1) When fixed costs are included in the cost of goods sold, the gross margin percentage
should increase and decrease with sales volume.
2) The units in beginning work in process inventory plus the units in ending work in
process inventory must equal the units transferred out of the department plus the units
started into production.
3) A product can have a high quality design but have a low quality of conformance.
4) The term joint cost is used to describe the costs incurred after the split-off point in a
process involving joint products.
5) The simple rate of return method does not take into account the time value of money.
6) When computing the return on equity, retained earnings should be excluded from the
average total stockholders’ equity.
7) Rent on a factory building used in the production process would be classified as a
product cost and as a fixed cost.
8) Under absorption costing, it is possible to defer a portion of the fixed manufacturing
overhead costs of the current period to future periods through the inventory account.
9) Laurie Corporation uses the FIFO method in its process costing system. Department
A is the first stage of Laurie Corporation’s production process. The following
information is available for conversion costs for the month of May for Department A:
The equivalent units of production for conversion costs for the month are:
A.42,000 units
B.38,000 units
C.44,000 units
D.36,000 units
10) Wienecke Corporation manufactures and sells one product. The following
information pertains to the company’s first year of operations:
The company does not have any variable manufacturing overhead costs or variable
selling and administrative costs. During its first year of operations, the company
produced 44,000 units and sold 41,000 units. The company’s only product is sold for
$239 per unit.
Assume that the company uses a variable costing system that assigns $16 of direct labor
cost to each unit that is produced. The net operating income under this costing system
is:
A.$856,000
B.$544,000
C.$808,000
D.$1,066,000
11) Letts Corporation manufactures and sells a single product. The company uses units
as the measure of activity in its budgets and performance reports. During January, the
company budgeted for 7,000 units, but its actual level of activity was 6,970 units. The
company has provided the following data concerning the formulas to be used in its
budgeting:
The net operating income in the planning budget for January would be closest to:
A.$20,292
B.$12,988
C.$20,700
D.$12,877
12) Galla Corporation makes a product with the following standard costs:
The company budgeted for production of 2,400 units in June, but actual production was
2,500 units. The company used 19,850 pounds of direct material and 980 direct
labor-hours to produce this output. The company purchased 21,700 pounds of the direct
material at $6.70 per pound. The actual direct labor rate was $19.20 per hour and the
actual variable overhead rate was $1.80 per hour.
The company applies variable overhead on the basis of direct labor-hours. The direct
materials purchases variance is computed when the materials are purchased.
The materials quantity variance for June is:
A.$4,550 U
B.$4,355 F
C.$4,550 F
D.$4,355 U
13) Last year Burch Corporation’s cash account decreased by $6,000. Net cash provided
by investing activities was $13,000. Net cash used in financing activities was $30,000.
On the statement of cash flows, the net cash flow provided by (used in) operating
activities was:
A.$(23,000)
B.$(17,000)
C.$(6,000)
D.$11,000
14) Letts Corporation manufactures and sells a single product. The company uses units
as the measure of activity in its budgets and performance reports. During January, the
company budgeted for 7,000 units, but its actual level of activity was 6,970 units. The
company has provided the following data concerning the formulas to be used in its
budgeting:
The direct materials in the flexible budget for January would be closest to:
A.$61,564
B.$62,095
C.$60,900
D.$60,639
15) Kerbow Corporation uses part B76 in one of its products. The company’s
Accounting Department reports the following costs of producing the 12,000 units of the
part that are needed every year.
An outside supplier has offered to make the part and sell it to the company for $27.40
each. If this offer is accepted, the supervisor’s salary and all of the variable costs,
including direct labor, can be avoided. The special equipment used to make the part was
purchased many years ago and has no salvage value or other use. The allocated general
overhead represents fixed costs of the entire company. If the outside supplier’s offer
were accepted, only $6,000 of these allocated general overhead costs would be avoided.
In addition, the space used to produce part B76 could be used to make more of one of
the company’s other products, generating an additional segment margin of $29,000 per
year for that product.
Required:
a. Prepare a report that shows the effect on the company’s total net operating income of
buying part B76 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
16) Latting Corporation has entered into a 7 year lease for a building it will use as a
warehouse. The annual payment under the lease will be $4,781. The first payment will
be at the end of the current year and all subsequent payments will be made at year-ends.
If the discount rate is 6%, the present value of the lease payments is closest to:
A.$31,573
B.$22,257
C.$33,467
D.$26,688
17) BieryCorporation makes a product with the following standard costs:
The company produced 4,100 units in April using 5,380 liters of direct material and
2,610 direct labor-hours. During the month, the company purchased 6,000 liters of the
direct material at $5.80 per liter. The actual direct labor rate was $19.80 per hour and
the actual variable overhead rate was $2.90 per hour.
The company applies variable overhead on the basis of direct labor-hours. The direct
materials purchases variance is computed when the materials are purchased.
The variable overhead rate variance for April is:
A.$261 U
B.$246 F
C.$261 F
D.$246 U
18) Forbs Corporation uses the direct method to allocate service department costs to
operating departments. The company has two service departments, Information
Technology and Personnel, and two operating departments, Fabrication and
Customization.
Information Technology Department costs are allocated on the basis of computer
workstations and Personnel Department costs are allocated on the basis of employees.
The total amount of Information Technology Department cost allocated to the two
operating departments is closest to:
A.$28,679
B.$32,334
C.$23,391
D.$126,849
19) Frank Corporation manufacturers a single product that has a selling price of $20.00
per unit. Fixed expenses total $45,000 per year, and the company must sell 5,000 units
to break even. If the company has a target profit of $13,500, sales in units must be:
A.6,000
B.5,750
C.6,500
D.7,925
20) Nantua Corporation has two divisions, Southern and Northern. The following
information was taken from last year’s income statement segmented by division:
Net operating income last year for Nantua Corporation was $400,000.
In last year’s income statement segmented by division, what were Nantua’s total
common fixed expenses?
A.$450,000
B.$800,000
C.$1,250,000
D.$1,300,000
21) The nursing station on the fourth floor of Central Hospital is responsible for the
care of orthopedic surgery patients. The costs of prescription drugs administered by the
nursing station to patients should be classified as:
A) direct patient costs.
B) indirect patient costs.
C) overhead costs of the nursing station.
D) period costs of the hospital.
22) Which of the following terms could be used to correctly describe the cost of the
soap used to wash the denim cloth?
Direct Cost Product Cost
A) Yes Yes
B) Yes No
C) No Yes
D) No No
23) Donham Corporation had $25,000 of raw materials on hand on May 1. During the
month, the Corporation purchased an additional $65,000 of raw materials. During May,
$66,000 of raw materials were requisitioned from the storeroom for use in production.
These raw materials included both direct and indirect materials. The indirect materials
totaled $4,000. The debits to the Work in Process account as a consequence of the raw
materials transactions in May total:
A.$0
B.$62,000
C.$65,000
D.$66,000
24) Wenig Inc. has some material that originally cost $73,500. The material has a scrap
value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100.
What would be the incremental effect on the company’s overall profit of reworking and
selling the material rather than selling it as is as scrap?
A) $22,000
B) $67,600
C) $51,500
D) $5,900
25) Lasorsa Corporation manufactures a single product. Variable costing net operating
income last year was $86,000 and this year was $98,000. Last year, $4,000 in fixed
manufacturing overhead costs were released from inventory under absorption costing.
This year, $27,000 in fixed manufacturing overhead costs were deferred in inventory
under absorption costing.
What was the absorption costing net operating income last year?
A.$63,000
B.$86,000
C.$90,000
D.$82,000
26) The selling price based on the absorption costing approach for this product would
be closest to:
A.$110.76
B.$81.00
C.$67.04
D.$82.59
27) Mattix Corporation’s balance sheet and income statement appear below:
The company sold equipment for $20 that was originally purchased for $7 and that had
accumulated depreciation of $1. It paid a cash dividend during the year and did not
issue any bonds payable or repurchase any of its own common stock.
Required:
Determine the net cash provided by (used in) operating activities for the year using the
indirect method.
28) The most recent monthly income statement for Kennaman Stores is given below:
Kennaman is considering closing Store I. If Store I is closed, one-fourth of its traceable
fixed expenses would continue unchanged. Also, the closing of Store I would result in a
20% decrease in sales in Store II. Kennaman allocates common fixed expenses on the
basis of sales dollars.
Required:
Compute the overall increase or decrease in Kennaman’s net operating income if Store I
is closed.
29) Remley Corporation has provided the following financial data:
Dividends on common stock during Year 2 totaled $3,000. The market price of common
stock at the end of Year 2 was $2.70 per share.
30) Weldin Inc. has provided the following data for the month of October. There were
no beginning inventories; consequently, the direct materials, direct labor, and
manufacturing overhead applied listed below are all for the current month.
Manufacturing overhead for the month was underapplied by $3,000.
The company allocates any underapplied or overapplied overhead among work in
process, finished goods, and cost of goods sold at the end of the month on the basis of
the overhead applied during the month in those accounts.
Required:
Provide the journal entry that would record the allocation of underapplied or
overapplied among work in process, finished goods, and cost of goods sold.
31) Cicchetti Corporation uses customers served as its measure of activity. The
following report compares the planning budget to the actual operating results for the
month of December:
Required:
Prepare the company’s flexible budget performance report for December. Label each
variance as favorable (F) or unfavorable (U).
32) Jordon Corporation uses the weighted-average method in its process costing. The
following data pertain to its Materials Preparation Department for November.
Required:
Determine the equivalent units of production for the Materials Preparation Department
for November using the weighted-average method.
33) ( Cascade, Inc., has assembled the estimates shown below relating to a proposed
new product. These estimates are based on a 5-year project life, at the end of which the
new equipment would be sold, working capital would revert to other uses in the
company, and the product would be discontinued. Cascade uses a discount rate of 18%.
Required:
Compute the net present value of the new product.
34) Corporation Z has two divisions: A & B. The contribution margin for Division A is
$188,600 and for Division B it is $196,500. Fixed expenses for Corporation Z are as
follows:
Required:
Prepare a segmented income statement for this company that shows the divisional
segment margins and the company’s net operating income.
