1) Indirect labor is not a component of manufacturing overhead.
2) Equivalent-unit calculations are necessary to allocate manufacturing costs between
units sold and ending work in process.
3) The upper limit on the production of goods and services if everything works
perfectly is known as practical capacity.
4) The internal rate of return equates the present value of a project’s cash inflows with
the present value of the cash outflows.
5) A flexible budget for 15,000 hours revealed variable manufacturing overhead of
$90,000 and fixed manufacturing overhead of $120,000. The budget for 25,000 hours
would reveal total overhead costs of $210,000.
6) One of the most important conditions for the successful use of standard costing is a
stable production process.
7) The payback period can only be used if net cash inflows are uniform throughout a
project’s life.
8) The final step in recognizing the completion of production requires a company to
debit Finished-Goods Inventory and credit Work-in-Process Inventory.
9) Normal defect rates in an assembly process would be considered if a company
desires to establish a series of practical manufacturing standards.
10) The Purchasing Department would normally begin an investigation regarding an
unfavorable materials quantity variance.
11) Equivalent-unit calculations are necessary to allocate manufacturing costs between
units sold and ending work in process.
12) Consumption ratios are useful in determining the existence of product-line diversity.
13) Martin and Beasley, an accounting firm, provides consulting and tax planning
services. For many years, the firm’s total administrative cost (currently $270,000) has
been allocated to services on this basis of billable hours to clients. A recent analysis
found that 55% of the firm’s billable hours to clients resulted from tax planning
services, while 45% resulted from consulting services.
The firm, contemplating a change to activity-based costing, has identified three
components of administrative cost, as follows:
A recent analysis of staff support found a strong correlation with the number of clients
served. In contrast, in-house computing and miscellaneous office cost varied directly
with the number of computer hours logged and number of client transactions,
respectively. Consulting clients served totaled 35% of the total client base, consumed
30% of the firm’s computer hours, and accounted for 20% of the total client
transactions.
If Martin and Beasley switched from its current accounting method to an activity-based
costing system, the amount of administrative cost chargeable to consulting services
would:
A.decrease by $32,500
B.increase by $32,500
C.decrease by $59,500
D.change by an amount other than those listed
E.change, but the amount cannot be determined based on the information presented
14) Product costing in a manufacturing firm is the process of:
A.accumulating the company’s period costs
B.allocating costs among the firm’s departments
C.placing a value on the company’s fixed assets
D.assigning costs to the firm’s inventory
E.assigning costs to the company’s managers
15) The comprehensive set of budgets that serves as a company’s overall financial plan
is commonly known as:
A.an integrated budget
B.a pro-forma budget
C.a master budget
D.a financial budget
E.a rolling budget
16) Which of the following is not a major influence on pricing decisions?
A.Planning and control policies of the firm
B.Customer demand
C.Costs
D.Competitors
E.Political, legal, and image-related issues
17) Which of the following choices correctly classifies a committed fixed cost and a
discretionary fixed cost?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
18) In regression analysis, the variable that is being predicted is known as the:
A.independent variable
B.dependent variable
C.explanatory variable
D.interdependent variable
E.functional variable
19) Consider the following data of Twill Corporation’s Eastern Division:
Required:
A. Calculate Eastern’s capital turnover.
B. Calculate Eastern’s average invested capital.
C. Calculate Eastern’s income.
D. Calculate residual income.
20) Wright Enterprises, which produces various goods, has limited processing hours at
its manufacturing plant. The following data apply to product no. 607:
Sales price per unit: $9.60
Variable cost per unit: $6.20
Process time per unit: 4 hours
Management is now studying whether to devote the firm’s limited hours to product no.
607 or to other products. What key dollar amount should management focus on when
determining no. 607’s “value” to the firm and deciding the best course of action to
follow?
A.$0.85
B.$2.40
C.$3.40
D.$6.20
E.$9.60
21) Edge Company had a beginning work-in-process inventory of 30,000 units on June
1 . These units contained $120,000 of direct materials and $272,000 of conversion cost.
The following data relate to activity during June:
Edge uses a weighted-average process-costing system. All materials are added at the
start of manufacturing; in contrast, conversion cost is incurred evenly throughout
production.
Required:
A. Compute the total equivalent units for direct material and conversion cost.
B. Compute the cost per equivalent unit of direct material and conversion cost.
C. Determine the cost of completed production.
D. Determine the cost of the June 30 work in process.
22) The Gingham Company’s budgeted income statement reflects the following
amounts:
Sales are collected 50% in the month of sale, 30% in the month following sale, and
19% in the second month following sale. One percent of sales is uncollectible and
expensed at the end of the year.
Gingham pays for all purchases in the month following purchase and takes advantage of
a 3% discount. The following balances are as of January 1:
*Of this balance, $35,000 will be collected in January and the remaining amount will be
collected in February.
The monthly expense figures include $5,000 of depreciation. The expenses are paid in
the month incurred.
Gingham’s budgeted cash receipts in February are:
A.$91,000
B.$95,000
C.$113,090
D.$113,640
E.$114,000
23) Dodger Products uses a job-costing system for its units, which pass from the
Machining Department, to the Assembly Department, to finished-goods inventory. The
Machining Department is heavily automated; in contrast, the Assembly Department
performs a number of manual-assembly activities. The company uses machine hours to
apply manufacturing overhead to products in the Machining Department, and direct
labor cost to apply manufacturing overhead to products in the Assembly Department.
The following information relates to the Machining Department for the year just ended:
The Machining Department data that follow pertain to job no. 775, the only job in
production at year-end.
Required:
A. Assuming the use of normal costing, calculate the predetermined overhead rate that
is used in the Machining Department.
B. Compute the cost of the Machining Department’s year-end work-in-process
inventory.
C. Determine the amount that overhead was under- or overapplied during the year in the
Machining Department. Indicate whether it is overapplied or underapplied.
D. If Dodger disposes of the Machining Department’s under- or overapplied overhead
as an adjustment to Cost of Goods Sold, would the company’s Cost-of-Goods-Sold
account increase or decrease? Explain.
E. How much overhead would have been charged to the Machining Department’s
Work-in-Process account during the year?
F. Comment on the appropriateness of direct labor cost to apply manufacturing
overhead in the Assembly Department.
24) The payback period is best defined as:
A.initial investment annual after-tax cash inflow
B.annual after-tax cash inflow initial investment
C.initial investment useful life of investment
D.(present value of the cash flows, exclusive of the initial investment) initial investment
E.initial investment (present value of the cash flows, exclusive of the initial investment)
25) Generally speaking, budgets are not used to:
A.identify a company’s most profitable products
B.evaluate performance
C.create a plan of action
D.assist in the control of profit and operations
E.facilitate communication and coordinate activities
26) Alexis Company recently completed 10,600 units of its single product, consuming
32,000 labor hours that cost the firm $480,000. According to manufacturing
specifications, each unit should have required 3 hours of labor time at $15.40 per hour.
On the basis of this information, determine Alexis’s total labor variance.
A.$15,880U
B.$9,720F
C.$15,720F
D.$9,720U
E.$15,880F
27) Maxine’s budget for the upcoming year revealed the following figures:
If the company’s break-even sales total $750,000, Maxine’s safety margin would be:
A.$(90,000)
B.$90,000
C.$246,000
D.$336,000
E.$696,000
28) A budget serves as a benchmark against which:
A.actual results can be compared
B.allocated results can be compared
C.actual results become inconsequential
D.allocated results become inconsequential
E.cash balances can be compared to expense totals
29) Lennox Industries manufactures two products: A and B. A review of the company’s
accounting records revealed the following per-unit costs and production volumes:
Manufacturing overhead is currently computed by spreading overhead of $1,860,000
over 20,000 direct labor hours. Management is considering a shift to activity-based
costing in an effort to improve the firm’s accounting procedures, and the following data
are available:
Lennox determines selling prices by adding 40% to a product’s total cost.
Required:
A. Compute the per-unit cost and selling price of product B by using Lennox’s current
costing procedures.
B. Compute the per-unit overhead cost of product B if the company switches to
activity-based costing.
C. Compute B’s total per-unit cost and selling price under activity-based costing.
D. Lennox has recently encountered significant international competition for product B,
with considerable business being lost to very aggressive suppliers. Will activity-based
costing allow the company to be more competitive with product B from a price
perspective? Briefly explain.
E. Will the cost and selling price of product A likely increase or decrease if Lennox
changes to activity-based costing? Why? Hint: No calculations are necessary.
30) The process of managing the various activities in the value chain, along with the
associated costs, is commonly known as:
A.activity-based costing
B.strategic cost management
C.total quality management
D.computer-integrated costing
E.sound management practices (SMP)
31) Quattro began operations in April of this year. It makes all sales on account, subject
to the following collection pattern: 30% are collected in the month of sale; 60% are
collected in the first month after sale; and 10% are collected in the second month after
sale. If sales for April, May, and June were $60,000, $80,000, and $70,000,
respectively, what were the firm’s budgeted collections for May?
A.$21,000
B.$60,000
C.$69,000
D.$75,000
E.None of the other answers are correct
32) Indiana Company incurred the following costs during the past year when planned
production and actual production each totaled 20,000 units:
If Indiana uses variable costing, the total inventoriable costs for the year would be:
A.$400,000
B.$460,000
C.$560,000
D.$620,000
E.$660,000
33) Stoffers Corporation manufactures products J, K, and L in a joint process. The
company incurred $480,000 of joint processing costs during the period just ended and
had the following data that related to production:
An analysis revealed that all costs incurred after the split-off point are variable and
directly traceable to the individual product line.
Required:
A. If Stoffers allocates joint costs on the basis of the products’ sales values at the
split-off point, what amount of joint cost would be allocated to product J?
B. If production of J totaled 50,000 gallons for the period, determine the relevant cost
per gallon that should be used in decisions that explore whether to sell at the split-off
point or process further? Briefly explain your answer.
C. At the beginning of the current year, Stoffers decided to process all three products
beyond the split-off point. If the company desired to maximize income, did it err in
regards to its decision with product J? Product K? Product L? By how much?
34) Quantum Enterprises currently sells a piece of luggage for $200. An aggressive
competitor has announced plans for a similar product that will be sold for $170.
Quantum’s marketing department believes that if the price is dropped to meet
competition, unit sales will increase by 10%. The current cost to manufacture and
distribute the luggage is $130, and Quantum has a profit goal of 30% of sales. If
Quantum meets competitive selling prices, what must happen to the company’s
manufacturing and distribution cost?
A.Nothing, because the costs are within defined ranges and can actually increase by $10
B.Nothing, because the costs are within defined ranges and can actually increase by $23
C.Costs must decrease by $11
D.Costs must decrease by $39
E.None of the other answers are correct
35) Finney & Associates is an interior decorating firm in Tucson. The following costs
were incurred in a project to redecorate the mayor’s offices:
The firm’s budget for the year included the following estimates:
Overhead is applied to contracts by using a predetermined overhead rate that is based
on direct professional labor cost. Actual professional labor during the year was
$655,000 and actual overhead was $793,000.
Required:
A. Determine the total cost to redecorate the mayor’s offices.
B. Calculate the under- or overapplied overhead for the year. Be sure to label your
answer.
36) Consider the following statements about competitive bidding:
I. The higher the price that a company bids, the greater the profit if the firm gets the
contract.
II. Bidding a higher price increases the probability of obtaining a contract.
III. A company that bids low to ensure acceptance of a contract may actually wind up
bidding too low to make an acceptable profit.
Which of the above statements is (are) true?
A.I only
B.II only
C.III only
D.I and III
E.I, II, and III
37) Internal controls focus on all of the following except:
A.effectiveness of operations
B.reliability of financial reporting
C.compliance with applicable laws and regulations
D.maximization of profit and cash flows
E.efficiency of operations
38) A forecast of a cost at a particular level of activity is known as:
A.cost estimation
B.cost prediction
C.cost behavior
D.cost analysis
E.cost approximation
39) Of the following organizations, activity-based costing (ABC) cannot be used by:
A.manufacturers
B.financial-services firms
C.book publishers
D.hotels
E.None of these are correct, as all these organizations can use ABC
40) When calculating unit costs under the weighted-average process-costing method,
the unit cost is based on:
A.only the current period’s manufacturing costs
B.only costs in the period’s beginning work-in-process inventory
C.a summation of the costs in the beginning work-in-process inventory plus costs
incurred in the current period
D.only costs incurred in previous accounting periods
E.a summation of the costs in the beginning work-in-process inventory plus costs to be
incurred in the upcoming period
41) “It’s close to a $40,000 loser and we ought to devote our efforts elsewhere,” noted
Karenne Whitmore, after reviewing financial reports of her company’s attempt to offer a
reduced-price daycare service to employees. The daycare’s financial figures for the year
just ended follow.
If the daycare service/center is closed, 70% of the traceable fixed cost will be avoided.
In addition, the company will incur one-time closure costs of $6,800.
Required:
A. Show calculations that support Whitmore’s belief that the daycare center lost almost
$40,000.
B. Should the center be closed? Show calculations to support your answer.
C. What problem might the company experience if the center is closed?
42) Taylor Enterprises purchased 56,000 pounds (cost = $420,000) of direct material to
be used in the manufacture of the company’s sole product. According the production
specifications, each completed unit requires five pounds of direct material at a standard
cost of $7.80 per pound. Direct materials consumed by the end of the period totaled
53,500 pounds in the manufacture of 10,900 finished units.
An examination of Taylor’s payroll records revealed that the company worked 22,000
labor hours (cost = $319,000) during the period, and specifications called for each
completed unit requiring two hours of labor at a standard cost of $14.80 per hour.
Assume that the company computes variances at the earliest point in time.
Taylor’s direct-material quantity variance was:
A.$7,800F
B.$16,800F
C.$7,800U
D.$16,800U
E.none of the other answers are correct
43) Hot’lanta, Inc., which uses the high-low method to analyze cost behavior, has
determined that machine hours best explain the company’s utilities cost. The company’s
relevant range of activity varies from a low of 600 machine hours to a high of 1,100
machine hours, with the following data being available for the first six months of the
year:
The fixed utilities cost per month is:
A.$3,764
B.$4,400
C.$4,760
D.$5,100
E.None of the other answers is correct
44) Which of the following measures would reflect the fixed costs controllable by a
segment manager?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
45) All of the following costs are inventoried under absorption costing except:
A.direct materials
B.direct labor
C.variable manufacturing overhead
D.fixed manufacturing overhead
E.fixed administrative salaries
46) Voltage Electrical, which installs sophisticated electronic-control systems in new
homes, prices jobs by using the time-and-materials method. The following data apply to
a job for LMB Builders:
Labor hours: 180
Materials cost: $48,000
The following predictions, based on 30,000 direct labor hours, pertain to the company’s
operations for the year:
Voltage Electrical adds a markup of $15 per hour on its time charges, but there is no
profit markup on material costs.
Required:
Calculate the price for the LMB Builders’ job.
47) The following events occurred at Crescent Manufacturing (CM), an assembler of
engine parts, during May:
1> Because of a stock shortage at its regular supplier, CM had to rely on a new vendor
for two purchases of raw material parts. The vendor required CM to pay air-freight
charges; however, upon arrival, the company found the goods to be above-average in
quality.
2> The local municipality raised its property tax rates by 2%.
3> A flu outbreak on the assembly line forced management to use more experienced,
senior personnel to complete production orders on a timely basis. These workers more
than made up for lost time.
4> A shoddy maintenance program resulted in an abnormally high number of
breakdowns on machine no. 76 and slowed production.
5> The implementation of a new program had positive effects for the company with
respect to material usage and worker productivity.
Required:
Create a table with the following headings: material price variance, material quantity
variance, labor rate variance, and labor efficiency variance. Determine which of these
variances would be affected by the individual events and whether the variance would be
favorable or unfavorable.
48) Maddock Corporation’s product no. H647 has a negative contribution margin. How
can such a situation arise? Should the company continue to stock and sell product no.
H647? Explain.
49) Describe the types of manufacturing environments that would best be suited for (1)
job-order costing and (2) process costing. Include two examples of manufacturers that
would likely use job-cost systems.
50) Turbon Manufacturing plans to produce 20,000 units, 24,000 units, and 30,000
units, respectively, in October, November, and December. Each of these units requires
four units of part no. 879, which the company can purchase for $7 each. Turbon has
35,000 units of part no. 879 in stock on September 30 .
Required:
Prepare a direct-material purchases budget for October and November in units and
dollars. Management desires to maintain an ending raw-material inventory equal to
40% of the following month’s production usage.
51) Grey is considering the replacement of some machinery that has zero book value
and a current market value of $2,800. One possible alternative is to invest in new
machinery that costs $30,000. The new equipment has a four-year service life and an
estimated salvage value of $3,500, will produce annual cash operating savings of
$9,400, and will require a $2,200 overhaul in year 3 . The company uses straight-line
depreciation.
Required:
Prepare a net-present-value analysis of Grey’s replacement decision, assuming an 8%
hurdle rate and no income taxes. Should the machinery be acquired? Note: Round
calculations to the nearest dollar.
52) Describe the types of manufacturing environments that would best be suited for (1)
job-order costing and (2) process costing. Include two examples of manufacturers that
would likely use job-cost systems.
53) Discuss the reason for (1) allocating overhead to the cost of production jobs, and (2)
applying overhead using a predetermined rate instead of an actual overhead rate.