1) If a company uses a cost-plus approach to pricing, it will find that there are several
different definitions of cost and the higher the cost, the higher the markup percentage.
2) Inventoriable costs are expensed when incurred.
3) The term “normal costing” refers to the use of job-costing systems.
4) The comprehensive set of budgets that serves as a company’s overall financial plan is
commonly known as the financial budget.
5) When units sold exceed units produced, absorption-costing income will be lower
than variable-costing income.
6) The difference between budgeted sales revenue and break-even sales revenue is the
operating leverage.
7) The extent to which an organization uses fixed costs in its cost structure is measured
by financial leverage.
8) Variable manufacturing overhead becomes part of a unit’s cost when variable costing
is used.
9) The relevant range is that range of activity where a company achieves its maximum
efficiency.
10) A cost center manager does not have the ability to produce revenue.
11) Flexible budgets reflect a company’s anticipated costs based on variations in activity
levels.
12) A company’s sales forecast would likely not consider general economic and industry
trends.
13) The term “opportunity cost” is best defined as the benefit associated with a rejected
alternative when making a choice.
14) Penetration pricing is a pricing strategy in which a new product’s initial price is set
relatively low in order to gain a large market share.
15) A company’s hurdle rate is generally influenced by whether management uses the
net-present-value method or the internal-rate-of-return method.
16) Manufacturing overhead is a pool of indirect production costs that must somehow
be attached to each unit manufactured.
17) CFF, Inc. overstated the percentage of work completed with respect to conversion
cost on the ending work-in-process inventory. This overstatement caused
conversion-cost equivalent units to be overstated.
18) If a company has excess capacity, a sensible bidding strategy is to base the bid on
the incremental costs incurred because the job will contribute toward the company’s
profit.
19) A division’s return on investment may be improved by increasing sales margin and
cost of capital.
20) In regression analysis, the variable that is being predicted is known as the
independent variable.
21) Gilberto adds materials at the beginning of production and incurs conversion cost
uniformly throughout manufacturing. Consider the data that follow.
Conversion cost in the beginning work-in-process inventory totaled $120,000, and
August conversion cost totaled $270,000. Assuming use of the weighted-average
method, which of the following choices correctly depicts the number of equivalent units
for materials and the conversion cost per equivalent unit?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
22) In a net-present-value analysis, the discount rate is often called the:
A.payback rate
B.hurdle rate
C.minimal value
D.net unit rate
E.objective rate of return
23) Many professions have adopted a series of ethical standards to provide guidance for
their memberships. The Institute of Management Accountants (IMA), for example, has
published standards that focus on competence, confidentiality, integrity, and credibility.
In light of these standards, consider the three cases that follow.
Case ALeston Corporation has experienced serious financial difficulties in recent years.
John Young, the company’s chief financial officer, has just learned that a major
competitor was likely to file for bankruptcy; however, he failed to disclose this
information at a board meeting held later that day when a plant closure decision was
being discussed. The board evaluated several proposals during the session that focused
on improving Leston’s financial position.
Case BQBX Company manufactures fertilizer from various raw materials, including a
raw material know as Felstar. Paul Kelly, the firm’s purchasing manager, purposely
acquired a lower grade of Felstar than normal because of a very attractive price. The
lower-grade product resulted in increased usage during the manufacturing process but
had no effect on the fertilizer’s overall quality. An end-of-period report showed that
QBX profited from Kelly’s actions, with the overall savings in purchase price more than
offsetting the cost of added consumption.
Case CCentral Distributing has a participative budgeting process, allowing employees
to have a say in projected sales targets for the upcoming period. These targets are
reflected in a series of performance reports that compare actual sales achieved against
targeted amounts. Hillary Baxter submitted very low sales targets because, as she
confided in a colleague, “I always want to look good in terms of meeting targets, even if
anticipated sales and closures don’t materialize.”
Required:
Evaluate the three cases and determine the ethical issues, if any, that are involved. Cite
the IMA’s standards if appropriate.
24) Which of the following statements is true?
A.Service firms have little need for determining the cost of their services
B.The concept of product costing is relevant only for manufacturing firms
C.The cost of year-end inventory appears on the balance sheet as an expense
D.Service companies use cost information for planning and control purposes
E.Mining and petroleum companies have no inventoriable costs
25) Which of the following statements pertain to both variable costing and absorption
costing?
A.The income statement discloses the amount of gross margin generated during the
reporting period
B.Fixed selling and administrative expenses are treated in the same manner as fixed
manufacturing overhead
C.Both variable and absorption costing can be used for external financial reporting
D.Variable selling costs are written-off as expenses of the accounting period
E.Fixed manufacturing overhead is attached to each unit produced
26) Which of the following employees would not be classified as indirect labor?
A.Plant Custodian
B.Salesperson
C.Assembler of wooden furniture
D.Plant security guard
E.Salesperson and assembler of wooden furniture
27) At the economic order quantity:
A.total annual inventory costs, holding costs, and ordering costs are all minimized
B.total annual inventory costs and holding costs are minimized
C.total annual inventory costs are minimized, and holding costs equal ordering costs
D.total annual inventory costs are minimized, and holding costs exceed ordering costs
E.total annual inventory costs are minimized, and ordering costs exceed holding costs
28) An accountant recently debited Work-in-Process Inventory and credited
Manufacturing Overhead at a company that uses normal costing. The accountant was:
A.applying a predetermined overhead amount to production
B.recognizing receipt of the factory utilities bill
C.recording a year-end adjustment for an insignificant amount of underapplied
overhead
D.recognizing actual overhead incurred during the period
E.recognizing the completion of production
29) The Marketing Club at Southern University recently held an end-of-year dinner and
swim party, which the treasurer declared to be a financial success. “Attendance was an
all-time high, 60 members, and the results were much better than expected.” The
treasurer presented the following performance report at the executive board’s June
meeting:
The budget was based on the assumptions that follow.
Forty-five members would attend at a fixed ticket price of $35.
Food and beverage costs were anticipated to be $15 and $7 per attendee, respectively.
A disc jockey was hired via a written contract at $50 per hour.
Required:
A. Briefly evaluate the meaningfulness of the treasurer’s performance report.
B. Prepare a performance report by using flexible budgeting and determine whether the
end-of-year party was as successful as originally reported.
C. Based on your answer in requirement “B,” present a possible explanation for the
variances in revenue, food costs, beverage costs, and the disc jockey.
30) Gregory, which uses a process-costing system, adds all material at the beginning of
production and incurs conversion cost evenly throughout manufacturing. The
information that follows relates to the period just ended:
Units started and completed: 75,000
Units in ending work-in-process inventory: 15,000, 60% complete
Which of the following choices correctly expresses the total equivalent units of
production with respect to material and conversion cost?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
31) Which of the following would be considered if a company desires to establish a
series of practical manufacturing standards?
A.The productivity loss associated with a short-term worker slowdown
B.Normal defect rates in an assembly process
C.Highly unusual spoilage rates of direct materials
D.Quantity discounts associated with purchases of direct materials
E.Both normal defect rates in an assembly process and quantity discounts associated
with purchases of direct materials
32) Amounts spent for charitable contributions are an example of a (n):
A.committed fixed cost
B.committed variable cost
C.discretionary fixed cost
D.discretionary variable cost
E.engineered cost
33)
If purchases of raw materials were $135,000 during the year, what was the amount of
raw materials used during the year?
A.$129,200
B.$140,800
C.$135,000
D.$146,600
E.None of the other answers are correct
34) An architecture firm currently offers services that appeal to both individuals and
commercial clients. If the firm decides to discontinue services to individuals because of
ongoing losses, which of the following costs could the company likely avoid?
A.General corporate overhead that was allocated to individual clients
B.Building depreciation
C.Insurance
D.Variable operating costs
E.Monthly installment payments on general-purpose, computer drafting equipment
35) Forest Company, which uses a weighted-average process-costing system, had 7,000
units in production at the end of the current period that were 60% complete. Material A
is introduced at the beginning of the process; material B is introduced at the end of the
process; and conversion cost is introduced evenly throughout manufacturing.
Equivalent-unit production costs follow.
Material A: $12.50
Material B: $2.00
Conversion cost: $6.60
The cost of the company’s ending work-in-process inventory is:
A.$88,620
B.$115,220
C.$123,620
D.$147,700
E.None of the answers is correct
36) Barrey, Inc. is subject to a 40% income tax rate. The following data pertain to the
period just ended when the company produced and sold 45,000 units:
How many units must Barrey sell to earn an after-tax profit of $225,000?
A.67,250
B.62,250
C.61,000
D.51,000
E.None of the other answers is correct
37) Dahlia Corporation, which is subject to a 30% income tax rate, is considering a
$420,000 asset that will result in the following over its six-year life:
Average revenue: $920,000
Average operating expenses (excluding depreciation): $770,000
Average depreciation: $70,000
The after-tax accounting rate of return on the initial investment is:
A.13.33%
B.19.05%
C.25.00%
D.35.71%
E.None of the other answers are correct
38) Which of the following choices correctly denotes the data needed to allocate joint
costs under the relative-sales-value method?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
39) Rachelle Hamilton has a fast-food franchise and must pay a franchise fee of
$45,000 plus 4% of gross sales. In terms of cost behavior, the fee is known as a:
A.variable cost
B.fixed cost
C.step-fixedcost
D.semivariable cost
E.curvilinear cost
40) Seventh Heaven takes tourists on helicopter tours of Hawaii. Each tourist buys a
$150 ticket; the variable costs average $60 per person. Seventh Heaven has annual
fixed costs of $702,000.
Required:
A. Compute the average number of tours the company must conduct per month to break
even.
B. Compute the average sales revenue needed per month to produce a target average
profit of $36,000 per month. See below (answer to “B”).
C. Calculate the contribution margin ratio.
D. Determine whether the actions that follow will increase, decrease, or not affect the
company’s break-even point.
1> A decrease in tour prices.
2> The termination of a salaried clerk (no replacement is planned).
3> A decrease in the number of tours sold.
41) Consider the following situation:
The marketing manager of Gilroy, Inc. accepted a rush order for a nonstock item from a
valued customer. The manager filed the necessary paperwork with the production
department, and a production manager did the same with purchasing for needed raw
materials. Unfortunately, a purchasing clerk temporarily lost the paperwork; by the time
it was found, it was too late to order from Gilroy’s regular supplier. A new supplier was
located that quoted a very attractive price.
The materials soon arrived and were found to be of poor quality, thus giving rise to a
favorable materials price variance, an unfavorable materials quantity variance, and an
unfavorable labor efficiency variance. These latter two variances, based on normal
practice, appeared on the production manager’s performance report for the period just
ended.
Required:
A. Given that the company uses a responsibility accounting system, should the
production manager be penalized for poor performance? Briefly discuss, keeping in
mind that a production manager is generally in a very good position to control material
usage and labor efficiency.
B. Should anything be done to correct the situation? If “yes,” briefly explain.
42) Majesco, which uses a process-costing system, adds material at the beginning of
production and incurs conversion cost evenly throughout manufacturing. The following
selected information was taken from the company’s accounting records:
Total equivalent units of materials: 5,000
Total equivalent units of conversion: 4,400
Units started and completed during the period: 3,500
On the basis of this information, the ending work-in-process inventory’s stage of
completion is:
A.40%
B.60%
C.70%
D.80%
E.some other percentage not listed
43) Given the following information, what is the cost of unused capacity? Cost of
material supplied is $3,200; Cost of material used is $3,000; Cost of material used per
cake is $3; Cost of material supplied per cake is $3.20 .
A.$0.20
B.$200
C.$2,000
D.$1,000
E.There is no unused capacity
44) The fixed cost per unit:
A.will increase as activity increases
B.will increase as activity decreases
C.will decrease as activity increases
D.will remain constant
E.will increase as activity decreases and will decrease as activity increases
45) Kendall Corporation has two divisions: Phoenix and Tucson. Phoenix currently
sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs
amount to $380, and demand for this product currently exceeds the division’s ability to
supply the marketplace.
Kendall is considering another use for the condenser, namely, integration into an
enhanced refrigeration system that would be made by Tucson. Related information
about the enhanced system follows.
Selling price of refrigeration system: $1,285
Additional variable manufacturing costs required: $820
Transfer price of condenser: $490
Top management is anxious to introduce the enhanced system; however, unless the
transfer is made, an introduction will not be possible because of the difficulty of
obtaining condensers in the quality and quantity desired. The company uses
responsibility accounting and ROI when measuring divisional performance, and awards
bonuses to divisional management.
Required:
A. How would Phoenix’s divisional manager likely react to the decision to transfer
condensers to Tucson? Show computations to support your answer.
B. How would Tucson’s divisional management likely react to the $490 transfer price?
Show computations to support your answer.
C. Assume that a lower transfer price is desired. What parties should be involved in
setting the new price?
D. From a contribution margin perspective, does Kendall benefit more if it sells the
condensers externally or transfers the condensers to Tucson? By how much?
46) Which of the following represents the cost-plus pricing formula?
A.Price = cost + (markup percentage cost)
B.Price = cost + markup percentage
C.Price = markup percentage cost
D.Price = cost markup percentage
E.Price = cost + (markup percentage + cost)
47) Coastal Airlines has a significant presence at the San Jose International Airport and
therefore operates the Emerald Club, which is across from gate 36 in terminal 1 . The
Emerald Club provides food and business services for the company’s frequent flyers.
Consider the following selected costs of Club operation:
1> Receptionist and supervisory salaries
2> Catering
3> Terminal depreciation (based on square footage)
4> Airport fees (computed as a percentage of club revenue)
5> Allocated Coastal administrative overhead
Management is exploring whether to close the club and expand the seating area for gate
36 . Which of the preceding expenses would the airline classify as unavoidable?
A.3
B.4
C.5
D.3, 5
E.None of the answers are correct
48) Hamilton, which uses a process-costing system, had a balance in its
Work-in-Process account of $68,000 on January 1 . The account was charged with
direct materials, direct labor, and manufacturing overhead of $450,000 throughout the
year. If a review of the accounting records determined that $86,000 of goods were still
in production at year-end, Hamilton should make a journal entry on December 31 that
includes:
A.a debit to Cost of Goods Sold for $432,000
B.a credit to Finished-Goods Inventory for $432,000
C.a credit to Work-in-Process Inventory for $432,000
D.a debit to Finished-Goods Inventory for $86,000
E.a credit to Work-in-Process Inventory for $86,000
49) The Telemarketing Department of a residential remodeling company would most
likely be evaluated as a:
A.cost center
B.revenue center
C.profit center
D.investment center
E.contribution center
50) The true statement about cost behavior is that:
A.variable costs are constant on a per-unit basis and change in total as activity changes
B.fixed costs are constant on a per-unit basis and change in total as activity changes
C.fixed costs are constant on a per-unit basis and constant in total as activity changes
D.variable costs change on a per-unit basis and change in total as activity changes
E.variable costs are constant on a per-unit basis and are constant in total as activity
changes
51) Digregory makes all purchases on account, subject to the following payment
pattern:
Paid in the month of purchase: 30%
Paid in the first month following purchase: 60%
Paid in the second month following purchase: 10%
If purchases for January, February, and March were $200,000, $180,000, and $230,000,
respectively, what were the firm’s budgeted payments in March?
A.$69,000
B.$138,000
C.$177,000
D.$197,000
E.None of the other answers are correct
52) The term “normal costing” refers to the use of:
A.job-costing systems
B.computerized accounting systems
C.targeted overhead rates
D.predetermined overhead rates
E.actual overhead rates
53) Heartfelt Bank & Trust operates in a very competitive marketplace, using a
traditional labor-hour-based system to determine the cost of processing its mortgage
loans. Recently, the firm explored a switch to activity-based costing to determine the
wisdom of its previous ways. The following information is available:
Two loan applications, among many others, were originated and closed during the year.
No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a
total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0
hours in loan underwriting and 3.0 hours in loan closure.
Required:
A. Use an activity-based-costing system and determine the cost of processing,
underwriting, and closing the two loan applications.
B. Determine the cost of processing the two loans if Heartfelt uses the traditional
labor-hour-based system. Conversations with management found that, on average, each
application took nine labor hours of processing time, excluding underwriting and
closure.
C. Is Heartfelt making a mistake by continuing to use a traditional system that is based
on an average labor cost per hour? Why?
54) Preston Company is considering the use of accelerated depreciation rather than
straight-line depreciation for a new asset acquisition. Which of the following choices
correctly shows when the majority of depreciation would be taken (early or late in the
asset’s life), when most of the tax savings occur (early or late in the asset’s life), and
which depreciation method would have the higher present value?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
55) In discussing the operation of her automobile, a doctor once observed that gasoline
is a fixed cost because the cost per gallon is relatively stable. Insurance, on the other
hand, is a variable cost because the cost per mile varies inversely with the number of
miles driven. Comment on the doctor’s observation.
56) A considerable portion of the text’s process-costing presentation illustrated the
proper way to allocate manufacturing costs to the units completed during the period and
the ending work-in-process inventory. For companies that have a single manufacturing
department, the journal entry to recognize completed production involves a debit to
Finished-Goods Inventory and a credit to Work-in-Process Inventory. What journal
entry, if any, is needed for these same companies to properly account for ending work in
process?
57) The value chain is a key component of contemporary management accounting.
Define the term “value chain” and explain how it would relate to an airline.
58) A considerable portion of the text’s process-costing presentation illustrated the
proper way to allocate manufacturing costs to the units completed during the period and
the ending work-in-process inventory. For companies that have a single manufacturing
department, the journal entry to recognize completed production involves a debit to
Finished-Goods Inventory and a credit to Work-in-Process Inventory. What journal
entry, if any, is needed for these same companies to properly account for ending work in
process?
59) Distinguish between least-squares regression and multiple regression as cost
estimation methods.