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Test 2- Chapter 10 Study Guide- Acct 2123- Carol Knapp

Direct Materiais Variance Chart-

AQxAP SPxSQ SQxSP

I Materials Price Materials Quanti_

Direct Labor _/_ionce Chart-

ARxAH SRxAH SRxSQ

Rate Efficiency

Variable Manufacturing overhead Variance Chart:.

ARxAH SRxAH SRxSH

Spending Efficiency

When quantity purchased in materials differs from quantityactually used:

*When there is a discrepancy between the amount purchased andthe amount used, calculate the materials PRICE variance based

upon the _ol;aiamount-PURCHASED.'

*Calculate the materialsqUANTiTY varianc_ based upon the

_C amount'used in production.

Exam 2- Chapter 9- Managerial Accounting- Carol Knapp

*Budgets are used for 2 primary purposes:

• Planning- developing goals and preparing various budgets to achievethese goals

• ConlTol- involves the steps taken by mgmt to increase lhe likelihood thatALL parts of the organization are working together to achieve the goalsset down at the planning stage.**Must have both to be an effective budgeting system•*

• Budgets are helpful because...

• They coordinate the activities of the entire organization byintegrating the plans of its various parts. Budgeting helps to ensurethat everyone in the organization is pulling in the same direction.

• Budgets provide benchmarks for evaluating subsequentperformance

• Good communication tool

Forces managers to FOCUSON T_HEFuTuRE(too easy to focus on'NOW instead of having a plan for the future) _

• Means of allocating resources- How can we BESTallocate theresources that we have most efficiently and effectively_

*ResponsibilityAccounting- The idea that a manager should be held responsiblefor those items- and only those items- that he manager can actually control to asignificant extent. People are evaluated based on the budget, and it isn't fair forthe production manager to be held responsible for the sales dept., etc.

• The point is NOTto penalize individuals for missingtargets, but to makesure nothing "falls through the cracks" and that the organization reactsQUICKLYand APPROPRIATELYto deviations from its plans

The most successful budget systems are those where the managers ACTIVELYparticipate in preparing their own budgets rather than having them imposedfrom above.

Participative budflet- Budget that is prepared with the FULLcooperation andparticipation of managers at ALL levels.

• Each person with responsibility for cost control will prepare his or her own

budget estimates and submit them to the next higher level of mgmt.These estimates are reviewed and consolidated as they move upward inthe organization. Basically, goes up from supervisors.

• People feel valued at all levels of the organization, as they are recognizedas members of the team whose views and judgments are valued by topmgmt

• Higher motivation when individuals participate in setting their own goals.Self-imposed budgets create commitment.

Human Factors in Bud.qetin.q-

• Behavior affected by rewards and punishment. You must be aware of

how people behave with regards to a budgel. If they are going to berewarded, they act a certain way.

• Budgets SHOULD NOT be used as a weapon, but as a positive instrumentto assist in establishing goals, measuring operating results,and isolatingareas that need attention.

• Want to be careful not to use budget to "blame" employees.

The Master Budget: An Overview

I _tstep: Creating a Sales Budget

• MUSTbe accurate- key to entire budgeting process

• Detailed schedule showing the expected sales for the budget period• Helps to determine how many units need to be produced, which lead into

the...

Production Budget

• Used to determine the budgets for manufacturing costs including DMbudget, DL budget, and the MO budget. These budgets are thencombined with data from the sales budget and selling and administrativeexpense budget to determine the CASH BUDGET.

Cash Budget

• Detailed plan showing how cash resources will be acquired and used.• All the operating budgets have an impact on the cash budget. After the

cash budget is prepared, the budgeted income statement and then thebudgeted balance sheet can be prepared.

Sales Budget > Schedule of Cash Collections >

Sq!es Budgeti

Budgeted Sales in Unitsx Sale Price per Unit

Total Sales

Production Budget •

• Notice that the production requirements are influenced by the desiredlevel of ending inventory.

Budgeted Sales inunits (comes from sales budget)_-Desired Ending Inventory

Total Needed

i-Beg_Invento_

Production Needs- Required Production

•Note: In the last column, offen the quarter end or year column, you carryover the desired ending inventory amount from the last column, and you takethe beginning inventory amount in the very t'irstcolumn as the beginninginventory amount.

Direct Materials Budqet:

• usually accompanied with a Cash Disbursements for Mater/als Budget

X Material per unlt

"ProductionNeecl_

!+Desired Ending inventory

Total Needed

Beginning Inventory

C:0sIof Material to-be Purchased

Direct Labor Buclgeti

Required Productlon in Un_ (Tqke_ h_om.bgttom-of-Prgducti0nBudget)f

x DLHper unit of production

T_Ota_lLa-_barN_eed_

X DL C:ostper ho_ur::(-wage rate)

TotalDL CostF

*Note: Sometimes a company has a policy so that workers must be paid forminimum amount of work each quarter, ff this is the case, you compare thisminimum amount to the total labor needs amount, and whichever one is

HIGHER,you go by. You then multiply this number by the wage rate to get thetotal DLCost.

Manufacturing Overhead Bud.qeti

-Listsall costsof production other than DM and DL

Depending on what overhead isbased off of, you begin withthese amounts.

Example: If your overhead rate is based upon DLH,you would use your DirectLabor HoursNeeded as the starting point. If it were based on units produced,you would begin with the unit production amount.

Production in units

X Variable_mfg. OH rate:

i

_/arlable mfg. OH total c_ostsFix?d mfg, OH cos_

_otql rnfg. QH co_sts

_dd up the-totql c_all the-periods/months and ibis is the TOTALMANUFACTUR_INGIrOVERHEADAMOUNT.

___S'I'J'IIJT_I_FSgBTo get the POHR,divide this amountby the total amount of whatever the activity rate is. You will need this amount tocalculate finished goods inventory.

Endin.qFinishedGoods inventory:

Computation is Important because...

I. Helps to determine COGS

2. To know what amount to put on the balance sheet _r _(3"/

inventory account f4_:_ei_l_:=m'dts

Production Cost per Case:

DM: Quantity x Unit Cost

+DL: Quantity x Unit Cost

+MO: Quantity x POHR

Unit product cost

{Cont. on next page)

Budgeted finished Roods inventory:

Ending FG Inventory (Take from last colurnn of Production Budget)

+ Unit product cost (fr0m just above- sum)

Selling and Administrative Expense Budget:.

-Liststhe budgeted expenses for areas other than manufacturing

-Also divided into Variable and Fixed Costs

'Budgeted Sales (From sales budge!) _

x Vadab!e Selling and _a=dmln;[ate

r .... .

_Variab!e Expenser ..... ,

+ Fixed Selllng and Admln. Costs

:FixedExpenses that are not Cash Ouffl0ws of th? current month (i.e.:

=0eprecia.en)

Total Selling and Admin. Expenses

_:_h -B-ud.qet

Beg!nning Cash BalanceCash _Coileclio_n_

I

_otal Cash Avallqbl_l-Dlsbursements_

r.....

- __.... _ _$elllng and Adminlsffaflv_F.......... 1...... Equipment Purchase

__ ......... _Dividends.i ..... II

TotalDisbursements_

over disbursementsExcess(deficiency)of cash available "

F,in- n ci q.q i

BorrowlnR

'RepaymentL_

'Budgeted Income Statement:

Salesr-coGs

Gross Margin

r _ - -:-Sellingand Admln. Expenses

Net Operahng Income

,-E...... Interest Expense_

Net Incom_

Budgeted Balance Sheet_

_ u_tYA_

CashAccounts Receivable

Raw materials inventory

FinishedGoods inventory

Total Current Assets

Pr0perty a_ Equipmen_

Land

Equipment

Total Propertyand Equipment

Total Asset_

Accounts PayableCommon Stock

Ending Retained Earnin.qs**

• t ____Toal Liabilitiesand Equities(Thisnumber SHOULDequal TotalAsse_-Number)

**To get retained earnings, remember to...

take-fhe-L)eg_Amount as-given+ hle_come--Div_ends = EndingretaineclF-----. ...... 1earmngs__balanc_

Exam 2- Managerial Acct- Chapter 8- Carol Knapp

ABC Costing

-Cost objects generate activities that consume resources which

cause costs. Activity Based Costing attempts to tTace these

relationships to identify HOW products and customers affect costs.

-Primarily for internal purposes

-Overhead costsare trac?_ to_qctiv__es,th?q cgsts are aced_topr_ductsi

-Nonmanufacturing AS WELLAS manufacturing costs may be assigned toproducts

-Some manufacturing costs may be excluded from product costs

-NUMEROUSoverhead cost pools are used, each of which isallocated to

products and other cost objects usingits own unique measure of activity

-Products are only charged for the costs of the capacity that they use- not forthe costs of capacity that they DON'T use. Thisprovides more stable unitproduct costs and is consistent with the goal of assigning to products only thecosts of the resources they use.

Why use it?

-To get a better understanding of your product and its costs (especially in terms

of overhead)

-Generally for LARGEcompanies with a high volume of Overhead costs andI

MANY different products are sold.

-()verhead costs are the ONLY-part of costs a ca_mpany doesn't understancl-__e_y venture into an ABC system to gain an understanding Ofthese costs. So_

i

_when a large volume of costs are OH and there_'sconsiderable diversity, y9u,_vgnt to use ABC.!

-The product margin for a product in an ABC system is the difference betweensale price to customer- total cost to company

-As time evolved and conditions began to change, lessand lesswork was beingperformed by direct laborers. _ogs ope/ce_qtgge_olf to_talc_ost,__)Lbegan.'

cleclining and overheadbegan increasing. Many taskspreviouslydone by DLwere being performed by automated equipment- a component of overhead.So continuing to rely exclusively on a limited number of overhead cost pools andtraditional allocation bases posed the riskthat reported unit product costs wouldbe distorted and therefore misleading when used for decision-making purposes.

Overhead Allocation: Levels of Complexity:

1. One Predetermined Overhead Rate2. Departmental Overhead Rate

3. ABC Costing

Unit-Level Activity:

• Effects/happens to EVERYSINGLE UNITH

• Performed EVERY time a unit is produced

• Should be proportional to the number of units produced

• Examples: Providing power required to run production

equipment, assembly activities, labor time required to assemble

a product

Batch-Level Activity:

• Performed each time a batch is handled or processed,

regardless of how many units are ordered

• Incurred once for each batch- each production run

• Materials Handling

• Costs depend on the number of batches processed rather than

on the number of units produced, the number of units sold, orother measures of volume

• Purchase order processing, setting up equipment, and

arranging for shipments to customers, setting up a machine for

batch processing

Product-Level Activity:

• Relates to specific products

• If ABC is used, modifications to the product design made by

engineering

• Must be carried out regardless of how many batches are run or

units of product are produced or sold

• Any cost you incur to sustain a specific product line

• Designing a product, advertising a product, and maintaining a

product manager and staff

Customer-Level Activity:

• Relates to specific customers

• Sales calls, catalog mailings, general technical support that

isn't tied to any specific product, entertaining expenses

• Any cost incurred to sustain business with customers is a

customer-level activity

Or.qanlzation Sustalnlna Activltv:

• Carried out regardless of which customers are served, which

products produced, how many batches run, or how many unitsare made

• Heating the factory, cleaning executive offices, providing a

computer network, arranging for loans, preparing annual

reports to shareholders

• Plant management- anything having to do with it

STEPS:

I. Identify and Define Activities and Activity Cost Pools (Interview

different department workers- group tasks together at

appropriate levels)

2. Whenever possible, directly trace overhead costs to activitiesand cost objects (Stage I allocation)

3. Assign costs to Activity Cost Pools

4. Calculate Activity Rates (Total Cost/Total Activity = ActivityRate)

5. Assign costs to cost objects (Stage 2 allocation)

6. Prepare mgmt reports

Managerial Accounting Exam 2 Study Guide

CHAPTER 6: COST-VOLUME-PROFIT

**Likely Test Question: A unit contribution margin is found bysubtracting sales per unit by BOTH variable manufacturing expenses

AND variable selling and admin, expenses outi

To calculate a change in net operating income, multiply conldbution

margin % by increase in total sales.

Example: Sales increased by 1000, and contribution margin is 20%. Calculate thechange in net operating income.

1000 x .20= $200; So net operating income will increase by 200 dollars.

To calculate if an increase in VC will be worth it if it increases sales

by a certain %, you figure out the change in the contribution marginand multiply that by the estimated Increase in sales.

Example: Sales are projected to increase by 18% if higher quality products are usedthat would increase MC by 3.2 per unit. Would it be worth it to usethe higher qualityproducts?

Per unit:

Sales=S79.00

VC= $46.61

CM=$32.39

*Beg Sales: 4600 units a month

*New Projected Sales: 4600(.18)= 828; 4600+ 828 = 5,428 units a month

5428 x $29.19 per unit (Change in contribution margin) = $158,443.32= NETOPERATINGINCOME

*Original:

4600 x $32.39 = $148,994 = ORIGINAL NETOPERATINGINCOME

So,since 158,443.32> 148,994, il WOULDbe worth it

Calculating a change in contribution margin if sales are altered:

Example:

*Say for every $1 in sales, total contribution margin isincreased by $.40

*If salesincrease by $50,000,what will be the increase in total contribution margin?

$50,000x .40= $20,000

Break Even Point:

When revenues = Expenses

Profit = 0

I. Equation Method:

Sales= VC+FC+Profff

-Can plug in numbers to either get the number of unitsneeding to be sold, oralso the dollar amount needing to be sold.

UnitsNeeded: DollarsNeeded (Use % of sales):

300X= 120X+ 10,000 . 0 X= .6X + 10,000 + 0

LWh-en-clealing-wffha MULT/-I_RODU_company,you C:ANN_ U_ PERUNif_'alues.Youmustusethe CMrafio_

CM ratio: CM total/Salestotal

BEPoint:.Fixed Cost/CM ratio

2. Contribution Margin Method:

Breakeven point in salesdollars=

Fixed Cost/CM % example: $80,000/.40

Break even point in unitssold=

Total Fixed Cost/Unit CM example: $80,000/$200

Cost-Volume-Profit Equation:

Sales = VC+FC+Profit

*Can plug in unit dollar amounts and desired profit to see how many unitsyou must sell to achieve that profit.

Example: How many bikes need to be sold to achieve a profit of$100,000?

$200 a bike$100 in VC$12,000 in FC

200Q= 100Q+ 12,000+ 100,000

Answer= 1!20 bikes

OR... we could use the contribution margin approach:

Fixed Cost + Desired Profit/Unit cM

IIIIII I m mmm I I IIII I III IIII I I I I llmm m mm M i i i i IIi III I I I I I m Ilml I I m1111 IM m IiIi I III III I I IIII II I mmm _ I

Mar.qin of Safety:

Sales.BE:Sales

mOn exam, we will probably have to solve for BESalesm

Levera_qe: MULTIPLYOPER.LEVERAGEBY% INC IN SALESTOGETTHE% INCREASEIN NETOPERATINGINCOME!!

CM/NOi

Thismeasures how sensitive net operating income Isto percentage change insales. With high operating leverage, the VC are low and FCare high. With lowoperating leverage, the VC are high and the FC are low.

*A high operating leverage has significant power in that a small increase in sales

can produce a much larger percentage increase in net operating income.

Tofind how a percent increase in sales affects the percent increase in protitsusing a specific degree of operating leverage:

Sales Increase 10%

Degree of Operating Leverage 5

10% x 5 = 50% increase in protits--WOWlil

_**Operating ieverage isthe relativemix -of-FiXEDA-NDy,_,-R/ABLEC:OSTS.**_

*It is HIGHESTwhen sales/profit is at or around break-even point, and decreasesas sales/profits riseabove BEpoint

*If two companies have the same revenue and same total expense but differentcost structures, then the company with the HIGHERproportionof FIXEDCOSTSinitscost structure will have higher operating leverage.

# 6 on Practice Exam Fall2007- Every single COSTon an income stmt is eitherFIXEDor VARIABLE,and when working problems like thisone, you want to use allof them in your computations.

*If substantial batch-level or product-level costsexist, then overhead allocationbased on a measure of volume such as direct labor-hours alone will

systematically overcost high-volume products and under-cost low-volumeproducts.

_ost S-tructure_

Refers to the relative proportion affixed and variable costs in an organization.

High/Low Variable and Fixed Costs:

• High FC Low VC:

-Sales are expected to exceed 100,000 In the future (Larger

Contribution Margin)

-Wider swings In net operating Income as sales fluctuate, with

greater profit in good years and greater losses in bad years.

• High VC Low FC:

-Less vulnerable to dawnturns (CM ratio lower, margin of safety

greater)

" -Less volatile profit (which means not as high profit as high fc/low vc

is in good times)

/

.+

Name:

Section_ or 4:30 circle one

SeatNumber:_ _-_

ACCOUNTING 2123

EXAMINATION 1

\

KNAPP, FALL 2007

VERSION 5

Exam 1 Fall 07 _=:_--0"-_-_..,.Version #5

There are 30 multiple choice questions in total. In all cases, select the BEST answer.

WhichofthefollowingisNOTaperiodcost?-4_S¢\\_ '_K. Insurance on a company showroom, where current and potential customers can view new products.

_Q)_. Cost of a seminar concerning tax law updates that was attended by the company's controller._.. Salary of a billing clerk.D. Monthly depreciation of the equipment in a fitness room used by factory workers.

. _ cos -

2. qgheSarbanes-Oxley Act of 2002 contains all of the following provisions EXCEPT:",_: A co_mpany'sannual report must contain an internal control report._. The audit committee of the board of directors of a company must hire, compensate, and terminate the public

.accounting firm that audits the company's financial reports.

C C. Financial statements must be audited once every three years by the Government Accounting Office.•_. 'Both the CEO and CFO must certify in writing that their company's financial statements and accompanying• "disclosures fairly represent the results of operations.

o - .

3. Job 910 was recently completed. The following data have been recorded on its job cost sheet:

Direct materials .............................. $3,193 bDirect labor-hours ........................... 21 labor-hours _,,_ ,_, \ .._ _'_ _-k-_--@irect labor wage rate ................ .... .I;12per labor-hourMachine-hours ............................... 166 machine-hours

The company applies manufacturing overhead on the basis of machine-hours, The predetermined overhead rate

is $15 per machine-hour. The total cost that would be recorded on the job cost sheet for Job 910 would be: _.,

A.. $3,760 e_._,,V,y_.._£._Ol_ (:)"_q'It,,,tm

055,935 _)_'3[_" _ . _f'_(V'_'_C. $3,445D. $3,220

,I

\4q,"\bbv, aqb

All of the following are characteristics of a pull production system EXCEPT:)Raw materials are released to production far in advance of being needed to ensure no interruptions in work)ws due to shortages of raw materials.

B. Inventories are reduced to a minimum by purchasing raw materials and producing units only as needed to

_)_. meet consumer demand•C. Products are completed just in time to be shipped to customers.D. Manufactured parts are completed just in time to be assembled into products.

5. The information below relates to Derby Manufacturing Company's operations for a recent month. (Assumethat all raw materials are direct materials.): '_

_.,_sc_or._o_;,:..-_._i-i_:_........................_91,-_,m- %_%e% 99 ,o_o,-1;tir-eet-labvr-costT_. .................................. .:: "$-1"227000" af. _9_j_(_ h'Ok\ I Ok]_

Selling costs (total) .................................... $42,000 _ -- ---Administrative costs (total) ........................ $56,000 / \'?'O,Ok_

--Mm'ru f-act-uring-o ve rhead-c o s ts-('totrat) ........ $-34137000---" ..._ %_N/_ ¢_ d - -"] ,OOQ)-- , b cginni:zg ........... _-e-2-2;000--

• tZini_hed-geods-m-venR>r-yr-beginnirtg ......... $42,_0--- _._ k._L.__i'a_g ............... $_,7_" 3f "_) L. Jr" /-W-or4_n-pre ee_z-m _z n tor4g-eaadmg ............ $35,090

" -t:in3gh_d-ff_dg-i?/v-entory,-e naing :.,._=-.,-_---$.1.5,.0.0.0_ .._ _,3_Q) "_ ")'O_ _ I0_ 1_)

at was Derby's cost of goods manufactured for the month? )f_ _/'_O_gl_)f- _ {_'_) _

_4_$587,000 - ._vO\X° _e._ _ 9"1 _0_3_.,B_.S545,000 _ OO_L]L] 0

_')')$560,000 ¢_"D'.S56S,000 -' _ _,)_ ---"_'L_ 1''_

Cage% qu ovs_cAcq/w _ +%0 o0o

- gc-

at journal entry is made in a job-order costing system when $8,000 of materials are requisitioned for1factory use instead of for use in a particular job?

_")Work in Process $8,000Manufacturing Overhead $8,000 tO,) _:) . "K ;/-

B) Work inProcess $8,000 ""i_Raw Materials $8,000 _ _ _

(2/ Manufacturing Overhead $8,000Work in Process $8,000

Manufacturing Overhead $8,000

, Raw Materials $8,000

Item DItem B

7. The annual insurance premium for the factory building would be a:

._vflaxed cost, product cost, and direct cost with regard to units of product.xed cost, product cost, indirect cost with regard to units of product.ariable cost, product cost, direct cost with regard to units of product.

_. fixed cost, period cost, and indirect cost with regard to units of product.°

o

8. Which of the following would usually be considered a CFlscretionaryfi_ed cost for a soft drink bottling ,company?

lA)the cost of advertising its products_.the cost of fire insurance on its factory building_depreciation on its manufacturing equipment_. both a and b above

I

Supply costs at Coulthard Corporation's chain of gyms are listed below:

Client-Visits Supply Cost

., March ..................... ]2,855, $23,598 . _CoSh" _'79,'_H9. -'_O3_)-"'1 q_

.......:.........12,283 - ty-a-k__May ................... 13,104 $23,742")

June ................... 1-2,850 $23,607July ......................... 12,493 $23,415 ":

August .................... 12,794 $23,562 (_)_1 \September .............. 12,686 $23,496October .................. 12,765 $23,541

November .............. 13,018 $23,687

Management believes that supply cost is a mixed cost that depends on client-visits. Using the high-low methodto estimate the variable and fixed components of this cost, those estimates would be closest to:A. $1.77 per client-visit; $557 per month

G I_. $1.85 per client-visit; $23,547 per month

_. 0.57 per client-visit; 6,273 per$ 1 month

D. $0.55 per client-visit; $16,579 per month

__during March, Zea Inc. transferred $50,000 from Work in Process to Finished Goods and recorded a Cost ofGoo s Sold of $56,000. The journal entries to record these transactions would include a:

iC i(_credit to Cost of Goods Sold of $56,000i x.J B. credit to Finished Goods of $50,000 QOc_ _ {,.9_ t,-_k--_k--_

c. credit to Work in Process of $50,000 "k_ _9 _ I_'k'_D. debit to Finished Goods of $56,000

11. The following inventory balances have been provided for the most recent year:

Raw-rnatg-fia_-._l_ ..... i.. LL.-.:_$2I.000-- -$-1-5;000 _- (-./6 _ irk --1 \ t_, O'-_

W_rk_in-l_r dce's s ................. $q8;600--$29.000 -...------- -

Finished goods ' $57,000 $33,000 ,5"OOM"V_'A_- ___,_,

The cost of goods manufactured was $714,000. What was the cost of goods sold? _ _'_f_/i"_ 1'5('_A. $714,000 ,..,.,- _ -

B. $733,000C. $693,000

O ,oooV)

12. Shown below are a number of costs incurred last year at Mecca Publishing Co., a manufacturer of

elementary school textbooks:

Solvents and cleaners usedby the custodians to clean the

textbook printing presses .................. ............................. $500-_Q)

Depreciation on the automobiles used by sales

representatives .............................................................. $4,200 s _Fire insurance on factory building ..................... _.............. $2,000 - t-_ (3

Shipping costs on textbooks sold ....................... -.............. _ _e.\\_%

"_What is the total of the manufacturing overhead costs above?

_,.)_@(_. 6,7005002,500

$6,200

13. Reamer Company uses apredetermined overhead rate based on machine-hours to apply manufacturingoverhead to jobs. The company has provided the Iollowmg estimated costs for next year:

Direct materials .......................................... $1,000 __'1_ .c_fv_Jd,

D ectlabor.........................................:...... .Sales commissions ..................................... -$4,808 -'%c\_'-_" _ v_,-- _2...----'--- I

Salary ofproduction supervisor ................. $2.000" f'_'O "-] ' _,._f___l_A

Indirect materials ....................................... $400 '- p,.o I...(/.At_ 01_ _gk(..."_"_'_ ' -_

Advertising expense ................................... _ D -JRent on factory equipment ......................... $1,000 -" _t_

Reamer estimates that 500 direct labor-hours and 1,000 machine-hours will be worked during the year. The

predetermined overhead rate per hour will be: i'-'- OO_ _i__.._$6.00

i() "B_$3.4 0 _ _- " _.._.______.__,_ C. $3.00 _ O( _ k._

D. $6.80

14. The plans of management are often expressed formally in:A. financial statements.

nce repots.

5. Consider the following costs incurred in a recent period:

Depreciation on factory equipment ........... $12,000 _" 9_k_l_ O_ 1_"['_'_'r''r JFactory janitor s salary .............................. $23 000 _ _t._Ok.k3Q._ . _\

Direct labor ............ :.................... $281000 --_¢_ _. _OC._" {._2_\_gef)Utilities for factory ...... _9 000 _.t_',,0t_..I _'_"

Selling expenses ..... ::::::::::::::::::::::::::::::::::: r _.-. --__ . ¢, --'.supervisors salary ................... $34.000 -- V_._0kk)C'r| t-'_0k\_0_ )__,,

Production

Administrative expenses ........................... _ _-e,._Y %_ t_

_ What was the total amount of the period costs listed above for the period?A. $46,000

_. _'I/_O00

Q...Q_37,000 JD. $71,000

.rA staffposition:elates directly to the carrying out of the basic objectives of the organization.

]Q__.@irlSsupportive in nature, providing service and assistance to other parts of the organization.s superior in authority to a line position. ' ..

one of these.

7. Which of the following would usually be found on a job cost sheet under a normal cost system?Actual direct material cost Actual manufacturing overhead cost

A) _ Yes _ YesB) Yes No

C) No Yes

D) No No

_. Item B 0¢'_J_¢_ • ,B. ltem A ¢__'x_ "C. Item C

Oem D

18. Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturin

For the month of October, Avery's estimated manufacturing overhead cost was $300,000 based on anestimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual directlabor-hours totaling 110,000 for the month. How much was the qver_tpplied or underapplied overhead?

I(_ $5,000 overapplied ,--_'-') _),a_ "-_ "'_' _' "_ k,._'_ _"__. $5,000 underapplied . .'.,_. k__k-3_ (_' ._ .._ "_ '._

• "C.$25,000overapplied F( 0k' _)_-" 10()ll._(.)_D. $25,000 under_.pl_d

n October, Raddatz Inc. incurred $73,000 of direct labor costs and $6,000 of indirect labor costs. The

al entry to record the accrual of these wages would include a:ebit to Manufacturing Overhead of $6,000

debit to Work in Process of $79,000credit to Manufacturing Overhead of $6,000credit to Work in Process of $79,000

C..,,20. Manufacturing overhead includes:

__all direct material, direct labor and administrative costs.all manufacturing costs except direct labor and direct materials. '_,all selling and administrative costs.

all manufac.turing costs except direct labor.

21. In the standard cost formula Y -- a + bX, what does the "X" represent?A. variable cost per unitB. total fixed cost

_. tonits of activitytal cost

C.

22. Shipping cost at Junk Food Imports is a mixed cost with variable and fixed components. Past recordsindicate total shipping cost was $18,000 for 16,000 pounds shipped and $22,500 for 22,000 pounds shipped.Assuming that this activity is within the relevant range, if the company plans to ship 18,000 pounds next month,the expected shipping cost is:A. $20,400

B. $24,000 \ \_ _,_),'_e_,¢C_18,500 _ '_

t"D_19,500 {_<_? _°°_t'3_

Which of the following is NOT one of the three major customer value propositions discussed in the text?discount pricing3perational excellence

C. customer intimacy

\_D. product leadership

24. Elliott Comi_any uses a predetermined overhead rate based on machine-hours to apply manufacturingoverhead to jobs. The company manufactures tools to customer specifications. The following data pertain to Job1501:

Direct materials used ....................................................... $4.200 _t,J, k /.,__Ok,._Directlabor-hours worked ............................................... 300 _t. IDirect laborrate per hour ................................................. $8.00 at- "_3

Machine-hours used ......................................................... 200 ft. _,,g_._ q'OO_OPredetermined overhead rate per machine-hour ...... "........ $15.00 .-"

_k

What is the total manufacturing cost recorded on Job 1501? _/_ q 0-o(_. $_8,800

9,600

10,300 _)D. $11,100

m

Comparative income statements for Boggs Sports Equipment Company for the last two months are presentedbelow:

July August

Sales in units .................................................... 11 000 10 000Sales ................................................................. £165,000 $150,000

Cost of goods sold ........................................... 72 600 66,000

Gross margin .................................................. :. 92 400 84 000Selling and administrative expenses:

ent............................................................... .ooo i2,0£'yqC--Salescommissions ........................................ 13,200 12,000 -Maintenance expenses .................................. 13,500 13,000- _"

Clerical expense ............................................ 16,000 15 000-- _"Total selling and administrative expenses ....... 54,700 52 000lXIet operating income ....................................... _ 37.700

All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). Assume that therelevant range includes all of the activity levels mentioned in this problem.

o

A,_Which of the selling and administrative expenses of the company is variable?/ _ A. Sales Commissions

@B. Clerical Expense_RentD. Maintenance Expense

,U[N_. An example of a fixed cost that would be considered a direct cost is:| _ASthe rental cost of a warehouse to store finished goods when the cost object i_ the Purchasing Department.

"_-. a cost accountant's salary when the cost object is a unit of product. -- IN0k0"_I',Board of Directors' fees when the cost object is the Marketing Department. o _\\_¢_O,_

_Q_a production supervisor's salary when the cost objective is the Production DepartL_nt.- ..\r,ox ,ee.rj

%The cost of the cushions that are used to manufacture sofas is best described as a:"a'A'_eriod cost.

___.,:?anufacturing overhead cost.onversion cost.

_variable cost.

8. Stuart Company is a merchandising company. During the next month, the company expects to sell 450units. The company has the following revenue and cost structure:

"Selling price per unit .......... $230 I¢V t_'_\ -- /O'za51"_X:) ") L I q _(b[]3Cost per unit ....................... $120 .l_k'_-_t _ _"o_ b_Sales commission ............... 12% of sales _ _ "_ t._ _)- 0

/-

Advertising expense ........... $18,000 per month (.9\ C_ _ (__Administrative expense ..... $32,500 per month

- %950O

What is the expected contribution margin next month?A. $53,000

566,420 C,\K._ .._$37,080 ...._)D. $50,500

29. Salaries of accounts receivable clerks when one clerical worker is needed for every 750 accounts receivableis an example of a:

_)step-variable cost

_ B. fixed costC. curvilinear costD. mixed cost

cl l aKoczela Inc. has provided the following data for the month of May: D _/_ _"0"] II_t"__)

5q 000

oO 0Inventories Beginning Ending Jf _/_{_

Work in process ................. $17,000 $12,000 _ g_-_ U _-I---_

Finished goods ................... $46,000 $50,000 \"_ (._

Additional information: _)Direct materials ..................................................................... $57,0

,' Dh-ect labor cost .................................................................... $87,000 V"_ 0 0_Manufacturing overhead cost incurred ................................. $63,000 ---- _t/'

Manufacturing overhead cost applied to Work in Process ... $61,000

9 i>o0%

0<%©

'_he cost of goods manufactured for May is:A. $205,000B. $207,000

Exam 1 Fall 07

There are 30 multiple choice questions in total. In all cases, select the BEST answer.

1. The plans of management are often expressed formally in:

p_ A. financial statements.B. budgets.

C. ledgers.D. performance reports.

2. A staff position:A. relates directly to the carrying out of the basic objectives of the organization.

_Q, B. is supportive in nature, providing service and assistance to other parts of the organization.C. is superior in authority to a line position.D. none of these.

3. Which of the following is NOT one of the three major customer value propositions discussed in the text?_. customer intimacy

•_ Bzoperational excellence/IZ. product leadership

D. discount pricing

4. All of the following are characteristics of a pull production system EXCEPT:A. Products are completed just in time to be shipped to customers.

B. Raw materials are released to production far in advance of being needed to ensure no interruptions in workflows due to shortages of raw materials.C. Manufactured parts are completed just in time to be assembled into products.D. Inventories are reduced to a minimum by purchasing raw materials and producing units only as needed tomeet consumer demand.

5. The Sarbanes-Oxley Act of 2002 contains all of the following provisions EXCEPT:A. Both the CEO and CFO must certify in writing that their company's financial statements and accompanying -111disclosures fairly represent the results of operations.

1

B. Financial statements must be audited once every three years by the Government Accounting Office.C. The audit committee of the board of directors of a company must hire, compensate, and terminate the publicaccounting firm that audits the company's financial reports.D. A company's annual report must contain an internal control report.

6. The cost of the cushions that are used to manufacture sofas is best described as a:A. variable cost.

(_B. conversion cost.] \ C. period cost.

D. manufacturing overhead cost.

7. Manufacturing overhead includes:

A. all manufacturing costs except direct labor and direct materials.B. all direct material, direct labor and administrative costs.C. all selling and administrative costs.D. all manufacturing costs except direct labor.

8. Which of the following is _/OT a period cost? _-)o_

_____,A. Salary of a billing clerk._B. Cost of a seminar concerning tax law updates that was attended by the company's controller.

C. Monthly depreciation of the equipment in a fitness room used by factory workers. 'v/D. Insurance on a company showroom, where current and potential customers can view new products.._/

9r_The annual insurance premium for the factory building would be a:fixed cost, product cost, and direct cost with regard to units of product.

\/') B. fixed cost, product cost, indirect cost with regard to units of product.

/_ variable cost, product cost, direct cost with regard to units of product.V _'-'-_xed cost, period cost, and indirect cost with regard to units of product.

10. An example of a fixed cost that would be considered a direct cost is:A. Board of Directors' fees when the cost object is the Marketing Department.

B. a production supervisor's salary when the cost objective is the Production Department.C: a cost accountant's salary when the cost object is a unit of product.

_. the rental cost of a warehouse to store finished goods when the cost object is the Purchasing Department.

below are a number of costs incurred last year at Mecca Publishing Co., a manufacturer of; school textbooks:

Solvents and cleaners usedby the custodians to clean the

textbook printing presses .............................................. $500 x/

Depreciation on the automobiles used by sales

representatives .............................................................. $4,200"/_Fire insurance on factory building ................................... $2,000 V /

Shipping costs on textbooks sold ..................................... $3,700"/x

What is the total of the manufacturing overhead costs above?A. $6,700B. $500C. $6,200

)D. $2,500

12. The information below relates to Derby Manufacturing Company's operations for a recent month. (Assumethat all raw materials are direct materials.):

P chasesofrawmaterials........................$91,000-Direct labor cost ......................................... $122,000 -

Sellingcosts(total).................................... $42,000 -I" _CY_ -_v"

Administrativecosts(total)........................$36,000 "-_0AIManufacturingoverhead costs(total)........$340,000 -

Raw materialsinventory,beginning..........$22,000- - _k/_ C_C_

Work in process inventory, beginning ....... $27,000

Finished goods inventory, beginning ......... $42,000 _ spc-:Raw materials inventory, ending ............... $7,000 - ._ _"3 I-

Work in process inventory, ending ............ $35,000 - _" I'Jk_)

Finished goods inventory, ending .............. $15,000 -h _IY__6_ , "

What was Derby's cost of goods manufactured for the month?A. $568,000

B. $545,000 C..,I_/_k/_c. $587,000D. $560,000

13. Consider the following costs incurred in a recent period:

Direct materials .......................................... $33,000X

Depreciation on factory equipment ........... $12,000Factory janitor's salary .............................. $23,000_Direct labor ................................................ $28,000

Utilities for factory .................................... $9,000 7xSelling expenses ......................................... $16,000 "v"

Production supervisor's salary ................... $34,000Administrative expenses ............................ $21,000 _/

What was the total amount of the period costs listed above for the period?A. $71,000

_ B.$37,000C. $46,000D. $78,000

14. The following inventory balances have been provided for the most recent year:

Be_nning EndingP.aw materials .................... $21,000 $15,000

Work in process ................. $18,000 $29,000

Finished goods ................... $57,000 $33,000

The cost of goods manufactured was $714,000. What was the cost of goods sold?A. $714,000B. $733,000

"C..- C. $738,000D. $693,000

of the following would usually be found on a job cost sheet under a normal cost system?

Actual direct material cost Actual manufacturing overhead costA) Yes YesB) Yes NoC) No YesD) No No

_A. Item B_" B. ItemA\r) C. Item D*'1 D. Item C

16. What journal entry is made in a job-order costing system when $8,000 of materials are requisitioned forgeneral factory use instead of for use in a particular job?

• A) Work inProcess $8,000Manufacturing Overhead $8,000

B) Work inProcess $8,000Raw Materials $8,000

C) Manufacturing Overhead $8,000Work in Process $8,000

D) Manufacturing Overhead $8,000Raw Materials $8,000

_,_ A. Item BB. Item D

mAmC

J

17. Elliott Company uses a predetermined overhead rate based on machine-hours to apply manufactu,ringoverhead to jobs. The company manufactures tools to customer specifications. The following data pertain to Jc1501:

Direct materials used ....................................................... $4,200Direct labor-hours worked ............................................... 300

Direct labor rate per hour ................................................. $8.00Machine-hours used ......................................................... 200

Predetermined overhead rate per machine-hour .............. $15.00

What is the total manufacturing cost recorded on Job 1501 ?A. $8,800B. $10,300

C. $9,600D. $11,100

18. Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overheadto jobs. For the month of October, Avery's estimated manufacturing overhead cost was $300,000 based on ahestimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual directlabor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead?A. $5,000 underapplied

D_. $ 5,000 overapplied,000 overapplied5,000 underapplied

19. Job 910 was recently completed. The following data have been recorded on its job cost sheet:

Direct materials .............................. $3,193Direct labor-hours .......................... 21 labor-hours

Direct labor wage rate .................... $12 per labor-hourMachine-hours ............................... 166 machine-hours

The company applies manufacturing overhead on the basis of machine-hours. The predetermined overhead rateis $15 per machine-hour. The total cost that would be recorded on the job cost sheet for Job 910 would be:

_i $5,935• $3,445• $3,760

D. $3,220

pany uses a predetermined overhead rate based on machine-hours to apply manufacturing•jobs. The company has provided the following estimated costs for next year:

Direct materials .......................................... $1,000

Direct labor ................................................ $3,000Sales commissions ..................................... $4,000

Salary of production supervisor ................. $2,000Indirect materials ....................................... $400

Advertising expense ................................... $800

Rent on factory equipment ......................... $1,000

Reamer estimates that 500 direct labor-hours and 1,000 machine-hours will be worked during the year. Thepredetermined overhead rate per hour will be:A. $6.00B. $6.80

b C. $3.40D. $3.00

21. In October, Raddatz Inc. incurred $73,000 of direct labor costs and $6,000 of indirect labor costs_ Thejournal entry to record the accrual of these wages would include a:

A. debit to Work in Process of $79,000B. credit to Manufacturing Overhead of $6,000

_/C. debit to Manufacturing Overhead of $6,000D. credit to Work in Process of $79,000

22. During March, Zea Inc. transferred $50,000 from Work in Process to Finished Goods and recorded a Cost of

fi/Goods Sold of $56,000. The journal entries to record these transactions would include a:_/-'_A. credit to Work in Process of $50,000"/ B. credit to Finished Goods of $50,000

C. debit to Finished Goods of $56,000D. credit to Cost of Goods Sold of $56,000

Koczela Inc. has provided the following data for the month of May:-q

Inventories Beginning EndingWork in proce,s ................. $17,000 $12,000

Finished goods ................... $46,000 $50,000

Additional information:

Direct materials ..................................................................... $57,000

Direct labor cost .................................................................... $87,000

Manufacturing overhead cost incurred ................................. $63,000

Manufacturing overhead cost applied to Work in Process... $61,000--..,

23. The costofgoods manufactured forMayis:A.$212,000B.$210,000C.$205,000D. $207,000

24. In the standard cost formula Y = a + bX, what does the "X" represent?A. total cost

13.units of activityC. total fixed cost

D. variable cost per unit

25. Which of the following would usually be considered a discretionary fixed cost for a soft drink bottlingcompany?A. the cost of advertising its productsB. the cost of fire insurance on its factory buildingC. depreciation on its manufacturing equipmentD. both a and b above

tpping cost'at Junk Food Imports is a mixed cost with variable and fixed components. Past recordstotfil shipping cost was $18,000 for 16,000 pounds shipped and $22,500 for 22,000 pounds shipped.

Assuming that this activity is within the relevant range, if the company plans to ship 18,000 pounds next month,the expected shipping cost is:A. $24,000B. $20,400C. $18,500

D. $19,500

27. Supply costs at Coulthard Corporation's chain of gyms are listed below:

Client-Visits Supply Cost

March ..................... 12,855 $23,59g I_llli_April....................... -May ........................ _ 13,104 $23,7£2_g _'"_C.,_ /June ........................ 12,850 $23,607

July ......................... 12,493 $23,415August .................... 12,794 $23,562

September .............. 12,6{36 $23,496

October .................. 12,7 65 $23,54q----. x

November

Management believes that supply cost is a mixed cost that depends on client-visits. Using the high-low methodto estimate the variable and fixed components of this cost, those estimates would be closest to:

"_-'-A-7._0.57 client-visit; $16,273 per monthper$0.55 per client-visit; $16,579 per month

C. $1.85 per client-visit; $23,547 per monthD. $1.77 per client-visit; $557 per month

28. Stuart Company is a merchandising company. During the next month, the company expects to sell 45,units. The company has the following revenue and cost structure:

Sellingpriceperuoit..........$230Cost per unit ....................... $120

Sales commission ............... 12% of sales ,I-3"_D,JAdvertising expense ........... $18,000 per month \Administrative expense ..... $32,500 per month .- _--Jltgt,.l0_._D

What is the expected contribution margin next month? _"- L_ q_(DDA. $66,420

_ B. $37,080C. $50,500D. $53,000

Comparative income statements for Boggs Sports Equipment Company for the last two months are presentedbelow:

July August

Sales in units .................................................... 11 000 10 000Sales ................................................................. $165,000 $150,000

Cost of goods sold ........................................... 72,600 66,000

Gross margin .................................................... 92 400 84 000Selling and administrative expenses:

Rent ............................................................... 12,000 12,000

Sales commissions ........................................ 13,200 12,000

Maintenance expenses .................................. 13,500 13,000

Clerical expense ............................................ 16 000 15 000Total selling and administrative expenses ....... 54 700 52 000Net operating income ....................................... $37.700 $32.000

All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). Assume that therelevant range includes all of the activity levels mentioned in this problem.

of the selling and administrative expenses of the company is variable?

B. Sales Commissions

(r), C. Clerical Expense

_._D. Rent

30. Salaries of accounts receivable clerks when one clerical worker is needed forevery 750 accounts receivableis an example of a:

,__._.curvilinear cost

(_ep-variable costlk._ _2. mixed costY D. fixed cost

Exam 1 Fall 07 Key1. B

2. B

3. D

4. B

5. B

6. A

7. A

8. C

9. B

10. B

II.D

12. D

13. B

14. C

15. A

16. B

17. C

18. C

19. A

20. C

21.C

22. A

23. B

24. B

25. A

26. D

27. A

28. B

29. B

30. B

EXAM 1 TERMS

-CAPITAL:

-human made aids to production (goods used ot produce other goods)-ex: plants, equipment, tools-significant because choices about capital goods lead to economic growth;-the greater the capital goods, higher the rate of future economic growth

-ENTREPRENEURSHIP: a human resource which:

-brings together other resources-motivated by self-interest or profit motive-bears risk

-has an idea about how to make profits-significant because it is an economic resource; therefore it is scarce;

-PRICE ELASTICITY OF DEMAND:

-how responsive buyers are to changes in price-significant because maybe determine how Price affects TR; also determineswho really pays the tax, where the tax burden falls

I °['___[ -Ed >1: elastic: if Price TR falls

A, (opposite): responsive

•]._ _ -percentage change in Q is greater than percentage change in P-Ed<l: inelastic: if Price ^, TR also ^ (same) : unresponsive

-percentage change in Q is less than percentage change in P-Ed=l: unitarily elastic

-LEGAL PRICE CEILING:

-legally imposed fixed level at which price cannot go above it; set below theequilibrium price-significant because creates shortages or excess demands ; no automaticmechanism to restore equilibrium; can't be fixed till ceiling is abolished

-ECONOMIC COSTS:

-explicit/implicit-opportunities/alternatives given up when any choice is made-occur at every decision ever made; helps define value of option you choose

-COMPETITIVE MARKET:

-large number of buyers and sellers; no ONE can affectively influence themarket and therefore areprice takers

-EXPLICIT:

-out of pocket cost; part of an economic cost: ex: tuition for college education-significant because occurs at every choice ever made

• f

Exam 1 Sample Questions

1. Suppose that the economy produces two types of goods: consumer goods (C) and capitalgoods (K). Use production possibilities curve (PPC) diagrams and brief verbal explanationsto explain the following situations:

q/a. The economy is operating at full-employment producing a lot of capital goods when alegal price ceiling is imposed on capital goods.

"_. The economy is operating at full-employment both before and after a major technologicalimprovement in the production of consurner goods. After the technological improvement,however, the economy is actually producing fewer consumer goods than before.

,//2. Use competitive market supply/demand diagrams of the camera market and the filmmarket to illustrate how camera sellers' expectations of lower future camera prices can leadto higher current film prices.

v_3. Use a competitive market supply/demand diagram and brief verbal descriptions to

how th@onomic inci_d_e_nceof a per-unit excise tax may fall.oh gasoline,_._. e_rs_ven though, the tax is legally.._imp°sed__exclusively.__ongasoline___sellers.

Briefly explain the determinants of price elasticity of demand (Ea). Why is price elasticityof demand an important concept?

4_. Consider the following: "The sharp rise in gasoline prices in the mid 1970's lead to asharp decline in the demand for 'gas guzzling' cars and large unsold inventories(surpluses) when many dealers refused to cut their sticker prices." Use a supply/demanddiagram of the 'fuel inefficient' or 'gas guzzling' car market and brief verbal descriptionsto explain this quotation

"7 5. In 1990, Congress passejd a-per_x on yachts. The tax was legally

" imposed on th_b__uyers_ihe_ luxu_ds. Within a year, a number of New Englandyacht building-firm_'_.iled and their unemployed workers protested vigorously.

Interestingly, yacht buyers_ittlec'on'_'about the tax Use a supply/demanddiagram of the yacht market and your knowledge about the legal and economic incidenceof a per-unit excise tax to explain this episode.

_. Suppose there is a technological advance in the production of hydrogen bombs. Use asupply/demand diagram of the hydrogen bomb market and a production possibilitiescurve (PPC) diagram showing 'military' and 'civilian' goods to illustrate thistechnological change. Carefully explain the connection between your diagrams.

/7 Recently, the Clinton administration proposed_$_!.00-p_r-unit (pack),_excj_ tax on

cigarettes (which would be imposed legally or statutorily on cigare_Somenews reports have suggested that the proposed tax would increase cigarette prices by

$1.00 per pack and be paid entirely by smokers(c_arette-b-_yers). Using a competitive• . - _: .3supply/demand diagram of the cigarette market, carefully show and explain thecircumstances under which these new reports would be true.

there so many different nominal interest rates? Explain carefully.

_.. Consider an economy that produces consumer goods and capital goods• Suppose theeconomy is operating at full-employment and all consumer goods are subject to legalprice ceilings set below equilibrium prices• Use a production possibilities curve (PPC)diagram and brief verbal descriptions to compare this economy's production combinationin the absence of price controls (15 points)• In this case, would the price controls resultin higher or lower rates of future economic growth? Why?

_0. Consider the following: "Under the Five Year Plans, the Soviet leadership mandateda production mix heavily weighted toward_oods. As a consequence, the Sovietsenjoyed some years of significant economic growth. Coupled with pr,ice_ols onc%nsumer_goods,.however, the Plans also meant that Soviet cmzens_a- vd_(e_ fewconsu-met_ satisfy their collective wants•" Use a production possibilities curve(PPC) diagram and brief verbal descriptions' to explain the Soviets' economic growth.Use another PPC diagram and brief verbal description to explain the small number ofSoviet consumer goods•

_1. Suppose the out-of-pocket price for driving on a freeway is zero. Now, use acompetitive supply/demand diagram of the "freeway space" market to explain trafficjams at 8:00 am, but no jams at l 1:00 pm. Also, use your diagram to explain the tollprice that would eliminate the morning traffic jams.

_. 12. Suppose the State legislature passes a $10.00 per credit hour tuition subsidy legallypayable to OU, stu_de-fits.Use a supply/demand diagram of the OU ed_rvices

"_'-_ " ' " t@conomic benefit of the subsidymarket to explain the condmons under which

would flow to the Um'versity (not the_students).

,/_3. Suppose that movies and popcorn are complimentary goods. Further suppose that

_/ _t_ screenwriters_,wages (a major cost of producingmo, ies)increase sharply due to a new-I13 union contract_.--Uging separate coml_etl_-_'tlve_s_p_ly-'/ae'--manddiagrams of the movie andpopcorn markets, illustrate and briefly explain the probable effects of the screenwriters'

wage increase on: Equilibrium prices, equilibr_ities, andtotal_i3n, the

m_popcom markets.

14. In 1992, Congress passed a per-unit excise tax on yachts. Although legally the taxwas to be collected from yacht suppliers, the law was intended to make the rich yachtbuyers pay more of the tax burden. The tax was repealed in 1993 in response to thevigorous protests of yacht manufacturers and their workers. Use a competitivesupply/demand diagram of the yacht market and your knowledge of economic taxincidence to these events.

v_5. Consider the following: "At the beginning of 1940, the United States economy wascharacterized by substantial unemployment. The Soviet economy at that time, however,was operating at full-employment. By the end of the year, the U.S. economy had movedto full-employment, increasing its output of both civilian and military goods. The Sovieteconomy was still at full-employment at year's end, but producing many fewer civiliangoods and many more military goods than at the beginning of the year." Use productionpossibilities curve (PPC) diagrams of the U.S. and Soviet economies to illustrate andexplain these historical events.

/116. Suppose there are two types of OU football tickets: (1) good tickets and (2) badtickets. Further suppose that the bad ticket market is in equilibrium at $35/ticket, but thegood ticket market is not in equilibrium at that price. Draw separate competitivesupply/demand diagrams of the good and bad ticket markets to explain this situation.Specifically, what disequilibrium situation do you expect in the good ticket market?Why?

/17. Recently, Congressional Republicans wanted to repeal a 4.3 per-gallonexcise tax ongasoline (which is statutorily or legally imposed on gasoline sellers). They claimedremoving the tax would lower gasoline prices (paid by buyers) by the full 4.3 cents.Using competitive supply/demand diagrams of the gasoline market and brief verbaldescriptions, carefully explain tw.___o.odifferent market conditions under which this claimwould be true.

"_18. Suppose the economy produces two types of goods: consumer goods (c) and capitalgoods (K). Use production possibilities curve (PPC) diagrams and brief verbaldescriptions to explain the following situations:

a. The economy is operating at full employment producing a lot of consumer goodswhen a legal price ceiling is imposed on consumer goods.

b. The economy is operating at full-employment both before and after a majortechnological improvement in the production of capital goods. Afier the technologicalimprovement, however, the economy is actually producing fewer capital goods thanbefore. _

"9. 19. Consider the following: "I don't care what the tax law says about collecting that [perunit] excise tax on tires from auto service shops [suppliers], everyone knows that wedrivers [buyers] will end up paying the whole tax." Using competitive supply/demanddiagrams and brief verbal descriptions of the tire market, illustrate and carefully explaintwo scenarios consistent with this opinion.

5t_-__c- 20. Suppose Congress, in an effort to control rising health care costs, imposes legal priceceilings in the market for healthvare _e_-_ice-_s.At the same time, the Department ofHealth and Human Services (HHS) releases a study suggesting that clinical examinationsevery 90 significantly increase the risk of infection and disease. Using a competitivesupply/demand diagram of the health services market and brief verbal descriptions,explain the effects of the actions of Congress and HHS.

_ly discuss three economic effects of inflation.

_2. Define price elasticity of demand (Ed). What are major determinants Of Ed? Why isprice elasticity of demand such an important concept?

v/223. Suppose the equilibrium price for a life saving surgical procedure is initially$10,000. Now suppose that a law is passed which requires hospitals (the suppliers of thesurgical procedure) to pay a $1,000 per-unit excise tax on each procedure performed.Using a competitive supply/demand diagram of the 'life saving surgical procedure'market and brief verbal descriptions, explain the legal and economic incidence of thisper-unit excise tax. j

24. Use a production possibilities curve (PPC) diagram and brief verbal descriptions toexplain the process of economic growth.

25"_. Would the price elasticity of demand (Ed) for Pepsi be higher or lower than the priceelasticity of demand for soft drinks in general? _l ooq-eaf

_26. Use competitive supply/demand diagrams of the milk market and brief verbaldescriptions to explain the effects of the following changes on: (a) supply or demand and(b) total revenues (TR).

i. a drought causes higher feed prices for dairy cows

ii. scientist find that drinking milk increases the risk of heart disease

_27. Use the production possibilities curve (PPC) diagram showing 'civilian goods' and'military goods' and brief verbal descriptions to explain the following: "From 1939 to1941, the U.S. economy moved from a position of substantial unemployment to aposition of full-employment. Over this time period, both civilian and military goodsproduction increased, but military production increased more rapidly."

28. Use competitive market/supply demand diagrams and brief verbal descriptions toanalyze the following:

a. "Many investors consider stocks (shares of corporate ownership) and bonds (IOUs) as

substitutes• Consequently, when stocl_ prices go down, bond.16rices usually too. (HINT:

Use a bond market diagram to answ"_his question)• ,_'_'_

b. Consider the following: "In 1973 several major oil producing countries formed a //

cartel. The cartel effectively decrea_6d_he-_u_l_ of crude oil. Gasoline pricesxose I/_.)t /sharply as did the total expenditures on gasohne. Use a supply/demand diagram of thegasoline mark_d y_6_-kn6_l_dge-of the price elasticity of demand (Ed) to illustrate f[_

and explain this quotation. _'_ <1 _-,w.._0_j_'

29. Use competitive supply/demand diagrams of the powdered milk (an inferior good)market and brief verbal descriptions to explain effects of the following changes on: (a)supply (b) demand (c) equih'bri_un price (d) equilibrium quantity and (e) total

revenues. _ _ _°t_nn e_ya. Incomes rise and powdered milk producti t improves

b. The price of whole milk drops .._

/2.30. Use a production possibilities curve (PPC) diagram and brief verbal descriptions toexplain the economic effects of a growing labor force.

31. Consider the following: "The Japanese economy has been growing faster than the _}American economy. This faster growth is largely due to the fact that the Japanese devote-

vmore of their resources to capital goods while the Americans de ote more of their 1_._ (resources to consumer goods." Use production possibilities curve diagrams for the _Japanese and American economies and brief verbal descriptions to illustrate and explain If-this observation.

32. Consider the following: "In 1973 several major oil producing countries formed acartel. The cartel effectively decreased-thes--_d_ly of crude oil. Gasoline price rosesharply as did the total revenues>_owiiag-to_e" oil producing countries." Use asupply/demand diagram of the gasoline market and your knowledge of the price elasticityof demand (Ed) to illustrate and explain this quotation.

33. Consider two "goods": (1) new cars and (2) borrowed money. Suppose these goodsare complements. Now, suppose the "price" of borrowed money (usually called theinterest rate) goes down. Use a competitive supply/demand diagram of the new carmarket and brief descriptions to explain the effects of the lower interest rates on: new carprices; quantity of new cars sold; and total revenues of new car sellers.

I,

34. Suppose the economy produces only two goods: consumers goods (C) and capitalgoods (K). Also suppose the economy is operating at full employment. Finally, supposeconsumer goods are subject to legal price controls ("price ceilings"). Use a productionpossibilities curve (PPC) to show the economy's output combination of C and K goodswith price controls versus the economy's output combination without price controls.Explain your reasoning.

35. Suppose the Drug Enforcement Agency (DEA) manages to reduce the supply ofillegal drugs flowing into the U.S. What effect, ceteris paribus, would this supplyreduction have on total expenditures made on illegal drugs? Why?

Identify and explain the significance/of:_v_u _gJom-3- Oqzo_4-e-_5wTL't)f _'GJd_;_c_,__--- _91m°"ut_to_._po_ ¢" "_-'c_,x_t_l'_Ll_:;mt_, _-o_.._a_.. 36. Minimum wage laws -F

-/-Ivm_b'_ t_f _-,_ 37. Parity price ratio_A_ ,_e_c-O l _b 'v ,- -

_J_e_ _-g--._ 38. Capital/CJw_)_ j (._u_i-cef (lo_ b, 2_X_'_xo_k q,_,,jT_Ccr_f,4--O---_'_v,t_,)

{+_ t._eP_TJt-) ._. Lntrepreneursnlp _ k "

"7...,S,,,4"!,,.*-,-_-,.-¢..$,.,>-,c,.-y-,. _'v0 : I _ I _k.._kex_n_v_._._'vo.a.,o

qu. vrlceerastlcityoIuemanu 7"or ' - +DO (.Ji_o,F_. _tl_..f"__/_._ _ 41. Legal price ceilings-- (¢J_ ¢_0_ _l,a_Q_t_)o

Ok._Cre>' ":._._ v_d_""-42. Economiccosts --_)tidt-/,Wb(c4c_ -I/,,ja.s.,_/,.._ <_^.,,:o ,.< __c)-__, ;-,s" ;k v<a Competitivemarket------ 'o <<.,-"

_x bt_ - --d_ls_elasticity of demand 19 -

_.s,/t.>lxa,l--,o,.,'r<5 ?o<..l_,.,os-I-45. Explicit and implicit economic costsr_,4-.)L_d-'c_d,.x.,,t.ov.,<no_4a,&-.__

7 46. Law of diminishing marginal utility | t/l? i ffl.0t- _A- 06 _OC_

_al unemployment

1_\\ 2.oO-2

Name: -_._---, ---_, _v '_j''_'-"_l

Section_r 4:30

ACCOUNTING 2123

EXAMINATION 2

FALL 200% KNAPF

VERSION 4

Exam 2, F07Version #4

1. Leaper Corporation uses an activity-based costing system with the following three activity cost pools:

Activity Cost Pool Total ActivityFabrication ......................... 40,000 machine-hours

Order processing ............... 200 ordersOther .................................. Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity andorganization-sustaining co sts.

The company has provided the following data concerning its costs:

Wages and salaries ...... $360,000

Depreciation ................ 140,000Occupancy ................... 160 000Total ............................

The distribution of resource consumption across activity costpools is given below:

Activity Cost Pools

Fabrication _roce_;_n.g_ Other TotalWages and salaries ...... 350/0 250/0 100% _t_t-k_-_-_O

Depreciation ................ 5% _ 40°/0 100% "_"k (D!,_Occupancy...................30°A 2Xo i "q'20 O

_. $ activity rate for the Order Processing activity cost pool is closest to: _.__1,465 per order "<'-

1,540 per order o _(_C. $1,320 per order "_oD. $1,485 per order

2. A basic idea underlying is that a manager should be held responsible only for thoseitems that the manager can actually control to a significant extent.A. planning and controlB. the master budget

(_earticipative budgeting

sponsibility accounting

3. Francis Manufacturing Company is currently preparing its cash budget for next month and has gathered the

following information: L-_ l_ t_ Q_t,__

Expected cash receipts ............................... $39,400

e.oa disbursemen,s: . - O qooLODirect materials ...... $12,000 6_11_._Direst labor .................. $9,000

Manufacturing ore rhead ......................... $11,500 )f (/_.-.,{_)_t_ I(_EA.) __ 6>

Selling and administrative expenses .......$22,000 @ I_-_O k'_

The beginning cash balance will be $6,000 and the company requires a minimum cash balance at the end of themonth of $5,000. How much will Francis Manufacturing need to borrow to meet its cash needs for the month?A. None of the above.B. $20,100C. $9,100D. $14,100

4. Which terms would make the following sentence true? Manufacturing companies that benefit the most fromactivity-based costing are those where overhead costs are a percentage of total product cost andwhere there is diversity among the various products that they produce.

-,_. low, little

_. liw, considerablegh, considerableigh, little

5. Warmuth Corporation has provided the following data concerning its direct labor costs for September':

Standard wage rate ............. $12.00 per DLHStandard hours ................... 8.8 DLHs per unit

Actualwage rate ................ $12.50 per DLH

Actual hours ....................... 68,120 DLHsActual output ..................... 6,600 units L /

The Labor Efficiency Variance for September would be recorded as a: _,_O 1_ 0_

A. credit of $120,480. _l_ _B. credit of $125,500. """--_

C. debit of $120,480. _ D 105o LD. debit of $125,500.

Abel Company uses activity-based costing. The company has two products: A and B. The annual productionand sales of Product A is 200 units and of Product B is 400 units. There are three activity cost pools, withestimated costs and expected activity as follows:

Expected ActivityEstimated

Activity Cost Pool Cost Product A ProductB Total

Activity 1 ............... $1B,6_(_ 600 100 7.0.0

.Actlvlty. 2 ............... 1,100_Activity 3 ............... -"-$9,731 60 160 - _20-

A.$24.91B.6. The activity rate for Activity 2 is closestto:$16.77 _qx_ __ <(_3 __.,__--_ "_ I_)qsO

7. Woulcl factory security and assembly activities be best classified at an appliance manufacturing plant as unit-level, batch-level, product-level, or organization-sustaining?

Security Assembly,4.) Product Unit

B) Batch BatchC) Organization Unit

-D)--Organtzat _err--_Pr_.luc_

A. Item DB. Item B

(CPA, adapted) The Maxwell Company manufactures and sells a single product. Budgeted data follow:

Forecasted annual _ales volume ................. 120,000 units __ _9___ k'_'_Gelling price per unit .................................. $2§.00Variable expenses per unit:

Raw materials ......................................... $11.00Direct labor ............................................. 5.00

Manufacturing overhead ......................... 2.50

Selling expenses ...................................... 1.30Total variable expenses per unit ................

Annual fixed expenses:Manufacturing overhead ......................... $192,000

Selling and administrative ...................... 276 000Total fixed expenses .................................. $468.000

090'0008"Maxwell's break-even point in units is: _ _.. _'--__/_\'_B. 76,667C. 130,000D. 72,000

6,2X--tq9O,OOb

9. Feldpausch Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Total Cost Total Activity _ C.'_\ (,0.(0._Assembly ..................... $1,137,360 84,000 machine-hours

Processing orders ......... $28.479 1,100 orders

Inspection ............. ,....... $97,155 1,270 inspection-hours _-'_ C_g'_,0.A.Z)

The company makes 470 units of product W26B a year, requiring a total of 660 machine-hours, 50 orders, and40 inspection-hours per year. The product's direct materials cost is $40.30 per unit and its direct labor cost is$42.22 per unit. The product sells for $118.00 per unit. According to the activity-based costing system, theDao_ductmargin for product W26B is:"A. $6,444.70 per unitB. $3,384.70 per unitC. $16,675.60 per unitD. $4,679.20 per unit

Next year, Mudd Face Cosmetics, a single product company, expects to sell 9,000 jars of miracle glaze. MuddFace is budgeting the following operating results for next year:

e-W--_ t4-19,_-_r.boS_es...................................$450,000 g_r-a1,Variable expenses ...... ._.\._. 135 000 -- ""

Contribution margin ........... 315,000 O-)'&;v_,-I_)_

Fixed expenses ................... 252 000 _¢'-'_) OO_...... 1 --

ope ati,,gincomo.........*63.O0O 1%,q60

10. What would Mudd Face's total sales dollars have to be next year in order to increase its projected netoperating income by 25%?A. $562,500

B. $499,500 / t _L_ _ d ._-"c_, _"_2 /"lq _/C. $465,750

_$472,500 / __0 ] q q%_ _--r'O

", - Iqi

11. Mazzucco Corporation has provided the following data concerning its direct labor costs for September:

Standard wage rate ............. $13.30 per DLI-I

Standard hours ................... 5.5 DLHs per unit

Actual wage rate ................ $13.20 perDLH _)_5_Actual hours ....................... 45,880 DLHs /

Actualoutput ..................... 8,400 units /'_"_, I_x /

J

The Labor Rate Variance for September would be recorded as a: b %1"_ 0_'_ •A. credit of $4,588.B. debit of $4,620. X I_ %'_"C. debit of $4,588. /I

D. credit of $4,620. _ [(._.._ _1

0 tclq(-0012. Garry Manufacturing Corporation's most recent production budget indicates the following requiredproduction:

1

October November December _C 1_'\'\ _ _'fl_'_-_Required production (units) .......... 210,000 175,000 110,000

Each unit of finished product requires 5ou_fraw materials. The company maintains raw materialsinventory equal to 25% of the next month's expected production needs. How many pounds of raw material

should Garry plan_-ffffpu_'cchasingfor the month of November? I '_ "] ,_-'!_{_

D. 893,500 .---------

13. During a recent lengthy strike at Morell Manufacturing Company, management replaced striking assemblyline workers with office workers. The assembly line workers were being paid $18 per hour while the officeworkers are only paid $10 per hour. What is the most likely effect on the labor variances in the first month of

this strike? _(_ _1_'/_?

A) Unfavorable No effect _]_

B) No effect Unfavorable

C) Unfavorable Favorable Ot.)_,__ _

D) ' Favorable Unfavorable _ l(:Z::) _ _'%

-poOL? "z ObC. Item CD. Item A

14. All of Gaylord Company's sales are on account. Thirty-five percent of the credit sales are collected ix]themonth of sale, 45% in the month following sale, and the rest are collected in the second month following sale.Bad debts are negligible and should be ignored. The following are budgeted sales data for the company:

January February March AprilTotal sales .............. $50,000 $60,000 $40,000 $30,000

What is the amount of cash that should be collected i_

..$39,000 qO. O0B. $37,000

\oOOO¥,5O-T6--'dg----

LBC Corporation makes and sells a product called Product WZ. Each unit of Product WZ requires 3.5 hours ofdirect labor at the rate of $14.50 per direct labor-hour. Management would like you to prepare a Direct LaborBudget for June.

15. The company plans to sell 39,000 units of Product WZ in June. The finished goods inventories on June 1and June 30 are budgeted to be 200 and 100 units, respectively. Budgeted direct labor costs for June would be:

A_$1 974 175

C. $1,984,325 -" - "_,D. $564,050 .......

. The variance that is most useful in assessing the performance of the purchasing department manag_er is.kthe materials quantity variance. _f_ _"0_( _'l ',_[

the materials price variance. _ !...,,Ce_helabor efficiency variance.

_'the labor rate variance. _

17. A company makes a single product that it sells for $16 per unit. Fixed costs are $76,800 per month and theproduct has a contribution margin ratio of 40%. If the company's actual sales are $224,000, its margin of safetyis:

A. $96,000

D. $192,000

Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow:- Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January.- Collections are expected to be 65% in the month of sale and 35% in the month following the sale.- The cost of goods sold is 80% of sales.

- The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the monthof sale. Payment for merchandise is made in the month following the purchase.- Other monthly expenses to be paid in cash are $21,100.- Monthly depreciation is $21,000.- Ignore taxes.

Statement of Financial PositionOctober 31

Assets:

Cash..............................................................................................-_ 25.000 5_ 030_Accounts receivable

(net of allowance for uncollectible accounts) ............................ 77,000

Inventory ....................................................................................... 162,400Property, plant and equipment

(net of $624,000 accumulated depreciation) ............................. 1,026,000Total assets ..................................................................................... $1,290,400

Liabilities and Stockholders' Equity:

Accounts payable ........................................................................... $ 239,000

Common stock ............................................................................... 740,000

Retained earnings ........................................................................... 311,400

Total liabilities and stockholders' equity ....................................... $1.290,400,

._._.-.Retahaed_amings at the end of November would be:-1tl iOk3_ __._

D. $347,200 _ _ ,_

\°o5 q s-f-ctO5A qo0

Providing the power required to run production equipment is an example of a:ganization-sustaining activity.

B. Batch-level activity.C. Unit-level activity.D. Product-level activity.

Bois Corporation has provided its contribution format income statement for January.

-- _5 5--vw t _-q_5Sales ................................... $426,400 O_ L_ -" _0 f"Variable expenses .............. 260 000 _t_to'a'-"

Con i .,io.margin........... 66, 00 9 0oFixed expenses ................... 120 900 -- _"'-_lNet operating income .........

20. If the company's sales increase by 7%, its net operating income should increase by about:A. 66%B. 11%

D. 26%

21. Borich Corporation produces and sells a single product. Data concerning that product appear below:

Selling price per unit ..................... $150.00

Variable expense per unit .............. $73.50 ]_ --q") _1-_ _-- 3Q)_7_-Fixed expense per month ............... $308,295 Q __. /O,,ol,._

The break-even in monthly unit sales is closest to: _0,_ -"5 3{_) I'_ C'7_'_

D. 3,426

22. Thefollowing materials standards have been established for a particular product:

Standard quantity per unit of output .......... 2.6 meters

Standard price ............................................ $10.55 per meter

The following data pertain to operations concerning the product for the last month:

Actual materials purchased ........................ 6,000 meters

Actual cost of materials purchased ............ $59,400Actual materials used in production .......... 5,600 meters

Actual output ............................................. 2,200 units

What is the materials quantity variance for the month? _ ,1

C. $3,960 U --'--D. $4,220 U _ @ 0_

5q,qOo 10,5T

23. If both the fixed and variable expenses associated with a product decrease, wristw"-ff/l]'be"U'fheeffect on thecontribution margin ratio and the break-even point, respectively?

Contribution margin ratio Break-evenpoint _,/_ _,_Decrease crease --_erease Decrease N.e_In_<Decrease DecreaseIncrease Increase

4

c.ItemD bidD. Item A g G I- '_

Qs'SO &O

24. The following materials standards have been established for a particular product:

Standard quantity per unit of output .......... 2.8 grams

Standard price ............................................ $12.50 per gram

The following data pertain to operations concerning the product for the last month:

Actual materials purchased .......... : ............. 6,200 grams -}Actual cost of materials purchased ............ $81,530 1Actual materials used in production .......... 5,700 grams _ __

Actual out'put .............................................1,800 units __ 1What is the materials price variance for the month?

A. $6,250 U _ (,0a{_-

B. $8,679 U x/_ \9 ' _'_ _jD. $6,575 U _-

$fO%

25. Gould Corporation uses the following activity rates from its activity-based costing to assign overhead coststo products:

Activity Cost Pools Activity Rate

Setting up batches .......................... $59.06 per batchProcessing customer orders ........... $72.66 per customer order

Assembling products ..................... $3.75 per assembly hour

Data concerning two products appear below:

P_ Product F650

Number of batches ........................ 50

Number of customer orders ........... 43

Number o£ assembly hours ............ \ 4_.._ 890

How much overhead cost would be assigned to Product K91B using the activity-based costing system?A. $135.47B. $4,961.04

26. Per_echino Corporation is developing standards for its products. One product requires an input that ispurchased for $82.00 per kilogram from the supplier. By paying cash, the company gets a discount of 2% offthis purchase price. Shipping costs from the supplier's warehouse amount to $6.55 per kilogram. Receivingcosts are $0.47 per kilogram. The standard price per kilogram of this input should be:A. $76.62

B. $90.66 (_#_ (,,._

(0,5-5--.tA-q

27. At the break-even point: -------.-'-

_. sSaleswould be equal to fixed expenses.ontribution margin would be equal to fixed expenses. _)3 ,"_%ales would be equal to contribution margin.

D. contribution margin would be equal to net operating income.

Harden, Inc., has budgeted sales in units for the next five months as follows:

June ........................ 7,000 units

July ......................... 5,300 unitsAugust .................... 7,100 unitsSeptember .............. 6,800 units

October .................. 4,900 units

Past experience has shown that the epding inventory_ .for each month should be equal to 15% of the next month'ssales in units. The inventory on Ma-"y3-1contained 1,050 units.-The company needs to prepare a productionbudget for the next five months.

28. The total number of units produced in July should be:A. 5,300-units_

D. 5,570 units

550o

29. The following data are available for the Phelps Company for a recent month:

[Product A [Product B [Product C Total

Sales .................................. $150,000 $130,000 $90,000 $370,000

Variable expenses .............. 91 000 104 000 27 000 222 000Contribution margin .......... $59.000 $26.000 $63.000 148,000Fixed expenses .................. 55 000Net operating income ........ $93.000

The break-even sales forthemonthforthecompany are:A.$203,000B.$91,667C.$148,000D. $137,500

30. Eccles Corporation uses an activity-based costing system with three activity cost pools. The company hasprovided the following data concerning its costs and its activity based costing system:

Costs:

Wages and salaries ............ $340,000Depreciation ...................... 180,000Utilities .............................. 200 000Total ..................................

Distribution of resource consumption:

Activity Cost Pools\. Setting Up Other TotalWages and salaries ...... 20% _ 60% 20% 100%

Depreciation ................ 15% J 35% 50% 100%/

Utilities ........................ 5°/_/ 55% 40% 100%

How much cost, in total, would be allocated in the first-stage allocation to theAssembly activity cost pool?A. $144,000B. $36,000

9qO00iObOO

31. Poo_'ly trained workers could have an unfavorable effect on which of the following variances?

Labor Rate Variance Materials Quantity Variance

A) Yes Yes

Yes NoNo Yes

D) No No

C. Item AD. Item D

1.The capital budgeting method that divides a project's annual incremental net income bythe initial investment is the:

A) the net present value method.B) internal rate of return method.

(_the payback method.

the simple ( or accounting) rate of return method.

2. The Wyeth Company produces three products, A, B, and C, from a single rawmaterial input. Product A can be sold at the split-off point for $40,000, or it canbe processed further at a total cost of $15,000 and then sold for $58,000. Joint

_) product costs total $60,000 annually. Product A should be:processed further and then sold.processed further only if its share of the total joint product costs is less than theincremental revenues from further processing.

C) discontinued since revenues after further processing are less than total jointproduct costs.

D) sold at the split-off point.

3. Gata Co. plans to discontinue a department that has a $48,000 contribution marginand $96,000 of fixed costs. Of these fixed costs, $42,000 cannot be avoided. Whatwould be the effect of this discontinuance on Gata's overall net operating income?

ecrease of $48,000crease of $6,000

C) Decrease of $6,000D) Increase of $48,000

4. (Ignore income taxes in this problem.) How is depreciation handled by thefollowing capital budgeting techniques?

Internal SimpleRate of Return Rate of Return Pavback

A) Included Included Excluded

(_ Included Excluded Included

Excluded Included ExcludedExcluded Excluded Included

5. (Ignore income taxes in this problem.) The following information concems aproposed investment:

Investment required $14,150 /_---\_ _ / _'//@-Annual savings $2,500 _f_--_Life of the project 12 years

t

I

The internal rate of return is (do not interpolate):

_) 510%"14%.%.

.D) 12%.

6. The net present value method of capital budgeting assumes that cash flows are

q reinvested at:the discount rate used in the analysis.a zero rate of return.

C) the rate of return on the company's debt.D) the internal rate of return on the project.

7. The evaluation of an investment having uneven cash flows using the paybackmethod:

A) cannot be done.

nearbedone only by matching cash inflows and investment outflows on a year-by-basis.

C) requires the use of a sophisticated calculator or computer software.D) will product essentially the same results as those obtained through the use of

discounted cash flow techniques.

8. (Ignore income taxes in this problem.) The Baker Company purchased a piece ofequipment with the following expected results:

Useful life 7years _, '_T _ qa _Yearly net cash inflow $50,000 /

Salvage value. -0- I/I I_q\Internal rate of return. 20%

Discount rate.. 16% _L0_- 1_"/

.B_he initial cost of the equipment was:180,250

) $300,100.C) Cannot be determined from the information given.D) $190,600.

9. (Ignore income taxes in this problem.) Denny Corporation is consideringreplacing a technologically obsolete machine with a new state-of-the-artnumerically controlled machine. The new machine would cost $450,000 andwould have a ten-year useful life. Unfortunately, the new machine would have no

7

va,ue e e ac in' w ', oo t 0,000yea,too eratemaintain, but would save $100,000 per year in labor and other costs. The oldmachine can be sold now for scrap for $50,000. The simple rate of return on the

new machine is closest to: Y4_'-q rT-O_22.220/0. _ . ...-r..r-F

-c) 20.00%. __Oh_,.AD) 7.78%. _00_" _'OtST_

10. (Ignore income taxes in this problem.) A piece of equipment has a cost of$20,000. The equipment will provide cost savings of $3,500 each year for tenyears, after which time it will have a salvage value of $2,500. If the company'sdiscount rate is 12%, the equipment's net present value is:

A) $2,275.

,tm,-_$225). Oc_m_ _o,,:._ gr-\,o /'_<.,..o_O°4"_.c_tS_580- ,z,_r--,O \ _._ 6.t_ I_ _q_D) $17,500. ,7-_._?_t_ _0 ,3_9

I I. Relay Corporation manufactures batons. Relay can manufacture 300,000 batons ayear at a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay'spredictions for next year, 240,000 batons will be sold at the regular price of $5.00each. In addition, a special order was placed for 60,000 batons to be sold at a 40%discount off the regular price. Total fixed costs would be unaffected by this order.By what amount would the company's net operating income be increased ordecreased as a result of the special order?

A) $36,000 increase. _/_ _)._IB) $180,000 increase.

$60,000 decrease._$30,000 increase.

12. Cardinal Company needs 20,000 units of a certain part to use in one of itsproducts. The following information is available:

Cost to Cardinal to make the part:Direct materials $ 4Direct labor 16

Variable manufacturing overhead. 8Fixed manufacturing overhead . J_-_(

$38aaa

Cost to buy the part fromthe Oriole Company $36

Oriole Company has offered to sell this part to Cardinal company for $36 each. IfCardinal buys the part from Oriole instead of making it, Cardinal would not haveany use for the released capacity. In addition, 60% of the fixed manufacturingoverhead costs will continue regardless of what decision is made. Assume thatdirect labor is an avoidable cost in this decision. In deciding whether to make orbuy the part, the total relevant costs to make the part are:

A) $760,000.B) $560,000.

(_ $720,000.

$640,000.

13. (Ignore income taxes in this problem.) Jarvey Company is studying a project thatwould have a ten-year life and would require a $450,000 investment in equipmentthat has no salvage value. The project would provide net income each year asfollows for the life of the project:

Sales $500,000Less cash variable expenses 200 000Contribution margin 300,000Less fixed expenses:

Fixed cash expenses $150,000Depreciation expenses 45,000 195 000

Net income $105,000aaaaaaa

The company's required rate of return is 12%. What is the payback period for thisproject?

A) 9 yearsB) 4.28 years

3 yearsD) 2 years

14. (Ignore income taxes in this problem.) Horn Corporation is considering inx_estingin a four-year project. Cash inflows from the project are expected to be asfollows: Year 1, $2,000; Year 2, $2,200; Year 3, $2,400; Year 4, $2,600. If usinga discount rate of 8%, the project has a positive net present value of $500, what

(_vas the amount of the original investment?7,054.

B) $2,411.C) $8,054.D) $1,411.

Use the following to answer question 15:

Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, thecompany has 10,000 machine hours of idle capacity available each year. This idlecapacity could be used by the company to make, rather than buy, one of the componentsused in its production process. Hadley needs 5,000 units of this component each year. Atpresent, the component is being purchased from an outside supplier at $7.50 per unit.Variable production cost for the component would be $4.10 per unit, and additionalsupervisory costs would be $18,000 per year. Already existing fixed costs that would beallocated to this part amount to $300,000 per year.

15. The change in the company's overall armual net operating income that wouldresult from making the component, rather than buying it, would be:

A) $14,000 decrease.B) $5,000 increase.C) $1,000 decrease.D) $17,000 increase.

Use the following to answer question 16:

Brown Company makes four products in a single facility. These products have thefollowing unit product costs:

.ProductA B C D

Direct materials $15.60 $19.50 $12.50 $15.20Direct labor 17.60 21.00 15.40 9.40Variable manufacturing overhead 4.40 5.60 8.10 5.10Fixed manufacturing overhead 27.50 14.40 14.50 16.50Unit product cost $65.10 $60.50 $50.50 $46.20

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Additional data concerning these products are listed below.

ProductA B C D

Grinding minutes per unit 2.00 1.10 0.70 0.30Selling price per unit $78.70 $71.10 $67.90 $62.60Variable selling cost per unit $2.60 $3.10 $2.80 $3.50Monthly demand in units 3,000 2,000 2,000 4,000

The grinding machines are potentially the constraint in the production facility. A total of10,500 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

16. Which product makes the LEAST profitable use of the grinding machines?A) Product DB) Product C

_ C) Product AD) Product B

17. (Ignore income taxes in this problem.) A planned factory expansion project has anestimated initial cost of $800,000. Using a discount rate of 20%, the present valueof future cost savings from the expansion is $843,000. To yield exactly a 20%internal rate of return, the actual investment cost cannot exceed the $800,000estimate by more than:

A) $160,000.B) $1,075.C) $43,000.D) $20,000.

18. Which of the following is not an effective way of dealing with a productionconstraint (i.e., bottleneck)?

A) Subcontract work that would otherwise required use of the bottleneck.B) Pay overtime to workers assigned to work stations located after the bottleneck in

the production process.C) Reduce the number of defective units produced at the bottleneck.D) Pay overtime to workers assigned to the bottleneck.

Answer Key -- sample fin04

1. D2. A3. B4. C5. B6. A7. B8. A9. B

10. C11. D12. D13. C14. A15. C16. C17. C