1) A company with sales of $50,000, variable costs of $35,000, and fixed costs of
$25,000 will earn a net income of $15,000.
2) A cost object is anything for which a measurement of costs is desired.
3) All customers are equally important to a company and should receive equal levels of
attention.
4) In the graph method of CVP analysis, the horizontal line above the x-axis represents
the total cost line.
5) A cost object is anything for which a cost measurement is desired.
6) Value engineering entails improvements in product designs, and changes in materials
specifications.
7) A step cost function is an example of a linear cost function.
8) A planned decrease in selling price would be expected to cause an increase in the
quantity sold.
9) The cost leadership strategy is for products and services that are similar to
competitor’s products and services.
10) While calculating terminal recovery of working capital there are no tax
consequences as there is no gain or loss on working capital.
11) Demanding but achievable targets tend to ________.
A) be set by subordinate managers to create intrinsic reasons to achieve targets
B) create unnecessary anxiety that de-motivates employees
C) improve performance of employees when they are closer to the target
D) be perceived as ambitious with little chance of success in achieving targets
12) When analyzing the change in operating income, the strategy component of
price-recovery ________.
A) calculations are similar to the efficiency-variance calculations
B) compares the change in output price with the changes in input prices
C) will report a large positive amount when a company has successfully pursued the
cost leadership strategy
D) isolates the change attributed solely to an increase in production efficiencies
13) Contrafic Corporation used the following data to evaluate its current operating
system. The company sells items for $21 each and used a budgeted selling price of $21
per unit.
What is the static-budget variance of operating income?
A) $85,000 favorable
B) $90,000 unfavorable
C) $110,000 favorable
D) $105,000 unfavorable
14) The actual information pertains to the third quarter. As part of the budgeting
process, the Duck Decoy Department of Paralith Incorporated had developed the
following static budget for the third quarter. Duck Decoy is in the process of preparing
the flexible budget and understanding the results.
The flexible budget will report ________ for the fixed costs.
A) $536,000
B) $35,000 Favorable
C) $35,000
D) $1,000 Unfavorable
15) Which of the following mathematical expression is used to calculate budgeted
variable overhead cost rate per output unit?
A) Budgeted output allowed per input unit x Budgeted variable overhead cost rate per
input unit
B) Budgeted input allowed per output unit / Budgeted variable overhead cost rate per
input unit
C) Budgeted output allowed per input unit / Budgeted variable overhead cost rate per
input unit
D) Budgeted input allowed per output unit x Budgeted variable overhead cost rate per
input unit
16) A challenge to using cost-benefit criteria for allocating costs is that ________.
A) the costs of designing and implementing complex cost allocations are not readily
apparent
B) the benefits of making better-informed pricing decisions are difficult to measure
C) cost systems are being simplified and fewer multiple cost-allocation bases are being
used
D) the costs of collecting and processing information keep spiraling upward
17) Comfort Corporation manufactures two models of office chairs, a standard and a
deluxe model. The following activity and cost information has been compiled:
Assume a traditional costing system applies the overhead costs based on direct labor
hours. What is the total amount of overhead costs assigned to the standard model?
A) $65,700
B) $63,600
C) $66,300
D) $66,700
18) Interactive control system ________.
A) ensure to adhere to legal or ethical accounting policies and procedures
B) ensure prompt and severe reprimand of unethical conduct, regardless of the benefits
that might accrue to the company from unethical action
C) ensure employees’ intrinsic motivation, the desire to achieve self-satisfaction for
performing well regardless of external rewards such as bonuses or promotion
D) ensure frequent face-to-face communications among managers and employees
regarding the critical uncertainties
19) ________ provides the lowest estimate of denominator-level capacity in case
demand of the product is not a limiting factor.
A) Practical capacity
B) Theoretical capacity
C) Master-budget capacity utilization
D) Normal capacity utilization
20) Each time Mayberry Nursery hires a new employee, it must wait for some period of
time before the employee can meet production standards. Management is unsure of the
learning curve in its operations but it knows the first job by a new employee averages
40 hours and the second job averages 32 hours. Assume all jobs to be equal in size.
Required:
a.What is the learning-curve percentage, assuming the cumulative average-time
method?
b.What is the time for a new employee to build 16 units with this learning curve using
the cumulative average-time method? You may use an index of -0.1520.
21) An unfavorable production-volume variance ________.
A) is not a good measure of a lost production opportunity
B) indicates that the company had reduced its per unit fixed overhead cost to improve
sales
C) measures the amount of extra fixed costs planned for but not used
D) takes into account the effect of additional revenues due to maintaining higher prices
22) Inventoriable costs ________.
A) include administrative and marketing costs
B) are expensed in the accounting period in which the products are sold
C) are expensed in the accounting period in which the products are manufactured
D) are also referred to as nonmanufacturing costs
23) Which of the following is true of unused capacity?
A) It is a definite sign of wasted resources.
B) It is intended for future use.
C) It is not possible to reduce or eliminate unused capacity costs.
D) It does not provide capacity for potential demand surges.
24) Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200
equal size lots.
As the lots are sold, they are cleared at an average cost of $5,000.
Storm drains and driveways are installed at an average cost of $8,000 per site.
Sales commissions are 10% of selling price.
Administrative costs are $850,000 per year.
The average selling price was $160,000 per lot during 20X5 when 50 lots were sold.
During 20X6, the company bought another 2,000-acre island and developed it exactly
the same way. Lot sales in 20X6 totaled 300 with an average selling price of $160,000.
All costs were the same as in 20X5.
Required:
Prepare income statements for both years using both absorption and variable costing
methods.
25) The Jarvis Corporation produces bucket loader assemblies for the tractor industry.
The product has a long term life expectancy. Jarvis has a traditional manufacturing and
inventory system. Jarvis is considering the installation of a just-in-time inventory
system to improve its cost structure. In doing a full study using its manufacturing
engineering team as well as consulting with industry JIT experts and the main vendors
and suppliers of the components Jarvis uses to manufacture the bucket loader
assemblies, the following incremental cost-benefit relevant information is available for
analysis:
The Jarvis cost of investment capital hurdle rate is 15%.
One time cost to rearrange the shop floor to create the manufacturing cell workstations
is $275,000.
One time cost to retrain the existing workforce for the JIT required skills is $60,000.
Anticipated defect reduction is 40%. Currently there is a cost of quality defect
assessment listed as $150,000 per year.
The setup time for each of the existing functions will be reduced by 67%. Currently the
forecast for setup costs are $225,000 per year.
Jarvis will expect to save $200,000 per year in carrying costs as a result of having a
lower inventory.
The suppliers will require a 15% premium over the current level of prices in order to
position themselves to supply the material on a smaller and more frequent schedule.
Currently the materials purchases are $1,500,000 per year.
Required:
Determine whether it is in the best interest of Jarvis Corporation to install a JIT system.
26) Explain sensitivity analysis and how do managers use sensitivity analysis to
evaluate its implications?
27) How are cost drivers selected in activity-based costing systems?
28) Produce Company needs to know the pounds of apples to have on hand each day.
Each pound of apples costs $0.50 and can be sold for $0.80. Unsold apples are
worthless at the end of the day. The following demands were found after studying the
last six months’ sales:
200 pounds of apples 30% of the time
300 pounds of apples 40% of the time
400 pounds of apples 30% of the time
Required:
Determine whether Produce Company should order 200, 300, or 400 pounds of apples.
29) Silver Company uses one raw material, silver ore, for all of its products. It spends
considerable time getting the silver from the ore before it starts the actual processing of
the finished products, rings, lockets, etc. Traditionally, the company made one product
at a time and charged the product with all costs of production, from ore to final
inspection. However, in recent months, the cost accounting reports have been somewhat
disturbing to management. It seems that some of the finished products are costing more
than they should, even to the point of approaching their retail value. It has been noted
by the accounting manager that this problem began when the company started buying
ore from different parts of the world, some of which require difficult extraction
methods.
Required:
Can you explain how the company might change its accounting system to reflect the
reporting problems better? Are there other problems with the purchasing area?
30) Jonathan has managed a downtown store in a major metropolitan city for several
years. The firm has ten stores in varying locations. In the past, senior management
noticed Jonathan’s work and he has received very good annual evaluations for his
management of the store.
This year his store has generated steady growth in sales, but earnings have been
deteriorating. After examining the monthly performance report generated by the
company budgeting department, he noticed that increasing fixed costs is causing the
decrease in earnings.
Administrative corporate costs, primarily fixed costs, are allocated to individual stores
each month based on actual sales for that month. Two of these stores are currently
growing at a rapid pace, while four other stores are having operating difficulties.
Required:
From the information presented, what do you think is the cause of Jonathan’s reported
decrease in earnings? How can this be corrected?