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24-41 SOLUTION Requirement 1 ROI = Operating income Average total assets Paint Stores’ ROI = $482,000 = 0.3480 = 34.80% $1,385,000 Consumer’s ROI $185,000 = 0.1167 = 11.67% $1,585,000 Requirement 2 Profit margin ratio = Operating income Net sales Paint […]

24-56 Comprehensive Problem for Chapters 22-24, cont. Requirement 1, cont. Schedule of Cash Payments 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total Total direct materials purchases $ 5,430 $ 6,400 $ 7,400 $ 8,470 $ 27,700 1st Qtr. 2nd […]

Chapter 25 Short-Term Business Decisions Review Questions 1. List the four steps in short-term decision making. At which step are managerial accountants most involved? The four steps in short-term decision making are: (1) Define business goals; (2) Identify alternative courses […]

E25-15 Making product mix decisions Learning Objective 3 2. CM per MHr, Regular $393 Tread Mile produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Mile could use all its available machine hours […]

SOLUTION Requirement 1 Joint costs of producing 62,000 gallons of petroleum distillate $(205,000) $390,600 (62,000 gal. × $6.30/gal.) Cost of processing further $(125,600) (62,000 gal. × $1.80/gal.) + [56,000 gal. × ($0.10/gal. + $0.15/gal.)] Revenues from processing further $504,000 (56,000 […]

P26-30A Using payback, ARR, NPV, IRR, and profitability index to make capital investment decisions Learning Objectives 2, 4 1. Plan A 1.19 profitability index; Plan B $(755,780) NPV Lados operates a chain of sandwich shops. The company is considering two […]

Chapter 26 Capital Investment Decisions Review Questions 1. Explain the difference between capital assets, capital investments, and capital budgeting. A capital asset is an operational asset used for a long period of time. A capital investment is the acquisition of […]

S26-14 Using NPV to make capital investment decisions Learning Objective 4 Castle is considering an investment opportunity with the following expected net cash inflows: Year 1, $230,000; Year 2, $170,000; Year 3, $110,000. The company uses a discount rate of […]

When finished products are sold, Sales Revenue is debited, and Cost of Goods Sold is credited. Most capital budgeting methods focus on accrual-based income. Answer: FALSE When using an activity-based costing system in service companies, the allocation of indirect costs […]

Companies evaluate investment centers using the same measures as the profit centers. The total amount of manufacturing overhead costs incurred during the period is recorded on the credit side of the Manufacturing Overhead account. Answer: FALSE Return on investment measures […]

Direct costs and indirect costs can be easily traced directly to a cost object. In deciding whether to accept a special pricing order, management should only consider the quantitative data and disregard qualitative factors. Answer: FALSE For short-term pricing decisions, […]

Repair and maintenance costs of vehicles used to deliver products to customers are product costs. Value engineering means reevaluating activities to reduce costs while still satisfying customer needs. Answer: TRUE Components of the master budget are the operating budget, the […]

Connections Company provides cleaning services to commercial and residential customers. The commercial business segment provided services to 270 customers and the residential business segment provided services to 665 customers. Identify the segment with the lower contribution margin ratio and show […]

A responsibility accounting system evaluates the performance of each responsibility center and its manager. Entries in the cash payments journal are posted daily to the accounts payable subsidiary ledger and monthly to the general ledger. Answer: TRUE The cash payments […]

Activity-based costing refines the cost allocation process even more than traditional allocation costing systems. Production cost reports prepared using the first-in, first-out (FIFO) method determine the cost of equivalent units of production by accounting for beginning inventory costs separately from […]

The most important part of a budgeting system is getting managers and employees to accept the budget. Variable costing considers direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead as product costs. Answer: FALSE In a standard costing […]

When using a periodic inventory system, the Merchandise Inventory DR column, in the purchases journal, is replaced with a column titled Cost of Goods Sold DR. In selecting machine usage as the primary cost driver for the Production Department, management […]

The three categories of period costs are direct materials, direct labor, and manufacturing overhead. The fundamental assumption of cost-volume-profit (CVP) analysis is that, in the long run, fixed costs become variable costs. Answer: FALSE When indirect materials are issued to […]

In a networked system, the server stores the program and the data. Journalize the following transactions for Malone Custom Furniture Manufacturing: a. Incurred and paid advertising expenses, $3,500. b. Incurred manufacturing wages of $30,000, 60% of which was direct labor […]

When the variable cost per unit increases, the total number of units required to break even also increases. In a manufacturing company, wages and benefits of assembly line workers are included in manufacturing overhead. Answer: FALSE The amount by which […]

Under process costing, the costs incurred by each department are reported in a separate production cost report for each department. Quality costs can be hard to measure. Answer: TRUE A strategic budget will be as detailed as an operational budget. […]

Mulcahey Automobiles Company fabricates automobiles. Each vehicle includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: An Indonesian factory has offered to supply Mulcahey with ready-made units for a cost of $15 […]

The balanced scorecard focuses only on lead indicators, because lag indicators are not important for performance evaluation. In making product mix decisions, when fixed costs are irrelevant, a company should emphasize the product with the highest contribution margin per unit […]

The limitations of financial performance measures reinforce the importance of the balanced scorecard. Companies are now spending less amounts of cash to ensure that their data and information are secure. Answer: FALSE Amounts needed for the preparation of the budgeted […]

Discounted cash flow methods incorporate compound interest by assuming that companies will reinvest future cash flows when they are received. The accounting rate of return method considers the time value of money. Answer: FALSE Management by exception directs the management’s […]

The number of equivalent units for direct materials and conversion costs must always be equal. The main difference between activity-based costing and traditional costing systems is that activity-based costing uses a separate allocation base for each activity. Answer: TRUE Absorption […]

Managerial accounting is used in manufacturing and merchandising companies, but not in service companies. Under absorption costing, the more fixed manufacturing overhead in ending Finished Goods Inventory, the larger the Cost of Goods Sold. Answer: FALSE Both the sales volume […]

When using management by exception, managers investigate only those variances that are unfavorable. Absorption costing is used to analyze contribution margin. Answer: FALSE The capital expenditures budget is completed before the preparation of the cash budget. Answer: TRUE A standard […]

In a decentralized company, segment managers may not fully understand the big picture when making decisions. Manufacturing costs flow from Work-in-Process Inventory to Cost of Goods Sold to Finished Goods Inventory. Answer: FALSE Explanation: Manufacturing costs flow from Raw Materials […]

South Bay Manufacturing began business on January 1. During its first year of operation, South Bay worked on five industrial jobs and reported the following information at year-end: South Bay’s allocation of overhead costs left a debit balance of $1,400 […]

An increase in sales price per unit decreases the contribution margin per unit. Total manufacturing costs to account for during the year minus the ending Work-in-Process Inventory equals the cost of goods manufactured. Answer: TRUE If the sales price of […]

The Other Accounts DR columns of a purchases journal are used for recording merchandise inventory and office supplies. The inventory costing method affects the process of preparing the cost of goods sold budget. Answer: TRUE Tosh Company fabricates automobiles. Each […]

Financial statements prepared for investors and creditors often include forward-looking information because they make decisions based on a company’s future prospects. The Accounting Rate of Return method evaluates the lifetime return of an investment, whereas Return on Investment evaluates the […]

Companies calculate the predetermined overhead rate at the beginning of an accounting period using the actual values of overhead costs. The cost per equivalent unit for transferred in units is calculated by dividing total transferred in costs by the equivalent […]

The cost of goods manufactured is recorded with a debit to the Work-in-Process Inventory account and a credit to the Cost of Goods Manufactured account. The accounting rate of return is calculated by dividing the average annual operating income by […]

A just-in-time costing system does not use the Finished Goods Inventory account; instead, it combines the Finished Goods Inventory account with the Work-in-Process Inventory account. Sensitivity analysis allows managers to see how various business strategies will affect profit levels. Answer: […]

A company with different segments using different software configurations can easily combine budget data of different segments to create the master budget. Fixed costs divided by the contribution margin ratio equals the breakeven point in sales dollars. Answer: TRUE When […]

A special journal is ________. A) an accounting journal designed to record a specific type of transaction B) an accounting journal that holds individual accounts that support a specific general ledger account C) a record of accounts that provides supporting […]

A production cost report helps managers identify the costs that can be reduced in the production process. A production cost report can help managers identify the most profitable products. Answer: TRUE In the first step in developing an activity-based costing […]

Direct material costs and direct labor costs cannot be easily traced to products. Therefore, they are allocated to products. Under process costing, the unit cost of the completed units is less than the unit cost of the incomplete units. Answer: […]

The contribution margin for service companies is calculated by subtracting fixed costs from service revenue. Flexible budgets use budgeted (or standard) costs at the actual level of activity. Answer: TRUE Merchandising companies, like service companies, do not have a Cost […]

The direct materials cost and efficiency variances make up the total direct materials variance. The margin of safety can be used to evaluate a company’s plans for the future. Answer: TRUE Absorption costing considers fixed selling and administrative costs as […]

On May 31, a retail firm pays rent of $2,700 for the month of May. When this transaction is recorded in the cash payments journal, ________. A) assets and equity will increase by $2,700 B) assets and liabilities will decrease […]

The Raw Materials Inventory account is debited when direct materials are issued for production. The payback method provides management with valuable information about the time period in which the cash invested will be recouped. Answer: TRUE Unlike merchandising companies, income […]

Which of the following is the correct formula for the profit margin ratio? A) Net profit / Sales B) Net sales / Average total assets C) Net profit × Capital invested D) Operating income / Net sales A cash payments […]

In a decentralized company, all the planning and controlling decisions are made by top management. The common factor in all quality management systems is the desire to improve the business’s performance by providing quality products or services. Answer: TRUE The […]

The income statement of a manufacturing company separates the product costs from the period costs. The level of inventory on hand at the end of the year does not affect the amount of operating income calculated under variable costing and […]

When more units are sold than produced, operating income is less under absorption costing. A depreciable asset’s original cost is relevant when considering whether to replace the asset. Answer: FALSE Absorption costing is required by the Generally Accepted Accounting Principles […]

Higher fixed costs increase the total number of units required to break even. Entries in the sales journal are posted to both the accounts receivable subsidiary ledger and the general ledger. Answer: TRUE A modification of the overhead allocation method […]

Traditional costing systems employ multiple allocation rates for manufacturing overhead costs, but an activity-based costing system uses only one rate for allocating manufacturing overhead costs. Manufacturing companies produce their own products, but merchandising companies do not. Answer: TRUE Traditional costing […]

The efficiency variance measures ________. A) the difference between the quantity used by the company and the quantity used by its competitors B) the change in quantities used over time C) how well the business uses its materials or human […]

A favorable direct materials cost variance occurs when the actual direct materials cost incurred is greater than the standard direct materials cost. Fixed cost per unit is assumed to be constant within a particular relevant range of activity. Answer: FALSE […]

Net present value is defined as the difference between the present value of the investment’s net cash inflows and the investment’s initial cost. The cost of goods sold is added to net sales revenue to determine gross profit. Answer: FALSE […]

Service companies do not have fixed costs; all costs incurred by service companies are variable costs. Financial accounting prepares reports for internal purposes, whereas managerial accounting provides information to external stakeholders. Answer: FALSE The payback and accounting rate of return […]

A disadvantage of a typical enterprise resource planning system is that it cannot be offered through cloud computing. In a standard cost system, the standard overhead allocation rate replaces the predetermined overhead allocation rate but the concept is the same. […]

Management compares the costs of undertaking a quality improvement program to the costs of continuing without the quality improvement program. Generally, all transactions are recorded in a special journal as well as the general journal. Answer: FALSE Total fixed costs […]