Standard costs should generally be based on the actual costs of prior periods.
Answer:
The revenue and spending variances are the differences between the static planning
budget and the actual results for the period.
Answer:
In segment reporting, sales dollars is usually an appropriate allocation base for selling,
general, and administrative expenses.
Answer:
Selling and administrative expenses are product costs under generally accepted
accounting principles.
Answer:
The activity rates in activity-based costing are computed by dividing the overhead in
each production department by its direct labor-hours.
Answer:
A favorable labor rate variance is recorded as a debit in the Labor Rate Variance
account.
Answer:
In October, Patnode Inc., a merchandising company, had sales of $294,000, selling
expenses of $27,000, and administrative expenses of $35,000. The cost of merchandise
purchased during the month was $211,000. The beginning balance in the merchandise
inventory account was $38,000 and the ending balance was $34,000.
Prepare a traditional format income statement for October.
Answer:
Issuing common stock will increase a company’s financial leverage.
Answer:
When more hours of labor time are necessary to complete a job than the standard
allows, the labor rate variance is unfavorable.
Answer:
Underapplied or overapplied manufacturing overhead represents the difference between
actual overhead costs and applied overhead costs.
Answer:
In a standard costing system, underapplied or overapplied fixed manufacturing
overhead is equal to the sum of the fixed manufacturing overhead budget variance and
the fixed manufacturing overhead volume variance.
Answer:
Negative working capital indicates that the sum of all current assets is negative.
Answer:
In general, the purchasing agent is responsible for the materials price variance.
Answer:
A mixed cost is partially variable and partially fixed.
Answer:
The purchase of marketable securities for cash will lower a firm’s acid-test ratio.
Answer:
In any decision making situation, sunk costs are irrelevant and should be ignored.
Answer:
Assurer Inc. uses the weighted-average method in its process costing system. The
following data concern the operations of the company’s first processing department for
a recent month.
a. Determine the equivalent units of production.
b. Determine the costs per equivalent unit.
c. Determine the cost of ending work in process inventory.
d. Determine the cost of the units transferred to the next department.
Answer:
When computing the cost per equivalent unit, it is not necessary to consider the
percentage completion of the units in beginning inventory under the weighted-average
method.
Answer:
A favorable labor efficiency variance is recorded as a credit in the Labor Efficiency
Variance account.
Answer:
The contribution margin tells us what happens to profits as volume changes if a
segment’s capacity and fixed costs change as well.
Answer:
Although formal entry of standard costs and variances into the accounting records is not
required, some organizations make such entries in order to emphasize the importance of
variances as well as to simplify the bookkeeping process.
Answer:
A process costing system would be best suited for production of a large quantity of a
homogeneous product.
Answer:
In process costing, the equivalent units computed for materials is generally the same as
that computed for direct labor.
Answer:
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. The companys
choice of the denominator level of activity affects the Fixed component of the
predetermined overhead rate.
Answer:
A favorable labor rate variance is recorded as a debit in the Labor Rate Variance
account.
Answer:
For a given level of sales, a low contribution margin ratio will produce less net
operating income than a high contribution margin ratio.
Answer:
If accounts receivable increase during a period, then the amount of cash collected from
customers will be greater than the amount of sales reported on the income statement for
the period.
Answer:
A materials price variance is favorable if the actual price exceeds the standard price.
Answer:
In a standard costing system where the denominator activity for the predetermined
overhead rate is labor-hours, overhead costs are applied to work in process on the basis
of actual hours worked.
Answer:
Under variable costing, all variable costs are treated as product costs.
Answer:
An unfavorable materials quantity variance is recorded as a credit in the Materials
Quantity Variance account.
Answer:
The sale of a long-term investment for cash would be classified as an investing activity
in the statement of cash flows.
Answer:
Segmented statements for internal use should be prepared in the contribution format.
Answer:
The concept of the relevant range does not apply to fixed costs.
Answer:
Under the direct method of determining the net cash provided by operating activities on
the statement of cash flows, an increase in income taxes payable would be subtracted
from income tax expense to convert income tax expense to a cash basis.
Answer:
The cost per equivalent unit for conversion costs will always be the same under both the
FIFO and the weighted-average methods if there is no ending work in process
inventory.
Answer:
Planning and control are essentially the same thing.
Answer:
Average maintenance costs are $1.50 per machine-hour at an activity level of 8,000
machine-hours and $1.20 per machine-hour at an activity level of 13,000
machine-hours. Assuming that this activity is within the relevant range, total expected
maintenance cost for a budgeted activity level of 10,000 machine-hours would be
closest to:
A. $16,128
B. $15,000
C. $13,440
D. $11,433
Answer:
Higgins Company presently has a current ratio of 0.6. It is currently negotiating a loan,
but it has been informed it must improve its current ratio before the loan will be
approved. Which of the following actions would improve its current ratio?
A. Pay off a portion of its long-term debt.
B. Use cash to pay off some current liabilities.
C. Purchase additional inventory on credit.
D. Collect some of the current accounts receivable.
Answer:
Schlender Corporation produces and sells two products. In the most recent month,
Product L40O had sales of $22,000 and variable expenses of $8,580. Product Y27L had
sales of $49,000 and variable expenses of $17,690. The fixed expenses of the entire
company were $43,950.
The break-even point for the entire company is closest to:
A. $27,050
B. $70,220
C. $69,762
D. $43,950
Answer:
Byklea Corporation uses the weighted-average method in its process costing system.
This month, the beginning inventory in the first processing department consisted of 200
units. The costs and percentage completion of these units in beginning inventory were:
A total of 7,000 units were started and 6,700 units were transferred to the second
processing department during the month. The following costs were incurred in the first
processing department during the month:
The ending inventory was 90% complete with respect to materials and 45% complete
with respect to conversion costs.
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.
What are the equivalent units for conversion costs for the month in the first processing
department?
A. 6,925
B. 7,200
C. 6,700
D. 225
Answer:
Kramer 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 total cost transferred from the first processing department to the next processing
department during the month is closest to:
A. $306,682
B. $353,149
C. $334,000
D. $341,000
Answer:
Reference: 8-36
Landram Corporation makes a product with the following standard costs:
In March the company produced 4,700 units using 10,230 kilos of the direct material
and 2,210 direct labor-hours. During the month, the company purchased 10,800 kilos of
the direct material at a cost of $76,680. The actual direct labor cost was $38,233 and the
actual variable overhead cost was $11,934.
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 March is:
A) $5,810 F
B) $5,893 U
C) $5,893 F
D) $5,810 U
Answer:
Reference: 8A-15
Seroka Corporation estimates that its variable manufacturing overhead is $6.90 per
machine-hour and its fixed manufacturing overhead is $745,290 per period.
If the denominator level of activity is 9,000 machine-hours, the fixed element in the
predetermined overhead rate would be:
A) $6.90
B) $89.71
C) $690.00
D) $82.81
Answer:
Data concerning Hewell Enterprises Corporation’s single product appear below:
The unit sales to attain the company’s monthly target profit of $14,000 is closest to:
A. 4,408 units
B. 8,186 units
C. 5,153 units
D. 2,865 units
Answer:
Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets costs $51
to buy from farmers and $14 to crush in the company’s plant. Two intermediate
products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can
be sold as is for $20 or processed further for $18 to make the end product industrial
fiber that is sold for $45. The beet juice can be sold as is for $41 or processed further
for $21 to make the end product refined sugar that is sold for $62. How much profit
(loss) does the company make by processing one batch of sugar beets into the end
products industrial fiber and refined sugar?
A. $(104)
B. $(4)
C. $7
D. $3
Answer:
The Rial Company’s income statement for June is given below:
If sales for Division F increase $40,000 with a $10,000 increase in the Division’s
traceable fixed costs, the overall company net operating income should:
A. increase by $30,000
B. increase by $6,000
C. increase by $2,889
D. decrease by $4,000
Answer:
Providing the power required to run production equipment is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Facility-level activity.
Answer:
What was the variable overhead efficiency variance for the period to the nearest dollar?
A) $1,746 U
B) $70 U
C) $820 F
D) $74 U
Answer:
Excerpts from Harris Corporation’s comparative balance sheet appear below:
Which of the following is the correct treatment within the operating activities section of
the statement of cash flows using the indirect method?
A. The change in Accounts Payable is added to net income; The change in Accrued
Liabilities is subtracted from net income
B. The change in Accounts Payable is added to net income; The change in Accrued
Liabilities is added to net income
C. The change in Accounts Payable is subtracted from net income; The change in
Accrued Liabilities is added to net income
D. The change in Accounts Payable is subtracted from net income; The change in
Accrued Liabilities is subtracted from net income
Answer:
Pellman Inc., which produces a single product, has provided the following data for its
most recent month of operations:
There were no beginning or ending inventories.
The unit product cost under variable costing was:
A. $33
B. $32
C. $72
D. $40
Answer:
(Ignore income taxes in this problem.) How much would you have to invest today in the
bank at an interest rate of 7% to have an annuity of $2,800 per year for 9 years, with
nothing left in the bank at the end of the 9 years? Select the amount below that is
closest to your answer.
A. $25,200
B. $18,242
C. $23,551
D. $1,523
Answer:
Kuhner Corporation produces and sells two products. Data concerning those products
for the most recent month appear below:
Fixed expenses for the entire company were $33,100.
The break-even point for the entire company is closest to:
A. $48,676
B. $33,100
C. $22,900
D. $51,020
Answer:
The management of Freshwater Corporation is considering dropping product C11B.
Data from the company’s accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company’s
accounting system. Further investigation has revealed that $211,000 of the fixed
manufacturing expenses and $122,000 of the fixed selling and administrative expenses
are avoidable if product C11B is discontinued.
What would be the effect on the company’s overall net operating income if product
C11B were dropped?
A. Overall net operating income would decrease by $188,000.
B. Overall net operating income would increase by $74,000.
C. Overall net operating income would decrease by $74,000.
D. Overall net operating income would increase by $188,000.
Answer:
The following standards have been established for a raw material used to make product
P62:
The following data pertain to a recent months operations:
Required:
a. What is the materials price variance for the month?
b. What is the materials quantity variance for the month?
Answer:
A company that makes organic fertilizer has supplied the following data:
The company’s unit contribution margin is closest to:
A. $5.25
B. $4.05
C. $3.50
D. $2.35
Answer:
Reference: 8-30
Snuggs Corporation makes a product with the following standard costs:
The company reported the following results concerning this product in October.
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 labor efficiency variance for October is:
A) $510 U
B) $480 F
C) $480 U
D) $510 F
Answer:
Condit Corporation manufactures a variety of products. Variable costing net operating
income was $75,600 last year and was $80,100 this year. Last year, inventory decreased
by 3,400 units. This year, inventory increased by 3,000 units. Fixed manufacturing
overhead cost is $5 per unit.
What was the absorption costing net operating income last year?
A. $77,600
B. $75,600
C. $92,600
D. $58,600
Answer:
Reference: 8-37
Arrow Industries uses a standard cost system in which direct materials inventory is
carried at standard cost. Arrow has established the following standards for the prime
costs of one unit of product.
During May, Arrow purchased 160,000 pounds of direct material at a total cost of
$304,000. The total direct labor wages for May were $37,800. Arrow manufactured
19,000 units of product during May using 142,500 pounds of direct material and 5,000
direct labor-hours.
The direct labor rate variance for May is:
A) $2,200 favorable
B) $1,900 unfavorable
C) $2,000 unfavorable
D) $2,090 favorable
Answer:
Reference: 8-1
Nussey Clinic uses client-visits as its measure of activity. During May, the clinic
budgeted for 2,100 client-visits, but its actual level of activity was 2,050 client-visits.
The clinic has provided the following data concerning the formulas used in its
budgeting and its actual results for May:
Data used in budgeting:
Actual results for May:
The revenue variance for May would be closest to:
A) $1,040 F
B) $1,040 U
C) $960 F
D) $960 U
Answer:
What was the variable overhead rate variance for the period to the nearest dollar?
A) $1,750 U
B) $820 F
C) $1,750 F
D) $820 U
Answer:
Reference: 8-40
The following materials standards have been established for a particular product:
The following data pertain to operations concerning the product for the last month:
What is the materials price variance for the month?
A) $660 U
B) $600 U
C) $660 F
D) $600 F
Answer:
Pinnini Co. uses a predetermined overhead rate based on direct labor-hours to apply
manufacturing overhead to jobs. Last year, Pinnini Company incurred $225,000 in
actual manufacturing overhead cost. The Manufacturing Overhead account showed that
overhead was overapplied $14,500 for the year. If the predetermined overhead rate was
$5.00 per direct labor-hour, how many hours did the company work during the year?
A. 45,000 hours
B. 47,900 hours
C. 42,100 hours
D. 44,000 hours
Answer:
Jaderston 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 per equivalent unit for materials for the month in the first processing
department is closest to:
A. $19.55
B. $19.20
C. $20.46
D. $20.09
Answer:
Sales reported on the income statement totaled $850,000. The beginning balance in
accounts receivable was $90,000. The ending balance in accounts receivable was
$160,000. Under the direct method of determining the net cash provided by operating
activities on the statement of cash flows, sales adjusted to a cash basis are:
A. $780,000
B. $940,000
C. $860,000
D. $920,000
Answer:
Sproles Inc. manufactures a variety of products. Variable costing net operating income
was $90,500 last year and its inventory decreased by 3,500 units. Fixed manufacturing
overhead cost was $6 per unit. What was the absorption costing net operating income
last year?
A. $90,500
B. $21,000
C. $69,500
D. $111,500
Answer:
The purchasing agent of the Clampett Company ordered materials of lower quality in an
effort to economize on price and in response to the demands of the production manager
due to a mistake in production scheduling. The materials were shipped by airfreight at a
rate higher than that ordinarily charged for shipment by truck, resulting in an
unfavorable materials price variance. The lower quality material proved to be unsuitable
on the production line and resulted in excessive waste. In this situation, who should be
held responsible for the materials price and quantity variances?
Materials Price Variance Materials Quantity Variance
A) Purchasing Agent Purchasing Agent
B) Production Manager Production Manager
C) Production Manager Purchasing Agent
D) Purchasing Agent Production Manager
Answer:
Ehrler 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 March, the company budgeted for 328 guests and 143 jeeps. The actual activity for
the month was 338 guests and 147 jeeps.
Required:
Prepare the companys flexible budget for the actual level of activity in March.
Answer:
During June, Catlin Corporation purchased $76,000 of raw materials on credit to add to
its raw materials inventory. A total of $81,000 of raw materials was requisitioned from
the storeroom for use in production. These requisitioned raw materials included $5,000
of indirect materials.
Prepare journal entries to record the purchase of materials and their use in production.
Answer:
Crovo Corporation uses customers served as its measure of activity. During December,
the company budgeted for 38,000 customers, but actually served 40,000 customers. The
company has provided the following data concerning the formulas used in its budgeting
and its actual results for December:
Data used in budgeting:
Actual results for December:
Required:
Prepare a report showing the companys revenue and spending variances for December.
Label each variance as favorable (F) or unfavorable (U).
Answer:
The management of Paye Corporation expects sales in April to be $130,000. The
company’s contribution margin ratio is 65% and its fixed monthly expenses are
$54,000.
Estimate the company’s net operating income for April, assuming that the fixed monthly
expenses do not change. Show your work!
Answer:
During March, Samorano Clinic plans for an activity level of 2,500 patient-visits.
Revenue is $42.10 per patient-visit. Personnel expenses are $30,400 per month plus
$11.20 per patient-visit. Medical supplies are $1,100 per month plus $6.50 per
patient-visit. Occupancy expenses are $6,500 per month plus $1.90 per patient-visit.
Administrative expenses are $5,200 per month plus $0.40 per patient-visit.
Required:
Prepare the clinics planning budget for March.
Answer:
Bertone Inc., which produces a single product, has provided the following data for its
most recent month of operation:
The company had no beginning or ending inventories.
Compute the unit product cost under variable costing. Show your work!
Answer:
Eaglen Corporation has provided the following data:
Compute the inventory turnover for this year:
Answer:
Glassey Clinic uses patient-visits as its measure of activity. The clinic bases its budgets
on the following information: Revenue should be $41.80 per patient-visit. Personnel
expenses should be $35,400 per month plus $10.60 per patient-visit. Medical supplies
should be $700 per month plus $7.90 per patient-visit. Occupancy expenses should be
$8,800 per month plus $1.30 per patient-visit. Administrative expenses should be
$5,600 per month plus $0.40 per patient-visit.
The clinic reported the following actual results for February:
Required:
Prepare a report showing the clinics revenue and spending variances for February.
Label each variance as favorable (F) or unfavorable (U).
Answer:
Data from Ankeny Corporation’s most recent balance sheet and income statement
appear below:
Compute the average sale period for this year:
Answer:
Answer:
Financial statements for Pracht Company appear below:
Dividends during Year 2 totaled $62 thousand, of which $15 thousand were preferred
dividends.
The market price of a share of common stock on December 31, Year 2 was $160.
Compute the following for Year 2:
a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders’ equity.
g. Book value per share.
h. Working capital.
i. Current ratio.
j. Acid-test ratio.
k. Accounts receivable turnover.
l. Average collection period.
m. Inventory turnover.
n. Average sale period.
o. Times interest earned.
p. Debt-to-equity ratio.
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:
Financial data for Windsor, Inc. for last year appear below:
The company paid dividends of $104,000 last year. The “Investment in Pine Company”
on the statement of financial position represents an investment in the stock of another
company.
a. Compute the company’s margin, turnover, and return on investment for last year.
b. The Board of Directors of Windsor, Inc. has set a minimum required return of 25%.
What was the company’s residual income last year?
Answer:
Poch Memorial Diner is a charity supported by donations that provides free meals to the
homeless. The diners budget for September is to be based on 2,700 meals. The diners
director has provided the following cost formulas to use in the budget:
Required:
Prepare the diners budget for the month of September. The budget will only contain the
costs listed above; no revenues will be on the budget.
Answer:
A customer has asked Twiner Corporation to supply 5,000 units of product D05, with
some modifications, for $40.20 each. The normal selling price of this product is $52.80
each. The normal unit product cost of product D05 is computed as follows:
Direct labor is a variable cost. The special order would have no effect on the company’s
total fixed manufacturing overhead costs. The customer would like some modifications
made to product D05 that would increase the variable costs by $3.50 per unit and that
would require a one-time investment of $23,000 in special molds that would have no
salvage value. This special order would have no effect on the company’s other sales.
The company has ample spare capacity for producing the special order.
Determine the effect on the company’s total net operating income of accepting the
special order. Show your work!
Answer:
Lahay Inc. bases its selling and administrative expense budget on the number of units
sold. The variable selling and administrative expense is $4.30 per unit. The budgeted
fixed selling and administrative expense is $30,240 per month, which includes
depreciation of $3,510. The remainder of the fixed selling and administrative expense
represents current cash flows. The sales budget shows 2,700 units are planned to be sold
in April.
Prepare the selling and administrative expense budget for April.
Answer:
During February, Poetker Corporation budgeted for 29,000 customers, but actually
served 28,000 customers. Revenue should be $4.70 per customer served. Wages and
salaries should be $31,700 per month plus $1.50 per customer served. Supplies should
be $0.80 per customer served. Insurance should be $8,400 per month. Miscellaneous
expenses should be $7,400 per month plus $0.40 per customer served.
Required:
Prepare the companys flexible budget for February based on the actual level of activity
for the month.
Answer:
Kramer Company makes 4,000 units per year of a part called an axial tap for use in one
of its products. Data concerning the unit production costs of the axial tap follow:
An outside supplier has offered to sell Kramer Company all of the axial taps it requires.
If Kramer Company decided to discontinue making the axial taps, 40% of the above
fixed manufacturing overhead costs could be avoided. Assume that direct labor is a
variable cost.
a. Assume Kramer Company has no alternative use for the facilities presently devoted
to production of the axial taps. If the outside supplier offers to sell the axial taps for $65
each, should Kramer Company accept the offer? Fully support your answer with
appropriate calculations.
b. Assume that Kramer Company could use the facilities presently devoted to
production of the axial taps to expand production of another product that would yield an
additional contribution margin of $80,000 annually. What is the maximum price Kramer
Company should be willing to pay the outside supplier for axial taps?
Answer:
Millage Corporation has provided the following data:
Compute the accounts receivable turnover for this year. Show your work!
Answer: