1) Direct labor-hours or direct labor cost should not be used as a measure of activity in
an activity-based costing system.
2) The step-down method of allocation is simpler and easier to apply than the direct
method.
3) A company has a standard cost system in which fixed and variable manufacturing
overhead costs are applied to products on the basis of direct labor-hours. A fixed
manufacturing overhead volume variance will NOT necessarily occur in a month in
which there is a fixed manufacturing overhead budget variance.
4) When a division is operating at full capacity, the transfer price to other divisions
should not include opportunity costs.
5) All other things the same, if the company purchases equipment on credit, this
transaction would have no impact on the company’s book value per share.
6) A manufacturing cycle efficiency (MCE) ratio close to 1.00 is desirable because this
is the ratio of value-added time to throughput time.
7) An investment project with a project profitability index of -0.05 has an internal rate
of return that is less than the discount rate.
8) When used in return on investment (ROI) calculations, operating assets do not
include investments in land held for future use and investments in other companies.
9) All other things the same, if the company purchases equipment on credit, this
transaction would have no impact on the company’s book value per share.
10) The costs of idle capacity should be assigned to products in activity-based costing.
11) A disadvantage of vertical integration is that by pooling demand for parts from a
number of companies, a supplier will face diseconomies of scale that result in lower
quality and higher cost than if every company makes its own parts.
12) Move time is considered value-added time.
13) A cost center is not a responsibility center.
14) Jessel Corporation has provided the following information concerning a capital
budgeting project:
The company uses straight-line depreciation on all equipment. Assume cash flows
occur at the end of the year except for the initial investments. The company takes
income taxes into account in its capital budgeting.
The net present value of the project is closest to:
A.$382,320
B.$227,039
C.$220,209
D.$364,000
15) The management of Lewinski Corporation would like to investigate the possibility
of basing its predetermined overhead rate on activity at capacity rather than on the
estimated amount of activity for the year. The company’s controller has provided an
example to illustrate how this new system would work. In this example, the allocation
base is machine-hours and the estimated amount of the allocation base for the upcoming
year is 62,000 machine-hours. In addition, capacity is 68,000 machine-hours and the
actual activity for the year is 59,200 machine-hours. All of the manufacturing overhead
is fixed and is $2,656,080 per year. For simplicity, it is assumed that this is the
estimated manufacturing overhead for the year as well as the manufacturing overhead at
capacity and the actual amount of manufacturing overhead for the year.
Required:
a. Determine the underapplied or overapplied overhead for the year if the predetermined
overhead rate is based on the estimated amount of the allocation base.
b. Determine the underapplied or overapplied overhead for the year if the
predetermined overhead rate is based on the amount of the allocation base at capacity.
16) The average collection period for Year 2 is closest to:
A.1.1 days
B.0.9 days
C.84.3 days
D.87.3 days
17) Wright, Inc. produces three products. Data concerning the selling prices and unit
costs of the three products appear below:
Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company’s productive capacity. The tapping
machine is the constraint, with only 2,400 minutes of tapping machine time available
this week.
Required:
a. Given the tapping machine constraint, which product should be emphasized? Support
your answer with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company should
emphasize in part (a) above, up to how much should the company be willing to pay for
an additional hour of tapping machine time?
18) Lumb Corporation uses the weighted-average method in its process costing system.
Data concerning the first processing department for the most recent month are listed
below:
Note: Your answers may differ from those offered below due to rounding error. In all
cases, select the answer that is the closest to the answer you computed. To reduce
rounding error, carry out all computations to at least three decimal places.
The cost of ending work in process inventory in the first processing department
according to the company’s cost system is closest to:
A.$32,892
B.$23,325
C.$17,413
D.$38,696
19) Division 1 of Ace Company makes and sells wheels that can either be sold to
outside customers or transferred to Division 2. The following data are available from
last month:
Division 1:
Division 2:
If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per unit in sales
commissions.
What is the maximum price per wheel that Division 2 should be willing to pay Division
1 if a transfer were to take place?
A.$33 per unit
B.$35 per unit
C.$47 per unit
D.$50 per unit
20) Minick Corporation has two divisions: Grocery Division and Convenience
Division. The following report is for the most recent operating period:
The common fixed expenses have been allocated to the divisions on the basis of sales.
Required:
a. What is the Grocery Division’s break-even in sales dollars?
b. What is the Convenience Division’s break-even in sales dollars?
c. What is the company’s overall break-even in sales dollars?
d. What would be the company’s overall net operating income if the company operated
at its two division’s break-even points?
21) Assume that dropping Product G will have no effect on other product lines. If the
company drops Product G, the change in annual net operating income due to this
decision will be a:
A.$10,000 decrease
B.$55,000 increase
C.$15,000 decrease
D.$40,000 decrease
The company would lose $750,000 in sales while saving $735,000 in expenses, so the
net effect would be a $15,000 decrease in net operating income.
22) Bee Company’s cost formula for total selling and administrative expenses, with “X”
equal to the number of units sold would be:
A) Y = $123,200 + $4.80X
B) Y = $123,200 + $6.80X
C) Y = $275,000 + $4.80X
D) Y = $166,200 + $6.80X
23) The company’s gross margin percentage for Year 2 is closest to:
A.4.9%
B.61.4%
C.38.1%
D.2031.9%
24) Kosco Corporation produces a single product. The company’s absorption costing
income statement for March follows:
During March, the company’s variable production costs were $8 per unit and its fixed
manufacturing overhead totaled $5,000.
The contribution margin per unit during March was:
A.$8 per unit
B.$12 per unit
C.$10 per unit
D.$3 per unit
25) Steinkraus Corporation has provided the following data:
26) Last year, Rochester Corporation’s variable costing net operating income was
$78,000. The fixed manufacturing overhead costs released from inventory under
absorption costing amounted to $39,000.
Required:
Determine the absorption costing net operating income last year. Show your work!
27) The management of Sambrano Corporation would like to better understand the
behavior of the company’s warranty costs. Those costs are listed below for a number of
recent months:
Management believes that warranty cost is a mixed cost that depends on the number of
product returns.
Required:
Estimate the variable cost per product return and the fixed cost per month using the
least-squares regression method.
28) Hayek Corporation uses the FIFO method in its process costing. The following data
concern the company’s Mixing Department for the month of August.
Required:
Compute the cost per equivalent unit for materials and conversion for the Mixing
Department for August using the FIFO method.
29) Arkin Corporation’s total current assets are $290,000, its noncurrent assets are
$520,000, its total current liabilities are $210,000, its long-term liabilities are $420,000,
and its stockholders’ equity is $180,000.
30) Cruea Tech is a for-profit vocational school. The school bases its budgets on two
measures of activity (i.e., cost drivers), namely student and course. The school uses the
following data in its budgeting:
In November, the school budgeted for 1,410 students and 138 courses. The actual
activity for the month was 1,810 students and 139 courses.
Required:
Prepare the school’s planning budget for November.
31) Harvie Company’s quality cost report is to be based on the following data:
Required:
Prepare a Quality Cost Report in good form with separate sections for prevention costs,
appraisal costs, internal failure costs, and external failure costs.
32) Freeport Corporation’s income statement for last year appears below:
The beginning and ending balances for last year are available for the following selected
accounts (the company did not dispose of any property, plant, and equipment during the
year):
Required:
Using the direct method, prepare in good form the operating activities section of the
statement of cash flows.
33) Financial statements for Rardin Corporation appear below:
