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Pittman Corporation, a merchandising company, reported the following results for
September:
Required:
a. Prepare a traditional format income statement for September.
b. Prepare a contribution format income statement for September.
Answer:
A partial listing of costs incurred at Starr Corporation during June appears below:
Required:
a. What is the total amount of product cost listed above? Show your work.
b. What is the total amount of period cost listed above? Show your work.
Answer:
Lettman Corporation has provided the following partial listing of costs incurred during
November:
Required:
a. What is the total amount of product cost listed above? Show your work.
b. What is the total amount of period cost listed above? Show your work.
Answer:
Assuming that a segment has both variable expenses and traceable fixed expenses, an
increase in sales should increase profits by an amount equal to the sales times the
segment margin ratio.
Answer:
In responsibility accounting, each segment in an organization should be charged with
the costs for which it is responsible and over which it has control plus its share of
common organizational costs.
Answer:
Negative free cash flow suggests that the company did not generate enough cash flow
from its operating activities to fund its capital expenditures and dividend payments.
Answer:
If two companies produce the same product and have the same total sales and same
total expenses, operating leverage will be lower in the company with a higher
proportion of fixed expenses in its cost structure.
Answer:
A shift in the sales mix from products with a low contribution margin ratio toward
products with a high contribution margin ratio will lower the break-even point in the
company as a whole.
Answer:
Under variable costing, all variable costs are treated as product costs.
Answer:
The investing and financing sections of the statement of cash flows record net cash
flows rather than gross cash flows.
Answer:
The change in the cash balance must equal the changes in all other balance sheet
accounts besides cash.
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:
The salary of the treasurer of a corporation is an example of a common cost which
normally cannot be traced to product segments.
Answer:
Financial leverage is positive if the interest rate on debt is lower than the return on total
assets.
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:
In a traditional format income statement for a merchandising company, the cost of
goods sold reports the product costs attached to the merchandise sold during the period.
Answer:
Residual income should not be used to evaluate a cost center.
Answer:
The salary paid to a store manager is a traceable fixed expense of the store.
Answer:
O'Keefe Company, which has only one product, has provided the following data
concerning its most recent month of operations:
a. Prepare a contribution format income statement for the month using variable costing.
b. Prepare an income statement for the month using absorption costing.
Answer:
Indirect costs, such as manufacturing overhead, are always fixed costs.
Answer:
Which terms will make the following statement TRUE? When manufacturing overhead
is overapplied, the Manufacturing Overhead account has a __________ balance and
applied manufacturing overhead is greater than __________ manufacturing overhead.
A. debit, actual
B. credit, actual
C. debit, estimated
D. credit, estimated
Answer:
For stockholders' equity accounts, credits are added to the beginning balance on the
statement of cash flows.
Answer:
In a contribution format income statement, sales minus cost of goods sold equals the
gross margin.
Answer:
Fixed costs are irrelevant in a decision.
Answer:
Fellner Corporation produces a single product and has the following cost structure:
a. Compute the unit product cost under absorption costing. Show your work!
b. Compute the unit product cost under variable costing. Show your work!
Answer:
The following journal entry would be made in a processing costing system when units
that have been completed with respect to the work done in Processing Department Z are
transferred from Processing Department Z to Processing Department Y:
Answer:
The gross margin percentage is computed by dividing the gross margin by sales.
Answer:
The following costs should be considered by a law firm to be indirect costs of
defending a particular client in court: rent on the law firm's offices, the law firm's
receptionist's wages, the costs of heating the law firm's offices, and the depreciation on
the personal computer in the office of the attorney who has been assigned the client.
Answer:
In segment reporting, sales dollars is usually an appropriate allocation base for selling,
general, and administrative expenses.
Answer:
Direct labor-hours should never be used as a measure of activity in an activity-based
costing system.
Answer:
When a company has a production constraint, the product with the highest contribution
margin per unit of the constrained resource should be given highest priority.
Answer:
If the fixed expenses increase in a company, and all other factors remain unchanged,
then one would expect the margin of safety to decrease.
Answer:
An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of
choosing one alternative over another.
Answer:
If the fixed manufacturing overhead volume variance is unfavorable, too much has been
spent on fixed manufacturing overhead items.
Answer:
Manufacturing overhead combined with direct materials is known as conversion cost.
Answer:
Reference: 8-21
Hanekamp Corporation manufactures and sells a single product. The company uses
units as the measure of activity in its flexible budgets. During August, the company
budgeted for 5,400 units, but its actual level of activity was 5,440 units. The company
has provided the following data concerning the formulas to be used in its budgeting:
The direct materials in the flexible budget for August would be closest to:
A) $59,840
B) $60,686
C) $59,797
D) $59,400
Answer:
Rider Company sells a single product. The product has a selling price of $40 per unit
and variable expenses of $15 per unit. The company's fixed expenses total $30,000 per
year. The company's break-even point in terms of total dollar sales is:
A. $100,000
B. $80,000
C. $60,000
D. $48,000
Answer:
Beall Industries is a division of a major corporation. Last year the division had total
sales of $20,160,000, net operating income of $1,592,640, and average operating assets
of $8,000,000.
The division's margin is closest to:
A. 39.7%
B. 47.6%
C. 7.9%
D. 19.9%
Answer:
Gotay Corporations standard wage rate is $12.00 per direct labor-hour (DLH) and
according to the standards, each unit of output requires 5.8 DLHs. In December, 4,900
units were produced, the actual wage rate was $11.00 per DLH, and the actual hours
were 27,870 DLHs. The Labor Rate Variance for December would be recorded as a:
A) debit of $28,420.
B) credit of $28,420.
C) credit of $27,870.
D) debit of $27,870.
Answer:
Osborne Corporation uses the FIFO 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.
What are the equivalent units for conversion costs for the month in the first processing
department?
A. 6,600
B. 440
C. 7,150
D. 7,600
Answer:
Data from Adamis Corporation's most recent balance sheet appear below:
The company's acid-test ratio is closest to:
A. 0.33
B. 0.71
C. 0.81
D. 0.10
Answer:
The standard hours allowed for actual production for the year total:
A) 247,500
B) 396,000
C) 400,000
D) 495,000
Answer:
The credits to the Raw Materials account for October would total:
A) $52,440
B) $48,760
C) $52,900
D) $53,130
Answer:
Reference: 8-38
The Thompson Company uses standard costing and has established the following direct
material and direct labor standards for each unit of Lept.
Direct materials: 2 gallons at $4 per gallon
Direct labor: 0.5 hours at $8 per hour
During September, the company made 6,000 Lepts and incurred the following costs:
Direct materials purchased: 13,400 gallons at $4.10 per gallon
Direct materials used: 12,600 gallons
Direct labor used: 2,800 hours at $7.65 per hour
The labor rate variance for September was:
A) $1,530 unfavorable
B) $980 favorable
C) $280 favorable
D) $980 unfavorable
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 provided by operating activities is:
A. $27,000
B. $29,000
C. $31,000
D. $6,000
Answer:
Young Enterprises has budgeted sales in units for the next five months as follows:
Past experience has shown that the ending inventory for each month should be equal to
10% of the next month's sales in units. The inventory on May 31 fell short of this goal
since it contained only 400 units. The company needs to prepare a Production Budget
for the next five months.
The total number of units to be produced in July is:
A. 7,740 units
B. 7,200 units
C. 7,020 units
D. 7,280 units
Answer:
Reference: 8A-17
Buell Corporation has provided the following data for June.
The volume variance for June is:
A) $10,830 F
B) $10,830 U
C) $3,610 U
D) $3,610 F
Answer:
A partial listing of costs incurred during December at Gagnier Corporation appears
below:
The total of the manufacturing overhead costs listed above for December is:
A. $325,000
B. $635,000
C. $89,000
D. $40,000
Answer:
The selling and administrative expense budget of Breckinridge Corporation is based on
budgeted unit sales, which are 5,500 units for June. The variable selling and
administrative expense is $1.00 per unit. The budgeted fixed selling and administrative
expense is $101,200 per month, which includes depreciation of $6,050 per month. The
remainder of the fixed selling and administrative expense represents current cash flows.
The cash disbursements for selling and administrative expenses on the June selling and
administrative expense budget should be:
A. $100,650
B. $106,700
C. $5,500
D. $95,150
Answer:
Reference: 8-48
Davidson Corporation makes a product that has the following direct labor standards:
In September the company produced 4,900 units using 2,210 direct labor-hours. The
actual direct labor rate was $22.40 per hour.
The labor rate variance for September is:
A) $1,470 U
B) $1,326 U
C) $1,326 F
D) $1,470 F
Answer:
Favini Company, which has only one product, has provided the following data
concerning its most recent month of operations:
What is the unit product cost for the month under absorption costing?
A. $91
B. $125
C. $118
D. $98
Answer:
Reference: 8-27
The Litton Company has established standards as follows:
Direct material: 3 pounds per unit @ $4 per pound = $12 per unit
Direct labor: 2 hours per unit @ $8 per hour = $16 per unit
Variable manufacturing overhead: 2 hours per unit @ $5 per hour = $10 per unit
Actual production figures for the past year are given below. The company records the
materials price variance when materials are purchased.
The company applies variable manufacturing overhead to products on the basis of
standard direct labor-hours.
The materials quantity variance is:
A) $800 U
B) $4,000 U
C) $760 U
D) $760 F
Answer:
Heller 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 of ending work in process inventory in the first processing department
according to the company's cost system is closest to:
A. $14,930
B. $23,466
C. $9,778
D. $39,110
Answer:
During April, Division D of Carney Company had a segment margin ratio of 15%, a
variable expense ratio of 60% of sales, and traceable fixed expenses of $15,000.
Division D's sales were closest to:
A. $100,000
B. $60,000
C. $33,333
D. $22,500
Answer:
A total of 30,000 units were sold last year. The contribution margin per unit was $2, and
fixed expenses totaled $20,000 for the year. This year fixed expenses are expected to
increase to $26,000, but the contribution margin per unit will remain unchanged at $2.
How many units must be sold this year to earn the same profit as was earned last year?
A. 23,000 units
B. 43,000 units
C. 30,000 units
D. 13,000 units
Answer:
Lone International Corporation's only product sells for $230.00 per unit and its variable
expense is $80.50. The company's monthly fixed expense is $822,250 per month. The
unit sales to attain the company's monthly target profit of $33,000 is closest to:
A. 3,718 units
B. 6,688 units
C. 10,624 units
D. 5,721 units
Answer:
When the actual amount of a raw material used in production is greater than the
standard amount allowed for the actual output, the journal entry would include:
A) Debit to Raw Materials; Credit to Materials Quantity Variance
B) Debit to Work-In-Process; Credit to Materials Quantity Variance
C) Debit to Raw Materials; Debit to Materials Quantity Variance
D) Debit to Work-In-Process; Debit to Materials Quantity Variance
Answer:
In February, one of the processing departments at Grosz Corporation had beginning
work in process inventory of $18,000 and ending work in process inventory of $11,000.
During the month, the cost of units transferred out from the department was $204,000.
The company uses the FIFO method in its process costing system.
In the department's cost reconciliation report for February, the costs added to production
in the department would be:
A. $211,000
B. $197,000
C. $186,000
D. $193,000
Answer:
Nikkel Corporation, a merchandising company, reported the following results for July:
The contribution margin for July is:
A. $333,800
B. $209,000
C. $233,700
D. $164,700
Answer:
Compound Q11H is a raw material used to make Grater Corporation's major product.
The standard cost of compound Q11H is $23.00 per ounce and the standard quantity is
3.8 ounces per unit of output. Data concerning the compound for October appear below:
The raw material was purchased on account.
The credits to the Raw Materials account for October would total:
A. $52,440
B. $48,760
C. $52,900
D. $53,130
Answer:
Gangwer Corporation produces a single product and has the following cost structure:
The absorption costing unit product cost is:
A. $95
B. $119
C. $61
D. $56
Answer:
What is the effect of a purchase of inventory on account on the current ratio and on
working capital, respectively? (Assume a current ratio greater than one prior to this
transaction.)
A. Option A
B. Option B
C. Option C
D. Option D
Answer:
Canon Company has two sales areas: North and South. During last year, the
contribution margin in the North Area was $50,000, or 20% of sales. The segment
margin in the South was $15,000, or 8% of sales. Traceable fixed expenses are $15,000
in the North and $10,000 in the South. During last year, the company reported total net
operating income of $26,000.
The variable expenses for the South Area for the year were:
A. $230,000
B. $185,000
C. $162,500
D. $65,000
Answer:
Budget data for the Bidwell Company are as follows:
If fixed expenses increased $31,500, the break-even sales in units would be:
A. 34,500 units
B. 80,500 units
C. 69,000 units
D. 94,500 units
Answer:
Abe Company, which has only one product, has provided the following data concerning
its most recent month of operations:
What is the total period cost for the month under the absorption costing approach?
A. $156,600
B. $210,000
C. $151,200
D. $366,600
Answer:
Reference: 8-13
Foxworthy Kennel uses tenant-days as its measure of activity; an animal housed in the
kennel for one day is counted as one tenant-day. During July, the kennel budgeted for
2,000 tenant-days, but its actual level of activity was 2,050 tenant-days. The kennel has
provided the following data concerning the formulas to be used in its budgeting:
The administrative expenses in the planning budget for July would be closest to:
A) $8,220
B) $8,200
C) $8,300
D) $8,098
Answer:
Hardy, Inc., has budgeted sales in units for the next five months as follows:
Past experience has shown that the ending inventory for each month should be equal to
20% of the next month's sales in units. The inventory on May 31 contained 1,640 units.
The company needs to prepare a production budget for the next five months.
The total number of units produced in July should be:
A. 7,240 units
B. 6,620 units
C. 6,300 units
D. 5,980 units
Answer:
A tile manufacturer has supplied the following data:
If the company increases its unit sales volume by 3% without increasing its fixed
expenses, then total net operating income should be closest to:
A. $3,000
B. $101,371
C. $115,480
D. $103,000
Answer:
The Immanuel Company has just obtained a request for a special order of 6,000 jigs to
be shipped at the end of the month at a selling price of $7 each. The company has a
production capacity of 90,000 jigs per month with total fixed production costs of
$144,000. At present, the company is selling 80,000 jigs per month through regular
channels at a selling price of $11 each. For these regular sales, the cost for one jig is:
If the special order is accepted, Immanuel will not incur any selling expense; however,
it will incur shipping costs of $0.30 per unit. Total fixed production cost would not be
affected by this order.
Suppose that regular sales of jigs total 85,000 units per month. All other conditions
remain the same. If Immanuel accepts the special order, the change in monthly net
operating income will be:
A. $14,400 increase
B. $7,200 increase
C. $3,600 decrease
D. $5,400 decrease
Answer:
Nilgiri Corporation uses the FIFO 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 conversion costs for the first department for the month
is closest to:
A. $40.57
B. $45.33
C. $39.31
D. $37.44
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:
During September, Paliotta Corporation recorded the following:
Prepare T-accounts for Raw Materials, Work in Process, Finished Goods, and
Manufacturing Overhead, and Cost of Goods Sold. Record the beginning balances and
each of the transactions listed above. Finally, determine the ending balances.
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:
Rizza 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 April, the school budgeted for 1,250 students and 45 courses. The schools income
statement showing the actual results for the month appears below:
Required:
Prepare a report showing the schools revenue and spending variances for April. Label
each variance as favorable (F) or unfavorable (U).
Answer:
Krouse Corporations manufacturing overhead includes $14.70 per machine-hour for
variable manufacturing overhead and $191,580 per period for fixed manufacturing
overhead.
Required:
Determine the predetermined overhead rate for the denominator level of activity of
3,100 machine-hours.
Answer:
The constraint at Vrana Inc. is an expensive milling machine. The three products listed
below use this constrained resource.
a. Rank the products in order of their current profitability from the most profitable to
the least profitable. In other words, rank the products in the order in which they should
be emphasized. Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the
least profitable product. Up to how much should the company be willing to pay to
acquire more of the constrained resource?
Answer:
Laco Company acquired its factory building about 20 years ago. For a number of years
the company has rented out a small, unused part of the building. The renter's lease will
expire soon. Rather than renewing the lease, Laco Company is considering using the
space itself to manufacture a new product. Under this option, the unused space will
continue to be depreciated on a straight-line basis, as in past years.
Direct materials and direct labor cost for the new product would be $50 per unit. In
order to have a place to store finished units of the new product, the company would
have to rent a small warehouse nearby. The rental cost would be $2,000 per month. It
would cost the company an additional $4,000 each month to advertise the new product.
A new production supervisor would be hired to oversee production of the new product
who would be paid $3,000 per month. The company would pay a sales commission of
$10 for each unit of product that is sold.
Complete the chart below by placing an "X" under each column heading that helps to
identify the costs listed to the left. There can be "X's" placed under more than one
heading for a single cost. For example, a cost might be a product cost, an opportunity
cost, and a sunk cost; there would be an "X" placed under each of these headings on the
answer sheet opposite the cost.
*Between the alternatives of (1) renting the space out again or (2) using the space to
produce the new product.
Answer:
Cassin Corporation manufactures a variety of products. Last year, the company's
variable costing net operating income was $86,300 and ending inventory decreased by
1,700 units. Fixed manufacturing overhead cost per unit was $8.
Determine the absorption costing net operating income for last year. Show your work!
Answer:
Swem Corporation makes a product that sells for $110 per unit. The product's current
sales are 17,700 units and its break-even sales are 14,337 units.
Compute the margin of safety in both dollars and as a percentage of sales.
Answer:
Hirschman Corporation has provided the following data for the month of April:
Prepare a Schedule of Cost of Goods Manufactured and a Schedule of Cost of Goods
Sold in good form.
Answer:
Data concerning three of Pressnell Corporation's activity cost pools appear below:
Compute the activity rates for each of the three cost pools. Show your work!
Answer:
Foulds Company makes 10,000 units per year of a part it uses in the products it
manufactures. The unit product cost of this part is computed as follows:
An outside supplier has offered to sell the company all of these parts it needs for $42.30
a unit. If the company accepts this offer, the facilities now being used to make the part
could be used to make more units of a product that is in high demand. The additional
contribution margin on this other product would be $39,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the
part would be avoided. However, $6.40 of the fixed manufacturing overhead cost being
applied to the part would continue even if the part were purchased from the outside
supplier. This fixed manufacturing overhead cost would be applied to the company's
remaining products.
a. How much of the unit product cost of $47.90 is relevant in the decision of whether to
make or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather
than making it?
c. What is the maximum amount the company should be willing to pay an outside
supplier per unit for the part if the supplier commits to supplying all 10,000 units
required each year?
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:
Dung Corporation uses the FIFO method in its process costing system. The following
data concern the company's Assembly Department for the month of August.
Determine the cost of ending work in process inventory and the cost of units transferred
out of the department during August using the FIFO method.
Answer:
Almo company manufactures and sells adjustable canopies that attach to motor homes
and trailers. Almo developed its budget for the current year assuming that the canopies
would sell at a price of $400 each. The variable expenses for each canopy were
forecasted to be $200 and the annual fixed expenses were forecasted to be $100,000.
Almo had targeted a profit of $400,000.
While Almo's sales usually rise during the second quarter, the May financial statements
reported that sales were not meeting expectations. For the first five months of the year,
only 350 units had been sold at the established price, with variable expense as planned,
and it was clear that the target profit for the year would not be reached unless some
actions were taken. Almo's president assigned a management committee to analyze the
situation and develop several alternative courses of action. The following three
alternatives were presented to the president, only one of which can be selected.
1/ Reduce the selling price by $40. The marketing department forecasts that with the
lower price, 2,700 units could be sold during the remainder of the year.
2/ Lower variable expenses per unit by $25 through the use of less expensive materials.
Because of the difference in materials, the selling price would have to be lowered by
$30 and sales of 2,200 units for the remainder of the year are forecast.
3/ Cut fixed expenses by $10,000 and lower the selling price by 5 percent. Sales of
2,000 units would be expected for the remainder of the year.
a. If no changes are made to the selling price or cost structure, estimate the number of
units that must be sold during the year to break even.
b. If no changes are made to the selling price or cost structure, estimate the number of
units that must be sold during the year to attain the target profit of $400,000.
c. Determine which of the alternatives Almo's president should select to maximize
profit.
Answer:
Iles Industries is a division of a major corporation. The following data are for the latest
year of operations:
What is the division's residual income?
Answer:
The following data pertain to the Milling Department of Gehle Corporation for July.
The company uses the FIFO method in its process costing.
Compute the equivalent units of production for both materials and conversion costs for
the Milling Department for July using the FIFO method.
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:
Gilde Industries is a division of a major corporation. Last year the division had total
sales of $23,380,000, net operating income of $2,828,980, and average operating assets
of $7,000,000. The company's minimum required rate of return is 12%.
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
Answer:
