Cost Allocation, Customer-profitability Analysis, And Sales-Variance Analysis

CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY

ANALYSIS, AND SALES-VARIANCE ANALYSIS

TRUE/FALSE

1. Indirect costs are costs that cannot be traced to cost objects in an economically feasible way.

Difficulty: 1 Objective: 1Terms to Learn: cost allocation

2. To motivate engineers to design simpler products, costs for production, distribution, and customer service may be included in product-cost estimates.


3. For external reporting, inventoriable costs under GAAP sometimes include R&D costs.


Under GAAP, inventoriable costs include only the costs of producing and sometimes the design costs of the product.

4. To allocate a cost, it must satisfy all four purposes for which costs are allocated.

Difficulty: 2 Objective: 1Terms to Learn: cost allocationTo allocate a cost, it is only necessary to satisfy one of the purposes for which costs are allocated.

5. Today, companies are simplifying their cost systems and moving toward less-detailed and less-complex cost allocation bases.

Difficulty: 3 Objective: 2Terms to Learn: cost allocationCompanies are moving toward more-detailed and more-complex cost allocations because today technology can capture these costs in a relatively inexpensive manner.

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6. When using the cause-and-effect criterion, cost drivers are selected as the cost allocation bases.


7. The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation.

Difficulty: 2 Objective: 2Terms to Learn: cost allocationThe cause-and-effect or benefits-received criteria is considered superior when the purpose of cost allocation is motivation.

8. The benefits of implementing a more-complex cost allocation system are relatively easy to quantify for application of the cost-benefit approach.

Difficulty: 2 Objective: 2Terms to Learn: cost allocationThe benefits of implementing a more-complex cost allocation system are difficult to measure.

9. Each company must decide which corporate cost categories should be included in the indirect costs of the divisions — all, only a subset, or none.


10. Full allocation of corporate costs to divisions is justified when the notion of controllability is applied.

Difficulty: 3 Objective: 3Terms to Learn: cost allocationThe controllability notion is used to justify excluding some or all corporate costs from division reports, not to justify including full costs.

11. When there is a lesser degree of homogeneity, fewer cost pools are required to accurately explain the use of company resources.

Difficulty: 2 Objective: 3Terms to Learn: homogeneous cost poolThe greater the degree of homogeneity, the fewer the cost pools required to accurately explain the use of company resources.

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12. If a cost pool is homogeneous, the cost allocations using that pool will be the same as they would be if costs of each individual activity in that pool were allocated separately.

Difficulty: 2 Objective: 3Terms to Learn: homogeneous cost pool

13. Facility-sustaining costs do not have a cause-and-effect relationship with individual products.


14. An individual cost item can be simultaneously a direct cost of one cost object and an indirect cost of another cost object.


15. A homogenous cost pool has costs that have similar cause-and-effect relationships with the cost-allocation base.


16. Once a cost pool has been established, it should not need to be revisited or revised.

Difficulty: 2 Objective: 3Terms to Learn: homogeneous cost poolOnce a cost pool has been established, it is often necessary to revisit it or revise it.

17. All customers are equally important to a company and should receive equal levels of attention.

Difficulty: 3 Objective: 4Terms to Learn: customer-profitability analysisCustomers should receive a level of attention from the company that matches their contribution to the company’s profitability.

18. The purpose of price discounting is to encourage increases in customer purchases.

Difficulty: 3 Objective: 4Terms to Learn: price discounting

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19. There are two elements that influence customer profitability — revenues and costs.

Difficulty: 2 Objective: 4Terms to Learn: customer-profitability analysis

20. Companies that only record the invoice price can usually track the magnitude of price discounting.

Difficulty: 2 Objective: 4Terms to Learn: price discountingTo track discounting, the discount must be recorded.

21. A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of using only one cost driver.

Difficulty: 2 Objective: 4Terms to Learn: homogeneous cost pool, customer cost hierarchyA customer cost hierarchy categorizes costs related to customers into different cost pools using different drivers.

22. An activity-based costing system may focus on customers rather than products.


23. A customer cost hierarchy may include distribution-channel costs.

Difficulty: 1 Objective: 5Terms to Learn: customer cost hierarchy

24. The cost of visiting customers is an example of a customer output unit-level cost.

Difficulty: 2 Objective: 5Terms to Learn: customer cost hierarchyThe cost of visiting customers is an example of a customer-sustaining cost.

25. In general, distribution-channel costs are more easily influenced by customer actions than customer batch-level costs.

Difficulty: 3 Objective: 6Terms to Learn: customer cost hierarchyIn general, customer batch-level costs are more easily influenced by customer actions than distribution-channel costs.

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26. If one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely be reduced by 25%.

Difficulty: 3 Objective: 6Terms to Learn: customer cost hierarchyIf one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely not be affected.

27. To more accurately assess customer profitability, corporate-sustaining costs should be allocated.

Difficulty: 3 Objective: 6Terms to Learn: customer-profitability analysis, customer cost hierarchyThe allocation of corporate-sustaining costs serves no useful purpose in assessing customer profitability, decision making, performance evaluation, or motivation.

28. It is common to find that a small number of customers generate a high percentage of operating income.


29. Managers who utilize customer profitability charts should drop customers that generate a negative customer operating income, since dropping an unprofitable customer will automatically cause overall income to increase.

Difficulty: 2 Objective: 6Terms to Learn: customer profitability analysisManagers who utilize customer profitability charts should not drop customers that generate a negative customer operating income, because dropping an unprofitable customer may not cause overall income to increase.

30. It is possible that the largest customer in terms of revenue is not the most profitable customer.

Difficulty: 2 Objective: 6Terms to Learn: customer profitability analysis

31. The static-budget variance is the difference between an actual result and a budgeted amount in the static budget.

Difficulty: 1 Objective: 7Terms to Learn: static budget variance

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32. The flexible-budget variance is the difference between an actual result and the flexible-budget amount based on the level of output actually achieved in the budget period.

Difficulty: 1 Objective: 7Terms to Learn: flexible budget variance

33. Additional insight can be gained by dividing the sales-mix variance into the flexible-budget variance and the sales-volume variance.

Difficulty: 1 Objective: 7Terms to Learn: static budget variance, flexible budget variance, sales-volume varianceAdditional insight can be gained by dividing the static-budget variance into the flexible-budget variance and the sales-volume variance.

34. A favorable sales-mix variance arises when the actual sales-mix percentage is less than the budgeted sales-mix percentage.

Difficulty: 3 Objective: 7Terms to Learn: sales-mix varianceA favorable sales-mix variance arises when the actual sales-mix percentage exceeds the budgeted sales-mix percentage.

35. A composite unit is a hypothetical unit with weights based on the mix of individual units.

Difficulty: 1 Objective: 7Terms to Learn: composite unit

36. The sales-mix variance can be explained in terms of the budgeted contribution margin per composite unit of the sales mix.

Difficulty: 2 Objective: 7Terms to Learn: sales-mix variance, composite unit

37. The sales-quantity variance is favorable when budgeted unit sales exceed actual unit sales.

Difficulty: 3 Objective: 7Terms to Learn: sales-quantity varianceThe sales-quantity variance is unfavorable when budgeted unit sales exceed actual unit sales.

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38. The sales mix variance is the difference between budgeted contribution margin for the actual sales mix and the budgeted contribution margin for the budgeted sales mix.

Difficulty: 2 Objective: 7Terms to Learn: sales mix variance

39. The sales quantity variance is the difference between budgeted contribution margin based on actual units sold of all products at the budgeted mix, and contribution margin in the flexible budget.

Difficulty: 2 Objective: 7Terms to Learn: sales quantity varianceThe sales quantity variance is the difference between budgeted contribution margin based on actual units sold of all products at the budgeted mix, and contribution margin in the static budget.

40. The market-share variance is caused solely by the actual market share being different than the budgeted market share.

Difficulty: 3 Objective: 8Terms to Learn: market-share variance

41. A favorable market-size variance results with a decrease in market size.

Difficulty: 3 Objective: 8Terms to Learn: market-size varianceA favorable market-size variance results with an increase in market size.

42. The flexible-budget variance can be further divided into the sales-mix variance and the sales-quantity variance.

Difficulty: 1 Objective: 8Terms to Learn: sales-volume variance, sales-mix variance, sales-quantity varianceThe sales-volume variance can be further divided into the sales-mix variance and the sales-quantity variance.

43. The market share variance is the difference in budgeted contribution margin for actual market size in units caused solely by the actual market share being different from the budgeted market share.

Difficulty: 2 Objective: 8Terms to Learn: market share variance

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44. The market size variance is the difference in budgeted contribution margin at budgeted market share caused solely by actual market size in units being different from budgeted market size in units.

Difficulty: 2 Objective: 8Terms to Learn: market size variance

45. A difficulty with the market share and market size variances is that accurate measures of market share and market size often do not exist.

Difficulty: 2 Objective: 8Terms to Learn: market size variance, market share variance

46. The direct materials mix variance is the sum of the direct materials mix variances for each input.

Difficulty: 1 Objective: 9Terms to Learn: direct materials mix variance

47. An unfavorable direct materials mix variance results when cheaper direct materials are substituted for more expensive direct materials.

Difficulty: 2 Objective: 9Terms to Learn: direct materials mix varianceA favorable direct materials mix variance results when cheaper direct materials are substituted for more expensive direct materials.

48. A favorable direct materials yield variance results when less direct materials are used than planned.

Difficulty: 2 Objective: 9Terms to Learn: direct materials mix variance, direct materials yield variance

MULTIPLE CHOICE

49. Costs which are not economically feasible to trace but which are related to a cost object are known as:a. fixed costsb. direct costsc. indirect costsd. variable costs


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50. Any item for which a separate measurement of cost is desired is known as:a. cost allocationb. a cost objectc. a direct costd. an indirect cost

Difficulty: 1 Objective: 1Terms to Learn: cost object

51. Indirect costs:a. often comprise a large percentage of overall costs assigned to a cost objectb. specifically exclude marketing costsc. cannot be used for external reportingd. are treated as period costs and not as product costs

Difficulty: 3 Objective: 1Terms to Learn: indirect costs

52. All of the following illustrate purposes for allocating costs to cost objects EXCEPT to:a. provide information for economic decisionsb. motivate managers and employeesc. determine a selling price the market will beard. measure income and assets for reporting to external parties


53. The costs of all six value-chain functions should be included when determining:a. whether to add a new product lineb. the selling price of a servicec. whether to make or buy a component part from another manufacturerd. All of these answers are correct.


54. R&D costs are used for which purpose of cost allocation?a. to provide information for economic decisionsb. to report to external parties when using generally accepted accounting

principlesc. to calculate costs of a government contractd. All of these answers are correct.


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55. Which purpose of cost allocation is used to encourage sales representatives to push high-margin products or services?a. to provide information for economic decisionsb. to motivate managers and other employeesc. to justify costs or compute reimbursementd. to measure income and assets for reporting to external parties


56. Which purpose of cost allocation is used to decide on the selling price for a customized product or service?a. to provide information for economic decisionsb. to motivate managers and other employeesc. to justify costs or compute reimbursementd. to measure income and assets for reporting to external parties


57. To guide cost allocation decisions, the cause-and-effect criterion: a. is used less frequently than the other criteriab. is the primary criterion used in activity-based costingc. is a difficult criterion on which to obtain agreementd. may allocate corporate salaries to divisions based on profits


58. To guide cost allocation decisions, the benefits-received criterion:a. generally uses the cost driver as the cost allocation baseb. results in subsidizing products that are not profitablec. is the primarily used criterion in activity-based costingd. may use an allocation base of division revenues to allocate advertising costs


59. To guide cost allocation decisions, the fairness or equity criterion is:a. the criterion often cited in government contractsb. superior when the purpose of cost allocation is for economic decisionsc. used more frequently than the other criteriad. the primary criterion used in activity-based costing


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60. To guide cost allocation decisions, the ability to bear criterion:a. is likely to be the most credible to operating personnelb. allocates costs in proportion to the benefits receivedc. results in subsidizing products that are not profitabled. is the criterion often cited in government contracts


61. Which cost-allocation criterion is appropriate when making an economic decision?a. the fairness or equity criterionb. the ability to bear criterionc. the cause-and-effect criteriond. All of these answers are correct.


62. Which cost-allocation criterion is MOST likely to subsidize poor performers at the expense of the best performers?a. the fairness or equity criterionb. the benefits-received criterionc. the ability to bear criteriond. the cause-and-effect criterion


63. A challenge to using cost-benefit criteria for allocating costs is that:a. the costs of designing and implementing complex cost allocations are not

readily apparentb. the benefits of making better-informed pricing decisions are difficult to

measurec. cost systems are being simplified and fewer multiple cost-allocation bases are

being usedd. the costs of collecting and processing information keep spiraling upward


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64. Corporate overhead costs can be allocated:a. using a single cost poolb. to divisions using one cost pool and then reallocating costs to products using

multiple cost poolsc. using numerous individual corporate cost poolsd. All of these answers are correct.


65. The MOST likely reason for allocating all corporate costs to divisions include that:a. division managers make decisions that ultimately control corporate costsb. divisions receive benefits from all corporate costsc. the hierarchy of costs promotes cost managementd. it is best to use multiple cost objects


66. The MOST likely reason for NOT allocating corporate costs to divisions include that:a. these costs are not controllable by division managersb. these costs are incurred to support division activities, not corporate activitiesc. division resources are already used to attain corporate goalsd. divisions receive no benefits from corporate costs


67. Some companies only allocate corporate costs to divisions that are:a. planned and under the control of division managersb. output unit-level costsc. perceived as causally related to division activitiesd. direct costs


68. Not allocating some corporate costs to divisions and products results in:a. an increase in overall corporate profitabilityb. the sum of individual product profitability being less than overall company

profitabilityc. the sum of individual product profitability being greater than overall company

profitabilityd. a decrease in overall corporate profitability


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69. The greater the degree of homogeneity, thea. greater the number of needed cost poolsb. fewer the number of needed cost poolsc. less accurate the costs of a particular cost objectd. greater the variety of cause-and-effect relationships with the cost driver


70. When individual activities within a cost pool have a similar relationship with the cost driver, those costs:a. need to be reallocatedb. need multiple cost driversc. are considered a homogeneous cost poold. are considered an allocated cost pool


71. Homogeneous cost pools lead to:a. more accurate costs of a given cost objectb. more resources being assigned to that cost objectc. the need for more cost driversd. Both a and c are correct.


72. Identifying homogeneous cost pools: a. requires judgment and should be reevaluated on a regular basisb. should include the input of managementc. should include a cost-benefit analysisd. All of these answers are correct.


73. To allocate corporate costs to divisions, the allocation base used should: a. be an output unit-level baseb. have the best cause-and-effect relationship with the costsc. combine administrative costs and human resource management costsd. allocate the full costs


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74. Corporate administrative costs allocated to a division cost pool are MOST likely to be:a. output unit-level costsb. facility-sustaining costsc. product-sustaining costsd. batch-level costs


75. To manage setup costs, a corporation might focus on thea. number of setup-hoursb. number of units included in each production runc. batch-level costs incurred per setup-hourd. Both a and c are correct.


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 76 THROUGH 78:The Hassan Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $20,000,000 bond issuance, the Electric Mixer Division used $14,000,000 and the Electric Lamp Division used $6,000,000 for expansion. Interest costs on the bond totaled $1,500,000 for the year.

76. What amount of interest costs should be allocated to the Electric Mixer Division?a. $450,000b. $1,050,000c. $4,200,000d. $14,000,000

Difficulty: 2 Objective: 3Terms to Learn: cost allocation$14,000,000 / $20,000,000 x $1,500,000= $1,050,000

77. What amount of interest costs should be allocated to the Electric Lamp Division?a. $450,000b. $1,050,000c. $4,200,000d. $6,000,000

Difficulty: 2 Objective: 3Terms to Learn: cost allocation$6,000,000 / $20,000,000 x $1,500,000 = $450,000

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78. The above interest costs would be considered a(n):a. output unit-level costb. facility-sustaining costc. product-sustaining costd. batch-level cost


79. Customers making large contributions to the profitability of the company should: a. be treated the same as other customers because all customers are importantb. receive a higher level of attention from the company than less profitable

customersc. be charged higher prices for the same products than less profitable customersd. not be offered the volume-based price discounts offered to less profitable

customers


80. Price discounts are influenced by:a. the volume of product purchasedb. a desire to sell to a customer in an area with high-growth potentialc. negotiating skills of the sales persond. All of these answers are correct.

ADifficulty: 2 Objective: 4Terms to Learn: price discounting

81. To improve customer profitability, companies should track:a. only the final invoice price of a saleb. the volume of the products purchased by each customerc. discounts taken by each customerd. Both b and c are correct.


82. To improve customer profitability, companies should: a. strictly enforce their volume-based price discounting policyb. track discounts by customerc. track discounts by sales persond. Both b and c are correct.


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83. A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different: a. types of cost driversb. benefits-received relationshipsc. levels of cause-and-effect relationshipsd. All of these answers are correct.


84. Costs incurred to process orders would MOST likely be classified as a: a. customer output unit-level costb. customer batch-level costc. customer-sustaining costd. corporate-sustaining cost


85. Top management and general administration costs would MOST likely be classified as a:a. customer output unit-level costb. customer batch-level costc. customer-sustaining costd. corporate-sustaining cost


86. The cost of visiting customers would MOST likely be classified as a: a. customer output unit-level costb. customer batch-level costc. customer-sustaining costd. corporate-sustaining cost


87. Costs incurred to handle each unit sold would MOST likely be classified as a:a. customer output unit-level costb. customer batch-level costc. customer-sustaining costd. corporate-sustaining cost


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88. _______________ categorizes costs related to customers into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect (or benefits-received) relationships.a. Customer-profitability analysisb. Customer revenuesc. Customer cost hierarchyd. Price discounting


89. An advantage of using a bar chart to visualize customer profitability is that:a. differences in commissions paid to sales persons stand outb. loss customers stand outc. trends in the volume of purchases become apparentd. All of these answers are correct.Difficulty: 3 Objective: 6Terms to Learn: customer-profitability analysis

90. Customer actions will LEAST affect: a. customer output unit-level costsb. customer batch-level costsc. customer-sustaining costsd. distribution-channel costs


91. To reduce distribution-channel costs, a company could: a. improve the efficiency of the ordering processb. make fewer customer visitsc. eliminate distribution to retailers and only service wholesalersd. All of these answers are correct.


92. Corporate-sustaining costs: a. are common to all individual customersb. have a clear cause-and-effect relationship with several cost-allocation basesc. should be allocated for decisions regarding reducing customer costsd. All of these answers are correct.


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93. The allocation of corporate-sustaining costs is useful for:a. evaluating the performance of salespersons with individual customer accountsb. motivating distribution-channel managementc. focusing on the cause-and-effect relationships with the cost-allocation basesd. None of these answers is correct.


94. If deciding whether to eliminate a distribution channel, allocating corporate-sustaining costs to distribution channelsa. helps define cost reduction possibilitiesb. gives the misleading impression of potential cost savingsc. identifies administrative inefficienciesd. evaluates the effectiveness of sales personnel


95. When corporate-sustaining costs are fully allocated to distribution channels, then the sum of the distribution-channel operating incomes is:a. less than company-wide operating incomeb. equal to company-wide operating incomec. greater than company-wide operating incomed. indeterminable

Difficulty: 3 Objective: 6Terms to Learn: customer-profitability analysis, customer cost hierarchy

96. Corporate-sustaining costs should be allocated to: a. motivate changes in customer behaviorb. evaluate distribution-channel managersc. determine the selling price that will cover all costsd. identify the most profitable customers

Difficulty: 3 Objective: 6Terms to Learn: cost allocation, customer-profitability analysis, customer cost hierarchy

97. A common finding in many studies is that a high percentage of operating income is: a. contributed by a small number of customersb. contributed to evenly by most customersc. the result of high discountingd. the result of cooperative efforts by many low-volume customers


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98. Loss-causing customers:a. should be droppedb. should be evaluated for ways to become profitable customersc. should be retained because each customer adds to long-run profitabilityd. do not exist because additional customer sales always increase profits


99. Customers are more valuable when they are all of the following EXCEPT:a. well known in the communityb. expected to continue to do business with a companyc. in an industry with high-growth potentiald. require special attention on a regular basis


100. Dropping an unprofitable customer will:a. eliminate long-run costs assigned to that customerb. eliminate most short-run costs assigned to that customerc. decrease long-run profitabilityd. increase the potential to cross-sell other products that are more desirable


101. More insight into the static-budget variance can be gained by subdividing it into: a. the sales-mix variance and the sales-quantity varianceb. the market-share variance and the market-size variancec. the flexible-budget variance and the sales-volume varianced. a cost hierarchy

Difficulty: 1 Objective: 7Terms to Learn: static-budget variance, flexible-budget variance, sales-volume variance

102. The static-budget variance will be favorable when:a. actual unit sales are less than budgeted unit salesb. the actual contribution margin is greater than the static-budget contribution

marginc. the actual sales mix shifts toward the less profitable unitsd. the composite unit for the actual mix is greater than for the budgeted mix

Difficulty: 3 Objective: 7Terms to Learn: static budget variance

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103. More insight into the sales-volume variance can be gained by subdividing it into: a. the sales-mix variance and the sales-quantity varianceb. the market-share variance and the market-size variancec. the flexible-budget variance and the market-size varianced. a cost hierarchy

Difficulty: 1 Objective: 7Terms to Learn: sales-volume variance

104. The budgeted contribution margin per composite unit for the budgeted mix can be computed by dividing the:a. total budgeted contribution margin by the actual total unitsb. total budgeted contribution margin by the total budgeted unitsc. actual total contribution margin by the total actual total unitsd. actual total contribution margin by the total budgeted units


105. The sales-mix variance results from a difference between the:a. actual market share and the budgeted market shareb. actual contribution margin and the budgeted contribution marginc. budgeted contribution margin per composite unit for the actual mix and the

budgeted contribution margin per composite unit for the budgeted mixd. actual market size in units and the budgeted market size in units

Difficulty: 2 Objective: 7Terms to Learn: sales-mix variance

106. The sales-mix variance will be unfavorable when:a. the actual sales mix shifts toward the less profitable unitsb. the composite unit for the actual mix is greater than for the budgeted mixc. actual unit sales are less than budgeted unit salesd. the actual contribution margin is greater than the static-budget contribution

margin


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107. The sales-mix variance will be favorable when:a. the actual contribution margin is greater than the static-budget contribution

marginb. actual unit sales are less than budgeted unit salesc. the actual sales mix shifts toward the less profitable unitsd. the composite unit for the actual mix is greater than for the budgeted mix


108. An unfavorable sales-mix variance would MOST likely be caused by:a. a new competitor providing better service in the high-margin product sectorb. a competitor having distribution problems with high-margin productsc. the company offering low-margin products at a higher priced. the company experiencing quality-control problems that get negative media

coverage of low-margin products


109. A shift towards a mix of products with a lower contribution margin per unit will MOST likely result in a(n):a. unfavorable sales-mix varianceb. unfavorable sales-quantity variancec. favorable sales-mix varianced. favorable sales-quantity variance


110. The sales-quantity variance will be unfavorable when:a. the composite unit for the actual mix is greater than for the budgeted mixb. actual unit sales are less than budgeted unit salesc. the actual contribution margin is greater than the static-budget contribution

margind. the actual sales mix shifts toward the less profitable units

Difficulty: 3 Objective: 7Terms to Learn: sales-quantity variance

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111. A favorable sales-quantity variance would MOST likely be caused by:a. a new competitor providing better service in the high-margin product sectorb. a competitor having distribution problems with high-margin productsc. the company offering low-margin products at a higher priced. the company experiencing quality-control problems that get negative media

coverage of low-margin products


112. The formula, (Actual sales quantity in units – Static budget sales quantity in units) x Budgeted contribution margin per unit, is equal to the: a. sales-volume varianceb. sales-mix variancec. sales-quantity varianced. market-share variance


113. The sales-quantity variance results from a difference between:a. the actual sales mix and the budgeted sales mixb. the actual quantity of units sold and the budgeted quantity of unit sales in the

static budgetc. actual contribution margin and the budgeted contribution margind. actual market size in units and the budgeted market size in units


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 114 THROUGH 117:Ceylon Tea Products has an exclusive contract with British Distributors. Calamine and Ceylon are two brands of teas that are imported and sold to retail outlets. The following information is provided for the month of March:

Actual BudgetCalamine Ceylon Calamine Ceylon

Sales in pounds 1,700 lbs. 1,800 lbs. 2,000 lbs. 1,500 lbsPrice per pound $2.50 $2.50 $2.00 $3.00Variable cost per pound 1.00 2.00 1.00 1.50Contribution margin $1.50 $0.50 $1.00 $1.50

Budgeted and actual fixed corporate-sustaining costs are $1,750 and $2,000, respectively.

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114. What is the actual contribution margin for the month?a. $3,750b. $4,400c. $4,250d. $3,450

Difficulty: 2 Objective: 7Terms to Learn: contribution margin(1,700 x $1.50) + (1,800 x $0.50) = $3,450

115. What is the contribution margin for the flexible budget?a. $3,750b. $4,400c. $4,250d. $3,450

Difficulty: 2 Objective: 7Terms to Learn: flexible budget(1,700 x $1.00) + (1,800 x $1.50) = $4,400

116. For the contribution margin, what is the total static-budget variance?a. $300 favorableb. $950 unfavorablec. $500 favorabled. $800 unfavorable

Difficulty: 2 Objective: 7Terms to Learn: static-budget varianceVariance = [(2,000 x $1.00) + (1,500 x $1.50)] – [(1,700 x $1.50) + (1,800 x $0.50)] $800 unfavorable = $4,250 – $3,450

117. For the contribution margin, what is the total flexible-budget variance?a. $300 favorableb. $950 unfavorablec. $500 favorabled. $800 unfavorable

Difficulty: 2 Objective: 7Terms to Learn: flexible-budget variance$950 unfavorable = $4,400 – $3,450(see calculations for the answers to questions 114 and 115)

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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 118 THROUGH 120:Edna’s Flowering Plants provides the following information for the month of May:

Actual BudgetTulips Geraniums Tulips Geraniums

Sales in units 1,950 1,800 2,250 1,500Contribution margin per unit $11 $18 $10 $20

118. What is the budgeted contribution margin per composite unit for the actual mix?a. $13.80b. $14.00c. $14.36d. $14.80

Difficulty: 2 Objective: 7Terms to Learn: composite unit[$10 x (1,950) / (1,950 + 1,800))] + [$20 x (1,800) / (1,950 + 1,800))] = $14.80

119. What is the budgeted contribution margin per composite unit for the budgeted mix?a. $13.80b. $14.00c. $14.36d. $14.80

Difficulty: 2 Objective: 7Terms to Learn: composite unit[$10 x (2,250) / (2,250 + 1,500))] + [$20 x (1,500 / (2,250 + 1,500))] = $14.00

120. For May, Edna will report a(n):a. favorable sales-mix varianceb. unfavorable sales-mix variancec. favorable sales-volume varianced. unfavorable sales-volume variance

Difficulty: 2 Objective: 7Terms to Learn: sales-mix variance(see calculations for answers to questions 118 and 119)

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 121 THROUGH 123:Edna’s Flowering Plants provides the following information for the month of May:

Actual BudgetFuchsia Dogwood Fuchsia Dogwood

Sales in units 10,000 2,500 8,000 2,000Contribution margin per unit $9 $7 $10 $8

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121. What is the budgeted contribution margin per composite unit for the actual mix?a. $8.00b. $8.60c. $9.00d. $9.60

Difficulty: 2 Objective: 7Terms to Learn: composite unit[$10 x (10,000) / (10,000 + 2,500))] + [$8 x (2,500 / (10,000 + 2,500))] = $9.60

122. What is the budgeted contribution margin per composite unit for the budgeted mix?a. $8.00b. $8.60c. $9.00d. $9.60

Difficulty: 2 Objective: 7Terms to Learn: composite unit[$10 x (8,000 / (8,000 + 2,000))] + [$8 x (2,000 / (8,000 + 2,000))] = $9.60

123. For May, Edna will report a(n):a. favorable sales-mix varianceb. unfavorable sales-mix variancec. favorable sales-volume varianced. unfavorable sales-volume variance


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 124 THROUGH 127:The XTRA Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:

Standard SuperBudgeted sales in units 3,200 800Budgeted selling price $300 $850Budgeted contribution margin per unit $210 $550Actual sales in units 3,500 1,500Actual selling price $325 $840

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124. What is the budgeted sales-mix percentage for the Standard and the Super vacuum cleaners, respectively?a. 0.80 and 0.20b. 0.70 and 0.30c. 0.20 and 0.80d. 0.30 and 0.70

Difficulty: 1 Objective: 7Terms to Learn: sales-mix variance3,200 / (3,200 + 800) = 0.80 and 800 / (3,200 + 800) = 0.20

125. What is the total sales-volume variance in terms of the contribution margin?a. $108,000 unfavorableb. $108,000 favorablec. $278,000 favorabled. $448,000 favorable

Difficulty: 2 Objective: 7Terms to Learn: sales-volume varianceStandard = (3,500 – 3,200) x $210 = $ 63,000 FSuper = (1,500 – 800) x $550 = 385,000 F

$448,000 F

126. What is the total sales-quantity variance in terms of the contribution margin?a. $110,000 favorableb. $170,000 favorablec. $278,000 favorabled. $448,000 favorable

Difficulty: 2 Objective: 7Terms to Learn: sales-quantity varianceStandard = (5,000 – 4,000) x .8 x $210 = $168,000 FSuper = (5,000 – 4,000) x .2 x $550 = 110,000 F

$278,000 F

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127. What is the total sales-mix variance in terms of the contribution margin?a. $110,000 favorableb. $170,000 favorablec. $278,000 favorabled. $448,000 favorable

Difficulty: 2 Objective: 7Terms to Learn: sales-mix varianceStandard = 5,000 x (.7 – .8) x $210 = $105,000 USuper = 5,000 x (.3 – .2) x $550 = $275,000 F

$170,000 F(see calculations for answers to question 126)

128. More insight into the sales-quantity variance can be gained by subdividing it into: a. the sales-mix variance and the sales-volume varianceb. the market-share variance and the market-size variancec. the flexible-budget variance and the sales-volume varianced. a cost hierarchy


129. The market-share variance results from a difference between the:a. actual market share and the budgeted market shareb. actual contribution margin and the budgeted contribution marginc. budgeted contribution margin per composite unit for the actual mix and the



130. The market-share variance will be favorable when:a. the flexible-budget contribution margin is greater than the static-budget

contribution marginb. the actual market share is greater than the budgeted market sharec. actual market size in units is less than budgeted market size in unitsd. actual unit sales are less than budgeted unit sales


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131. The market-share variance is MOST influenced by:a. economic downturns in the economyb. how well managers perform relative to their peersc. shifts in consumer preferences that are outside of the manager’s controld. rates of inflation


132. An unfavorable market-share variance would MOST likely be caused by:a. a competitor providing better serviceb. a competitor having distribution problemsc. the company offering products at a lower priced. the company experiencing quality-control problems that get negative media

coverage


133. The market-size variance results from a difference between the:a. actual market share and the budgeted market shareb. actual contribution margin and the budgeted contribution marginc. budgeted contribution margin per composite unit for the actual mix and the


Difficulty: 1 Objective: 8Terms to Learn: market-size variance

134. The market-size variance will be unfavorable when:a. the flexible-budget contribution margin is greater than the static-budget

contribution marginb. the actual market share is greater than the budgeted market sharec. actual market size in units is less than budgeted market size in unitsd. actual unit sales are less than budgeted unit sales


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135. A favorable market-size variance would MOST likely be caused by:a. the company reducing the services provided to customersb. an increase in overall market sizec. a new competitor moving into the aread. a competitor providing better prices


136. Reliable information about market size and market share is available for:a. no industriesb. the management consulting and personal financial planning industriesc. the automobile and television industriesd. all industries

Difficulty: 2 Objective: 8Terms to Learn: market-size variance, market-share variance

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 137 THROUGH 139:Zorro Company manufactures remote control devices for garage doors. The following information was collected during June:

Actual market size (units) 10,000Actual market share 32%Actual average selling price $10.00Budgeted market size (units) 11,000Budgeted market share 30%Budgeted average selling price $11.00Budgeted contribution margin percomposite unit for budgeted mix $ 5.00

137. What is the market-size variance?a. $500 Ub. $1,500 Uc. $1,600 Fd. $1,000 F

Difficulty: 2 Objective: 8Terms to Learn: market-size variance(10,000 – 11,000) x 0.30 x $5 = $1,500 U

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138. What is the market-share variance?a. $1,000 Fb. $1,100 Fc. $500 Ud. $1,500 U

Difficulty: 2 Objective: 8Terms to Learn: market-share variance10,000 x (0.32 – 0.30) x $5 = $1,000 F

139. What is the sales-quantity variance?a. $1,500 Ub. $1,000 Fc. $500 Ud. The variance cannot be determined.

Difficulty: 2 Objective: 8Terms to Learn: sales-quantity variance$1,500 U + $1,000 F = $500 U(see calculations for answers to questions 137 and 138)

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 140 THROUGH 148:The Sasita Corporation manufactures two types of vacuum cleaners, the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 20X5 were as follows:

Static Budget ZENITH House-Helper Total Number sold 5,000 20,000 25,000Contribution margin $1,500,000 $3,000,000 $4,500,000

Actual Results ZENITH House-Helper Total Number sold 4,000 28,000 32,000Contribution margin $1,280,000 $3,920,000 $5,200,000

Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the ZENITH and House-Helper category to be 250,000 units, but actual industry volume was 256,000 units.

140. What is the contribution margin for the flexible budget?a. $1,200,000b. $4,200,000c. $5,200,000d. $5,400,000

Difficulty: 2 Objective: 7Terms to Learn: contribution margin

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Budgeted contribution margin per unit:ZENITH = $1,500,000/5,000 = $300 House-Helper = $3,000,000/20,000 = $150Flexible-budget contribution margin: 4,000 x $300 = $1,200,000

28,000 x $150 = 4,200,000$5,400,000

141. What is the total static-budget variance in terms of the contribution margin?a. $900,000 favorableb. $700,000 favorablec. $200,000 unfavorabled. $360,000 unfavorable

Difficulty: 1 Objective: 7Terms to Learn: static-budget variance$700,000 favorable = $4,500,000 – $5,200,000

142. What is the total flexible-budget variance in terms of the contribution margin?a. $900,000 favorableb. $700,000 favorablec. $200,000 unfavorabled. $360,000 unfavorable

Difficulty: 2 Objective: 7Terms to Learn: flexible budget variance$200,000 unfavorable = $5,400,000 – $5,200,000(see calculation for answer to question 140)

143. What is the total sales-volume variance in terms of the contribution margin?a. $900,000 favorableb. $1,260,000 favorablec. $200,000 unfavorabled. $360,000 unfavorable

Difficulty: 2 Objective: 7Terms to Learn: sales-volume variance$900,000 favorable = $4,500,000 – $5,400,000(see calculation for answer to question 140)

144. What is the total sales-quantity variance in terms of the contribution margin?a. $200,000 unfavorableb. $900,000 favorablec. $360,000 unfavorabled. $1,260,000 favorable


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Budgeted sales-mix percentage: ZENITH = 5,000/25,000 = 0.20 House-Helper = 20,000/25,000 = 0.80

Actual sales-mix percentage:ZENITH = 4,000/32,000 = 0.125 House-Helper = 28,000/32,000 = 0.875

Sales-quantity variance

Actual units of all products sold – Budgeted units of all products sold

Budgeted sales-mix %

Budgeted CMper unit

Sales-quantity variance

ZENITH (32,000 – 25,000) x 0.20 x $300 = $ 420,000 FHouse-Helper (32,000 – 25,000) x 0.80 x $150 = $ 840,000 F Total $1,260,000 F

145. What is the total sales-mix variance in terms of the contribution margin?a. $200,000 unfavorableb. $360,000 unfavorablec. $900,000 favorabled. $1,260,000 favorable


Sales-mix variance

Actual units of all

products sold

Actual sales-mix % - Budgeted sales-mix %

Budgeted CM

per unit

Sales-mix variance

ZENITH 32,000 x (0.125 – 0.200) x $300 = $720,000 FHouse-Helper

32,000 x (0.875 – 0.800) x $150= $360,000

U Total $360,000 U

146. What is the budgeted contribution margin per composite unit of the budgeted mix?a. $140.625b. $180.000c. $208.000d. $162.500


ZENITH = $300 x .2 = $ 60House-Helper = $150 x .8 = 120OR $4,500,000/25,000 = $180

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147. What is the market-size variance?a. $1,152,000 Fb. $108,000 Fc. $360,000 Ud. $1,260,000 F


Actual market share = 32,000/256,000 = 0.125Budgeted market share = 25,000/250,000 = 0.100

Market-size variance

Actual market size in units – Budgeted market size in units

Budgeted market share

Budgeted CMper composite unit for budgeted mix

Market-size variance

Sasita Corp(256,000 – 250,000) x

0.100 x $180 = $108,000 F

148. What is the market-share variance?a. $360,000 Ub. $1,260,000 Fc. $1,152,000 Fd. $108,000 F


Market-share variance

Actual market size in units

Actual market share – Budgeted market share

Budgeted CMper composite unit for budgeted mix

Market-share variance

Sasita Corp 256,000 x(0.125 – 0.100)

x$180 = $1,152,000 F

149. More insight into the flexible-budget variance for direct materials can be gained by subdividing it into the direct materials:a. mix and volume variancesb. market-share and market-size variancesc. mix and yield variancesd. price and efficiency variances

Difficulty: 2 Objective: ATerms to Learn: direct material price variance, direct material efficiency variance

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150. More insight into the efficiency variance for direct materials can be gained by subdividing it into the direct materials:a. mix and volume variancesb. market-share and market-size variancesc. mix and yield variances.d. price and efficiency variances

Difficulty: 2 Objective: ATerms to Learn: direct materials mix variance, direct materials yield variance

151. The direct materials mix variance will be favorable when:a. the flexible-budget contribution margin is greater than the actual contribution

marginb. the actual direct materials input mix is less expensive than the budgeted direct

materials input mixc. the actual quantity of total inputs used is greater than the flexible budget for

total inputsd. actual unit sales are less than budgeted unit sales

Difficulty: 2 Objective: ATerms to Learn: direct materials mix variance

152. The materials yield variance will be unfavorable when:a. the flexible-budget contribution margin is greater than the actual contribution

marginb. the actual direct materials input mix is less expensive than the budgeted direct

materials input mixc. the actual quantity of total inputs used is greater than the flexible budget for

total inputsd. actual unit sales are less than budgeted unit sales

Difficulty: 2 Objective: ATerms to Learn: direct materials yield variance

153. The direct materials mix variance is the: a. average of the direct materials mix variances for each inputb. sum of the direct materials mix variances for each inputc. difference between the direct materials mix variances for each inputd. multiple of the direct materials mix variances for each input

Difficulty: 2 Objective: ATerms to Learn: direct materials mix variance

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EXERCISES AND PROBLEMS

154. For each cost pool listed select an appropriate allocation base from the list below. An allocation base may be used only once. Assume a manufacturing company.

Allocation bases for which the information system can provide data:

1. Number of employees per department2. Employee wages and salaries per department3. Production facility square footage4. Hours of operation of each production department5. Machine hours by department6. Operations costs of each department7. Hours of computer use per month per department8. Indirect labor-hours per department

Cost pools:

_______ a. Vice President of Finance’s office expenses_______ b. Computer operations used in conjunction with manufacturing_______ c. Personnel Department_______ d. Manufacturing machinery cost_______ e. Energy costs


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155. Handy-Man Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:

Customer Revenues Customer CostsMarveline Burnett $300 $225J Jackson 200 305Roger Jones 80 75Paul Saas 75 110Becky Stephan 350 220

Required:a. Compute the operating income for each of the five customers.b. What options should Handy-Man Services consider in light of the customer-

profitability results?c. What problems might Handy-Man Services encounter in accurately estimating

the operating costs of each customer?


156. Aromatic Coffee, Inc., sells two types of coffee, Colombian and Blue Mountain. The monthly budget for U.S. coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the U.S. market. The following information is provided for March:

Actual BudgetColombian Blue Mountain Colombian Blue

MountainSales in pounds 7,000 lbs. 8,000 lbs. 6,400 lbs. 8,600 lbs

Price per pound $25 $30 $25 $30Variable cost per pound 11 14 12 13

Contribution margin $14 $16 $13 $17

Budgeted and actual fixed corporate-sustaining costs are $60,000 and $72,000, respectively.

Required:a. Calculate the actual contribution margin for the month.b. Calculate the contribution margin for the static budget.c. Calculate the contribution margin for the flexible budget.d. Determine the total static-budget variance, the total flexible-budget

variance, and the total sales-volume variance in terms of the contribution margin.

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Difficulty: 2 Objective: 7Terms to Learn: contribution margin, static budget variance, flexible budget variance, sales volume variance

157. Harry's Electronics manufactures TVs and VCRs. During February, the following activities occurred:

TVs VCRs Budgeted units sold 17,640 66,360Budgeted contribution margin per unit $90 $156Actual units sold 20,000 80,000Actual contribution margin per unit $100 $158

Required:Compute the following variances in terms of the contribution margin.

a. Determine the total sales-mix variance.

b. Determine the total sales-quantity variance.

c. Determine the total sales-volume variance.

Difficulty: 3 Objective: 7Terms to Learn: sales-volume variance, sales-mix variance, sales-quantity variance

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158. Speedy Printing manufactures soft cover books. For January, the following information is available:

Budgeted market size (units) 125,000Budgeted market share 18%Budgeted average contribution margin per unit $1.20Actual market size (units) 100,000Actual market share 19%Actual average contribution margin per unit $1.22

Required:Compute the market-share variance, the market-size variance, and the sales-quantity variance in terms of the contribution margin.

Difficulty: 2 Objective: 8Terms to Learn: market-share variance, market-size variance, sales-quantity variance

159. The Omega Corporation manufactures two types of vacuum cleaners: the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 20X5 are as follows:



Required:a. Calculate the contribution margin for the flexible budget.b. Determine the total static-budget variance, the total flexible-budget

variance, and the total sales-volume variance in terms of the contribution margin.

Difficulty: 2 Objective: 7Terms to Learn: contribution margin, static-budget variance, flexible-budget variance, sales volume variance

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160. The Omega Corporation manufactures two types of vacuum cleaners: the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 20X5 are as follows:



Required:Compute the sales-mix variance and the sales-quantity variance by type of vacuum cleaner, and in total. (in terms of the contribution margin)

Difficulty: 3 Objective: 7Terms to Learn: sales-mix variance, sales-quantity variance

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161. The Omega Corporation manufactures two types of vacuum cleaners, the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 20X5 are as follows:



Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the Zenith and House-Helper category to be 300,000 units, but actual industry volume was only 275,000 units.

Required: Compute the market-share variance and market-size variance in terms of the contribution margin.

Difficulty: 3 Objective: 8Terms to Learn: market-share variance, market-size variance

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162. The Chair Company manufactures two modular types of chairs: one for the residential market, and the other for the office market. Budgeted and actual operating data for the year 20X5 are:

Static Budget Residential Office Total Number of chairs sold 260,000 140,000 400,000Contribution margin $26,000,000 $11,200,000 $37,200,000

Actual Results Residential Office Total Number of chairs sold 248,400 165,600 414,000Contribution margin $22,356,000 $13,248,000 $35,604,000

Prior to the beginning of the year, an office products research firm estimated the industry volume for residential and office chairs of the type sold by the Chair Company to be 2,400,000. Actual industry volume for the year 20X5 was only 2,200,000 chairs.

Required:Compute the following variances in terms of contribution margin:a. Compute the total static-budget variance, the total flexible-budget

variance, and the total sales-volume variance.b. Compute the sale-mix variance and the sales-quantity variance by type of

chair, and in total.c. Compute the market-share variance and market-size variance.

Difficulty: 3 Objectives: 7, 8Terms to Learn: static-budget variance, flexible budget variance, sales-volume variance, sales-mix variance, sales-quantity variance, market-share variance, market-size variance

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CRITICAL THINKING

163. A company might choose to allocate corporate costs to various divisions within the company for what four purposes? Give an example of each.


164. An electronics manufacturer is trying to encourage its engineers to design simpler products so that overall costs are reduced.

Required:Which of the value-chain function costs (R&D, design, production, marketing, distribution, customer service) should be included in product-cost estimates to achieve the above purpose? Why?


165. Should a company allocate its corporate costs to divisions?

Difficulty: 2 Objectives: 3Terms to Learn: cost allocation

166. List at least three different levels of costs in a customer-cost hierarchy and an example of each.


167. Why would a manager perform customer-profitability analysis?


168. What actions might be taken with an unprofitable customer?

Difficulty: 2 Objectives: 6Terms to Learn: customer profitability analysis

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169. Why would a manager want to calculate the sale-mix and the sales-quantity variances? Market-share and market-size variances?

Difficulty: 2 Objectives: 7, 8Terms to Learn: sales-mix variance, sales-quantity variance, market-size variance, market-share variance

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Cost Allocation, Customer-profitability Analysis, And Sales-Variance Analysis

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