If by dropping a product a firm can avoid more in fixed costs than it loses in
contribution margin, then the firm is better off economically if the product is dropped.
Answer:
Generally, a product line should be dropped when the fixed costs that can be avoided by
dropping the product line are less than the contribution margin that will be lost.
Answer:
When more hours of labor time are necessary to complete a job than the standard
allows, the labor rate variance is unfavorable.
Answer:
On a CVP graph for a profitable company, the total expense line will be steeper than the
line representing fixed costs.
Answer:
Free cash flow is net cash provided by operating activities less dividends.
Answer:
Depreciation expense on existing factory equipment is generally relevant to a decision
of whether to accept or reject a special offer for a company’s product.
Answer:
A company with a degree of operating leverage of 4 would expect net operating income
to increase by 200% if sales increased from $100,000 to $150,000.
Answer:
The budget variance represents the difference between the actual fixed manufacturing
overhead cost incurred during a period and the budgeted fixed manufacturing overhead
cost.
Answer:
The performance measures on a balanced scorecard tend to fall into four groups:
financial measures, customer measures, internal business process measures, and
external business process measures.
Answer:
To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.
Answer:
A variable cost is a cost whose cost per unit varies as the activity level rises and falls.
Answer:
If the assets in which borrowed funds are invested are able to earn a rate of return
greater than the interest rate required by the lender, then financial leverage is positive.
Answer:
Residual income is superior to return on investment as a means of measuring
performance because it encourages managers to make investment decisions that are
more consistent with the interests of the company as a whole.
Answer:
If activity is higher than expected, total variable costs should be higher than expected. If
activity is lower than expected, total variable costs should be lower than expected.
Answer:
A sunk cost is a cost that has already been incurred and that cannot be avoided
regardless of what action is chosen.
Answer:
Laro Corporation produces and sells a single product with the following characteristics:
The company is currently selling 5,000 units per month. Fixed expenses are $302,000
per month.
This question is to be considered independently of all other questions relating to Laro
Corporation. Refer to the original data when answering this question.
The marketing manager would like to cut the selling price by $13 and increase the
advertising budget by $17,000 per month. The marketing manager predicts that these
two changes would increase monthly sales by 1,200 units. What should be the overall
effect on the company’s monthly net operating income of this change?
A. decrease of $57,400
B. decrease of $7,600
C. increase of $57,400
D. increase of $147,400
Answer:
Boole Corporation’s net cash provided by operating activities was $112; its capital
expenditures were $76; and its cash dividends were $31. The company’s free cash flow
was:
A. $36
B. $81
C. $219
D. $5
Answer:
Would the following costs be classified as product or period costs under variable
costing at a retail clothing store?
A. Option A
B. Option B
C. Option C
D. Option D
Answer:
Reference: 8-8
Diiorio Clinic uses client-visits as its measure of activity. During February, the clinic
budgeted for 2,700 client-visits, but its actual level of activity was 2,750 client-visits.
The clinic has provided the following data concerning the formulas used in its
budgeting and its actual results for February:
Data used in budgeting:
Actual results for February:
The net operating income in the flexible budget for February would be closest to:
A) $15,889
B) $15,316
C) $10,920
D) $11,750
Answer:
Data concerning the direct labor costs for April of Dimaio Corporation appear below:
The journal entry to record the incurrence of direct labor costs in April would include
the following for Work in Process:
A. debit of $341,658.
B. credit of $341,658.
C. credit of $294,174.
D. debit of $294,174.
Answer:
On April 1, Stelter Corporation had $34,000 of raw materials on hand. During the
month, the company purchased an additional $60,000 of raw materials. During April,
$70,000 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 $7,000. Prepare journal entries to record these events. Use those journal entries
to answer the following questions:
The credits to the Manufacturing Overhead account as a consequence of the raw
materials transactions in April total:
A. $0
B. $70,000
C. $63,000
D. $7,000
Answer:
Kelln Corporation’s most recent comparative balance sheet and income statement
appear below:
The company paid a cash dividend and it did not dispose of any property, plant, and
equipment. The company did not issue any bonds payable or repurchase any of its own
common stock. The following question pertain to the company’s statement of cash
flows.
The net cash provided by (used in) operating activities for the year was:
A. $36
B. $3
C. $75
D. $56
Answer:
In a statement of cash flows, which of the following would be classified as an operating
activity?
A. The purchase of equipment.
B. Dividends paid to the company’s own common stockholders.
C. Tax payments to governmental bodies.
D. The cash paid to retire bonds payable.
Answer:
Megna Company’s net income last year was $143,000. Changes in the company’s
balance sheet accounts for the year appear below:
The company paid a cash dividend and it did not dispose of any long-term investments
or property, plant, and equipment. The company did not issue any bonds payable or
repurchase any of its own common stock. The following question pertain to the
company’s statement of cash flows.
The net cash provided by (used in) investing activities last year was:
A. $(95,000)
B. $95,000
C. $(125,000)
D. $125,000
Answer:
Colosi Corporation’s comparative balance sheet appears below:
The company’s net income (loss) for the year was $3,000 and its cash dividends were
$1,000. It did not sell or retire any property, plant, and equipment during the year.
The company’s net cash used in investing activities is:
A. $41,000
B. $5,000
C. $9,000
D. $18,000
Answer:
Broze Company makes four products in a single facility. These products have the
following unit product costs:
Additional data concerning these products are listed below.
The grinding machines are potentially the constraint in the production facility. A total of
53,600 minutes are available per month on these machines.
Direct labor is a variable cost in this company.
How many minutes of grinding machine time would be required to satisfy demand for
all four products?
A. 56,100
B. 40,900
C. 53,600
D. 13,000
Answer:
Financial statements for Orange Company appear below:
Dividends during Year 2 totaled $156 thousand, of which $18 thousand were preferred
dividends.
The market price of a share of common stock on December 31, Year 2 was $100.
Orange Company’s return on total assets for Year 2 was closest to:
A. 15.5%
B. 15.9%
C. 16.5%
D. 14.5%
Answer:
The Cox Company uses standard costing. The following data are available for April:
The standard quantity of material allowed for April production is:
A) 14,200 gallons
B) 12,700 gallons
C) 11,700 gallons
D) 10,200 gallons
Answer:
Assume a company has a current ratio that is greater than 1. Which of the following
transactions will reduce the company’s current ratio?
A. Selling office equipment at book value.
B. Paying a cash dividend already declared.
C. Borrowing by taking out a short-term loan.
D. Selling equipment at a loss.
When the current ratio is greater than 1 (e.g., $500 ÷ $400 = 1.25) then increasing both
portions of the fraction by an equal amount would reduce the current ratio (e.g., $550 ÷
$450 = 1.22.)
Answer:
Carter Corporation applies manufacturing overhead on the basis of machine-hours. At
the beginning of the most recent year, the company based its predetermined overhead
rate on total estimated overhead of $135,850. Actual manufacturing overhead for the
year amounted to $145,000 and actual machine-hours were 5,660. The company’s
predetermined overhead rate for the year was $24.70 per machine-hour.
The predetermined overhead rate was based on how many estimated machine-hours?
A. 5,870
B. 5,500
C. 6,081
D. 5,660
Answer:
Clements Company, which has only one product, has provided the following data
concerning its most recent month of operations:
The total contribution margin for the month under the variable costing approach is:
A. $61,500
B. $51,000
C. $55,500
D. $43,600
Answer:
The following partially completed T-accounts summarize the transactions of Belson
Company for last year:
At the end of the year, the company closes out the balance in the Manufacturing
Overhead account to Cost of Goods Sold.
The indirect labor cost is:
A. $6,000
B. $13,000
C. $16,000
D. $31,000
Answer:
Reference: 8-5
Yewston Hotel bases its budgets on guest-days. The hotels static budget for April
appears below:
The total cost at the activity level of 3,300 guest-days per month should be:
A) $78,530
B) $93,060
C) $77,660
D) $64,860
Answer:
The term differential cost refers to:
A. a difference in cost which results from selecting one alternative instead of another.
B. the benefit forgone by selecting one alternative instead of another.
C. a cost which does not involve any dollar outlay but which is relevant to the
decision-making process.
D. a cost which continues to be incurred even though there is no activity.
Answer:
Raybould Corporation has provided the following data concerning its most important
raw material, compound M31P:
When recording the purchase of materials, Raw Materials would be:
A) credited for $49,950.
B) credited for $51,300.
C) debited for $49,950.
D) debited for $51,300.
Answer:
The budgeted amount of raw materials to be purchased is determined by:
A. adding the desired ending inventory of raw materials to the raw materials needed to
meet the production schedule.
B. subtracting the beginning inventory of raw materials from the raw materials needed
to meet the production schedule.
C. adding the desired ending inventory of raw materials to the raw materials needed to
meet the production schedule and subtracting the beginning inventory of raw materials.
D. adding the beginning inventory of raw materials to the raw materials needed to meet
the production schedule and subtracting the desired ending inventory of raw materials.
Answer:
The following labor standards have been established for a particular product:
The following data pertain to operations concerning the product for the last month:
What is the labor efficiency variance for the month?
A) $13,805 U
B) $13,530 U
C) $15,305 U
D) $15,305 F
Answer:
Fraser Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $10,000 and the ending accounts receivable balance was
$14,000. The company’s accounts receivable turnover was closest to:
A. 5.42
B. 13.00
C. 9.29
D. 10.83
Answer:
Reference: 8-50
Fabiano Corporation makes a product whose direct labor standards are 0.5 hours per
unit and $23.00 per hour. In February the company produced 3,300 units using 1,640
direct labor-hours. The actual direct labor cost was $38,540.
The labor rate variance for February is:
A) $825 U
B) $820 U
C) $820 F
D) $825 F
Answer:
Hartzog Corporation’s most recent balance sheet and income statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand. Dividends on
preferred stock totaled $5 thousand. The market price of common stock at the end of
Year 2 was $7.04 per share.
The working capital at the end of Year 2 is:
A. $610 thousand
B. $860 thousand
C. $310 thousand
D. $710 thousand
Answer:
Reference: 8A-5
The Dodge Company makes and sells a single product and uses a standard cost system
in which manufacturing overhead costs are applied to units of product on the basis of
standard direct labor-hours. The standard cost card shows that 5 direct labor-hours are
required per unit of product. The Dodge Company had the following budgeted and
actual data for the year:
The budgeted direct labor-hours is used as the denominator activity for the month.
The variable overhead efficiency variance was:
A) $6,000 U
B) $6,000 F
C) $12,000 U
D) $12,000 F
Answer:
Favini Company, which has only one product, has provided the following data
concerning its most recent month of operations:
What is the net operating income for the month under variable costing?
A. $11,800
B. $3,700
C. $8,100
D. $(23,600)
Answer:
When the actual direct labor-hours is less than the standard direct labor-hours allowed
for the actual output of the period, the journal entry would include:
A. Debit to Wages Payable; Credit to Labor Efficiency Variance
B. Debit to Work-In-Process; Credit to Labor Efficiency Variance
C. Debit to Wages Payable; Debit to Labor Efficiency Variance
D. Debit to Work-In-Process; Debit to Labor Efficiency Variance
Answer:
Under the indirect method of determining net cash provided by operating activities on
the statement of cash flows, which of the following would be subtracted from net
income?
A. A decrease in accounts receivable.
B. An increase in accrued liabilities.
C. A decrease in accounts payable.
D. An increase in dividend payments to stockholders.
Answer:
Reference: 8A-4
The Phelps Company applies overhead costs to products on the basis of standard direct
labor-hours. The standard cost card shows that 5 direct labor-hours are required per unit
of product. Phelps Company had the following budgeted and actual data for March:
The budgeted direct labor-hours is used as the denominator activity for the month.
The variable overhead rate variance for March is:
A) $7,000 unfavorable
B) $9,000 unfavorable
C) $13,000 unfavorable
D) $11,000 unfavorable
Answer:
Hocking Corporation’s comparative balance sheet appears below:
The company’s net income (loss) for the year was $10,000 and its cash dividends were
$1,000. It did not sell or retire any property, plant, and equipment during the year. The
company uses the indirect method to determine the net cash provided by operating
activities.
The company’s net cash provided by operating activities is:
A. $47,000
B. $51,000
C. $43,000
D. $24,000
Answer:
The Reed Division reports the following operating data for the past two years:
The return on investment at Reed was exactly the same in Year 1 and Year 2
Sales in Year 2 amounted to:
A. $250,000
B. $300,000
C. $325,000
D. $350,000
Answer:
Cecere 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 February, the school budgeted for 1,740 students and 160 courses. The actual activity
for the month was 1,540 students and 161 courses.
Required:
Prepare the schools planning budget for February.
Answer:
Rubidoux Jeep Tours operates jeep tours in the heart of the Colorado Rockies. The
company bases its budgets on two measures of activity (i.e., cost drivers), namely
guests and jeeps. One vehicle used in one tour on one day counts as a jeep. Each jeep
has one tour guide. The company uses the following data in its budgeting:
In September, the company budgeted for 483 guests and 240 jeeps. The companys
income statement showing the actual results for the month appears below:
Required:
Prepare a report showing the companys revenue and spending variances for September.
Label each variance as favorable (F) or unfavorable (U).
Answer:
Deluz Corporation uses the FIFO method in its process costing. The following data
pertain to its Assembly Department for August.
Compute the equivalent units of production for both materials and conversion costs for
the Assembly Department for August using the FIFO method.
Answer:
Lundberg Corporation’s most recent balance sheet and income statement appear below:
Dividends on common stock during Year 2 totaled $50 thousand. Dividends on
preferred stock totaled $20 thousand. The market price of common stock at the end of
Year 2 was $9.36 per share.
Compute the following for Year 2:
a. Gross margin percentage.
b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders’ equity.
h. Book value per share.
i. Working capital.
j. Current ratio.
k. Acid-test ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned.
q. Debt-to-equity ratio.
Answer:
Onofre 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 October, the school budgeted for 1,410 students and 58 courses. The actual activity
for the month was 1,210 students and 62 courses.
Required:
Prepare the schools flexible budget for the actual level of activity in October.
Answer:
Cabigas Company manufactures two products, Product C and Product D. The company
estimated it would incur $167,140 in manufacturing overhead costs during the current
period. Overhead currently is applied to the products on the basis of direct labor-hours.
Data concerning the current period’s operations appear below:
a. Compute the predetermined overhead rate under the current method, and determine
the unit product cost of each product for the current year.
b. The company is considering using an activity-based costing system to compute unit
product costs for external financial reports instead of its traditional system based on
direct labor-hours. The activity-based costing system would use three activity cost
pools. Data relating to these activities for the current period are given below:
Determine the unit product cost of each product for the current period using the
activity-based costing approach.
Answer:
Redner, 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 grinding
machine is the constraint, with only 2,400 minutes of grinding machine time available
this week.
a. Given the grinding 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 grinding machine time?
Answer:
Bumpass Corporation’s contribution margin ratio is 74% and its fixed monthly expenses
are $43,000. Assume that the company’s sales for July are expected to be $102,000.
Estimate the company’s net operating income for July, assuming that the fixed monthly
expenses do not change. Show your work!
Answer:
Zeeb Corporation produces and sells a single product. Data concerning that product
appear below:
Fixed expenses are $355,000 per month. The company is currently selling 5,000 units
per month.
The marketing manager believes that a $12,000 increase in the monthly advertising
budget would result in a 160 unit increase in monthly sales. What should be the overall
effect on the company’s monthly net operating income of this change? Show your
work!
Answer:
Roosevelt Corporation’s balance sheet appears below:
Net income for the year was -$43. Cash dividends were $1. The company did not
dispose of any property, plant, and equipment, issue any bonds payable, or repurchase
any of its own common stock during the year.
Prepare a statement of cash flows in good form using the indirect method.
Answer:
Spurrier Corporation produces two intermediate products, A and B, from a common
input. Intermediate product A can be further processed into end product X. Intermediate
product B can be further processed into end product Y. The common input is purchased
in batches that cost $50 each and the cost of processing a batch to produce intermediate
products A and B is $15. Intermediate product A can be sold as is for $28 or processed
further for $18 to make end product X that is sold for $43. Intermediate product B can
be sold as is for $31 or processed further for $24 to make end product Y that is sold for
$68.
a. Assuming that no other costs are involved in processing potatoes or in selling
products, how much money does the company make from processing one batch of the
common input into the end products X and Y? Show your work!
b. Should each of the intermediate products, A and B, be sold as is or processed further
into an end product? Explain.
Answer:
Answer:
Babb Company is a manufacturing firm that uses job-order costing. The company’s
inventory balances were as follows at the beginning and end of the year:
The company applies overhead to jobs using a predetermined overhead rate based on
machine-hours. At the beginning of the year, the company estimated that it would work
17,000 machine-hours and incur $272,000 in manufacturing overhead cost. The
following transactions were recorded for the year:
– Raw materials were purchased, $416,000.
– Raw materials were requisitioned for use in production, $412,000 $(376,000 direct
and $36,000 indirect).
– The following employee costs were incurred: direct labor, $330,000; indirect labor,
$69,000; and administrative salaries, $157,000.
– Selling costs, $113,000.
– Factory utility costs, $29,000.
– Depreciation for the year was $121,000 of which $114,000 is related to factory
operations and $7,000 is related to selling, general, and administrative activities.
– Manufacturing overhead was applied to jobs. The actual level of activity for the year
was 15,000 machine-hours.
– Sales for the year totaled $1,282,000.
a. Prepare a schedule of cost of goods manufactured in good form.
b. Was the overhead underapplied or overapplied? By how much?
c. Prepare an income statement for the year in good form. The company closes any
underapplied or overapplied manufacturing overhead to Cost of Goods Sold.
Answer:
Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following
product-line income data:
The following additional information is available:
* The factory rent of $1,500 assigned to Product C is avoidable if the product were
dropped.
* The company’s total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors’ salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce
monthly expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the
administrative staff; their combined salaries total $3,000.
Prepare an analysis showing whether Product C should be eliminated.
Answer:
EMD Corporation manufactures two products, Product S and Product W. Product W is
of fairly recent origin, having been developed as an attempt to enter a market closely
related to that of Product W. Product W is the more complex of the two products,
requiring one hour of direct labor time per unit to manufacture compared to one-half
hour of direct labor time for Product S. Product W is produced on an automated
production line.
Overhead is currently assigned to the products on the basis of direct labor-hours. The
company estimated it would incur $500,000 in manufacturing overhead costs and
produce 10,000 units of Product W and 60,000 units of Product S during the current
year. Unit cost for materials and direct labor are:
a. Compute the predetermined overhead rate under the current method of allocation and
determine the unit product cost of each product for the current year.
b. The company’s overhead costs can be attributed to four major activities. These
activities and the amount of overhead cost attributable to each for the current year are
given below:
Using the data above and an activity-based costing approach, determine the unit product
cost of each product for the current year.
Answer:
A number of costs and measures of activity are listed below.
For each item above, indicate whether the cost is MAINLY fixed or variable with
respect to the possible measure of activity listed next to it.
Answer:
Iron Decor manufactures decorative iron railings. In preparing for next year’s
operations, management has developed the following estimates:
Compute the following items:
a. Unit contribution margin.
b. Contribution margin ratio.
c. Break-even in dollar sales.
d. Margin of safety percentage.
e. If the sales volume increases by 20% with no change in total fixed expenses, what
will be the change in net operating income?
f. If the per unit variable production costs increase by 15%, and if fixed selling and
administrative expenses increase by 12%, what will be the new break-even point in
dollar sales?
Answer:
Edwards Company has projected sales and production in units for the second quarter of
the year as follows:
a. Cash production costs are budgeted at $6 per unit produced. Of these production
costs, 40% are paid in the month in which they are incurred and the balance in the
following month. Selling and administrative expenses (all paid in cash) amount to
$60,000 per month. The accounts payable balance on March 31 totals $96,000, all of
which will be paid in April. Prepare a schedule for each month showing budgeted cash
disbursements for Edwards Company.
b. Assume that all units will be sold on account for $15 each. Cash collections from
sales are budgeted at 60% in the month of sale, 30% in the month following the month
of sale and the remaining 10% in the second month following the month of sale.
Accounts receivable on March 31 totaled $255,000 $(45,000 from February’s sales and
the remainder from March.) Prepare a schedule for each month showing budgeted cash
receipts for Edwards Company.
Answer:
