouryears):
Cashreceipts
Cashexpenditures
Salvagevalueofequipmentafterfouryears
Discountrate

$10,000
5,500
$1,000
12%

Thefirmusesthestraight-linemethodofdepreciationwithnomid-yearconvention.
Whatisthenetpresentvaluefortheinvestment,assumingnotaxesarepaid?a.$500
b.$1,500c.
$12,500
d.$1,802.50
ANSWER:
d
RATIONALE:
SUPPORTINGCALCULATIONS:NPV=[3.037(PVAFn=4,12%)$4,500]+[0.636(PVn=4,12
%)$1,000]-$12,500=$1,802.50
63.
Thepresentvalueof$10,000tobereceivedtenyearsfromnowandearninga12percentreturn(rounded)isa.
$2,200.
b.$2,484.
c.$3,160.
d.$3,220.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$10,0000.322(PVAF,n=10,12%)=$3,220

Chapter 19: Capital Investment

64. CanyonCompanyisconsideringaninvestmentof$45,000.Datarelatedtotheinvestmentareasfollows:
Year
1
2
3
4
5

CashFlow
$15,000
18,000
22,500
30,000
15,000

Costofcapitalis18percent.
Whatisthenetpresentvalueoftheinvestment,assumingnotaxesarepaid?a.
$10,500
b.
$55,500
c.
$61,366
d.
$16,367
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:($15,0000.847)+($18,0000.718)+($22,5000.609)+
($30,0000.516)+($15,0000.437)-$45,000=$16,367
65.
LaramieCorporationisconsideringaninvestmentinequipmentfor$20,000.Laramieusesthestraightlinemethodofdepreciationwithnomidyearconvention.Inaddition,itstaxrateis40percent,andthelifeoftheequipmentisfiveyearswithnosalvagevalue.Theexpect
edincomebeforedepreciationandtaxesisprojectedtobe$10,000peryear.Thecostofcapitalis20percent.
Whatisthenetpresentvalueoftheinvestment?a.
$(1,366)
b.$2,732c.
$22,991
d.
$22,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Cashflow=($10,0000.60)+
($20,000/50.40)=$7,600NPV=($7,6002.991)-$20,000=$2,731.60
(PVAFn=5,20%)

Chapter 19: Capital Investment

66.
MakeitRiteCompanyisconsideringthepurchaseofanewmachinefor$80,000.Themachinewouldgenerateana
nnualcashflowbeforedepreciationandtaxesof$28,778forfiveyears.Attheendoffiveyears,themachinewouldhavenos
alvagevalue.Thecompany'scostofcapitalis12percent.Thecompanyusesstraight-linedepreciationwithnomidyearconventionandhasa40percenttaxrate.
Whatisthenetpresentvalueforthemachine?a.$-0b.$5,318c.
$85,318
d.
$23,744
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Cashflow=($28,7780.60)+($80,000/50.40)=
$23,666.80NPV=($23,666.80 3.605)$80,000=$5,318(PVAFn=5,12%)
67.
Thepresentvalueof$10,000tobereceivedeachyearfortenyearsandearninga14percentreturn(rounded)isa.
$11,600.
b.$26,000.
c.$52,160.
d.$52,436.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$10,0005.216(PVAF,n=10,14%)=$52,160

Chapter 19: Capital Investment

68.
GalvestonCorporationisconsideringaninvestmentinequipmentfor$45,000.Datarelatedtotheinvestmentarea
sfollows:
CashFlowbefore
Year
DepreciationandTaxes1
$30,000
2 30,000
3 30,000
4 30,000
5 30,000
Costofcapitalis18percent.
Galvestonusesthestraight-linemethodofdepreciationwithnomidyearconvention.Inaddition,theirtaxrateis40percent,andthelifeoftheequipmentisfiveyearswithnosalvagevalue.
Whatisthenetpresentvalueoftheinvestment?
a.$67,543
b.$22,543
c.$48,810
d.$11,286
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Cashflow=($30,0000.60)+($45,000/5
0.40)=$21,600NPV=($21,6003.127)-$45,000=$22,543
(PVAFn=5,18%)
69.

Thepresentvalueof$7,500tobereceivedeachyearforfiveyearsandearningan10percentreturn(rounded)is

a.$28,433.
b.$8,250.
c.$14,717.
d.$33,750.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:$7,5003.791(PVAF,n=5,10%)=$28,432.50

Chapter 19: Capital Investment

70.
JacuzziCorporationisconsideringaninvestmentinequipmentfor$25,000.Datarelatedtotheinvestmentareasf
ollows:
CashFlowbefore
Year

DepreciationandTaxes1
$12,500

2 12,500
3 12,500
4 12,500
Jacuzziusesthestraight-linemethodofdepreciationwithnomidyearconvention.Inaddition,itstaxrateis40percent,andthelifeoftheequipmentisfouryearswithnosalvagevalue.Co
stofcapitalis12percent.
Whatisthenetpresentvalueoftheinvestment?a.
$5,370
b.
$(2,222)
c.
$12,962
d.
$30,370
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:Cashflow=($12,500 .60)+($25,000/4.40)=$10,000
$10,0003.037$25,000=$5,370(PVAFn=4,12%)
71.
ClementeCompanyisconsideringthepurchaseofanewmachinefor$160,000.Themachinewouldgenerateanan
nualcashflowbeforedepreciationandtaxesof$62,588forfouryears.Attheendoffouryears,themachinewouldhavenosa
lvagevalue.Thecompany'scostofcapitalis12percent.Thecompanyusesstraight-linedepreciationwithnomidyearconventionandhasa40percenttaxrate.
Whatisthenetpresentvalueforthemachine?a.
($45,952)
b.
$162,640
c.
$30,080d
.$2,640
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:Cashflow=($62,5880.60)+($160,000/40.40)=

Chapter 19: Capital Investment

$53,552.80NPV=($53,552.803.037)-$160,000=$2,640(PVAFn=4,12%)

Chapter 19: Capital Investment

72. ThefollowinginformationpertainstoaninvestmentbytheTownofSutton:
Investment
Annualrevenues
Annualvariablecosts
Annualfixedout-of-pocketcosts
Salvagevalue
Discountrate
Expectedlifeofproject

$140,000
$96,000
$32,000
$20,000
$12,000
12%
8years

Ignoreincometaxes.Thepresentvalueofthesalvagevalue(rounded)is
a.$5,738.
b.$4,848.
c.$6,228.
d.$6,448.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$12,0000.404(PVAF,n=8,12%)=$4,848
73.
Thepresentvalueof$20,000tobereceivedfiveyearsfromnowandearninga6percentreturn(rounded)isa.
$14,000.
b.
$14,940.
c.
$15,784.
d.
$16,420.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$20,0000.747(PVAF,n=5,6%)=$14,940

Chapter 19: Capital Investment

74. SpiritlightVenturesisconsideringthefollowinginvestment:
Investment
$140,000
Annualrevenues
$96,000
Annualvariablecosts
$32,000
Annualfixedout-of-pocketcosts
$20,000
Salvagevalue
$12,000
Discountrate
12%
Expectedlifeofproject
8years
Ignoreincometaxes.Thepresentvalueoftheannualcashflow(rounded)isa.
$218,592.
b.
$204,884.
c.
$152,538.
d.
$136,822.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:
Revenues
Less:
Variablecosts
Fixedout-of-pocketcosts
Annualcashflow
PVAF,n=8,12%
Presentvalue

$ 96,000
(32,000)
(20,000)
$ 44,000
4.968
$218,592

75.
Thepresentvalueof$4,000tobereceivedthreeyearsfromnowandearninga12percentreturn(rounded)isa.
$2,848.
b.$2,520.
c.$4,880.
d.$5,440.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:$4,0000.712(PVAF,n=3,12%)=$2,848
76.
Afirmisconsideringaprojectwithanannualcashflowof$200,000.Theprojectwouldhavea7yearlife,andthecompanyusesadiscountrateof10percent.Ignoringincometaxes,whatisthemaximumamountthecompan
ycouldinvestintheprojectandhavetheprojectstillbeacceptable?
a.$718,200b.
$1,400,000
c.

Chapter 19: Capital Investment

$973,600d.
$200,000
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$200,0004.868(PVAF,n=7,10%)=$973,600

Chapter 19: Capital Investment

77.
Afirmisconsideringaprojectwithanannualcashflowof$80,000.Theprojectwouldhavea10yearlife,andthecompanyusesadiscountrateof8percent.Ignoringincometaxes,whatisthemaximumamountthecompany
couldinvestintheprojectandhavetheprojectstillbeacceptable(rounded)?
a.
$800,000
b.
$536,800
c.
$406,420
d.
$727,208
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$80,0006.710(PVAF,n=10,8%)=$536,800
78. Thefollowinginformationpertainstoaninvestment:
Investment
Annualrevenues
Annualvariablecosts
Annualfixedout-of-pocketcosts
Salvagevalue
Discountrate
Expectedlifeofproject

$240,000
$140,000
$30,000
$22,000
$54,000
16%
3years

Ignoringincometaxes,thepresentvalueofthesalvagevalue(rounded)is
a.
$31,346.
b.
$34,614.
c.
$35,500.
d.
$46,440.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$54,0000.641(PVAF,n=3,16%)=$34,614
79. Thepresentvalueof$4,000tobereceivedeachyearforthreeyearsandearninga10percentreturn(rounded)is
a.
$11,120.
b.
$9,948.
c.$9,822.

Chapter 19: Capital Investment

d.$9,200.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$4,0002.487(PVAF,n=3,10%)=$9,948

Chapter 19: Capital Investment

80.
Acapitalinvestmentprojectrequiresaninvestmentof$100,000andhasanexpectedlifeoffouryears.Annualca
shflowsattheendofeachyearareexpectedtobeasfollows:
Year
1
2
3
4

Amount
$40,000
$48,000
$76,000
$56,000

Ignoringincometaxes,thenetpresentvalueoftheprojectusinga8percentdiscountrateis
a.$20,320b.
$49,680c.
($49,680)
d.($20,320)
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Investment
Presentvalueofcashflow:
Year1($40,0000.926)
Year2($48,0000.857)
Year3($76,0000.794)
Year4($56,0000.735)
Netpresentvalue

$(100,000)
37,040
41,136
60,344
41,160
$179,640

81.
VociferousCompanyisconsideringthepurchaseofproductionequipmentthatcosts$800,000.Theequipmentise
xpectedtogenerateanannualcashflowof$250,000andhaveausefullifeoffiveyearswithnosalvagevalue.Thefirm'scost
ofcapitalis12percent.Thestraight-linemethodwithnomid-yearconventionisused.
Ignoringincometaxes,thenetpresentvalueoftheprojectisa.
$80,960.
b.$97,250.c.
$108,900.
d.
$101,250.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Investment

$(800,000)

Presentvalueofcashflow($250,0003.605)(PVAFn=5,12%)
901,250Net present value

$ 101,250

Chapter 19: Capital Investment

82.
Afirmisconsideringaprojectwithanannualcashflowof$240,000.Theprojectwouldhavean8yearlife,andthecompanyusesadiscountrateof12percent.Ignoringincometaxes,whatisthemaximumamountthecompany
couldinvestintheprojectandhavetheprojectstillbeacceptable(rounded)?
a.$977,480b.
$1,125,228
c.
$1,160,582
d.
$1,192,320
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$240,0004.968(PVAF,n=8,12%)=$1,192,320
83. Theinternalrateofreturnisdefinedas
a. ablendofthecostsofcapitalfromallsources.
b. theminimalacceptableinterestrateoninvestments.
c. thedifferencebetweenthepresentvalueofthecashinflowsandoutflowsassociatedwithaproject.
d. theinterestratethatsetsthepresentvalueofaprojectscashinflowsequaltothepresentvalueofaprojectsc
ost.
ANSWER: d
84. Whichofthefollowingmethodsconsiderthetimevalueofmoney?
a. paybackandaccountingrateofreturn
b. paybackandinternalrateofreturn
c. internalrateofreturnandaccountingrateofreturn
d. internalrateofreturnandnetpresentvalue
ANSWER: d
85.
LindasGraphicDesignsisconsideringthepurchaseofausedcolorLaserPrintercosting$38,400.ThePrinterwould
generateanannualcashflowof$16,000forthreeyears.Attheendofthreeyears,thePrinterwouldhavenosalvagevalue.Thec
ompany'scostofcapitalis10percent.Thecompanyusesstraight-linedepreciationwithnomid-yearconvention.
WhatistheinternalrateofreturntothenearestpercentforthePrinter,assumingnotaxesarepaid?
a. 8%
b. 10%
c. 12%
d. 42%
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$38,400/$16,000=2.40,whichisthepvfactorforn=3,i

Chapter 19: Capital Investment

=$12%

Chapter 19: Capital Investment

86.
HeckrweeIndustriesisconsideringaprojectthatwouldrequireaninitialinvestmentof$101,000.Theprojectwouldre
sultincostsavingsof$62,000inyear1and$70,000inyear2.Theinternalrateofreturnis
a. under15%.
b. between16%and17%.
c. between18%and20%.
d. noneoftheabove.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
At18%,thetwodiscountfactorswouldbe.847and.718;($62,000.847)+($70,000.718)=
$102,774
At20%,thetwodiscountfactorswouldbe.833and.694;($62,000.833)+($70,000.694)=
$100,226
87.
UrsulaCompanyisconsideringthepurchaseofanewmachinefor$160,000.Themachinewouldgenerateanann
ualcashflowbeforedepreciationandtaxesof$62,588forfouryears.Attheendoffouryears,themachinewouldhavenosa
lvagevalue.Thecompany'scostofcapitalis12percent.Thecompanyusesstraight-linedepreciationwithnomidyearconventionandhasa40percenttaxrate.
Whatistheinternalrateofreturnforthemachineroundedtothenearestpercent?
a. below12%
b. between16and18%
c. between14and16%
d. between12and14%
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:
Cashflow=($62,5880.60)+($160,000/40.40)=$53,552.80
$160,000/$53,552.80=2.988,whichisthepvfactorforn=4andibetween12and14%
88.
ChinchillaCompanyisconsideringthepurchaseofanewmachinefor$57,000.Themachinewouldgenerateanannu
alcashflowof$18,228forfiveyears.Attheendoffiveyears,themachinewouldhavenosalvagevalue.Thecompany'scostofc
apitalis12percent.Thecompanyusesstraight-linedepreciationwithnomid-yearconvention.
Whatistheinternalrateofreturnforthemachineroundedtothenearestpercent,assumingnotaxesarepaid?a.12%
b. 18%
c. 14%
d. 16%

Chapter 19: Capital Investment

ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$57,000/$18,228=3.127,whichisthepvfactorforn=5,i
=$18%

Chapter 19: Capital Investment

89.
Afirmisconsideringaprojectrequiringaninvestmentof$200,000.Theprojectwouldgenerateanannu
alcashflowof$55,478forthenextfiveyears.Thecompanyusesthestraightlinemethodofdepreciationwithnomidyearconvention.Ignoreincometaxes.Theapproximateinternalrateofreturnfortheprojectis
a. 9%.
b. 10%.
c. 12%.
d. 16%.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$200,000/$55,478=3.605PVAFof3.605,n=5,corresponds
to$12%
90.
CallendulaCompanyisconsideringthepurchaseofanewmachinefor$80,000.Themachinewouldgen
erateanannualcashflowbeforedepreciationandtaxesof$28,778forfiveyears.Attheendoffiveyears,themachi
newouldhavenosalvagevalue.Thecompany'scostofcapitalis12percent.Thecompanyusesstraightlinedepreciationwithnomid-yearconventionandhasa40percenttaxrate.
Whatistheinternalrateofreturnforthemachineroundedtothenearestpercent?
a. between16and18%
b. between14and16%
c. between12and14%
d. below12%
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:
Cashflow=($28,7780.60)+($80,000/50.40)=$23,666.80
$80,000/$23,666.80=3.380,whichisthepvfactorforn=5andibetween14and16%
91.
Afirmisconsideringaprojectrequiringaninvestmentof$27,000.Theprojectwouldgenerateanannualcas
hflowof$6,296forthenextsevenyears.Thecompanyusesthestraight-linemethodofdepreciationwithnomidyearconvention.Ignoreincometaxes.Theapproximateinternalrateofreturnfortheprojectis
a. 6%.
b. 8%.
c. 12%.
d. 14%.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$27,000/$6,296=4.288PVAFof4.288,n=7,corresponds
to$14%

Chapter 19: Capital Investment

Chapter 19: Capital Investment

92.
Whichofthefollowingcapitalinvestmentmodelswouldbepreferredwhenchoosingamongmutually
exclusivealternatives?
a. paybackperiod
b. accountingrateofreturn
c. IRR
d. NPV
ANSWER: d
93. Fivemutuallyexclusiveprojectshadthefollowinginformation:

NPV
IRR

V
$(6,000)
8%

W
$40,000
11%

X
$30,000
13%

Y
$10,000
10%

Z
$20,000
12%

Whichprojectispreferred?
a. ProjectV
b. ProjectW
c. ProjectX
d. ProjectY
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Project W,becauseithasthehighestNPV.
94. NPVdiffersfromIRR:
a. NPVmeasuresprofitabilityinabsoluteterms,whereastheIRRmethodmeasuresprofitabilityinrelativeterms.
b. IRRshouldbeusedforchoosingamongcompeting,mutuallyexclusiveprojects.
c. NPVconsidersthetimevalueofmoneyandIRRdoesnot.
d. BothNPVandIRRwillgeneratethesamedecisions.
ANSWER: a
95. Fivemutuallyexclusiveprojectshadthefollowinginformation:

NPV
IRR

A
$200
11%

Whichprojectispreferred?
a. ProjectA
b. ProjectB
c. ProjectC
d. ProjectD

B
$400
13%

C
$2,000
10%

D
$1,000
12%

E
$(400)
8%

Chapter 19: Capital Investment

ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS: Project C,becauseithasthehighestNPV.

Chapter 19: Capital Investment

96. Afirmisconsideringtwomutuallyexclusiveprojectswiththefollowingcashflows:
ProjectX ProjectY
Year1

$40,000 $120,000

Year2

80,000

80,000

Year3

120,000

40,000

Eachprojectrequiresaninvestmentof$100,000.Thecostofcapitalis10percent.
Whichprojectwillhavethehighernetpresentvalue?
a. Projec
tX
b. Project
Y
c. ProjectXandProjectYwillhavethesamenetpresentvalue.
d. Itisnotpossibletoanswerthequestionbasedupontheinformationprovided.
ANSWER:
b
RATIONALE: ProjectYwillhavethegreaternetpresentvaluebecauseitwillreceivealargeramount,$120,000,inyear
onewhereasProjectXwillnotreceivethe$120,000untilyear3.
97.
MacadamiaCompanyisconsideringaninvestmentinequipmentfor$55,000.Chocolateusesthestraightlinemethodofdepreciationwithnomidyearconvention.Inaddition,itstaxrateis40percent,andthelifeoftheequipmentisfiveyearswithnosalvagevalue.Theexp
ectedincomebeforedepreciationandtaxesisprojectedtobe$30,000peryear.
WhatistheannualcashflowforYear1?a.
$33,000
b.
$18,000
c.
$22,000
d.
$22,400
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:($30,0000.60)+($55,000/50.40)=$22,400
98.
Ifthetaxrateis40percentandacompanyhas$800,000ofincome,adepreciationdeductionof$100,000wouldres
ultinataxsavingsof
a.
$34,000.
b.

Chapter 19: Capital Investment

$40,000.
c.
$30,000.
d.
$66,000.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$100,00040%=$40,000

Chapter 19: Capital Investment

99.
Amachinewithabookvalueof$60,000couldbesoldfor$80,000.Thecorporationthatownsthemachinehastax
ableincomeof$670,000anda40percenttaxrate.Whatwouldbethetaxonthesaleofthemachine?
a. $
0
b.
$20,000
c.
$12,000
d.
$8,000
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:($80,000-$60,000)0.40=$8,000
100.
Ifthetaxrateis40percentandacompanyhas$800,000ofincome,adepreciationdeductionof$160,000wouldres
ultinataxsavingsof
a.
$105,600.
b.
$96,000.c
.
$64,000.d
.$54,400.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$160,00040%=$64,000
101.
llows:

Year
1
2
3
4

MonocleCorporationisconsideringaninvestmentinequipmentfor$50,000.Datarelatedtotheinvestmentisasfo

CashFlowbefore
DepreciationandTaxes
$25,000
25,000
25,000
25,000

Monocleusesthestraight-linemethodofdepreciationwithnomidyearconvention.Inaddition,itstaxrateis35percentandthelifeoftheequipmentisfouryearswithnosalvagevalue.Cost
ofcapitalis12percent.

Chapter 19: Capital Investment

WhatistheannualcashflowforYear1?a.
$15,375
b.
$20,625
c.
$25,625
d.
$6,000
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:Cashflow=($25,0000.65)+[($50,000/4)0.35]
=$20,625

Chapter 19: Capital Investment

102.
Acorporationwithtaxableincomeof$400,000anda40percenttaxrateisconsideringthesaleofanasset.Theorigina
lcostoftheassetis$20,000,with$12,000ofitdepreciated.Howmuchtotalaftertaxcashwillbeproducedfromthesaleoftheassetfor$24,000?
a.
$17,600
b.
$24,000
c.
$22,400
d.
($6,400)
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:Taxes=($24,000-$8,000)0.40=$6,400Cashflow=
$24,000 -$6,400=$17,600
103.
BodaciousCompanyisconsideringthepurchaseofanewmachinefor$80,000.Themachinewouldgenerateana
nnualcashflowbeforedepreciationandtaxesof$28,778forfiveyears.Attheendoffiveyears,themachinewouldhavenos
alvagevalue.Thecompany'scostofcapitalis12percent.Thecompanyusesstraight-linedepreciationwithnomidyearconventionandhasa40percenttaxrate.
Whatistheannualnetafter-taxcashflow(rounded)?a.
$23,667
b.$8,633c.
$6,400d
.
$28,778
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:($28,7780.60)+[($80,000/5)0.40]=$23,667
104.
ClementineCompanyisconsideringthepurchaseofanewmachinefor$160,000.Themachinewouldgenerateana
nnualcashflowbeforedepreciationandtaxesof$62,588forfouryears.Attheendoffouryears,themachinewouldhavenosal
vagevalue.Thecompany'scostofcapitalis12percent.Thecompanyusesstraight-linedepreciationwithnomidyearconventionandhasa40percenttaxrate.
Whatistheannualnetafter-taxcashflowperyear?a.
$62,588
b.
$53,553
c.
$37,552
d.
$16,000

Chapter 19: Capital Investment

ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:($62,5880.60)+[($160,000/4)0.40]=$53,553

Chapter 19: Capital Investment

105.
VendomeCompanyisconsideringthepurchaseofthefollowingcomputerequipment,whichisconsidered5yearpropertyfortaxpurposes:
Acquisitioncost
Annualcashflow
Annualoperatingcosts
Expectedsalvagevalue
Costofcapital
Taxrate

$500,000
$180,000
$30,000
$-012%
40%

VendomeplanstouseMACRSandkeeptheproductionequipmentforsevenyears.(Roundamountstodollars.)
TheMACRSdeductioninYear2wouldbea.
$172,000.
b.
$160,000.
c.
$170,000.
d.
$140,000.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$500,00032%=$160,000
106.
VendomeCompanyisconsideringthepurchaseofthefollowingcomputerequipment,whichisconsidered5yearpropertyfortaxpurposes:
Acquisitioncost
Annualcashflow
Annualoperatingcosts
Expectedsalvagevalue
Costofcapital
Taxrate

$500,000
$180,000
$30,000
$-012%
40%

VendomeplanstouseMACRSandkeeptheproductionequipmentforsevenyears.(Roundamountstodollars.)
ThetaxsavingsfromdepreciationinYear3wouldbea.
$38,400.
b.
$28,570.
c.
$71,428.

Chapter 19: Capital Investment

d.
$96,000.
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:$500,00019.20%40%=$38,400

Chapter 19: Capital Investment

107.
ColorformCompanyisconsideringthepurchaseofthefollowingcomputerequipment,whichisconsidered5yearpropertyfortaxpurposes:
Acquisitioncost
Annualcashflow
Annualoperatingcosts
Expectedsalvagevalue
Costofcapital
Taxrate

$400,000
$140,000
$20,000
0
10%
40%

ColorformCompanyplanstouseMACRSandkeeptheproductionequipmentforsevenyears.(Roundamountsto
dollars.)
TaxsavingsfromdepreciationinYear3wouldbea.
$54,400.
b.
$30,720.
c.
$22,856.
d.
$35,360.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$400,00019.2%40%=$30,720
108. InformationaboutaprojectWunderbarCompanyisconsideringisasfollows:
Investment
Revenues
Variablecosts
Fixedout-of-pocketcosts
Costofcapital
Taxrate

$600,000
$380,000
$100,000
$50,000
8%
40%

Thepropertyisconsidered5-yearpropertyfortaxpurposes.ThecompanyplanstouseMACRSanddisposeofthe
propertyattheendofthesixthyear;nosalvagevalueisexpected.Assumeallcashflowsoccurattheendoftheyear.Roundam
ountstodollars.
ThetaxsavingsfromdepreciationinYear2wouldbea.
$48,000.
b.
$64,800.

Chapter 19: Capital Investment

c.
$82,400.
d.
$76,800.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$600,00032%40%=$76,800

Chapter 19: Capital Investment

109.
Underthecurrenttaxlaw,anassetthatisclassifiedas7yearpropertyandhasacostof$400,000wouldresultinadepreciationdeductioninYear3of
a.
$97,920.
b.
$69,960.
c.
$66,667.
d.
$57,140.
ANSWER:
b
RATIONALE: SUPPORTINGCALCULATIONS:$400,00017.49%=$69,960
110.
Underthecurrenttaxlaw,anassetthatisclassifiedas5yearpropertyandhasacostof$200,000wouldresultinadepreciationdeductioninYear2of
a.
$40,000.
b.
$50,000.
c.
$64,000.
d.
$38,400.
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:$200,00032%=$64,000
111. InformationaboutaprojectDalwhinnieCompanyisconsideringisasfollows:
Investment
Revenues
Variablecosts
Fixedout-of-pocketcosts
Costofcapital
Taxrate

$1,500,000
$700,000
$140,000
$80,000
12%
40%

Thepropertyisconsidered5-yearpropertyfortaxpurposes.ThecompanyplanstouseMACRSanddisposeofthe
propertyattheendofthesixthyear.Nosalvagevalueisexpected.Assumeallcashflowsoccurattheendoftheyear.Roundamount
stodollars.
ThetaxsavingsfromdepreciationinYear2wouldbea.
$80,000.
b.
$284,000.

Chapter 19: Capital Investment

c.
$217,800.
d.
$192,000.
ANSWER:
d
RATIONALE: SUPPORTINGCALCULATIONS:$1,500,00032%40%=$192,000

Chapter 19: Capital Investment

112.
BellamyCompanyisconsideringthepurchaseofacomputerizedmanufacturingsystem.Theaftertaxcashbenefits/savingsassociatedwiththesystemareasfollows:
Decreasedwaste
Increasedquality
Decreaseinoperatingcosts
Increaseinon-timedeliveries

$300,000
400,000
600,000
200,000

Thesystemwillcost$9,000,000andwilllasttenyears.Thecompany'scostofcapitalis12percent.
Whatisthepaybackperiodforthecomputerizedmanufacturingsystem?
a. 6.00years
b. 10.00years
c. 11.25years
d. 15.00years
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:Paybackperiod=$9,000,000/$1,500,000=$6.00years
113.
BellamyCompanyisconsideringthepurchaseofacomputerizedmanufacturingsystem.Theaftertaxcashbenefits/savingsassociatedwiththesystemareasfollows:
Decreasedwaste
Increasedquality
Decreaseinoperatingcosts
Increaseinon-timedeliveries

$300,000
400,000
600,000
200,000

Thesystemwillcost$9,000,000andwilllasttenyears.Thecompany'scostofcapitalis12percent.
WhatistheNPVforthecomputerizedmanufacturingsystem?a.
($525,000)
b.
($5,610,000)
c.
$8,475,000d.
$9,000,000
ANSWER:
a
RATIONALE: SUPPORTINGCALCULATIONS:(5.650$1,500,000)-$9,000,000=$(525,000)(PVAFn=10,12%)

Chapter 19: Capital Investment

114.
BellamyCompanyisconsideringthepurchaseofacomputerizedmanufacturingsystem.Theaftertaxcashbenefits/savingsassociatedwiththesystemareasfollows:
Decreasedwaste
Increasedquality
Decreaseinoperatingcosts
Increaseinon-timedeliveries

$300,000
400,000
600,000
200,000

Thesystemwillcost$9,000,000andwilllasttenyears.Thecompany'scostofcapitalis12percent.
WhichofthefollowingbestdescribestheIRRforthisproject?
a. between14and16%
b. between12and14%
c. between10and12%
d. between8and10%
ANSWER:
c
RATIONALE: SUPPORTINGCALCULATIONS:
$9,000,000/$1,500,000=6.000,whichisthepvfactorforn=10,andis
greaterthan10%,butlessthan12%.
115. Apostauditcompares
a. estimatedbenefitsandcostswithbudgetedbenefitsandcosts.
b. estimatedbenefitswithestimatedcosts.
c. actualbenefitswithactualcosts.
d. actualbenefitsandcostswithestimatedbenefitsandcosts.
ANSWER: d
116.
Explainwhatacapitalinvestmentdecisionis.Inyouranswer,distinguishbetweenindependentandmutually
exclusivecapitalinvestmentdecisions.
ANSWER:
Capitalinvestmentdecisionsareconcernedwiththeprocessofplanning,settinggoalsandpriorities,arrangingfi
nancing,andusingcertaincriteriatoselectlong-termassets.
Independentprojectsareprojectsthat,ifacceptedorrejected,donotaffectthecashflowsofotherprojects.
Mutuallyexclusiveprojectsarethoseprojectsthat,ifaccepted,precludetheacceptanceofallothercompetingpr
ojects.

Chapter 19: Capital Investment

117.
Acapitalinvestmentprojectrequiresaninvestmentof$450,000.Ithasanexpectedlifeofsixyearswithanannualcas
hflowof$90,000receivedattheendofeachyear.Thecompanyusesthestraight-linemethodofdepreciationwithnomidyearconvention.Ignoreincometaxes.
Required:
a. Computepaybackfortheproject.
b. Computethenetpresentvalueoftheprojectusinga12percentdiscountrate.
c. Wouldyourecommendthisprojectbeaccepted?Whyorwhynot?
ANSWER:
a. 5years=$450,000/$90,000
b. NPVusinga12percentdiscountrate:
Investment
Presentvalueofcashflow($90,000 4.111)

$(450,000)

369,990Net present value

$(80,010)

No,theprojectshouldnotbeaccepted.Althoughthepaybackperiodoffivey
earsislessthantheexpectedlifeoftheproject,the
c. NPVisnegative,indicatingtheproject'sreturnislessthan12percent.TheIR
Risapproximately5.5percent,whichismuch
lowerthanthedesiredreturnof12percent;therefore,theprojectshouldberejecte
d.

118. Fill in thelettered blanksin the followingtable:

Amountofinvestment
Economiclifeinyears
Annualcashflow
Paybackperiodinyears
Presentvalueofcashflows
Netpresentvalue

InvestmentA
$80,000
10
$10,000
(c)
(e)
$5,500

ANSWER:
a. $66,000 -$6,000=$60,000b.
$60,000/4=$15,000
c. $80,000/$10,000=8d.
$20,000/$2,500=8

InvestmentB
(a)
5
(b)
4
$66,000
$6,000

InvestmentC
$20,000
8
$2,500
(d)
(f)
($1,000)

Chapter 19: Capital Investment

e. $80,000 + $5,500 =$85,500f.
$20,000 -$1,000=$19,000

Chapter 19: Capital Investment

119.
ollowingpredictedcashflows:

AbsentiaCompanyisevaluatingacapitalexpenditureproposalthathasthef

Originalinvestment

$45,000

Cashflow:
Year1
Year2
Year3

$17,500
25,000
15,000

Salvagevalue

-0-

Discountrate
Required:

14%

Determinethefollowingvalues:
a. Netpresentvalueoftheinvestment
b. Proposal'sinternalrateofreturn
c. Paybackperiod
ANSWER:
a. PeriodPresentValue
CashF
low
Prese
ntVal
ueFac
tor
1 $17,500

0.877

$15,347.50

2 25,000

0.769

19,225.00

3 15,000

0.675

10,125.00

Totalpresentvalue

$44,697.50

Lessoriginalinvestment

45,000.00

Net present value

b. Approximately14%

$ (302.50)

Chapter 19: Capital Investment

c. 2+ $2,500/$15,000 =2.167years

120.
WastenotProductionCompanyisconsideringthepurchaseofaflexiblemanufacturingsystem.Theafte
r-taxcashbenefits/savingsassociatedwiththesystemareasfollows:
Decreasedwaste
Increasedquality
Decreaseinoperatingcosts
Increaseinon-timedeliveries

$ 82,500
110,000
68,750
13,750

Thesystemwillcost$825,000andwilllasttenyears.
Thecompany'scostofcapitalis10percent.
Required:
a. Whatisthepaybackperiodfortheflexiblemanufacturingsystem?
b. WhatistheNPVfortheflexiblemanufacturingsystem?
c. WhatistheIRRfortheflexiblemanufacturingsystem?
ANSWER:
a. $825,000/$275,000=3 years
b. 6.145$275,000 - $825,000 =$864,875(PVAFn=10,10%)
c.
$825,000/$275,000=3.000,whichisthepresentvaluefactorforn=10,andtheinterestrateiss
lightlygreaterthan30%.
121.

BertramCorporationisconsideringaninvestmentinequipmentfor$150,0
00.
Datarelatedtotheinvestmentareasfollows:
Incomebefore
Year
DepreciationandTaxes
1
$60,000
2
60,000
3
60,000
4
60,000
5
60,000
Costofcapitalis10percent.
Bertramusesthestraight-linemethodofdepreciationwithmidyearconventionfortaxpurposes.Inaddition,itstaxrateis40percentandthedepreciablelifeoftheequipmentisfo
uryearswithnosalvagevalue.Theequipmentissoldattheendofthefifthyear.
Required:
Determinethefollowingamountsusingafter-taxcashflows:
a. Paybackperiod

b. Accountingrateofreturnonoriginalinvestmentsforeachyear
c. Netpresentvalue

ANSWER:
Years
1 2
Incomebefore
deprec.andtaxes
Less:Depreciation
Pretaxincome
Incometaxes
Netincome
Add:Depreciation
Cashflow

a.

$60,000
18,750
$41,250
16,500
$24,750
18,750
$43,500

3
$60,000
37,500
$22,500
9,000
$13,500
37,500
$51,000

Cumulative
CashFlow
$43,500
51,000
51,000
51,000

Year
1
2
3
4

$60,000
37,500
$22,500
9,000
$13,500
37,500
$51,000

$60,000
37,500
$22,500
9,000
$13,500
37,500
$51,000

Investment
CashFlow
$ 43,500
94,500
145,500

$60,000
18,750
$41,250
16,500
$24,750
18,750
$43,500

YettoRecover
$106,500
55,500
4,500

Paybackperiod=3+($4,500/$51,000)=3.09years
b. Years1and5:$24,750/$150,000=16.5%
Years2,3and4:$13,500/$150,000=9.0%
c. Period
0
1
2
3
4
5
Netpresentvalue

CashFlow PVFactor
$(150,000)
43,500
51,000
51,000
51,000
43,500

PresentValue
1.000
0.909
0.826
0.751
0.683
0.621

$(150,000.00)
39,541.50
42,126.00
38,301.00
34,833.00
27,013.50
$ 31,815.00

122.
MissoulaOfficeServicesisconsideringthepurchaseofanewservertoreplacetheoneinoperation.Data
onthenewserverareasfollows:
Cost
Salvagevalueattheendoffiveyears
Usefullife,inyears
Annualoperatingcost

$12,000
$1,000
5
$4,000

Iftheexistingserveriskeptandused,itwouldrequirethepurchaseofadditionalhardwareayearfromnow
costing$2,000.Aftertheuseoftheserverforfiveyears,thesalvagevaluewouldbe$300.Additionalinformationon
theexistingsystemisasfollows:
Additionalyearsofuse
Annualoperatingcosts
Remainingbookvalue
Currentsalvagevalue
Costofcapital

5
$9,000
$12,000
$3,000
12%

Thecompanyusesthestraight-linemethodofdepreciationwithnomid-yearconvention.
Required:
Shouldthenewserverbepurchased?Whyorwhynot?
ANSWER:
Period
0
0
1

Present
Cash Flow
$(12,000)
3,000
2,000

1-5
5
Net present value of
new server

New Computer
Value Factor
1.000
1.000
0.893

Server
$(12,000)
3,000
1,786

5,000

3.605

18,025

700

0.567

397

Comment
Outlay cost
Salvage of old
Purchase of
hardware avoided
Lower operating
costs
Difference in
salvage value

$ 11,208

Positivenetpresentvalueindicatesthatthenewserverreturnsaregreaterthanthecompany'scostofcapital.Buythe
newserver.

123.
SantanderCompanyisconsideringaprojectthatrequiresaninvestmentof$700,000.Theprojectisexpec
tedtogenerateanannualcashflowof$280,000forsixyears.Thecashflowwouldbereceivedattheendofeachyear
.
Theassetisconsidered5yearpropertyfordepreciationpurposesandwouldbedisposedofattheendofthesixthyear,atwhichtimeitisexp
ectedtohavenosalvagevalue.ThecompanyplanstouseMACRS.
Assumethecostofcapitalis12percentandtheincometaxrateis40percent.
Required:
a. Determinethenetpresentvalueoftheasset.(Roundamountstodollars.)
b. Stateyourrecommendationtothemanagementofthecompany.
ANSWER:
a.
Investment

0
$(700,000)

Cash flow
after taxes
($280,000 60%)
Tax savings
depreciation *
Net cash flow
after taxes
PV factors, 12%
Present values
NPV

897,493
$197,493

$168,000

$168,000

$168,000

$168,000

56,000

89,600

53,760

32,256

$224,000

$257,600

$221,760

$200,256

0.893
$200,032

0.797
$205,307

0.712
$157,893

0.636
$127,363

>
>
>
>
>
>
>
>
>
>
>
>
>
>
>

<
<
<
<
<
<
<
<
<
<
<
<
<
<

$168,000

$168,000

32,256

16,128

$200,256

$184,128

0.567
0.507
$113,545
$ 93,353
*Taxsavingsfromdepreciation:
Year1:$700,00020.00%=$140,00040%
=$56,000Year2:$700,00032.00%=$224,00040%
=$89,600Year3:$700,00019.20%=$134,40040%
=$53,760Year4:$700,00011.52%=$80,64040%
=$32,256Year5:$700,00011.52%=$80,64040%
=$32,256Year6:$700,0005.76%=$40,32040%
=$16,128
b. Recommendation:Accept

124.
MarionDexterCompanyisevaluatingaproposaltopurchaseanewmachinethatwouldcost$100,000andhave
asalvagevalueof$10,000infouryears.Itwouldprovideannualoperatingcashsavingsof$10,000,asfollows:
OldMachine NewMachine
Salaries
$40,000
$36,000
Supplies
7,000
5,000
Maintenance
9,000
5,000
Total
$56,000
$46,000
Ifthenewmachineispurchased,theoldmachinewillbesoldforitscurrentsalvagevalueof$20,000.Ifthenewmachineisn
otpurchased,theoldmachinewillbedisposedofinfouryearsatapredictedsalvagevalueof$2,000.Theoldmachine'sp
resentbookvalueis$40,000.Ifkept,inoneyeartheoldmachinewillrequirerepairspredictedtocost$35,000.
MarionDexter'scostofcapitalis14percent.
Required:
Shouldthenewmachinebepurchased?Whyorwhynot?
ANSWER:
Present
Period
0
0
1
1-4
4
Net present value of
new machine

Cash Flow
$100,000
20,000
35,000
10,000

Value Factor
1.000
1.000
0.877
2.914

New Machine
$(100,000)
20,000
30,695
29,140

8,000

0.592

4,736

Comment
Outlay cost
Salvage of old
Repairs avoided
Lower operating
costs
Difference in
salvage value

$(15,429)

Negativenetpresentvalueindicatesthatthenewmachinereturnsarelessthanthecompany'scostofcapital.Donotbuyth
enewmachine.

125.
LocalConstructionCompanyisconsideringthepurchaseofabulldozerfor$280,000.Theexpectedlifeisfouryea
rs.ThecompanyiscomparingthedepreciationtaxshieldusingMACRSversusthestraightlinemethod.IfMACRSisused,theMACRSlifeisthreeyearswithadepreciationrateof200percentannually.Regardless
ofthemethodofdepreciationused,themidyearconventionwillbeobserved.Thecompany'staxrateis40percent.Thestraight-linemethodassumesmidyearconvention,andthecostofcapitalis14percent.
Required:(Roundallcalculationstothenearestdollar.)
a. CalculatethetaxsavingsfromdepreciationforeachyearusingboththeMACRSandstraightlinemethods.
b. Calculatethepresentvalueofthetaxsavingsforbothdepreciationmethods.
c. Whichmethodshouldbeusedtominimizethefirm'staxliability?Why?
ANSWER: a.MACRS:
Depreciation
Base

Year
1
2
3
4

$280,000
280,000
280,000
280,000

Depreciation
Rate

Annual
Depreciation

Tax
Rate

0.3333

$ 93,324
0.4445124,460
0.1481
41,468
0.0741
20,748
$280,000

Tax
Saving
0.40 $ 37,330
0.40 49,784
0.40 16,587
0.40
8,299
$112,000

Straight-line:

Year
1
2
3
4
5

Depreciation
Base
$280,000
280,000
280,000
280,000
280,000

b.
Year
1
2
3
4
5
c.

Present
Value
Factor
0.877
0.769
0.675
0.592
0.519

Depreciation
Rate
0.125
0.250
0.250
0.250
0.125

Annual
DepreciationRate
$ 35,000
70,000
70,000
70,000
35,000
$280,000

MACRS Rates
Present
Tax
Value of
Savings
Tax Svgs.
$ 37,330
$32,738
49,784
38,284
16,587
11,196
8,299
4,913
-0-0$112,000
$87,131

Tax
0.40
0.40
0.40
0.40
0.40

Tax
Saving
$ 14,000
28,000
28,000
28,000
14,000
$112,000
Straight-Line Rates
Present
Tax
Value of
Savings
Tax Svgs.
$ 14,000
$12,278
28,000
21,532
28,000
18,900
28,000
16,576
14,000
7,266
$112,000
$76,552

The present value of tax savings using MACRS rates is greater than the present value of tax
savings for the straight-line rates. Therefore, the company should use MACRS rates in order to
minimize taxes.

126.
Whatarethedifferencesthataffectcapitalinvestmentdecisionsregardingadvancedtechnologyandenvironmen
talconsiderations?
ANSWER:
Althoughdiscountedcashflowanalysisremainsnecessaryincapitalinvestmentdecisionsinvolvingadvancet
echnologyorP2opportunities,moreattentionmustbepaidtotheinputsusedindiscountedcashflowmodels.H
owinvestmentisdefined,howoperatingcashflowsareestimated,howsalvagevalueistreatedandhowthedis
countrateischosenarealldifferentfromatraditionalapproach.Forautomatedmanufacturing,amorepredomi
nantportionoftheinitialinvestmentrelatestoperipheralcostssuchassoftwareprograms,engineering,trainin
gandimplementation.Theseperipheralscanbemoredifficulttoestimateandeasytooverlook.Estimatingope
ratingcashflowsisamorecomplexsituationbecausethesavingsarenotasreadilyavailable.Manytimescosts
arehiddeninothercostsorburiedinoverhead.Salvagevalueanddiscountratesalsochangebetweenatradition
alcapitalinvestmentanalysisandcapitalanalysisforadvancedtechnologyorenvironmentalconsiderations.S
alvagevalueestimatesareimportantandcouldspellthedifferencebetweeninvestingornotinvestinginaparti
cularproject.Beingoverconservativewithdiscountratesisalsodamaging.Excessivelyhighdiscountratesbiasdecisionstowardsshor
t-terminvestments.

Chapter 20
1. Effectiveinventorymanagementconservesinvestmentcapitalandfacilitatesresponsetocustomerdemands.
a. True
b. False
ANSWER: True
2. Just-in-caseinventorymanagementisatraditionalinventorymodelbasedonawait-until-neededdemand.
a. True
b. False
ANSWER: False
3. Orderingcostsarecostsofplacingandreceivinganorderandsetupcostsarethecostsofgettingequipmentandfacilitiestopr
oduceproducts.
a. True
b. False
ANSWER: True
4. Effectiveinventorymanagementdoesnotconsiderinventory-relatedcosts.
a. True
b. False
ANSWER: False
5. CompetitivepressureshaveledmanycompaniestofavortheJITinventoryapproach.
a. True

b. False
ANSWER: True
6. Firmsfacelimitedresourcesandlimiteddemandfortheirproductscalledconstraints.
a. True
b. False
ANSWER: True
7. JITisamanufacturingapproachfocusedonpresentdemandratherthananticipateddemand.
a. True
b. False
ANSWER: True

8. JITinventorymanagementoffersalternativesolutionsthatrequirehigherinventories.
a. True
b. False
ANSWER: False
9. JITuseslong-termcontracts,continuousrefilling,andelectronicdatainterchangestoreduceoreliminateorderingcosts.
a. True
b. False
ANSWER: True
10. Reducingorderingandsetupcostsinterferewiththereductionofinventorycosts.
a. True
b. False
ANSWER: False
11. TheKanbansystemisaninformationsystemwhichensuresthatpartsormaterialsareavailablewhenneeded.
a. True
b. False
ANSWER: True
12. Externalconstraintsareimposedonafirmfromwithinandinternalconstraintsareimposedelectronically.
a. True
b. False
ANSWER: False
13. Whenaproductmixdoesnotutilizefullyitsconstraints,theyarecalledlooseconstraints,whenusedcompletely,theyarecal
ledbindingconstraints.
a. True
b. False
ANSWER: True
14. Whenonlyonebindingconstraintexists,theproductwiththesmallestcontributionmarginwillbefocusedon.
a. True
b. False
ANSWER: False

15. Withmultipleinternalbindingconstraints,theoptimalmixisdeterminedbyagraphicalapproachorthesimplexmethod.
a. True
b. False
ANSWER: True
16. Thegoalofthetheoryofconstraintsistomakemoneyinthefuturebymanagingconstraints.
a. True
b. False
ANSWER: False
17. Thetheoryofconstraintsidentifiesacompanysconstraintsandexploitsthem.
a. True
b. False
ANSWER: True
18. Throughputistherateatwhichanorganizationgeneratesmoneythroughsales.
a. True
b. False
ANSWER: True
19. Thetheoryofconstraintsfocusesontwooperationalmeasuresofsystemperformance:inventoryexpensesandoperati
ngexpenses.
a. True
b. False
ANSWER: False
20. Themajorbindingconstraintinanorganizationisdefinedasthedrummer,whichsetstheproductionrateforthewholeplan
t.
a. True
b. False
ANSWER: True
21. Thecostsofholdinginventoryarecalled

costs.

ANSWER: carrying
22. Thetraditionalinventorymodelbasedonanticipateddemandiscalledthe
ANSWER: just-in-case

inventorymanagement.

23. Theinventorymanagementsystemwhichrepresentsthecontinuousgoalofeliminatingwasteiscalledthe
inventorymanagement.
ANSWER: just-in-time
24.
Theprocessofcontinuousreplacementofinventoryhasbeenmadeeasierbytheuseof
interchanges.
ANSWER: electronicdata
25.
ThemanufacturingmodelwhichsharesthesamepracticesasaJITmanufacturingsystemiscalled
manufacturing.
ANSWER: lean
26. Thesystemthatensuresthatpartsormaterialsareavailablewhenneedediscalledthe

system.

ANSWER: Kanban
27. Theoptimalmixchosenwhichmaximizesthetotalcontributionmargingiventheconstraintsfacebyafirmiscalled
__________.
ANSWER: constraintoptimization
28. Themodelwhichexpressesaconstrainedoptimizationproblemasalinearobjectivefunctioniscalledthe
__________ model.
ANSWER: linearprogramming
29. Thefocusonthegoalofmakingmoneynowandinthefuturebymanagingconstraintsiscalledthe
.
ANSWER: theoryofconstraints
30.

The
istheamountofinventoryneededtokeeptheconstrainedresourcebusyforaspecifiedtimeinterval.

ANSWER: timebuffer
31. WhichofthefollowingisNOTanexampleofanorderingcost?
a. receivingcosts
b. salespeoplessalariescosts
c. clericalcostsofpreparingdocuments
d. insurancecostsonshipment
ANSWER: b
32. WhichofthefollowingisNOTacostreadilyidentifiedwithinventorymanagement?

a. costofsellinginventory
b. costofnothavingstockonhand
c. costofholdinginventory
d. costofacquiringinventory
ANSWER: a

33. Thecostofacquiringinventoryincludes
a. setupcostsforgoodsproducedinternally.
b. costofinsuranceonthewarehouseforinventory.
c. costofnothavingaproductwhenacustomerwantsone.
d. costofobsolescence.
ANSWER: a
34. WhichofthefollowingisNOTconsideredacarryingcost?
a. insuranceontheinventory
b. theopportunitycostoffundsinvestedininventory
c. storagecosts
d. receivingcosts
ANSWER: d
35. Thecostofholdinginventoryisknownas
a. orderingcost.
b. setupcost.
c. stock-outcost.
d. carryingcost.
ANSWER: d
36. Thecostofpreparingequipmentandfacilitiessotheycanbeusedtoproduceaparticularproductorcomponentisknownas
a. orderingcosts.
b. setupcosts.
c. carryingcosts.
d. inventorycosts.
ANSWER: b
37. WhichofthefollowingisNOTanopportunitycostassociatedwithinventorymanagement?
a. lostsalestocustomers
b. useofcapitaltiedupininventoryinvestment
c. costofexpediting
d. allareopportunitycosts
ANSWER: c

38. WhichofthefollowingcostsareconsideredintheEOQmodel?
a. orderingcosts
b. sellingcosts
c. carryingcosts
d. bothaandc
ANSWER: d
39. Inventorymanagementidentifiesaneconomicorderquantitythat
a. minimizesthetotalcostsoforderingandcarryinginventory.
b. maximizesthestockoutcosts.
c. minimizesthecostsofordering.
d. maximizesthecostofcarryinginventory.
ANSWER: a
40. Theorderingofsmall,frequentorders
a. minimizesstockoutcosts.
b. minimizesorderingcosts.
c. minimizescarryingcosts.
d. minimizesallthree.
ANSWER: c
41. Safetystockis
a. thecostofholdinginventory.
b. anon-valueactivityandshouldneverbeconsidered.
c. notconsideredwhencalculatingthereorderpoint.
d. extrainventorycarriedtoserveasinsuranceagainstfluctuationsindemand.
ANSWER: d
42. AeroboatsFrameCorporationincreasedthesizeofseveralinventoryorderquantitiesthathadpreviouslybeendetermined
usingtheEOQmodel.Whatistheimpactonthetotalannualorderingcosts?
a. increase
b. decrease
c. nochange
d. cannotbedetermined
ANSWER: b

43. Ifinventoryconsistsofgoodsproducedinternally,theinventory-relatedcostsare
a. orderingandcarryingcosts.
b. setupcostsandcarryingcosts.
c. orderingandsetupcosts.
d. bothaandc.
ANSWER: b
44. Whichofthefollowingequationsdeterminesthetotalannualorderingcosts?
a. Costofplacinganordertimestheorderquantity.
b. Costofplacinganordertimesthenumberofordersperyear.
c. Costofplacinganordertimesone-halfoftheorderquantity.
d. Unitcarryingcostsperyeartimestheorderquantity.
ANSWER: b
45. Ifinventoryconsistsofgoodspurchasedfromanoutsidesupplier,theinventory-relatedcostsare
a. orderingandcarryingcosts.
b. setupcostsandcarryingcosts.
c. orderingandsetupcosts.
d. bothaandc.
ANSWER: a
46. ComfyWheelsBusCompanyproducesbuses.Inordertoproducetheseatsforthebuses,specialequipmentmustbesetup.
Thesetupcostperframeis$35.Thecostofcarryingseatsininventoryis$6perseatperyear.Thecompanyproduces90,000b
usesperyear.
Thenumberofseatsthatshouldbeproducedpersetupinordertominimizethetotalsetupandcarryingcostsis
a. 933seats.
b. 2,050seats.
c. 1,025seats.
d. 513seats.
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:
=1,025seats

47. ComfyWheelsBusCompanyproducesbuses.Inordertoproducetheseatsforthebuses,specialequipmentmustbesetup.
Thesetupcostperframeis$35.Thecostofcarryingseatsininventoryis$6perseatperyear.Thecompanyproduces90,000b
usesperyear.
Totalcarryingcosts(roundedtothenearestdollar)associatedwiththeeconomicorderquantityarea.$3,075.
b.
$3,750.
c.
$502.d.
$328.

R:
a
ALE:SUPPORTINGCALCULATIONS:
= 1,025 seats
Total carrying costs = ($6) (1,025/2) = $3,075

48. ComfyWheelsBusCompanyproducesbuses.Inordertoproducetheseatsforthebuses,specialequipmentmustbesetup.
Thesetupcostperframeis$35.Thecostofcarryingseatsininventoryis$6perseatperyear.Thecompanyproduces90,000b
usesperyear.
Totalsetupcostsassociatedwiththeeconomicorderquantityarea.
$4,610.
b.$3,073.
c.$3,750.
d.$1,537.
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:
= 1,025 seats
Total setup costs = $35 (90,000/1,025) = $3,073

49. SouthwesternSupplyCompanyhasaneconomicorderquantityforitemAof200units.Theannualdemandfortheproductis5,
000units,andthecostofplacinganorderis$8.Thecarryingcostperunitis
a.$6.00.
b.$2.00.
c.$4.00.d.
$141.00.
ANSWER:

RATIONALE:SUPPORTINGCALCULATIONS:

=200units

80,000/X=40,000X=$2.00
50. SouthwesternSupplyCompanyhasaneconomicorderquantityforitemAof200units.Theannualdemandfortheproductis5,
000units,andthecostofplacinganorderis$8.Ifthecompanyoperates200daysayearandtheleadtimefortheitemisfivedays,w
hatisthereorderpointifasafetystockof50unitsismaintained?
a. 4days
b. 50units
c. 25units
d. 175units
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:[(5,000/200)5]+50=175units

Figure20-1
MoriahsCandleCompanymanufacturescandles.Thecompanybuyswaxin45Kilogramcontainersthatcost$17each.Thecompanyuses25,000containersperyear,andusageoccursevenlythroughoutthe
year.Theaveragecosttocarrya45Kilogramcontainerininventoryperyearis$3,andthecosttoplaceanorderis$9.Thecompanyworks250daysperyear.
51. RefertoFigure20-1.Theeconomicorderquantity(rounded)is
a. 1,000containers.
b. 750containers.
c. 45containers.
d. 387containers.
ANSWER:

RATIONALE:SUPPORTINGCALCULATIONS:

/$3=387.3containers

52. RefertoFigure201.Theleadtimeis4workingdaysandtheaveragerateofusageis60containersperday.Whatisthereorderpoint?
a. 240containers
b. 260containers
c. 220containers
d. 200containers
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:Reorderpoint=604days=240containers
53. RefertoFigure201.Theleadtimeis4workingdays,theaveragerateofusageis60containersperday,andthecompanycarriesasafetystockof25co
ntainers.Whatisthereorderpoint?
a. 285containers
b. 245containers
c. 265containers
d. 225containers
ANSWER:
c
RATIONALE:SUPPORTINGCALCULATIONS:Reorderpoint=(604)+25=265containers
54. AlbuquerqueCompanyhasthefollowinginformationavailableconcerningoneofitsinventoryitems:
Costofplacinganorder
Unitcarryingcostperyear
Annualunitdemand
Safetystock
Averagedailydemand
Normalleadtimeindays
Theeconomicorderquantityforthisitemis
a.16units.
b.160,000units.
c.500units.
d.400units.
ANSWER:

$50.00
$2.00
3,200
80
10
12

RATIONALE:SUPPORTINGCALCULATIONS:

=400units

55. AlbuquerqueCompanyhasthefollowinginformationavailableconcerningoneofitsinventoryitems:
Costofplacinganorder
Unitcarryingcostperyear
Annualunitdemand
Safetystock
Averagedailydemand
Normalleadtimeindays
Thereorderpointfortheinventoryitemis
a.500units.
b.970units.
c.320units.
d.200units.

$50.00
$2.00
3,200
80
10
12

ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:(1012)+80=200units
56. AlbuquerqueCompanyhasthefollowinginformationavailableconcerningoneofitsinventoryitems:
Costofplacinganorder
Unitcarryingcostperyear
Annualunitdemand
Safetystock
Averagedailydemand
Normalleadtimeindays

$50.00
$2.00
3,200
80
10
12

Ifthereisadelayinshippingtheitem,approximatelyhowmanydayscanbecoveredbythesafetystock?
a. 0.83days
b. 8.00days
c. 6.67days
d. 40.00days
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:80/10=8days
57. DryCreekCompanydecreasedthesizeofinventoryorderquantitiesthathadpreviouslybeendeterminedusingtheEOQmodel
.Ifdemandremainsthesame,whatistheimpactonthenumberofordersmadeduringtheyear?
a. nochange
b. increase
c. decrease
d. cannotbedetermined
ANSWER: b

58. DryCreekCompanydecreasedthesizeofinventoryorderquantitiesthathadpreviouslybeendeterminedusingtheEOQmodel
.Whatistheimpactonthetotalamountofannualcarryingandorderingcosts?
a. nochange
b. decrease
c. increase
d. cannotbedetermined
ANSWER: c
59. Theeconomicorderquantityistheorderquantitythatresultsin
a. theminimumtotalannualinventorycosts.
b. themaximumtotalannualinventorycosts.
c. noinventoryshortages.
d. minimumorderingcosts.
ANSWER: a
60. TheorderquantityusedintheEOQmodelisthequantityofinventoryordered
a. duringoneyear.
b. foronejob.
c. foronedepartment.
d. atonetime.
ANSWER: d
61. Intheeconomicorderquantityequation,thenumeratorunderthesquarerootincludes
a. annualdemandandcostofplacinganorder.
b. annualdemandandunitcarryingcost.
c. unitcarryingcostandcostofplacinganorder.
d. orderquantityandcostofplacinganorder.
ANSWER: a
62. AlabasterManufacturingCompanyincreasedthesizeofseveralinventoryorderquantitiesthathadpreviouslybeendetermine
dusingtheEOQmodel.Whatistheimpactonthetotalamountofannualcarryingandorderingcosts?
a. nochange
b. increase
c. decrease
d. cannotbedetermined
ANSWER: b

63. OlgaCompanyhasaneconomicorderquantityforitemBof100units.Theannualdemandfortheproductis1,400units,andthe
unitcarryingcostperyearis$7.Whatisthecostofplacinganorder?
a.$25
b.$8
c.$200
d.$2
ANSWER:

RATIONALE:SUPPORTINGCALCULATIONS:

=100

10,000=(21,400)(P)/7
70,000=2,800(P)
$25=P

64. OlgaCompanyhasaneconomicorderquantityforitemBof100units.Theannualdemandfortheproductis1,400units,andthe
unitcarryingcostperyearis$7.Thecompanyoperates200daysayear,theleadtimefortheitemistendays,andthesafetystockis
100units.
Whatisthereorderpoint?
a. 70units
b. 100units
c. 1000units
d. 170units
ANSWER:
d
RATIONALE:SUPPORTINGCALCULATIONS:{[(1,400/200)10]+100}=170units

65. Whichofthefollowingequationsdeterminesthetotalannualcarryingcostswhennosafetystockiskept?
a. Costofplacinganorder Orderquantity
b. CostofplacinganorderNumberofordersperyear
c. Costofplacinganorder One-halfoftheorderquantity
d. Unitcarryingcostsperyear One-halfoftheorderquantity
ANSWER: d
66. ThereorderpointintheEOQmodelis
a. thedayofthemonthforreordering.
b. whenalloftheinventoryhasbeenused.
c. whentheinventorylevelisbelowtheorderquantity.
d. theinventorylevelatwhichanorderforadditionalunitsisplaced.
ANSWER: d
67. Whichofthefollowingelementscouldbedeterminedbyusingtheeconomicorderquantityformula?
a. theoptimumsizeofproductionrun
b. reorderpoint
c. safetystock
d. annualdemand
ANSWER: a
Figure20-2
WalrusCompanyhasthefollowinginformationavailableconcerningoneofitsinventoryitems:
Costofplacinganorder
$30.00
Unitcarryingcostperyear
$3.00
Annualunitdemand
6,625
Safetystock
125
Averagedailydemand
25
Normalleadtimeindays
10
68. RefertoFigure20-2.Theeconomicorderquantityforthisitemis
a. 1,500units.
b. 364units.
c. 140units.
d. 725units.
ANSWER:

RATIONALE:SUPPORTINGCALCULATIONS:

=364units

69. RefertoFigure20-2.Thereorderpointfortheinventoryitemis
a. 275units.
b. 375units.
c. 625units.
d. 1,525units.
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:(2510)+125=375units
70. RefertoFigure20-2.Ifthereisadelayinshippingtheitem,approximatelyhowmanydayscanbecoveredbythesafetystock?
a. 5days
b. 31days
c. 26days
d. 110days
ANSWER:
a
RATIONALE:SUPPORTINGCALCULATIONS:125/25=5days
71. JITreducesleadtimestomeetdeliverydatesby
a. reducingsetuptimes.
b. expeditingdeliverytocustomers.
c. havingmoreinventoryavailable.
d. workingovertimetofillorders.
ANSWER: a
72. StrategicobjectivesofJITinclude
a. increasingprofits.
b. improvingafirm'scompetitiveposition.
c. increasinginventory.
d. bothaandb.
ANSWER: d
73. TheJITapproachtoinventorymanagement
a. allowsgreaterflexibilityastowhenproductscanbemanufactured.
b. resultsinhigherinventorylevelsbutreducesorderingandsetupcosts.
c. resultsinlowerinventorycarryingcosts.
d. noneofthese.
ANSWER: c

74. TheobjectivesofJITareachievedby
a. controllingcosts.
b. improvingdeliveryperformance.
c. improvingquality.
d. allofthese.
ANSWER: d
75. Oneofthetraditionalreasonsforholdinginventoryistominimizetotalcarryingcostsandsetupcosts.TheJITsolutionisto
a. reducesetupcosts.
b. reduceleadtime.
c. usetotalpreventivemaintenance.
d. usetotalqualitycontrol.
ANSWER: a
76. JITpurchasingisdoneusing
a. short-termcontractsemphasizingprice.
b. long-termcontractsbasedonquality,reliability,andprice.
c. short-termcontractsbasedonquality,reliability,andprice.
d. inventorytohedgeagainststockoutsandpriceincreases.
ANSWER: b
77. JITavoidsshutdownsduetomaterialsshortageinallofthefollowingwaysEXCEPT
a. usingtotalpreventivemaintenance.
b. holdinginventory.
c. usingtotalqualitycontroltoreducedefectivematerials.
d. workingwithsupplierstoensuretheavailabilityofmaterials.
ANSWER: b
78. Oneofthetraditionalreasonsforholdinginventoryistoavoidshutdownsduetounavailabilityofmaterials.TheJITsolutionisto
a. reducesetupcosts.
b. reduceleadtime.
c. uselong-termcontractswithsuppliers.
d. usetotalpreventivemaintenance.
ANSWER: c

79. WhencomparingthetraditionalapproachofinventorymanagementtoJIT,whichofthefollowingstatementsistrue?
a. Thetraditionalapproachacceptstheexistenceofsetupcosts,butnotcarryingcostsorinventories.JITacceptsthee
xistenceofsetupandcarryingcosts,butpushesforzeroinventories.
b. Thetraditionalapproachacceptstheexistenceofcarryingcostsandinventories,butnotsetupcosts.JITacceptsthee
xistenceofsetupcostsbutnotcarryingcostsandpushesforzeroinventories.
c. Thetraditionalapproachacceptstheexistenceofbothsetupcostsandcarryingcostsandattemptstofindtheorderquantit
ythatbestbalancesthosecosts.JITdoesnotaccepteithersetupcostsorcarryingcostsandpushesforzeroinventorylevels
.
d. Thetraditionalapproachdoesnotacceptcarryingcostsorsetupcosts.JITminimizesbothsetupandcarryingcos
tsbyfindingthebestorderquantitytobalancethesecosts.
ANSWER: c
80. Oneofthetraditionalreasonsforholdinginventoryistotakeadvantageofquantitydiscountsandhedgeagainstfuturepricei
ncreases.TheJITsolutionisto
a. reducesetupcosts.
b. reduceleadtime.
c. uselong-termcontractswithsuppliers.
d. usetotalqualitycontrol.
ANSWER: c
81. Oneofthetraditionalreasonsforholdinginventoryistoavoidshutdownsduetodefectiveparts.TheJITsolutionisto
a. reducesetupcosts.
b. reduceleadtime.
c. usetotalpreventivemaintenance.
d. usetotalqualitycontrol.
ANSWER: d
82. Oneofthetraditionalreasonsforholdingfinishedgoodsinventoriesistoensureafirm'sabilitytomeetdeliverydates.TheJI
Tsolutionisto
a. reducesetupcosts.
b. reduceleadtime.
c. usetotalpreventivemaintenance.
d. usetotalqualitycontrol.
ANSWER: b

83. Oneofthetraditionalreasonsforholdinginventoryistoavoidashutdownduetomachinefailure.TheJITsolutionisto
a. reducesetupcosts.
b. reduceleadtime.
c. usetotalpreventivemaintenance.
d. usetotalqualitycontrol.
ANSWER: c
84. Amarkerorcardthatsignalstoasupplierthequantityofmaterialsthatneedtobedeliveredandthetimeofdeliveryisa
a. productionKanban.
b. vendorKanban.
c. withdrawalKanban.
d. depositKanban.
ANSWER: b
85. WhichofthefollowingisNOTacommonreasonforshutdowns?
a. safetystockofinventory
b. defectivematerialsorsubassemblies
c. machinefailure
d. unavailabilityofamaterialofsubassembly
ANSWER: a
86. WithJITmanufacturing,finishedgoodsinventoriesare
a. kepthightoavoidstockouts.
b. heldinvariouslocationsforfasterdeliverytocustomers.
c. immaterial.
d. kepthightoletthecompanytakeadvantageofvolumediscounts.
ANSWER: c
87. AwithdrawalKanbanspecifies
a. howmuchshouldbeproducedtoreplaceinventory.
b. thequantitythatasubsequentprocessshouldwithdrawfromtheprecedingprocess.
c. whencustomersshouldbenotifiedtopickuporders.
d. whensuppliersshouldbenotifiedtodelivermoreparts.
ANSWER: b

88. Amarkerorcardthatspecifiesthequantitythatasubsequentprocessshouldtakefromaprecedingprocessisa
a. productionKanban.
b. vendorKanban.
c. withdrawalKanban.
d. depositKanban.
ANSWER: c
89. TheKanbansystemisusedto
a. ensurepartsormaterialsareavailablewhenneeded.
b. signalwhenpreventivemaintenanceisneeded.
c. signalwhenadefectiveunithasbeenproduced.
d. ensureidletimeofworkersisnotwasted.
ANSWER: a
90. Amarkerorcardthatspecifiesthequantitythattheprecedingprocessshouldmanufactureisa
a. productionKanban.
b. vendorKanban.
c. withdrawalKanban.
d. depositKanban.
ANSWER: a
91. Iftheobjectiveistomaximizeprofitsinalinearprogrammingproblem,thecoefficientsofthevariablesintheobjectivefunct
ionshouldbethe
a. sellingpriceperunit.
b. variablecostsperunit.
c. contributionmarginperunit.
d. fixedcostsperunit.
ANSWER: c
92. Looseconstraintsarebestdefinedas
a. aconstraintwherethelimitingfactorismachinehoursorlaboravailability.
b. aconstraintwherethelimitingfactorcouldbesomethinglikemarketdemand.
c. aconstraintwhereaproductmixusesallofthelimitedresourcesoftheconstraint.
d. aconstraintwhoselimitedresourcesarenotfullyusedbyaproductmix.
ANSWER: d

93. MagnitudeCompanyproducesAandBwithcontributionmarginsperunitof$40and$30,respectively.Only500laborhoursan
d300machinehoursareavailableforproduction.
TimerequirementstoproduceoneunitofAandBareasfollows:
ProductA

ProductB

Laborhoursperunit

Machinehoursperunit

WhatistheconstraintonmachinehoursforMagnitudeCompany?
a.1A+4B300
b.5A+2B500c.1A+4
B500d.40A+30B50
0
ANSWER: a

Figure20-3
ThefollowinginformationisavailableforPullawayTrailerCompany,whichsellstwoproducts:

Processingtime
Vinylcoverused
Sellingprice
Variablecost
Fixedcost

TrailerA
2hours
16sq.ft.
$50.00
$35.00
$10.00

TrailerB
4hours
12sq.ft.
$80.00
$50.00
$20.00

Thereare100hoursavailableintheplantand75squarefeetofvinylavailableperoperatingperiod.
94. RefertoFigure20-3.WhichofthefollowingstatementsisINCORRECT?
a. ThematerialsconstraintfavorsTrailerBoverTrailerA.
b. ThetimeconstraintfavorsTrailerAoverTrailerB.
c. ThematerialconstraintfavorsTrailerAoverTrailerB.
d. TheobjectivefunctionfavorsTrailerBoverTrailerA.
ANSWER: c

95. Thecorrectorderforthefourstepsthatmustbefollowedtosolveproblemsgraphicallyis
a. Grapheachconstraint,Identifythefeasiblesetofsolutions,Identifyallthecornerpointvaluesinthefeasibleset,Selectthecornerpointthatyieldsthelargestvaluefortheobjectivefunction.
b. Identifythefeasiblesetofsolutions,Grapheachconstraint,Identifyallthecornerpointvaluesinthefeasibleset,Selectthecornerpointthatyieldsthelargestvaluefortheobjectivefunction.
c. Identifythefeasiblesetofsolutions,Identifyallthecornerpointvaluesinthefeasibleset,Grapheachconstraint,Selectthecornerpointthatyieldsthelargestvaluefortheobjectiv
efunction.
d. Grapheachconstraint,Identifyallthecornerpointvaluesinthefeasibleset,Identifythefeasiblesetofsolutions,Selectthecornerpointthatyieldsthelargestvaluefort
heobjectivefunction.
ANSWER: a
96. Alinearprogrammingproblemhasanobjectivefunctionof12X+14Y.Iftheoptimalsolutionprovidedbythemodelistoprodu
ceandsell500unitsofXand1,250unitsofY,theexpectedreturnis
a.$1,750.
b.$23,500.
c.$15,000.
d.$27,000.
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:(500$12)+(1,250$14)=$23,500
97. AlinearprogrammingmodelwouldNOTincludewhichofthefollowingitems?
a. independentvariables
b. networks
c. dependentvariables
d. objectivefunction
ANSWER: b
98. Alinearprogrammingproblemhasthefollowingobjectivefunction:20X+40Y+60Z.
Iftheoptimalsolutionprovidedbythemodelistoproduceandsell100,200,and300unitsofX,Y,andZ,respectively,whatistheexpe
ctedreturn?
a.$36,000b.
$28,000
c.$120
d.$24,000
ANSWER:
b
RATIONALE:SUPPORTINGCALCULATIONS:(100 $20)+(200 $40)+(300$60)=$28,000

99. HasselbladCompanymanufacturestwodifferentproducts,XandY.Thecompanyhas100poundsofmaterialsand300directla
borhoursavailableforproduction.
Thetimerequirementsandcontributionmarginsperunitareasfollows:
ProductX

ProductY

$5
2
5

$6
3
3

Contributionmarginperunit
Materialsperunit(lbs.)
Directlaborhoursperunit
Whatistheobjectivefunctionformaximizingprofits?
a. Minimize$5X+$6Y
b. Maximize$2X+$3Y
c. Maximize$5X+$6Y
d. Maximize$5X+$3Y
ANSWER: c

100.
HasselbladCompanymanufacturestwodifferentproducts,XandY.Thecompanyhas100poundsofmaterialsand30
0directlaborhoursavailableforproduction.
Thetimerequirementsandcontributionmarginsperunitareasfollows:

Contributionmarginperunit
Materialsperunit(lbs.)
Directlaborhoursperunit
Whatistheequationfortheconstraintonmaterials?
a.5X + 6Y300b.4X
+ 3Y100c.5X +
6Y100d.2X
+
3Y100
ANSWER: d

ProductX

ProductY

$5
2
5

$6
3
3

101.
HasselbladCompanymanufacturestwodifferentproducts,XandY.Thecompanyhas100poundsofmaterialsan
d300directlaborhoursavailableforproduction.
Thetimerequirementsandcontributionmarginsperunitareasfollows:
ProductX

ProductY

$5
2
5

$6
3
3

Contributionmarginperunit
Materialsperunit(lbs.)
Directlaborhoursperunit
Whatistheequationfortheconstraintondirectlabor?
a.2X
3Y300b.5X
3Y300c.5X
6Y100d.5X
3Y100

+
+
+
+

ANSWER: b

Figure20-4
MontgomeryCompanyproducesAandBwithcontributionmarginsperunitof$40and$30,respectively.Only500laborhoursan
d300machinehoursareavailableforproduction.
TimerequirementstoproduceoneunitofAandBareasfollows:

Laborhoursperunit
Machinehoursperunit

ProductA
6
2

ProductB
3
5

102. RefertoFigure20-4.WhatistheobjectivefunctiontomaximizeprofitsforMontgomeryCompany?
a. Minimize6A+3B
b. Maximize2A+5B
c. Minimize40A+ 30B
d. Maximize40A+30B
ANSWER: d
103.
RefertoFigure20-4.WhatistheconstraintonlaborhoursforMontgomeryCompany?
a.6A+3B500
b.6A+2B500c.2A
+5B300d.40A+30
B500
ANSWER: a

104.
RefertoFigure20-4.WhatistheconstraintonmachinehoursforMontgomeryCompany?
a.2A+5B500
b.2A+5B300c.6A
+3B500d.40A+30
B500
ANSWER: b
105.
KnoxvilleManufacturingCompanyproducesXandYwithcontributionmarginsperunitof$10and$90,r
espectively.Only200laborhoursand400machinehoursareavailableforproduction.
TimerequirementstoproduceoneunitofXandYareasfollows:

Laborhoursperunit
Machinehoursperunit

ProductX
1
5

ProductY
2
1

WhatistheconstraintonmachinehoursforKnoxvilleManufacturingCompany?
a.10X+90Y200b.1
X + 2Y400c.5X +
1Y400d.1X +
2Y200

ANSWER: c
106.
KnoxvilleManufacturingCompanyproducesXandYwithcontributionmarginsperunitof$10and$90,r
espectively.Only200laborhoursand400machinehoursareavailableforproduction.
TimerequirementstoproduceoneunitofXandYareasfollows:
ProductX ProductY
Laborhoursperunit
1
2
Machinehoursperunit
5
1
WhatistheconstraintonlaborhoursforKnoxvilleManufacturingCompany?
a.1X +
2Y200b.10X+90Y
200c.1X +
2Y400d.1X +
4Y400

ANSWER: a

107.
KnoxvilleManufacturingCompanyproducesXandYwithcontributionmarginsperunitof$10and$90,r
espectively.Only200laborhoursand400machinehoursareavailableforproduction.
TimerequirementstoproduceoneunitofXandYareasfollows:

Laborhoursperunit
Machinehoursperunit

ProductX
1
5

ProductY
2
1

WhatistheobjectivefunctiontomaximizeprofitsforKnoxvilleManufacturingCompany?
a. Minimize10X+90Y
b. Maximize10X+90Y
c. Maximize1X +2Y
d. Minimize1X+2Y
ANSWER: b
108. ThefollowinginformationisavailableforWoodsideFurnitureCompany,whichsellstwoproducts:

Processingtime
Metalused
Sellingprice
Variablecost
Fixedcost

ChairX
4hours
30sq.ft.
$200.00
$150.00
$30.00

ChairY
6hours
18sq.ft.
$100.00
$60.00
$30.00

Thereare200hoursavailableintheplantand200squarefeetofmetalavailableperoperatingperiod.
Theconstraintequationrepresentingprocessingtimeavailableisa.4X+
6Y200.
b.4X
+6Y200.c.30X+
18Y 200.d.4X
+6Y400.
ANSWER: a

109. ThefollowinginformationisavailableforWoodsideFurnitureCompany,whichsellstwoproducts:

Processingtime
Metalused
Sellingprice
Variablecost
Fixedcost

ChairX
4hours
30sq.ft.
$200.00
$150.00
$30.00

ChairY
6hours
18sq.ft.
$100.00
$60.00
$30.00

Thereare200hoursavailableintheplantand200squarefeetofmetalavailableperoperatingperiod.
Whatistheobjectivefunctionformaximizingsales?
a. Minimize200X + 100Y
b. Maximize180X+90Y
c. Maximize50X+40Y
d. Maximize200X+100Y
ANSWER: d

Figure20-5
TheGoldenWheelsTrailerCompanyrecordedthefollowinginformationfortwooftheirtrailers:
TrailerA
TrailerB
Processingtime
3hours
5hours
Vinylcoverused
17sq.ft.
13sq.ft.
Sellingprice
$60.00
$90.00
Variablecost
$45.00
$60.00
Fixedcost
$20.00
$30.00

Thereare100hoursavailableintheplantand75squarefeetofvinylavailableperoperatingperiod.
110. RefertoFigure20-5.Whatistheobjectivefunctionformaximizingprofits?
a. Minimize$15A+$30B
b. Maximize$60A+$90B
c. Maximize$45A+$60B
d. Maximize$15A+$30B
ANSWER: d

111.
RefertoFigure205.Theconstraintequationrepresentingthematerialsavailablefortheproductionprocessesisa.3A+5B100.
b.17A
+
13B=75.c.17A+13B
75.d.3A+5B=200.
ANSWER: c
112. RefertoFigure20-5.WhichofthefollowingstatementsisINCORRECT?
a. ThematerialsconstraintfavorsTrailerBoverTrailerA.
b. ThetimeconstraintfavorsTrailerAoverTrailerB.
c. TheobjectivefunctionfavorsTrailerBoverTrailerA.
d. ThematerialconstraintfavorsTrailerAoverTrailerB.
ANSWER: d
113. Usingthegraphicapproachtolinearprogramming,thesolutionisusually
a. acornerpointwheretwoormoreconstraintsintersect.
b. wherethelinesintersectfarthestfromzero.
c. thepointfarthestfromtheY-axis.
d. thepointfarthestfromtheX-axis.
ANSWER: a
114. Inthegraphicmethodofsolvingalinearprogrammingproblem,whichofthefollowingisdepictedonthegraph?
a. coefficientofcorrelation
b. constraint
c. least-squareslineofbestfit
d. break-evenpoint
ANSWER: b
115. Theoryofconstraintsfocusesonwhatthreeoperationmeasuresofsystemperformance?
a. inventory,throughput,andlooseconstraints
b. throughput,operatingexpenses,andproductmix
c. throughput,inventory,andoperatingexpenses
d. throughput,operatingexpensesandcontributionmargin
ANSWER: c
116. ThetheoryofconstraintsfocusesoneachofthefollowingmeasuresoforganizationalperformanceEXCEPT
a. revenues.
b. throughput.
c. operatingexpenses.
d. inventory.

ANSWER: a
117. WhichofthefollowingisTRUEaboutthetheoryofconstraints?
a. TOCrecognizesthatEOQisimportant.
b. TOCrecognizesthatloweringinventorydecreasescarryingcostsandthusdecreasesoperatingexpensesandimproves
netincome.
c. TOCrecognizesthatlowerinventoriesmeanmoredefects.
d. TOCrecognizesthatlowerinventoriesmeanslowerresponsetocustomers.
ANSWER: b
118.
WhichofthefollowingisNOTastepinthemethodologyforimprovingperformanceunderthetheoryofco
nstraints?
a. exploitthebindingconstraints
b. subordinateeverythingelsetothedecisionsmadetoexploitbindingconstraints
c. elevatetheorganizationsbindingconstraints
d. analyzetheproductmix
ANSWER: d
119. Thetheoryofconstraintsusesthefollowingfivestepstoachieveitsgoalofimprovingorganizationalperformance:
1.
2.
3.
4.
5.

Exploitthebindingconstraints.
Elevatetheorganization'sbindingconstraints.
Identifyanorganization'sconstraints.
Repeattheprocessasanewconstraintemergestolimitoutput.
Subordinateeverythingelsetothedecisionsmadewhenexploitingthebindingconstraints.

Whatisthecorrectorderforperformingthesesteps?
a.3,1,5,2,4
b.3,5,1,2,4
c.1,3,5,2,4
d.3,1,5,4,2
ANSWER: a
120. Adrummeris(are)
a. theinventoryneededtokeeptheconstrainedresourcebusyforaspecifiedtimeinterval.
b. themajorbindingconstraint.
c. theminorbindingconstraint.
d. theactionstakentotietherateatwhichmaterialsarereleasedintotheplant(atthefirstoperation)totheproductionrate
oftheconstrainedresource.
ANSWER: b

121. Theshadowprice
a. indicatestheamountbywhichthroughputwillincreaseforoneunitofunconstrainedresource.
b. isthepricepaidontheblackmarketforoneunitofscarceresource.
c. isthepricepaidatnightforascarceresource.
d. indicatestheamountbywhichcontributionmarginwillincreaseforoneunitofscarceresource.
ANSWER: d
122. Thedrum-buffer-ropesystemisanothernamefor
a. atraditionalinventorysystem.
b. aJITinventorysystem.
c. aTOCinventorysystem.
d. bothaandb.
ANSWER: c
123. Followingisinformationpertainingtomaterialthatisusedintheassemblyofmotorcycles:
Annualdemand
Unitcost
Costofplacinganorder
CarryingcostasapercentageofunitcostRequired:

5,000units
$30
$700
12%

a. Calculatetotalannualcarryingcostsforanorderquantityof200unitsperorder.
b. Calculatetotalannualorderingcostsforanorderquantityof200unitsperorder.
c. Determinetheoptimalordersize.
ANSWER:
a.

c.

($30 0.12)(200/2)=$360b.
$700(5,000/200)=$17,500
EOQ =

= 1,394.43 units

124.
HarrisburgCompanyusesquantitativemodelsforinventorycontrol.Forcannedsyrup,theannualdemandis9,000ca
ses.Thesupplieris500milesaway,anditusuallytakes4daystogetanorderfilled.Theaverageordercosts
$18toprocessandthecarryingcostpercaseis$42peryear.Thestoreisopen300daysayear.
Required:
a. Determinetheeconomicorderquantity.
b. Determinethereorderpointifasafetystockof24casesisdesired.
ANSWER:
a.
Economic order quantity =
= 88 cases
b. Reorder point = [(9,000/300) 4] + 24 = = 144 cases
125.
SweetToothCompanymanufacturescandy.Thecompanybuyschocolateusedinthecandyin10poundboxesthatcost$10each.Thecompanyuses30,000oftheboxesperyear,andusageoccursevenlythroughouttheyear.
Theaveragecosttocarrya10-poundboxininventoryperyearis$4,andthecosttoplaceanorderis$3.
Required:
a. Determinetheeconomicorderquantityforthechocolateintermsof10-poundboxes.
b. Ifthecompanyworks250daysperyear,ontheaverage,howmanyboxesofchocolateareusedperworki
ngday?
c. Iftheleadtimeforanorderisnormallyeightworkingdays,determinethereorderpointforchocolate.
d. If50boxesofchocolatearecarriedassafetystock,determinethereorderpointforthechocolate.
ANSWER:
a.
b.
c.
d.

212boxes
120boxes
960boxes
1,010boxes

EOQ=
30,000/250
(120x 8)
(120x8)+50

126. HarrowingCompanyhasthefollowinginformation:
Annualdemand

3,500units

Ordersize

500units

Ordering costper order

$400

Carryingcostsperunitforoneyear
$40Leadtime(maximum20days)
Maximumdailyuse
Work year

10days
25units
250days

Required:
a. DeterminetheeconomicorderquantityforHarrowing.
b. WhatistheannualsavingstoHarrowingCompanyifitwastochangefromanordersizeof1,000totheeco
nomicorderquantity?
c. Whatisthereorderpoint?
d. Whatisthesafetystockneededtopreventstockouts?
ANSWER:
a.

EOQ=

=264.58units

b. Totalcosts(500units)=
[$400(3,500/500)]+[$40 (500/2)]=
Totalcosts(264.58units)=
[$400 (3,500/264.58)]+($40(264.58/2)]=
Annualsavings

$12,800
10,583
$2,217

c. Dailydemand=(3,500/250)=14unitsperday
Reorderpoint=14units 10days=140units
d.

MaximumdemandperdayMax
imumleadtimeMaximumleadt
imedemand
ReorderpointwithoutsafetystockSafetyst
ock

25units
20
500units
140units
360units

127. Answerthefollowingquestionspertainingtojust-in-timeinventorymanagement:
a. WhatarekeyelementsoftheJITphilosophy?
b. WhatelementsoftheJITapproachcontributetoreducingmaterialsinventory?
c. WhydoproponentsofJITbelieveinventoryisanenemy?
ANSWER:
a.
b.

c.

KeyelementsoftheJITphilosophyincludeinventoryreduction,reducedproductiontimes,andincrease
dproductqualityandemployeeinvolvement.
TheJITapproachtoreducinginventoriesincludes(1)developinglongtermrelationshipswithalimitednumberofsuppliers,
(2)selectingsuppliersonthebasisofserviceandmaterialqualityaswellasprice,
(3)establishingproceduresforproductionemployeestoordermaterialsforcurrentproductionneedsdire
ctlyfromapprovedsuppliers,and(4)acceptingsupplierdeliveriesdirectlytotheshopfloor.
Proponentsarguethatinventoryisanenemybecauseitcausestheincurringofcarryingandhandling
costs,increasesproductiontimes,andhidesqualityproblems.

128. Thefollowingreasonshavebeenofferedforholdinginventories:
1.Tobalanceorderingorsetupcostsandcarryingcosts.
2.

Tosatisfycustomerdemand(e.g.,meetdeliverydates).

3. Toavoidshuttingdownmanufacturingfacilitiesbecauseof
(a) machinefailure.
(b) defectiveparts.
(c) unavailableparts.

6.

4.

Unreliableproductionprocesses.

5.

Totakeadvantageofdiscounts.

Tohedgeagainstfuturepriceincreases.
Required:
a.

ExplainhowtheJITapproachrespondstoeachofthesereasonsand,consequently,arguesforinsig
nificantlevelsofinventories.

b.

Thetheoryofconstraints(TOC)criticizestheJITapproachtoinventorymanagement,arguingthat
itfailstoprotectthroughput.ExplainwhatthismeansanddescribehowTOCaddressesthisissue.

ANSWER:
a.
1.

JITdoesnotacceptsetup(orordering)costsasagiven;rather,JITattemptstodrivethesec
oststozerobyreducingthetimeittakestosetupandbydevelopinglongtermcontractswithsuppliers.Carryingcostsareminimizedbyreducinginventoriestoins
ignificantlevels.

2.

JITreducesleadtimes,whichincreasesafirm'sabilitytomeetrequesteddeliverydates.Thi
sisaccomplishedby(1)reductionofsetuptimes,
(2)improvedquality,and(3)cellularmanufacturing.

3.

Theproblemsthatusuallycauseshutdownsare(1)machinefailure,
(2)defectivematerialorsubassembly,and(3)unavailabilityofamaterialorsubassembly(eithern
otdeliveredordeliveredlate).JITattemptstosolveeachofthethreeproblemsbyemphasizingtot
alpreventivemaintenance,totalqualitycontrol(strivesforzerodefects),andbuildingtherightkind
ofrelationshipwithsuppliers.

4.

Unreliableproductionprocessesareaddressedbytotalqualitymanagement.Asfewerdefectiv
eunitsareproduced,thereislessneedforinventorytoreplacenonconformingunits.

5.

Theobjectiveoftakingadvantageofdiscountsistolowerthecostofinventory.JITaccomplishes
thesameobjectivebynegotiatinglongtermcontractswithafewchosensuppliersandestablishingmoreextensivesupplierinvolvement
.

6.
7.

JITemphasizeslong-termcontractsthatstipulatepricesandacceptablequalitylevels.

b.
JIThasthepolicyofstoppingproductionifaproblemisdetectedsothattheproblemcanbe
corrected(ofcourse,theproblemmayalsocauseproductiontostopindependentofapolicyorpracticeofstoppingsothatthesourceoftheproblemcanbecorrected).SinceJI
Tproducesondemand,anyinterruptionofproductionmeansthatthroughputislost.TOCusesatimebuff
erlocatedinfrontofthebindingconstrainttoprotectthroughput.Thetimebufferisdesignedtokeeptheco
nstrainedresourcebusyforaspecifiedperiodoftime
atimelongenoughtoovercomemostdisruptionsinproduction.

129.
LexamoorProductsCorporationproducestwoproducts.Themanufactureoftheseproductsispartiallyautomated.T
otalavailablelaborhoursare400,andthetotalavailablemachinehoursare600.Timerequirementsandcontributionmarginsper
unitforeachproductareasfollows:

Laborhours
Machinehours
Contributionmarginperunit

ProductX

ProductY

2
4
$5

3
2
$4

Required:
a. Whatistheequationtobemaximized?
b. Whataretheequationsthatexpresstheconstraints?
c. WhatisthegreatestnumberofunitsofXthatcanbeproducedgiventheconstraints?
d. Whatistheoptimalsolution?
ANSWER:

b.

a. Maximize$5X+$4Y
Laborhours:
3Y400Machinehours:
c. 400/2=
200600/4=
150

2X+
4X+ 2Y600

ThemachinehourconstraintlimitsproductionofXto150units.
d.

X=125units,Y=50units.

130.
CommonwealthDryCleanershas400hoursaweekavailabletouseindrycleaningorlaundry.Fourthousandinchesof
hangingspaceisavailable.Theaverageitemthatisdrycleanedtakessixinchesofhangingspace,whereaslaundryitemstakeupo
nlythreeinchesofhangingspace.Thecontributionmarginforlaundryitemsaverages$3.50;drycleaneditemsaverage$6.50.Fi
ftyitemscanbewashedperhour,whereasonlytwentycanbedrycleaned.
Required:
a. Determinetheobjectivefunction.Isitaminimizationormaximizationfunction?
b. Setuptheconstraintequations.
ANSWER: a.
b.

Objective function:

Maximize$3.50(L)+$6.50(D)

Hoursavailable:
Hangingspace:

0.02(L) +0.05(D) 400

3.00(L) +6.00(D) 4,000

131.
WoodcraftersCorporationmanufacturestwodifferentminiaturemodelsoffurniture,atableandachair.The
companyhas500feetoflumber,400machinehours,and600directlaborhoursavailableforproduction.Theminiaturet
ablesandchairsprovide$5and$4ofcontributionmargin,respectively.
Thetimeandlumberrequirementstobuildaminiaturetableorchairareasfollows:
Table
5
2
4

Feetoflumberperunit
Machinehoursperunit
Directlaborhoursperunit

Chair
2
3
2

Required:
a. Whatistheobjectivefunctionbeingmaximized?
b. Whataretheconstraintequations?
c. Graphtheconstraintequations.Identifythefeasibleregion.
d. Whatistheoptimalsolution?
ANSWER:
a.
b.

Maximize

$5T+$4C

Lumber:5T
+2C
500Machinehours:2T+3C400La
borhours:4T +2C600
c.

d.

Therearethreepossiblecornersolutions:
(1)
(2)

T=100,C=0
T= 0,C = 133.333

(3)

T = 63.64, C= 90.91

Produce91chairsand64tables.

CM=$5(100)+$4(0)=$500
CM=$5(0)+$4(133.333)=
$533.33
CM=$5(63.64)+$4(90.91)=
$681.84

132.
IronHorsesCorporationproducestwotypesofmotorcycleframes,
(FrameXandFrameY).FrameXpassesthroughfourprocesses:Cutting,Welding,Polishing,andPainting.FrameYusesthr
eeofthesameprocesses:Cutting,Welding,andPainting.Eachofthefourprocessesemploysfortyworkerswhoworkeightho
urseachday.FrameXsellsfor$80perunit,andFrameYsellsfor$110perunit.Materialsistheonlyunit-levelvariable
expense.ThematerialscostforFrameXis$40perunit,andthematerialscostforFrameYis$50perunit.IronHorses'accountin
gsystemhasprovidedthefollowingadditionalinformationaboutitsoperationsandproducts:

ResourceName
CuttinglaborWelding
laborPolishinglaborP
aintinglabor

ResourceAvailable
19,200minutes
19,200minutes
19,200minutes
19,200minutes

ResourceUsag
e/UnitFrameX

ResourceU
sage/UnitFr
ameY

30minutes
30minutes
30minutes
20minutes

20minutes
60minutes
30minutes

Marketdemand:X
Marketdemand:Y

400perday
1unit
200perday
1unit
IronHorses'managementhasdeterminedthatanyproductioninterruptionscanbecorrectedwithintwodays.
Required:
a. AssumingthatIronHorsescanmeetdailymarketdemand,computethepotentialdailyprofit.Nowcomputet
heminutesneededforeachprocesstomeetthedailymarketdemand.CanIronHorsesmeetdailymarketdem
and?Ifnot,whereisthebottleneck?Canyouderiveanoptimalmixwithoutusingagraphicalsolution?
Ifso,explainhow.
b. Explainhowadrum-buffer-ropesystemwouldworkforIronHorses.
ANSWER:
a.Potentialdailysales:
FrameX

FrameY

$80

$110

40

50

CMperunit

$40

$60

Dailydemand

400

200

$16,000

$12,000

Sales
Materials

Dailyprofit

Totaldailyprofitpotentialis$28,000.

Process
Cutting

X:

Resource Demands
12,000
30 400 =

Resource Supply

Y:
Welding

X:
Y:

20 200 =
30 400 =
60 200 =

4,000
16,000

19,200

12,000
12,000
24,000

19,200

Polishing

X:

30 400 =

12,000

19,200

Painting

X:
Y:

20 400 =
30 200 =

8,000
6,000
14,000

19,200

IronHorsescannotmeetdailydemand.Theweldingprocessrequires24,000minutes
,buthasonly19,200available.Allotherprocesseshaveexcesscapacity.Thus,weldin
gisthebottleneck.Thecontributionmarginperunitofweldingresourceforeachprod
uctiscomputedbelow:
X:$40/30=$1.33Y:
$60/60=$1.00
ThissuggeststhatBaldwinshouldfirstproduceallthatitcanofFrameX.Thus,30
400=12,000minutesofweldingwillbededicatedtoFrameX.Theremainingminutes
(7,200)willbeusedtoproduceallthatispossibleofFrameY:7,200/60=120unitsofFr
ameY.TheoptimalmixisFrameX=400units,andFrameY=120units,producingada
ilycontributionof$23,200[($40
400)+($60120)].
b.Theweldingprocessisthedrummer.Itsetstheproductionratefortheentireplant.Thus,
theplantshouldproduce400unitsofFrameXperdayand120unitsofFrameYperday
.Toensurethatthecuttingprocessdoesnotexceedthisrate,thereleaseofmaterialsist
iedtothemaximumproductionrateoftheweldingprocess(materialsfor400unitsof
FrameXandmaterialsfor120unitsofFrameYwouldbereleases).Thisistherope.Fi
nally,toprotectthroughput,atimebufferissetupinfrontoftheweldingprocess.This
bufferwouldconsistof800cutunitsofFrameXand400cutunitsofFrameY(atwodaybuffer).

133. Grapevine Incorporated produces two different barrels used in wine making. (X and Y)
Thecompanyhasthreeprocesses,cutting,
forming,andcuring.Incutting,thewoodiscuttosizeandpreparedforforming.Informing,thewood
is bent to shape and connected together to form the barrel. In curing, the seams are finished and the oak is left to
process. In cutting, setuptime
is 1/2 hour. The other
twoprocessesdonothaveanysetuptime.ThedemandforComponentXis90unitsperdayandthedemandfor ComponentY
is240 units per day. The minutes required per unit for each component are as follows:
Cutting
Forming
Curing
ComponentX
30
12
8
ComponentY
20
15
6
Thecompanyoperatesone8-hourshift.Thecuttingprocessemploys10workers.Twohoursoftheirtimeisusedforsetup.
Theformingprocessisthemostlaborintensiveandhas15workers.Thecuringdepartmentisnotlaborintensive
theonlysignificantunit
level
variable costs are materials and power. The department only employs 6 associates. For component X, the
variable cost is $40 per unit and for Component Y, it is $30 per unit. The selling price per barrel is $95 for
Component X and $80 for Component Y.
Required:
a. Calculatetheestimateddailypotentialprofit.
b. Calculatetheresourcesavailableinminutesforeacharea.
c. Calculatetheresourcesdemandedinminutesforeachareaandidentifyanybottlenecks.
d. Whatisthecontributionmarginperunitofbottleneckresourceandwhatdoesthatimply?

ANSWER:
a. Potential Daily Profit
X
$95
40
$55
90

Y
$80
30
$50
240

$4,950

$12,000

Sales
Variable Costs
CM Per unit
Daily demand
Daily Profit

$16,950

total daily profit

potential

4,800
7,200
2,880

minutes available
minutes available
minutes available

b. Resource Availability:
Cutting
Forming
Curing

10
15
6

workers
workers
workers

8
8
8

hours =
hours =
hours =

c. Resource Demand:
Cutting
30 min/unit
Forming
12 min/unit
Curing
8 min/unit

X
2,700
1,080
720

Total Demands:
Cutting
Forming
Curing

Demanded
7,500
4,680
2,160

minutes demanded
minutes demanded
minutes demanded
Available
4,800
7,200
2,880

20
15
6

Y
min/unit
min/unit
min/unit

Bottleneck

Contribution Margin per unit of

cutting:
X

$55

CM /

30

$50

CM /

20

Process all of Y possible, then X.

min /
unit
min /
unit

$1.83

CM per unit

$2.50

CM per unit

4,800
3,600
1,440

min demanded
min demanded
min demanded