PART 3A
COST MEASUREMENT CONCEPTS
457 QUESTIONS
with a production level of 12,000 units and a sales level of
8,000 units are
A. $692,000.
B. $960,000.
[1] Source: CMA 0690 5-27
Costs that arise from periodic budgeting decisions that have
no strong input-output relationship are commonly called
C. $948,000.
D. $932,000.
A. Committed costs.
[6] Source: CMA 0692 3-6
Departmental overhead rates are usually preferred to
plant-wide overhead rates when
B. Discretionary costs.
C. Opportunity costs.
A. The activities of each of the various departments in
the plant are not homogeneous.
D. Differential costs.
[Fact Pattern #1]
The estimated unit costs for a company using absorption
(full) costing and planning to produce and sell at a level of
12,000 units per month are as follows.
Estimated
Cost Item
Unit Cost
----------------Direct materials
$32
Direct labor
20
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling
3
Fixed selling
4
B. The costs of many service departments are being
allocated to each of the various departments.
C. All products passing through the various
departments require the same manufacturing effort in
each department.
D. Most of the overhead costs are fixed.
15
6
[2] Source: CMA 1291 3-27
(Refers to Fact Pattern #1)
Estimated conversion costs per unit are
A. $35.
[7] Source: CMA 0691 3-22
The cost of statistical quality control in a product quality
cost system is categorized as a(n)
A. External failure cost.
B. Internal failure cost.
C. Prevention cost.
D. Appraisal cost.
B. $41.
C. $48.
D. $67.
[3] Source: CMA 1291 3-28
(Refers to Fact Pattern #1)
Estimated prime costs per unit are
A. $73.
B. $32.
C. $67.
D. $52.
[4] Source: CMA 1291 3-29
(Refers to Fact Pattern #1)
Estimated total variable costs per unit are
A. $38.
B. $70.
C. $52.
D. $18.
[5] Source: CMA 1291 3-30
(Refers to Fact Pattern #1)
Estimated total costs that would be incurred during a month
[8] Source: CIA 1193 IV-6
Some units of output failed to pass final inspection at the
end of the manufacturing process. The production and
inspection supervisors determined that the estimated
incremental revenue from reworking the units exceeded the
cost of rework. The rework of the defective units was
authorized, and the following costs were incurred in
reworking the units:
Materials requisitioned from stores:
Direct materials
$ 5,000
Miscellaneous supplies
$ 300
Direct labor
$14,000
The manufacturing overhead budget includes an allowance
for rework. The predetermined manufacturing overhead
rate is 150% of direct labor cost. The account(s) to be
charged and the appropriate charges for the rework cost
would be
A. Work-in-process inventory control for $19,000.
B. Work-in-process inventory control for $40,300.
C. Work-in-process inventory control for $5,000
and factory overhead control for $35,300.
D. Factory overhead control for $40,300.
[9] Source: CIA 0593 IV-4
A new advertising agency serves a wide range of clients
including manufacturers, restaurants, service businesses,
department stores, and other retail establishments. The
accounting system the advertising agency has most likely
adopted for its record keeping in accumulating costs is
[14] Source: Publisher
The manufacturing (work-in-process) account is
A. Job-order costing.
A. Neither a real nor a nominal account.
B. Operation costing.
C. Relevant costing.
D. Process costing.
[10] Source: CIA 0594 III-47
Which of the following statements about activity-based
costing is not true?
A. Activity-based costing is useful for allocating
marketing and distribution costs.
B. Activity-based costing is more likely to result in
major differences from traditional costing systems if
the firm manufactures only one product rather than
multiple products.
B. An inventory account indicating the beginning and
ending inventory of goods being processed.
C. A hybrid account (both a real and a nominal
account).
D. A nominal account to which indirect costs are
charged as incurred and credited as these costs are
charged to production.
[15] Source: Publisher
The debits in work-in-process are BWIP, direct labor,
direct materials, and factory overhead. The account should
be credited for production that is completed and sent to
finished goods inventory. The balance is
A. EWIP, which is a credit.
C. In activity-based costing, cost drivers are what
cause costs to be incurred.
D. Activity-based costing differs from traditional
costing systems in that products are not
cross-subsidized.
[11] Source: CIA 0591 IV-7
Companies characterized by the production of
heterogeneous products will most likely use which of the
following methods for the purpose of averaging costs and
providing management with unit cost data?
B. EWIP, which is a debit.
C. Total production costs to be accounted for.
D. Closed out at the end of the accounting period.
[16] Source: Publisher
Which of the following items is not included in (charged to)
factory overhead?
A. Factory depreciation and supplies.
A. Process costing.
B. Costs of service departments.
B. Relevant costing.
C. Costs of maintenance departments.
C. Direct costing.
D. Costs of marketing departments.
D. Job-order costing.
[12] Source: CIA 1188 IV-5
A shipbuilding company, employing 30 workers, constructs
custom-built yachts. Which of the following is an
appropriate product-costing method for this operation?
A. Process costing.
B. Variable cost transfer pricing.
[17] Source: CIA 0591 IV-11
The following information is available from the records of a
manufacturing company that applies factory overhead
based on direct labor hours:
Estimated overhead cost
$500,000
Estimated labor hours
200,000
Actual overhead cost
$515,000
Actual labor hours
210,000
Based on this information, factory overhead is
C. Job-order costing.
A. Underapplied by $9,524.
D. Step-down allocation of costs.
B. Overapplied by $10,000.
C. Overapplied by $40,750.
[13] Source: CIA 0589 IV-4
A corporation provides management consulting services to
hospitals. Consulting engagements vary widely from
hospital to hospital, both in terms of the nature of the
consulting services provided and the scope of the
consulting engagements. The most appropriate product
costing system for the corporation is a
D. Underapplied by $15,000.
[18] Source: Publisher
At the beginning of the year, Smith Inc. budgeted the
following:
A. Process costing system.
Units
B. Job-order costing system.
Sales
Minus:
Total variable expenses
Total fixed expenses
C. Operations costing system.
D. Just-in-time costing system.
Net income
10,000
=======
$100,000
60,000
20,000
-------$ 20,000
========
Factory overhead:
Variable
$ 30,000
Fixed
10,000
There were no beginning inventories. At the end of the
year, no work was in process, total factory overhead
incurred was $39,500, and underapplied factory overhead
was $1,500. Factory overhead was applied on the basis of
budgeted unit production. How many units were produced
this year?
[23] Source: Publisher
Normal spoilage is defined as
A. Spoilage that results from normal operations.
B. Uncontrollable waste as a result of a special
production run.
C. Spoilage that arises under inefficient operations.
A. 10,250.
D. Controllable spoilage.
B. 10,000.
C. 9,875.
[24] Source: Publisher
Costs of normal spoilage are usually charged to
D. 9,500.
A. EWIP but not cost of goods manufactured when
the inspection point is at the end of the process.
[19] Source: CIA 0591 IV-6
Companies characterized by the production of basically
homogeneous products will most likely use which of the
following methods for the purpose of averaging costs and
providing management with unit-cost data?
A. Job-order costing.
B. Direct costing.
C. Absorption costing.
B. Cost of goods manufactured but not EWIP if the
goods are inspected when they are 50% complete
and EWIP is 75% complete.
C. Cost of goods manufactured and EWIP when the
inspection point is at the end of the process.
D. Cost of goods manufactured and EWIP when the
inspection point is prior to the end of the process,
and goods in EWIP have passed the inspection point.
D. Process costing.
[20] Source: Publisher
Activity-based costing
A. May be used with job-order but not process
costing.
B. May be used with process but not job-order
costing.
C. Tends to decrease the number of cost pools.
D. Tends to increase the number of cost pools.
[21] Source: Publisher
Why are transferred-in costs differentiated from direct
materials?
A. They usually consist of the basic units being
produced.
[25] Source: Publisher
If a process has several inspection points, how should the
costs of normal spoilage be accounted for?
A. Charged to the cost of goods completed during
the period.
B. Allocated to EWIP and goods completed during
the period based on their relative values.
C. Allocated to the good units passing through each
inspection point.
D. Allocated to EWIP and goods completed during
the period based on units.
[26] Source: Publisher
Shrinkage should be accounted for as
A. A miscellaneous period cost.
B. Miscellaneous revenue.
B. They are of greater value than most other materials
added.
C. They are greater in value than the value of all other
materials added.
D. They are added at the beginning of the process,
unlike other direct materials.
[22] Source: Publisher
Separate equivalent units calculations are often not made
for
C. An offset to overhead.
D. Spoilage.
[27] Source: CIA 0591 IV-9
Abnormal spoilage is
A. Not expected to occur when perfection standards
are used.
B. Not usually controllable by the production
supervisor.
A. Conversion costs.
C. The result of unrealistic production standards.
B. Transferred-in costs.
C. Direct materials costs.
D. Not expected to occur under efficient operating
conditions.
D. Direct labor costs.
[28] Source: CIA 1185 IV-6
In a process-costing system, the cost of abnormal spoilage
should be
A. Prorated between units transferred out and ending
inventory.
B. Included in the cost of units transferred out.
[33] Source: CIA 1190 IV-10
A joint process is a manufacturing operation yielding two or
more identifiable products from the resources employed in
the process. The two characteristics that identify a product
generated from this type of process as a joint product are
that it
C. Treated as a loss in the period incurred.
D. Ignored.
[29] Source: Publisher
Assuming the value of scrap sales is material, when is it not
necessary to record the value of scrap in inventory as it is
produced?
A. When it is sold regularly, e.g., daily, weekly, etc.
B. When the unit value fluctuates.
A. Is identifiable as an individual product only upon
reaching the split-off point, and it has relatively minor
sales value when compared to the other products.
B. Is identifiable as an individual product before the
production process, and it has relatively significant
physical volume when compared with the other
products.
C. Is identifiable as an individual product only upon
reaching the split-off point, and it has relatively
significant sales value when compared with the other
products.
C. If it is recognized as miscellaneous revenue.
D. When it is kept in a separate place for indefinite
periods of time.
[30] Source: CIA 1189 IV-7
A manufacturing process normally produces defective units
equal to 1% of production. Defective units are
subsequently reworked and sold. The cost of reworking
these defective units should be charged to
D. Has relatively significant physical volume when
compared with the other products, and it can be sold
immediately without any additional processing.
[34] Source: CIA 0585 IV-11
A company produces three main joint products and one
by-product. The by-product's relative sales value is quite
low compared with that of the main products. The
preferable accounting for the by-product's net realizable
value is as
A. Factory overhead control.
B. Work-in-process control.
A. An addition to the revenues of the other products
allocated on the basis of their respective net realizable
values.
C. Finished goods control.
B. Revenue in the period it is sold.
D. Cost of goods sold.
C. A reduction in the common cost to be allocated to
the three main products.
[31] Source: Publisher
What is a Quantity of Production Report?
A. A report of the units completed this period in
comparison with the immediately preceding period,
and a moving average of the number completed
during the twelve preceding periods.
B. A report that details the units transferred into one
or more manufacturing accounts during a period and
the disposition of these units, i.e., the units completed,
spoiled, and in EWIP.
D. A separate net realizable value upon which to
allocate some of the common costs.
[35] Source: Publisher
Cost objectives
A. May be intermediate if the costs charged are later
reallocated to another cost objective.
B. May be final if the cost objective is the job,
product, or process itself.
C. A cost of goods manufactured statement.
C. Should be logically linked with the cost pool.
D. A report that lists and accounts for all debits to the
manufacturing account during the period and the
disposition of these costs, i.e., the costs of units
completed, spoiled, and in EWIP.
[32] Source: CIA 0577 IV-3
Joint costs are useful for
D. All answers are correct.
[36] Source: Publisher
Which of the following is true in respect to plant-wide and
departmental overhead rates?
A. Setting the selling price of a product,
A. Only one overhead control account is necessary
for a plant-wide overhead rate.
B. Determining whether to continue producing an
item.
B. Each production department requires a separate
overhead cost pool for a departmental overhead rate.
C. Evaluating management by means of a
responsibility reporting system.
C. The departmental overhead rate concept is more
precise and relatively more complex than the
plant-wide overhead rate concept.
D. Determining inventory cost for accounting
purposes.
D. All answers are correct.
actual use of services.
[37] Source: CIA 1188 IV-4
A computer company charges indirect manufacturing costs
to a project at a fixed percentage of a cost pool. This
project is covered by a cost-plus government contract.
Which of the following is an appropriate guideline for
determining how costs are assigned to the pool?
[41] Source: Publisher
The fixed costs of service departments should be allocated
to production departments based on
A. Actual short-run use based on predetermined
rates.
A. Establish separate pools for variable and fixed
costs.
B. Actual short-run units based on actual rates.
B. Assign prime costs and variable administrative
costs to the same pool.
C. The service department's expected costs of
long-run capacity.
C. Establish a separate pool for each assembly line
worker to account for wages.
D. The service department's actual costs based on
actual use of services.
D. Assign all manufacturing costs related to the
project to the same pool.
[38] Source: CIA 0581 IV-17
The allocation of general overhead costs to operating
departments can be least justified in determining
A. Income of a product or functional unit.
[42] Source: CIA 1190 IV-3
A corporation allocates indirect corporate overhead costs
to its operating divisions. The company uses a
cause-and-effect criterion in the selection of appropriate
allocation bases. Which of the following would be an
appropriate allocation base to assign the costs of the
corporate personnel department to the operating divisions
using a cause-and-effect criterion?
B. Costs for making management's decisions.
A. Number of employees in each division.
C. Costs for the federal government's cost-plus
contracts.
B. Square footage of space occupied by each
division.
D. Income tax payable.
C. Total service years of employees in each division.
D. Total book value of identifiable division assets.
[39] Source: CIA 0590 IV-8
A public accounting firm has two departments,
Management Consulting Services (MCS) and Tax
Advisory Services (TAS). These two departments use the
services of two service departments, Computer
Programming (CP) and Computer Operations (CO). The
percentages of each service used by each department for a
typical period are:
[43] Source: CMA 1295 3-14
The cost of statistical quality control in a product quality
cost system is categorized as a(n)
A. External failure cost.
B. Internal failure cost.
CP
CO
MCS TAS
--- --- --- --CP -30% 50% 20%
CO 25% -45% 30%
The company prices its management consulting and tax
advisory services on the basis of estimated costs of
providing those services. Based upon this information, the
most appropriate method for allocating service department
costs is the
A. Physical-units method.
B. Step-down method.
C. Massachusetts Formula.
C. Training cost.
D. Appraisal cost.
[44] Source: CMA 1290 3-1
Practical capacity as a plant capacity concept
A. Assumes all personnel and equipment will operate
at peak efficiency and total plant capacity will be
used.
B. Does not consider idle time caused by inadequate
sales demand.
D. Reciprocal method.
[40] Source: Publisher
The variable costs of service departments should be
allocated to production departments by using
C. Includes consideration of idle time caused by both
limited sales orders and human and equipment
inefficiencies.
D. Is the production volume that is necessary to meet
sales demand for the next year.
A. Actual short-run output based on predetermined
rates.
B. Actual short-run output based on actual rates.
[45] Source: CMA 1290 3-12
Which one of the following considers the impact of fixed
overhead costs?
C. The service department's expected costs of
long-run capacity.
A. Full absorption costing.
D. The service department's actual costs based on
B. Marginal costing.
product.
C. Direct costing.
D. Variable costing.
[46] Source: CMA 0692 3-5
The terms direct cost and indirect cost are commonly used
in accounting. A particular cost might be considered a
direct cost of a manufacturing department but an indirect
cost of the product produced in the manufacturing
department. Classifying a cost as either direct or indirect
depends upon
A. The behavior of the cost in response to volume
changes.
B. Whether the cost is expensed in the period in
which it is incurred.
C. The cost objective to which the cost is being
related.
D. Whether an expenditure is unavoidable because it
cannot be changed regardless of any action taken.
B. Include only the conversion costs of manufacturing
a product.
C. Are expensed when products become part of
finished goods inventory.
D. Are regarded as assets before the products are
sold.
[51] Source: CMA 1293 3-9
An operation costing system is
A. Identical to a process costing system except that
actual cost is used for manufacturing overhead.
B. The same as a process costing system except that
materials are allocated on the basis of batches of
production.
C. The same as a job order costing system except
that materials are accounted for in the same way as
they are in a process costing system.
D. The same as a job order costing system except
[47] Source: CMA 1292 3-1
Costs are allocated to cost objects in many ways and for
many reasons. Which one of the following is a purpose of
cost allocation?
A. Evaluating revenue center performance.
B. Measuring income and assets for external
reporting.
that no overhead allocations are made since actual
costs are used throughout.
[52] Source: CMA 0694 3-5
Which one of the following categories of cost is most likely
not considered a component of fixed factory overhead?
A. Rent.
C. Budgeting cash and controlling expenditures.
B. Property taxes.
D. Aiding in variable costing for internal reporting.
C. Depreciation.
[48] Source: CMA 1292 3-3
In determining cost behavior in business, the cost function is
often expressed as Y = a + bX. Which one of the following
cost estimation methods should not be used in estimating
fixed and variable costs for the equation?
D. Power.
[53] Source: CMA 0694 3-8
Committed costs are costs that
A. Graphic method.
A. Were capitalized and amortized in prior periods.
B. Simple regression.
B. Management decides to incur in the current period
that do not have a clear cause and effect relationship
between inputs and outputs.
C. High and low point method.
D. Multiple regression.
[49] Source: CMA 1292 3-4
In joint-product costing and analysis, which one of the
following costs is relevant when deciding the point at which
a product should be sold to maximize profits?
A. Separable costs after the split-off point.
B. Joint costs to the split-off point.
C. Sales salaries for the period when the units were
produced.
D. Purchase costs of the materials required for the
joint products.
[50] Source: CMA 0693 3-5
Inventoriable costs
A. Include only the prime costs of manufacturing a
C. Result from a clear measurable relationship
between inputs and outputs.
D. Establish the current level of operating capacity
and cannot be altered in the short run.
[54] Source: CMA 0694 3-9
The difference between variable costs and fixed costs is
A. Variable costs per unit fluctuate and fixed costs
per unit remain constant.
B. Variable costs per unit are fixed over the relevant
range and fixed costs per unit are variable.
C. Total variable costs are variable over the relevant
range and fixed in the long term, while fixed costs
never change.
D. Variable costs per unit change in varying
increments, while fixed costs per unit change in equal
increments.
[Fact Pattern #2]
Huron Industries has recently developed two new
products, a cleaning unit for laser discs and a tape
duplicator for reproducing home movies taken with a video
camera. However, Huron has only enough plant capacity to
introduce one of these products during the current year.
The company controller has gathered the following data to
assist management in deciding which product should be
selected for production.
Huron's fixed overhead includes rent and utilities,
equipment depreciation, and supervisory salaries. Selling
and administrative expenses are not allocated to products.
Tape
Cleaning
Duplicator Unit
---------- -------Raw materials
$ 44.00 $ 36.00
Machining @ $12/hr.
18.00
15.00
Assembly @ $10/hr.
30.00
10.00
Variable overhead @ $8/hr.
36.00
18.00
Fixed overhead @ $4/hr.
18.00
9.00
-------- -------Total cost
$ 146.00 $ 88.00
======== ========
Suggested selling price
$ 169.95 $ 99.98
Actual research and
development costs
$240,000 $175,000
Proposed advertising and
promotion costs
$500,000 $350,000
[55] Source: CMA 1294 3-1
(Refers to Fact Pattern #2)
For Huron's tape duplicator, the unit costs for raw
materials, machining, and assembly represent
(Refers to Fact Pattern #2)
Research and development costs for Huron's two new
products are
A. Conversion costs.
B. Sunk costs.
C. Relevant costs.
D. Avoidable costs.
[59] Source: CMA 1294 3-5
(Refers to Fact Pattern #2)
The advertising and promotion costs for the product
selected by Huron will be
A. Discretionary costs.
B. Opportunity costs.
C. Committed costs.
D. Incremental costs.
[60] Source: CMA 1294 3-6
(Refers to Fact Pattern #2)
The costs included in Huron's fixed overhead are
A. Joint costs.
B. Committed costs.
C. Opportunity costs.
D. Prime costs.
A. Conversion costs.
B. Separable costs.
C. Committed costs.
[61] Source: CMA 0695 3-9
When an organization is operating above the breakeven
point, the degree or amount that sales may decline before
losses are incurred is called the
D. Prime costs.
A. Residual income rate.
[56] Source: CMA 1294 3-2
(Refers to Fact Pattern #2)
The difference between the $99.98 suggested selling price
for Huron's laser disc cleaning unit and its total unit cost of
$88.00 represents the unit's
B. Marginal rate of return.
C. Margin of safety.
D. Target (hurdle) rate of return.
A. Contribution margin ratio.
B. Gross profit.
C. Contribution.
D. Gross profit margin ratio.
[57] Source: CMA 1294 3-3
(Refers to Fact Pattern #2)
The total overhead cost of $27.00 for Huron's laser disc
cleaning unit is a
[62] Source: CMA 1295 3-15
Because this allocation method recognizes that service
departments often provide each other with
interdepartmental service, it is theoretically considered to
be the most accurate method for allocating service
department costs to production departments. This method
is the
A. Direct method.
B. Variable method.
C. Reciprocal method.
A. Carrying cost.
D. Linear method.
B. Discretionary cost.
C. Sunk cost.
D. Mixed cost.
[58] Source: CMA 1294 3-4
[63] Source: CMA 1295 3-16
When allocating service department costs to production
departments, the method that does not consider different
cost behavior patterns is the
A. Step method.
classification and behavior of shipping costs?
B. Reciprocal method.
C. Direct method.
Classification
Behavior
-------------- ---------------------A.
D. Single-rate method.
Variable cost
$1.66 per unit sold
B.
[64] Source: CMA 1295 3-26
An accounting system that collects financial and operating
data on the basis of the underlying nature and extent of the
cost drivers is
Mixed cost
$16,000 per month plus
$1.40 per unit sold
C.
A. Direct costing.
B. Activity-based costing.
C. Cycle-time costing.
Mixed cost
$30,000 per month plus
$35.00 per sales order
D.
Mixed cost
$58,000 per month plus
$23.33 per sales order
D. Variable costing.
[65] Source: CMA 0694 3-1
Which one of the following is least likely to be an objective
of a cost accounting system?
[68] Source: CIA 1196 III-83
(Refers to Fact Pattern #3)
In relation to the dollar amount of sales, which of the
following cost classifications is appropriate for advertising
and sales salaries costs?
A. Product costing.
B. Department efficiency.
Advertising Sales Salaries
----------- -------------A.
C. Inventory valuation.
D. Sales commission determination.
[66] Source: CMA 0694 3-3
In cost terminology, conversion costs consist of
A. Direct and indirect labor.
B. Direct labor and direct materials.
Mixed cost
B.
Fixed cost
Fixed cost
C.
Variable cost
Mixed cost
D.
Mixed cost
Fixed cost
Fixed cost
C. Direct labor and factory overhead.
D. Indirect labor and variable factory overhead.
[Fact Pattern #3]
A company wants to determine its marketing costs for
budgeting purposes. Activity measures and costs incurred
for 4 months of the current year are presented in the table
below. Advertising is considered to be a discretionary cost.
Salespersons are paid monthly salaries plus commissions.
The sales force was increased from 20 to 21 individuals
during the month of May.
[69] Source: CIA 1194 III-50
An assembly plant accumulates its variable and fixed
manufacturing overhead costs in a single cost pool, which is
then applied to work in process using a single application
base. The assembly plant management wants to estimate
the magnitude of the total manufacturing overhead costs for
different volume levels of the application activity base using
a flexible budget formula. If there is an increase in the
application activity base that is within the relevant range of
activity for the assembly plant, which one of the following
relationships regarding variable and fixed costs is correct?
A. The variable cost per unit is constant, and the total
fixed costs decrease.
MARCH
APRIL
MAY
JUNE
---------- ---------- ---------- ---------Activity measures:
Sales orders
2,000
1,800
2,400
2,300
Units sold
55,000
60,000
70,000
65,000
Dollar sales
$1,150,000 $1,200,000 $1,330,000
$1,275,000
Marketing costs:
Advertising
$190,000 $200,000 $190,000
$190,000
Sales salaries
20,000
20,000
21,000
21,000
Commissions
23,000
24,000
26,600
25,500
Shipping costs
93,000 100,000 114,000
107,000
---------- ---------- ---------- ---------Total costs
$326,000 $344,000 $351,600
$343,500
[70] Source: CIA 0596 III-94
A company is attempting to determine if there is a
cause-and-effect relationship between scrap value and
output produced. The following exhibit presents the
company's scrap data for the last fiscal year:
[67] Source: CIA 1196 III-82
(Refers to Fact Pattern #3)
Which of the following most appropriately describes the
Scrap Value as a Percent of Standard Dollar
Value of Output Produced
Standard Dollar
Percent
B. The variable cost per unit is constant, and the total
fixed costs increase.
C. The variable cost per unit and the total fixed costs
remain constant.
D. The variable cost per unit increases, and the total
fixed costs remain constant.
Month
Value of Output
Scrap (%)
---------------------------Nov 2000
$1,500,000
4.5
Dec 2000
$1,650,000
2.5
Jan 2001
$1,600,000
3.0
Feb 2001
$1,550,000
2.5
Mar 2001
$1,650,000
1.5
Apr 2001
$1,500,000
4.0
May 2001
$1,400,000
2.5
Jun 2001
$1,300,000
3.5
Jul 2001
$1,650,000
5.5
Aug 2001
$1,000,000
4.5
Sep 2001
$1,400,000
3.5
Oct 2001
$1,600,000
2.5
Based on the above data, the company's scrap value in
relation to the standard dollar value of output produced
appears to be
B. Normal capacity as the denominator level will
result in a lower net income amount than if any other
capacity volume is chosen.
C. Master-budget capacity as the denominator level
will result in a lower net income amount than if
theoretical capacity is chosen.
D. Practical capacity as the denominator level will
result in a higher net income amount than if normal
capacity is chosen.
[73] Source: CMA 0696 3-12
The ratio of fixed costs to the unit contribution margin is the
A. Breakeven point.
A. A variable cost.
B. Profit margin.
B. A fixed cost.
C. Operating profit.
C. A semi-fixed cost.
D. Contribution margin ratio.
D. Unrelated to the standard dollar value of output.
[74] Source: CMA 0696 3-15
In target costing,
[Fact Pattern #4]
Nash Glassworks Company has budgeted fixed factory
overhead of $100,000 per month. The company uses
absorption costing for both external and internal financial
reporting purposes. Budgeted factory overhead rates for
cost allocations for the month of April using alternative unit
output denominator levels are shown below.
Budgeted
Budgeted
Capacity Denominator Level Overhead
Levels
(units of output) Cost Rate
----------- ----------------- --------Theoretical
1,500,000
$.0667
Practical
1,250,000
.0800
Normal
775,000
.1290
Master-budget
800,000
.1250
Actual output for the month of April was 800,000 units of
glassware.
A. The market price of the product is taken as a
given.
B. Only raw materials, labor, and variable overhead
cannot exceed a threshold target.
C. Only raw materials cannot exceed a threshold
target.
D. Raw materials are recorded directly to cost of
goods sold.
[75] Source: CMA 0696 3-16
The series of activities in which customer usefulness is
added to the product is the definition of
A. A value chain.
[71] Source: CMA 0696 3-1
(Refers to Fact Pattern #4)
When Nash Glassworks Company allocates fixed costs,
management will select a capacity level to use as the
denominator volume. All of the following would be
appropriate as the capacity level that approximates actual
volume levels except
A. Normal capacity.
B. Expected annual activity.
B. Process value analysis.
C. Integrated manufacturing.
D. Activity-based costing.
[76] Source: CMA 0696 3-17
The upper limit of a company's productive output capacity
given its existing resources is called
C. Theoretical capacity.
A. Excess capacity.
D. Master-budget capacity.
B. Cycle-time capacity.
C. Practical capacity.
[72] Source: CMA 0696 3-2
(Refers to Fact Pattern #4)
The choice of a production volume level as a denominator
in the computation of fixed overhead rates can significantly
affect reported net income. Which one of the following
statements is correct for Nash Glassworks Company if its
beginning inventory is zero, production exceeded sales, and
variances are adjustments to cost of goods sold? The
choice of
D. Theoretical capacity.
[77] Source: CMA 0696 3-18
Conversion costs do not include
A. Depreciation.
B. Direct materials.
A. Practical capacity as the denominator level will
result in a lower net income amount than if
master-budget capacity is chosen.
C. Indirect labor.
D. Indirect materials.
A. A prime cost.
[78] Source: CMA 0696 3-20
Contribution margin is the excess of revenues over
B. A period cost.
C. A product cost.
A. Cost of goods sold.
D. Both a product cost and a prime cost.
B. Manufacturing cost.
C. Direct cost.
D. All variable costs.
[84] Source: Publisher
The sum of the costs necessary to effect a one-unit increase
in the activity level is a(n)
A. Margin of safety.
[79] Source: CMA 1296 3-3
Conversion cost pricing
A. Places minimal emphasis on the cost of materials
used in manufacturing a product.
B. Opportunity cost.
C. Marginal cost.
D. Incremental cost.
B. Could be used when the customer furnishes the
material used in manufacturing a product.
C. Places heavy emphasis on indirect costs and
disregards consideration of direct costs.
D. Places heavy emphasis on direct costs and
disregards consideration of indirect costs.
[85] Source: Publisher
The costing system appropriate to use with a JIT inventory
system whose costs flow directly to cost of goods sold is
A. Activity-based costing.
B. Variable costing.
[80] Source: CMA 1296 3-29
Life-cycle costing
C. Backflush costing.
D. Absorption costing.
A. Is sometimes used as a basis for cost planning and
product pricing.
B. Includes only manufacturing costs incurred over
the life of the product.
C. Includes only manufacturing cost, selling expense,
and distribution expense.
[86] Source: CMA 1295 3-28
The difference between the sales price and total variable
costs is
A. Gross operating profit.
B. Net profit.
D. Emphasizes cost savings opportunities during the
manufacturing cycle.
C. The breakeven point.
D. The contribution margin.
[81] Source: Publisher
Products of relatively small total value that are produced
simultaneously from a common manufacturing process with
products of greater value and quantity are
[87] Source: Publisher
In a broad sense, cost accounting can best be defined
within the accounting system as
A. Scrap.
B. By-products.
A. Internal and external reporting that may be used in
making nonroutine decisions and in developing plans
and policies.
C. Waste.
D. Abnormal spoilage.
[82] Source: Publisher
Which of the following is a type of costing that refers to the
continuous accumulations of small betterment activities
rather than innovative improvements?
A. Target costing.
B. External reporting to government, various outside
parties, and shareholders.
C. Internal reporting for use in management planning
and control, and external reporting to the extent its
product-costing function satisfies external reporting
requirements.
D. Internal reporting for use in planning and
controlling routine operations.
B. Kaizen costing.
C. Variable costing.
D. Process costing.
[83] Source: CMA 0697 3-1
Which one of the following best describes direct labor?
[88] Source: CMA 1293 3-1
Cost drivers are
A. Activities that cause costs to increase as the
activity increases.
B. Accounting techniques used to control costs.
C. Accounting measurements used to evaluate
whether or not performance is proceeding according
to plan.
D. A mechanical basis, such as machine hours,
computer time, size of equipment, or square footage
of factory, used to assign costs to activities.
[89] Source: Publisher
Spoilage that is not expected to occur under normal,
efficient operating conditions is considered
B. The difference between flexible budget and actual
sales volume, times master budget unit contribution
margin.
C. The difference between flexible budget and master
budget sales volume, times actual unit contribution
margin.
D. The difference between flexible budget and master
budget sales volume, times master budget unit
contribution margin.
A. Abnormal spoilage.
B. Actual spoilage.
[94] Source: Publisher
A cost that may be eliminated by performing an activity
more efficiently is a(n)
C. Normal spoilage.
A. Opportunity cost.
D. Residual spoilage.
B. Avoidable cost.
[90] Source: Publisher
The amount of raw materials left over from a production
process or production cycle for which there is no further
use is
A. Scrap.
B. Abnormal spoilage.
C. Cost driver.
D. Indirect cost.
[95] Source: Publisher
A method which provides a continuous record of the
quantities of inventory is the
C. Waste.
A. Periodic inventory method.
D. Normal spoilage.
B. Step-down method.
C. Perpetual inventory method.
[91] Source: Publisher
The quantity of output divided by the quantity of one input
equals
A. Gross margin.
B. Residual income.
C. Practical capacity.
D. Reciprocal method.
[96] Source: Publisher
The difference between the actual and standard price of an
input, multiplied by the actual quantity equals the
A. Price (rate) variance.
B. Controllable variance.
D. Partial productivity.
C. Spending variance.
[92] Source: CIA 1195 III-79
Residual income is a performance evaluation that is used in
conjunction with return on investment (ROI) or instead of
ROI. In many cases, residual income is preferred over ROI
because
A. Residual income is a measure over time while ROI
represents the results for a single time period.
D. Quantity (usage) variance.
[97] Source: Publisher
Comparing one's own product, service, or practice with the
best known similar activity is
A. Actual costing.
B. Residual income concentrates on maximizing
absolute dollars of income rather than a percentage
return as with ROI.
B. Benchmarking.
C. The imputed interest rate used in calculating
residual income is more easily derived than the target
rate that is compared to the calculated ROI.
D. Budgeting.
D. Average investment is employed with residual
income while year-end investment is employed with
ROI.
[93] Source: CIA 0593 IV-14
The sales volume variance is
A. The difference between actual and master budget
sales volume, times actual unit contribution margin.
C. Backflush costing.
[98] Source: CMA 0697 3-5
Target pricing
A. Is more effective when applied to mature,
long-established products.
B. Considers short-term variable costs and excludes
fixed costs.
C. Is often used when costs are difficult to control.
D. Is a pricing strategy used to create competitive
advantage.
[99] Source: Publisher
The responsibility for safeguarding financial assets and
arranging financing is given to the
A. Controller.
B. Chief financial officer.
C. Comptroller.
mine support braces (MSB) and unseasoned commercial
building lumber (CBL). A standard production run incurs
joint costs of $300,000 and results in 60,000 units of MSB
and 90,000 units of CBL. Each MSB sells for $2 per unit,
and each CBL sells for $4 per unit. Assume the
commercial building lumber is not marketable at split-off
but must be further planed and sized at a cost of $200,000
per production run. During this process, 10,000 units are
unavoidably lost; these spoiled units have no discernible
value. The remaining units of commercial building lumber
are salable at $10.00 per unit. The mine support braces,
although salable immediately at the split-off point, are
coated with a tar-like preservative that costs $100,000 per
production run. The braces are then sold for $5 each.
D. Treasurer.
[100] Source: CMA Samp Q3-6
When compared with normal spoilage, abnormal spoilage
A. Arises more frequently from factors that are
inherent in the manufacturing process.
B. Is given the same accounting treatment as normal
spoilage.
[103] Source: CMA 0690 4-8
(Refers to Fact Pattern #6)
Using the net realizable value (NRV) basis, the completed
cost assigned to each unit of commercial building lumber
would be
A. $2.92.
B. $5.625.
C. $2.50.
C. Is generally thought to be more controllable by
production management than normal spoilage.
D. Is not typically influenced by the "tightness" of
production standards.
[Fact Pattern #5]
Sonimad Sawmill manufactures two lumber products from
a joint milling process. The two products developed are
mine support braces (MSB) and unseasoned commercial
building lumber (CBL). A standard production run incurs
joint costs of $300,000 and results in 60,000 units of MSB
and 90,000 units of CBL. Each MSB sells for $2 per unit,
and each CBL sells for $4 per unit.
[101] Source: CMA 0690 4-6
(Refers to Fact Pattern #5)
Assuming no further processing work is done after the
split-off point, the amount of joint cost allocated to
commercial building lumber (CBL) on a physical quantity
allocation basis would be
A. $75,000.
B. $180,000.
D. $5.3125.
[104] Source: CMA 0690 4-9
(Refers to Fact Pattern #6)
If Sonimad Sawmill chose not to process the mine support
braces beyond the split-off point, the contribution from the
joint milling process would be
A. $50,000 higher.
B. $100,000 higher.
C. $150,000 higher.
D. $80,000 lower.
[Fact Pattern #7]
Killian Company manufactures two skin care lotions,
Liquid Skin and Silken Skin, out of a joint process. The
joint (common) costs incurred are $420,000 for a standard
production run that generates 180,000 gallons of Liquid
Skin and 120,000 gallons of Silken Skin. Liquid Skin sells
for $2.40 per gallon, and Silken Skin sells for $3.90 per
gallon.
C. $225,000.
D. $120,000.
[102] Source: CMA 0690 4-7
(Refers to Fact Pattern #5)
If there are no further processing costs incurred after the
split-off point, the amount of joint cost allocated to the mine
support braces (MSB) on a relative sales value basis would
be
[105] Source: CMA 0689 4-21
(Refers to Fact Pattern #7)
Assuming both products are sold at the split-off point, the
amount of joint cost of each production run allocated to
Liquid Skin on a net realizable value (NRV) basis is
A. $168,000.
B. $201,600.
C. $218,400.
A. $75,000.
D. $252,000.
B. $180,000.
C. $225,000.
D. $120,000.
[Fact Pattern #6]
Sonimad Sawmill manufactures two lumber products from
a joint milling process. The two products developed are
[106] Source: CMA 0689 4-22
(Refers to Fact Pattern #7)
If no additional costs are incurred after the split-off point,
the amount of joint cost of each production run allocated to
Silken Skin on a physical-quantity basis is
A. $168,000.
B. $201,600.
C. $218,400.
D. $252,000.
[107] Source: CMA 0689 4-23
(Refers to Fact Pattern #7)
If additional processing costs beyond the split-off point are
$1.40 per gallon for Liquid Skin and $.90 per gallon for
Silken Skin, the amount of joint cost of each production run
allocated to Silken Skin on a net realizable value basis is
A. $140,000.
B. $168,000.
[110] Source: CIA 1192 IV-6
The following data pertain to a company's
cracking-department operations in December.
Units Completion
------- ---------Work-in-process, December 1
20,000
50%
Units started
170,000
Units completed and
transferred to the
distilling department
180,000
Work-in-process, December 31 10,000
50%
Materials are added at the beginning of the process and
conversion costs are incurred uniformly throughout the
process. Assuming use of the FIFO method of process
costing, the equivalent units of conversion performed during
December were
C. $252,000.
A. 170,000 equivalent units.
D. $280,000.
B. 175,000 equivalent units.
C. 180,000 equivalent units.
[108] Source: CMA 0689 4-24
D. 185,000 equivalent units.
(Refers to Fact Pattern #7)
If additional processing costs beyond the split-off point are
$1.40 per gallon for Liquid Skin and $.90 per gallon for
Silken Skin, the amount of joint cost of each production run
allocated to Liquid Skin on a physical-quantity basis is
A. $140,000.
B. $168,000.
C. $252,000.
D. $280,000.
[109] Source: CIA 0593 IV-5
A company employs a process cost system using the
first-in, first-out (FIFO) method. The product passes
through both Department 1 and Department 2 in order to
be completed. Units enter Department 2 upon completion
in Department 1. Additional direct materials are added in
Department 2 when the units have reached the 25% stage
of completion with respect to conversion costs. Conversion
costs are added proportionally in Department 2. The
production activity in Department 2 for the current month
was as follows:
[Fact Pattern #8]
A company has two service departments, Power and
Maintenance, and two production departments, Machining
and Assembly. All costs are regarded as strictly variable.
For September the following information is available:
Production
Service Departments
Departments
------------------- ------------------Power Maintenance Machining Assembly
------- ----------- --------- -------Direct costs
$62,500 $40,000
$25,000 $15,000
Actual activity:
Kilowatt hrs.
50,000
150,000 50,000
Maintenance
hours
250
1,125 1,125
[111] Source: CIA 0594 III-75
(Refers to Fact Pattern #8)
If the company uses the direct method for allocating service
departments costs to production departments, what dollar
amount of Power Department cost will be allocated to the
Machining Department for September?
A. $37,500
Beginning work-in-process inventory (40%
complete with respect to conversion costs) 15,000
Units transferred in from Department 1
80,000
-----Units to account for
95,000
======
Units completed and transferred to finished
goods
85,000
Ending work-in-process inventory (25%
complete with respect to conversion costs) 10,000
-----Units accounted for
95,000
======
How many equivalent units for direct materials were added
in Department 2 for the current month?
B. $15,625
C. $39,062.50
D. $46,875
[112] Source: CIA 0594 III-76
(Refers to Fact Pattern #8)
If the company uses the direct method for allocating service
departments costs to production departments, what dollar
amount of Power Department cost will be allocated to the
Maintenance Department for September?
A. $17,544
A. 70,000 units.
B. $12,500
B. 80,000 units.
C. $15,625
C. 85,000 units.
D. $0
D. 90,000 units.
[113] Source: CIA 0594 III-77
(Refers to Fact Pattern #8)
Assume the company uses the sequential or step method
for allocating service department costs to production
departments. The company begins with the service
department which receives the least service from other
service departments. What dollar amount of Power
Department costs will be allocated to the Maintenance
Department for September?
A. $0
B. $12,500
C. $6,250
D. $8,000
and the number of production runs that may be
performed in a year.
[117] Source: CIA 0590 IV-3
The loan department of a financial corporation makes loans
to businesses. The costs of processing these loans are often
several thousand dollars. The costs for each loan, which
include labor, telephone, and travel, are significantly
different across loans. Some loans require the use of
outside services such as appraisals, legal services, and
consulting services, whereas other loans do not require
these services. The most appropriate cost accumulation
method for the loan department of the corporation is
A. Job-order costing.
B. Process costing.
[114] Source: CIA 1193 IV-7
A manufacturing firm has a normal spoilage rate of 4% of
the units inspected; anything over this rate is considered
abnormal spoilage. Final inspection occurs at the end of the
manufacturing process. The firm employs the first-in,
first-out (FIFO) method of inventory flow. The processing
for the current month was as follows:
Beginning work-in-process inventory 24,600 units
Units entered into production
470,400 units
Units completed and passing
inspection
(460,800) units
Units failing final inspection
(22,600) units
-------Ending work-in-process inventory
11,600 units
========
The equivalent units assigned to normal and abnormal
spoilage for the current month would be
Normal
Abnormal
Spoilage
Spoilage
----------------------A. 904 units 21,696 units
C. Differential costing.
D. Joint product costing.
[118] Source: CIA 1187 IV-5
Which of the industries listed is most likely to use process
costing in accounting for production costs?
A. Road builder.
B. Electrical contractor.
C. Newspaper publisher.
D. Clothing manufacturing.
[119] Source: Publisher
Operation costing is appropriate for products that are
A. Unique.
B. 18,432 units 4,168 units
B. Produced in batches or production runs.
C. 18,816 units 3,784 units
C. Homogeneous.
D. 19,336 units 3,264 units
D. Related to food and beverage industries.
[115] Source: CIA 0578 IV-1
Job-order costs are most useful for
[120] Source: Publisher
Which component of the product usually varies by product
type in operation-costing systems?
A. Determining inventory valuation using LIFO.
A. Direct materials.
B. Estimating the overhead costs included in transfer
prices.
B. Direct labor.
C. Controlling indirect costs of future production.
C. Overhead.
D. Determining the cost of a specific project.
D. Conversion costs.
[116] Source: CIA 1186 IV-4
Job-order cost accounting systems and process-cost
accounting systems differ in the way
[121] Source: Publisher
Operation costing is a product-costing system best
described as
A. Manufacturing costs are assigned to production
runs and the number of units for which costs are
averaged.
A. Job-order costing.
B. Orders are taken and the number of units in the
orders.
C. Direct costing.
B. Process costing.
D. A blend of job-order and process costing.
C. Product-profitability is determined and compared
with planned costs.
D. Manufacturing processes can be accomplished
[122] Source: Publisher
Which manufacturing operation would not be suited to
operation costing?
B. 420, 700.
A. Shoes.
C. 700, 420.
B. Clothing.
D. 700, 700.
C. Furniture manufactured with production runs of
each style, type, etc.
D. Oil refining.
[123] Source: CIA 1188 IV-6
A company uses weighted-average process costing for the
product it manufactures. All direct materials are added at
the beginning of production, and conversion costs are
applied evenly during production. The following data apply
to the past month:
Total units in beginning inventory
(30% complete as to conversion costs)
1,500
Total units transferred to finished
goods inventory
7,400
Total units in ending inventory
(60% complete as to conversion costs)
2,300
Assuming no spoilage, equivalent units of conversion costs
total
A. 8,330.
B. 8,780.
[126] Source: CIA 0586 IV-6
A company that manufactures baseballs begins operations
on January 1. Each baseball requires three elements: a hard
plastic core, several yards of twine that are wrapped
around the plastic core, and a piece of leather to cover the
baseball. The plastic core is started down a conveyor belt
and is automatically wrapped with twine to the approximate
size of a baseball at which time the leather cover is sewn to
the wrapped twine. Finished baseballs are inspected and
defective ones are pulled out. Defective baseballs cannot
be economically salvaged and are destroyed. Normal
spoilage is 3% of the number of baseballs that pass
inspection. Cost and production reports for the first week
of operations are:
Raw materials cost
Conversion cost
$840
315
-----$1,155
======
During the week 2,100 baseballs were completed and
2,000 passed inspection. There was no ending
work-in-process. Calculate abnormal spoilage.
C. 9,230.
A. $33.
D. 9,700.
B. $20.35.
C. $22.
[124] Source: CIA 0591 IV-4
A company manufactures a product that passes through
two production departments, molding and assembly. Direct
materials are added in the assembly department when
conversion is 50% complete. Conversion costs are
incurred uniformly. The activity in units for the assembly
department during April is as follows:
Units
-----Work-in-process inventory, April 1
(60% complete as to conversion costs)
5,000
Transferred in from molding department
32,000
Defective at final inspection
(within normal limits)
2,500
Transferred out to finished goods
inventory
28,500
Work-in-process inventory, April 30
(40% complete as to conversion costs)
6,000
The number of equivalent units for direct materials in the
assembly department for April calculated on the
weighted-average basis is
A. 26,000 units.
B. 28,500 units.
C. 31,000 units.
D. $1,100.
[127] Source: CIA 0587 IV-5
Assume 550 units were worked on during a period in
which a total of 500 good units were completed. Normal
spoilage consisted of 30 units; abnormal spoilage, 20 units.
Total production costs were $2,200. The company
accounts for abnormal spoilage separately on the income
statement as loss due to abnormal spoilage. Normal
spoilage is not accounted for separately. What is the cost
of the good units produced?
A. $2,080.
B. $2,120.
C. $2,200.
D. $2,332.
[128] Source: CIA 1190 IV-9
The normal spoilage rate for a company is 5% of normal
input. A current job consisted of 31,000 total units, of
which 28,500 good units were produced and 2,500 units
were defective. The amount of abnormal spoilage on this
job is
D. 34,000 units.
A. 950 units.
[125] Source: Publisher
If inspection is at the 60% point of the process and
defective units are removed upon inspection, how many
equivalent units of production (EUP) would be assigned to
normal and abnormal spoilage, respectively, if 700 units of
each were found during the period?
A. 420, 420.
B. 1,000 units.
C. 1,075 units.
D. 1,550 units.
[129] Source: CIA 0586 IV-11
A company processes a raw material into products F1, F2,
and F3. Each ton of raw material produces five units of F1,
two units of F2, and three units of F3. Joint-processing
costs to the split-off point are $15 per ton. Further
processing results in the following per-unit figures:
F1 F2 F3
--- --- --Additional processing costs per unit $28 $30 $25
Selling price per unit
30 35 35
If joint costs are allocated based on the net realizable value
of finished product, what proportion of joint costs should
be allocated to F1?
A. 20%.
B. 30%.
$714
$286
$750
$250
D.
[132] Source: CIA 0587 IV-6
A lumber company produces two-by-fours and
four-by-eights as joint products and sawdust as a
by-product. The packaged sawdust can be sold for $2 per
pound. Packaging costs for the sawdust are $.10 per
pound and sales commissions are 10% of sales price. The
by-product net revenue serves to reduce joint processing
costs for joint products. Joint products are assigned joint
costs based on board feet. Data follows:
Joint processing costs
$ 50,000
Two-by-fours produced (board feet)
200,000
Four-by-eights produced (board feet)
100,000
Sawdust produced (pounds)
1,000
What is the cost assigned to two-by-fours?
C. 33-1/3%.
D. 50%.
A. $32,000.
[130] Source: CIA 1185 IV-11
A company manufactures products X and Y using a joint
process. The joint processing costs are $10,000. Products
X and Y can be sold at split-off for $12,000 and $8,000,
respectively. After split-off, product X is processed further
at a cost of $5,000 and sold for $21,000, whereas product
Y is sold without further processing. If the company uses
the net realizable value method for allocating joint costs, the
joint cost allocated to X is
A. $5,000.
B. $6,000.
C. $6,667.
D. $10,000.
[131] Source: CIA 1184 IV-23
A cheese company produces natural cheese from cow's
milk. As a result of the process, a secondary product,
whey, is produced in the proportion of one pound for each
pound of cheese. The data give the standards set for 1,000
pounds of cow's milk:
Input: 1,000 pounds of cow's milk at $.20/pound
40 hours of labor at $10/hour
Overhead is applied on a basis of 100% of direct labor
cost
Output: 450 pounds of cheese
450 pounds of whey
The following prices and demand are expected:
Price per Pound
Demand in Pounds
-----------------------------Cheese
$2.00
450
Whey
.80
375
Given that the cheese company allocates common costs on
the basis of net realizable values, the allocated common
costs per 1,000 pounds of cow's milk for cheese and whey
would be (rounded to nearest dollar), respectively,
Common Cost Allocation
---------------------To Cheese
To Whey
--------------A.
$450
$150
$500
$500
B.
C.
B. $32,133.
C. $32,200.
D. $33,333.
[133] Source: CMA 1294 4-1
Copeland Inc. produces X-547 in a joint manufacturing
process. The company is studying whether to sell X-547 at
the split-off point or upgrade the product to become
Xylene. The following information has been gathered:
I. Selling price per pound of X-547
II. Variable manufacturing costs of upgrade process
III. Avoidable fixed costs of upgrade process
IV. Selling price per pound of Xylene
V. Joint manufacturing costs to produce X-547
Which items should be reviewed when making the upgrade
decision?
A. I, II, and IV.
B. I, II, III, and IV.
C. All items.
D. I, II, IV, and V.
[Fact Pattern #9]
Madtack Company's beginning and ending inventories for
the month of November are
November 1 November 30
---------- ----------Direct materials
$ 67,000
$ 62,000
Work-in-process
145,000
171,000
Finished goods
85,000
78,000
Production data for the month of November follows:
Direct labor
$200,000
Actual factory overhead
132,000
Direct materials purchased
163,000
Transportation in
4,000
Purchase returns and allowances 2,000
Madtack uses one factory overhead control account and
charges factory overhead to production at 70% of direct
labor cost. The company does not formally recognize
over/underapplied overhead until year-end.
[134] Source: CMA 1295 3-19
(Refers to Fact Pattern #9)
Madtack Company's prime cost for November is
----A. $370,000
B. $168,000
C. $363,000
D. $170,000
[135] Source: CMA 1295 3-20
(Refers to Fact Pattern #9)
Madtack Company's total manufacturing cost for
November is
Total units to account for
6,000
=====
Units completed and transferred out from BI 1,000
Units started and completed during November 3,000
Work-in-process on November 30
(20% complete as to conversion costs)
2,000
----Total units accounted for
6,000
=====
[139] Source: CMA 1286 4-14
(Refers to Fact Pattern #10)
Using the FIFO method, the equivalent units for direct
materials for November are
A. $502,000
A. 5,000 units.
B. $503,000
B. 6,000 units.
C. $363,000
C. 4,400 units.
D. $510,000
D. 3,800 units.
[136] Source: CMA 1295 3-21
(Refers to Fact Pattern #9)
Madtack Company's cost of goods transferred to finished
goods inventory for November is
[140] Source: CMA 1286 4-15
(Refers to Fact Pattern #10)
Using the FIFO method, the equivalent units for conversion
costs for November are
A. $469,000
A. 3,400 units.
B. $477,000
B. 3,800 units.
C. $495,000
C. 4,000 units.
D. $484,000
D. 4,400 units.
[137] Source: CMA 1295 3-22
(Refers to Fact Pattern #9)
Madtack Company's cost of goods sold for November is
A. $484,000
[141] Source: CMA 1286 4-16
(Refers to Fact Pattern #10)
Using the weighted-average method, the equivalent units
for direct materials for November are
B. $491,000
A. 3,400 units.
C. $502,000
B. 4,400 units.
D. $476,000
C. 5,000 units.
D. 6,000 units.
[138] Source: CMA 1295 3-23
(Refers to Fact Pattern #9)
Madtack Company's net charge to factory overhead
control for the month of November is
A. $8,000 debit, overapplied.
[142] Source: CMA 1286 4-17
(Refers to Fact Pattern #10)
Using the weighted-average method, the equivalent units
for conversion costs for November are
B. $8,000 debit, underapplied.
A. 3,400 units.
C. $8,000 credit, overapplied.
B. 3,800 units.
D. $8,000 credit, underapplied.
C. 4,000 units.
D. 4,400 units.
[Fact Pattern #10]
Levittown Company employs a process cost system for its
manufacturing operations. All direct materials are added at
the beginning of the process and conversion costs are
added proportionately. Levittown's production quantity
schedule for November is reproduced as follows.
Units
----Work-in-process on November 1
(60% complete as to conversion costs)
1,000
Units started during November
5,000
[Fact Pattern #11]
Zeta Company is preparing its annual profit plan. As part of
its analysis of the profitability of individual products, the
controller estimates the amount of overhead that should be
allocated to the individual product lines from the
information given as follows:
Wall Specialty
Mirrors Windows
------- ---------
Units produced
25
Material moves per product
line
5
15
Direct labor hours per unit 200
Budgeted materials handling
costs
$50,000
25
200
[143] Source: CMA 0694 3-25
(Refers to Fact Pattern #11)
Under a costing system that allocates overhead on the basis
of direct labor hours, the materials handling costs allocated
to one unit of wall mirrors would be
(Refers to Fact Pattern #12)
Using the direct method, the total amount of overhead
allocated to each machine hour at Rochester Manufacturing
would be
A. $2.40.
B. $5.25.
C. $8.00.
D. $15.65.
A. $1,000
[147] Source: CMA 0691 3-19
(Refers to Fact Pattern #12)
If Rochester Manufacturing uses the step-down method of
allocating service costs beginning with quality control, the
maintenance costs allocated to the assembly department
would be
B. $500
C. $2,000
D. $5,000
A. $70,000.
[144] Source: CMA 0694 3-26
(Refers to Fact Pattern #11)
Under activity-based costing (ABC), the materials handling
costs allocated to one unit of wall mirrors would be
A. $1,000
B. $108,000.
C. $162,000.
D. $200,000.
B. $500
[148] Source: CMA 0691 3-20
(Refers to Fact Pattern #12)
If Rochester Manufacturing uses the reciprocal method of
allocating service costs, the total amount of quality control
costs (rounded to the nearest dollar) to be allocated to the
other departments would be
C. $1,500
D. $2,500
[Fact Pattern #12]
The managers of Rochester Manufacturing are discussing
ways to allocate the cost of service departments such as
Quality Control and Maintenance to the production
departments. To aid them in this discussion, the controller
has provided the following information:
Qual. Cont. Maintenance Machining Assembly
A. $284,211.
B. $336,842.
C. $350,000.
D. $421,053.
Total
----------- ----------- --------- -------- ---------Budgeted overhead
costs before
allocation
$350,000 $200,000 $400,000 $300,000
$1,250,000
Budgeted machine
hours
--50,000 -50,000
Budgeted direct
---25,000 25,000
labor hours
Budgeted hours of
service:
Quality control
-7,000 21,000 7,000
35,000
Maintenance
10,000
-18,000 12,000
40,000
[145] Source: CMA 0691 3-16
(Refers to Fact Pattern #12)
If Rochester Manufacturing uses the direct method of
allocating service department costs, the total service costs
allocated to the assembly department would be
[149] Source: CMA 0691 3-18
(Refers to Fact Pattern #12)
If Rochester Manufacturing decides not to allocate service
costs to the production departments, the overhead
allocated to each direct labor hour in the Assembly
Department would be
A. $3.20.
B. $3.50.
C. $12.00.
D. $16.00.
[150] Source: CMA 1273 4-1
Which of the following statements is true for a firm that uses
variable costing?
A. $80,000.
A. The cost of a unit of product changes because of
changes in number of units manufactured.
B. $87,500.
B. Profits fluctuate with sales.
C. $120,000.
C. An idle facility variation is calculated.
D. $167,500.
D. Product costs include "direct" (variable)
administrative costs.
[146] Source: CMA 0691 3-17
[151] Source: CMA 1273 4-2
When a firm prepares financial reports by using absorption
costing,
A. Profits will always increase with increases in sales.
[155] Source: CMA 1286 4-19
(Refers to Fact Pattern #14)
Using absorption (full) costing, inventoriable costs are
A. $400,000.
B. $450,000.
B. Profits may decrease with increased sales even if
there is no change in selling prices and costs.
C. Decreased output and constant sales result in
increased profits.
D. Profits will always decrease with decreases in
sales.
[Fact Pattern #13]
Osawa, Inc. planned and actually manufactured 200,000
units of its single product in its first year of operations.
Variable manufacturing costs were $30 per unit of product.
Planned and actual fixed manufacturing costs were
$600,000 and selling and administrative costs totaled
$400,000. Osawa sold 120,000 units of product that year
at a selling price of $40 per unit.
[152] Source: CMA 1285 4-14
(Refers to Fact Pattern #13)
Osawa's operating income using absorption (full) costing is
A. $200,000.
B. $440,000.
C. $600,000.
C. $530,000.
D. $590,000.
[Fact Pattern #15]
Valyn Corporation employs an absorption costing system
for internal reporting purposes; however, the company is
considering using variable costing. Data regarding Valyn's
planned and actual operations for the calendar year are
presented.
Planned Actual
Activity Activity
-------- -------Beginning finished goods
inventory in units
35,000 35,000
Sales in units
140,000 125,000
Production in units
140,000 130,000
The planned per unit cost figures shown in the next
schedule were based on the estimated production and sale
of 140,000 units for the year. Valyn uses a predetermined
manufacturing overhead rate for applying manufacturing
overhead to its product; thus, a combined manufacturing
overhead rate of $9.00 per unit was employed for
absorption costing purposes. Any over- or underapplied
manufacturing overhead is closed to the cost of goods sold
account at the end of the reporting year.
D. $840,000.
[153] Source: CMA 1285 4-15
(Refers to Fact Pattern #13)
Osawa's operating income using variable (direct) costing is
A. $200,000.
B. $440,000.
C. $800,000.
D. $600,000.
[Fact Pattern #14]
This data was taken from Valenz Company's records for
the fiscal year ended November 30.
Direct materials used
$300,000
Direct labor
100,000
Variable factory overhead
50,000
Fixed factory overhead
80,000
Selling and admin. costs-variable
40,000
Selling and admin. costs-fixed
20,000
[154] Source: CMA 1286 4-18
(Refers to Fact Pattern #14)
If Valenz Company uses variable (direct) costing, the
inventoriable costs for the fiscal year are
A. $400,000.
Planned Costs
--------------------- Incurred
Per Unit
Total
Costs
-------- ---------- ---------Direct materials
$12.00 $1,680,000 $1,560,000
Direct labor
9.00 1,260,000 1,170,000
Variable manufacturing
overhead
4.00
560,000 520,000
Fixed manufacturing
overhead
5.00
700,000 715,000
Variable selling expenses
8.00 1,120,000
1,000,000
Fixed selling expenses
7.00
980,000 980,000
Variable administrative
expenses
2.00
280,000 250,000
Fixed administrative
expenses
3.00
420,000 425,000
------ ---------- ---------Total
$50.00 $7,000,000 $6,620,000
====== ========== ==========
The beginning finished goods inventory for absorption
costing purposes was valued at the previous year's planned
unit manufacturing cost, which was the same as the current
year's planned unit manufacturing cost. There are no
work-in-process inventories at either the beginning or the
end of the year. The planned and actual unit selling price for
the current year was $70.00 per unit.
[156] Source: CMA 1290 3-24
(Refers to Fact Pattern #15)
The value of Valyn Corporation's current year actual
ending finished goods inventory under the absorption
costing basis was
B. $450,000.
A. $900,000.
C. $490,000.
B. $1,200,000.
D. $530,000.
C. $1,220,000.
D. $1,350,000.
[157] Source: CMA 1290 3-25
(Refers to Fact Pattern #15)
The value of Valyn Corporation's actual ending finished
goods inventory on the variable costing basis was
[162] Source: CMA 1290 3-30
(Refers to Fact Pattern #15)
The difference between Valyn Corporation's operating
income calculated on the absorption costing basis and
calculated on the variable costing basis was
A. $65,000.
A. $1,400,000.
B. $25,000.
B. $1,125,000.
C. $40,000.
C. $1,000,000.
D. $90,000.
D. $750,000.
[158] Source: CMA 1290 3-29
(Refers to Fact Pattern #15)
Valyn Corporation's absorption costing operating income
for the year was
[163] Source: CMA 1292 3-5
Absorption costing and variable costing are two different
methods of assigning costs to units produced. Of the
following five cost items listed, identify the one that is not
correctly accounted for as a product cost.
A. Higher than variable costing operating income
because actual production exceeded actual sales.
Part of Product
Cost under
-------------------Absorption Variable
Cost
Cost
---------- --------
B. Lower than variable costing operating income
because actual production exceeded actual sales.
C. Lower than variable costing operating income
because actual production was less than planned
production.
A.
Manufacturing supplies
B.
Yes
Yes
D. Lower than variable costing operating income
because actual sales were less than planned sales.
Insurance on factory
C.
[159] Source: CMA 1290 3-28
(Refers to Fact Pattern #15)
Valyn Corporation's total fixed costs expensed under the
absorption costing basis were
Yes
Direct labor cost
D.
No
Yes
Packaging and shipping costs
Yes
Yes
Yes
A. $2,095,000.
B. $2,120,000.
C. $2,055,000.
[164] Source: CMA 1292 3-6
The costing method that is properly classified for both
external and internal reporting purposes is
D. $2,030,000.
[160] Source: CMA 1290 3-26
(Refers to Fact Pattern #15)
Valyn Corporation's actual manufacturing contribution
margin calculated under the variable costing basis was
A. $4,375,000.
External Internal
Reporting Reporting
--------- --------A.
Activity-based costing
B.
Job costing
C.
Yes
No
Yes
Yes
B. $4,935,000.
Variable costing
D.
Yes
No
C. $4,910,000.
D. $5,625,000.
Process costing
No
Yes
[161] Source: CMA 1290 3-27
(Refers to Fact Pattern #15)
The total variable cost currently expensed by Valyn
Corporation under the variable costing basis was
A. $4,375,000.
B. $4,500,000.
[165] Source: CMA 1292 3-26
Jansen, Inc. pays bonuses to its managers based on
operating income. The company uses absorption costing,
and overhead is applied on the basis of direct labor hours.
To increase bonuses, Jansen's managers may do all of the
following except
A. Produce those products requiring the most direct
labor.
C. $4,325,000.
D. $4,550,000.
B. Defer expenses such as maintenance to a future
period.
C. Increase production schedules independent of
customer demands.
D. Nonvariable direct costs are treated as product
costs.
D. Decrease production of those items requiring the
most direct labor.
[166] Source: CIA 0593 IV-10
Data from the duplicating department of a company for the
last 2 months are as follows:
Duplicating
Number of copies Department's
made
Costs
---------------- -----------January
100,000
$8,500
February
150,000
9,500
What is total variable cost at 110,000 copies?
A. $1,100
[170] Source: CIA 1186 IV-8
Under variable (direct) costing, fixed manufacturing
overhead costs are classified as
A. Administrative costs.
B. Selling costs.
C. Inventoriable costs.
D. Period costs.
[171] Source: CIA 1187 IV-9
Which of the following is an argument against the use of
direct (variable) costing?
B. $2,200
C. $5,500
A. Absorption costing overstates the balance sheet
value of inventories.
D. $7,920
B. Variable factory overhead is a period cost.
[167] Source: CIA 1193 IV-10
The management of a company computes net income using
both the absorption and variable costing approaches to
product costing. This year, the net income under the
variable costing approach was greater than the net income
under the absorption costing approach. This difference is
most likely the result of
A. A decrease in the variable marketing expenses.
B. An increase in the finished goods inventory.
C. Sales volume exceeding production volume.
D. Inflationary effects on overhead costs.
[168] Source: CIA 0594 III-46
When comparing absorption costing with variable costing,
which of the following statements is not true?
A. Absorption costing enables managers to increase
operating profits in the short run by increasing
inventories.
B. When sales volume is more than production
volume, variable costing will result in higher operating
profit.
C. A manager who is evaluated based on variable
costing operating profit would be tempted to increase
production at the end of a period in order to get a
more favorable review.
D. Under absorption costing, operating profit is a
function of both sales volume and production volume.
[169] Source: CIA 0577 IV-18
In the application of direct costing as a cost-allocation
process in manufacturing,
A. Variable direct costs are treated as period costs.
B. Nonvariable indirect costs are treated as product
costs.
C. Variable indirect costs are treated as product
costs.
C. Fixed factory overhead is difficult to allocate
properly.
D. Fixed factory overhead is necessary for the
production of a product.
[172] Source: CIA 1187 IV-51
Assuming absorption costing, which of the following
columns includes only product costs?
A B C D
-----------------------------------------------Direct labor
X
X X
Direct materials
X X
X
Sales materials
X
Advertising costs
X
Indirect factory materials
X X
X
Indirect labor
X X X
Sales commissions
X
Factory utilities
X
X X
Administrative supplies expense
X
Administrative labor
X
Depreciation on administration
building
X
Cost of research on customer
demographics
X
-----------------------------------------------A. A.
B. B.
C. C.
D. D.
[173] Source: CIA 0585 IV-5
The Blue Company has failed to reach its planned activity
level during its first 2 years of operation. The following
table shows the relationship among units produced, sales,
and normal activity for these years and the projected
relationship for Year 3. All prices and costs have remained
the same for the last 2 years and are expected to do so in
Year 3. Income has been positive in both Year 1 and Year
2.
Units Produced Sales Planned Activity
-------------- ------ ----------------
Year 1
90,000
90,000
100,000
Year 2
95,000
95,000
100,000
Year 3
90,000
90,000
100,000
Because Blue Company uses an absorption-costing
system, one would predict gross margin for Year 3 to be
[176] Source: CIA 0584 IV-7
(Refers to Fact Pattern #16)
Assuming the average variable cost per unit of the new
order is $7.17, the expected contribution margin per unit of
the new order is
A. Greater than Year 1.
A. $.08
B. Greater than Year 2.
B. $.25
C. Equal to Year 1.
C. $.33
D. Equal to Year 2.
D. $.42
[174] Source: CIA 0584 IV-1
A company manufactures a single product for its customers
by contracting in advance of production. Therefore, the
company produces only units that will be sold by the end of
each period. During the last period, the following sales
were made and costs incurred:
Sales
$40,000
Direct materials
9,050
Direct labor
6,050
Rent (9/10 factory, 1/10 office)
3,000
Depreciation on factory equipment
2,000
Supervision (2/3 factory, 1/3 office)
1,500
Salespeople's salaries
1,300
Insurance (2/3 factory, 1/3 office)
1,200
Office supplies
750
Advertising
700
Depreciation on office equipment
500
Interest on loan
300
Based on the given data, the gross margin percentage for
the last period (rounded to nearest percent) was
[Fact Pattern #17]
Product sales: 1,000 units at $10 each
Variable manufacturing costs: $5.50 per unit
Fixed manufacturing overhead: $1,200
Variable selling and administrative costs: $.50 per unit sold
Fixed selling and administrative costs: $1,000
No beginning inventory
Units produced: 1,200
[177] Source: CIA 0591 IV-13
(Refers to Fact Pattern #17)
Operating income under variable (direct) costing is
A. $600
B. $700
C. $1,800
D. $2,300
A. 34%
B. 41%
C. 44%
D. 46%
[178] Source: CIA 0591 IV-14
(Refers to Fact Pattern #17)
Assuming operating income under variable costing is
$1,800, operating income under absorption costing is
A. $1,800
B. $1,967
[Fact Pattern #16]
Kirklin Co. is a manufacturer operating at 95% of capacity.
Kirklin has been offered a new order at $7.25 per unit
requiring 15% of capacity. No other use of the 5% current
idle capacity can be found. However, if the order were
accepted, the subcontracting for the required 10%
additional capacity would cost $7.50 per unit. The variable
cost of production for Kirklin on a per-unit basis follows:
Materials
$3.50
Labor
1.50
Variable overhead
1.50
----$6.50
=====
[175] Source: CIA 0584 IV-6
(Refers to Fact Pattern #16)
In applying the contribution margin approach to evaluating
whether to accept the new order, assuming subcontracting,
what is the average variable cost per unit?
C. $2,000
D. $2,167
[179] Source: CIA 1190 IV-12
During its first year of operations, a company produced
275,000 units and sold 250,000 units. The following costs
were incurred during the year:
Variable costs per unit:
Direct materials
$15.00
Direct labor
10.00
Manufacturing overhead
12.50
Selling and administrative
2.50
Total fixed costs:
Manufacturing overhead
$2,200,000
Selling and administrative
1,375,000
What is the difference between operating income calculated
on the absorption-costing basis and on the variable-costing
basis?
A. $6.83
B. $7.00
C. $7.17
A. Absorption-costing operating income is greater
than variable-costing operating income by $200,000.
B. Absorption-costing operating income is greater
than variable-costing operating income by $220,000.
D. $7.25
C. Absorption-costing operating income is greater
than variable-costing operating income by $325,000.
D. Variable-costing operating income is greater than
absorption-costing operating income by $62,500.
at the rate of $25 per machine hour, and Job ICU2
required 800 machine hours. If Job ICU2 resulted in 7,000
good shirts, the cost of goods sold per unit would be
A. $6.50
[Fact Pattern #18]
A sporting goods manufacturer buys wood as a direct
material for baseball bats. The Forming Department
processes the baseball bats, and the bats are then
transferred to the Finishing Department where a sealant is
applied. The Forming Department began manufacturing
10,000 "Casey Sluggers" during the month of May. There
was no beginning inventory.
Costs for the Forming Department for the month of May
were as follows:
Direct materials
$33,000
Conversion costs
17,000
------Total
$50,000
=======
A total of 8,000 bats were completed and transferred to
the Finishing Department; the remaining 2,000 bats were
still in the forming process at the end of the month. All of
the Forming Department's direct materials were placed in
process, but, on average, only 25% of the conversion cost
was applied to the ending work-in-process inventory.
[180] Source: CMA 0696 3-3
(Refers to Fact Pattern #18)
The cost of the units transferred to the Finishing
Department is
A. $50,000
B. $6.30
C. $5.70
D. $5.50
[184] Source: CMA 0696 3-30
New-Rage Cosmetics has used a traditional cost
accounting system to apply quality control costs uniformly
to all products at a rate of 14.5% of direct labor cost.
Monthly direct labor cost for Satin Sheen makeup is
$27,500. In an attempt to distribute quality control costs
more equitably, New-Rage is considering activity-based
costing. The monthly data shown in the chart below have
been gathered for Satin Sheen makeup.
Quantity for
Activity
Cost Driver
Cost Rates Satin Sheen
----------------- ---------------- --------------- -----------Incoming material
inspection
Type of material $11.50 per type 12 types
In-process
inspection
Number of units $0.14 per unit 17,500
units
Product
certification Per order
$77 per order 25 orders
The monthly quality control cost assigned to Satin Sheen
makeup using activity-based costing is
B. $40,000
A. $88.64 per order.
C. $53,000
D. $42,400
B. $525.50 lower than the cost using the traditional
system.
C. $8,500.50
[181] Source: CMA 0696 3-4
(Refers to Fact Pattern #18)
The cost of the work-in-process inventory in the Forming
Department at the end of May is
A. $10,000
B. $2,500
C. $20,000
D. $7,600
D. $525.50 higher than the cost using the traditional
system.
[185] Source: CMA 1296 3-18
Which one of the following alternatives correctly classifies
the business application to the appropriate costing system?
Job Costing System
Process Costing System
---------------------- -------------------------A.
Wallpaper manufacturer
[182] Source: CMA 0696 3-19
If the beginning balance for May of the materials inventory
account was $27,500, the ending balance for May is
$28,750, and $128,900 of materials were used during the
month, the materials purchased during the month cost
Aircraft assembly
B. $127,650
Public accounting firm
C.
Paint manufacturer
A. $101,400
Oil refinery
B.
Retail banking
D.
Print shop
Beverage drink manufacturer
C. $130,150
D. $157,650
[183] Source: CMA 0696 3-29
Lucy Sportswear manufactures a specialty line of T-shirts
using a job-order cost system. During March, the following
costs were incurred in completing Job ICU2: direct
materials, $13,700; direct labor, $4,800; administrative,
$1,400; and selling, $5,600. Factory overhead was applied
[186] Source: CIA 1193 IV-4
During the current accounting period, a manufacturing
company purchased $70,000 of raw materials, of which
$50,000 of direct materials and $5,000 of indirect
materials were used in production. The company also
incurred $45,000 of total labor costs and $20,000 of other
factory overhead costs. An analysis of the work-in-process
control account revealed $40,000 of direct labor costs.
Based upon the above information, what is the total amount
accumulated in the factory overhead control account?
P1 . . . . .
50%
30%
P2 . . . . .
40%
50%
What are the total allocated service department costs to P2
if the company uses the reciprocal method of allocating its
service department costs? (Round calculations to the
nearest whole number.)
A. $25,000
B. $30,000
C. $45,000
D. $50,000
A. $19,800
B. $21,949
[187] Source: CMA Samp Q3-5
Pane Company uses a job costing system and applies
overhead to products on the basis of direct labor cost. Job
No. 75, the only job in process on January 1, had the
following costs assigned as of that date: direct materials,
$40,000; direct labor, $80,000; and factory overhead,
$120,000. The following selected costs were incurred
during the year:
Traceable to jobs:
Direct materials
$178,000
Direct labor
345,000 $523,000
-------Not traceable to jobs:
Factory materials and
supplies
46,000
Indirect labor
235,000
Plant maintenance
73,000
Depreciation on factory
equipment
29,000
Other factory costs
76,000 459,000
-------Pane's profit plan for the year included budgeted direct
labor of $320,000 and factory overhead of $448,000.
Assuming no work-in-process on December 31, Pane's
overhead for the year was
C. $22,500
D. $23,051
[190] Source: CIA 0595 III-89
In comparing the FIFO (first-in, first-out) and
weighted-average methods for calculating equivalent units
A. The FIFO method tends to smooth costs out
more over time than the weighted-average method.
B. The weighted-average method is more precise
than the FIFO method because the weighted-average
method is based only on the work completed in the
current period.
C. The two methods will give similar results even if
physical inventory levels and the production costs
(material and conversion costs) fluctuate greatly from
period to period.
D. The FIFO method is better than the
weighted-average method for judging the
performance in a period independently from
performance in preceding periods.
A. $11,000 overapplied.
B. $24,000 overapplied.
[191] Source: CIA 0595 III-94
A company allocates overhead to jobs in process using
direct labor costs, raw material costs, and machine hours.
The overhead application rates for the current year are
C. $11,000 underapplied.
D. $24,000 underapplied.
[188] Source: CIA 0594 III-47
Which of the following statements about activity-based
costing is not true?
A. Activity-based costing is useful for allocating
marketing and distribution costs.
B. Activity-based costing is more likely to result in
major differences from traditional costing systems if
the firm manufactures only one product rather than
multiple products.
C. In activity-based costing, cost drivers are what
cause costs to be incurred.
100% of direct labor
20% of raw materials
$117 per machine hour
A particular production run incurred the following costs:
Direct labor, $8,000
Raw materials, $2,000
A total of 140 machine hours were required for the
production run.
What is the total cost that would be charged to the
production run?
A. $18,000
B. $18,400
C. $34,780
D. Activity-based costing differs from traditional
costing systems in that products are not
cross-subsidized.
[189] Source: CIA 1194 III-49
A company has two service departments (S1 and S2) and
two production departments (P1 and P2). Departmental
data for January were as follows:
S1
-------
S2
------$27,000
Costs incurred:
Service provided to:
S1 . . . . .
-S2 . . . . .
10%
20%
--
$18,000
D. None of the answers are correct.
[192] Source: CIA 1195 III-41
Cost allocation is the process of assigning indirect costs to
a cost object. The indirect costs are grouped in cost pools
and then allocated by a common allocation base to the cost
object. The base that is employed to allocate a
homogeneous cost pool should
A. Have a cause-and-effect relationship with the cost
items in the cost pool.
B. Assign the costs in the pool uniformly to cost
objects even if the cost objects use resources in a
nonuniform way.
D. $6.30
C. Be a nonfinancial measure (e.g., number of setups)
because a nonfinancial measure is more objective.
D. Have a high correlation with the cost items in the
cost pool as the sole criterion for selection.
[Fact Pattern #19]
Believing that its traditional cost system may be providing
misleading information, an organization is considering an
activity based costing (ABC) approach. It now employs a
full cost system and has been applying its manufacturing
overhead on the basis of machine hours.
[195] Source: CIA 1196 III-84
A manufacturing company has a continuous flow cycle that
employs simplified activities in a short manufacturing cycle.
The company produces a single product with a minimal
defect rate. The product costing system that this company
would most likely use for its manufacturing operations is
A. Activity-based costing.
B. Job-order costing.
C. Operation costing.
The organization plans on using 50,000 direct labor hours
and 30,000 machine hours in the coming year. The
following data show the manufacturing overhead that is
budgeted.
Budgeted Budgeted
Activity
Cost Driver
Activity
Cost
----------------- -------------------- --------- ----------Material handling No. of parts handled 6,000,000 $
720,000
Setup costs
No. of setups
750
315,000
Machining costs Machine hours
30,000
540,000
Quality control No. of batches
500
225,000
----------Total manufacturing overhead cost: $ 1,800,000
===========
Cost, sales, and production data for one of the
organization's products for the coming year are as follows:
Prime costs:
-----------Direct material cost per unit
$4.40
Direct labor cost per unit
.05 DLH @ $15.00/DLH
.75
----Total prime cost
$5.15
=====
Sales and production data:
-------------------------Expected sales
20,000 units
Batch size
5,000 units
Setups
2 per batch
Total parts per finished unit
5 parts
Machine hours required
80 MH per batch
[193] Source: CIA 1195 III-93
(Refers to Fact Pattern #19)
If the organization uses the traditional full cost system, the
cost per unit for this product for the coming year would be
D. Process costing.
[196] Source: CIA 0596 III-77
Three commonly employed systems for product costing are
job-order costing, operation costing, and process costing.
Match the type of production environment with the costing
method used.
Job-Order Costing
Operation Costing
Process
Costing
------------------ ---------------------- ------------------A.
Auto repair
B.
Clothing manufacturing Oil refining
Loan processing
printing
C.
Drug manufacturing
Custom printing
manufacturing
D.
Paint manufacturing
Custom
Paper
Engineering design Auto assembly
Motion
picture
production
[Fact Pattern #20]
A company employs a process costing system for its
two-department manufacturing operation using the first-in,
first-out (FIFO) inventory method. When units are
completed in Department 1, they are transferred to
Department 2 for completion. Inspection takes place in
Department 2 immediately before the direct materials are
added, when the process is 70% complete with respect to
conversion. The specific identification method is used to
account for lost units.
A. $5.39
B. $5.44
C. $6.11
D. $6.95
[194] Source: CIA 1195 III-94
(Refers to Fact Pattern #19)
If the organization employs an activity based costing
system, the cost per unit for the product described for the
coming year would be
A. $6.00
B. $6.08
C. $6.21
The number of defective units (that is, those failing
inspection) is usually below the normal tolerance limit of
4% of units inspected. Defective units have minimal value,
and the company sells them without any further processing
for whatever it can. Generally, the amount collected equals,
or slightly exceeds, the transportation cost. A summary of
the manufacturing activity for Department 2, in units for the
current month, is presented below.
Physical Flow
(output units)
-------------Beginning inventory (60% complete with
respect to conversion)
20,000
Units transferred in from Department 1
180,000
Total units to account for
200,000
Units completed in Department 2 during
the month
170,000
Units found to be defective at inspection
5,000
Ending inventory (80% complete with
respect to conversion)
Total units accounted for
25,000
200,000
[197] Source: CIA 1196 III-85
(Refers to Fact Pattern #20)
The equivalent units for direct materials for the current
month would be
[200] Source: CIA 0596 III-83
(Refers to Fact Pattern #21)
If the company employs the step method to allocate the
costs of the service departments and if information services
costs are allocated first, then the total amount of service
department costs (Information Services and Building
Operations) allocated to finishing would be
A. 175,000 units.
A. $657,000
B. 181,500 units.
B. $681,600
C. 195,000 units.
C. $730,000
D. 200,000 units.
D. $762,000
[198] Source: CIA 1196 III-86
(Refers to Fact Pattern #20)
The units that failed inspection during the current month
would be classified as
A. Abnormal spoilage.
B. Normal scrap.
C. Normal reworked units.
D. Normal waste.
[201] Source: CIA 0596 III-99
A company with three products classifies its costs as
belonging to five functions: design, production, marketing,
distribution, and customer services. For pricing purposes,
all company costs are assigned to the three products. The
direct costs of each of the five functions are traced directly
to the three products. The indirect costs of each of the five
business functions are collected into five separate cost
pools and then assigned to the three products using
appropriate allocation bases. The allocation base that
would most likely be the best for allocating the indirect
costs of the distribution function is
A. Number of customer phone calls.
[Fact Pattern #21]
Fabricating and Finishing are the two production
departments of a manufacturing company. Building
Operations and Information Services are service
departments that provide support to the two production
departments as well as to each other. The company
employs departmental overhead rates in the two production
departments to allocate the service department costs to the
production departments. Square footage is used to allocate
building operations, and computer time is used to allocate
information services. The costs of the service departments
and relevant operating data for the departments are as
follows:
Building Information
Operations Services
B. Number of shipments.
C. Number of sales persons.
D. Dollar sales volume.
[202] Source: CMA 0680 4-5
The cost associated with abnormal spoilage ordinarily
would be charged to
A. Inventory.
B. A material variance account.
Fabricating
Finishing
C. Manufacturing overhead.
---------- ----------- ----------- ---------
Costs:
----Labor and benefit costs $200,000 $ 300,000
other traceable costs
350,000
900,000
-------- ---------Total
$550,000 $1,200,000
======== ==========
Operating Data:
-------------Square feet occupied
5,000
10,000
16,000
24,000
Computer time (in hours)
200
1,200
600
[199] Source: CIA 0596 III-82
(Refers to Fact Pattern #21)
If the company employs the direct method to allocate the
costs of the service departments, then the amount of
building operations costs allocated to Fabricating would be
A. $140,000
D. A special loss account
[203] Source: CMA 0697 3-4
Smile Labs develops 35mm film using a four-step process
that moves progressively through four departments. The
company specializes in overnight service and has the
largest
drug store chain as its primary customer. Currently, direct
labor, direct materials, and overhead are accumulated by
department. The cost accumulation system that best
describes the system Smile Labs is using is
A. Operation costing.
B. Activity-based costing.
C. Job-order costing.
D. Process costing.
B. $160,000
C. $176,000
D. $220,000
[Fact Pattern #22]
Kimbeth Manufacturing uses a process cost system to
manufacture Dust Density Sensors for the mining industry.
The following information pertains to operations for the
month of May:
Units
------Beginning work-in-process inventory,
May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory,
May 31
24,000
The beginning inventory was 60% complete for materials
and 20% complete for conversion costs. The ending
inventory was 90% complete for materials and 40%
complete for conversion costs. Costs pertaining to the
month of May are as follows:
ｷ Beginning inventory costs are materials, $54,560;
direct labor, $20,320; and factory overhead, $15,240.
ｷ Costs incurred during May are materials used, $468,000;
direct labor, $182,880; and factory overhead, $391,160.
[204] Source: CMA 0695 3-1
(Refers to Fact Pattern #22)
Using the first-in, first-out (FIFO) method, the equivalent
units of production (EUP) for materials are
(Refers to Fact Pattern #22)
Using the FIFO method, the total cost of units in the ending
work-in-process inventory at May 31 is
A. $153,168
B. $154,800
C. $155,328
D. $156,960
[209] Source: CMA 0695 3-6
(Refers to Fact Pattern #22)
Using the weighted-average method, the equivalent unit
cost of materials for May is
A. $4.12
B. $4.50
C. $4.60
D. $5.02
A. 97,600 units.
B. 104,000 units.
C. 107,200 units.
D. 108,000 units.
[205] Source: CMA 0695 3-2
(Refers to Fact Pattern #22)
Using the FIFO method, the equivalent units of production
for conversion costs are
[210] Source: CMA 0695 3-7
(Refers to Fact Pattern #22)
Using the weighted-average method, the equivalent unit
conversion cost for May is
A. $5.65
B. $5.83
C. $6.00
D. $6.20
A. 85,600 units.
B. 88,800 units.
C. 95,200 units.
D. 98,400 units.
[206] Source: CMA 0695 3-3
(Refers to Fact Pattern #22)
Using the FIFO method, the equivalent unit cost of
materials for May is
[211] Source: CMA 0695 3-8
(Refers to Fact Pattern #22)
Using the weighted-average method, the total cost of the
units in the ending work-in-process inventory at May 31 is
A. $99,360
B. $153,168
C. $154,800
D. $156,960
A. $4.12
B. $4.50
C. $4.60
D. $4.80
[207] Source: CMA 0695 3-4
(Refers to Fact Pattern #22)
Using the FIFO method, the equivalent unit conversion cost
for May is
A. $5.65
B. $5.83
C. $6.00
D. $6.20
[208] Source: CMA 0695 3-5
[212] Source: CMA 1290 3-4
Units of production is an appropriate overhead allocation
base when
A. Several well-differentiated products are
manufactured.
B. Direct labor costs are low.
C. Direct material costs are large relative to direct
labor costs incurred.
D. Only one product is manufactured.
[213] Source: CMA 0696 3-21
The appropriate method for the disposition of underapplied
or overapplied factory overhead
A. Is to cost of goods sold only.
B. Is to finished goods inventory only.
Department?
C. Is apportioned to cost of goods sold and finished
goods inventory.
A. Zero.
D. Depends on the significance of the amount.
B. $875
C. $7,000
[Fact Pattern #23]
The Photocopying Department provides photocopy
services for both Departments A and B and has prepared
its total budget using the following information for next year:
Fixed costs
Available capacity
Budgeted usage
Department A
Department B
Variable cost
$100,000
4,000,000 pages
1,200,000 pages
2,400,000 pages
$0.03 per page
[214] Source: CMA 0697 3-6
(Refers to Fact Pattern #23)
Assume that the single-rate method of cost allocation is
used and the allocation base is budgeted usage. How much
photocopying cost will be allocated to Department B in the
budget year?
A. $72,000
B. $122,000
C. $132,000
D. $138,667
[215] Source: CMA 0697 3-7
(Refers to Fact Pattern #23)
Assume that the dual-rate cost allocation method is used
and the allocation basis is budgeted usage for fixed costs
and actual usage for variable costs. How much cost would
be allocated to Department A during the year if actual
usage for Department A is 1,400,000 pages and actual
usage for Department B is 2,100,000 pages?
A. $42,000
B. $72,000
C. $75,333
D. $82,000
D. $11,667
[217] Source: CMA 0697 3-9
(Refers to Fact Pattern #24)
Using the step-down method of allocation, the allocation
from the Repair Department to the Tool Department would
be
A. Zero.
B. $875
C. $7,000
D. $11,667
[Fact Pattern #25]
A manufacturer began operations on October 1 . It buys
wood as a direct material for the production of floor lamps.
The company's Forming Department processes the lamp
frames, and the frames are then transferred to the Finishing
Department where a sealant is applied. The Forming
Department began manufacturing 10,000 lamps during the
month of October. Costs for the Forming Department for
the month of October were as follows:
Direct materials $66,000
Conversion costs 34,000
A total of 6,000 lamp frames were completed and
transferred to the Finishing Department; the remaining
4,000 lamps were still in the forming process at the end of
the month. All of the Forming Department's direct materials
were placed in process, but on average, only 25% of the
conversion cost was applied to the ending work-in-process
inventory.
[218] Source: Publisher
(Refers to Fact Pattern #25)
The cost of the units transferred to the Finishing
Department (after rounding each calculation to the nearest
cent) is
A. $68,760
[Fact Pattern #24]
M&P Tool has three service departments that support the
production area. Outlined below is the estimated overhead
by department for the upcoming year.
Estimated
Number of
Service Departments
Overhead
Employees
-------------------------------------------------------------Receiving
$25,000
2
Repair
35,000
2
Tool
10,000
1
Production Departments
---------------------Assembly
25
Bolting
12
The Repair Department supports the greatest number of
departments, followed by the Tool Department. Overhead
cost is allocated to departments based upon the number of
employees.
[216] Source: CMA 0697 3-8
(Refers to Fact Pattern #24)
Using the direct method of allocation, how much of the
Repair Department's overhead will be allocated to the Tool
B. $60,000
C. $39,600
D. $29,160
[219] Source: Publisher
(Refers to Fact Pattern #25)
The cost (after rounding each calculation to the nearest
cent) of the work-in-process inventory in the Forming
Department at the end of October is
A. $11,460
B. $26,400
C. $31,260
D. $45,840
[220] Source: Publisher
If the beginning monthly balance of materials inventory was
$37,000, the ending balance was $39,500, and $257,800
of materials were used, the cost of materials purchased
during the month was
A. $255,300
B. $257,800
C. $260,300
D. $297,300
[221] Source: Publisher
Felicity Corporation manufactures a specialty line of
dresses using a job-order cost system. During January, the
following costs were incurred in completing job J-1:
Direct materials
$27,400
Direct labor
9,600
Administrative costs
2,800
Selling costs
11,200
Factory overhead was applied at the rate of $50 per direct
labor hour, and job J-1 required 400 direct labor hours. If
job J-1 resulted in 4,000 good dresses, the cost of goods
sold per unit is
A. $9.25
Work-in-process
145,000
170,000
Finished goods
85,000
70,000
Production data for the month of October are
Direct labor
$220,000
Actual factory overhead
145,200
Direct materials purchased
179,300
Transportation in
4,400
Purchase returns and allowances
2,200
Mednick uses one factory overhead control account and
charges factory overhead to production at 70% of direct
labor cost. The company does not formally recognize overor underapplied overhead until year-end.
[223] Source: Publisher
(Refers to Fact Pattern #26)
Mednick Company's prime costs for October were
A. $408,500
B. $188,500
C. $181,500
D. $365,200
[224] Source: Publisher
(Refers to Fact Pattern #26)
Mednick Company's total manufacturing costs incurred
during October were
B. $14.25
A. $553,700
C. $14.95
B. $569,500
D. $17.75
C. $408,500
[222] Source: Publisher
Davis Corporation has used a traditional cost accounting
system to apply quality control costs uniformly to all
products at a rate of 15% of direct labor cost. Monthly
direct labor cost for its main product is $30,000. In an
attempt to distribute quality control costs more equitably,
Davis is considering activity-based costing (ABC). The
monthly data shown below have been gathered for the main
product. The three activities are (1) incoming materials
inspection, (2) in-process inspection, and (3) product
certification. Costs are to be allocated to each activity on
the basis of cost drivers.
D. $562,500
[225] Source: Publisher
(Refers to Fact Pattern #26)
Mednick Company's cost of goods transferred to finished
goods inventory for October was
A. $543,700
B. $552,500
C. $528,700
Quantity
for Main
Activity Cost Driver
Cost Rate
Product
-------- ---------------------------- -----------(1)
Number of types
of materials
$12 per type
12 types
(2)
Number of units
$0.14 per unit 17,500 units
(3)
Number of orders
$77 per order 30 orders
The monthly quality control cost assigned to the main
product using ABC is
D. $537,500
[226] Source: Publisher
(Refers to Fact Pattern #26)
Mednick Company's cost of goods sold for October was
A. $537,500
B. $552,500
A. $150 per order.
C. $522,500
B. $404 lower than using the traditional system.
D. $543,700
C. $4,500
D. $404 higher than using the traditional system.
[Fact Pattern #26]
Mednick Company's beginning and ending inventories for
the month of October are
[227] Source: Publisher
(Refers to Fact Pattern #26)
Mednick Company's net debit or credit to factory
overhead control for the month of October was
A. Debit of $8,800 overapplied.
October 1 October 31
--------- ---------Direct materials $ 67,000 $ 60,000
B. Debit of $8,800 underapplied.
C. Credit of $8,800 overapplied.
A. $32,000
D. Credit of $8,800 underapplied.
B. $33,280
[228] Source: CMA 1296 3-19
Generally, individual departmental rates rather than a
plantwide rate for applying overhead would be used if
A. A company wants to adopt a standard cost
system.
B. A company's manufacturing operations are all
highly automated.
C. Manufacturing overhead is the largest cost
component of its product cost.
D. The manufactured products differ in the resources
consumed from the individual departments in the
plant.
C. $36,280
D. $40,000
[232] Source: Publisher
(Refers to Fact Pattern #27)
Using the weighted-average method, what is the value
(rounded) of the ending work-in-process inventory in the
first processing department?
A. $6,720
B. $8,000
C. $3,720
D. $0
[229] Source: CMA 1296 3-28
The use of activity-based costing normally results in
A. Substantially greater unit costs for low-volume
products than is reported by traditional product
costing.
B. Substantially lower unit costs for low-volume
products than is reported by traditional product
costing.
C. Decreased setup costs being charged to
low-volume products.
[233] Source: Publisher
(Refers to Fact Pattern #27)
Assume that this company uses first-in, first-out (FIFO) for
inventory costing instead of the weighted-average inventory
valuation. If materials used in production cost $15,000 and
conversion costs incurred were $25,000, what amount of
inventory (rounded) was transferred to the next department
under FIFO?
A. $32,000
B. $33,280
D. Equalizing setup costs for all product lines.
C. $36,280
[230] Source: CMA 1293 3-15
Multiple or departmental overhead rates are considered
preferable to a single or plantwide overhead rate when
A. Manufacturing is limited to a single product
flowing through identical departments in a fixed
sequence.
B. Various products are manufactured that do not
pass through the same departments or use the same
manufacturing techniques.
C. Cost drivers, such as direct labor, are the same
over all processes.
D. Individual cost drivers cannot accurately be
determined with respect to cause-and-effect
relationships.
[Fact Pattern #27]
A company uses a process costing system in which all
materials are added at the beginning of the first process.
Conversion costs are added evenly throughout the process.
During the past month, 10,000 units were started in
production and 8,.000 were completed and transferred to
the next department. There were no beginning inventories.
The ending inventories were 70% complete at the end of
the month. The company uses a weighted-average method
for inventory valuation.
[231] Source: Publisher
(Refers to Fact Pattern #27)
If materials used in production cost $15,000 and
conversion costs incurred were $25,000, what amount of
inventory (rounded) was transferred to the next
department?
D. $40,000
[Fact Pattern #28]
Rebel Corporation uses a process-costing system.
Products are manufactured in a series of three departments.
The following data relate to Department Two for the month
of February:
Beginning work-in-process (70% complete) 10,000 units
Goods started in production
80,000 units
Ending work-in-process (60% complete)
5,000 units
The beginning work-in-process was valued at $66,000,
consisting of $20,000 of transferred-in costs, $30,000 of
materials costs, and $16,000 of conversion costs.
Materials are added at the beginning of the process;
conversion costs are added evenly throughout the process.
Costs added to production during February were
Transferred-in
$16,000
Materials used
88,000
Conversion costs
50,000
All preliminary and final calculations are rounded to two
decimal places.
[234] Source: Publisher
(Refers to Fact Pattern #28)
Under the weighted-average method, how much
conversion cost did Rebel Corporation transfer out of
Department Two during February?
A. $69,259
B. $63,750
C. $66,000
D. $5,500
D. $64,148
[235] Source: Publisher
(Refers to Fact Pattern #28)
Under the weighted-average method, how much materials
cost did Rebel Corporation transfer out of Department
Two during February?
[240] Source: Publisher
(Refers to Fact Pattern #28)
Assuming the company uses the FIFO method of inventory
valuation, what amount of materials cost is included in the
ending work-in-process inventory?
A. $1,860
A. $88,000
B. $3,300
B. $93,500
C. $5,500
C. $111,350
D. $6,450
D. $112,500
[236] Source: Publisher
(Refers to Fact Pattern #28)
Under the weighted-average method, what is the total of
equivalent units for transferred-in costs for the month?
A. 75,000 units.
B. 80,000 units.
C. 81,000 units.
D. 90,000 units.
[237] Source: Publisher
(Refers to Fact Pattern #28)
Assume that the company uses the first-in, first-out (FIFO)
method of inventory valuation. Under FIFO, how much
conversion cost did Rebel Corporation transfer out of
Department Two during February?
A. $63,750
B. $64,360
C. $66,000
[Fact Pattern #29]
Albany Mining Corporation uses a process costing system
for its ore extraction operations. The following information
pertains to work-in-process inventories and operations for
the month of May:
Completion %
----------------------Units
Materials Conversion
--------------- ---------BWIP on May 1
32,000
60%
20%
Started in production 200,000
Completed production 184,000
EWIP on May 31
48,000
90%
40%
Costs for the month were as follows:
BWIP
Incurred in May
--------------------Materials
$54,560
$ 468,000
Direct labor
20,320
182,880
Factory overhead
15,240
391,160
---------------$90,120
$1,042,040
=======
==========
[241] Source: Publisher
(Refers to Fact Pattern #29)
Under the FIFO method, the equivalent units of materials
are
D. $74,500
A. 195,200 units.
[238] Source: Publisher
(Refers to Fact Pattern #28)
Assume that the company uses the first-in, first-out (FIFO)
method of inventory valuation. Under FIFO, how much
materials cost did Rebel Corporation transfer out of
Department Two during February?
A. $88,000
B. $111,350
B. 208,000 units.
C. 214,400 units.
D. 227,200 units.
[242] Source: Publisher
(Refers to Fact Pattern #29)
Under the FIFO method, the equivalent units of conversion
cost are
C. $112,500
A. 171,200 units.
D. $114,615
B. 177,600 units.
[239] Source: Publisher
(Refers to Fact Pattern #28)
Assuming the company uses the FIFO method of inventory
valuation, conversion costs included in the ending
work-in-process inventory equal
A. $1,860
B. $2,250
C. $3,100
C. 184,000 units.
D. 196,800 units.
[243] Source: Publisher
(Refers to Fact Pattern #29)
Under the FIFO method, the equivalent-unit cost of
materials for May is
A. $2.06
B. $2.25
C. $2.30
D. $2.51
[244] Source: Publisher
(Refers to Fact Pattern #29)
Using the FIFO method, the equivalent-unit conversion
cost for May is
[249] Source: CIA 0597 III-75
Activity-based costing (ABC) is increasingly more feasible
because of technological advances that allow managers to
obtain better and more timely information at relatively low
cost. For this reason, a manufacturer is considering using
bar-code identification for recording information on parts
used by the manufacturer. A reason to use bar codes rather
than other means of identification is to ensure that
A. The movement of all parts is recorded.
A. $2.92
B. $3.00
B. The movement of parts is easily and quickly
recorded.
C. $3.10
C. Vendors use the same part numbers.
D. $3.23
D. Vendors use the same identification methods.
[245] Source: Publisher
(Refers to Fact Pattern #29)
Under the FIFO method, the total cost of units in the
ending work-in-process inventory at May 31 is (round unit
costs to the nearest whole cent)
A. $153,264
B. $154,800
C. $155,424
D. $156,960
[246] Source: Publisher
(Refers to Fact Pattern #29)
Using the weighted-average method, the equivalent-unit
cost of materials for May is
A. $2.06
B. $2.25
C. $2.30
D. $2.51
[247] Source: Publisher
(Refers to Fact Pattern #29)
Under the weighted-average method, the equivalent-unit
conversion cost for May is
[250] Source: Publisher
ALF Co. is an assisted-living facility that provides services
in the form of residential space, meals, and other occupant
assistance (OOA) to its occupants. ALF currently uses a
traditional cost accounting system that defines the service
provided as assisted living, with service output measured in
terms of occupant days. Each occupant is charged a daily
rate equal to ALF's annual cost of providing residential
space, meals, and OOA divided by total occupant days.
However, an activity-based costing (ABC) analysis has
revealed that occupants' use of OOA varies substantially.
This analysis determined that occupants could be grouped
into three categories (low, moderate, and high usage of
OOA) and that the activity driver of OOA is nursing hours.
The driver of the other activities is occupant days. The
following quantitative information was also provided:
Annual
Annual
Occupant Category Occupant Days Nursing Hours
----------------- --------------- --------------Low usage
36,000
90,000
Medium usage
18,000
90,000
High usage
6,000
120,000
--------------- --------------60,000
300,000
=============== ===============
The total annual cost of OOA was $7.5 million, and the
total annual cost of providing residential space and meals
was $7.2 million. Accordingly, the ABC analysis indicates
that the daily costing rate should be
A. $182.50 for occupants in the low-usage category.
B. $145.00 for occupants in the medium-usage
category.
A. $2.92
C. $245.00 for occupants in the high-usage category.
B. $3.00
D. $620.00 for all occupants.
C. $3.10
D. $3.31
[248] Source: Publisher
(Refers to Fact Pattern #29)
Using the weighted-average method, the total cost of the
ending work-in-process inventory at May 31 is
A. $153,264
B. $154,800
C. $155,424
D. $156,960
[251] Source: CMA 0693 3-2
Because of changes that are occurring in the basic
operations of many firms, all of the following represent
trends in the way indirect costs are allocated except
A. Treating direct labor as an indirect manufacturing
cost in an automated factory.
B. Using throughput time as an application base to
increase awareness of the costs associated with
lengthened throughput time.
C. Preferring plant-wide application rates that are
applied to machine hours rather than incurring the
cost of detailed allocations.
D. Using several machine cost pools to measure
product costs on the basis of time in a machine
center.
[252] Source: CMA 1292 3-2
In allocating factory service department costs to producing
departments, which one of the following items would most
likely be used as an activity base?
A. Units of product sold.
B. Salary of service department employees.
C. Units of electric power consumed.
D. Direct materials usage.
[253] Source: Publisher
The cost of goods manufactured for Toddler Toys for the
year 2000 was $860,000. Beginning work-in-process
inventory was $50,000. Ending work-in-process was
$60,000. If the beginning finished goods inventory was
$500,000 and the ending finished goods inventory was
$990,000, what was the cost of goods sold for the year?
in the table below.
Northcoast Manufacturing Company
Budgeted Annual Costs
for Total Factory Overhead
Units of product
360,000 540,000 720,000
Labor hours
30,000 36,000 42,000
Machine hours
72,000 108,000 144,000
Total factory overhead costs:
Plant supervision
$ 70,000 $ 70,000 $ 70,000
Plant rent
40,000 40,000 40,000
Equipment depreciation 288,000 432,000 576,000
Maintenance
42,000 51,000 60,000
Utilities
144,600 216,600 288,600
Indirect material
90,000 135,000 180,000
Other costs
11,200 16,600 22,000
-------- -------- ---------Total
$685,800 $961,200 $1,236,600
======== ======== ==========
[254] Source: Publisher
(Refers to Fact Pattern #30)
What is the predetermined overhead application rate for
the year?
A. 1.78
B. 1.83
A. $360,000
C. 2.09
B. $370,000
D. 2.15
C. $490,000
D. $1,350,000
[Fact Pattern #30]
Northcoast Manufacturing Company, a small manufacturer
of parts used in appliances, has just completed its first year
of operations. The company's controller, Vic Trainor, has
been reviewing the actual results for the year and is
concerned about the application of factory overhead.
Trainor is using the following information to assess
operations.
- Northcoast's equipment consists of several
machines with a combined cost of $2,200,000
and no residual value. Each machine has an
output of five units of product per hour and
a useful life of 20,000 hours.
- Selected actual data of Northcoast's operations
for the year just ended is presented below.
Products manufactured
650,000 units
Machine utilization
130,000 hours
Direct labor usage
35,000 hours
Labor rate
$15 per hour
Total factory overhead
$1,130,000
Cost of goods sold
$1,720,960
Finished goods inventory
(at year-end)
$430,240
Work-in-process inventory
(at year-end)
$0
- Total factory overhead is applied to direct
labor cost using a predetermined plant-wide rate.
- The budgeted activity for the year included
20 employees each working 1,800 productive
hours per year to produce 540,000 units of
product. The machines are highly automated,
and each employee can operate two to four
machines simultaneously. Normal activity
is for each employee to operate two to four
machines simultaneously. Normal activity
is for each employee to operate three machines.
Machine operators are paid $15 per hour.
- Budgeted factory overhead costs for the past
year for various levels of activity are shown
[255] Source: Publisher
(Refers to Fact Pattern #30)
How much is factory overhead overapplied/underapplied?
A. $195,500 overapplied.
B. $168,800 overapplied.
C. $168,800 underapplied.
D. $195,500 underapplied.
[256] Source: Publisher
(Refers to Fact Pattern #30)
What is the amount of underapplied overhead allocated to
cost of goods sold?
A. $0
B. $39,100
C. $156,400
D. $195,500
[257] Source: Publisher
(Refers to Fact Pattern #30)
If machine hours were used as the application base, what
would be Northcoast's predetermined overhead rate?
A. $10.46 per machine hour.
B. $8.90 per machine hour.
C. $8.69 per machine hour.
D. $7.39 per machine hour.
[Fact Pattern #31]
Jackson Products
Schedule of Cost of Goods Manufactured
For the Year Ended December 31 (in thousands)
Direct materials:
Beginning inventory
$17,000
Purchases of direct materials
70,000
------Cost of direct materials available for use $87,000
Ending inventory
9,000
Direct materials used
$ 78,000
Direct manufacturing labor
9,000
Indirect manufacturing costs:
Indirect manufacturing labor
$ 8,000
Supplies
1,000
Heat, light, and power
4,000
Depreciation--plant building
2,000
Depreciation--plant equipment
3,000
Miscellaneous
2,000
------20,000
-------Manufacturing costs incurred during the period
$107,000
Add beginning work-in-process inventory
11,000
-------Total manufacturing costs to account for
$118,000
Deduct ending work-in-process inventory
7,000
-------Cost of goods manufactured (to Income Statement)
$111,000
========
[258] Source: Publisher
(Refers to Fact Pattern #31)
What are Jackson's prime costs for the year?
to take corrective steps. Corolla, on the other hand,
maintains that the Mixing Department is operating properly.
He has prepared the following report for the Mixing
Department to support his contention.
Romano Foods -- Mixing Department
Production Cost Report
Month ended November 30
Good
10% Normal Abnormal Good
Input Units Total Cost Output Units Spoilage Spoilage
Unit Cost
120,000 $45,360
107,000
12,000 1,000
$.42
Budgeted unit cost
$0.435
Actual cost per good unit
0.420
-----Favorable variance
$0.015
======
Cost Reconciliation
------------------Cost of 107,000 good units @ $.42 each
$44,940
Abnormal spoilage (charge to purchasing for buying
inferior materials): 1,000 units @ $.42 each
420
------Total cost
$45,360
=======
[260] Source: Publisher
(Refers to Fact Pattern #32)
After revising Joe Corolla's production cost report for
November, what are the number of units of abnormal
spoilage?
A. 0
B. 1,000
A. $20,000
C. 1,300
B. $79,000
D. 2,300
C. $87,000
D. $98,000
[259] Source: Publisher
(Refers to Fact Pattern #31)
What are Jackson's conversion costs for the year?
[261] Source: Publisher
(Refers to Fact Pattern #32)
After revising Joe Corolla's production cost report for
November, what is the total cost of good units?
A. $40,446
B. $44,490.60
A. $4,000
C. $44,940
B. $20,000
D. $45,360
C. $29,000
D. $98,000
[Fact Pattern #32]
Romano Foods, Inc. manufactures Fresh Frozen Pizzas
that are 12 inches in diameter and retail for $4.69 to $5.99,
depending upon the topping. The company employs a
process costing system in which the product flows through
several processes. Joe Corolla, vice president of
production, has had a long-running disagreement with the
controller, Sue Marshall, over the handling of spoilage
costs. Corolla resists every attempt to charge production
with variance responsibilities unless they are favorable.
Spoilage costs have not been significant in the past, but, in
November, the Mixing Department had a substantial
amount of spoilage. Traditionally, Romano Foods has
treated 10% of good output as normal spoilage. The
department input 120,000 units of ingredients, and 13,000
dough units were rejected at inspection. Marshall is
concerned about the abnormal spoilage and wants Corolla
[262] Source: Publisher
(Refers to Fact Pattern #32)
What is the total cost of abnormal spoilage?
A. $420
B. $869.40
C. $966
D. $4,914
[Fact Pattern #33]
Kristina Company, which manufactures quality paint sold at
premium prices, uses a single production department.
Production begins with the blending of various chemicals,
which are added at the beginning of the process, and ends
with the canning of the paint. Canning occurs when the
mixture reaches the 90% stage of completion. The gallon
cans are then transferred to the Shipping Department for
crating and shipment. Labor and overhead are added
continuously throughout the process. Factory overhead is
applied on the basis of direct labor hours at the rate of
$3.00 per hour.
Prior to May, when a change in the process was
implemented, work-in-process inventories were
insignificant. The change in the process enables greater
production but results in material amounts of
work-in-process for the first time. The company has
always used the weighted average method to determine
equivalent production and unit costs. Now, production
management is considering changing from the weighted
average method to the first-in, first-out method.
C. $9.93
D. $9.52
[266] Source: Publisher
(Refers to Fact Pattern #33)
Using the FIFO method, what is the cost per equivalent
unit for the conversion element?
A. $1.90
B. $1.98
C. $2.23
D. $2.33
Costs for May
------------Work-in-process inventory, May 1 (4,000 gallons 25%
complete)
Direct materials-chemicals
$ 45,600
Direct labor ($10 per hour)
6,250
Factory overhead
1,875
May costs added
Direct materials-chemicals
228,400
Direct materials-cans
7,000
Direct labor ($10 per hour)
35,000
Factory overhead
10,500
Units for May
------------Gallons
------Work-in-process inventory, May 1 (25% complete)
4,000
Sent to Shipping Department
20,000
Started in May
21,000
Work-in-process inventory, May 31 (80% complete)
5,000
[263] Source: Publisher
(Refers to Fact Pattern #33)
Using the weighted-average method, how many conversion
equivalent units were produced?
[267] Source: CMA Samp Q3-4
Juniper Manufacturing uses a weighted-average process
costing system at its satellite plant. Goods pass from the
Major Assembly Department to the Finishing Department
to finished goods inventory. The goods are inspected twice
in the Finishing Department. The first inspection occurs
when the goods are 30% complete, and the second
inspection occurs at the end of production. The following
data pertain to the Finishing Department for the month of
July.
Units
-----Good units started and completed during July
65,000
Normal spoilage - first inspection
2,000
Abnormal spoilage - second inspection
150
Ending work-in-process inventory, 60% complete
15,000
There was no beginning work-in-process inventory in July.
Juniper recognizes spoiled units to make the cost of all
spoilage visible in its management reporting. What are the
equivalent units for assigning costs for July?
A. 74,000
A. 20,000
B. 74,150
B. 21,000
C. 74,600
C. 24,000
D. 74,750
D. 25,000
[264] Source: Publisher
(Refers to Fact Pattern #33)
Using the FIFO method, how many conversion equivalent
units were produced?
A. 16,000
[269] Source: CMA 0683 4-8
(Refers to Fact Pattern #34)
The budgeted total volume of 250,000 units was based
upon Xerbert's achieving a market share of 10%. Actual
industry volume was 2,580,000 units. Xerbert's increased
volume owing to improved market share is
B. 19,000
A. 100%
C. 23,000
B. 80%
D. 25,000
C. 20%
[265] Source: Publisher
(Refers to Fact Pattern #33)
Using the weighted-average method, what is the cost per
equivalent unit for direct materials-chemicals?
A. $11.91
D. 4%
[270] Source: CMA 0683 4-9
(Refers to Fact Pattern #34)
The variance of actual contribution margin from budgeted
contribution margin attributable to sales price is
B. $11.42
A. $115,000 unfavorable.
B. $3,312,000
B. $115,000 favorable.
C. $1,656,000
C. $65,000 favorable.
D. $3,110,400
D. $65,000 unfavorable.
[271] Source: CMA 0683 4-10
(Refers to Fact Pattern #34)
The variance of actual contribution margin from budgeted
contribution attributable to unit variable cost changes is
[275] Source: CMA 1285 4-7
(Refers to Fact Pattern #35)
If prime costs increased by 20% and all other values
remained the same, Oradell Company's contribution margin
(to the nearest whole percent) would be
A. $165,000 favorable.
A. .30
B. $137,000 favorable.
B. .76
C. $137,000 unfavorable.
C. .20
D. Zero because actual unit variable costs were the
same as budgeted unit variable costs.
D. .24
[Fact Pattern #35]
Oradell Company sells its single product at a price of $60
per unit and incurs the following variable costs per unit of
product:
Direct material
$16
Direct labor
12
Manufacturing overhead
7
--Total variable manufacturing costs $35
Selling expenses
5
--Total variable costs
$40
===
Oradell's annual fixed costs are $880,000, and Oradell is
subject to a 30% income tax rate.
[272] Source: CMA 1285 4-4
(Refers to Fact Pattern #35)
A production and sales volume of 4,000 units of product
per month would result in an annual after-tax income (loss)
for Oradell Company of
[277] Source: CMA 0686 4-29
(Refers to Fact Pattern #36)
If Bidwell Company is subject to an effective income tax
rate of 40%, the number of units Bidwell would have to sell
to earn an after-tax profit of $90,000 is
A. 100,000 units.
B. 120,000 units.
C. 102,858 units.
D. 145,000 units.
[278] Source: CMA 0686 4-30
(Refers to Fact Pattern #36)
If fixed costs increased $31,500 with no other cost or
revenue factors changing, the breakeven sales in units
would be
A. 34,500 units.
A. $80,000
B. 80,500 units.
B. $(800,000)
C. 69,000 units.
C. $56,000
D. 94,150 units.
D. $(560,000)
[273] Source: CMA 1285 4-5
(Refers to Fact Pattern #35)
The number of units of product that Oradell Company must
sell annually to break even is
A. 22,000 units.
[Fact Pattern #37]
Donnelly Corporation manufactures and sells T-shirts
imprinted with college names and slogans. Last year, the
shirts sold for $7.50 each, and the variable cost to
manufacture them was $2.25 per unit. The company
needed to sell 20,000 shirts to break even. The net
after-tax income last year was $5,040. Donnelly's
expectations for the coming year include the following:
B. 44,000 units.
C. 35,200 units.
D. 30,800 units.
[274] Source: CMA 1285 4-6
(Refers to Fact Pattern #35)
The annual sales revenue required by Oradell Company in
order to achieve after-tax net income of $224,000 for the
year is
A. $3,600,000
ｷ The sales price of the T-shirts will be $9.
ｷ Variable costs to manufacture will increase by one-third.
ｷ Fixed costs will increase by 10%.
ｷ The income tax rate of 40% will be unchanged.
[279] Source: CMA 0687 4-10
(Refers to Fact Pattern #37)
The selling price that would maintain the same contribution
margin rate as last year is
A. $9.00
B. $8.25
C. $10.00
D. $9.75
[280] Source: CMA 0687 4-11
(Refers to Fact Pattern #37)
The number of T-shirts Donnelly Corporation must sell to
break even in the coming year is
A. 17,500
B. 19,250
C. 20,000
D. 22,000
[281] Source: CMA 0687 4-12
(Refers to Fact Pattern #37)
Sales for the coming year are expected to exceed last
year's by 1,000 units. If this occurs, Donnelly's sales
volume in the coming year will be
A. 22,600 units.
B. 21,960 units.
C. 23,400 units.
D. 21,000 units.
[282] Source: CMA 0687 4-13
(Refers to Fact Pattern #37)
If Donnelly Corporation wishes to earn $22,500 in net
income for the coming year, the company's sales volume in
dollars must be
======
Recently, Randall Corporation received an offer from Blurr
Corporation to supply the table tops to Randall. Randall is
considering buying the table tops from Blurr instead of
manufacturing them internally. Which one of the following
statements is correct?
A. Randall should reject Blurr's offer if it is less than
$47.00 and Randall has excess manufacturing
capacity.
B. Randall should accept Blurr's offer if it is $50.00
or more and Randall has excess manufacturing
capacity.
C. Randall should accept Blurr's offer if it is less than
$47.00 and Randall has excess manufacturing
capacity.
D. Randall should reject Blurr's offer if it is $50.00 or
more.
[Fact Pattern #38]
Presented are Valenz Company's records for the current
fiscal year ended November 30:
Direct materials used
$300,000
Direct labor
100,000
Variable factory overhead
50,000
Fixed factory overhead
80,000
Selling and admin. costs-variable
40,000
Selling and admin. costs-fixed
20,000
[285] Source: CMA 1286 4-18
(Refers to Fact Pattern #38)
If Valenz Company uses variable costing, the inventoriable
costs for the fiscal year are
A. $400,000
A. $213,750
B. $450,000
B. $257,625
C. $490,000
C. $207,000
D. $530,000
D. $229,500
[283] Source: CMA 0687 4-14
For a profitable company, the amount by which sales can
decline before losses occur is known as the
[286] Source: CMA 1286 4-19
(Refers to Fact Pattern #38)
Using absorption (full) costing, inventoriable costs are
A. $400,000
A. Sales volume variance.
B. $450,000
B. Hurdle rate.
C. $530,000
C. Variable sales ratio.
D. $590,000
D. Margin of safety.
[284] Source: CMA 1296 3-25
Randall Corporation is a table manufacturing company that
has the following cost structure for producing table tops:
Unit Costs
---------Direct materials
$23.00
Direct labor
12.00
Variable manufacturing overhead
10.00
Fixed manufacturing overhead
17.00
Variable administrative costs
2.00
Fixed administrative costs
3.00
-----Total unit costs
$67.00
[Fact Pattern #39]
Valyn Corporation employs an absorption costing system
for internal reporting purposes; however, the company is
considering using variable costing. Data regarding Valyn's
planned and actual operations for the calendar year are
presented below.
Planned Actual
Activity Activity
-------- -------Beginning finished goods inventory
in units
35,000 35,000
Sales in units
140,000 125,000
Production in units
140,000 130,000
The planned per-unit cost figures shown in the next
schedule were based on the estimated production and sale
of 140,000 units for the year. Valyn uses a predetermined
manufacturing overhead rate for applying manufacturing
overhead to its product; thus, a combined manufacturing
overhead rate of $9.00 per unit was employed for
absorption costing purposes. Any over- or underapplied
manufacturing overhead is closed to the cost of goods sold
account at the end of the reporting year.
Planned Costs
Incurred
Per Unit Total
Costs
-------- --------- ---------Direct materials
$12.00 $1,680,000 $1,560,000
Direct labor
9.00 1,260,000 1,170,000
Variable manufacturing
overhead
4.00 560,000 520,000
Fixed manufacturing
overhead
5.00 700,000 715,000
Variable selling
expenses
8.00 1,120,000 1,000,000
Fixed selling
expenses
7.00 980,000 980,000
Variable administrative
expenses
2.00 280,000 250,000
Fixed administrative
expenses
3.00 420,000 425,000
------ ---------- ---------Total
$50.00 $7,000,000 $6,620,000
====== ========== ==========
The beginning finished goods inventory for absorption
costing purposes was valued at the previous year's planned
unit manufacturing cost, which was the same as the current
year's planned unit manufacturing cost. There are no
work-in-process inventories at either the beginning or the
end of the year. The planned and actual unit selling price for
the current year was $70.00 per unit.
[287] Source: CMA 1290 3-24
(Refers to Fact Pattern #39)
The value of Valyn Corporation's actual ending finished
goods inventory on the absorption costing basis was
because actual production was less than planned
production.
D. Lower than variable costing operating income
because actual sales were less than planned sales.
[290] Source: CMA 1290 3-28
(Refers to Fact Pattern #39)
Valyn Corporation's total fixed costs expensed this year on
the absorption costing basis were
A. $2,095,000
B. $2,120,000
C. $2,055,000
D. $2,030,000
[291] Source: CMA 1290 3-27
(Refers to Fact Pattern #39)
The total variable cost currently expensed currently by
Valyn Corporation on the variable costing basis was
A. $4,375,000
B. $4,500,000
C. $4,325,000
D. $4,550,000
[292] Source: CMA 1290 3-30
(Refers to Fact Pattern #39)
The difference between Valyn Corporation's operating
income calculated on the absorption costing basis and
calculated on the variable costing basis was
A. $65,000
A. $900,000
B. $25,000
B. $1,200,000
C. $40,000
C. $1,220,000
D. $90,000
D. $1,350,000
[288] Source: CMA 1290 3-25
(Refers to Fact Pattern #39)
The value of Valyn Corporation's actual ending finished
goods inventory on the variable costing basis was
[293] Source: CMA 1290 3-26
(Refers to Fact Pattern #39)
Valyn Corporation's actual manufacturing contribution
margin calculated on the variable costing basis was
A. $4,375,000
A. $1,400,000
B. $4,935,000
B. $1,125,000
C. $4,910,000
C. $1,000,000
D. $5,625,000
D. $750,000
[289] Source: CMA 1290 3-29
(Refers to Fact Pattern #39)
Valyn Corporation's absorption costing operating income
was
[294] Source: CMA 1292 3-5
Absorption costing and variable costing are two different
methods of assigning costs to units produced. Of the 4 cost
items listed below, identify the one that is not correctly
accounted for as a product cost.
A. Higher than variable costing operating income
because actual production exceeded actual sales.
Part of Product Cost under
-------------------------Absorption Variable
Cost
Cost
---------- --------
B. Lower than variable costing operating income
because actual production exceeded actual sales.
A.
C. Lower than variable costing operating income
Manufacturing supplies
B.
Yes
Insurance on factory
C.
Direct labor cost
D.
Yes
Yes
Yes
Packaging and shipping costs
No
C. Profits may decrease with increased sales even if
there is no change in selling prices and costs.
D. Decreased output and constant sales result in
increased profits.
Yes
Yes
Yes
[295] Source: CMA 1292 3-6
The costing method that is properly classified for both
external and internal reporting purposes is
External Internal
Reporting Reporting
--------- ---------
[Fact Pattern #40]
Osawa, Inc. planned and actually manufactured 200,000
units of its single product in its first year of operations.
Variable manufacturing costs were $30 per unit of product.
Planned and actual fixed manufacturing costs were
$600,000, and selling and administrative costs totaled
$400,000. Osawa sold 120,000 units of product at a
selling price of $40 per unit.
[299] Source: CMA 1285 4-14
(Refers to Fact Pattern #40)
Osawa's operating income using absorption (full) costing is
A.
A. $200,000
Activity-based costing
B.
Job-order costing
C.
No
Yes
B. $440,000
No
Yes
C. $600,000
D. $840,000
Variable costing
D.
No
Yes
Process costing
No
No
[296] Source: CMA 1292 3-26
Jansen, Inc. pays bonuses to its managers based on
operating income. The company uses absorption costing,
and overhead is applied on the basis of direct labor hours.
To increase bonuses, Jansen's managers may do all of the
following except
A. Produce those products requiring the most direct
labor.
B. Defer expenses such as maintenance to a future
period.
C. Increase production schedules independent of
customer demands.
[300] Source: CMA 1285 4-15
(Refers to Fact Pattern #40)
Osawa's operating income for the year using variable
costing is
A. $200,000
B. $440,000
C. $800,000
D. $600,000
[301] Source: CMA 0694 3-4
The breakeven point in units increases when unit costs
A. Increase and sales price remains unchanged.
B. Decrease and sales price remains unchanged.
D. Decrease production of those items requiring the
most direct labor.
C. Remain unchanged and sales price increases.
D. Decrease and sales price increases.
[297] Source: CMA 1273 4-1
Which of the following statements is true for a firm that uses
variable costing?
A. The cost of a unit of product changes because of
changes in number of units manufactured.
[302] Source: CMA 0697 3-2
Which one of the following is correct regarding a relevant
range?
A. Total variable costs will not change.
B. Profits fluctuate with sales.
B. Total fixed costs will not change.
C. An idle facility variation is calculated.
D. Product costs include variable administrative
costs.
C. Actual fixed costs usually fall outside the relevant
range.
D. The relevant range cannot be changed after being
established.
[298] Source: CMA 1273 4-2
When a firm prepares financial reports by using absorption
costing,
A. Profits will always increase with increases in sales.
B. Profits will always decrease with decreases in
sales.
[303] Source: CMA 0697 3-3
Which method of inventory costing treats direct
manufacturing costs and manufacturing overhead costs,
both variable and fixed, as inventoriable costs?
A. Direct costing.
B. Variable costing.
C. Absorption costing.
D. Conversion costing.
[304] Source: CMA 0697 3-10
Which one of the following statements is correct regarding
absorption costing and variable costing?
[307] Source: CMA 1293 3-4
(Refers to Fact Pattern #41)
Assuming Atlas Foods inventories Morefeed, the
by-product, the joint cost to be allocated to Alfa, using the
physical quantity method is
A. $3,000
B. $30,000
A. Overhead costs are treated in the same manner
under both costing methods.
B. If finished goods inventory increases, absorption
costing results in higher income.
C. Variable manufacturing costs are lower under
variable costing.
D. Gross margins are the same under both costing
methods.
[Fact Pattern #41]
Atlas Foods produces the following three supplemental
food products simultaneously through a refining process
costing $93,000.
C. $31,000
D. $60,000
[308] Source: CMA 1293 3-5
(Refers to Fact Pattern #41)
Assuming Atlas Foods inventories Morefeed, the
by-product, the joint cost to be allocated to Betters using
the weighted-quantity method based on caloric value per
pound is
A. $39,208
B. $39,600
C. $40,920
The joint products, Alfa and Betters, have a final selling
price of $4 per pound and $10 per pound, respectively,
after additional processing costs of $2 per pound of each
product are incurred after the split-off point. Morefeed, a
by-product, is sold at the split-off point for $3 per pound.
Alfa
grain
10,000 pounds of Alfa, a popular but relatively rare
supplement having a caloric value of 4,400 calories
per
D. $50,400
[309] Source: CMA 1293 3-6
(Refers to Fact Pattern #41)
Assuming Atlas Foods inventories Morefeed, the
by-product, and that it incurs no additional processing
costs for Alfa and Betters, the joint cost to be allocated to
Alfa using the gross market value method is
pound.
5,000 pounds of Betters, a flavoring material high
A. $36,000
carbohydrates with a caloric value of 11,200 calories
B. $40,000
pound.
Morefeed 1,000 pounds of Morefeed, used as a cattle feed
supplement
with a caloric value of 1,000 calories per pound.
C. $41,333
Betters
in
per
[305] Source: CMA adap
(Refers to Fact Pattern #41)
Assuming Atlas Foods inventories Morefeed, the
by-product, the joint cost to be allocated to Alfa using the
net realizable value method is
A. $3,000.
B. $30,000.
C. $31,000.
D. $60,000.
[306] Source: CMA 1293 3-7
(Refers to Fact Pattern #41)
Assuming Atlas Foods does not inventory Morefeed, the
by-product, the joint cost to be allocated to Betters using
the net realizable value method is
A. $30,000.
B. $31,000.
C. $52,080.
D. $62,000.
D. $50,000
[Fact Pattern #42]
Petro-Chem Inc. is a small company that acquires
high-grade crude oil from low-volume production wells
owned by individuals and small partnerships. The crude oil
is processed in a single refinery into Two Oil, Six Oil, and
impure distillates. Petro-Chem does not have the
technology or capacity to process these products further
and sells most of its output each month to major refineries.
There were no beginning inventories of finished goods or
work-in-process on November 1. The production costs
and output of Petro-Chem for November are as follows.
Crude oil acquired and placed
in production
$5,000,000
Direct labor and related costs
2,000,000
Factory overhead
3,000,000
Production and sales
ｷ Two Oil, 300,000 barrels produced; 80,000 barrels sold at
$20 each.
ｷ Six Oil, 240,000 barrels produced; 120,000 barrels sold at
$30 each.
ｷ Distillates, 120,000 barrels produced and sold at $15 per
barrel.
[310] Source: CMA 1295 3-29
(Refers to Fact Pattern #42)
The portion of the joint production costs assigned to Six
Oil based upon physical output would be
A. $3,636,000
B. $3,750,000
[314] Source: CMA 1293 3-8
The principal disadvantage of using the physical quantity
method of allocating joint costs is that
C. $1,818,000
D. $7,500,000
A. Costs assigned to inventories may have no
relationship to value.
B. Physical quantities may be difficult to measure.
[311] Source: CMA 1295 3-30
(Refers to Fact Pattern #42)
The portion of the joint production costs assigned to Two
Oil based upon the relative sales value of output would be
A. $4,800,000
C. Additional processing costs affect the allocation
base.
D. Joint costs, by definition, should not be separated
on a unit basis.
B. $4,000,000
C. $2,286,000
D. $2,500,000
[Fact Pattern #43]
A manufacturing company uses a joint production process
that produces three products at the split-off point. Joint
production costs during April were $720,000. The
company uses the sales value method for allocating joint
costs. Product information for April was as follows:
Product
------------------------R
S
T
----- ----- ----Units produced
2,500 5,000 7,500
Units sold
2,000 6,000 7,000
Sales prices:
At the split-off $100
$ 80
$20
After further
processing
$150
$115
$30
Costs to process
after split-off $150,000 $150,000 $100,000
[312] Source: CIA 1194 III-47
(Refers to Fact Pattern #43)
Assume that all three products are main products and that
they can be sold at the split-off point or processed further,
whichever is economically beneficial to the company. What
is the total cost of Product S in April if joint cost allocation
is based on sales value at split-off?
[315] Source: CMA 1296 3-30
Lankip Company produces two main products and a
by-product out of a joint process. The ratio of output
quantities to input quantities of direct material used in the
joint process remains consistent from month to month.
Lankip has employed the physical-volume method to
allocate joint production costs to the two main products.
The net realizable value of the by-product is used to reduce
the joint production costs before the joint costs are
allocated to the main products. Data regarding Lankip's
operations for the current month are presented in the chart
below. During the month, Lankip incurred joint production
costs of $2,520,000. The main products are not
marketable at the split-off point and, thus, have to be
processed further.
First Main Second Main
Product
Product
By-product
---------- ---------- ---------Monthly output in pounds
90,000
150,000
60,000
Selling price per pound
$30
$14
$2
Separable process costs $540,000
$660,000
The amount of joint production cost that Lankip would
allocate to the Second Main Product by using the
physical-volume method to allocate joint production costs
would be
A. $1,200,000
B. $1,260,000
C. $1,500,000
D. $1,575,000
A. $375,000
B. $390,000
C. $510,000
D. $571,463
[313] Source: CIA 1194 III-48
(Refers to Fact Pattern #43)
Assume that Product T is treated as a by-product and that
the company accounts for the by-product at net realizable
value as a reduction of joint cost. Assume also that
Products S and T must be processed further before they
can be sold. What is the total cost of Product R in April if
joint cost allocation is based on net realizable values?
[Fact Pattern #44]
Travis Petroleum is a small company that acquires crude oil
and manufactures it into three intermediate products,
differing only in grade. The products are Grade One,
Grade Two, and Grade Three. No beginning inventories of
finished goods or work-in-process existed on November
1. The production costs for November were as follows
(assume separable costs were negligible):
C. $374,630
Crude oil acquired
and put into production
$4,000,000
Direct labor and related costs 2,000,000
Factory overhead
3,000,000
The output and sales for November were as follows:
Grade One Grade Two Grade Three
--------- ---------- -----------Barrels
Produced
300,000 240,000
120,000
Barrels Sold 80,000 120,000
120,000
Prices per
Barrel Sold $30
$40
$50
D. $595,000
[316] Source: Publisher
A. $220,370
B. $370,370
(Refers to Fact Pattern #44)
The portion of the joint production costs assigned to Grade
Two based upon physical output is (rounded to the nearest
thousand dollars)
$5,000,000
$4,000
$8,333,333
$833
$9,000,000
$1,000
$10,000,000
$5,000
B.
C.
A. $3,273,000
B. $3,375,000
C. $1,636,000
D.
D. $3,512,000
[317] Source: Publisher
(Refers to Fact Pattern #44)
The portion of the joint production costs assigned to Grade
One based upon the relative sales values of output is
(rounded to the nearest thousand dollars)
[321] Source: Publisher
The breakeven point in units sold for Tierson Corporation
is 44,000. If fixed costs for Tierson are equal to $880,000
annually and variable costs are $10 per unit, what is the
contribution margin per unit for Tierson Corporation?
A. $0.05
A. $3,512,000
B. $20.00
B. $3,293,000
C. $44.00
C. $1,636,000
D. $88.00
D. $4,091,000
[318] Source: Publisher
(Refers to Fact Pattern #44)
Based on the relative sales values of output, cost of the
ending inventory of Grade Two is
[322] Source: Publisher
What is the breakeven point in units for a product that sells
for $10 if fixed costs are $4,000 and variable costs are
20%?
A. 250
A. $3,512,000
B. 500
B. $1,756,000
C. 800
C. $1,636,000
D. 2,000
D. $3,375,000
[319] Source: Publisher
A manufacturing concern sells its sole product for $10 per
unit, with a unit contribution margin of $6. The fixed
manufacturing cost rate per unit is $2 based on a
denominator capacity of 1,000,000 units, and fixed
marketing costs are $1,500,000. If 900,000 units are
produced, the absorption-costing breakeven point in units
sold is
[323] Source: Publisher
Stuffed Animals, Inc. has decided to focus strictly on
producing and selling one type of teddy bear. For the
upcoming year, Stuffed Animals, Inc. hopes to make a
25% profit on sales. Fixed costs are set at $51,000 and
variable costs are $9.50 per unit. If teddy bears are sold at
$15 each, how many bears must be sold to meet the profit
goal?
A. 5,514
A. 425,000 units.
B. 9,273
B. 583,333 units.
C. 13,600
C. 900,000 units.
D. 29,143
D. 1,000,000 units.
[320] Source: Publisher
A not-for-profit social agency provides home health care
assistance to as many patients as possible. Its budgeted
appropriation (X) for next year must cover fixed costs of
$5,000,000 and the annual per-patient cost (Y) of its
services. However, the agency is preparing for a possible
10% reduction in its appropriation that will lower the
number of patients served from 5,000 to 4,000. The
reduced appropriation and the annual per-patient cost equal
Reduced
Per-Patient
Appropriation Annual Cost
------------- ----------A.
[324] Source: Publisher
Barney Corporation sells sets of encyclopedias. Barney
sold 4,000 sets last year at $250 a set. If the variable cost
per set was $175, and the fixed costs for Barney were
$100,000, what is Barney's degree of operating leverage
(DOL)?
A. 0.67
B. 0.75
C. 1.5
D. 3.0
[Fact Pattern #45]
A manufacturer at the end of its fiscal year recorded the
data below:
A. 0.25
Prime cost
$800,000
Variable manufacturing overhead
100,000
Fixed manufacturing overhead
160,000
Variable selling and other expenses 80,000
Fixed selling and other expenses
40,000
B. 0.2083
[325] Source: CMA 1286 4-18
(Refers to Fact Pattern #45)
If the manufacturer uses variable costing, the inventoriable
costs for the fiscal year are
C. 0.2941
D. 0.1852
[328] Source: Publisher
(Refers to Fact Pattern #46)
Using the information presented, the contribution by which
of the four divisions was the highest?
A. $800,000
A. Division 1.
B. $900,000
B. Division 2.
C. $980,000
C. Division 3.
D. $1,060,000
D. Division 4.
[326] Source: CMA 1286 4-19
(Refers to Fact Pattern #45)
Using absorption (full) costing, inventoriable costs are
A. $800,000
B. $900,000
C. $1,060,000
D. $1,080,000
[Fact Pattern #46]
The data available for the current year are given below:
Whole Division Division Division Division
Company
1
2
3
4
--------- -------- -------- -------- -------Variable
manufacturing
cost of goods sold $400,000 $140,000 $80,000
$70,000 $110,000
Unallocated costs
(e.g., president's
salary)
100,000
Fixed costs
controllable by
division managers
(e.g., advertising,
engineering,
supervision costs)
90,000 30,000 20,000 20,000
20,000
Net revenue
1,000,000 300,000 200,000 250,000
250,000
Variable selling
and administrative
costs
120,000 40,000 20,000 30,000
30,000
Fixed costs
controllable by
others (e.g.,
depreciation,
insurance)
120,000 40,000 30,000 25,000
25,000
[327] Source: Publisher
(Refers to Fact Pattern #46)
Managers for the above company often compare
contribution margins of divisions with the contribution
margin of the company as a whole. Based on the
information given, the ratio of the contribution margin of
Division 1 to the contribution margin of the company as a
whole is
[Fact Pattern #47]
Almo Company manufactures and sells adjustable canopies
that attach to motor homes and trailers. The market covers
both new unit purchasers as well as replacement canopies.
Almo developed its business plan based on the assumption
that canopies would sell at a price of $400 each. The
variable costs for each canopy were projected at $200,
and the annual fixed costs were budgeted at $100,000.
Almo's after-tax profit objective was $240,000; the
company's effective tax rate is 40%.
While Almo's sales usually rise during the second quarter,
the May financial statements reported that sales were not
meeting expectations. For the first 5 months of the year,
only 350 units had been sold at the established price, with
variable costs as planned, and it was clear that the after-tax
profit projection would not be reached unless some actions
were taken. Almo's president assigned a management
committee to analyze the situation and develop an
alternative course of action. The following was presented to
the president.
Reduce the sales price by $40. The sales organization
forecasts
that with the significantly reduced sales price, 2,700 units
can
be sold during the remainder of the year. Total fixed and
variable unit costs will stay as budgeted.
[329] Source: Publisher
(Refers to Fact Pattern #47)
Assuming no changes were made to the selling price or
cost structure, how many units must Almo sell to break
even?
A. 167
B. 250
C. 500
D. 1,700
[330] Source: Publisher
(Refers to Fact Pattern #47)
Assuming no changes were made to the selling price or
cost structure, how many units must Almo sell to achieve its
after-tax profit objective?
A. 1,250
B. 1,700
C. 2,000
D. 2,500
[331] Source: Publisher
(Refers to Fact Pattern #47)
If management decides to reduce the selling price by $40,
what will Almo's after-tax profit be?
A. $157,200
which rents for $28 per square foot annually. Associated
expenses will be $22,000 for property insurance and
$32,000 for
utilities.
It will be necessary for the group to purchase malpractice
insurance, which is expected to cost $180,000 annually.
The initial investment in office equipment will be $60,000;
this
equipment has an estimated useful life of 4 years.
The cost of office supplies has been estimated to be $4
per
expected new client consultation.
B. $160,800
C. $241,200
[332] Source: Publisher
(Refers to Fact Pattern #48)
What is the expected total fixed expenses for the year?
D. $301,200
A. $1,327,700
[Fact Pattern #48]
Don Masters and two of his colleagues are considering
opening a law office that would make inexpensive legal
services available to those who could not otherwise afford
these services. The intent is to provide easy access for their
clients by having the office open 360 days per year, 16
hours each day from 7:00 a.m. to 11:00 p.m. The office
would be staffed by a lawyer, paralegal, legal secretary,
and clerk-receptionist for each of the two 8-hour shifts.
To determine the feasibility of the project, Masters hired a
marketing consultant to assist with market projections. The
results of this study show that if the firm spends $500,000
on advertising the first year, the number of new clients
expected each day would have the following probability
distribution.
Number of New
Clients per Day Probability
--------------- ----------20
.10
30
.30
55
.40
85
.20
Masters and his associates believe these numbers are
reasonable and are prepared to spend the $500,000 on
advertising. Other information about the operation of the
office is given below.
B. $1,484,480
C. $1,491,980
D. $1,536,980
[333] Source: Publisher
(Refers to Fact Pattern #48)
What is the law office's breakeven point?
A. 9,947
B. 10,219
C. 12,862
D. 57,384
[334] Source: Publisher
(Refers to Fact Pattern #48)
What is the expected number of clients per day?
A. 47.5
B. 50
C. 52.5
The only charge to each new client would be $30 for the
initial
consultation. All cases that warranted further legal work
would
be accepted on a contingency basis with the firm earning
30% of
any favorable settlements or judgments. Masters
estimates that
20% of new client consultations will result in favorable
settlements or judgments averaging $2,000 each. It is not
expected that there will be repeat clients during the first
year
of operations.
The hourly wages of the staff are projected to be $25 for
the
lawyer, $20 for the paralegal, $15 for the legal secretary,
and
$10 for the clerk-receptionist. Fringe benefit expense will
be
40% of the wages paid. A total of 400 hours of overtime is
expected for the year; this will be divided equally between
the
legal secretary and the clerk-receptionist positions.
Overtime
will be paid at one and one-half times the regular wage,
and the
fringe benefit expense will apply to the full wage.
Masters has located 6,000 square feet of suitable office
space
D. 55
[Fact Pattern #49]
The Daniels Tool & Die Corporation has been in existence
for a little over 3 years; their sales have been increasing
each year as they build their reputation. The company
manufactures dies to their customers' specifications; as a
consequence, a job order cost system is employed.
Factory overhead is applied to the jobs based on direct
labor hours, utilizing the absorption (full) costing method.
Overapplied or underapplied overhead is treated as an
adjustment to cost of goods sold. The company's income
statements for the last 2 years are presented below.
Daniels Tool & Die Corporation
2000-2001 Comparative Income Statements
2000
2001
-------- ---------Sales
$840,000 $1,015,000
-------- ---------Cost of goods sold
Finished goods, 1/1
$ 25,000 $ 18,000
Cost of goods manufactured
548,000
657,600
-------- ---------Total available
$573,000 $ 675,600
Finished goods, 12/31
18,000
14,000
-------- ---------Cost of goods sold before overhead
adjustment
$555,000 $ 661,600
Underapplied factory overhead
36,000
14,400
-------- ---------Cost of goods sold
$591,000 $ 676,000
-------- ---------Gross profit
$249,000 $ 339,000
-------- ---------Selling expenses
$ 82,000 $ 95,000
Administrative expenses
70,000
75,000
-------- ---------Total operating expenses
$152,000 $
170,000
-------- ---------Operating income
$ 97,000 $ 169,000
======== ==========
Daniels Tool & Die Corporation
Inventory Balances
1/1/00
12/31/00 12/31/01
-------------- -------Raw material
$22,000
$30,000
$10,000
Work-in-process
Costs
$40,000
$48,000
$64,000
Direct labor hours
1,335
1,600
2,100
Finished goods
Costs
$25,000
$18,000
$14,000
Direct labor hours
1,450
1,050
820
Daniels used the same predetermined overhead rate in
applying overhead to production orders in both 2000 and
2001. The rate was based on the following estimates.
Fixed factory overhead
$ 25,000
Variable factory overhead
$155,000
Direct labor hours
25,000
Direct labor costs
$150,000
In 2000 and 2001, actual direct labor hours expended
were 20,000 and 23,000, respectively. Raw materials put
into production were $292,000 in 2000 and $370,000 in
2001. Actual fixed overhead was $37,400 for 2001 and
$42,300 for 2000, and the planned direct labor rate was
the direct labor rate achieved.
For both years, all of the reported administrative costs
were fixed, while the variable portion of the reported selling
expenses resulted from a commission of 5% of sales
revenue.
[335] Source: Publisher
(Refers to Fact Pattern #49)
Assume the Daniels Tool & Die Corp. switches to the
variable costing method. What is the cost of the goods
available for sale for the year ended December 31, 2001?
[337] Source: Publisher
(Refers to Fact Pattern #49)
What is Daniels Tool & Die's contribution margin for
2001?
A. $281,130
B. $325,380
C. $331,880
D. $363,130
[338] Source: Publisher
(Refers to Fact Pattern #49)
What is Daniels Tool & Die's variable operating income for
2001?
A. $168,730
B. $206,130
C. $212,980
D. $243,730
[339] Source: CMA Samp Q3-3
The change in period-to-period operating income when
using variable costing can be explained by the change in the
A. Unit sales level multiplied by the unit sales price.
B. Finished goods inventory level multiplied by the
unit sales price.
C. Unit sales level multiplied by a constant unit
contribution margin.
D. Finished goods inventory level multiplied by a
constant unit contribution margin.
[340] Source: Publisher
A manufacturer contemplates a change in technology that
would reduce fixed costs from $800,000 to $700,000.
However, the ratio of variable costs to sales will increase
from 68% to 80%. What will happen to break-even level
of revenues?
A. Decrease by $301,470.50
A. $667,550
B. Decrease by $500,000
B. $675,600
C. Decrease by $1,812,500
C. $713,950
D. Increase by $1,000,000
D. $716,600
[336] Source: Publisher
(Refers to Fact Pattern #49)
What is the variable manufacturing cost of goods sold for
2001?
[341] Source: Publisher
How much does each additional sales dollar contribute
toward profit for a firm with $4 million break-even level of
revenues and $1.2 million in fixed costs including
depreciation?
A. $0.30
A. $635,950
B. $0.33
B. $638,870
C. $0.50
C. $652,050
D. $0.67
D. $700,770
rate.
[342] Source: Publisher
Planners have determined that sales will increase by 25%
next year, and that the profit margin will remain at 15% of
sales. Which of the following statements is correct?
[346] Source: Publisher
(Refers to Fact Pattern #50)
What is HCC's net tax liability?
A. Profit will grow by 25%.
A. $17,700
B. The profit margin will grow by 15%.
B. $15,300
C. Profit will grow proportionately faster than sales.
C. $9,700
D. Ten percent of the increase in sales will become
net income.
D. $2,000
[343] Source: Publisher
A regressive tax is a tax in which
A. Individuals with higher incomes pay a higher
percentage of their income in tax.
[347] Source: Publisher
(Refers to Fact Pattern #50)
Which item reduces HCC's gross tax liability by the largest
amount?
A. Gross income.
B. The burden for payment falls disproportionately on
lower-income persons.
B. The tax-exempt interest exclusion.
C. The individual pays a constant percentage in taxes,
regardless of income level.
C. The depreciation deduction.
D. Individuals with lower incomes pay a lower
percentage of their income in tax.
D. The tax credit.
[344] Source: CMA 0686 1-20
Two examples of indirect taxes are
[348] Source: CMA 1291 2-11
None of the following items are deductible in calculating
taxable income except
A. Taxes on business and rental property and
personal income taxes.
A. Estimated liabilities for product warranties
expected to be incurred in the future.
B. Sales taxes and Social Security taxes paid by
employees.
B. Dividends on common stock declared but not
payable until next year.
C. Sales taxes and Social Security taxes paid by
employers.
C. Bonus accrued but not paid by the end of the year
to a cash-basis 90% shareholder.
D. Social Security taxes paid by employees and
personal income taxes.
D. Vacation pay accrued on an
employee-by-employee basis.
[345] Source: CMA 0690 4-27
When a fixed plant asset with a 5-year estimated useful life
is sold during the second year, how would the use of an
accelerated depreciation method instead of the straight-line
method affect the gain or loss on the sale of the fixed plant
asset?
Gain
-------A.
Loss
--------
[349] Source: CMA 1291 2-12
All of the following are adjustments/preference items to
corporate taxable income in calculating alternative minimum
taxable income except
A. All of the gain on an installment sale of real
property in excess of $150,000.
B. Mining exploration and development costs.
C. A charitable contribution of appreciated property.
Increase
B.
Increase
Increase
C.
Decrease
Decrease
D.
Increase
Decrease
D. Sales commission earned in the current year but
paid in the following year.
Decrease
[350] Source: CMA 1294 1-29
Which one of the following factors might cause a firm to
increase the debt in its financial structure?
A. An increase in the corporate income tax rate.
B. Increased economic uncertainty.
[Fact Pattern #50]
The Hando Communications Corporation (HCC) has just
finished its first year of operations. For the year, HCC had
$80,000 of income. HCC also earned $11,000 of interest
on a tax-exempt bond, a $10,000 depreciation deduction,
and an $8,000 tax credit. Assume that HCC has a 30% tax
C. An increase in the federal funds rate.
D. An increase in the price-earnings ratio.
[351] Source: Publisher
The deferral or nonrecognition of gains is not allowed for
tax purposes when the transaction is a(n)
A. Reorganization that is a change in the form of
investment.
products are
A. Conversion costs.
B. Sunk costs.
C. Relevant costs.
B. Exchange of property that is used in a business for
like-kind property.
C. Reorganization that is considered a disposition of
assets.
D. Involuntary conversion of property into qualified
replacement property.
D. Opportunity costs.
[355] Source: CMA 0689 4-12
(Refers to Fact Pattern #51)
The advertising and promotion costs for the product
selected by Hitchcock will be
A. Discretionary costs.
[Fact Pattern #51]
Hitchcock Industries, has developed two new products but
has only enough plant capacity to introduce one of these
products this year. The company controller has gathered
the following data to assist management in deciding which
product should be selected for production.
Hitchcock's fixed overhead includes proportional rent and
utilities, machinery depreciation, and supervisory salaries.
Selling and administrative expenses are not allocated to
products.
Cost per unit:
Power Drill
Power Saw
----------- ----------Raw materials
$22.00
$18.00
Machining at $12/hr.
9.00
7.50
Assembly at $10/hr.
15.00
5.00
Variable O/H at $8/hr.
18.00
9.00
Fixed O/H at $4/hr.
9.00
4.50
----------Total unit cost
$73.00
$44.00
======
======
Suggested selling price
$88.98
$49.95
Actual research and
development costs
$180,000
$95,000
Proposed advertising
and promotion costs
$300,000
$250,000
[352] Source: CMA 0689 4-9
(Refers to Fact Pattern #51)
The difference between the $49.95 selling price of
Hitchcock's power saw and its total unit cost of $44.00
represents the unit
A. Contribution margin ratio.
B. Opportunity costs.
C. Committed costs.
D. Mixed costs.
[356] Source: CMA 0689 4-13
(Refers to Fact Pattern #51)
The costs included in Hitchcock's fixed overhead are
A. Sunk costs.
B. Discretionary costs.
C. Committed costs.
D. Prime costs.
[357] Source: CMA 1290 3-3
There are several methods for allocating service
department costs to the production departments. The
method that recognizes service provided by one service
department to another but does not recognize reciprocal
interdepartmental service is the
A. Direct method.
B. Variable method.
C. Reciprocal method.
D. Step-down method.
B. Gross profit.
C. Contribution.
D. Gross profit margin ratio.
[358] Source: CMA 1291 3-5
The basic objective of the residual income approach to
performance measurement and evaluation is to have a
division maximize its
A. Return on investment rate.
[353] Source: CMA 0689 4-10
(Refers to Fact Pattern #51)
The total overhead cost of $13.50 for Hitchcock's power
saw is a
A. Carrying cost.
B. Imputed interest rate charge.
C. Cash flows.
D. Income in excess of a desired minimum return.
B. Sunk cost.
C. Mixed cost.
D. Committed cost.
[354] Source: CMA 0689 4-11
(Refers to Fact Pattern #51)
Research and development costs for Hitchcock's two new
[359] Source: CMA 1291 3-6
The imputed interest rate used in the residual income
approach for performance measurement and evaluation can
best be characterized as the
A. Weighted-average cost of capital for the
company.
B. Marginal after-tax cost of new equity capital.
D. 43,200 units.
C. Average return on investment that has been
earned by the company over a particular time period.
D. Average return on assets employed over a
particular time period.
[363] Source: CMA 1277 5-5
An imputed cost is
A. The difference in total costs which results from
selecting one alternative instead of another.
[Fact Pattern #52]
Marlan Manufacturing produces a product that passes
through two departments. The units from the molding
department are completed in the assembly department. The
units are completed in assembly by adding the remaining
direct materials when the units are 60% complete with
respect to conversion costs. Conversion costs are added
proportionately in assembly. The production activity in the
assembly department for the current month is presented as
follows. Marlan uses the FIFO (first-in, first-out) inventory
method in its process cost system.
Beginning inventory units
(25% complete with respect to
conversion costs)
8,000
Units transferred in from the molding
department during the month
42,000
-----Units to account for
50,000
======
Units completed and transferred to
finished goods inventory
38,000
Ending inventory units
(40% complete with respect to
conversion costs)
12,000
-----Units accounted for
50,000
======
[360] Source: CMA 0692 3-2
(Refers to Fact Pattern #52)
The equivalent units transferred from the molding
department to the assembly department for the current
month are
B. A cost that cannot be avoided because it has
already been incurred.
C. A cost that does not entail any dollar outlay but is
relevant to the decision-making process.
D. A cost that continues to be incurred even though
there is no activity.
[364] Source: CMA 0678 4-6
Conversion costs are
A. Manufacturing costs incurred to produce units of
output.
B. All costs associated with manufacturing other than
direct labor costs and raw material costs.
C. The sum of direct labor costs and all factory
overhead costs.
D. The sum of raw materials costs and direct labor
costs.
[365] Source: CMA 0678 4-7
The term prime costs refers to
A. All costs associated with manufacturing other than
direct labor costs and raw materials costs.
B. Costs that are predetermined and should be
attained.
A. 30,000 units.
B. 38,000 units.
C. 40,800 units.
C. The sum of direct labor costs and all factory
overhead costs.
D. The sum of raw materials costs and direct labor
costs.
D. 42,000 units.
[361] Source: CMA 0692 3-3
(Refers to Fact Pattern #52)
The equivalent units in the assembly department for direct
materials for the current month are
A. 30,000 units.
B. 38,000 units.
C. 40,800 units.
[366] Source: CMA 0678 4-9
Variable costs are all costs
A. That are associated with marketing, shipping,
warehousing, and billing activities.
B. That do not change in total for a given period and
relevant range but become progressively smaller on a
per unit basis as volume increases.
C. Of manufacturing incurred to produce units of
output.
D. 42,000 units.
D. That fluctuate in total in response to small changes
in the rate of utilization of capacity.
[362] Source: CMA 0692 3-4
(Refers to Fact Pattern #52)
The equivalent units in the assembly department for
conversion costs for the current month are
A. 34,800 units.
B. 40,800 units.
C. 42,800 units.
[367] Source: CMA 0678 4-10
Committed costs are
A. Those management decides to incur in the current
period to enable the company to achieve objectives
other than the filling of orders placed by customers.
B. Likely to respond to the amount of attention
devoted to them by a specified manager.
A. A variable cost.
C. Governed mainly by past decisions that
established the current levels of operating and
organizational capacity and that only change slowly in
response to small changes in capacity.
D. Those that fluctuate in total in response to small
changes in the rate of use of capacity.
[368] Source: CMA 0678 4-11
Discretionary costs are
B. An indirect cost.
C. A conversion cost.
D. A prime cost.
[373] Source: CMA 0685 5-6
A cost incurred for the benefit of more than one cost
objective is
A. Those management decides to incur in the current
period to enable the company to achieve objectives
other than the filling of orders placed by customers.
A. A variable cost.
B. Likely to respond to the amount of attention
devoted to them by a specified manager.
C. A prime cost.
B. A conversion cost.
D. A common cost.
C. Governed mainly by past decisions that
established the current levels of operating and
organizational capacity and that only change slowly in
response to small changes in capacity.
D. Unaffected by current managerial decisions.
[369] Source: CMA 0678 4-12
Controllable costs are those that
A. Management decides to incur in the current period
to enable the company to achieve objectives other
than the filling of orders placed by customers.
B. Are likely to respond to the amount of attention
devoted to them by a specified manager.
C. Are governed mainly by past decisions that
established the present levels of operating and
organizational capacity and that only change slowly in
response to small changes in capacity.
D. Will be unaffected by current managerial
decisions.
[370] Source: CMA 0680 4-5
The cost associated with abnormal spoilage ordinarily is
charged to
A. Inventory.
B. A material variance account.
C. Manufacturing overhead.
D. A special loss account.
[Fact Pattern #53]
Farber Company employs a normal (nonstandard)
absorption cost system. The following information is from
the financial records of the company for the year.
ｷ Total manufacturing costs were $2,500,000.
ｷ Cost of goods manufactured was $2,425,000.
ｷ Applied factory overhead was 30% of total manufacturing
costs.
ｷ Factory overhead was applied to production at a rate of
80% of
direct labor cost.
ｷ Work-in-process inventory at January 1 was 75% of workin-process
inventory at December 31.
[374] Source: CMA 1285 4-25
(Refers to Fact Pattern #53)
Farber Company's total direct labor cost for the year is
A. $750,000.
B. $600,000.
C. $900,000.
D. $937,500.
[375] Source: CMA 1285 4-26
(Refers to Fact Pattern #53)
Total cost of direct material used by Farber Company for
the year is
A. $750,000.
B. $812,500.
[371] Source: CMA 1282 4-101
Which of the following is the best example of a variable
cost?
C. $850,000.
D. $1,150,000.
A. Property taxes.
B. The corporate president's salary.
C. Interest charges.
D. Cost of raw materials.
[372] Source: CMA 0685 5-1
A cost that always can be physically traced to a cost
objective is
[376] Source: CMA 1285 4-27
(Refers to Fact Pattern #53)
The carrying value of Farber Company's work-in-process
inventory at December 31 is
A. $300,000.
B. $225,000.
C. $100,000.
D. $75,000.
[377] Source: CIA 0593 IV-3
A manufacturing firm produces multiple families of products
requiring various combinations of different types of parts.
The manufacturer has identified various cost pools, one of
which consists of materials handling costs. This cost pool
includes the wages and employee benefits of the workers
involved in receiving materials, inspecting materials, storing
materials in inventory, and moving materials to the
workstations; depreciation and maintenance of materials
handling equipment (e.g., forklift trucks); and costs of
supplies used as well as other related costs. Of the
following, the most appropriate cost driver for assigning
materials handling costs to the various products most likely
is
A. Direct labor hours.
B. Number of units produced.
C. Number of vendors involved.
D. Number of parts used.
B. The overtime hours times the sum of the
straight-time wages and overtime premium would be
treated as direct labor.
C. The overtime hours times the overtime premium
would be charged to repair and maintenance
expense, and the overtime hours times the
straight-time wages would be treated as direct labor.
D. The overtime hours times the overtime premium
would be charged to manufacturing overhead, and
the overtime hours times the straight-time wages
would be treated as direct labor.
[381] Source: CIA 1193 IV-3
A large manufacturing company has two service
departments and two production departments. Each of the
service departments renders services to each other and to
the two production departments. Which one of the
following methods would most accurately allocate the costs
of the service departments to the production departments
of this company?
A. The direct allocation method.
B. The step-down allocation method.
[378] Source: CIA 1193 IV-1
Many companies recognize three major categories of costs
of manufacturing a product. These are direct materials,
direct labor, and overhead. Which of the following is an
overhead cost in the production of an automobile?
A. The cost of small tools used in mounting tires on
each automobile.
B. The cost of the tires on each automobile.
C. The cost of the laborers who place tires on each
automobile.
D. The delivery costs for the tires on each
automobile.
[379] Source: CIA 1193 IV-4
During the current accounting period, a manufacturing
company purchased $70,000 of raw materials, of which
$50,000 of direct materials and $5,000 of indirect
materials were used in production. The company also
incurred $45,000 of total labor costs and $20,000 of other
factory overhead costs. An analysis of the work-in-process
control account revealed $40,000 of direct labor costs.
Based upon the given information, what is the total amount
accumulated in the factory overhead control account?
A. $20,000
B. $25,000
C. The linear allocation method.
D. The reciprocal allocation method.
[382] Source: CIA 0592 IV-6
A metal fabricating company uses a job-order cost system.
The company expects to have small residual pieces of
metal cuttings and shavings from all of its jobs. Although the
metal pieces and shavings cannot be reused, they can be
sold for scrap. The scrap metal is sold when a ton of scrap
has been accumulated. The requisitions and the scrap
recovery for aluminum during the current month are as
follows.
Aluminum requisitions:
100,000 lbs. @ $1.50/lb. $150,000
Aluminum scrap recovery:
800 lbs.
This amount of scrap is within normal allowances for the
company's operations. The market price for scrap
aluminum fluctuates greatly and has ranged from $.25 to
$.40 per pound during the last 12 months. The
accumulated scrap aluminum was sold last month for $.35
per pound.
The appropriate accounting treatment for the scrap
aluminum recovered during the current month is to
A. Debit direct materials quantity variance for $1,200
(800 lbs. @ $1.50/lb.) and credit work-in-process
inventory control for $1,200, with postings to each
job from which the scrap metal was recovered.
C. $30,000
D. $45,000
[380] Source: CIA 1193 IV-5
A company experienced a machinery breakdown on one of
its production lines. As a consequence of the breakdown,
manufacturing fell behind schedule, and a decision was
made to schedule overtime to return manufacturing to
schedule. Which one of the following methods is the proper
way to account for the overtime paid to the direct laborers?
A. The overtime hours times the sum of the
straight-time wages and overtime premium would be
charged entirely to manufacturing overhead.
B. Debit scrap inventory for $280 (800 lbs. @
$.35/lb.) and credit factory overhead control for
$280.
C. For materiality reasons, no entry is made until the
scrap metal is sold. At that time, debit cash and credit
factory overhead control for the quantity sold at the
current market price.
D. Debit direct materials quantity variance for $1,200
(800 lbs. @ $1.50/lb.) and credit factory overhead
control for $1,200 at the time of recovery, and when
the scrap is sold, debit cash and credit direct
materials quantity variance for the quantity sold at the
current market price.
[383] Source: CIA 0594 III-70
Three commonly employed systems for product costing are
termed job order costing, operations costing, and process
costing. Match the type of production environment with the
costing method used.
incurred by the more highly skilled and paid employees,
which activity base is most likely to be appropriate for
applying overhead?
A. Direct labor hours.
B. Direct materials cost.
Job Order Costing Operations Costing Processing
Costing
------------------ ---------------------- ------------------A.
Auto repair
B.
C. Machine hours.
D. Direct labor cost.
Clothing manufacturing Oil refining
Loan processing
printing
C.
Drug manufacturing
Custom printing
manufacturing
D.
Paint manufacturing
Custom
[388] Source: Publisher
The denominator of the overhead application rate can be
based on one of several production capacities. Which
would minimize expected over- or underapplied overhead?
A. Theoretical capacity.
Paper
B. Expected volume.
C. Normal volume.
Engineering design Auto assembly
Motion picture
production
[384] Source: Publisher
What is the journal entry to record the purchase of
materials on account?
D. Practical capacity.
[389] Source: Publisher
Which concept of capacity applies the least amount of
overhead to units of production?
A. Theoretical capacity.
A.
Raw materials inventory
Accounts payable
XX
XX
B.
B. Normal volume.
C. Practical capacity.
Accounts payable
XX
Raw materials inventory
D. Minimum volume.
XX
C.
Accounts receivable
Accounts payable
XX
XX
D.
Raw materials inventory
Cash
XX
XX
[390] Source: CIA 1185 IV-10
When the amount of overapplied factory overhead is
significant, the entry to close overapplied factory overhead
will most likely require
A. A debit to cost of goods sold.
B. Debits to cost of goods sold, finished goods
inventory, and work-in-process inventory.
[385] Source: Publisher
Annual overhead application rates are used to
A. Budget overhead.
C. A credit to cost of goods sold.
D. Credits to cost of goods sold, finished goods
inventory, and work-in-process inventory.
B. Smooth seasonal variability of overhead costs.
C. Simulate seasonal variability of activity levels.
D. Treat overhead as period costs.
[386] Source: Publisher
The numerator of the overhead application rate equals
[391] Source: Publisher
Assuming two overhead accounts are used, what is the
entry to close them and to charge underapplied overhead
to cost of goods sold?
A.
Cost of goods sold
Finished goods
A. Estimated overhead costs.
XX
XX
B.
B. Actual overhead costs.
Factory O/H applied
Factory O/H control
Cost of goods sold
C. The estimated activity level.
D. The actual activity level.
[387] Source: Publisher
In a labor intensive industry in which more overhead
(service, support, more expensive equipment, etc.) is
XX
XX
XX
C.
Cost of goods sold
Factory O/H applied
D.
XX
XX
Cost of goods sold
Factory O/H applied
Factory O/H control
XX
XX
XX
[392] Source: Publisher
FIFO requires separate costing of goods started last period
and finished this period and goods started and completed
this period. The weighted-average method does not. Which
is the true statement about the cost of completed goods
transferred under FIFO to the next production department
or to finished goods inventory?
[395] Source: CMA 0690 4-2
(Refers to Fact Pattern #54)
Alex Company's total manufacturing cost for January was
A. $681,000.
B. $665,000.
C. $489,000.
D. $673,000.
A. The two amounts are kept separate but are
combined by the next department.
B. The two amounts are ultimately recorded in
separate finished goods accounts.
C. The two amounts are considered combined as the
goods are transferred.
D. The goods started and completed this period are
transferred prior to those started last period and
completed this period.
[396] Source: CMA 0690 4-3
(Refers to Fact Pattern #54)
Alex Company's cost of goods manufactured for January
was
A. $665,000.
B. $681,000.
C. $673,000.
D. $657,000.
[393] Source: CMA 0694 3-6
The term "gross margin" for a manufacturing firm refers to
excess of sales over
A. Cost of goods sold, excluding fixed indirect
manufacturing costs.
[397] Source: CMA 0690 4-4
(Refers to Fact Pattern #54)
Alex Company's cost of goods sold for January was
A. $697,000.
B. All variable costs, including variable selling and
administrative expenses.
C. Cost of goods sold, including fixed indirect
manufacturing costs.
B. $681,000.
C. $673,000.
D. $657,000.
D. Manufacturing costs, excluding fixed
manufacturing costs.
[Fact Pattern #54]
Alex Company had the following inventories at the
beginning and end of the month of January.
[398] Source: CMA 0690 4-5
(Refers to Fact Pattern #54)
Alex Company's balance in factory overhead control for
January was
A. $5,000 debit-overapplied.
January 1 January 31
--------- ---------Finished goods
$125,000 $117,000
Work-in-process
235,000
251,000
Direct materials
134,000
124,000
The following additional manufacturing data were available
for the month of January:
Direct materials purchased
$189,000
Purchase returns and allowances 1,000
Transportation-in
3,000
Direct labor
300,000
Actual factory overhead
175,000
Alex Company applies factory overhead at a rate of 60%
of direct labor cost, and any overapplied or underapplied
factory overhead is deferred until the end of the year,
December 31.
[394] Source: CMA 0690 4-1
(Refers to Fact Pattern #54)
Alex Company's prime cost for January was
B. $5,000 credit-underapplied.
C. $5,000 debit-underapplied.
D. $5,000 credit-overapplied.
[399] Source: CMA 0690 4-10
During May 1997, Mercer Company completed 50,000
units costing $600,000, exclusive of spoilage allocation. Of
these completed units, 25,000 were sold during the month.
An additional 10,000 units, costing $80,000, were 50%
complete at May 31. All units are inspected between the
completion of manufacturing and transfer to finished goods
inventory. Normal spoilage for the month was $20,000,
and abnormal spoilage of $50,000 was also incurred during
the month. The portion of total spoilage that should be
charged against revenue in May is
A. $50,000.
A. $199,000.
B. $20,000.
B. $501,000.
C. $70,000.
C. $489,000.
D. $60,000.
D. $201,000.
[400] Source: CMA 1290 3-2
Allocation of service department costs to the production
departments is necessary to
abnormal spoilage are
A. Assigned to the good units transferred to finished
goods.
A. Control costs.
B. Coordinate production activity.
C. Determine overhead rates.
B. Allocated between the units transferred to finished
goods and those remaining in work-in-process.
C. Charged to the manufacturing overhead control
account.
D. Maximize efficiency.
D. Charged to a special abnormal spoilage loss
account.
[401] Source: CMA 0693 3-1
The allocation of costs to particular cost objectives allows
a firm to analyze all of the following except
A. Whether a particular department should be
expanded.
B. Why the sales of a particular product have
increased.
C. Whether a product line should be discontinued.
D. Why a particular product should be purchased
rather than manufactured in-house.
[406] Source: CIA 1194 III-46
A company produces stereo speakers for automobile
manufacturers. The automobile manufacturers emphasize
total quality control (TQC) in their production processes
and reject approximately 3% of the stereo speakers
received as being of unacceptable quality. The company
inspects the rejected speakers to determine which ones
should be reworked and which ones should be discarded.
The discarded speakers are classified as
A. Waste.
B. Scrap.
[402] Source: CMA 0693 3-4
A fixed cost that would be considered a direct cost is
C. Spoilage.
D. Rework costs.
A. A cost accountant's salary when the cost objective
is a unit of product.
B. The rental cost of a warehouse to store inventory
when the cost objective is the Purchasing
Department.
C. A production supervisor's salary when the cost
objective is the Production Department.
D. Board of directors' fees when the cost objective is
the Marketing Department.
[403] Source: CMA 1293 3-2
The most accurate method of allocating service department
costs is the
A. Reciprocal method.
[407] Source: CIA 1193 IV-6
Some units of output failed to pass final inspection at the
end of the manufacturing process. The production and
inspection supervisors determined that the estimated
incremental revenue from reworking the units exceeded the
cost of rework. The rework of the defective units was
authorized, and the following costs were incurred in
reworking the units:
Materials requisitioned from stores:
Direct materials
$5,000
Miscellaneous supplies
$ 300
Direct labor
$14,000
The manufacturing overhead budget includes an allowance
for rework. The predetermined manufacturing overhead
rate is 150% of direct labor cost. The account(s) to be
charged and the appropriate charges for the rework cost
would be
B. Step method.
A. Work-in-process inventory control for $19,000.
C. Direct method.
D. Accretion method.
B. Work-in-process inventory control for $5,000
and factory overhead control for $35,300.
C. Factory overhead control for $19,300.
[404] Source: CMA 1295 3-27
A cost that bears an observable and known relationship to
a quantifiable activity base is a(n)
A. Engineered cost.
B. Indirect cost.
C. Sunk cost.
D. Target cost.
[405] Source: CIA 0593 IV-6
A manufacturing firm may experience both normal and
abnormal spoilage in its operations. The costs of both
normal and abnormal spoilage are accounted for in the
accounting records. The costs associated with any
D. Factory overhead control for $40,300.
[408] Source: CIA 1196 III-93
A company uses a job-order cost system in accounting for
its manufacturing operations. Because its processes are
labor oriented, it applies manufacturing overhead on the
basis of direct labor hours (DLH).
Normal spoilage is defined as 4% of the units passing
inspection. The company includes a provision for normal
spoilage cost in its budgeted manufacturing overhead and
manufacturing overhead rate. Data regarding a job
consisting of 30,000 units are presented below:
Volume Data
-----------
Total units in job
30,000
Units failing inspection (spoiled)
1,500
Good units passing inspection
28,500
Cost Data:
Per Unit Total Cost
---------------- ---------Direct materials
$ 18.00 $ 540,000
Direct labor 2 DLH
@ $16.00/DLH
32.00
960,000
Manufacturing overhead 2 DLH
@ $30.00/DLH
60.00 1,800,000
------- ---------Total
$110.00 $3,300,000
======= ==========
The 1,500 units that failed inspection required .25 direct
labor hours per unit to rework the units into good units.
What is the proper charge to the loss from abnormal
spoilage account?
pounds)
48,000 51,000
Direct materials purchases (in
pounds)
48,000 50,000
Total cost of direct materials
purchases
$120,000 $120,000
[411] Source: CIA 1196 III-80
(Refers to Fact Pattern #55)
The direct materials price variance for the current month is
A. $7,500 unfavorable.
B. Zero.
C. $5,000 favorable.
D. $5,100 favorable.
A. $1,440
[412] Source: CIA 1196 III-81
(Refers to Fact Pattern #55)
The direct materials efficiency variance for the current
month is
B. $4,140
C. $3,450
D. Zero.
A. $500 favorable.
B. $3,000 favorable.
[409] Source: CIA 1194 III-54
The major objectives of any budget system are to
A. Define responsibility centers, provide a framework
for performance evaluation, and promote
communication and coordination among organization
segments.
B. Define responsibility centers, facilitate the fixing of
blame for missed budget predictions, and ensure goal
congruence between superiors and subordinates.
C. Foster the planning of operations, provide a
framework for performance evaluation, and promote
communication and coordination among organization
segments.
D. Foster the planning of operations, facilitate the
fixing of blame for missed budget predictions, and
ensure goal congruence between superiors and
subordinates.
C. $7,500 unfavorable.
D. $8,000 unfavorable.
[413] Source: CIA 1195 III-84
Productivity is defined as the ratio of outputs of a
production process to the inputs that are used. Consider a
process that currently produces 2,000 units of output with
500 hours of labor per day. This process can be
redesigned to produce 2,520 units of output requiring 600
labor hours per day. The percentage change in productivity
from redesigning the process is
A. 5%
B. 10%
C. 20%
D. 26%
[410] Source: CIA 1193 IV-27
A company develops a budget that is based on the
behavior of costs and revenues over a range of sales for the
upcoming year. This is an example of a
[414] Source: CIA 0596 III-90
A manufacturing cell's partial productivity can be measured
using data on
A. Production budget.
A. Inventory shrinkage.
B. Cash budget.
B. Inventory turnover.
C. Capital budget.
C. Direct materials usage.
D. Flexible budget.
D. Scrap.
[Fact Pattern #55]
A company manufactures a product that has the direct
materials, standard cost presented below. Budgeted and
actual information for the current month for the manufacture
of the finished product and the purchase and use of the
direct materials is also presented.
[415] Source: CIA 1192 IV-17
Data regarding four different products manufactured by an
organization are presented below. Direct material and
direct labor are readily available from the respective
resource markets. However, the manufacturer is limited to
a maximum of 3,000 machine hours per month.
Standard cost for direct materials:
1.60 lbs. @ $2.50 per lb. = $4.00
Budget Actual
-------- -------Finished goods (in units)
30,000
Direct materials usage (in
Product Product Product Product
A
B
C
D
------- ------- ------- ------Selling price/unit $15
$18
$20
$25
Variable cost/unit
$7
$11
$10
$16
Units produced per
32,000
machine hour
3
4
2
3
The product that is the most profitable for the manufacturer
in this situation is
A. Product A.
point of transfer plus the opportunity cost per unit to
the supplying division.
B. Additional outlay cost per unit incurred to the
point of transfer plus the opportunity cost per unit to
the buying division.
B. Product B.
C. Product C.
D. Product D.
[416] Source: CIA 0592 IV-18
The following is a standard cost variance analysis report on
direct labor cost for a division of a manufacturing company.
Actual Hours Actual Hours Standard Hours
at
at
at
Job Actual Wages Standard Wages Standard Wages
--- ------------ -------------- -------------213
$3,243
$3,700
$3,100
215
15,345
15,675
15,000
217
6,754
7,000
6,600
219
19,788
18,755
19,250
221
3,370
3,470
2,650
------------------Totals $48,500
$48,600
$46,600
=======
=======
=======
What is the total flexible budget direct labor variance for
the division?
C. Full cost per unit incurred to the point of transfer
plus a percentage markup on the full cost per unit.
D. Variable cost per unit incurred to the point of
transfer.
[419] Source: CIA 0595 III-95
Making segment disclosures is an advantage to a company
because it
A. Facilitates evaluation of company management by
providing data on particular segments.
B. Eliminates the interdependence of segments.
C. Masks the effect of intersegment transfers.
D. Provides competitors with comparative
information on the company's performance.
[Fact Pattern #56]
The segmented income statement for a retail company with
three product lines is presented below:
A. $100 Favorable.
B. $1,900 Unfavorable.
C. $1,900 Favorable.
D. $2,000 Unfavorable.
[417] Source: CIA 1195 III-96
A large manufacturing company has several autonomous
divisions that sell their products in perfectly competitive
external markets as well as internally to the other divisions
of the company. Top management expects each of its
divisional managers to take actions that will maximize the
organization's goals as well as their own goals. Top
management also promotes a sustained level of
management effort of all of its divisional managers. Under
these circumstances, for products exchanged between
divisions, the transfer price that will generally lead to
optimal decisions for the manufacturing company would be
a transfer price equal to the
A. Full cost of the product.
B. Full cost of the product plus a markup.
C. Variable cost of the product plus a markup.
D. Market price of the product.
[418] Source: CIA 1196 III-94
Companies with decentralized, autonomous divisions that
sell their goods and services internally to other divisions of
the company as well as externally in competitive markets
have to establish transfer prices for the goods and services
transferred internally among divisions. Generally, upper
management has established such operating criteria for
managing the divisions as goal congruence, subunit
autonomy, and a sustained high level of management effort.
An approach consistent with the above criteria would be to
set the transfer price equal to the
A. Additional outlay cost per unit incurred to the
Total Product Product Product
Company Line 1 Line 2 Line 3
---------- -------- -------- -------Volume (in units)
20,000 28,000 50,000
Sales revenue
$2,000,000 $800,000 $700,000
$500,000
Costs & expenses:
Administrative $ 180,000 $ 60,000 $ 60,000 $ 60,000
Advertising
240,000 96,000 84,000 60,000
Commissions
40,000 16,000 14,000 10,000
Cost of sales
980,000 360,000 420,000 200,000
Rent
280,000 84,000 140,000 56,000
Salaries
110,000 54,000 32,000 24,000
---------- ------- -------- -------Total costs &
expenses
$1,830,000 $670,000 $750,000 $410,000
---------- ------- -------- -------Operating
income (loss) $ 170,000 $130,000 $(50,000) $ 90,000
========== ======== ========
========
The company buys the goods in the three product lines
directly from manufacturers' representatives. Each product
line is directed by a manager whose salary is included in the
administrative expenses. Administrative expenses are
allocated to the three product lines equally because the
administration is spread evenly among the three product
lines. Salaries represent payments to the workers in each
product line and therefore are traceable costs of each
product line. Advertising promotes the entire company
rather than the individual product lines. As a result, the
advertising is allocated to the three product lines in
proportion to the sales revenue. Commissions are paid to
the salespersons in each product line based on 2% of gross
sales. Rent represents the cost of the retail store and
warehouse under a lease agreement with 5 years remaining.
The product lines share the retail and warehouse space,
and the rent is allocated to the three product lines based on
the square footage occupied by each of the product lines.
[420] Source: CIA 1196 III-97
(Refers to Fact Pattern #56)
The segmented income statement for this retail company
does not facilitate performance evaluation because it does
not distinguish between controllable and uncontrollable
costs. The only costs and expenses controllable at the
product-line level for this retail company are
A. Commissions, cost of sales, and rent.
B. Advertising, cost of sales, and salaries.
over the next 12 months. This product would be sold in the
same manner as Product Line 1's other products except
that the customer is hoping for a price break. Product Line
1's cost to purchase this product (cost of sales) would be
$14.70. Product Line 1 has excess capacity, meaning that
the rate or amount of the remaining operating costs would
not change as a consequence of the purchase and sale of
this special-order product. The minimum selling price for
this special-order product would be
C. Commissions, cost of sales, and salaries.
A. $15.00
D. Administration, advertising, and rent.
B. $17.30
[421] Source: CIA 1196 III-98
(Refers to Fact Pattern #56)
The company has an opportunity to promote one of its
product lines by making a one-time $7,000 expenditure.
The company can choose only one of the three product
lines to promote. The incremental sales revenue that would
be realized from this $7,000 promotion expenditure in each
of the product lines is estimated as follows:
Increase in
Sales Revenue
------------Product Line 1
$15,000
Product Line 2
20,000
Product Line 3
14,000
In order to maximize profits, the promotion expenditure
should be spent on <List A>, resulting in an increase in
operating income of <List B>.
List A
List B
-------------- ------A.
Product Line 2 $13,000
B.
Product Line 2 $ 5,000
C.
Product Line 3 $ 1,400
D.
Product Line 3 $ 1,120
[422] Source: CIA 1196 III-99
(Refers to Fact Pattern #56)
One company executive has expressed concern about the
operating loss that has occurred in Product Line 2 and has
suggested that Product Line 2 be discontinued. If Product
Line 2 is dropped, the manager of the line would be
retained and assigned other duties with the company, but
the other employees would not be retained. Management
has indicated that the nature of the company's advertising
might change with the elimination of Product Line 2, but the
total dollar amount would not change. If Product Line 2
were to be dropped, the operating income of the company
would
C. $27.50
D. $30.20
[424] Source: CIA 1194 III-42
Using absorption costing, fixed manufacturing overhead
costs are best described as
A. Direct period costs.
B. Indirect period costs.
C. Direct product costs.
D. Indirect product costs.
[425] Source: CIA 0594 III-46
When comparing absorption costing with variable costing,
which of the following statements is not true?
A. Absorption costing enables managers to increase
operating profits in the short run by increasing
inventories.
B. When sales volume is more than production
volume, variable costing will result in higher operating
profit.
C. A manager who is evaluated based on variable
costing operating profit would be tempted to increase
production at the end of a period in order to get a
more favorable review.
D. Under absorption costing, operating profit is a
function of both sales volume and production volume.
[426] Source: CIA 0596 III-86
A manufacturing company employs variable costing for
internal reporting and analysis purposes. However, it
converts its records to absorption costing for external
reporting. The Accounting Department always reconciles
the two operating income figures to assure that no errors
have occurred in the conversion. Financial data for the year
are presented below. The fixed manufacturing overhead
cost per unit was based on the planned level of production
of 480,000 units.
A. Increase by $50,000.
B. Decrease by $94,000.
C. Decrease by $234,000.
D. Increase by $416,000.
[423] Source: CIA 1196 III-100
(Refers to Fact Pattern #56)
A customer, operating in an isolated foreign market, has
approached the head salesperson for Product Line 1 and
offered to purchase 4,000 units of a special-order product
Budgeted and Actual Levels for Sales and Production
Budget Actual
------- ------Sales (in units)
495,000 510,000
Production (in units)
480,000 500,000
Standard Unit Manufacturing Costs
Variable Absorption
Costing Costing
-------- ---------Variable costs
$10.00 $10.00
Fixed manufacturing overhead
0
6.00
Total unit manufacturing
costs
$10.00 $16.00
The difference between the operating income calculated
under the variable costing method and the operating income
calculated under the absorption costing method would be
Total
----$7.00
=====
Annual fixed costs
Manufacturing overhead
Marketing and distribution
A. $57,600
$810,000
270,000
B. $60,000
[429] Source: CIA 1195 III-91
(Refers to Fact Pattern #57)
The selling price per pound that the confectioner should
charge for a one-pound box of candy to obtain a 20% rate
of return on invested capital is
C. $90,000
D. $120,000
[427] Source: CIA 0596 III-80
A manufacturing company's primary goals include product
quality and customer satisfaction. The company sells a
product, for which the market demand is strong, for $50
per unit. Due to the capacity constraints in the Production
Department, only 300,000 units can be produced per year.
The current defective rate is 12% (i.e., of the 300,000 units
produced, only 264,000 units are sold and 36,000 units
are scrapped). There is no revenue recovery when
defective units are scrapped. The full manufacturing cost of
a unit is $29.50, including
Direct materials
$17.50
Direct labor
4.00
Fixed manufacturing overhead
8.00
The company's designers have estimated that the defective
rate can be reduced to 2% by using a different direct
material. However, this will increase the direct materials
cost by $2.50 per unit to $20 per unit. The net benefit of
using the new material to manufacture the product will be
A. $9.70
B. $11.05
C. $11.50
D. $11.86
[430] Source: CIA 1195 III-92
(Refers to Fact Pattern #57)
The confectioner has been asked by a retailer to submit a
bid for a special order of 40,000 one-pound boxes of
candy; this is a one-time order that will not be repeated.
While the candy would be almost identical, the candy
ingredients would be $0.45 less. The total distribution costs
for the entire order would be $32,000. Special setup costs
required by this order would amount to $60,000. There
would be no other changes in costs, rates, or amounts. The
minimum selling price per one-pound box that the
confectioner would bid on this special order would be
A. $ (120,000)
A. $7.05
B. $ 120,000
B. $8.85
C. $ 750,000
C. $9.05
D. $1,425,000
D. $9.55
[428] Source: CIA 0596 III-95
A company's accounts receivable department processed
33,000 invoices during a 6-month period with a billing
error rate of 3%. Each billing error cost $110 to correct. In
addition, 15% of contract cancellations during this period
were attributed to billing errors, resulting in estimated lost
total contribution margins of $75,000 from dissatisfied
customers who canceled their contracts. If the number of
invoices issued and the costs per billing error remain
unchanged, the annual savings available for funding of a
quality improvement program to lower the company's
billing error rate by 1% (i.e., from 3% to 2%) would be
[431] Source: Publisher
Managerial accounting differs from financial accounting in
that financial accounting is
A. More oriented toward the future.
B. Primarily concerned with external financial
reporting.
C. Concerned with nonquantitative information.
D. Heavily involved with decision analysis and
implementation of decisions.
A. $61,300
B. $122,600
[432] Source: Publisher
Management should implement a different and/or more
expensive accounting system only when
C. $222,600
D. $267,800
A. The cost of the system exceeds the benefits.
[Fact Pattern #57]
A mail-order confectioner sells fine candy in one-pound
boxes. It has the capacity to produce 600,000 boxes
annually, but forecasts that it will produce and sell only
500,000 boxes in the coming year. The costs to
manufacture and distribute the candy are detailed below.
The organization has invested capital of $6,750,000.
Variable costs per pound
Manufacturing
Packaging
Distribution
$4.85
.35
1.80
B. Management thinks it appropriate.
C. The board of directors dictates a change.
D. The benefits of the system exceed the cost.
[433] Source: Publisher
Cost and managerial accounting systems are goods in the
economic sense and, as such, their benefits must exceed
their costs. When managerial accounting systems change,
the cost that is frequently ignored is the cost of
goals is that tactical goals are
A. Educating users.
A. Usually attainable.
B. Gathering and analyzing data.
B. Developed by top management.
C. Training accounting staff.
C. Concerned with issues other than profit.
D. Preparing reports.
D. Short term in nature.
[434] Source: Publisher
Controllers are ordinarily not concerned with
[440] Source: Publisher
Competitive intelligence programs include
A. Preparation of tax returns.
A. Early warning of opportunities and threats.
B. Reporting to government.
B. Environmental scannings.
C. Protection of assets.
C. Market research.
D. Investor relations.
D. Business intelligence.
[435] Source: Publisher
The treasury function is usually not concerned with
[441] Source: Publisher
Effective cost capacity management
A. Financial reporting.
A. Minimizes the values delivered to customers.
B. Short-term financing.
B. Maximizes required future investments.
C. Cash custody and banking.
D. Credit extension and collection of bad debts.
C. Matches the firm's resources with current and
future market opportunities.
D. Is limited to eliminating short-term worth.
[436] Source: Publisher
Management accounting is used by an organization's
management for a multitude of purposes that do not include
A. Marketing.
[442] Source: Publisher
When should cash discounts be deducted from the unit cost
of direct materials?
B. Control.
A. If costs are determined by estimate.
C. Evaluation.
B. If the rate of discount exceeds reasonable interest
rates.
D. Reporting.
C. If there are excessive purchasing, receiving
inspection, storage, etc., costs.
[437] Source: Publisher
When allocating service and administrative costs, the least
useful criterion as a basis for allocation is
A. Fairness.
B. Benefit.
D. Only if the discounts are taken.
[443] Source: Publisher
When developing comprehensive performance indicators to
assist in assuring total quality management, performance
indicators should not
C. Cause.
A. Be forward looking.
D. Ability to bear.
B. Focus on significant external as well as internal
relationships.
[438] Source: Publisher
In terms of financial performance, you would expect
revenue growth, negligible profits, negative cash flows, and
negative return on assets during which stage of an
organization's life cycle?
C. Track nonfinancial as well as financial indicators.
D. Rely on traditional, historical, internal financial
measures.
A. Growth stage.
B. Maturity stage.
[444] Source: Publisher
In computing the cost of capital, the cost of debt capital is
determined by
C. Declined stage.
D. Start-up stage.
A. Annual interest payment divided by the proceeds
from debt issuance.
B. Interest rate times (1 - the firm's tax rate).
[439] Source: CMA 0697 3-13
The key difference between strategic goals and tactical
C. Annual interest payment divided by the book
value of the debt.
A. 0.0743
D. The capital asset pricing model.
B. 0.0820
[445] Source: CIA 1195 III-67
Return on investment (ROI) is a very popular measure
employed to evaluate the performance of corporate
segments because it incorporates all of the major
ingredients of profitability (revenue, cost, investment) into a
single measure. Under which one of the following
combinations of actions regarding a segment's revenues,
costs, and investment would a segment's ROI always
increase?
Revenues Costs Investment
-------- -------- ---------A.
Increase
B.
Decrease
C.
Increase
D.
Increase
Decrease
Decrease
Increase
Decrease
Increase
Decrease
C. 0.0660
D. 0.0733
[449] Source: CMA 1296 3-30
Lankip Company produces two main products and a
by-product out of a joint process. The ratio of output
quantities to input quantities of direct material used in the
joint process remains consistent from month to month.
Lankip has employed the physical-volume method to
allocate joint production costs to the two main products.
The net realizable value of the by-product is used to reduce
the joint production costs before the joint costs are
allocated to the main products. Data regarding Lankip's
operations for the current month are presented in the chart
below. During the month, Lankip incurred joint production
costs of $2,520,000. The main products are not
marketable at the split-off point and, thus, have to be
processed further.
Increase
Decrease
[446] Source: Publisher
Management knowledge of the cost of capital is useful for
each of the following except
A. Making capital investment decisions.
First Main Second Main
Product
Product By-product
---------- ----------- ---------Monthly output in pounds
90,000
150,000
60,000
Selling price per pound
$30
$14
$2
Separable process costs $540,000
$660,000
The amount of joint production cost that Lankip would
allocate to the Second Main Product by using the
physical-volume method to allocate joint production costs
would be
B. Managing working capital.
A. $1,200,000
C. Setting the maximum rate of return on new
investments.
B. $1,260,000
C. $1,500,000
D. Evaluating performance.
D. $1,575,000
[447] Source: Publisher
Responsibility costs motivate managers of responsibility
centers to act in the organization's interest. The attribute
that would be least persuasive in deciding to allocate costs
to responsibility centers is that they
[450] Source: Publisher
If a financial manager/management accountant discovers
unethical conduct in his/her organization and fails to act,
(s)he will be in violation of which ethical standard(s)?
A. Are limited to staff services, such as consulting or
internal audit.
A. "Actively or passively subvert the attainment of the
organization's legitimate and ethical objectives."
B. Can be influenced by actions of the center's
manager.
B. "Communicate unfavorable as well as favorable
information."
C. Are helpful in measuring support used by the
responsibility center.
C. "Condone the commission of such acts by others
within their organizations."
D. Are used in product pricing.
D. All of the answers are correct.
[448] Source: Publisher
Company X is interested in calculating its weighted-average
cost of capital. Company X has a current financial structure
that is composed of 50% debt, 40% common stock, and
10% preferred stock. Ignore the effects of cost of retained
earnings. The beta of Company X stock is 0.7, and the
current risk-free rate of return is 4%. The market risk
premium is 6%. The preferred dividend on Company X
preferred stock is set at $2.25, and the net issuance price
per share (which happens to be the same as the current
price per share) of preferred stock is $30. Debt issued by
Company X yields an 11% stated interest rate to investors.
The marginal tax rate for Company X is 40%. What is the
weighted-average cost of capital for Company X?
[451] Source: Publisher
Under the express terms of the IMA Code of Ethics, a
financial manager/management accountant may not
A. Advertise.
B. Encroach on the practice of another financial
manager/management accountant.
C. Disclose confidential information unless authorized
or legally obligated.
D. Accept other employment while serving as a
financial manager/management accountant.
[452] Source: Publisher
Which ethical standard is most clearly violated if a financial
manager/management accountant knows of a problem that
could mislead users but does nothing about it?
A. Competence.
to the budgets submitted by other line managers. As a
token of appreciation, the line manager in question has
given the controller a gift certificate for a popular local
restaurant. In considering whether or not to accept the
certificate, the controller should refer to which section of
Statements on Management Accounting Number 1C
(SMA 1C) (revised), Standards of Ethical Conduct for
Practitioners of Management Accounting and Financial
Management?
B. Legality.
A. Competency.
C. Objectivity.
B. Confidentiality.
D. Confidentiality.
C. Integrity.
[453] Source: Publisher
The IMA Code of Ethics includes an integrity standard,
which requires the financial manager/ management
accountant to
A. Identify and make known anything that may hinder
his/her judgment or prevent satisfactory completion of
any duties.
B. Report any relevant information that could
influence users of financial statements.
C. Disclose confidential information when authorized
by his/her firm or required under the law.
D. Objectivity.
[457] Source: CMA 3
In accordance with Statements on Management
Accounting Number 1C (SMA 1C) (revised), Standards
of Ethical Conduct for Practitioners of Management
Accounting and Financial Management, a management
accountant who fails to perform professional duties in
accordance with relevant standards is acting contrary to
which one of the following standards?
A. Competency.
B. Confidentiality.
D. Refuse gifts from anyone.
C. Integrity.
[454] Source: Publisher
The IMA Code of Ethics includes a competence standard,
which requires the financial manager/ management
accountant to
A. Report information, whether favorable or
unfavorable.
B. Develop his/her professional proficiency on a
continual basis.
C. Discuss ethical conflicts and possible courses of
action with an unbiased counselor.
D. Discuss, with subordinates, their responsibilities
regarding the disclosure of information about the firm.
[455] Source: CMA 1
According to Statements on Management Accounting
Number 1C (SMA 1C) (revised), Standards of Ethical
Conduct for Practitioners of Management Accounting and
Financial Management, a practitioner has a responsibility to
recognize professional limitations. Under which standard of
ethical conduct would this responsibility be included?
A. Competency.
B. Confidentiality.
C. Integrity.
D. Objectivity.
[456] Source: CMA 2
At Key Enterprises, the controller is responsible for
directing the budgeting process. In this role, the controller
has significant influence with executive management as
individual department budgets are modified and approved.
For the current year, the controller was instrumental in the
approval of a particular line manager's budget without
modification, even though significant reductions were made
D. Objectivity.
PART 3A
COST MEASUREMENT CONCEPTS
ANSWERS
[1] Source: CMA 0690 5-27
Answer (A) is incorrect because committed costs are
fixed costs arising from the possession of plant and
equipment and a basic organization. These costs are
affected primarily by long-run decisions as to a
company's desired capacity.
Answer (B) is correct. Discretionary costs are
characterized by uncertainty about the relationship
between input (the costs) and the value of the related
output. Advertising and research are examples. They
should be contrasted with engineered costs, that is,
costs having a clear input-output relationship (e.g.,
the cost of direct materials).
Answer (C) is incorrect because opportunity cost is
the return available from the next best use of a
resource.
Answer (D) is incorrect because differential
(incremental) costs are those that vary among
decision options.
[2] Source: CMA 1291 3-27
Answer (A) is incorrect because $35 equals direct
labor plus variable manufacturing overhead. It does
not include $6 fixed overhead.
Answer (B) is correct. Conversion costs are incurred
in transforming raw materials into finished products.
They include direct labor and factory overhead. Thus,
unit conversion costs equal $41 ($20 direct labor +
$15 variable overhead + $6 fixed overhead).
Answer (C) is incorrect because $48 includes $3 in
variable selling costs and $4 in fixed selling costs.
Answer (D) is incorrect because $67 includes $32 in
direct materials and excludes $6 fixed overhead.
[3] Source: CMA 1291 3-28
Answer (A) is incorrect because $73 includes $15
variable manufacturing overhead and $6 fixed
manufacturing overhead.
Answer (B) is incorrect because $32 does not
include $20 direct labor.
$70 ($32 direct materials + $20 direct labor + $15
variable overhead + $3 variable selling costs).
Answer (C) is incorrect because $52 does not
include $15 variable overhead and $3 variable selling
costs.
Answer (D) is incorrect because $18 does not
include $32 direct materials and $20 direct labor.
[5] Source: CMA 1291 3-30
Answer (A) is incorrect because total estimated costs
are $948,000 [($73 x 12,000) + ($4 x 12,000) +
($3 x 8,000)].
Answer (B) is incorrect because $960,000 is
calculated using 12,000 units to determine variable
selling costs instead of 8,000.
Answer (C) is correct. Manufacturing costs at a
production level of 12,000 units are $73 per unit
($32 + $20 + $15 + $6). Total estimated
manufacturing costs are therefore $876,000 ($73 x
12,000 units). Fixed selling costs are expected to be
$48,000 ($4 x 12,000 units). The anticipated total
variable selling costs are $24,000 ($3 x 8,000 units).
Thus, the total estimated costs are $948,000
($876,000 + $48,000 + $24,000).
Answer (D) is incorrect because $932,000 is
calculated using 8,000 units to determine fixed selling
costs instead of 12,000.
[6] Source: CMA 0692 3-6
Answer (A) is correct. The activity base for overhead
allocation should have a high correlation with the
incurrence of overhead. Thus, the activities of various
departments are usually more appropriate as activity
bases than plant-wide activities, particularly when
products and production activities are not
homogeneous.
Answer (B) is incorrect because the number of
departments is not as important as the relationship
between the costs and activity base.
Answer (C) is incorrect because products require
similar manufacturing effort, they are relatively
homogeneous, and a plant-wide rate might be
adequate.
Answer (D) is incorrect because the degree of
variability in costs is not as important as the
relationship between activity bases and costs, and the
degree to which manufacturing activities are similar
for all products.
Answer (C) is incorrect because $67 includes $15
variable manufacturing overhead.
[7] Source: CMA 0691 3-22
Answer (D) is correct. Prime costs are the costs of
direct materials and direct labor. They are costs that
can be directly associated with the finished product.
Hence, unit prime costs are $52 ($32 direct materials
+ $20 direct labor).
[4] Source: CMA 1291 3-29
Answer (A) is incorrect because $38 does not
include $32 direct materials.
Answer (B) is correct. Variable costs vary in direct
proportion to production. Total unit variable costs are
Answer (A) is incorrect because external failure cost
is not related to statistical quality control.
Answer (B) is incorrect because internal failure cost
is not related to statistical quality control.
Answer (C) is incorrect because prevention cost is
not related to statistical quality control.
Answer (D) is correct. Statistical quality control
methods attempt to identify nonrandom variations in
operating activities. The costs of maintaining a
statistical quality control system are appraisal costs
because they are incurred to detect products not
meeting specifications.
[8] Source: CIA 1193 IV-6
Answer (A) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
Answer (B) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
Answer (C) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
Answer (D) is correct. The rework charge for direct
materials, indirect materials (supplies), direct labor,
and overhead applied on the basis of direct labor
cost is $40,300 [$5,000 + $300 + $14,000 + (1.5 x
$14,000)]. If an allowance for rework is included in a
company's manufacturing overhead budget, rework
of defective units is spread over all jobs or batches as
part of the predetermined overhead application rate.
Hence, the debit is to overhead control.
appropriate activity base (cost driver).
Answer (D) is incorrect because, under ABC, a
product is allocated only those costs that pertain to its
production; that is, products are not
cross-subsidized.
[11] Source: CIA 0591 IV-7
Answer (A) is incorrect because process costing is
employed when manufacturing involves a
homogeneous product.
Answer (B) is incorrect because relevant costing
refers to expected future costs that are considered in
decision making.
Answer (C) is incorrect because direct costing
includes only variable manufacturing costs in unit cost.
Answer (D) is correct. The job-order cost system of
accounting is appropriate when products have varied
characteristics and/or when identifiable groupings are
possible, e.g., batches of certain styles or types of
furniture. The unique aspect of job-order costing is
the identification of costs to specific units or a
particular job.
[12] Source: CIA 1188 IV-5
[9] Source: CIA 0593 IV-4
Answer (A) is correct. Job-order costing is used by
organizations whose products or services are readily
identified by individual units or batches. The
advertising agency accumulates its costs by client.
Job-order costing is the most appropriate system for
this type of nonmanufacturing firm.
Answer (B) is incorrect because operation costing
would most likely be employed by a manufacturer
producing goods that have common characteristics
plus some individual characteristics. This would not
be an appropriate system for an advertising agency
with such a diverse client base.
Answer (C) is incorrect because relevant costing
refers to expected future costs that are considered in
decision making.
Answer (D) is incorrect because process costing is
employed when a company mass produces a
homogeneous product in a continuous fashion through
a series of production steps.
Answer (A) is incorrect because process costing is
more appropriate for the continuous manufacture of
similar products.
Answer (B) is incorrect because transfer pricing is
used when a company transfers products between
two decentralized divisions.
Answer (C) is correct. The job-order cost system of
accounting is appropriate when producing products
with individual characteristics such as in the
manufacturing of custom-built yachts. The unique
aspect of job-order costing is the identification of
costs to specific units or a particular job.
Answer (D) is incorrect because the step-down
method allocates service department costs to the
users of services.
[13] Source: CIA 0589 IV-4
Answer (A) is incorrect because a process costing
system is used for continuous process manufacturing
of units that are relatively homogeneous (e.g., oil
refining and automobile production).
[10] Source: CIA 0594 III-47
Answer (A) is incorrect because marketing and
distribution costs should be allocated to specific
products.
Answer (B) is correct. ABC determines the activities
that will serve as cost objects and then accumulates a
cost pool for each activity using the appropriate
activity base (cost driver). It is a system that may be
employed with job order or process costing methods.
Thus, when there is only one product, the allocation
of costs to the product is trivial. All of the cost is
assigned to the one product; the particular method
used to allocate the costs does not matter.
Answer (C) is incorrect because ABC determines the
activities that will serve as cost objects and then
accumulates a cost pool for each activity using the
Answer (B) is correct. The job-order cost system of
accounting is appropriate when producing products
with individual characteristics and/or when identifiable
groupings are possible, e.g., batches of certain styles
or types of furniture. The unique aspect of job-order
costing is the identification of costs to specific units or
a particular job. A job-order system is appropriate in
consulting because of the substantial variation
between engagements.
Answer (C) is incorrect because an operations
costing system is a hybrid of job-order and process
costing. It is used by companies that manufacture
goods with some common and some dissimilar
characteristics.
Answer (D) is incorrect because a just-in-time
costing system is a hybrid-costing system used in
conjunction with just-in-time production systems. It
eliminates the stores account and detailed recording
of raw materials and direct labor through various
operations. It also replaces work-in-process with a
raw and in-process inventory.
[14] Source: Publisher
Answer (A) is incorrect because work-in-process is
an inventory or real account.
Answer (B) is correct. The manufacturing account is
an inventory account to which direct materials, direct
labor, and factory overhead costs are charged as
they are incurred in the production process. The sum
of these costs plus the cost of BWIP is the total
production cost to be accounted for in any one
period. The total is allocated to goods completed
during the period, i.e., to finished goods, and to
EWIP. The manufacturing account may also be
credited for abnormal spoilage.
Answer (C) is incorrect because work-in-process is
a real account.
Answer (D) is incorrect because the factory
overhead account pools the indirect costs as incurred
and charges them to production systematically.
[15] Source: Publisher
Answer (A) is incorrect because EWIP is credited
when completed units are transferred but should
never have a credit balance.
Answer (B) is correct. The sum of the debits to WIP
equals total production costs to be accounted for.
Ignoring possible spoilage, production consists either
of goods that have been completed or those still in
process. Accordingly, after the account is credited
for the cost of goods completed and transferred to
the FG inventory, the debit balance in the account is
EWIP.
Answer (C) is incorrect because total production
costs to be accounted for include finished goods as
well as EWIP.
Answer (D) is incorrect because work-in-process is
an asset (inventory) account. Asset accounts are real
accounts that are not closed out at the end of the
period.
[16] Source: Publisher
Answer (A) is incorrect because factory depreciation
and supplies are excellent examples of indirect costs
that are considered overhead.
Answer (B) is incorrect because service department
costs are not directly related to the production of
specific goods; these costs are indirect although
associated with the manufacturing process. Thus, they
can be allocated to the final output.
Answer (C) is incorrect because maintenance costs
are indirectly associated with manufacturing and are
allocated to products through the overhead account.
Answer (D) is correct. Marketing costs, for example,
salaries of sales personnel, sales commissions, and
advertising, are period costs and are expensed as
incurred. They cannot be allocated to the product
because these marketing costs are not associated
with the manufacturing process.
[17] Source: CIA 0591 IV-11
Answer (A) is incorrect because this amount results
from treating the actual overhead and labor hours as
the estimated values and vice versa.
Answer (B) is correct. Applied overhead equals the
actual labor hours (210,000) times the estimated
application rate ($500,000 ・200,000 DLH = $2.50
per direct labor hour), or $525,000. This amount is
$10,000 ($525,000 - $515,000 actual cost) higher
than the actual overhead cost incurred. Hence,
overhead was overapplied by $10,000.
Answer (C) is incorrect because this amount results
from treating actual overhead as the estimated value
and vice versa.
Answer (D) is incorrect because $15,000 is the
excess of actual over estimated overhead.
Additionally, factory overhead is overapplied.
[18] Source: Publisher
Answer (A) is incorrect because 10,250 would have
been produced if overhead had been overapplied by
$1,500 [($39,500 + $1,500) ・$4].
Answer (B) is incorrect because 10,000 is the result
of dividing budgeted, not applied, overhead by the
application rate.
Answer (C) is incorrect because 9,875 units would
have been produced if $39,500 had been the amount
of applied overhead.
Answer (D) is correct. Given actual overhead of
$39,500 and underapplied overhead of $1,500,
overhead applied was $38,000 ($39,500 - $1,500).
Overhead is applied at the rate of $4 per unit
($40,000 budgeted overhead ・10,000 budgeted
units). Accordingly, 9,500 units were produced
($38,000 applied overhead ・$4 per unit application
rate).
[19] Source: CIA 0591 IV-6
Answer (A) is incorrect because job-order costing is
employed when manufacturing involves different
(heterogeneous) products.
Answer (B) is incorrect because direct costing
includes only variable manufacturing costs in unit cost.
It may be used whether products are homogeneous
or heterogeneous and with either process or
job-order costing.
Answer (C) is incorrect because absorption costing
includes all manufacturing costs as part of the cost of
a finished product. It may be used whether products
are homogeneous or heterogeneous and with either
process or job-order costing.
Answer (D) is correct. Like products that are mass
produced should be accounted for using process
costing techniques to assign costs to products. Costs
are accumulated by departments or cost centers
rather than by jobs, work-in-process is stated in
terms of equivalent units, and unit costs are
established on a departmental basis. Process costing
is an averaging process that calculates the average
cost of all units.
[23] Source: Publisher
[20] Source: Publisher
Answer (A) is incorrect because activity-based
costing may be used with process costing.
Answer (B) is incorrect because activity-based
costing may be used with a job-order costing system.
Answer (C) is incorrect because activity-based
costing tends to increase cost pools.
Answer (D) is correct. Activity-based costing
analyzes production processes and defines the
activities of which they are composed. It then
accumulates a cost pool for each activity using the
appropriate activity base (cost driver or causal factor
in the incurrence of cost). Whereas a traditional
system might use a single cost pool for a process,
activity-based costing may designate many activities
within that process for the separate accumulation of
costs, each with a different allocation base. The result
is greater accuracy because costs are more likely to
be assigned on a specific cause-and-effect basis than
in less precise traditional systems.
[21] Source: Publisher
Answer (A) is correct. Transferred-in costs are the
costs incurred in prior stages of production. They
pertain to the units of production that move from one
process to another. Thus, they are the basic units
being produced. Direct materials are added to the
basic units during processing.
Answer (B) is incorrect because value is not an issue
in differentiating between transferred-in costs and
other direct materials.
Answer (C) is incorrect because value is not an issue
in differentiating between transferred-in costs and
other direct materials.
Answer (D) is incorrect because direct materials may
be added at the beginning of a process and,
conceivably, the transferred-in materials (i.e., basic
units) could be added to the process after the direct
materials were processed.
[22] Source: Publisher
Answer (A) is incorrect because EUP must be
calculated for conversion costs.
Answer (B) is incorrect because transferred-in costs
are usually included at the beginning of the process.
They consist of costs incurred in preceding
departments and are therefore conceptually similar to
direct materials. Hence, they are separate from other
costs.
Answer (C) is incorrect because direct materials may
be added at various points in the operation. Each
kind of material should be the basis for a separate
EUP calculation.
Answer (D) is correct. Overhead is often applied on
the basis of a direct labor activity base such as hours
or cost. Thus, a single EUP calculation is made for
conversion costs (direct labor and overhead). There
is no basis for separating these costs if they are
incurred uniformly.
Answer (A) is correct. Normal spoilage is the
spoilage that occurs under normal operating
conditions. It is essentially uncontrollable in the short
run. Normal spoilage arises under efficient operations
and is treated as a product cost.
Answer (B) is incorrect because, if spoilage occurs
from a special production run, it is abnormal.
Answer (C) is incorrect because spoilage is abnormal
if it arises under inefficient operations.
Answer (D) is incorrect because, if spoilage is
controllable, it should be controlled under normal
circumstances.
[24] Source: Publisher
Answer (A) is incorrect because the allocation is
solely to cost of goods manufactured when EWIP
has not been inspected.
Answer (B) is incorrect because normal spoilage
costs should be allocated to all good units, i.e., all
units that have passed the inspection point.
Answer (C) is incorrect because, when the inspection
point is at the end of the process, goods in EWIP
have not yet passed the inspection point.
Answer (D) is correct. Normal spoilage costs should
be allocated to all good units, i.e., all units that have
passed the inspection point. In typical accounting
problems, the inspection point is at the end of the
process. Therefore, goods in EWIP have not passed
the inspection point. If the inspection point is prior to
the end of the process, however, and goods in EWIP
have passed the inspection point, a portion of the
normal spoilage costs should be allocated to EWIP.
[25] Source: Publisher
Answer (A) is incorrect because normal spoilage is
allocated to good units as they pass through each
inspection point, not just to goods completed during
the period.
Answer (B) is incorrect because normal spoilage
must be allocated to all good units as they pass
through each inspection point, not just to units in
EWIP and completed goods based on their relative
values.
Answer (C) is correct. At each inspection point, the
costs of normal spoilage should be allocated to the
good units passing through the inspection point.
Consequently, the cost of moving the good units to
the inspection point includes the direct materials and
conversion costs of the normally spoiled units as well
as those of the good units.
Answer (D) is incorrect because normal spoilage is
allocated to good units as they pass through each
inspection point based on their relative values (not
based on units).
[26] Source: Publisher
Answer (A) is incorrect because shrinkage should be
treated as spoilage and charged to the product if
normal and charged as a loss if abnormal.
Answer (B) is incorrect because shrinkage usually
does not result in scrap or waste products that can be
sold and accounted for as a revenue.
Answer (C) is incorrect because shrinkage usually
does not result in scrap or waste products that can be
sold and accounted for as a contra cost.
Answer (D) is correct. Shrinkage consists of
materials lost through the manufacturing process (e.g.,
heat, compression, etc.). It is accounted for in the
same manner as spoilage. If shrinkage is normal, it is
charged to the product. If it is abnormal, it is charged
as period cost (a loss).
[27] Source: CIA 0591 IV-9
Answer (A) is incorrect because perfection standards
are based on perfect operating conditions, and
negative deviation from such standards is expected.
Answer (B) is incorrect because abnormal spoilage
may result from any of a variety of conditions or
circumstances that are usually controllable by first-line
supervisors.
Answer (D) is incorrect because this would be an
example of when it is necessary to record the value of
scrap in inventory.
[30] Source: CIA 1189 IV-7
Answer (A) is correct. Normal rework costs incurred
because of factors common to all units produced
ordinarily are charged to factory overhead control to
spread the costs over all good units.
Answer (B) is incorrect because, in a process-costing
application, normal rework is customarily charged to
overhead. In a job-order costing application, normal
rework costs related to specific jobs are usually
charged to the work-in-process account for the given
job, not the control account.
Answer (C) is incorrect because rework costs are
not charged to finished goods.
Answer (D) is incorrect because rework costs are
applied to good units or, in the case of abnormal
rework, charged to a loss account.
[31] Source: Publisher
Answer (C) is incorrect because abnormal spoilage
may result from any of a variety of conditions or
circumstances that are not necessarily related to
standards.
Answer (D) is correct. Abnormal spoilage is spoilage
that is not expected to occur under normal, efficient
operating conditions. The cost of abnormal spoilage
should be separately identified and reported to
management. Abnormal spoilage is typically treated
as a period cost (a loss) because of its unusual
nature.
[28] Source: CIA 1185 IV-6
Answer (A) is incorrect because abnormal spoilage
costs are not considered a component of the cost of
good units produced.
Answer (B) is incorrect because abnormal spoilage
costs are not considered a component of the cost of
good units produced.
Answer (A) is incorrect because the quantity of
production report is only concerned with the units put
into and transferred out of the process in the current
period.
Answer (B) is correct. A quantity of production
report adds the units in BWIP and those entering the
process during the period, and indicates the
disposition of those units, i.e., the units completed,
spoiled, and in EWIP, respectively.
Answer (C) is incorrect because the cost of goods
manufactured statement gives the cost of goods
completed rather than an accounting for all of the
units that went into the process.
Answer (D) is incorrect because a cost of production
report details the costs debited to and credited from
the manufacturing account.
[32] Source: CIA 0577 IV-3
Answer (C) is correct. Abnormal spoilage is spoilage
that is not expected to occur under normal, efficient
operating conditions. Because of its unusual nature,
abnormal spoilage is typically treated as a loss in the
period in which it is incurred.
Answer (D) is incorrect because abnormal spoilage
costs must be taken out of the manufacturing account.
[29] Source: Publisher
Answer (A) is correct. If scrap material is sold on a
regular basis, e.g., daily, its value should be recorded
either as a contra cost or as a revenue on a regular
basis, and income will be accounted for properly. If it
is not sold regularly and not recorded in inventory,
income may be misstated.
Answer (B) is incorrect because failure to record
significant scrap value can misstate income.
Answer (C) is incorrect because the issue is timing
the recognition of scrap value, not the account used.
Answer (A) is incorrect because items such as
additional processing costs, competitive conditions in
sales markets, and the relative contribution margins of
all products derived from the common process must
be considered in setting selling prices.
Answer (B) is incorrect because items such as
additional processing costs, competitive conditions in
sales markets, and the relative contribution margins of
all products derived from the common process must
be considered in determining whether to continue
producing an item.
Answer (C) is incorrect because management of one
department may have no control over joint costs.
Answer (D) is correct. Joint costs are useful for
inventory costing when two or more identifiable
products emerge from a common production
process. The joint costs of production must be
allocated on some basis, such as relative sales value.
[33] Source: CIA 1190 IV-10
Answer (A) is incorrect because a joint product has
relatively significant sales value when compared with
the other products. A by-product is identifiable as an
individual product only upon reaching the split-off
point, and it has relatively minor sales value when
compared to the other products.
Answer (B) is incorrect because products that are
separately identifiable before the production process
are not classified as joint products. Furthermore,
physical volume has nothing to do with determining a
joint product. Some joint products with significant
physical volume may not have significant sales value.
Answer (C) is correct. Joint products are two or
more separate products generated by a common
process from a common input that are not separable
prior to the split-off point. Moreover, in contrast to
by-products, they have significant sales values in
relation to each other either before or after additional
processing.
Answer (D) is incorrect because products do not
have to be salable at the split-off point to be
considered joint products; in fact, many joint
products have to be processed after the split-off
point before they can be sold.
[34] Source: CIA 0585 IV-11
Answer (A) is incorrect because treating the net
realizable value of a by-product as an addition to the
revenues of the other products attributes the
allocation characteristics of main products to
by-products.
Answer (B) is incorrect because the NRV is
ordinarily recognized as a contra cost in the period
the by-product is produced.
Answer (C) is correct. Because of the relatively small
sales value, a cost-effective allocation method is used
for by-products. The net realizable value of
by-products is usually deducted from the cost of the
main products.
Answer (D) is incorrect because recognition of a
separate net realizable value upon which to allocate
some of the common costs attributes the allocation
characteristics of main products to by-products.
[35] Source: Publisher
Answer (A) is incorrect because cost objectives may
be final, and should be logically related to the cost
pool, preferably on a cause-and-effect basis.
Answer (B) is incorrect because cost objectives may
be intermediate if the costs charged are later
reallocated to another cost objective. Furthermore,
cost objectives should be logically linked with the
cost pool.
Answer (C) is incorrect because cost objectives may
be intermediate or final, and should be logically
related to the cost pool, preferably on a
cause-and-effect basis.
Answer (D) is correct. Cost objectives are the
intermediate and final dispositions of cost pools. Cost
objectives may be intermediate as cost pools move
from their originating points to the final cost
objectives. Cost objectives may be final, e.g., a job,
product, or process itself, and should be logically
related to the cost pool, preferably on a
cause-and-effect basis.
[36] Source: Publisher
Answer (A) is incorrect because, with respect to
plant-wide and departmental overhead rates, a
plant-wide overhead rate requires only one overhead
control account. Conversely, using a departmental
overhead rate, a separate overhead cost pool is
required for each production department, which
makes the departmental overhead rate concept more
complex and more accurate than the plant-wide
overhead rate concept.
Answer (B) is incorrect because, with respect to
plant-wide and departmental overhead rates, a
plant-wide overhead rate requires only one overhead
control account. Conversely, using a departmental
overhead rate, a separate overhead cost pool is
required for each production department, which
makes the departmental overhead rate concept more
complex and more accurate than the plant-wide
overhead rate concept.
Answer (C) is incorrect because, with respect to
plant-wide and departmental overhead rates, a
plant-wide overhead rate requires only one overhead
control account. Conversely, using a departmental
overhead rate, a separate overhead cost pool is
required for each production department, which
makes the departmental overhead rate concept more
complex and more accurate than the plant-wide
overhead rate concept.
Answer (D) is correct. A firm with a relatively simple
production and accounting system may use only one
overhead control account with one plant-wide
overhead rate. In a more complex environment, the
firm may need a separate overhead cost pool for
each department. The departmental rate is relatively
more complex than the plant-wide rate because of
the number of accounts as well as the number of rates
that must be established prior to implementation. A
departmental rate allows for a more accurate
application of overhead to a specific job when
products require different methods of production;
e.g., product A may require more machine hours but
fewer labor hours than product B. If a plant-wide
rate were used based on labor hours, product A
would not be allocated its fair share of overhead.
[37] Source: CIA 1188 IV-4
Answer (A) is correct. Cost pools are accounts in
which a variety of similar costs are accumulated prior
to allocation to cost objectives. The overhead
account is a cost pool into which various types of
overhead are accumulated prior to their allocation.
Indirect manufacturing costs are an element of
overhead allocated to a cost pool. Ordinarily,
different allocation methods are applied to variable
and fixed costs, thus requiring them to be separated.
Establishing separate pools allows the determination
of dual overhead rates. As a result, the assessment of
capacity costs, the charging of appropriate rates to
user departments, and the isolation of variances are
facilitated.
Answer (B) is incorrect because prime costs are
direct costs, and variable administrative costs are
period, not manufacturing, costs. The question
inquires about indirect manufacturing costs.
Answer (C) is incorrect because establishing a
separate pool for each assembly line worker to
account for wages is not necessary under most cost
allocation schemes.
Answer (D) is incorrect because different allocation
methods are usually applied to variable costs and
fixed costs.
[38] Source: CIA 0581 IV-17
Answer (A) is incorrect because determining the
income of a product or functional unit requires
absorption (full-cost) data.
Answer (B) is correct. In the short run, management
decisions are made in reference to incremental costs
without regard to fixed overhead costs because fixed
overhead cannot be changed in the short run. Thus,
the emphasis in the short run should be on
controllable costs. For example, service department
costs allocated as a part of overhead may not be
controllable in the short run.
Answer (C) is incorrect because determining the
costs for the federal government's cost-plus contracts
requires absorption (full-cost) data.
Answer (D) is incorrect because absorption costing
(full-costing) is currently required for tax purposes.
[39] Source: CIA 0590 IV-8
Answer (A) is incorrect because the physical units
method is not a service department cost allocation
method. It is a method for allocating joint costs.
Answer (B) is incorrect because the step-down
method gives only partial recognition to services
rendered by service departments to other service
departments. Once a service department's costs have
been allocated, the costs of subsequent service
departments are not reallocated to it.
Answer (C) is incorrect because the Massachusetts
Formula is only used when there is no apparent
causal relationship. In this instance, the relationship
between the service departments and the operating
departments is known.
Answer (D) is correct. The reciprocal method uses
simultaneous equations to allocate costs by explicitly
recognizing the mutual services rendered among all
departments. Because it acknowledges all sources of
cost, it should be used when management is using the
results of allocations to make decisions on pricing
products.
[40] Source: Publisher
Answer (A) is correct. The most appropriate method
of overhead allocation of variable service department
costs to production departments is to multiply the
actual usage of the production department by the
predetermined rate. This basis establishes the user
department's responsibility for the actual usage at the
predetermined rate.
Answer (B) is incorrect because the actual rate may
differ substantially from the estimated rate, and the
production department usually has no control over
the actual rate.
Answer (C) is incorrect because the capacity costs of
the service department should be allocated by a fixed
overhead rate or lump-sum charge based upon the
capacity needs of the production department.
Answer (D) is incorrect because the user department
does not control service department costs.
[41] Source: Publisher
Answer (A) is incorrect because fixed service
department cost allocation based on actual short-run
use transfers any efficiencies or inefficiencies of the
service department to the production department.
Answer (B) is incorrect because allocating fixed
service department costs based on actual short-run
units or actual rates transfers any efficiencies or
inefficiencies of the service department to the
production department.
Answer (C) is correct. The fixed costs of service
departments should be allocated to production
departments in lump-sum amounts on the basis of the
service department's budgeted costs of long-term
capacity to serve. This basis allows the production
department to develop (budget) a certain capacity
needed from the service departments and to agree on
the assessment of costs. Analysis of actual results
permits evaluation of the service departments' ability
to provide the estimated volume of service.
Answer (D) is incorrect because allocating the
service department's actual costs based on actual use
of services transfers any efficiencies or inefficiencies
of the service department to the production
department.
[42] Source: CIA 1190 IV-3
Answer (A) is correct. The cause-and-effect criterion
seeks a relationship between cost and the cost
objective (for example, an operating division) such
that changes in total costs can be predicted based on
activities of the cost objective. Thus, the number of
employees in an operating division is likely to
correlate with incurrence of costs by the personnel
department.
Answer (B) is incorrect because square footage
would be more appropriate for allocating building and
maintenance costs than personnel costs.
Answer (C) is incorrect because total service years
of employees in each division is not a basis for
predicting changes in personnel department costs.
Answer (D) is incorrect because total book value of
identifiable division assets is not a basis for predicting
changes in personnel department costs.
[43] Source: CMA 1295 3-14
Answer (A) is incorrect because external failure
occurs after the product is shipped; thus, statistical
quality control is not an external failure cost.
Answer (B) is incorrect because internal failure costs
arise after poor quality has been found; statistical
quality control is designed to detect quality problems.
Answer (C) is incorrect because statistical quality
control is not a training cost.
Answer (D) is correct. SMA 4-R lists four categories
of quality costs: prevention, appraisal, internal failure,
and external failure (lost opportunity). Appraisal costs
include quality control programs, inspection, and
testing.
[44] Source: CMA 1290 3-1
Answer (A) is incorrect because theoretical capacity
assumes all personnel and equipment will operate at
peak efficiency and total plant capacity will be used.
Answer (B) is correct. Practical capacity is the
maximum level at which output is produced
efficiently. It includes consideration of idle time
caused by human and equipment inefficiencies but not
by inadequate sales demand. Practical capacity
exceeds the other commonly used denominator levels
included in the calculation of the fixed factory
overhead rate. Because practical capacity will almost
always exceed the actual use of capacity, it will result
in an unfavorable production volume variance.
Moreover, this variance (the difference between
budgeted fixed overhead and the fixed overhead
applied based on standard input allowed for the
actual output) will be greatest given a practical
capacity measure. The unfavorable production
volume variance is charged to income summary, so
the effect of using a larger denominator volume is the
more rapid write-off of fixed overhead (practical
capacity may be used for federal income tax
purposes).
the specific cost object influences whether a cost is
direct or indirect. For example, a cost might be
directly associated with a single plant. The same cost,
however, might not be directly associated with a
particular department in the plant.
Answer (D) is incorrect because both direct and
indirect costs can be either avoidable or unavoidable,
depending upon the cost object.
[47] Source: CMA 1292 3-1
Answer (A) is incorrect because a revenue center is
evaluated on the basis of revenue generated, without
regard to costs.
Answer (B) is correct. Cost allocation is the process
of assigning and reassigning costs to cost objects. It is
used for those costs that cannot be directly
associated with a specific cost object. Cost allocation
is often used for purposes of measuring income and
assets for external reporting purposes. Cost
allocation is less meaningful for internal purposes
because responsibility accounting systems emphasize
controllability, a process often ignored in cost
allocation.
Answer (C) is incorrect because cost allocation is not
necessary for cash budgeting and controlling
expenditures.
Answer (D) is incorrect because allocations are not
needed for variable costing, which concerns direct,
not indirect, costs.
Answer (C) is incorrect because practical capacity
ignores demand.
[48] Source: CMA 1292 3-3
Answer (D) is incorrect because the production
volume to meet a given production level may be more
or less than practical capacity. Horngren and Foster
call this volume the master-budget volume.
[45] Source: CMA 1290 3-12
Answer (A) is correct. Full absorption costing treats
fixed factory overhead costs as product costs. Thus,
inventory and cost of goods sold include (absorb)
fixed factory overhead.
Answer (B) is incorrect because marginal costing
considers only the incremental costs of producing an
additional unit of product. In most cases marginal
costs are variable costs.
Answer (C) is incorrect because direct (variable)
costing treats only variable costs as product costs.
Answer (D) is incorrect because direct (variable)
costing treats only variable costs as product costs.
[46] Source: CMA 0692 3-5
Answer (A) is incorrect because behavior in
response to volume changes is a factor only if the
cost object is a product.
Answer (B) is incorrect because the timing of an
expense is not a means of classifying a cost as direct
or indirect.
Answer (C) is correct. A direct cost can be
specifically associated with a single cost object in an
economically feasible way. An indirect cost cannot be
specifically associated with a single cost object. Thus,
Answer (A) is incorrect because the graphic
approach can be used to estimate a linear function.
Answer (B) is incorrect because simple regression,
which is based on one independent variable, is the
best means of expressing a linear cost function.
Answer (C) is incorrect because the high-low
method, although unsophisticated, can often give a
good approximation of a linear cost function.
Answer (D) is correct. Regression analysis can be
used to find an equation for the linear relationship
among variables. However, multiple regression is not
used to generate an equation of the type Y = a + bX
because multiple regression has more than one
independent variable. In other words, a multiple
regression equation would take the form: Y = a +
bX1 + cX2 + dX3 + . . . .
[49] Source: CMA 1292 3-4
Answer (A) is correct. Joint products are created
from processing a common input. Common costs are
incurred prior to the split-off point and cannot be
identified with a particular joint product. As a result,
common costs are irrelevant to the timing of sale.
However, separable costs incurred after the split-off
point are relevant because, if incremental revenues
exceed the separable costs, products should be
processed further, not sold at the split-off point.
Answer (B) is incorrect because joint costs (common
costs) have no effect on the decision as to when to
sell a product.
Answer (C) is incorrect because sales salaries for the
production period do not affect the decision.
Answer (D) is incorrect because purchase costs are
joint costs.
[50] Source: CMA 0693 3-5
Answer (A) is incorrect because overhead costs as
well as prime costs (direct materials and labor) are
included in inventory.
Answer (B) is incorrect because materials costs are
also included.
Answer (C) is incorrect because inventory costs are
expensed when the goods are sold, not when they
are transferred to finished goods.
Answer (D) is correct. Under an absorption costing
system, inventoriable (product) costs include all costs
necessary for good production. These include direct
materials and conversion costs (direct labor and
overhead). Both fixed and variable overhead is
included in inventory under an absorption costing
system. Inventoriable costs are treated as assets until
the products are sold because they represent future
economic benefits. These costs are expensed at the
time of sale.
[51] Source: CMA 1293 3-9
Answer (A) is incorrect because operation costing
differs from process costing in the treatment of
materials.
Answer (B) is correct. Operation costing is a hybrid
of job-order and process costing systems wherein
materials are allocated on the basis of batches of
production. It is used by companies that manufacture
goods that undergo some similar and some dissimilar
processes. Operation costing accumulates total
conversion costs and determines a unit conversion
cost for each operation. However, direct materials
costs are charged specifically to products or batches
as in job-order systems.
[53] Source: CMA 0694 3-8
Answer (A) is incorrect because committed costs
have not been amortized.
Answer (B) is incorrect because discretionary costs
are those that do not have a clear cause and effect
relationship between inputs and outputs.
Answer (C) is incorrect because engineered costs are
those that have a measurable relationship between
inputs and outputs.
Answer (D) is correct. Committed costs result when
a going concern holds fixed assets such as property,
plant, and equipment. The related committed costs
include depreciation, long-term lease payments, and
insurance. Such costs establish the present level of
operating capacity and cannot be altered in the short
run.
[54] Source: CMA 0694 3-9
Answer (A) is incorrect because variable costs are
fixed per unit; they do not fluctuate. Fixed costs per
unit change as production changes.
Answer (B) is correct. Fixed costs remain unchanged
within the relevant range for a given period despite
fluctuations in activity, but per unit fixed costs do
change as the level of activity changes. Thus, fixed
costs are fixed in total but vary per unit as activity
changes. Total variable costs vary directly with
activity. They are fixed per unit, but vary in total.
Answer (C) is incorrect because all costs are variable
in the long term.
Answer (D) is incorrect because unit variable costs
are fixed in the short term.
[55] Source: CMA 1294 3-1
Answer (A) is incorrect because conversion costs
consist of direct labor and overhead.
Answer (C) is incorrect because operation costing
differs from process costing in the treatment of
materials.
Answer (B) is incorrect because separable costs are
incurred beyond the point at which jointly produced
items become separately identifiable.
Answer (D) is incorrect because overhead allocations
are made in operation costing.
Answer (C) is incorrect because committed costs
result when an entity holds fixed assets; examples of
committed costs include long-term lease payments
and depreciation.
[52] Source: CMA 0694 3-5
Answer (A) is incorrect because rent is an example
of fixed factory overhead.
Answer (B) is incorrect because property taxes are
an example of fixed factory overhead.
Answer (C) is incorrect because depreciation is an
example of fixed factory overhead.
Answer (D) is correct. A fixed cost is one that
remains unchanged within the relevant range for a
given period despite fluctuations in activity. Such
items as rent, property taxes, depreciation, and
supervisory salaries are normally fixed costs because
they do not vary with changes in production. Power
costs, however, are at least partially variable because
they increase as usage increases.
Answer (D) is correct. Raw materials and direct
labor (such as machining and assembly) are a
manufacturer's prime costs.
[56] Source: CMA 1294 3-2
Answer (A) is incorrect because contribution margin
ratio is the ratio of contribution margin (sales variable costs) to sales.
Answer (B) is correct. Gross profit is the difference
between sales price and the full absorption cost of
goods sold.
Answer (C) is incorrect because contribution
(margin) is the difference between unit selling price
and unit variable costs. Fixed costs are not
considered.
Answer (D) is incorrect because the gross profit
margin ratio equals gross profit divided by sales.
choices.
[60] Source: CMA 1294 3-6
[57] Source: CMA 1294 3-3
Answer (A) is incorrect because a carrying cost is the
cost of carrying inventory; examples are insurance
and rent on warehouse facilities.
Answer (A) is incorrect because joint (common)
costs are incurred in the production of two or more
inseparable products up to the point at which the
products become separable.
Answer (B) is incorrect because a discretionary cost
(a managed or program cost) results from a periodic
decision about the total amount to be spent. It is also
characterized by uncertainty about the relationship
between input and the value of the related output.
Examples are advertising and R&D costs.
Answer (B) is correct. Committed costs are those for
which management has made a long-term
commitment. They typically result when a firm holds
fixed assets. Examples include long-term lease
payments and depreciation. Committed costs are
typically fixed costs.
Answer (C) is incorrect because a sunk cost is a past
cost or a cost that the entity has irrevocably
committed to incur. Because it is unavoidable, it is not
relevant to future decisions.
Answer (C) is incorrect because an opportunity cost
is the maximum benefit forgone by using a scarce
resource for a given purpose; it is the benefit
provided by the next best use of a particular
resource.
Answer (D) is correct. A mixed cost is a combination
of fixed and variable elements. Consequently, the $27
of total overhead cost is mixed because it contains
both fixed overhead and variable overhead.
Answer (D) is incorrect because prime costs are
composed of raw material and direct labor costs.
[61] Source: CMA 0695 3-9
[58] Source: CMA 1294 3-4
Answer (A) is incorrect because conversion costs are
composed of direct labor and factory overhead, that
is, costs incurred to convert materials into a finished
product.
Answer (B) is correct. Before they are incurred,
R&D costs are often considered to be discretionary.
However, Huron's R&D costs have already been
incurred. Thus, they are sunk costs. A sunk cost is a
past cost or a cost that the entity has irrevocably
committed to incur. Because it is unavoidable, it is not
relevant to future decisions.
Answer (C) is incorrect because relevant costs are
expected future costs that vary with the action taken.
A cost that has already been incurred is not relevant
to future decisions.
Answer (D) is incorrect because avoidable costs may
be eliminated by not engaging in an activity or by
performing it more efficiently.
[59] Source: CMA 1294 3-5
Answer (A) is correct. A discretionary cost (a
managed or program cost) results from a periodic
decision about the total amount to be spent. It is also
characterized by uncertainty about the relationship
between input and the value of the related output.
Examples are advertising and R & D costs.
Answer (B) is incorrect because an opportunity cost
is the maximum benefit forgone by using a scarce
resource for a given purpose. It is the benefit
provided by the next best use of a particular
resource.
Answer (C) is incorrect because committed costs are
those for which management has made a long-term
commitment. They typically result when a firm holds
fixed assets. Examples include long-term lease
payments and depreciation.
Answer (D) is incorrect because incremental costs
are the differences in costs between two decision
Answer (A) is incorrect because residual income is
the excess of earnings over an imputed charge for the
given investment base.
Answer (B) is incorrect because a marginal rate of
return is the return on the next investment.
Answer (C) is correct. The margin of safety is the
excess of budgeted revenues over breakeven
revenues. It is considered in sensitivity analysis.
Answer (D) is incorrect because a target or hurdle
rate of return is the required rate of return. It is also
known as the discount rate or the opportunity cost of
capital.
[62] Source: CMA 1295 3-15
Answer (A) is incorrect because the direct method
does not recognize the fact that service departments
might provide services to each other; all costs are
assigned directly to production departments.
Answer (B) is incorrect because the variable method
is a nonsense term as used here.
Answer (C) is correct. The three most common
methods of allocating service department costs are
the direct method, the step method, and the
reciprocal method (also called the simultaneous
equations method). The reciprocal method is
theoretically the preferred method because it
recognizes reciprocal services among service
departments.
Answer (D) is incorrect because the linear method is
not one of the methods used to allocate departmental
costs.
[63] Source: CMA 1295 3-16
Answer (A) is incorrect because the step method can
be used on a single- or dual-rate basis.
Answer (B) is incorrect because the reciprocal
method can be used on a single- or dual-rate basis.
cost over 4 months.
Answer (C) is incorrect because the direct method
can be used on a single-or dual-rate basis.
Answer (D) is correct. The single-rate method
combines fixed and variable costs. However, dual
rates are preferable because they allow variable costs
to be allocated on a different basis from fixed costs.
Answer (B) is correct. Using the high-low method,
the variable and fixed costs for shipping can be
calculated. The difference in cost levels divided by
the difference in unit volume equals the variable cost
per unit of $1.40 [($114,000 - $93,000) ・(70,000 55,000)]. The variable cost for 70,000 units is
$98,000 ($1.40 x 70,000). Subtracting the variable
cost from total shipping cost results in the fixed cost
of $16,000 ($114,000 - $98,000).
[64] Source: CMA 1295 3-26
Answer (A) is incorrect because direct costing is a
system that treats fixed costs as period costs; in other
words, production costs consist only of variable
costs, while fixed costs are expensed as incurred.
Answer (B) is correct. An activity-based costing
(ABC) system identifies the causal relationship
between the incurrence of cost and the underlying
activities that cause those costs. Under an ABC
system, costs are applied to products on the basis of
resources consumed (drivers).
Answer (C) is incorrect because $30,000 per month
plus $35.00 per sales order is based on orders
instead of sales, and the March shipping costs are
incorrectly matched with the April orders.
Answer (D) is incorrect because $58,000 per month
plus $23.33 per sales order is based on orders.
[68] Source: CIA 1196 III-83
Answer (A) is incorrect because advertising cost is
considered fixed.
Answer (C) is incorrect because cycle time is the
period from the time a customer places an order to
the time that product is delivered.
Answer (B) is incorrect because sales salaries are
considered fixed in terms of dollar sales.
Answer (D) is incorrect because variable costing is
the same as direct costing, which expenses fixed
costs as incurred.
Answer (C) is incorrect because advertising and sales
salaries are considered fixed costs in terms of dollar
sales.
[65] Source: CMA 0694 3-1
Answer (A) is incorrect because product costing is
an objective of a cost accounting system.
Answer (B) is incorrect because department
efficiency is an objective of a cost accounting system.
Answer (C) is incorrect because inventory valuation
is an objective of a cost accounting system.
Answer (D) is correct. Both advertising and sales
salaries should be classified as fixed costs. The
advertising was constant for 3 of the 4 months and
would be considered fixed in terms of dollar sales.
Sales salaries also did not vary with dollar sales.
[69] Source: CIA 1194 III-50
Answer (A) is incorrect because the variable cost per
unit and the total fixed costs will remain constant if the
activity level increases within the relevant range.
Answer (D) is correct. A cost accounting system has
numerous objectives, including product costing,
assessing departmental efficiency, inventory valuation,
income determination, and planning, evaluating, and
controlling operations. Determining sales commissions
is not an objective of a cost accounting system
because such commissions are based on sales, not
costs.
Answer (B) is incorrect because the variable cost per
unit and the total fixed costs will remain constant if the
activity level increases within the relevant range.
Answer (A) is incorrect because all factory overhead
is included in conversion costs, not just indirect labor.
Answer (C) is correct. Total variable cost changes
when changes in the activity level occur within the
relevant range. The cost per unit for a variable cost is
constant for all activity levels within the relevant
range. Thus, if the activity volume increases within the
relevant range, total variable costs will increase. A
fixed cost does not change when volume changes
occur in the activity level within the relevant range. If
the activity volume increases within the relevant
range, total fixed costs will remain unchanged.
Answer (B) is incorrect because direct materials are
not an element of conversion costs; they are a prime
cost.
Answer (D) is incorrect because the variable cost per
unit and the total fixed costs will remain constant if the
activity level increases within the relevant range.
[66] Source: CMA 0694 3-3
Answer (C) is correct. Conversion costs consist of
direct labor and factory overhead. These are the
costs of converting raw materials into a finished
product.
Answer (D) is incorrect because direct labor is also
an element of conversion costs.
[67] Source: CIA 1196 III-82
Answer (A) is incorrect because $1.66 is the average
[70] Source: CIA 0596 III-94
Answer (A) is incorrect because a variable cost
would remain a constant percentage of standard
dollars shipped.
Answer (B) is incorrect because a fixed cost would
be a lower percentage when standard dollars shipped
were high than when they were low.
Answer (C) is incorrect because a semi-fixed cost as
a percentage would move up and down with
standard dollars shipped, with a base level higher
than zero percent.
Answer (D) is correct. There is no systematic
relationship between standard dollars shipped and the
percentage of scrap.
[71] Source: CMA 0696 3-1
Answer (A) is incorrect because normal capacity is
the long-term average level of activity that will
approximate demand over a period that includes
seasonal, cyclical, and trend variations.
Answer (B) is incorrect because expected annual
activity is an approximation of actual volume levels
for a specific year.
Answer (C) is correct. Theoretical (ideal) capacity is
the maximum capacity given continuous operations
with no holidays, downtime, etc. It assumes perfect
efficiency at all times. Consequently, it can never be
attained and is not a reasonable estimate of actual
volume.
Answer (D) is incorrect because master-budget
capacity is the expected level of activity used for
budgeting for a given year.
[72] Source: CMA 0696 3-2
Answer (A) is correct. The choice of practical rather
than master budget capacity as the denominator level
will result in a lower absorption costing net income.
Practical capacity is the maximum level at which
output is produced efficiently, with an allowance for
unavoidable interruptions, for example, for holidays
and scheduled maintenance. Because this level will be
higher than master-budget (expected) capacity, its
use will usually result in the underapplication of fixed
factory overhead. For example, given costs of
$100,000 and master-budget capacity of 800,000
units, $.125 per unit is the application rate. If
practical capacity is 1,250,000 units, the application
rate is $.08 per unit. If actual production is 800,000
units, fixed factory overhead will not be over- or
underapplied given the use of master-budget
capacity. However, there will be $36,000 (450,000
units x $.08) of underapplied fixed factory overhead
if practical capacity is the denominator level.
Consequently, given t hat the beginning inventory is
zero and that production exceeded sales, less fixed
factory overhead will be inventoried at the lower
practical capacity rate than at the master-budget rate.
The effect is that master-budget net income will be
greater.
Answer (B) is incorrect because a normal capacity
rate results in a larger ending inventory and a greater
net income than a theoretical or practical capacity
rate.
Answer (C) is incorrect because the master-budget
rate exceeds the theoretical capacity rate. It results in
a greater ending inventory and a greater net income.
Answer (D) is incorrect because a practical capacity
rate results in a lower ending inventory and a lower
net income than a normal capacity rate.
[73] Source: CMA 0696 3-12
Answer (A) is correct. The breakeven point is the
level of sales at which revenues equal the sum of
variable and fixed costs. Consequently, the
contribution margin equals fixed costs at the
breakeven point. Because this relationship is true, the
breakeven point in units sold can be determined by
dividing fixed costs by the difference between unit
selling price and unit variable cost (unit contribution
margin).
Answer (B) is incorrect because the profit margin is
the difference between revenues and cost of goods
sold.
Answer (C) is incorrect because operating profit is
the difference between operating revenues and
expenses.
Answer (D) is incorrect because the contribution
margin ratio equals unit selling price minus unit
variable cost, divided by unit selling price. Dividing
fixed costs by the CMR yields the breakeven point in
dollars.
[74] Source: CMA 0696 3-15
Answer (A) is correct. Target costing begins with a
target price, which is the expected market price given
the company's knowledge of its customers and
competitors. Subtracting the unit target profit margin
determines the long-term target cost. If this cost is
lower than the full cost, the company may need to
adopt comprehensive cost-cutting measures. For
example, in the furniture industry, certain price points
are popular with buyers: a couch might sell better at
$400 than at $200 because consumers question the
quality of a $200 couch and thus will not buy the
lower-priced item. The result is that furniture
manufacturers view $400 as the target price of a
couch, and the cost must be somewhat lower.
Answer (B) is incorrect because all product cost
categories are addressed by target costing.
Answer (C) is incorrect because all product cost
categories are addressed by target costing.
Answer (D) is incorrect because the manner in which
raw materials costs are accounted for is irrelevant.
[75] Source: CMA 0696 3-16
Answer (A) is correct. SMA 4X states that
value-chain analysis for assessing competitive
advantage is an integral part of the strategic planning
process. Value-chain analysis is a continuous process
of gathering, evaluating, and communicating
information for business decision making. A value
chain depicts how customer value accumulates along
a chain of activities that lead to an end product or
service. A value chain consists of the activities
required to research and develop, design, produce,
market, deliver, and support its product. Extended
value-chain analysis expands the view of the parties
involved to include those upstream (e.g., suppliers)
and downstream (e.g., customers).
Answer (B) is incorrect because process value
analysis relates to a single process.
Answer (C) is incorrect because computer-integrated
manufacturing uses computers to control all aspects
of manufacturing in a single location.
Answer (D) is incorrect because ABC identifies the
activities associated with cost incurrence and the
drivers of those activities. Costs are then assigned to
cost objects based on the demands they make on
activities.
direct labor and factory overhead, the costs of
converting raw materials into finished goods.
Normally, a company does not consider only
conversion costs in making pricing decisions, but if
the customer were to furnish the raw materials,
conversion cost pricing would be appropriate.
[76] Source: CMA 0696 3-17
Answer (A) is incorrect because excess capacity is
unused capacity.
Answer (B) is incorrect because manufacturing lead
(cycle) time is the sum of setup time and
manufacturing time for a customer order. It is a
component of customer response time.
Answer (C) is correct. Practical capacity is the
maximum level at which output is produced
efficiently, with an allowance for unavoidable
interruptions, for example, for holidays and scheduled
maintenance. Because this level will be higher than
expected capacity, its use will ordinarily result in
underapplied fixed factory overhead.
Answer (D) is incorrect because theoretical capacity
makes no allowance for unavoidable interruptions.
Answer (C) is incorrect because direct labor is an
element of conversion costs.
Answer (D) is incorrect because factory overhead is
an indirect cost that is an element of conversion costs.
[80] Source: CMA 1296 3-29
Answer (A) is correct. Life-cycle costing estimates a
product's revenues and expenses over its expected
life cycle. This approach is especially useful when
revenues and related costs do not occur in the same
periods. It emphasizes the need to price products to
cover all costs, not just those for production. Hence,
costs are determined for all value-chain categories:
upstream (R&D, design), manufacturing, and
downstream (marketing, distribution, and customer
service). The result is to highlight upstream and
downstream costs in the cost planning process that
often receive insufficient attention.
[77] Source: CMA 0696 3-18
Answer (A) is incorrect because depreciation is a
factory overhead cost and therefore is a conversion
cost.
Answer (B) is correct. Conversion costs are
necessary to convert raw materials into finished
products. They include all manufacturing costs, for
example, direct labor and factory overhead, other
than direct materials.
Answer (C) is incorrect because indirect labor is a
factory overhead cost and therefore is a conversion
cost.
Answer (D) is incorrect because indirect materials
are factory overhead costs and therefore are
conversion costs.
Answer (B) is incorrect because the life-cycle model
includes the upstream (R&D and design) and
downstream (marketing, distribution, and customer
service) elements of the value chain as well as
manufacturing costs.
Answer (C) is incorrect because the life-cycle model
includes the upstream (R&D and design) and
downstream (marketing, distribution, and customer
service) elements of the value chain as well as
manufacturing costs.
Answer (D) is incorrect because life-cycle costing
emphasizes the significance of locked-in costs, target
costing, and value engineering for pricing and cost
control. Thus, cost savings at all stages of the life
cycle are important.
[81] Source: Publisher
[78] Source: CMA 0696 3-20
Answer (A) is incorrect because revenues minus cost
of goods sold is gross profit (margin).
Answer (B) is incorrect because nonmanufacturing
variable costs are also part of the calculation.
Answer (C) is incorrect because a direct cost is a
cost that can be feasibly associated with a single cost
object.
Answer (D) is correct. Contribution margin is the
excess of revenues over all variable costs (including
both manufacturing and nonmanufacturing variable
costs) that vary with an output-related cost driver.
The contribution margin equals the revenues that
contribute toward covering the fixed costs and
providing a net income.
[79] Source: CMA 1296 3-3
Answer (A) is incorrect because conversion cost
pricing does not place any emphasis on raw materials
cost.
Answer (B) is correct. Conversion costs consist of
Answer (A) is incorrect because scrap consists of
raw materials left over from the production cycle but
still usable for purposes other than those for which it
was originally intended. Scrap may be sold to outside
customers, usually for a nominal amount, or may be
used for a different production process.
Answer (B) is correct. By-products are products of
relatively small total value that are produced
simultaneously from a common manufacturing
process with products of greater value and quantity
(joint products).
Answer (C) is incorrect because waste is the amount
of raw materials left over from a production process
or production cycle for which there is no further use.
Waste is usually not salable at any price and must be
discarded.
Answer (D) is incorrect because abnormal spoilage is
spoilage that is not expected to occur under normal,
efficient operating conditions. The cost of abnormal
spoilage should be separately identified and reported
to management. Abnormal spoilage is typically
treated as a period cost (a loss) because of its
unusual nature.
[82] Source: Publisher
Answer (A) is incorrect because target costing
(pricing) begins with a target price, which is the
expected market price given the company's
knowledge of its customers and competitors.
Subtracting the unit target profit margin determines
the long-term target cost.
Answer (B) is correct. Kaizen costing supports the
cost reduction process in the manufacturing phase of
existing products. Kaizen is a Japanese word that
refers to continuous improvement. Kaizen makes
improvements through the accumulations of small
betterment activities rather than innovative
improvements.
Answer (C) is incorrect because variable (direct)
costing considers only variable manufacturing costs to
be product costs, i.e., inventoriable. Fixed
manufacturing costs are considered period costs and
are expensed as incurred.
Answer (D) is incorrect because process costing is
used to assign costs to similar products that are mass
produced on a continuous basis. Costs are
accumulated by departments or cost centers rather
than by jobs, work-in-process is stated in terms of
equivalent units, and unit costs are established on a
departmental basis. Process costing is an averaging
process that calculates the average cost of all units.
costing "identifies the causal relationship between the
incurrence of cost and activities, determines the
underlying driver of the activities, establishes cost
pools related to individual drivers, develops costing
rates, and applies cost to product on the basis of
resources consumed (drivers)" (SMA 2A).
Answer (B) is incorrect because variable (direct)
costing considers only variable manufacturing costs to
be product costs, i.e., inventoriable. Fixed
manufacturing costs are considered period costs and
are expensed as incurred.
Answer (C) is correct. Backflush costing is often
used with a just-in-time (JIT) inventory system. It
delays costing until goods are finished. Standard
costs are then flushed backward through the system
to assign costs to products. The result is that detailed
tracking of costs is eliminated. The system is best
suited to companies that maintain low inventories
because costs then flow directly to cost of goods
sold.
Answer (D) is incorrect because absorption costing
(sometimes called full absorption costing) treats all
manufacturing costs as product costs. These costs
include variable and fixed manufacturing costs
whether direct or indirect. Thus, fixed manufacturing
overhead is inventoried. Compare with variable
costing.
[86] Source: CMA 1295 3-28
[83] Source: CMA 0697 3-1
Answer (A) is incorrect because direct labor is also a
product cost.
Answer (A) is incorrect because gross operating
profit is the net result after deducting all manufacturing
costs from sales, including both fixed and variable
costs.
Answer (B) is incorrect because a period cost is
expensed when incurred. Direct labor cost is
inventoriable.
Answer (B) is incorrect because net profit is the
remainder after deducting from revenue all costs,
both fixed and variable.
Answer (C) is incorrect because direct labor is also a
prime cost.
Answer (C) is incorrect because the breakeven point
is the level of sales that equals the sum of fixed and
variable costs.
Answer (D) is correct. Direct labor is both a product
cost and a prime cost. Product costs are incurred to
produce units of output and are deferred to future
periods to the extent that output is not sold. Prime
costs are defined as direct materials and direct labor.
Answer (D) is correct. Contribution margin is
calculated by subtracting all variable costs from sales
revenue. It represents the portion of sales that is
available for covering fixed costs and profit.
[84] Source: Publisher
[87] Source: Publisher
Answer (A) is incorrect because margin of safety is
the excess of budgeted revenues over the breakeven
point.
Answer (B) is incorrect because opportunity cost is
the maximum benefit forgone by using a scarce
resource for a given purpose. It is the benefit, for
example, the contribution to income, provided by the
best alternative use of that resource.
Answer (C) is correct. A marginal cost is the sum of
the costs necessary to effect a one-unit increase in the
activity level.
Answer (D) is incorrect because differential (or
incremental) cost is the difference in total cost
between two decisions.
[85] Source: Publisher
Answer (A) is incorrect because activity-based
Answer (A) is incorrect because cost accounting is
concerned with more than just reporting to be used in
making nonroutine decisions.
Answer (B) is incorrect because cost accounting also
provides information for internal reporting.
Answer (C) is correct. Cost accounting is a
combination of (1) managerial accounting in the sense
that its purpose can be to provide internal reports for
use in planning and control and in making nonroutine
decisions, and (2) financial accounting because its
product-costing function satisfies external reporting
requirements for reporting to shareholders,
government, and various outside parties.
Answer (D) is incorrect because managerial
accounting entails internal reporting for use in planning
and controlling routine operations.
[88] Source: CMA 1293 3-1
Answer (A) is correct. According to SMA 2A, a
cost driver is "a measure of activity, such as direct
labor hours, machine hours, beds occupied,
computer time used, flight hours, miles driven, or
contracts, that is a causal factor in the incurrence of
cost to an entity." It is a basis used to assign costs to
cost objects.
Answer (B) is incorrect because cost drivers are
measures of activities that cause the incurrence of
costs.
Answer (C) is incorrect because cost drivers are not
accounting measurements but measures of activities
that cause costs.
Answer (D) is incorrect because, although cost
drivers may be used to assign costs, they are not
necessarily mechanical. For example, a cost driver
for pension benefits is employee salaries.
[89] Source: Publisher
Answer (A) is correct. Abnormal spoilage is spoilage
that is not expected to occur under normal, efficient
operation conditions.
Answer (B) is incorrect because actual spoilage is the
spoilage that occurred.
Answer (C) is incorrect because normal spoilage is
expected to occur.
Answer (D) is incorrect because residual spoilage is a
nonsense term.
Answer (B) is incorrect because residual income is
the excess of the return on an investment over a
targeted amount equal to an imputed interest charge
on invested capital. The rate used is ordinarily the
weighted-average cost of capital. Some enterprises
prefer to measure managerial performance in terms of
the amount of residual income rather than the
percentage ROI. The principle is that the enterprise is
expected to benefit from expansion as long as
residual income is earned. Using a percentage ROI
approach, expansion might be rejected if it lowered
ROI even though residual income would increase.
Answer (C) is incorrect because practical capacity is
the maximum level at which output is produced
efficiently. It allows for unavoidable delays in
production for maintenance, holidays, etc. Use of
practical capacity as a denominator value usually
results in underapplied overhead because it always
exceeds the actual use of capacity.
Answer (D) is correct. Partial productivity equals the
quantity of output divided by the quantity of one
input.
[92] Source: CIA 1195 III-79
Answer (A) is incorrect because both measures
represent the results for a single period.
Answer (B) is correct. Residual income equals
earnings in excess of a minimum desired return. Thus,
it is measured in dollars. If performance is evaluated
using ROI, a manager may reject a project that
exceeds the minimum return if the project will
decrease overall ROI. For example, given a target
rate of 20%, a project with an ROI of 22% might be
rejected if the current ROI is 25%.
[90] Source: Publisher
Answer (A) is incorrect because scrap consists of
raw materials left over from the production cycle but
still usable for purposes other than those for which it
was originally intended. Scrap may be sold to outside
customers, usually for a nominal amount, or may be
used for a different production process.
Answer (B) is incorrect because abnormal spoilage is
spoilage that is not expected to occur under normal,
efficient operating conditions. The cost of abnormal
spoilage should be separately identified and reported
to management. Abnormal spoilage is typically
treated as a period cost (a loss) because of its
unusual nature.
Answer (C) is correct. Waste is the amount of raw
materials left over from a production process or
production cycle for which there is no further use.
Waste is usually not salable at any price and must be
discarded.
Answer (D) is incorrect because normal spoilage is
the spoilage that occurs under normal operating
conditions. It is essentially uncontrollable in the short
run. Normal spoilage arises under efficient operations
and is treated as a product cost.
Answer (C) is incorrect because the target rate for
ROI is the same as the imputed interest rate used in
the residual income calculation.
Answer (D) is incorrect because the same investment
base should be employed in both methods.
[93] Source: CIA 0593 IV-14
Answer (A) is incorrect because budgeted, not
actual, UCM is used to calculate this variance.
Answer (B) is incorrect because the flexible budget
volume is the actual volume, resulting in a zero
variance.
Answer (C) is incorrect because budgeted, not
actual, UCM is used to calculate this variance.
Answer (D) is correct. For a single-product
company, the sales volume variance is the difference
between flexible budget and master budget sales
quantity, times master budget unit contribution margin
(UCM). This amount can also be calculated for each
product in a sales mix, and the results are added to
determine the total sales volume variance. This
variance may be further decomposed into quantity
and mix variances.
[91] Source: Publisher
Answer (A) is incorrect because gross margin (profit)
is the difference between sales and the absorption
cost of goods sold. It should be contrasted with
contribution margin (sales - variable costs) and profit
margin (income ・revenue).
[94] Source: Publisher
Answer (A) is incorrect because opportunity cost is
the maximum benefit forgone by using a scarce
resource for a given purpose. It is the benefit, for
example, the contribution to income, provided by the
best alternative use of that resource.
Answer (D) is incorrect because quantity (usage)
variance is an efficiency variance for direct materials.
Answer (B) is correct. Avoidable costs are those that
[97] Source: Publisher
may be eliminated by not engaging in an activity or by
performing it more efficiently.
Answer (C) is incorrect because cost driver "is a
measure of activity, such as direct labor hours,
machine hours, beds occupied, computer time used,
flight hours, miles driven, or contracts, that is a causal
factor in the incurrence of cost to an entity" (SMA
2A).
Answer (D) is incorrect because indirect costs cannot
be specifically associated with a given cost object in
an economically feasible way. They are also defined
as costs that are not directly identified with one final
cost object but that are identified with two or more
final cost objects or with at least one intermediate
cost object.
[95] Source: Publisher
Answer (A) is incorrect because periodic inventory
systems rely on physical counts to determine
quantities.
Answer (B) is incorrect because step-down method
of service department cost allocation is a sequential
(but not a reciprocal) process. These costs are
allocated to other service departments as well as to
users. The starting point may be the service
department that rendered the greatest percentage of
its services to other service departments or that
incurred the greatest dollar amount of services to
other service departments.
Answer (C) is correct. Perpetual inventory records
provide for continuous record keeping of the
quantities of inventory (and possibly unit costs and/or
total costs). This method requires a journal entry
every time items are added to or taken from
inventory.
Answer (D) is incorrect because reciprocal method
uses simultaneous equations to allocate each service
department's costs among the departments providing
mutual services before reallocation to other users.
[96] Source: Publisher
Answer (A) is correct. Price (rate) variance equals
the difference between the actual and standard price
of an input, multiplied by the actual quantity.
Answer (B) is incorrect because controllable variance
in two-way analysis is the part of the total factory
overhead variance not attributable to the volume
variance.
Answer (C) is incorrect because spending variance is
an overhead variance. For variable overhead, it is the
difference between actual costs and the product of
the actual activity and the budgeted application rate.
For fixed overhead, the spending (also known as the
budget or flexible budget) variance is the difference
between actual and budgeted fixed costs. In
three-way analysis, the two spending variances
isolated in four-way analysis are combined. In
two-way analysis, the two spending variances and the
variable overhead efficiency variance are combined.
Answer (A) is incorrect because actual costing is
based on actual rates and quantities for indirect as
well as direct costs.
Answer (B) is correct. Benchmarking (also called
competitive benchmarking or best practices)
compares one's own product, service, or practice
with the best known similar activity. The objective is
to measure the key outputs of a business process or
function against the best and to analyze the reasons
for the performance difference. Benchmarking applies
to services and practices as well as to products and is
an ongoing systematic process. It entails both
quantitative and qualitative measurements that allow
both an internal and an external assessment.
Answer (C) is incorrect because backflush costing is
often used with a just-in-time (JIT) inventory system.
It delays costing until goods are finished. Standard
costs are then flushed backward through the system
to assign costs to products. The result is that detailed
tracking of costs is eliminated. The system is best
suited to companies that maintain low inventories
because costs then flow directly to cost of goods
sold.
Answer (D) is incorrect because budgeting is the
formal quantification of management's plans. Budgets
are usually expressed in quantitative terms and are
used to motivate management and evaluate its
performance in achieving goals. In this sense,
standards are established.
[98] Source: CMA 0697 3-5
Answer (A) is incorrect because target pricing is used
on products that have not yet been developed.
Answer (B) is incorrect because target pricing
considers all costs in the value chain.
Answer (C) is incorrect because target pricing can be
used in any situation, but it is most likely to succeed
when costs can be well controlled.
Answer (D) is correct. Target pricing and costing
may result in a competitive advantage because it is a
customer-oriented approach that focuses on what
products can be sold at what prices. It is also
advantageous because it emphasizes control of costs
prior to their being locked in during the early links in
the value chain. The company sets a target price for a
potential product reflecting what it believes
consumers will pay and competitors will do. After
subtracting the desired profit margin, the long-run
target cost is known. If current costs are too high to
allow an acceptable profit, cost-cutting measures are
implemented or the product is abandoned. The
assumption is that the target price is a constraint.
[99] Source: Publisher
Answer (A) is incorrect because the controller (or
comptroller) is a financial officer having responsibility
for the accounting functions (management and
financial) as well as budgeting and internal control.
the physical quantities method.
Answer (B) is incorrect because the chief financial
officer (CFO) is the senior officer empowered with
oversight of the entire financial operations of a
company.
Answer (C) is incorrect because the controller (or
comptroller) is a financial officer having responsibility
for the accounting functions (management and
financial) as well as budgeting and internal control.
Answer (D) is correct. The treasurer has
responsibility for safeguarding financial assets
(including the management of cash) and arranging
financing.
[100] Source: CMA Samp Q3-6
Answer (A) is incorrect because normal spoilage
arises more frequently from factors that are inherent
in the manufacturing process.
Answer (B) is incorrect because abnormal spoilage
costs are treated as a loss, and normal spoilage costs
are inventoried.
[102] Source: CMA 0690 4-7
Answer (A) is correct. At $2 each, the 60,000 units
of MSL sell for $120,000. At $4 each, the 90,000
units of CBL sell for $360,000. Because 25%
[$120,000 ・($120,000 + $360,000)] of the total
sales are produced by MSB, it should absorb 25%
of the joint cost. Thus, $75,000 (25% x $300,000
joint cost) is allocated to MSB.
Answer (B) is incorrect because $180,000 is the
joint cost allocated to CBL based on physical
quantities.
Answer (C) is incorrect because $225,000 is the
joint cost allocated to CBL based on the relative
sales value method.
Answer (D) is incorrect because $120,000 is the
joint cost allocated to MSB based on physical
quantities.
[103] Source: CMA 0690 4-8
Answer (C) is correct. Spoiled goods are defective
items that cannot be feasibly reworked. Traditional
cost accounting systems distinguish between normal
and abnormal spoilage because, in some operations,
a degree of spoilage is viewed as inevitable.
However, organizations that have adopted rigorous
approaches to quality regard normal spoilage as
minimal or even nonexistent. Thus, all spoilage may
be identified as abnormal. Normal spoilage occurs
under normal, efficient operating conditions. It is
spoilage that is uncontrollable in the short run and
therefore should be expressed as a function of good
output (treated as a product cost). Accordingly,
normal spoilage is assigned to all good units in
process costing systems, that is, all units that have
passed the inspection point at which the spoilage was
detected. If normal spoilage is attributable to a
specific job, only the disposal value of the normally
spoiled goods is removed from work-in-process,
thereby assigning the cost of normal spoilage to the
good units remaining in the specific job. Abnormal
spoilage is not expected to occur under normal,
efficient operating conditions. The cost of abnormal
spoilage should be separately identified and reported.
Abnormal spoilage is typically treated as a period
cost (a loss) because it is unusual.
Answer (D) is incorrect because the tighter the
standards, the more likely that any spoilage will be
deemed to be abnormal.
Answer (A) is incorrect because the total cost of
CBL is $425,000 ($225,000 + $200,000). The unit
cost is $5.3125 ($425,000 ・80,000).
Answer (B) is incorrect because $5.625 is calculated
using costs of $225,000 instead of $200,000.
Answer (C) is incorrect because $2.50 is calculated
by dividing $200,000 by 80,000 units.
Answer (D) is correct. The first step is to compute
the sales for each product. The 60,000 units of MSB
sell for $5 each after $100,000 of additional costs
are incurred. The NRV is therefore $200,000 [($5 x
60,000 units) - $100,000]. The 80,000 units of CBL
sell for $10 each, or $800,000, after further
processing. But to determine the NRV for CBL, the
costs of this processing must be deducted from sales.
Consequently, the NRV for CBL is $600,000
($800,000 - $200,000). CBL contributes 75%
[$600,000 ・($200,000 + $600,000)] of the
realizable value and should bear an equal proportion
of the $300,000 of joint costs, or $225,000. The
total cost of CBL is $425,000 ($225,000 +
$200,000), and the unit cost is $5.3125 ($425,000 ・
80,000).
[104] Source: CMA 0690 4-9
[101] Source: CMA 0690 4-6
Answer (A) is incorrect because $75,000 is the
amount allocated to MSB based on the relative sales
value method.
Answer (B) is correct. Given 60,000 units of MSB
and 90,000 units of CBL (a total of 150,000 units),
CBL makes up 60% of the total quantity (90,000 ・
150,000). Hence, CBL should be charged with 60%
of the joint costs (60% x $300,000 = $180,000).
Answer (C) is incorrect because $225,000 is the
amount allocated to CBL based on the relative sales
value method.
Answer (D) is incorrect because $120,000 equals
the joint costs that should be allocated to MSB under
Answer (A) is incorrect because the contribution
from the joint milling process would be $80,000
lower ($200,000 - $120,000).
Answer (B) is incorrect because the contribution
from the joint milling process would be $80,000
lower ($200,000 - $120,000).
Answer (C) is incorrect because the contribution
from the joint milling process would be $80,000
lower ($200,000 - $120,000).
Answer (D) is correct. MSB sells for $120,000 ($2
x 60,000 units) at the split-off point. By processing
further, the company earns $200,000 ($300,000 in
sales - $100,000 in preservative costs). Thus, the
contribution from the joint milling process would be
$80,000 lower ($200,000 - $120,000) if MSB is
sold at the split-off point.
[105] Source: CMA 0689 4-21
Answer (A) is incorrect because $168,000 is the
joint cost allocated to Silken Skin on a
physical-quantity basis.
Answer (B) is correct. Under the NRV method,
additional separable costs are deducted from sales
revenue to determine the NRV. In this problem, no
additional costs are incurred, so the NRV equals the
total sales revenue for the joint products.
Liquid Skin 180,000 gals. x $2.40 = $432,000
Silken Skin 120,000 gals. x $3.90 = 468,000
-------Total Sales
$900,000
========
Because sales of Liquid Skin make up 48% of total
sales ($432,000 ・$900,000), it should be allocated
48% of the joint cost. Thus, Liquid Skin's share is
$201,600 (48% x $420,000).
Answer (C) is incorrect because $218,400 is Silken
Skin's share of joint costs under the NRV method.
Answer (D) is incorrect because $252,000 is the
joint cost allocated to Liquid Skin on a
physical-quantity basis.
[106] Source: CMA 0689 4-22
Answer (A) is correct. The total physical quantity is
300,000 gallons (180,000 + 120,000). Because
Silken Skin accounts for 120,000 gallons, or 40% of
the total, it should be allocated $168,000 (40% x
$420,000 joint cost).
Answer (B) is incorrect because $201,600 is the
joint cost allocated to Liquid Skin on the NRV basis.
The NRVs are $180,000 ($432,000 - $252,000) for
Liquid Skin and $360,000 ($468,000 - $108,000)
for Silken Skin, a total of $540,000. Consequently,
Silken Skin should be allocated $280,000 of the joint
cost [$420,000 x ($360,000 ・$540,000)].
[108] Source: CMA 0689 4-24
Answer (A) is incorrect because $140,000 is the
joint cost allocated to Liquid Skin under the NRV
method given additional processing costs.
Answer (B) is incorrect because $168,000 is the
joint cost allocated to Silken Skin on a
physical-quantity basis.
Answer (C) is correct. If a physical-quantity
allocation method is used, sales, costs, and NRVs
are irrelevant. The total physical quantity is 300,000
gallons (180,000 + 120,000). Because Liquid Skin is
60% of the total, it should be allocated $252,000
(60% x $420,000 joint cost).
Answer (D) is incorrect because $280,000 is the
joint cost allocated to Silken Skin under the NRV
method.
[109] Source: CIA 0593 IV-5
Answer (A) is correct. Beginning inventory is 40%
complete. Hence, direct materials have already been
added. Ending inventory has not reached the 25%
stage of completion, so direct materials have not yet
been added to these units. Thus, the equivalent units
for direct materials calculated on a FIFO basis are
equal to the units started and completed in the current
period (85,000 units completed - 15,000 units in
BWIP = 70,000 units started and completed).
Answer (B) is incorrect because 80,000 total units
were transferred in from Department 1.
Answer (C) is incorrect because $218,400 is Silken
Skin's share of joint costs under the NRV method.
Answer (C) is incorrect because 85,000 equals the
equivalent units for direct materials calculated on a
weighted-average basis.
Answer (D) is incorrect because $252,000 is the
joint cost allocated to Liquid Skin on a
physical-quantity basis.
Answer (D) is incorrect because 90,000 units equals
the sum of units transferred in from Department 1 and
ending work-in-process inventory.
[107] Source: CMA 0689 4-23
Answer (A) is incorrect because $140,000 is the
joint cost allocated to Liquid Skin under the NRV
method given additional processing costs.
Answer (B) is incorrect because $168,000 is the
joint cost allocated to Silken Skin on a
physical-quantity basis.
Answer (C) is incorrect because $252,000 is the
joint cost allocated to Liquid Skin on a
physical-quantity basis.
Answer (D) is correct. If the products cannot be sold
at split-off, additional processing costs must be
incurred. Under the NRV method, these additional
costs are deducted from sales to determine NRV.
Total sales of the joint products are $432,000 for
Liquid Skin and $468,000 for Silken Skin. The costs
incurred beyond the split-off point are
Liquid Skin 180,000 gals. x $1.40 = $252,000
Silken Skin 120,000 gals. x $ .90 = 108,000
[110] Source: CIA 1192 IV-6
Answer (A) is incorrect because 170,000 is the
number of equivalent units of materials for the period.
Answer (B) is correct. The number of equivalent units
computed under this method excludes work done on
BWIP in the prior period. Thus, the total of
equivalent units of conversion cost for the period is
calculated as follows:
10,000 units in EWIP x 50% = 5,000
180,000 completed units x 100% = 180,000
------185,000
20,000 units in BWIP x 50% = (10,000)
------175,000
=======
Answer (C) is incorrect because 180,000 is the total
amount of work done on the completed units.
Answer (D) is incorrect because 185,000 is the
amount determined using the weighted-average
method.
[114] Source: CIA 1193 IV-7
[111] Source: CIA 0594 III-75
Answer (A) is incorrect because $37,500 results
from allocating the cost based on total kilowatt hours
used by service and production departments.
Answer (B) is incorrect because $15,625 is the
amount allocated to the assembly department.
Answer (C) is incorrect because $39,062.50 results
from allocating the cost based on direct costs for
each production department.
Answer (D) is correct. Under the direct method,
service department costs are allocated directly to the
producing departments without recognition of
services provided to other service departments.
Allocation of service department costs are made only
to production departments based on their relative use
of services, in this case, kilowatt hours. Thus, the cost
allocated to the Machining Department is $46,875
[$62,500 x (150,000 ・200,000)].
[112] Source: CIA 0594 III-76
Answer (A) is incorrect because 904 equals 4% of
units failing final inspection.
Answer (B) is incorrect because normal spoilage is
4% of the total goods inspected, not 4% of the
completed units passing inspection.
Answer (C) is incorrect because normal spoilage is
4% of the units inspected, not of the units entering
production.
Answer (D) is correct. Normal spoilage equals 4% of
the units inspected. The equivalent units of normal
spoilage equal 19,336 [.04 x (460,800 units passing
inspection + 22,600 units failing inspection)]. The
equivalent units of abnormal spoilage are simply the
residual of the spoiled units, or 3,264 (22,600 total
spoiled units - 19,336 normal spoilage).
[115] Source: CIA 0578 IV-1
Answer (A) is incorrect because LIFO is equally
applicable to either job-order costing or process
costing.
Answer (A) is incorrect because no cost should be
allocated.
Answer (B) is incorrect because process costing is
equally useful for the estimation of overhead.
Answer (B) is incorrect because no cost should be
allocated.
Answer (C) is incorrect because control of costs
does not vary between job-order and
process-costing systems.
Answer (C) is incorrect because no cost should be
allocated.
Answer (D) is correct. Job-order costs are used in
determining the costs of a specific, clearly identifiable
job or project. In contrast, process costing averages
the costs of all production.
Answer (D) is correct. Under the direct method,
service department costs are allocated directly to the
producing departments without recognition of
services provided to other service departments.
Allocation of service department costs are made only
to production departments based on their relative use
of services. Thus, none of the cost will be allocated to
the maintenance department.
[113] Source: CIA 0594 III-77
Answer (A) is incorrect because, under the step
method, service costs are allocated to both
production and service departments.
Answer (B) is correct. Under the step method,
service costs are allocated to producing departments
and to other service departments. This method does
not allocate any cost back to the departments whose
costs have already been allocated. This company will
allocate Power Department costs first because the
Maintenance Department receives relatively more
service from the Power Department. The amount of
Power Department cost allocated to the Maintenance
Department is $12,500 [$62,500 x (50,000 ・
250,000)]. This allocation is based on the total
kilowatt hours used by all departments (service and
production).
Answer (C) is incorrect because $6,250 results from
allocating Power Department costs based on
maintenance hours used.
Answer (D) is incorrect because $8,000 results from
allocating the Maintenance Department's direct costs
to itself based on kilowatt hours used.
[116] Source: CIA 1186 IV-4
Answer (A) is correct. A cost system accounts for
the costs of manufacturing inventoriable output. The
objective is to determine the portion of manufacturing
cost to be expensed (because the output was sold)
and the portion to be deferred (because the output
was still on hand). Process costing is used for
continuous process manufacturing of units that are
relatively homogeneous (e.g., oil refining, automobile
production, etc.). Job-order costing is used to
account for the cost of specific jobs or projects when
output is heterogeneous. The difference is often
overemphasized. Job-order costing simply requires
subsidiary ledgers (to keep track of the specific jobs)
for the same work-in-process (manufacturing)
account and finished goods inventory account that are
basic to process costing.
Answer (B) is incorrect because how orders are
taken is irrelevant to whether job-order or process
costing is used.
Answer (C) is incorrect because profit is determined
in the same way in both job-order and process
costing.
Answer (D) is incorrect because the cost system is
not necessarily related to the manufacturing
processes.
[117] Source: CIA 0590 IV-3
Answer (A) is correct. Job-order costing is used by
companies whose products or services are readily
identified by individual units or a specific job, each of
which receives varying amounts and types of input.
The dissimilarity of the various loan services provided
makes job-order costing appropriate.
Answer (B) is incorrect because process costing is
used by companies whose products or services are
relatively uniform and are produced in a series of
production steps or processes.
Answer (C) is incorrect because differential costing is
not a cost accumulation method. It is useful for
decision-making.
Answer (D) is incorrect because joint product costing
is not a cost accumulation method. It is a method of
allocating joint costs to joint products.
[118] Source: CIA 1187 IV-5
Answer (A) is incorrect because road building
involves unique projects which require job-order
costing.
Answer (B) is incorrect because electrical contracting
involves unique projects which require job-order
costing.
Answer (C) is correct. Process costing is used for
continuous process manufacturing of relatively
homogeneous units. Newspapers are published in
long runs of identical items, hence process costing is
applicable.
Answer (D) is incorrect because the manufacture of
clothing requires different sizes and styles to be
produced. Operations costing is required.
[119] Source: Publisher
Answer (A) is incorrect because, when the products
are unique, job-order costing is appropriate.
Answer (B) is correct. Operation costing is used
when goods are produced in batches or production
runs. While the production procedures or operations
are similar, the types of items processed are different,
e.g., different models of furniture, etc.
rather than conversion costs vary by production run.
[121] Source: Publisher
Answer (A) is incorrect because operation costing is
a hybrid form of job-order and process costing.
Answer (B) is incorrect because operation costing is
a hybrid form of job-order and process costing.
Answer (C) is incorrect because direct costing
includes only variable manufacturing costs in unit cost.
Answer (D) is correct. Operation costing is a hybrid
of job-order costing and process costing. As in
process costing, a single average unit conversion cost
is applied based on operations. Direct materials costs
are applied to the individual batches in the same
manner as in job-order costing. It is used to account
for the costs of batch processing of relatively large
numbers of similar units in individual production runs.
Operation costing is appropriate for the processing of
different types of materials through the same basic
operations, such as woodworking, finishing, and
polishing for different product lines of furniture. It
usually has many more WIP accounts because there
is one for each process or operation.
[122] Source: Publisher
Answer (A) is incorrect because shoes are produced
in production runs or batches, but with different styles
or materials.
Answer (B) is incorrect because clothing is produced
in production runs or batches, but with different styles
or materials.
Answer (C) is incorrect because furniture is
produced in production runs or batches, but with
different styles or materials.
Answer (D) is correct. The products of the oil
refining industry are homogeneous and are not
produced in batches. Although refineries can vary the
nature of their output slightly, they essentially produce
a continuous flow of products.
[123] Source: CIA 1188 IV-6
Answer (C) is incorrect because, when the product is
homogeneous, process costing is appropriate.
Answer (D) is incorrect because the products of the
food and beverage industry may be either unique or
homogeneous, and produced in jobs, lots, or
batches.
[120] Source: Publisher
Answer (A) is correct. When operation costing is
employed, the basic materials usually vary by
production run, but the processes used are similar
(e.g., milling, grinding, finishing, painting, polishing,
etc.).
Answer (B) is incorrect because direct materials
rather than direct labor vary by production run.
Answer (C) is incorrect because direct materials
rather than overhead vary by production run.
Answer (D) is incorrect because direct materials
Answer (A) is incorrect because the EUP for
conversion costs would be 8,330 [8,780
weighted-average EUP - (30% x 1,500 units in
BWIP)] if the FIFO method were used.
Answer (B) is correct. The weighted-average method
of process costing commingles prior period (BWIP)
and current costs. It does not consider the degree of
completion of BWIP when computing EUP.
Units
-----
%
CC EUP
-------Completed
7,400
100
7,400
EWIP
2,300
60
1,380
-----Equivalent units
8,780
======
Answer (C) is incorrect because 9,230 includes 30%
of BWIP in the total.
Answer (D) is incorrect because 9,700 is the sum of
the physical, not equivalent, units completed and in
EWIP.
Answer (D) is incorrect because $1,100 is the cost
of good baseballs produced ($.55 x 2,000).
[124] Source: CIA 0591 IV-4
Answer (A) is incorrect because 26,000 (31,000
weighted-average EUP - 5,000 EUP in BWIP) is the
number of direct materials equivalent units calculated
using the FIFO method.
Answer (B) is incorrect because 28,500 is the
number of units transferred out to finished goods
inventory.
Answer (C) is correct. The weighted-average
approach averages the costs in beginning
work-in-process with those incurred during the
period. Accordingly, the degree of completion of the
BWIP is ignored in computing the equivalent units for
direct materials. Direct materials equivalent units
therefore consist of units transferred to finished goods
(28,500) and units that failed inspection (2,500), or
31,000. Ending work-in-process inventory has not
reached the point at which materials are added.
Answer (D) is incorrect because 34,000 [5,000 units
in BWIP + 32,000 units transferred in - (60% x
5,000 units in BWIP)] is the number of physical units
minus the conversion work previously done on the
BWIP.
[125] Source: Publisher
Answer (A) is correct. EUP assigned to spoilage are
based upon the actual processing costs incurred. If
700 spoiled units are 60% complete, 420 equivalent
units have been produced. Accordingly, 420 EUP
should be assigned to both normal and abnormal
spoilage. The most accurate equivalent unit
calculation includes spoilage, both abnormal and
normal.
Answer (B) is incorrect because the 700 units of
abnormal spoilage are only 60% complete.
Answer (C) is incorrect because the 700 units of
normal spoilage are only 60% complete.
Answer (D) is incorrect because the 700 units each
of both normal and abnormal spoilage are only 60%
complete.
[126] Source: CIA 0586 IV-6
Answer (A) is incorrect because $33 is the normal
spoilage cost [(.03 x 2,000) x $.55].
Answer (B) is incorrect because $20.35 is based on
calculating normal spoilage as 3% of the number of
baseballs completed [(100 - (.03 x 2,100)) x $.55].
Answer (C) is correct. Abnormal spoilage is
calculated as the total unit cost times the amount of
spoilage in excess of expected normal spoilage. Total
unit cost is
Materials cost ($840 ・2,100 EUP)
$0.40
Conversion cost ($315 ・2,100 EUP)
0.15
----$0.55
=====
Spoilage in excess of normal spoilage is 40 units [100
spoiled units - (.03 x 2,000 good units)]. Abnormal
spoilage is thus $22 ($.55 x 40).
[127] Source: CIA 0587 IV-5
Answer (A) is incorrect because normal spoilage
($120), not abnormal spoilage ($80), should be
included in the cost of good units produced.
Answer (B) is correct. Abnormal spoilage is not
expected to occur under efficient operating
conditions. Thus, abnormal spoilage is excluded from
the cost of the good units. Hence, the total
production cost of $2,200 is reduced by $80 [20
units x ($2,200 ・550 total units)] to arrive at the
$2,120 cost of good units.
Answer (C) is incorrect because the total production
costs should be reduced by the abnormal spoilage
($80) to find the cost of good units produced.
Answer (D) is incorrect because $2,332 results from
basing the cost per unit on 500 good units rather than
550 total units.
[128] Source: CIA 1190 IV-9
Answer (A) is incorrect because spoilage is
calculated using the normal input (not total units) of
30,000 units (28,500 ・.95).
Answer (B) is correct. Normal input (input for the
good units and normal spoilage) is calculated by
dividing the good units produced by the proportion
left after the spoiled units are removed, or 95%
(100% - 5%). Thus, normal input is the input for
30,000 units (28,500 ・.95), normal spoilage is
1,500 units (30,000 - 28,500), and abnormal
spoilage is the difference between total and normal
spoilage [(31,000 - 28,500) - 1,500].
Answer (C) is incorrect because spoilage is
calculated using the normal input (not good units) of
30,000 units (28,500 ・.95).
Answer (D) is incorrect because spoilage is
calculated using the normal input (not total units) of
30,000 units (28,500 ・.95). Abnormal spoilage
would then be determined by subtracting 1,500
(30,000 x .05) units of normal spoilage from 2,500
total spoiled units.
[129] Source: CIA 0586 IV-11
Answer (A) is correct. To determine the proportion
of joint costs to be allocated to F1, the net realizable
values of the three products must be calculated. Net
realizable value per unit is selling price minus
additional processing costs.
F1: 5($30 - $28) = $10
F2: 2($35 - $30) = 10
F3: 3($35 - $25) = 30
--$50
===
The amount of joint costs to be allocated to F1 is
20% ($10 ・$50).
Answer (B) is incorrect because the proportion of
joint costs allocated to F1 is calculated based on the
proportion of net realizable value attributable to F1,
not on the proportion of selling price attributable to
F1.
Answer (C) is incorrect because the allocation of
joint costs is based on net realizable value; joint costs
are not divided equally among the three products.
The amount of joint costs to be allocated to F1 is
20% ($10 net realizable value for five units of F1 ・
$50 total net realizable value).
Answer (D) is incorrect because the portion of joint
costs allocated to F1 is based on net realizable value.
The net realizable value for F1 is $2 per unit ($30
selling price - $28 additional processing costs) and
each ton of material yields five units of F1, for a total
net realizable value of $10 per ton. Net realizable
value for all three products is $50 per ton. Therefore,
the portion of joint costs allocated to F1 is 20% ($10
・$50).
[130] Source: CIA 1185 IV-11
Answer (A) is incorrect because $5,000 is the cost
to further process product X after split-off. The
amount of joint costs allocated to product X is
$6,000 [($12,000 sales price at split-off for product
X ・$20,000 total sales price for X and Y) x
$10,000 joint processing costs].
Answer (B) is correct. Under the net realizable value
method, joint costs are allocated to products based
on their relative net realizable values unless sales price
quotations are available at split-off. Split-off sales
price quotations are available, so the amount of joint
costs allocated to product X can be computed as
follows:
Sales value of product X
------------------------ x Joint costs
Total sales value
$12,000
= ------- X $10,000
$20,000
= $6,000
Answer (C) is incorrect because, since sales prices at
split-off are known, joint costs will be allocated
based on each product's proportional sales value.
Answer (D) is incorrect because $10,000 is the total
joint processing cost. The total needs to be allocated
to each product based on their net realizable values.
[131] Source: CIA 1184 IV-23
Answer (A) is incorrect because the common cost
allocations of $450 to cheese and $150 to whey
were arrived at by allocating total common costs of
$600 instead of $1,000, which includes overhead of
$400.
sales value of the individual products. The total
common costs are
Milk (1,000 lb. x $.20)
$ 200
Labor (40 hr. x $10)
400
O/H (1.0 x $400 DL cost)
400
-----Common costs
$1,000
======
Sales Value:
Cheese ($2 x 450)
$ 900 75%
Whey ($.80 x 375)
300 25%
-----Total
$1,200
======
Cost to cheese (75% x 1,000)
$ 750
Cost to whey (25% x 1,000)
250
-----$1,000
======
If only 375 pounds of whey can be sold, the other 75
pounds are worthless and are not allocated any
common cost.
[132] Source: CIA 0587 IV-6
Answer (A) is incorrect because the net revenue from
the sale of the by-product is $1,700, not $2,000. The
costs related to the packaging and selling of the
by-product must be deducted.
Answer (B) is incorrect because the $.10-per-pound
packaging cost for the sawdust must be deducted
from the by-product revenue.
Answer (C) is correct. The net revenue from sale of
the by-product is $1,700 [($2 price x 1,000 lb.) ($.10 x 1,000 lb.) - (.1 x $2 x 1,000 lb.)]. Joint
processing costs to be allocated to joint products are
therefore $48,300 ($50,000 - $1,700 net
by-product revenue). Of this amount, $32,200
should be assigned to the two-by-fours [$48,300 x
(200,000 board feet of two-by-fours ・300,000 total
board feet)].
Answer (D) is incorrect because the net revenue of
$1,700 [($2 sale price - $.10 packaging - $.20 sales
cost) x 1,000 lb.] from the by-product should be
subtracted from the joint processing costs before the
joint processing costs are allocated.
[133] Source: CMA 1294 4-1
Answer (A) is incorrect because the joint
manufacturing costs are the only irrelevant item.
Answer (C) is incorrect because the common costs
are allocated based on net realizable values (price per
pound x demand in pounds), not sales prices per
pound.
Answer (B) is correct. Common, or joint, costs
cannot be identified with a particular joint product.
By definition, joint products have common costs until
the split-off point. Costs incurred after the split-off
point are separable costs. The decision to continue
processing beyond split-off is made separately for
each product. The costs relevant to the decision are
the separable costs because they can be avoided by
selling at the split-off point. They should be compared
with the incremental revenues from processing
further. Thus, items I (revenue from selling at split-off
point), II (variable costs of upgrade), III (avoidable
fixed costs of upgrade), and IV (revenue from selling
after further processing) are considered in making the
upgrade decision.
Answer (D) is correct. The relative sales value
method allocates costs in proportion to the relative
Answer (C) is incorrect because the joint
manufacturing costs are the only irrelevant item.
Answer (B) is incorrect because the common cost
allocation of $500 to both cheese and whey was
arrived at by allocating the total common cost of
$1,000 by output in pounds instead of the sales
values.
Answer (D) is incorrect because the joint
manufacturing costs are the only irrelevant item.
[138] Source: CMA 1295 3-23
[134] Source: CMA 1295 3-19
Answer (A) is correct. Prime costs are defined as
direct materials and direct labor. The first step is to
calculate the cost of raw materials used during the
month:
Beginning materials inventory
$ 67,000
Plus purchases
163,000
Plus transportation in
4,000
Minus purchase returns
(2,000)
Materials available for use
$232,000
Minus ending materials inventory
(62,000)
Materials used
$170,000
Adding the $170,000 of materials used to the
$200,000 of direct labor results in a total of
$370,000 for prime costs.
Answer (B) is incorrect because $168,000 equals
purchases of raw materials adjusted for the change in
inventories.
Answer (C) is incorrect because $363,000
incorporates the change in finished goods inventories.
Answer (D) is incorrect because the $170,000 is
only the raw materials used.
[135] Source: CMA 1295 3-20
Answer (A) is incorrect because $502,000 is based
on actual overhead.
Answer (B) is incorrect because $503,000
incorporates the change in finished goods inventories.
Answer (C) is incorrect because $363,000 excludes
overhead but includes the change in finished goods
inventory.
Answer (D) is correct. Total manufacturing costs
consist of materials, labor, and overhead. Total prime
costs were $370,000. Overhead applied was
$140,000 (70% x $200,000 of direct labor).
Therefore, total manufacturing cost is $510,000
($170,000 + $200,000 + $140,000).
[136] Source: CMA 1295 3-21
Answer (A) is incorrect because $469,000 uses
actual overhead and adjusts the figures for the change
in finished goods inventory.
Answer (B) is incorrect because $477,000 includes
the change in finished goods inventory in the
calculation.
Answer (C) is incorrect because $495,000 uses
materials purchased rather than materials used and
also fails to adjust properly for transportation in.
Answer (D) is correct. Total manufacturing costs
consist of materials, labor, and overhead. That
amount is then adjusted for the change in
work-in-process inventories to arrive at the cost of
goods transferred to finished goods. Total
manufacturing cost was $510,000. Thus, the cost of
goods transferred to finished goods inventory is
$484,000 ($510,000 + $145,000 - $171,000).
Answer (A) is incorrect because an overapplication
of overhead would be represented by a credit in the
overhead control account.
Answer (B) is incorrect because the overhead was
overapplied for the month.
Answer (C) is correct. The factory overhead control
account would have been debited for $132,000 of
actual overhead. Credits would have totaled
$140,000 representing 70% of direct labor costs of
$200,000. Therefore, the $140,000 credit exceeds
the $132,000 debit, and there has been an
overapplication of overhead in the amount of $8,000.
Answer (D) is incorrect because the overhead was
overapplied for the month.
[139] Source: CMA 1286 4-14
Answer (A) is correct. The computation of equivalent
units for a period using the FIFO method of process
costing includes only the conversion costs and
material added to the product in that period and
excludes any work done in previous periods.
Accordingly, FIFO equivalent units include work and
material to complete BWIP, plus work and material
to complete units started this period, minus work and
material needed to complete EWIP. Since all
materials are added at the beginning of the process,
only those units started during November would have
received materials in that month. Because 5,000 units
were started, the equivalent units for direct materials
equal 5,000.
Answer (B) is incorrect because 6,000 is the total
units to account for.
Answer (C) is incorrect because 4,400 equals units
completed and transferred out from BI plus units
started and completed in November plus 20% of
work-in-process on November 30 (1,000 + 3,000 +
400).
Answer (D) is incorrect because 3,800 is not the
equivalent units for direct materials. Only those units
started during November would have received
materials in that month. Therefore, equivalent units for
direct materials equal 5,000.
[140] Source: CMA 1286 4-15
Answer (A) is incorrect because 3,400 units consist
of the units started and completed during November
plus the 20% of work-in-process complete as to
conversion costs (3,000 + 400).
Answer (B) is correct. Since BWIP (1,000 units)
was already 60% complete, 400 equivalent units
were needed for completion. In addition, 3,000 units
were started and completed during the period. The
2,000 units in EWIP equal 400 equivalent units since
they are 20% complete. Total equivalent units are
3,800 (400 + 3,000 + 400).
Answer (C) is incorrect because 4,000 units consist
of the units started and completed in November and
the units completed and transferred out from BI
(3,000 + 1,000).
Answer (D) is incorrect because 4,400 units consist
of the units started and completed in November, plus
the units completed and transferred out from BI plus
the 20% of work-in-process complete as to
conversion costs (3,000 + 1,000 + 400).
[141] Source: CMA 1286 4-16
Answer (A) is incorrect because 3,400 units equals
units started and completed in November plus 20%
of ending work-in-process (3,000 + 400).
Answer (B) is incorrect because 4,400 units equals
units started and completed in November plus units
completed and transferred out from BI plus 20% of
ending work-in-process (3,000 + 1,000 + 400).
Answer (C) is incorrect because 5,000 units are the
number of units started in November.
Answer (D) is correct. The difference between the
weighted-average and FIFO methods of process
costing is how BWIP is handled. FIFO makes a
distinction between the costs in BWIP and the costs
of goods started this period. Weighted average does
not. Thus, when there is no BWIP, there is no
difference between the two costing methods. Since
6,000 units have been started (1,000 BWIP + 5,000
started this period), and all materials are added at the
beginning of the process, equivalent units for materials
equal 6,000.
[142] Source: CMA 1286 4-17
Answer (A) is incorrect because 3,400 units consist
of the units started and completed in November plus
the 20% of work-in-process complete as to
conversion costs (3,000 + 400).
Answer (B) is incorrect because 3,800 units equal
the 400 units in BWIP needed for completion plus
the units started and completed in November plus the
20% of work-in-process complete as to conversion
costs (400 + 3,000 + 400).
Answer (C) is incorrect because 4,000 units equal
the units completed and transferred out from BI plus
units started and completed during November (1,000
+ 3,000).
Answer (D) is correct. Under the weighted-average
method, work in the previous period on the beginning
inventories is included along with the work added this
period. Thus, the only difference between the FIFO
calculations and the weighted-average calculation is
the equivalent units for the beginning inventory. The
4,000 completed units (1,000 BWIP + 3,000 started
this period) equal 4,000 equivalent units. The 2,000
units in EWIP are equivalent to 400 units (20%
complete x 2,000 units). Thus, there are 4,400
conversion cost equivalent units.
[143] Source: CMA 0694 3-25
Answer (A) is correct. If direct labor hours are used
as the allocation base, the $50,000 of costs is
allocated over 400 hours of direct labor. Multiplying
the 25 units of each product times 200 hours results
in 5,000 labor hours for each product, or a total of
10,000 hours. Dividing $50,000 by 10,000 hours
results in a cost of $5 per direct labor hour.
Multiplying 200 hours times $5 results in an allocation
of $1,000 of overhead per unit of product.
Answer (B) is incorrect because $500 is the
allocation based on number of material moves.
Answer (C) is incorrect because $2,000 assumes
that all the overhead is allocated to the wall mirrors.
Answer (D) is incorrect because $5,000 assumes
overhead of $250,000.
[144] Source: CMA 0694 3-26
Answer (A) is incorrect because $1,000 uses direct
labor as the allocation basis.
Answer (B) is correct. An activity-based costing
(ABC) system allocates overhead costs on the basis
of some causal relationship between the incurrence of
cost and activities. Because the moves for wall
mirrors constitute 25% (5 ・20) of total moves, the
mirrors should absorb 25% of the total materials
handling costs. Thus, $12,500 (25% x $50,000) is
allocated to mirrors. The remaining $37,500 is
allocated to specialty windows. Dividing the $12,500
by 25 units produces a cost of $500 per unit of
mirrors.
Answer (C) is incorrect because $1,500 is the
allocation per unit of specialty windows.
Answer (D) is incorrect because $2,500 is not based
on the number of material moves.
[145] Source: CMA 0691 3-16
Answer (A) is incorrect because the total of the
service department costs allocated to the Assembly
Department is $167,500.
Answer (B) is incorrect because the total of the
service department costs allocated to the Assembly
Department is $167,500.
Answer (C) is incorrect because the total of the
service department costs allocated to the Assembly
Department is $167,500.
Answer (D) is correct. Under the direct method,
service department costs are allocated directly to the
production departments, with no allocation to other
service departments. The total budgeted hours of
service by the Quality Control Department to the two
production departments is 28,000 (21,000 + 7,000).
Given that the Assembly Department is expected to
use 25% (7,000 ・28,000) of the total hours
budgeted for the production departments, it will
absorb 25% of total quality control costs (25% x
$350,000 = $87,500). The total budgeted hours of
service by the Maintenance Department to the
production departments is 30,000 (18,000 +
12,000). The Assembly Department is expected to
use 40% (12,000 ・30,000) of the total maintenance
hours budgeted for the production departments.
Thus, the Assembly Department will be allocated
40% of the $200,000 of maintenance costs, or
$80,000. The total service department costs
allocated to the Assembly Department is $167,500
($87,500 + $80,000).
[146] Source: CMA 0691 3-17
Answer (A) is incorrect because the overhead cost
per machine hour is $15.65.
Answer (B) is incorrect because the overhead cost
per machine hour is $15.65.
Answer (C) is incorrect because the overhead cost
per machine hour is $15.65.
Answer (D) is correct. Machining uses 75% (21,000
・28,000) of the total quality control hours and 60%
(18,000 ・30,000) of the total maintenance hours
budgeted for the production departments. Under the
direct method, it will therefore be allocated $262,500
(75% x $350,000) of quality control costs and
$120,000 (60% x $200,000) of maintenance costs.
In addition, Machining is expected to incur another
$400,000 of overhead costs. Thus, the total
estimated Machining overhead is $782,500
($262,500 + $120,000 + $400,000), and the
overhead cost per machine hour is $15.65
($782,500 ・50,000 hours).
[147] Source: CMA 0691 3-19
Answer (A) is incorrect because the Assembly
Department will be allocated maintenance costs of
$108,000.
Answer (B) is correct. The step-down method
allocates service costs to both service and production
departments but does not permit mutual allocations.
Accordingly, Quality Control will receive no
allocation of maintenance costs. The first step is to
allocate quality control costs to the Machining
Department. Maintenance is expected to use 20%
(7,000 ・35,000) of the available quality control
hours and will be allocated $70,000 (20% x
$350,000) of quality control costs. Thus, total
allocable maintenance costs equal $270,000
($70,000 + $200,000). The Assembly Department is
estimated to use 40% (12,000 ・30,000) of the
available maintenance hours. Consequently, it will be
allocated maintenance costs of $108,000 (40% x
$270,000).
Answer (C) is incorrect because the Assembly
Department will be allocated maintenance costs of
$108,000.
Answer (D) is incorrect because the Assembly
Department will be allocated maintenance costs of
$108,000.
M = $200,000 + .2Q
To solve for Q, the second equation can be
substituted into the first as follows:
Q = $350,000 + .25($200,000 + .2Q)
Q = $350,000 + $50,000 + .05Q
.95Q = $400,000
Q = $421,053
[149] Source: CMA 0691 3-18
Answer (A) is incorrect because the overhead cost
applied per direct labor hour will be $12.
Answer (B) is incorrect because the overhead cost
applied per direct labor hour will be $12.
Answer (C) is correct. With no allocation of service
department costs, the only overhead applicable to the
Assembly Department is the $300,000 budgeted for
that department. Hence, the overhead cost applied
per direct labor hour will be $12 ($300,000
budgeted overhead ・25,000 hours).
Answer (D) is incorrect because the overhead cost
applied per direct labor hour will be $12.
[150] Source: CMA 1273 4-1
Answer (A) is incorrect because it is a characteristic
of absorption costing systems.
Answer (B) is correct. In a direct (variable) costing
system, only the variable manufacturing costs are
recorded as product costs. All fixed manufacturing
costs are expensed in the period incurred. Because
changes in the relationship between production levels
and sales levels do not cause changes in the amount
of fixed manufacturing cost expensed, profits more
directly follow the trends in sales.
Answer (C) is incorrect because it is a characteristic
of absorption costing systems.
Answer (D) is incorrect because neither variable nor
absorption costing includes administrative costs in
inventory.
[151] Source: CMA 1273 4-2
[148] Source: CMA 0691 3-20
Answer (A) is incorrect because the total quality
control costs to be allocated equal $421,053.
Answer (B) is incorrect because the total quality
control costs to be allocated equal $421,053.
Answer (C) is incorrect because the total quality
control costs to be allocated equal $421,053.
Answer (D) is correct. The reciprocal method
permits mutual allocations of service costs among
service departments. For this purpose, a system of
simultaneous equations is necessary. The total costs
for the Quality Control Department consist of
$350,000 plus 25% (10,000 hours ・40,000 hours)
of maintenance costs. The total costs for the
Maintenance Department equal $200,000 plus 20%
(7,000 hours ・35,000 hours) of quality control
costs. These relationships can be expressed by the
following equations:
Q = $350,000 + .25M
Answer (A) is incorrect because, since profit is a
function of both sales and production, it will not
always move in the same direction as sales.
Answer (B) is correct. In an absorption costing
system, fixed overhead costs are included in
inventory. When sales exceed production, more
overhead is expensed under absorption costing due
to fixed overhead carried over from the prior
inventory. If sales increase over production, more
than one period's factory overhead is recognized as
expense. Accordingly, if the increase in factory
overhead expensed is greater than the contribution
margin of the increased units sold, there may be less
profit with an increased level of sales.
Answer (C) is incorrect because decreased output
will increase the unit cost of items sold since fixed
factory overhead per unit will increase.
Answer (D) is incorrect because, given that profit is a
function of both sales and productivity, it will not
always move in the same direction as sales.
the fixed and variable selling and administrative costs.
[153] Source: CMA 1285 4-15
Answer (A) is correct. The contribution margin from
manufacturing (sales - variable costs) is $10 ($40 $30) per unit sold, or $1,200,000 (120,000 units x
$10). The fixed costs of manufacturing ($600,000)
and selling and administrative costs ($400,000) are
deducted from the contribution margin to arrive at an
operating income of $200,000. The difference
between the absorption income of $440,000 and the
$200,000 of direct costing income is attributable to
capitalization of the fixed manufacturing costs under
the absorption method. Since 40% of the goods
produced are still in inventory (80,000 ・200,000),
40% of the $600,000 in fixed costs, or $240,000,
was capitalized under the absorption method. That
amount was expensed under the direct costing
method.
Answer (B) is incorrect because $440,000 is the
operating income using absorption costing.
Answer (C) is incorrect because $800,000 equals
the contribution margin minus the selling and
administrative costs ($1,200,000 - $400,000).
Answer (D) is incorrect because $600,000 equals
the fixed manufacturing costs.
[154] Source: CMA 1286 4-18
Answer (A) is incorrect because $400,000 does not
include the variable factory overhead. In addition, this
is the amount of inventoriable costs using absorption
costing.
Answer (B) is correct. Under direct costing, the only
costs that are capitalized are the variable costs of
manufacturing. These include
[156] Source: CMA 1290 3-24
Answer (A) is incorrect because ending inventory
was $1,200,000.
Answer (B) is correct. Under the absorption method,
unit cost is $30 ($12 direct materials + $9 direct
labor + $4 variable overhead + $5 fixed overhead).
Given beginning inventory of 35,000 units, the ending
inventory equals 40,000 units (35,000 BI + 130,000
produced - 125,000 sold). Hence, ending inventory
was $1,200,000 ($30 x 40,000 units).
Answer (C) is incorrect because ending inventory
was $1,200,000.
Answer (D) is incorrect because ending inventory
was $1,200,000.
[157] Source: CMA 1290 3-25
Answer (A) is incorrect because ending inventory
was $1,000,000.
Answer (B) is incorrect because ending inventory
was $1,000,000.
Answer (C) is correct. Using variable costing, the unit
cost of ending inventory is $25 ($12 direct materials
+ $9 direct labor + $4 variable overhead). Given
beginning inventory of 35,000 units, the ending
inventory equals 40,000 units (35,000 BI + 130,000
produced - 125,000 sold). Thus, ending inventory
was $1,000,000 ($25 x 40,000).
Answer (D) is incorrect because ending inventory
was $1,000,000.
[158] Source: CMA 1290 3-29
Direct materials used
$300,000
Direct labor
100,000
Variable factory overhead
50,000
-------Total inventoriable costs
$450,000
========
Answer (C) is incorrect because $490,000 includes
the variable selling and administrative costs.
Answer (D) is incorrect because $530,000 includes
the fixed factory overhead.
[155] Source: CMA 1286 4-19
Answer (A) is incorrect because $400,000 does not
include the variable factory overhead or the fixed
factory overhead.
Answer (B) is incorrect because $450,000 does not
include the fixed factory overhead. In addition, this is
the amount of inventoriable costs using direct costing.
Answer (C) is correct. The absorption method is
required for financial statements prepared according
to GAAP. It charges all costs of production to
inventories. The variable cost of materials
($300,000), direct labor ($100,000), variable factory
overhead ($50,000), and the fixed factory overhead
($80,000) are included. They total $530,000.
Answer (D) is incorrect because $590,000 includes
Answer (A) is correct. Absorption costing results in a
higher income figure than variable costing whenever
production exceeds sales. The reason is that
absorption costing capitalizes some fixed factory
overhead as part of inventory. These costs are
expensed during the period incurred under variable
costing. Consequently, variable costing recognizes
greater expenses and lower income. The reverse is
true when sales exceed production. In that case, the
absorption method results in a lower income because
some fixed costs of previous periods absorbed by the
beginning inventory are expensed in the current
period as cost of goods sold. Variable costing
income is never burdened with fixed costs of previous
periods.
Answer (B) is incorrect because an increase in
inventory results in a higher income under absorption
costing.
Answer (C) is incorrect because the important
relationship is that between actual production and
actual sales, not that between actual and planned
production.
Answer (D) is incorrect because planned sales do not
determine actual income.
[159] Source: CMA 1290 3-28
Answer (A) is correct. Under the absorption method,
all selling and administrative fixed costs are charged
to the current period. Accordingly, $980,000 of
selling expenses and $425,000 of actual fixed
administrative expenses were expensed during the
year. The fixed manufacturing costs must be
calculated after giving consideration to the increase in
inventory during the period (some fixed costs were
capitalized) and to the underapplied overhead. The
beginning finished goods inventory included 35,000
units, each of which had absorbed $5 of fixed
manufacturing overhead. Each unit produced during
the year also absorbed $5 of fixed manufacturing
overhead. Given that 125,000 of those units were
sold, cost of goods sold was debited for $625,000 of
fixed overhead (125,000 units x $5). At year-end,
the underapplied overhead was also added to cost of
goods sold. Because production was expected to be
140,000 units, the overhead application rate for the
$700,000 of planned fixed manufacturing overhead
was $5 per unit. Only 130,000 units were
manufactured. Hence, $650,000 ($5 x 130,000
units) of overhead was applied to units in process.
Because inventory increased from 35,000 to 40,000
units, $25,000 (5,000-unit increase x $5) of the
applied fixed manufacturing overhead for the period
was inventoried, not expensed. Actual overhead was
$715,000, so the underapplied overhead was
$65,000 ($715,000 - $650,000). This amount was
charged to cost of goods sold at year-end. The total
of the fixed costs expensed was therefore
$2,095,000 ($980,000 selling expenses + $425,000
administrative expenses + $625,000 standard
manufacturing overhead costs of units sold +
$65,000 underapplied overhead).
Answer (B) is incorrect because the total fixed costs
under the absorption costing basis were $2,095,000.
Answer (C) is incorrect because the total fixed costs
under the absorption costing basis were $2,095,000.
Answer (D) is incorrect because the total fixed costs
under the absorption costing basis were $2,095,000.
variable costs included selling expenses ($8 per unit)
and administrative expenses ($2 per unit). The unit
selling and administrative costs actually incurred for
sales of 125,000 units were the same as the planned
unit costs. For example, actual unit variable selling
expense was $8 ($1,000,000 ・125,000 units sold),
which equaled the planned unit cost. Thus, total unit
variable cost was $35 ($25 + $8 + $2). The total
expensed was therefore $4,375,000 ($35 x 125,000
units sold).
Answer (B) is incorrect because the total variable
cost expensed under the variable costing basis was
$4,375,000.
Answer (C) is incorrect because the total variable
cost expensed under the variable costing basis was
$4,375,000.
Answer (D) is incorrect because the total variable
cost expensed under the variable costing basis was
$4,375,000.
[162] Source: CMA 1290 3-30
Answer (A) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
Answer (B) is correct. The difference is caused by
the capitalization of some of the fixed manufacturing
overhead. When inventories increase during the
period, the absorption method capitalizes that
overhead and transfers it to future periods. The
variable costing method deducts it in the current
period. Inventories increased by 5,000 units during
the period, and each of those units would have
included $5 of fixed manufacturing overhead under
absorption costing. Accordingly, $25,000 of fixed
manufacturing overhead would have been capitalized.
Recognizing $25,000 of fixed costs in the balance
sheet instead of the income statement results in a
$25,000 difference in income between the two
costing methods.
[160] Source: CMA 1290 3-26
Answer (A) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (B) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (C) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
Answer (D) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
Answer (C) is incorrect because the variable costing
contribution margin was $5,625,000.
[163] Source: CMA 1292 3-5
Answer (D) is correct. At $70 per unit, actual sales
revenue was $8,750,000 for 125,000 units. Actual
variable costs of manufacturing were $25 per unit
($12 + $9 + $4). The unit incurred costs for a
production level of 130,000 units were the same as
the unit planned costs, which were the same for all
units, whether made in the previous or current year.
For example, total planned direct materials cost for
140,000 units was $1,680,000, or $12 per unit. The
incurred unit cost was also $12 ($1,560,000 ・
130,000 units). Thus, total variable manufacturing
cost was $3,125,000 ($25 x 125,000 units).
Consequently, manufacturing contribution margin was
$5,625,000 ($8,750,000 - $3,125,000).
[161] Source: CMA 1290 3-27
Answer (A) is correct. The unit variable
manufacturing cost was $25 ($12 direct materials +
$9 direct labor + $4 variable overhead). Other
Answer (A) is incorrect because manufacturing
supplies are variable costs inventoried under both
methods.
Answer (B) is incorrect because factory insurance is
a fixed manufacturing cost inventoried under
absorption costing but written off as a period cost
under variable costing.
Answer (C) is incorrect because direct labor cost is a
product cost under both methods.
Answer (D) is correct. Under absorption costing, all
manufacturing costs, both fixed and variable, are
treated as product costs. Under variable costing, only
variable costs of manufacturing are inventoried as
product costs. Fixed manufacturing costs are
expensed as period costs. Packaging and shipping
costs not product costs under either method because
they are incurred after the goods have been
manufactured. Instead, they are included in selling
and administrative expenses for the period.
[164] Source: CMA 1292 3-6
Answer (A) is correct. Activity-based costing,
job-order costing, process costing, and standard
costing can all be used for both internal and external
purposes. Variable costing is not acceptable under
GAAP for external reporting purposes.
Answer (B) is incorrect because job costing is
acceptable for external reporting purposes.
Answer (C) is incorrect because variable costing is
acceptable for internal purposes only.
Answer (D) is incorrect because process costing is
acceptable for external reporting purposes.
inventory is less than the ending finished goods
inventory, absorption costing assigns more fixed
overhead costs to the balance sheet and less to the
cost of goods sold on the income statement than does
variable costing.
Answer (C) is correct. Absorption costing (full
costing) is the accounting method that considers all
manufacturing costs as product costs. These costs
include variable and fixed manufacturing costs,
whether direct or indirect. However, variable costing
treats fixed factory overhead as a period cost instead
of charging it to the product (inventory). Thus, when
sales exceed production, the absorption costing
method recognizes fixed factory overhead inventoried
in a prior period. Direct costing does not.
Accordingly, net income under variable costing will
be greater than net income under absorption costing.
Answer (D) is incorrect because inflationary effects
will usually affect both absorption and variable
costing in the same way.
[165] Source: CMA 1292 3-26
Answer (A) is incorrect because producing more of
the products requiring the most direct labor will
permit more fixed overhead to be capitalized in the
inventory account.
Answer (B) is incorrect because deferring expenses
such as maintenance will increase income in the
current period (but may result in long-range losses
caused by excessive down-time).
Answer (C) is incorrect because increasing
production without a concurrent increase in demand
applies more fixed costs to inventory.
Answer (D) is correct. Under an absorption-costing
system, income can be manipulated by producing
more products than are sold because more fixed
manufacturing overhead will be allocated to the
ending inventory. When inventory increases, some
fixed costs are capitalized rather than expensed.
Decreasing production, however, will result in lower
income because more of the fixed manufacturing
overhead will be expensed.
[166] Source: CIA 0593 IV-10
Answer (A) is incorrect because total variable cost
would be $1,100 if 200,000 copies were made in
February.
Answer (B) is correct. Unit variable cost can be
determined by dividing the $1,000 cost increase for
the additional copies made in February by the
increase in copies made. Hence, total variable cost
for 110,000 copies is $2,200 {[$1,000 ・(150,000 100,000)] x 110,000}.
Answer (C) is incorrect because variable cost per
unit would have to be $.05 to total $5,500.
Answer (D) is incorrect because $7,920 results from
calculating an average cost per copy for January and
February and then multiplying by 110,000 copies.
[167] Source: CIA 1193 IV-10
Answer (A) is incorrect because a change in a
variable period cost will affect absorption and
variable costing in the same way.
Answer (B) is incorrect because, if the beginning
[168] Source: CIA 0594 III-46
Answer (A) is incorrect because increasing
inventories increases absorption costing profit as a
result of capitalizing fixed factory overhead.
Answer (B) is incorrect because when sales volume
exceeds production, inventories decline. Thus, fixed
factory overhead expensed will be greater under
absorption costing.
Answer (C) is correct. Absorption (full) costing is the
accounting method that considers all manufacturing
costs as product costs. These costs include variable
and fixed manufacturing costs whether direct or
indirect. Variable (direct) costing considers only
variable manufacturing costs to be product costs, i.e.,
inventoriable. Fixed manufacturing costs are
considered period costs and are expensed as
incurred. If production is increased without increasing
sales, inventories will rise. However, all fixed costs
associated with production will be an expense of the
period under variable costing. Thus, this action will
not artificially increase profits and improve the
manager's review.
Answer (D) is incorrect because, under variable
costing, operating profit is a function of sales. Under
absorption costing, it is a function of sales and
production.
[169] Source: CIA 0577 IV-18
Answer (A) is incorrect because variable
manufacturing costs, whether direct (direct materials
and direct labor) or indirect (variable factory
overhead), are accounted for as product costs, not
period costs.
Answer (B) is incorrect because nonvariable indirect
costs are treated as period costs in direct costing.
Answer (C) is correct. Direct (variable) costing
considers only variable manufacturing costs to be
product costs. Variable indirect costs included in
variable factory overhead are therefore treated as
inventoriable. Fixed costs are considered period
costs and are expensed as incurred.
Answer (D) is incorrect because, in direct costing,
nonvariable direct costs are treated as period costs,
not product costs.
indirect labor, and indirect materials. Product costs
are inventoried until the product is sold, at which time
they are expensed as cost of goods sold.
[170] Source: CIA 1186 IV-8
Answer (A) is incorrect because administrative costs
and fixed manufacturing overhead costs are treated
separately although both are period costs in a direct
costing system.
[173] Source: CIA 0585 IV-5
Answer (A) is incorrect because the gross margins
for Years 1 and 3 are equal.
Answer (B) is incorrect because selling and fixed
manufacturing overhead costs are treated separately
although both are period costs in a direct costing
system.
Answer (B) is incorrect because, with other factors
held constant, the greater sales volume in Year 2
should have produced a greater gross margin than in
Years 1 or 3.
Answer (C) is incorrect because inventoriable costs
are directly related to the products produced, unlike
fixed manufacturing overhead which is, under variable
costing, a period cost.
Answer (C) is correct. Gross margin equals sales
minus CGS (BI + CGM - EI). An absorption-costing
system applies fixed as well as variable overhead to
products. Because Blue's production has always
been less than planned activity, overhead was
underapplied each year. Hence, Blue must have
debited underapplied overhead each year to CGS,
WIP, and FG. Because production always equaled
sales, however, no inventories existed at any
year-end, and thus each annual underapplication
should have been debited entirely to CGS.
Consequently, the gross margins for Years 1 and 3
must be the same because the gross revenue and
CGS were identical for the two periods.
Answer (D) is correct. The distinction between
absorption costing and direct costing is in the
treatment of fixed manufacturing costs. Absorption
costing treats them as product costs by allocating
them to inventory and cost of goods sold. Direct
costing treats all fixed costs as period costs by
expensing them as incurred.
[171] Source: CIA 1187 IV-9
Answer (A) is incorrect because direct costing
arguably understates inventory.
Answer (D) is incorrect because Year 3 includes the
same amount of fixed overhead costs as in Year 2,
but it has less revenue than in Year 2; therefore, the
gross margin will be lower.
Answer (B) is incorrect because variable factory
overhead is a product cost under any cost system.
[174] Source: CIA 0584 IV-1
Answer (C) is incorrect because it states an argument
against absorption costing.
Answer (D) is correct. Direct costing treats fixed
manufacturing costs as period costs, whereas
absorption costing accumulates them as product
costs. If product costs are viewed as all
manufacturing costs incurred to produce output, fixed
factory overhead should be inventoried because it is
necessary for production. The counter argument in
favor of direct costing is that fixed factory overhead is
more closely related to capacity to produce than to
the production of individual units. Internal reporting
for cost behavior analysis is more useful if it
concentrates on the latter.
[172] Source: CIA 1187 IV-51
Answer (A) is incorrect because indirect labor is a
product cost and sales commissions and depreciation
on the administration building are period costs.
Answer (B) is incorrect because direct labor and
factory utilities are product costs. Sales materials and
administrative supplies are period costs.
Answer (C) is incorrect because product costs
include direct materials and indirect factory materials.
Product costs do not include advertising costs,
administrative labor, or demographic research.
Answer (D) is correct. Product costs are the costs of
producing the product and are usually directly
identifiable with it. Thus, product costs include the
costs of the factors of production identifiable with the
product, which usually include direct materials, direct
labor, and factory (not general) overhead. Factory
overhead includes both fixed and variable elements in
an absorption-costing system, e.g., factory utilities,
Answer (A) is incorrect because 34% gross margin
includes all of the listed expenses. The period costs
should not be included in the gross margin calculation.
Answer (B) is incorrect because sales salaries and
advertising expenses should not be included in the
determination of the gross margin percentage.
Answer (C) is incorrect because 44% gross margin
includes all of the rent and supervision expenses.
Only their respective percentages of 9/10 and 2/3
should be included in the gross margin percentage
calculation.
Answer (D) is correct. The gross margin percentage
equals gross profit (sales - CGS) divided by sales.
Sales are given as $40,000, and expenses included in
cost of goods sold are listed as follows. The gross
margin is $18,400, which is 46% of $40,000.
Sales
$40,000
Cost of goods sold
Direct materials
$9,050
Direct labor
6,050
Rent (9/10 x $3,000)
2,700
Depreciation
2,000
Supervision (2/3 x $1,500)
1,000
Insurance (2/3 x $1,200)
800
(21,600)
-----------$18,400
=======
Office expenses are usually general and administrative
expenses, which are period rather than product costs.
[175] Source: CIA 0584 IV-6
Answer (A) is incorrect because $6.83 is computed
by assuming two-thirds of the order is produced at
$6.50 per unit and one-third of the order is produced
at $7.50 per unit.
Answer (B) is incorrect because $7.00 is the simple
average of the two variable cost amounts.
Answer (C) is correct. Variable cost is equal to the
direct costs associated with a product, an order, or
other decision. In this case, one-third of the order has
a variable cost of $6.50, and two-thirds of the order
has a variable cost of $7.50. Thus, the average
variable cost is $7.17 {($6.50 ・3) + [(2 x $7.50) ・
3]}.
(treats as a product cost) fixed manufacturing
overhead. Variable costing treats all fixed
manufacturing overhead as a period cost. Assuming a
fixed manufacturing overhead application rate of $1
per unit ($1,200 ・1,200 units produced), ending
inventory and operating income will be $200 greater
under absorption than variable costing. Accordingly,
absorption costing operating income is $2,000
($1,800 variable costing operating income + $200).
Answer (D) is incorrect because only fixed
manufacturing overhead costs are allocated to CGS
and inventory. Fixed selling and administrative costs
are treated as period costs.
Answer (D) is incorrect because the sales price per
unit of the new order is $7.25.
[179] Source: CIA 1190 IV-12
[176] Source: CIA 0584 IV-7
Answer (A) is correct. The unit contribution margin
of the new order is the selling price of $7.25 minus
the average variable cost. The average variable cost
is $7.17. Accordingly, the unit contribution margin on
the order is $.08.
Answer (B) is incorrect because a $.25 contribution
margin assumes a cost per unit of $7.00.
Answer (C) is incorrect because the contribution
margin is determined by subtracting the average
variable cost ($7.17) from the unit sales price
($7.25).
Answer (D) is incorrect because the contribution
margin is determined by subtracting the average
variable cost ($7.17) from the unit sales price
($7.25).
[177] Source: CIA 0591 IV-13
Answer (A) is incorrect because operating income
under variable costing equals sales, minus all fixed
costs, minus the variable cost of the goods sold.
Answer (B) is incorrect because $700 results from
multiplying variable manufacturing costs per unit
($5.50) by units produced (1,200) rather than units
sold (1,000).
Answer (C) is correct. Operating income under
variable costing equals sales, minus all fixed costs,
minus the variable cost of the goods sold. No fixed
costs are inventoried. The unit variable cost of the
goods sold was $6.00 ($5.50 + $.50), so variable
CGS was $6,000 (1,000 units x $6.00). Total fixed
costs equaled $2,200 ($1,200 + $1,000). Given
sales of $10,000 (1,000 units x $10), operating
income was $1,800 ($10,000 - $6,000 - $2,200).
Answer (D) is incorrect because $2,300 does not
include variable selling and administrative costs of
$500 (10,000 units x $.50).
[178] Source: CIA 0591 IV-14
Answer (A) is incorrect because $1,800 is the
operating income under variable costing.
Answer (B) is incorrect because fixed manufacturing
overhead costs are allocated to CGS and inventory.
Fixed selling and administrative costs are not
allocated, but are treated as period costs.
Answer (C) is correct. Absorption costing inventories
Answer (A) is correct. Absorption-costing operating
income will exceed variable-costing operating income
because production exceeds sales, resulting in a
deferral of fixed manufacturing overhead in the
inventory calculated using the absorption method.
The difference of $200,000 is equal to the fixed
manufacturing overhead per unit ($2,200,000 ・
275,000 = $8.00) times the difference between
production and sales (275,000 - 250,000 = 25,000,
which is the inventory change in units).
Answer (B) is incorrect because units produced, not
units sold, should be used as the denominator to
calculate the fixed manufacturing cost per unit.
Answer (C) is incorrect because fixed selling and
administrative costs are not properly inventoriable
under absorption costing.
Answer (D) is incorrect because variable selling and
administrative costs are period costs under both
variable- and absorption-costing systems in the
determination of operating income.
[180] Source: CMA 0696 3-3
Answer (A) is incorrect because a portion of the total
costs is still in work-in-process.
Answer (B) is incorrect because $40,000 assumes
that work-in-process is 100% complete as to
conversion costs.
Answer (C) is incorrect because $53,000 exceeds
the actual costs incurred during the period. Given no
beginning inventory, the amount transferred out
cannot exceed the costs incurred during the period.
Answer (D) is correct. The total equivalent units for
raw materials equals 10,000 because all materials for
the ending work-in-process had already been added
to production. Hence, the materials cost per unit was
$3.30 ($33,000 ・10,000). For conversion costs,
the total equivalent units equals 8,500 [8,000
completed + (25% x 2,000 in EWIP)]. Thus, the
conversion cost was $2.00 per unit ($17,000 ・
8,500). The total cost transferred was therefore
$42,400 [8,000 units x ($3.30 + $2.00)].
[181] Source: CMA 0696 3-4
Answer (A) is incorrect because $10,000 assumes
that work-in-process inventory is 100% complete as
to conversion costs.
Answer (B) is incorrect because $2,500 assumes that
work-in-process inventory is 100% complete as to
conversion costs and that 500 bats are in inventory.
Answer (C) is incorrect because $20,000 assumes
that work-in-process is 100% complete as to
conversion costs and that 6,000 units were
transferred out.
Answer (D) is correct. $42,400 of costs were
transferred out. Consequently, the cost of the ending
work-in-process must have been $7,600 ($50,000
total costs incurred - $42,400).
ABC, the amount allocated is $4,513 [($11.50 x 12)
+ ($.14 x 17,500) + ($77 x 25)], or $525.50 more
than under the traditional system.
[185] Source: CMA 1296 3-18
Answer (A) is incorrect because a wallpaper
manufacturer would use a process costing system.
Answer (B) is incorrect because a public accounting
firm would use a job costing system.
Answer (C) is incorrect because a paint manufacturer
would use a process costing system.
[182] Source: CMA 0696 3-19
Answer (A) is incorrect because $101,400 assumes
zero ending inventory.
Answer (B) is incorrect because $127,650 results
from reversing the treatment of beginning and ending
inventories.
Answer (C) is correct. Purchases equals usage
adjusted for the inventory change. Hence, purchases
equals $130,150 ($128,900 used - $27,500 BI +
$28,750 EI).
Answer (D) is incorrect because $157,650 assumes
zero beginning inventory.
Answer (D) is correct. A job costing system is used
when products differ from one customer to the next,
that is, when products are heterogeneous. A process
costing system is used when similar products are
mass produced on a continuous basis. A print shop,
for example, would use a job costing system because
each job will be unique. Each customer provides the
specifications for the product desired. A beverage
manufacturer, however, would use a process costing
system because homogenous units are produced
continuously.
[186] Source: CIA 1193 IV-4
Answer (A) is incorrect because $25,000 excludes
the indirect materials.
[183] Source: CMA 0696 3-29
Answer (A) is incorrect because $6.50 includes
selling and administrative expenses.
Answer (B) is incorrect because $6.30 includes
Answer (B) is correct. Factory (manufacturing)
overhead consists of all costs, other than direct
materials and direct labor, that are associated with
the manufacturing process. It includes both fixed and
variable costs. The factory overhead control account
should have the following costs:
selling costs.
Answer (C) is incorrect because $5.70 includes
administrative expenses.
Answer (D) is correct. Cost of goods sold is based
on the manufacturing costs incurred in production but
does not include selling or general and administrative
expenses. Manufacturing costs equal $38,500
[$13,700 DM + $4,800 DL + (800 hours x $25)
FOH]. Thus, per-unit cost is $5.50 ($38,500 ・
7,000 units).
Indirect materials
$ 5,000
Indirect labor ($45,000-$40,000)
5,000
Other factory overhead
20,000
------Total overhead
$30,000
=======
Answer (C) is incorrect because $45,000 is the total
labor cost.
Answer (D) is incorrect because $50,000 is the
direct materials cost.
[184] Source: CMA 0696 3-30
Answer (A) is incorrect because the ABC assignment
of $4,513 is at a rate of $180.52 for each of the 25
orders.
Answer (B) is incorrect because ABC yields a higher
allocation.
Answer (C) is incorrect because the total is $4,513
on the ABC basis.
Answer (D) is correct. ABC identifies the causal
relationship between the incurrence of cost and
activities, determines the drivers of the activities,
establishes cost pools related to the drivers and
activities, and assigns costs to ultimate cost objects
on the basis of the demands (resources or drivers
consumed) placed on the activities by those cost
objects. Hence, ABC assigns overhead costs based
on multiple allocation bases or cost drivers. Under
the traditional, single-base system, the amount
allocated is $3,987.50 ($27,500 x 14.5%). Under
[187] Source: CMA Samp Q3-5
Answer (A) is incorrect because $11,000 equals the
difference between budgeted and actual overhead.
Answer (B) is correct. Pane applies overhead to
products on the basis of direct labor cost. The rate is
1.4 ($448,000 budgeted OH ・$320,000 budgeted
DL cost). Thus, $483,000 (1.4 x $345,000 actual
DL cost) of overhead was applied, of which $24,000
($483,000 - $459,000 actual OH) was overapplied.
Answer (C) is incorrect because $11,000 equals the
difference between budgeted and actual overhead.
Answer (D) is incorrect because the overhead was
overapplied.
[188] Source: CIA 0594 III-47
Answer (A) is incorrect because marketing and
distribution costs should be allocated to specific
products.
Answer (B) is correct. ABC determines the activities
that will serve as cost objects and then accumulates a
cost pool for each activity using the appropriate
activity base (cost driver). It is a system that may be
employed with job order or process costing methods.
Thus, when there is only one product, the allocation
of costs to the product is trivial. All of the cost is
assigned to the one product; the particular method
used to allocate the costs does not matter.
[192] Source: CIA 1195 III-41
Answer (A) is correct. A cost allocation base is the
common denominator for systematically correlating
indirect costs and a cost object. The cost driver of
the indirect costs is ordinarily the allocation base. In a
homogeneous cost pool, all costs should have the
same or a similar cause-and-effect relationship with
the cost allocation base.
Answer (C) is incorrect because ABC determines the
activities that will serve as cost objects and then
accumulates a cost pool for each activity using the
appropriate activity base (cost driver).
Answer (B) is incorrect because, if an allocation base
uniformly assigns costs to cost objects when the cost
objects use resources in a nonuniform way, the base
is smoothing or spreading the costs. Smoothing can
result in undercosting or overcosting of products, with
adverse effects on product pricing, cost management
and control, and decision making.
Answer (D) is incorrect because, under ABC, a
product is allocated only those costs that pertain to its
production; that is, products are not
cross-subsidized.
Answer (C) is incorrect because financial measures
(e.g., sales dollars and direct labor costs) and
nonfinancial measures (e.g., setups and units shipped)
can be used as allocation bases.
[189] Source: CIA 1194 III-49
Answer (A) is incorrect because $19,800 equals the
sum of 40% of S1's pre-allocation costs and 50% of
S2's pre-allocation costs.
Answer (B) is incorrect because $21,949 is the total
service cost allocated to P1.
Answer (C) is incorrect because $22,500 equals the
average of the pre-allocation costs of S1 and S2.
Answer (D) is correct. The reciprocal method
allocates service department costs to other service
departments as well as to production departments by
means of simultaneous equations, as shown below.
Thus, total service cost allocated to P2 is $23,051
[(40% x $31,224) + (50% x $21,122)].
S1 = $27,000 + .2S2
S2 = $18,000 +
.1($31,224)
$27,000 + [.2($18,000 + .1S1)]
$18,000 + $3,122
$27,000 + $3,600 + .02S1
S2 = $21,122
.98S1 = $30,600
S1 = $31,224
[190] Source: CIA 0595 III-89
Answer (A) is incorrect because the
weighted-average method tends to smooth costs over
time.
Answer (B) is incorrect because the FIFO method is
more precise. It is based only on the work completed
in the current period.
Answer (C) is incorrect because the two methods
will provide dissimilar results when physical inventory
levels and the production costs (materials and
conversion costs) fluctuate greatly from period to
period.
Answer (D) is correct. The calculation of the cost per
equivalent unit using the FIFO method keeps the
costs in one period separate from the costs of prior
periods. Under the weighted-average method, the
costs in the beginning work-in-process inventory are
combined with current-period costs.
Answer (D) is incorrect because high correlation
between the cost items in a pool and the allocation
base does not necessarily mean that a
cause-and-effect relationship exists. Two variables
may move together without such a relationship. The
perceived relationship between the cost driver
(allocation base) and the indirect costs should have
economic plausibility and high correlation.
[193] Source: CIA 1195 III-93
Answer (A) is incorrect because $5.39 assumes that
80 machine hours are required for the total
production of 20,000 units.
Answer (B) is incorrect because $5.44 is based on
the machining overhead rate ($18).
Answer (C) is correct. Given that manufacturing
overhead is applied on the basis of machine hours,
the overhead rate is $60 per hour ($1,800,000 ・
30,000) or $.96 per unit [($60 x 80 machine hours
per batch) ・5,000 units per batch]. Accordingly, the
unit full cost is $6.11 ($5.15 unit prime cost + $.96).
Answer (D) is incorrect because $6.95 is based on
the direct labor hour manufacturing overhead rate.
[194] Source: CIA 1195 III-94
Answer (A) is incorrect because $6.00 assumes one
setup per batch and that total machine hours equaled
80.
Answer (B) is incorrect because $6.08 assumes that
only 80 machine hours were used.
Answer (C) is incorrect because $6.21 assumes one
setup per batch.
Answer (D) is correct. Materials handling cost per
part is $.12 ($720,000 ・6,000,000), cost per setup
is $420 ($315,000 ・750), machining cost per hour
is $18 ($540,000 ・30,000), and quality cost per
batch is $450 ($225,000 ・500). Hence, total
manufacturing overhead applied is $22,920 [(5 parts
per unit x 20,000 units x $.12) + (4 batches x 2
setups per batch x $420) + (4 batches x 80 machine
hours per batch x $18) + (4 batches x $450)]. The
total unit cost is $6.296 [$5.15 prime cost +
($22,920 ・20,000 units) overhead].
[195] Source: CIA 1196 III-84
Answer (A) is incorrect because activity-based
costing develops cost pools for activities and then
allocates those costs to cost objects based on the
drivers of the activities.
materials had not been added to beginning inventory
(60% complete) and spoiled units (70% complete),
but that ending inventory (80% complete) includes
direct materials.
Answer (D) is incorrect because 200,000 units
includes 100% of the defective units.
[198] Source: CIA 1196 III-86
Answer (B) is incorrect because job-order costing
accumulates costs by job or lot, for example, when
the company produces varied items on a
custom-order basis.
Answer (C) is incorrect because operation costing is
a hybrid of job-order costing and process costing.
Answer (D) is correct. Process costing is used to
assign costs to similar products that are mass
produced on a continuous basis. Because the
company has a continuous flow of a single product,
process costing is most likely to be used for its
manufacturing operations.
[196] Source: CIA 0596 III-77
Answer (A) is correct. Job-order costing is
appropriate when producing products with individual
characteristics and/or when identifiable groupings are
possible, e.g., batches of certain styles or types of
furniture. The unique aspect of job-order costing is
the identification of costs to specific units or a
particular job. Thus, job-order costing is appropriate
for auto repair. Operation costing is a hybrid of
job-order and process costing systems. It is used by
companies that manufacture goods that undergo
some similar and some dissimilar processes.
Operation costing accumulates total conversion costs
and determines a unit conversion cost for each
operation. However, direct materials costs are
charged specifically to products as in job-order
systems. Operation costing is appropriate for clothing
manufacturing. Process costing should be used to
assign costs to similar products that are mass
produced on a continuous basis. Costs are
accumulated by departments or cost centers rather
than by jobs, work in process is stated in terms of
equivalent units, and unit costs are established on a
departmental basis. Process costing is an averaging
process that calculates the average cost of all units.
Process costing is appropriate for oil refining.
Answer (B) is incorrect because custom printing
requires job-order costing.
Answer (C) is incorrect because process costing
should be used for paint manufacturing.
Answer (D) is incorrect because job-order costing is
appropriate for motion picture production.
[197] Source: CIA 1196 III-85
Answer (A) is incorrect because 175,000 units does
not include 20,000 units from BWIP.
Answer (B) is incorrect because 181,500 units
includes 150,000 units plus 40% of BWIP, 80% of
EWIP, and 70% of the defective units.
Answer (C) is correct. The equivalent units for direct
materials equals 195,000 units (20,000 BWIP +
150,000 units started and completed + 25,000
EWIP). This calculation recognizes that direct
Answer (A) is incorrect because abnormal spoilage is
not a normal result of efficient operations. In this
case, the percentage of spoiled units is within the
normal tolerance limit.
Answer (B) is correct. The units that failed inspection
are classified as normal scrap because they have
minimal value and can be sold without further
reworking. The defective units are less than the 4%
tolerance limit for normal spoilage. Scrap can be
sold, disposed of, or reused.
Answer (C) is incorrect because reworked units are
defective units that require further processing for them
to be sold. This company does not rework defective
units.
Answer (D) is incorrect because waste has no
monetary value and may have a disposal cost
associated with it.
[199] Source: CIA 0596 III-82
Answer (A) is incorrect because $140,000 is 40% of
other traceable costs.
Answer (B) is incorrect because $160,000 assumes
an allocation base of 55,000 square feet.
Answer (C) is incorrect because $176,000 assumes
an allocation base of 50,000 square feet, the base
that would be used under the step method if the costs
of building operations are allocated first.
Answer (D) is correct. The direct method does not
allocate service costs to other service departments.
Hence, the allocation base is the square footage in the
two production departments. Fabricating's share is
40% (16,000 ・40,000) of the total cost incurred by
Building Operations, or $220,000 (40% x
$550,000).
[200] Source: CIA 0596 III-83
Answer (A) is incorrect because $657,000 results
from allocating building operations costs first. Also,
the information services costs are allocated using total
computer hours.
Answer (B) is incorrect because $681,600 results
from allocating building operations costs to
Information Services.
Answer (C) is incorrect because $730,000 allocates
the costs of both service departments according to
the direct method rather than the step method.
Answer (D) is correct. The step method of service
department cost allocation is a sequential (but not a
reciprocal) process. These costs are allocated to
other service departments as well as to users. The
process usually starts with the service department that
renders the greatest percentage of its services to
other service departments, the department that
provides services to the greatest number of other
departments, or the department with the greatest
costs of services provided to other service
departments. If the $1,200,000 of information
services costs is allocated first, the allocation base is
2,000 computer hours (200 + 1,200 + 600). Thus,
$120,000 [(200 ・2,000) x $1,200,000] will be
allocated to Building Operations and $360,000 [(600
・2,000) x $1,200,000] to Finishing. The total of the
building operations costs to be allocated to
production equals $670,000 ($550,000 +
$120,000). The allocation base will be 40,000
square feet because no costs are allocated back to
Information Services. Accordingly, the total of
service costs allocated to Finishing equals $762,000
{$360,000 + [$670,000 x (24,000 ・40,000)]}.
[201] Source: CIA 0596 III-99
Answer (A) is incorrect because the number of
customer phone calls has little relation to distribution.
It is probably more closely related to customer
service.
Answer (B) is correct. The number of shipments is an
appropriate cost driver. A cause-and-effect
relationship may exist between the number of
shipments and distribution costs.
Answer (C) is incorrect because the number of sales
persons is not related to distribution. It is more
closely related to marketing.
Answer (D) is incorrect because the dollar sales
volume is not necessarily related to distribution. It is
more likely related to marketing.
Answer (D) is correct. Process costing is used to
assign costs to similar products that are mass
produced on a continuous basis. Costs are
accumulated by departments or cost centers rather
than by jobs. Process costing is an averaging process
that calculates the average cost of all units.
[204] Source: CMA 0695 3-1
Answer (A) is incorrect because 97,600 units omits
the 6,400 EUP added to beginning work-in-process.
Answer (B) is correct. Under FIFO, EUP are based
solely on work performed during the current period.
The EUP equals the sum of the work done on the
beginning work-in-process inventory, units started
and completed in the current period, and the ending
work-in-process inventory. Given that beginning
work-in-process was 60% complete as to materials,
the current period is charged for 6,400 EUP (40% x
16,000 units). Because 92,000 units were completed
during the period, 76,000 (92,000 - 16,000 in
BWIP) must have been started and completed during
the period. They represent 76,000 EUP. Finally, the
EUP for ending work-in-process equal 21,600 (90%
x 24,000 units). Thus, total EUP for May are
104,000 (6,400 + 76,000 + 21,600).
Answer (C) is incorrect because 107,200 units
assumes beginning work-in-process was 40%
complete.
Answer (D) is incorrect because 108,000 units
equals the sum of the physical units in beginning
work-in-process and the physical units completed.
[205] Source: CMA 0695 3-2
[202] Source: CMA 0680 4-5
Answer (A) is incorrect because normal spoilage
costs end up in inventory, not abnormal spoilage.
Answer (B) is incorrect because material variance
accounts are charged only for the variances in
material usage or material price, not for the spoilage
of product.
Answer (C) is incorrect because, while charging
abnormal spoilage to manufacturing overhead is an
occasional practice, it is not the ordinary practice,
which is to charge it to a special loss account.
Answer (D) is correct. Abnormal spoilage is usually
charged to a special loss account in the period in
which detection occurs because it is not normal or
anticipated.
Answer (A) is incorrect because 85,600 units omits
the work done on beginning work-in-process.
Answer (B) is incorrect because 88,800 units omits
the work done on ending work-in-process.
Answer (C) is incorrect because 95,200 units
assumes the beginning work-in-process was 40%
complete as to conversion costs.
Answer (D) is correct. The beginning inventory was
20% complete as to conversion costs. Hence,
12,800 EUP (80% x 16,000 units) were required for
completion. EUP for units started and completed
equaled 76,000 [100% x (92,000 completed units 16,000 units in BWIP)]. The work done on ending
work-in-process totaled 9,600 EUP (40% x 24,000
units). Thus, total EUP for May are 98,400 (12,800
+ 76,000 + 9,600).
[203] Source: CMA 0697 3-4
Answer (A) is incorrect because operation costing is
used for goods that undergo some similar and some
dissimilar processes. Direct materials are costed on a
job-order basis, whereas a unit conversion cost is
determined for each operation.
Answer (B) is incorrect because ABC emphasizes
activities as the basic cost objects. It establishes cost
pools for the activities and then reassigns those costs
to other cost objects (e.g., products) on the basis of
their consumption of the related cost drivers.
Answer (C) is incorrect because job-order costing
accumulates costs by job rather than by department.
[206] Source: CMA 0695 3-3
Answer (A) is incorrect because $4.12 is based on
EUP calculated under the weighted-average method.
Answer (B) is correct. Under the FIFO method,
EUP for materials equal 104,000 [(16,000 units in
BWIP x 40%) + (76,000 units started and
completed x 100%) + (24,000 units in EWIP x
90%)]. Consequently, the equivalent unit cost of
materials is $4.50 ($468,000 total materials cost in
May ・104,000 EUP).
Answer (C) is incorrect because $4.60 is the
weighted-average cost per equivalent unit.
Answer (D) is incorrect because $4.80 omits the
6,400 EUP added to beginning work-in-process.
$54,560). Thus, weighted-average unit cost is $4.60
($522,560 ・113,600 EUP).
Answer (D) is incorrect because $5.02 is based on a
FIFO calculation of equivalent units and a
weighted-average calculation of costs.
[207] Source: CMA 0695 3-4
Answer (A) is incorrect because $5.65 is based on
EUP calculated under the weighted-average method.
Answer (B) is correct. Under the FIFO method,
EUP for conversion costs equal 98,400 [(16,000
units in BWIP x 80%) + (76,000 units started and
completed x 100%) + (24,000 units in EWIP x
40%)]. Conversion costs incurred during the current
period equal $574,040 ($182,880 DL + $391,160
FOH). Hence, the equivalent unit cost for conversion
costs is $5.83 ($574,040 ・98,400).
Answer (C) is incorrect because $6.00 is the cost
per equivalent unit calculated under the
weighted-average method.
Answer (D) is incorrect because $6.20 results from
combining conversion costs for May with those in
beginning work-in-process and dividing by 98,400
EUP.
[208] Source: CMA 0695 3-5
Answer (A) is correct. The FIFO costs per
equivalent unit for materials and conversion costs are
$4.50 and $5.83, respectively. EUP for materials in
ending work-in-process equal 21,600 (90% x
24,000). Thus, total FIFO materials cost is $97,200
(21,600 EUP x $4.50). EUP for conversion costs in
ending work-in-process equal 9,600 (40% x
24,000). Total conversion costs are therefore
$55,968 (9,600 EUP x $5.83). Consequently, total
work-in-process costs are $153,168 ($97,200 +
$55,968).
[210] Source: CMA 0695 3-7
Answer (A) is incorrect because $5.65 omits the
conversion costs in beginning work-in-process.
Answer (B) is incorrect because $5.83 is the
equivalent unit conversion cost based on FIFO.
Answer (C) is correct. The weighted-average
method does not distinguish between the work done
in the prior period and the work done in the current
period. Accordingly, the 92,000 completed units
represent 92,000 weighted-average EUP. The
24,000 units in ending work-in-process are 40%
complete as to conversion costs, so they equal 9,600
EUP. Hence, total EUP for conversion costs are
101,600 (92,000 + 9,600). The sum of the
conversion costs accumulated in beginning
work-in-process and incurred during the period is
$609,600 ($20,320 + $15,240 + $182,880 +
$391,160). Thus, weighted-average unit cost is
$6.00 ($609,600 ・101,600 EUP).
Answer (D) is incorrect because $6.20 is based on a
FIFO calculation of equivalent units and a
weighted-average calculation of costs.
[211] Source: CMA 0695 3-8
Answer (A) is incorrect because $99,360 is the
weighted-average cost of materials in ending
work-in-process.
Answer (B) is incorrect because $153,168 is the
FIFO cost of ending work-in-process.
Answer (B) is incorrect because $154,800 is based
on a FIFO calculation for materials and a
weighted-average calculation for conversion costs.
Answer (C) is incorrect because $154,800 is based
on a FIFO calculation for materials and a
weighted-average calculation for conversion costs.
Answer (C) is incorrect because $155,328 is based
on a weighted-average calculation for materials and a
FIFO calculation for conversion costs.
Answer (D) is correct. The weighted-average costs
per equivalent unit for materials and conversion costs
are $4.60 and $6.00, respectively. EUP for materials
in ending work-in-process equal 21,600 (90% x
24,000). Thus total weighted-average materials cost
is $99,360 ($4.60 x 21,600). EUP for conversion
costs in ending work-in-process equal 9,600 (40% x
24,000 units). Total conversion costs are therefore
$57,600 ($6.00 x 9,600 EUP). Consequently, total
ending work-in-process costs are $156,960
($99,360 + $57,600).
Answer (D) is incorrect because $156,960 is the
weighted-average cost of ending work-in-process.
[209] Source: CMA 0695 3-6
Answer (A) is incorrect because $4.12 equals
materials costs for May divided by weighted-average
EUP.
[212] Source: CMA 1290 3-4
Answer (B) is incorrect because $4.50 is the
equivalent unit cost based on the FIFO method.
Answer (C) is correct. The weighted-average
method averages the work done in the prior period
with the work done in the current period. There are
two layers of units to analyze: those completed during
the period, and those still in ending inventory. The
units completed totaled 92,000. The 24,000 ending
units are 90% complete as to materials, so EUP
equal 21,600. Hence, total EUP for materials are
113,600 (92,000 + 21,600). The total materials
costs incurred during the period and accumulated in
beginning work-in-process is $522,560 ($468,000 +
Answer (A) is incorrect because the number of units
of production may have no logical relationship to
overhead when several different products are made.
Answer (B) is incorrect because a low level of direct
labor costs means that fixed overhead is substantial,
and an appropriate cost driver should be used to
make the allocation.
Answer (C) is incorrect because the allocation should
be made on the basis of the appropriate cost drivers
without regard to the relationship between direct
materials and labor costs.
Answer (D) is correct. Allocating overhead on the
basis of the number of units produced is usually not
appropriate. Costs should be allocated on the basis
of some plausible relationship between the cost
object and the incurrence of the cost, preferably
cause and effect. Overhead costs may be incurred
regardless of the level of production. When multiple
products are involved, the number of units of
production may bear no relationship to the incurrence
of the allocated cost. If overhead is correlated with
machine hours but different products require different
quantities of that input, the result may be an illogical
allocation. However, if a firm manufactures only one
product, this allocation method may be acceptable
because all costs are to be charged to the single
product.
[213] Source: CMA 0696 3-21
Answer (A) is incorrect because a material amount
should be allocated among cost of goods sold,
work-in-process, and finished goods.
Answer (B) is incorrect because a material amount
should be allocated among cost of goods sold,
work-in-process, and finished goods.
Answer (C) is incorrect because a material amount
should be allocated among cost of goods sold,
work-in-process, and finished goods.
Answer (D) is correct. Overapplied or underapplied
factory overhead should be disposed of at the end of
an accounting period by transferring the balance
either to cost of goods sold (if the amount is not
material) or to cost of goods sold, finished goods
inventory, and work-in-process inventory.
Theoretically, the allocation is preferred, but, because
the amount is usually immaterial, the entire balance is
often transferred directly to cost of goods sold. Thus,
the entry depends upon the significance of the
amount.
[214] Source: CMA 0697 3-6
Answer (A) is incorrect because $72,000 is the
variable cost allocation.
Answer (B) is incorrect because $122,000 assumes
that fixed costs are allocated equally between A and
B.
Answer (C) is incorrect because $132,000 assumes
fixed costs are allocated at a per-page rate based on
available capacity ($100,000 ・4,000,000 pages =
$.025 per page), not on budgeted usage ($100,000
・3,600,000 pages = $.0278 per page).
Answer (D) is correct. Department B is budgeted to
use 66 2/3% of total production (2,400,000 ・
3,600,000), so it should be allocated fixed costs of
$66,667 (66 2/3% x $100,000). The variable cost
allocation is $72,000 (2,400,000 pages x $.03 per
page), and the total allocated is therefore $138,667
($66,667 + $72,000).
Answer (C) is correct. Based on budgeted usage,
Department A should be allocated 33-1/3%
[1,200,000 pages ・(1,200,000 pages + 2,400,000
pages)] of fixed costs, or $33,333 (33-1/3% x
$100,000). The variable costs are allocated at $.03
per unit for 1,400,000 pages, or $42,000. The sum
of the fixed and variable elements is $75,333.
Answer (D) is incorrect because $82,000 assumes
fixed costs are allocated at a per-page rate based on
actual usage ($100,000 ・3,500,000 pages =
$.0286 per page).
[216] Source: CMA 0697 3-8
Answer (A) is correct. The direct method allocates
service department costs directly to the producing
departments without recognition of services provided
among the service departments. Hence, no service
cost is allocated to the Tool Department because it is
a service department.
Answer (B) is incorrect because the direct method
does not recognize any allocation between or among
service departments; only production departments
receive cost allocations.
Answer (C) is incorrect because the direct method
does not recognize any allocation between or among
service departments; only production departments
receive cost allocations.
Answer (D) is incorrect because the direct method
does not recognize any allocation between or among
service departments; only production departments
receive cost allocations.
[217] Source: CMA 0697 3-9
Answer (A) is incorrect because, under the
step-down method, other service departments share
in the allocation of costs.
Answer (B) is correct. Under the step-down method,
service costs are allocated to all departments.
However, no reciprocal allocations are allowed. The
process may begin with the department that supports
the greatest number of departments, that incurs the
greatest costs, or that provides the greatest
percentage of its services to other service
departments. Thus, the Repair Department is the
logical starting point. Given that service costs are
allocated to each department (service or production)
on the basis of its proportion of employees (excluding
employees in the allocating department), the
allocation of the Repair Department's overhead to the
Tool Department is $875 {$35,000 x [1 employee ・
(1 + 2 + 25 + 12)]}.
Answer (C) is incorrect because this amount is far
greater than could be allocated to a service
department with one employee.
Answer (D) is incorrect because this amount is far
greater than could be allocated to a service
department with one employee.
[215] Source: CMA 0697 3-7
[218] Source: Publisher
Answer (A) is incorrect because $42,000 equals the
variable costs allocated to Department A.
Answer (B) is incorrect because $72,000 is the
allocation to Department B using a single rate.
Answer (A) is correct. The total equivalent units for
raw materials equal 10,000 units (the total units
placed into production) because all direct materials
were added to production. The materials cost per
equivalent unit is therefore $6.60 ($66,000 total DM
costs ・10,000 equivalent units). The total equivalent
units for conversion costs equal 7,000 units [6,000
finished units + (25% x 4,000 units in EWIP]. Hence,
conversion cost per equivalent unit is $4.86 ($34,000
total CC ・7,000 equivalent units). Total product
cost per equivalent unit is $11.46 ($6.60 + $4.86),
so total transferred-out cost is $68,760 ($11.46 x
6,000 units transferred).
Answer (B) is incorrect because $60,000 assumes
conversion costs are added at the beginning of the
process in the same manner as raw materials.
Answer (C) is incorrect because $39,600 assumes
that only raw materials costs are transferred out.
Answer (D) is incorrect because $29,160 is the
amount of conversion costs transferred out.
[219] Source: Publisher
Answer (A) is incorrect because $11,460 assumes
that the work-in-process inventory is only 1,000
units.
Answer (B) is incorrect because $26,400 includes
only the cost of raw materials.
Answer (C) is correct. Direct materials cost and
conversion cost per equivalent unit are $6.60 and
$4.86, respectively. Because the ending
work-in-process contains 4,000 equivalent units of
direct materials costs (4,000 physical units x 100%)
and 1,000 equivalent units of conversion costs (4,000
physical units x 25%), its recorded balance is
$31,260 (4,000 x $6.60) + (1,000 x $4.86).
Answer (D) is incorrect because $45,840 assumes
that the units are 100% complete as to conversion
costs as well as materials.
[220] Source: Publisher
Answer (A) is incorrect because $255,300
transposed the ending and beginning inventory
amounts.
Answer (B) is incorrect because $257,800 is the
amount of materials used without regard to changes in
inventory levels.
Answer (C) is correct. Materials used equals
beginning inventory, plus purchases, minus ending
inventory. Given that purchases are not known, the
calculation is as follows:
$37,000 + P - $39,500 = $257,800
P = $257,800 + $39,500 - $37,000
P = $260,300
Answer (D) is incorrect because $297,300 fails to
consider the beginning inventory.
[221] Source: Publisher
Answer (A) is incorrect because $9.25 fails to
include overhead.
Answer (B) is correct. Cost of goods sold is based
on the manufacturing costs incurred in production. It
does not include selling or general and administrative
expenses. Manufacturing costs consist of direct
materials, $27,400; direct labor, $9,600; and factory
overhead, $20,000 (400 direct labor hours x $50 per
hour). The total of these three cost elements is
$57,000. Dividing the $57,000 of total manufacturing
costs by the 4,000 units produced results in a
per-unit cost of $14.25.
Answer (C) is incorrect because $14.95 includes
administrative costs.
Answer (D) is incorrect because $17.75 includes
selling and administrative costs.
[222] Source: Publisher
Answer (A) is incorrect because $150 per order
equals $4,500 divided by 30 orders.
Answer (B) is incorrect because ABC yields an
allocation $404 higher than the traditional system.
Answer (C) is incorrect because $4,500 is the quality
control cost under the traditional system.
Answer (D) is correct. ABC assigns overhead costs
on the basis of multiple cost drivers instead of only
one driver. Using the three cost drivers in the
question produces the following calculation:
Number of types
of materials
($12 x 12)
$ 144
Number of units
($.14 x 17,500)
2,450
Number of orders
($77 x 30)
2,310
-----Total
$4,904
======
Under the old method of allocation based on direct
labor, the allocated amount would have been 4,500
(15% x $30,000), or $404 lower than under ABC.
[223] Source: Publisher
Answer (A) is correct. Prime costs are incurred for
direct materials and direct labor. The first step is to
calculate the cost of materials used during the month:
Beginning materials inventory
$ 67,000
Purchases
179,300
Transportation in
4,400
Purchase returns and allowances
(2,200)
-------Materials available for use
$248,500
Ending materials inventory
(60,000)
========
Materials used
$188,500
Prime costs were $408,500 ($188,500 DM +
$220,000 DL).
Answer (B) is incorrect because $188,500 equals
materials used.
Answer (C) is incorrect because $181,500 equals
purchases adjusted for purchase returns and
allowances and transportation.
Answer (D) is incorrect because $365,200 equals
conversion costs.
[224] Source: Publisher
Answer (A) is incorrect because $553,700 is based
on actual overhead.
Answer (B) is incorrect because $569,500 equals
total manufacturing costs plus the decrease in material
inventory.
Answer (C) is incorrect because $408,500 equals
prime costs.
Answer (B) is incorrect because the overhead was
overapplied. Actual costs were less than those
charged to production.
Answer (D) is correct. Total manufacturing costs
consist of materials, labor, and overhead. The cost of
materials used during the month was $188,500.
Given $220,000 of direct labor and overhead applied
of $154,000 (70% x $220,000 of direct labor), the
total production costs are $562,500 ($188,500 +
$220,000 + $154,000).
Answer (C) is correct. Factory overhead control is
debited for actual overhead and, if a single control
account is used, credited for applied overhead. This
account should have been debited for $145,200 of
actual overhead and credited for $154,000 (70% x
$220,000 DL) of applied overhead. Thus, a net
credit of $8,800 ($154,000 - $145,200) resulted
from an overapplication of overhead.
[225] Source: Publisher
Answer (A) is incorrect because $543,700 results
from using actual instead of applied overhead and
adding the decrease in finished goods to the cost of
goods completed, which is not done.
Answer (B) is incorrect because $552,500 results
from adding the decrease in finished goods to the
cost of goods completed.
Answer (C) is incorrect because $528,700 results
from using actual instead of applied overhead.
Answer (D) is correct. Total manufacturing costs
incurred during the period consist of materials, labor,
and overhead. That amount is then adjusted for the
change in work-in-process inventories to arrive at the
cost of goods transferred to finished goods (cost of
goods manufactured). The total manufacturing costs
incurred during the month were $562,500.
Work-in-process increased during October by
$25,000 ($170,000 EWIP - $145,000 BWIP).
Accordingly, the cost of goods completed (cost of
goods manufactured) during October was $537,500
($562,500 manufacturing costs - $25,000 increase in
EWIP).
Answer (D) is incorrect because the $8,800 credit is
an overapplication of overhead.
[228] Source: CMA 1296 3-19
Answer (A) is incorrect because a standard cost
system can be based on individual or multiple
application rates.
Answer (B) is incorrect because whether production
is machine intensive affects the nature but not
necessarily the number of cost drivers.
Answer (C) is incorrect because a single plant-wide
application rate is acceptable, even with high
overhead, if all overhead is highly correlated with a
single application base.
Answer (D) is correct. Factory overhead is usually
assigned to products based on a predetermined rate
or rates. The activity base for overhead allocation
should have a high correlation with the incurrence of
overhead. Given only one cost driver, one overhead
application rate is sufficient. If products differ in the
resources consumed in individual departments,
multiple rates are preferable.
[229] Source: CMA 1296 3-28
[226] Source: Publisher
Answer (A) is incorrect because $537,500 is the
cost of goods manufactured.
Answer (B) is correct. The cost of goods sold equals
cost of goods manufactured ($537,500) adjusted for
the change in finished goods.
Beginning finished goods
$ 85,000
Cost of goods manufactured
537,500
-------Goods available for sale
$622,500
Ending finished goods
(70,000)
-------Cost of goods sold
$552,500
========
Answer (C) is incorrect because $522,500 results
from reversing the beginning and ending finished
goods inventories.
Answer (D) is incorrect because $543,700 is based
on actual overhead costs.
[227] Source: Publisher
Answer (A) is incorrect because an overapplication
of overhead is represented by a credit in the
overhead control account. Actual costs are debited
and applied costs are credited.
Answer (A) is correct. ABC differs from traditional
product costing because it uses multiple allocation
bases and therefore allocates overhead more
accurately. The result is that ABC often charges
low-volume products with more overhead than a
traditional system. For example, the cost of machine
setup may be the same for production runs of widely
varying sizes. This relationship is reflected in an ABC
system that allocates setup costs on the basis of the
number of setups. However, a traditional system
using an allocation base such as machine hours may
underallocate setup costs to low-volume products.
Many companies adopting ABC have found that they
have been losing money on low-volume products
because costs were actually higher than originally
thought.
Answer (B) is incorrect because low-volume
products are usually charged with greater unit costs
under ABC.
Answer (C) is incorrect because greater setup costs
are usually charged to low-volume products under
ABC.
Answer (D) is incorrect because setup costs will not
be equalized unless setup time is equal for all
products.
[230] Source: CMA 1293 3-15
Answer (A) is incorrect because one rate may be
cost beneficial when a single product proceeds
through homogeneous processes.
Answer (B) is correct. Multiple rates are appropriate
when a process differs substantially among
departments or when products do not go through all
departments or all processes. The trend in cost
accounting is toward activity-based costing, which
divides production into numerous activities and
identifies the cost driver(s) most relevant to each. The
result is a more accurate tracing of costs.
Answer (C) is incorrect because, if cost drivers are
the same for all processes, multiple rates are
unnecessary.
Answer (D) is incorrect because individual cost
drivers for all relationships must be known to use
multiple application rates.
[231] Source: Publisher
Answer (A) is incorrect because $32,000 is based
on 10,000 equivalent units of conversion costs.
Answer (B) is correct. The equivalent units of
materials equal 10,000 because all materials are
added at the beginning of the process, and 10,000
units were started. The equivalent units of conversion
costs equal 9,400 [8,000 units completed + (70% x
2,000 units in ending inventory)]. The unit cost of
materials is $1.50 ($15,000 ・10,000 EU). The unit
cost of conversion is $2.66 ($25,000 ・9,400 EU).
Thus, the cost of goods transferred was $33,280
[8,000 units x ($1.50 + $2.66)].
added at the beginning of the process, and 10,000
units were started. The equivalent units of conversion
costs equal 9,400 [8,000 units completed + (70% x
2,000 units in ending inventory)]. The unit cost of
materials is $1.50 ($15,000 ・10,000 EU). The unit
cost of conversion is $2.66 ($25,000 ・9,400 EU).
Thus, the cost of goods transferred was $33,280
[8,000 units x ($1.50 + $2.66)].
Answer (C) is incorrect because $36,280 assumes
transfer of 10,000 units of materials.
Answer (D) is incorrect because $40,000 equals
total costs incurred in production.
[234] Source: Publisher
Answer (A) is incorrect because $69,259 results
from using the equivalent units calculated under FIFO
(81,000) in determining the unit conversion cost
under the weighted-average method.
Answer (B) is correct. For conversion costs, the
equivalent-unit calculation under the
weighted-average method is as follows:
Answer (C) is incorrect because $36,280 assumes
transfer of 10,000 units of materials.
Beginning WIP
10,000 units x 100% = 10,000
Started and completed 75,000 units x 100% = 75,000
Ending WIP
5,000 units x 60% = 3,000
-----88,000
======
The conversion costs consisted of $16,000 in
beginning inventory and $50,000 incurred during the
month, for a total of $66,000. Unit conversion cost is
therefore $.75 ($66,000 ・$88,000 EU). Thus, the
total conversion cost transferred was $63,750 [$.75
x (10,000 units in BWIP + 80,000 units started 5,000 units in EWIP)].
Answer (D) is incorrect because $40,000 equals
total costs incurred in production.
Answer (C) is incorrect because $66,000 equals the
total conversion costs to be accounted for.
[232] Source: Publisher
Answer (A) is correct. The cost transferred out was
$33,280. Hence, the ending inventory must equal the
production costs for the month (given no beginning
inventories), minus costs transferred out, or $6,720
[($15,000 materials + $25,000 conversion cost) $33,280].
Answer (B) is incorrect because $8,000 assumes that
ending work-in-process contains 2,000 equivalent
units of conversion costs.
Answer (C) is incorrect because $3,720 assumes
that ending work-in-process contains only conversion
costs.
Answer (D) is incorrect because some units remain in
work-in-process.
[233] Source: Publisher
Answer (A) is incorrect because $32,000 is based
on 10,000 equivalent units of conversion costs.
Answer (B) is correct. The only difference between
weighted average and FIFO relates to the beginning
inventories. Because there were no beginning
inventories in this problem, the two valuation methods
produce the same results. The equivalent units of
materials equal 10,000 because all materials are
Answer (D) is incorrect because $64,148 is the
conversion cost transferred out under a FIFO
assumption.
[235] Source: Publisher
Answer (A) is incorrect because $88,000 is the
materials costs incurred during the month.
Answer (B) is incorrect because $93,500 results
from using a unit cost based on the FIFO method.
Answer (C) is correct. For materials, the
equivalent-unit calculation under the
weighted-average method is
Beginning WIP
10,000 units x 100% = 10,000
Started and completed
75,000 units x 100% = 75,000
Ending WIP
5,000 units x 100% = 5,000
-----90,000
======
The materials costs consisted of $30,000 in beginning
inventory and $88,000 incurred during the month, for
a total of $118,000. The equivalent unit cost of
materials is therefore $1.31 ($118,000 ・90,000
EU). Total materials cost transferred is $111,350
(85,000 units transferred x $1.31).
Answer (D) is incorrect because $112,500 is the
materials cost transferred out under FIFO.
[236] Source: Publisher
Answer (A) is incorrect because 75,000 units is the
amount started and completed during the month; it
ignores the impact of inventories.
Answer (B) is incorrect because 80,000 units is
based on the FIFO method.
Answer (C) is incorrect because 81,000 units is
based on the equivalent units for conversion costs
calculated under the FIFO method.
Answer (D) is correct. The equivalent units for
transferred-in costs are calculated in the same way as
those for materials added at the beginning of the
process. The equivalent-unit calculation under the
weighted-average method is
-----80,000
======
The materials cost includes $30,000 in beginning
inventory, all of which would have been transferred
out. The $88,000 incurred during the month is
divided by the 80,000 equivalent units to arrive at a
unit cost for the current period of $1.10. Thus, given
that 75,000 equivalent units (85,000 physical units
transferred out - 10,000 EU in BWIP completed in
the prior period) of current-period production were
completed and transferred, total materials cost
transferred out equals $112,500 [$30,000 BWIP +
($1.10 x 75,000 FIFO EU)].
Answer (D) is incorrect because $114,615 is based
on the equivalent units for conversion costs.
[239] Source: Publisher
Beginning WIP
10,000 units x 100% = 10,000
Started and completed
75,000 units x 100% = 75,000
Ending WIP
5,000 units x 100% = 5,000
-----90,000
======
[237] Source: Publisher
Answer (A) is incorrect because $63,750 is based
on the weighted-average method.
Answer (B) is correct. For conversion costs, the
equivalent-unit calculation under the FIFO method is
Beginning WIP
10,000 units x 30% = 3,000
Started and completed
75,000 units x 100% = 75,000
Ending WIP
5,000 units x 60% = 3,000
-----81,000
======
The conversion cost includes $16,000 in beginning
inventory, all of which would have been transferred
out. The $50,000 incurred during the month is
divided by the 81,000 equivalent units to arrive at a
unit cost for the current period of $.62. Given that
78,000 equivalent units (85,000 physical units
transferred out - 7,000 EU in BWIP completed in the
prior period) of current-period production were
completed and transferred, the total conversion cost
transferred out was $64,360 [$16,000 BWIP +
($.62 x 78,000 FIFO EU)].
Answer (C) is incorrect because $66,000 equals
total conversion costs incurred.
Answer (D) is incorrect because $74,500 is based
on the weighted-average unit cost per equivalent unit.
[238] Source: Publisher
Answer (A) is incorrect because $88,000 is the
amount of materials costs incurred during the month.
Answer (B) is incorrect because $111,350 is based
on the weighted-average method.
Answer (C) is correct. For materials, the
equivalent-unit calculation under the FIFO method is
Beginning WIP
10,000 units x 0% =
0
Started and completed 75,000 units x 100% = 75,000
Ending WIP
5,000 units x 100% = 5,000
Answer (A) is correct. The FIFO unit conversion
cost for the current period is $.62. Moreover, ending
work-in-process consists of 3,000 equivalent units of
conversion cost (5,000 physical units x 60%).
Accordingly, the conversion cost in the ending
work-in-process inventory consists of $1,860 ($.62
x 3,000 EU) of current-period cost. The conversion
cost incurred in the prior period and attached to the
beginning work-in-process inventory is deemed to
have been transferred out.
Answer (B) is incorrect because $2,250 is based on
the weighted-average method.
Answer (C) is incorrect because $3,100 is based on
the equivalent units for materials.
Answer (D) is incorrect because $5,500 is the
amount of materials cost in the ending
work-in-process inventory.
[240] Source: Publisher
Answer (A) is incorrect because $1,860 is the
amount of conversion costs.
Answer (B) is incorrect because $3,300 assumes that
materials are added proportionately throughout the
process.
Answer (C) is correct. The unit cost of materials
under FIFO is $1.10. Because the 5,000 units in
ending work-in-process inventory are 100%
complete as to materials, its materials cost consists of
$5,500 (5,000 EU x $1.10) of current-period costs.
Materials costs incurred in the prior period and
attached to the beginning work-in-process inventory
are deemed to have been transferred out.
Answer (D) is incorrect because $6,450 is based on
the unit cost under the weighted-average method.
[241] Source: Publisher
Answer (A) is incorrect because 195,200 units omits
the 12,800 equivalent units of work on BWIP during
the current period.
Answer (B) is correct. Under the FIFO method,
equivalent units are determined based only on work
performed during the current period. They include
work performed to complete BWIP, work on units
started and completed during the period, and work
done on EWIP. Thus, total FIFO equivalent units of
materials are
BWIP
32,000 units x 40% = 12,800
Started and completed
(184,000 - 32,000 in BWIP) 152,000 units x 100% =
152,000
EWIP
48,000 units x 90% = 43,200
------Total equivalent units
208,000
=======
Answer (C) is incorrect because 214,400 units
assumes that BWIP was 40% complete.
Answer (D) is incorrect because 227,200 units is
based on the weighted-average method.
equivalent unit under the weighted-average method.
Answer (C) is incorrect because $3.10 equals total
conversion cost divided by FIFO equivalent units of
conversion cost.
Answer (D) is incorrect because $3.23 assumes
EWIP is 0% complete as to conversion cost.
[245] Source: Publisher
Answer (A) is correct. Under FIFO, the
equivalent-unit materials cost is $2.25, and the EWIP
contains 43,200 equivalent units of materials. The
equivalent-unit conversion cost is $2.92, and the
EWIP contains 19,200 equivalent units of conversion
cost. Consequently, EWIP equals $153,264 [($2.25
x 43,200) + ($2.92 x 19,200)].
[242] Source: Publisher
Answer (A) is incorrect because 171,200 units omits
work on BWIP.
Answer (B) is incorrect because 177,600 units omits
work on EWIP.
Answer (C) is incorrect because 184,000 equals the
physical units completed.
Answer (D) is correct. Under FIFO, equivalent units
are determined based only on work performed during
the current period. They include work performed to
complete BWIP, work on units started and
completed during the period, and work done on
EWIP. Thus, total FIFO equivalent units of
conversion cost are
BWIP
32,000 units x 80% = 25,600
Started and completed
(184,000 - 32,000 BWIP) 152,000 units x 100% =
152,000
EWIP
48,000 units x 40% = 19,200
------Total equivalent units
196,800
=======
[243] Source: Publisher
Answer (A) is incorrect because $2.06 results from
dividing May's costs by the equivalent units calculated
under the weighted-average method.
Answer (B) is correct. The FIFO equivalent units of
materials equal 208,000. Accordingly, unit cost of
materials under FIFO is $2.25 ($468,000 materials
cost in May ・208,000 EU).
Answer (B) is incorrect because $154,800 is based
on a FIFO calculation for materials and a
weighted-average calculation for conversion cost.
Answer (C) is incorrect because $155,424 is based
on a weighted-average calculation for materials and a
FIFO calculation for conversion cost.
Answer (D) is incorrect because $156,960 is based
on the unit costs under the weighted-average method.
[246] Source: Publisher
Answer (A) is incorrect because $2.06 is based on
weighted-average equivalent units and FIFO costs.
Answer (B) is incorrect because $2.25 is the cost
based on the FIFO method.
Answer (C) is correct. The weighted-average
method averages the work done in the prior period
with the work done in the current period. The two
layers of units to analyze are those completed during
the period and those still in EWIP. The units
completed totaled 184,000. The equivalent units of
materials in EWIP equaled 43,200 (48,000 physical
units x 90%). Hence, the total equivalent units of
materials equaled 227,200 (184,000 + 43,200). The
materials cost in BWIP is combined in the
weighted-average calculation with the materials cost
incurred during the current period. The
equivalent-unit materials cost is therefore $2.30
[($54,560 BWIP + $468,000 incurred in May) ・
227,200 EU].
Answer (D) is incorrect because $2.51 equals total
materials costs divided by FIFO equivalent units of
materials.
Answer (C) is incorrect because $2.30 is the
weighted-average cost per equivalent unit.
[247] Source: Publisher
Answer (D) is incorrect because $2.51 equals total
materials cost divided by FIFO equivalent units of
materials.
[244] Source: Publisher
Answer (A) is correct. The FIFO equivalent units of
conversion cost equal 196,800. Conversion cost
incurred during May was $574,040 ($182,880 DL +
$391,160 FOH). Hence, the equivalent-unit
conversion cost under FIFO is $2.92 ($574,040 ・
196,800).
Answer (B) is incorrect because $3.00 is the cost per
Answer (A) is incorrect because $2.92 is the FIFO
unit cost.
Answer (B) is correct. The weighted-average method
averages the work performed in the prior period with
the work done in the current period. The two layers
of units to analyze are those completed during the
period and those still in EWIP. The units completed
totaled 184,000. The 48,000 units in EWIP are 40%
complete as to conversion cost, the equivalent of
19,200 units. Thus, total equivalent units for
conversion cost under the weighted-average method
equaled 203,200. Moreover, the conversion cost in
BWIP is combined in the weighted-average
calculation with the conversion cost incurred during
the current period. The equivalent-unit conversion
cost is therefore $3.00 [($20,320 DL in BWIP +
$15,240 FOH in BWIP + $182,880 DL in May +
$391,160 FOH in May) ・203,200].
Answer (C) is incorrect because $3.10 is based on
FIFO equivalent units and weighted-average cost.
Answer (D) is incorrect because $3.31 results from
omitting the equivalent units in EWIP.
category is $6,570,000 [($120 x 36,000 days) +
($25 x 90,000 hours)]. The daily cost rate for these
occupants is therefore $182.50 ($6,570,000 ・
36,000 occupant days).
Answer (B) is incorrect because $145.00 equals the
sum of the cost pool rates ($120 + $25).
Answer (C) is incorrect because $245 equals the rate
per day for medium-usage occupants.
Answer (D) is incorrect because $620 is the rate per
day for high-usage occupants.
[248] Source: Publisher
Answer (A) is incorrect because $153,264 is the
FIFO EWIP.
Answer (B) is incorrect because $154,800 is based
on a FIFO calculation for materials and a
weighted-average calculation for conversion cost.
Answer (C) is incorrect because $155,424 is based
on a weighted-average calculation for materials and a
FIFO calculation for conversion cost.
Answer (D) is correct. Given a weighted-average
assumption, the unit materials cost was $2.30, and
the unit conversion cost was $3.00. Furthermore, the
equivalent units for materials equaled 43,200 (48,000
physical units x 90%), and the equivalent units for
conversion cost equaled 19,200 (48,000 physical
units x 40%). The total weighted-average cost of
EWIP was therefore $156,960 [($2.30 x 43,200 EU
of materials) + ($3.00 x 19,200 EU of conversion
cost)].
[249] Source: CIA 0597 III-75
Answer (A) is incorrect because any identification
method may fail to record the movement of some
parts.
Answer (B) is correct. Bar-code scanning is a form
of optical character recognition. Bar codes are a
series of bars of different widths that represent critical
information about the item. They can be read and the
information can be instantly recorded using a scanner.
Thus, bar coding records the movement of parts with
minimal labor costs.
Answer (C) is incorrect because each vendor has its
own part-numbering scheme.
Answer (D) is incorrect because each vendor has its
own identification method, although vendors in the
same industry often cooperate to minimize the
number of bar-code systems they use.
[250] Source: Publisher
Answer (A) is correct. This service organization
produces three "products" (the three occupant
categories), and the "units produced" equal occupant
days. According to the ABC analysis, production
involves two activities: (1) provision of residential
space and meals and (2) OOA. The drivers of these
activities are occupant days and nursing hours,
respectively. Thus, the cost pool rate for the first
activity (residential space and meals) is $120 per
occupant day ($7,200,000 ・60,000 days), and the
cost pool rate for the second activity (OOA) is $25
($7,500,000 ・300,000 hours). The total cost for
providing services to occupants in the low-usage
[251] Source: CMA 0693 3-2
Answer (A) is incorrect because one effect of
computerization is that the amount of direct labor
relative to other costs has been decreasing. For this
reason, some companies have found that it is no
longer expedient to track direct labor costs as closely
as was once done. Thus, some companies are
treating direct labor as an indirect factory overhead
cost.
Answer (B) is incorrect because throughput time is
one of the cost drivers that is beginning to be used
more often as an overhead application base.
Throughput is the rate of production over a stated
time. This rate clearly drives (influences) costs.
Answer (C) is correct. With the recent automation of
factories and the corresponding emphasis on
activity-based costing (ABC), companies are finding
new ways of allocating indirect factory overhead.
One change is that plant-wide application rates are
being used less often because a closer matching of
costs with cost drivers provides better information to
management. ABC results in a more accurate
application of indirect costs because it provides more
refined data. Instead of a single cost goal for a
process, a department, or even an entire plant, an
indirect cost pool is established for each identified
activity. The related cost driver, the factor that
changes the cost of the activity, is also identified.
Answer (D) is incorrect because multiple cost pools
are preferable. They permit a better matching of
indirect costs with cost drivers.
[252] Source: CMA 1292 3-2
Answer (A) is incorrect because making allocations
on the basis of units sold may not meet the
cause-and-effect criterion.
Answer (B) is incorrect because the salary of service
department employees is the cost allocated, not a
basis of allocation.
Answer (C) is correct. Service department costs are
considered part of factory overhead and should be
allocated to the production departments that use the
services. A basis reflecting cause and effect should be
used to allocate service department costs. For
example, the number of kilowatt hours used by each
producing department is probably the best allocation
base for electricity costs.
Answer (D) is incorrect because making allocations
on the basis of materials usage may not meet the
cause-and-effect criterion.
[253] Source: Publisher
Answer (A) is incorrect because $360,000 results
from subtracting the difference between beginning
and ending work-in-process inventories from the cost
of goods sold.
cost of goods sold. Thus, the ending balances must
be added together to get $2,151,200 ($1,720,960 +
$430,240). The amount of underapplied overhead is
then multiplied by .8 ($1,720,960 ・$2,151,200) to
get the amount of underapplied overhead allocated to
cost of goods sold, which is $156,400.
Answer (B) is correct. Beginning finished goods
inventory ($500,000) + cost of goods manufactured
($860,000) - ending finished goods inventory
($990,000) = cost of goods sold ($370,000). The
work-in-process inventories are irrelevant.
Answer (D) is incorrect because $195,500 is the
amount of overhead underapplied.
[257] Source: Publisher
Answer (C) is incorrect because $490,000
represents the difference between beginning and
ending inventories.
Answer (D) is incorrect because $1,350,000 is the
result of reversing the treatment of beginning and
ending finished goods inventories.
[254] Source: Publisher
Answer (A) is correct. The predetermined overhead
application rate is found by dividing the total
budgeted overhead by the budgeted direct labor
cost. Therefore, the predetermined overhead
application rate is 1.78 [$961,200 ・(36,000 x
$15)].
Answer (B) is incorrect because 1.83 results from
dividing total budgeted overhead by the actual direct
labor cost.
Answer (A) is incorrect because $10.46 per machine
hour results from dividing the actual overhead by the
budgeted machine hours.
Answer (B) is correct. The predetermined overhead
rate is found by dividing total budget overhead by
budgeted machine hours. Therefore, the budgeted
overhead of $961,200 is divided by the budget
machine hours of 108,000 to get a predetermined
overhead rate of $8.90 per machine hour.
Answer (C) is incorrect because $8.69 per machine
hour results from dividing the actual overhead by the
actual machine hours.
Answer (D) is incorrect because $7.39 per machine
hour results from dividing budgeted overhead by the
actual machine hours.
[258] Source: Publisher
Answer (C) is incorrect because 2.09 results from
dividing total actual overhead by the budgeted direct
labor cost.
Answer (A) is incorrect because the $20,000 is
overhead.
Answer (D) is incorrect because 2.15 results from
dividing total actual overhead by the actual direct
labor cost.
Answer (B) is incorrect because $79,000 results
from using the cost of material purchases instead of
materials used.
[255] Source: Publisher
Answer (A) is incorrect because $195,500 is the
amount underapplied.
Answer (B) is incorrect because $168,800 results
from subtracting actual incurred overhead from total
budget overhead.
Answer (C) is correct. Prime costs are all direct
manufacturing costs--in this case, direct materials
cost ($78,000) + direct manufacturing labor cost
($9,000), or $87,000.
Answer (D) is incorrect because $98,000 uses
overhead instead of labor.
[259] Source: Publisher
Answer (C) is incorrect because $168,800 results
from subtracting actual incurred overhead from total
budget overhead.
Answer (D) is correct. The amount of factory
overhead overapplied/underapplied is found by
subtracting the actual incurred overhead from the
actual applied overhead. The actual applied overhead
is $934,500 [(35,000 hours x $15) x 1.78].
Therefore, the amount of underapplied overhead is
$195,500 ($934,500 - $1,130,000).
Answer (A) is incorrect because $4,000 is the
difference between the beginning and ending
work-in-process inventories.
Answer (B) is incorrect because $20,000 excludes
direct labor.
Answer (C) is correct. Conversion costs are all
manufacturing costs other than direct material costs.
In this case, conversion costs are equal to the direct
manufacturing labor cost ($9,000) + indirect
manufacturing costs ($20,000), or $29,000.
[256] Source: Publisher
Answer (A) is incorrect because $0 is the amount
allocated to work-in-process inventory.
Answer (B) is incorrect because $39,100 is the
amount allocated to finished goods inventory.
Answer (C) is correct. Since the amount of
underapplied overhead is considered material, the
proper accounting treatment is to prorate this amount
to work-in-process, finished goods inventory, and the
Answer (D) is incorrect because $98,000
erroneously includes materials and excludes labor.
[260] Source: Publisher
Answer (A) is incorrect because 0 units of abnormal
spoilage means all 13,000 rejected units were normal
spoilage.
Answer (B) is incorrect because 1,000 units of
abnormal spoilage is the amount on the initial
production cost report.
Answer (C) is incorrect because 1,300 units of
abnormal spoilage is found by subtracting the initial
number of abnormal spoilage units from the correct
amount.
Answer (D) is correct. The number of units of
abnormal spoilage in this process is found by taking
10% of good output as normal spoilage, and then
calculating the difference to find abnormal spoilage.
Therefore, 10% of 107,000 good output units is
10,700, and 13,000 rejected units minus 10,700
normal spoilage units is equal to 2,300 units of
abnormal spoilage.
method is found by adding the number of units
completed and transferred to the equivalent amount
of units in the ending work-in-process inventory.
Since there are 5,000 gallons in the ending
work-in-process inventory that are 80% completed,
the equivalent amount of units is 4,000 (5,000 x
80%). Therefore, 4,000 equivalent units in ending
work-in-process inventory plus 20,000 units
completed and transferred is equal to 24,000
equivalent units.
Answer (D) is incorrect because 25,000 units is the
result of adding the total number of units in the ending
work-in-process inventory to the 20,000 units.
[264] Source: Publisher
[261] Source: Publisher
Answer (A) is incorrect because $40,446 is the total
cost of good units completed without regard to
normal spoilage.
Answer (B) is correct. The first step in finding the
total cost of good units produced is to calculate the
unit cost of production. This number is equal to the
total cost of production divided by total input units, or
$.378 ($45,360 ・120,000 units). The next step is to
multiply the unit cost of production times the number
of good units completed to get a total cost of good
units of $40,446 (107,000 x .378). This number is
then added to the total cost of normal spoilage
$4,044.60 (10,700 x .378) to get a total cost of
good units of $44,490.60.
Answer (C) is incorrect because $44,940 is the total
cost of good units completed in the initial production
cost report.
Answer (D) is incorrect because $45,360 is the total
cost of all production.
[262] Source: Publisher
Answer (A) is incorrect because $420 is the total
cost of abnormal spoilage in the initial production cost
report.
Answer (B) is correct. The total cost of abnormal
spoilage is found by multiplying the number of units of
abnormal spoilage times the unit cost of production.
Therefore, the total cost of abnormal spoilage is
$869.40 (2,300 units x $.378).
Answer (C) is incorrect because $966 is found by
multiplying the number of units of abnormal spoilage
by the initial unit cost of good units.
Answer (D) is incorrect because $4,914 is the
combined cost of normal spoilage and abnormal
spoilage.
Answer (A) is incorrect because 16,000 units is the
amount completed and transferred.
Answer (B) is incorrect because 19,000 units does
not include the equivalent units from ending
work-in-process inventory.
Answer (C) is correct. The number of conversion
equivalent units produced using the FIFO method is
found by adding together the equivalent units
produced from beginning work-in-process inventory,
the current production transferred, and the equivalent
units produced in ending work-in-process inventory.
Since there were 4,000 units in beginning
work-in-process inventory that were 25%
completed, then 3,000 equivalent units were
produced this month [4,000 units x (1 - .25)]. Since
there were 5,000 units in ending work-in-process
inventory that were 80% completed, there were
4,000 equivalent units from ending inventory (5,000 x
.8). Therefore, 3,000 equivalent units from beginning
WIP inventory plus 16,000 (21,000 - 5,000) units
completed and transferred plus 4,000 equivalent units
from ending WIP inventory is equal to 23,000
equivalent units.
Answer (D) is incorrect because 25,000 units does
not take into consideration work previously
completed or work still needing to be completed in
work-in-process inventories.
[265] Source: Publisher
Answer (A) is incorrect because $11.91 is the result
of dividing the total cost using the weighted-average
method, by the number of equivalent units using the
FIFO method.
Answer (B) is correct. The cost per equivalent unit
for a cost element using the weighted-average
method is found by dividing the total cost by the
equivalent units. In this case, the total cost was
$274,000 ($45,600 from beginning work-in-process
+ $228,400 from May's production). This number is
divided by the 24,000 equivalent units to get a cost
per equivalent unit of $11.42.
[263] Source: Publisher
Answer (A) is incorrect because 20,000 units is the
amount completed and transferred.
Answer (B) is incorrect because 21,000 units is the
result of adding the number of equivalent units in the
ending work-in-process inventory that still need to be
completed to the 20,000 units.
Answer (C) is incorrect because $9.93 is the cost
per equivalent unit using the FIFO method.
Answer (D) is incorrect because $9.52 is the result of
dividing the $228,400 from May's production by the
number of equivalent units.
[266] Source: Publisher
Answer (C) is correct. The amount of conversion
equivalent units produced using the weighted-average
Answer (A) is incorrect because $1.90 is the result of
dividing the total cost of the FIFO method by the
equivalent units of the weighted-average method.
Answer (B) is correct. The cost per equivalent unit
for a cost element using the FIFO method is found by
dividing the total cost by the equivalent units. While
using the FIFO method, the only costs are those
incurred during the month of May, $45,500 ($35,000
+ $10,500) and the equivalent units are the ones
completed from beginning work-in-process
inventory, 3,000 ($4,000 x .75), those completed
and transferred out, 16,000 units, and the amount in
ending work-in-process, 4,000 (5,000 x .8).
Therefore, the cost per equivalent unit is $1.98
($45,500 ・23,000 units).
Answer (C) is incorrect because $2.23 is the
equivalent cost per unit using the weighted-average
method.
Answer (D) is incorrect because $2.33 is the result of
dividing the total cost of the weighted-average
method by the equivalent units of the FIFO method.
budgeted fixed costs [(420 - 448) ・448].
Answer (D) is incorrect because the percentage
difference between the actual and the budgeted
breakeven point was 5.00% above (not below) the
budget.
[269] Source: CMA 0683 4-8
Answer (A) is incorrect because only 20% of the
increased volume is due to an improved market
share, while the other 80% is due to the increased
industry volume.
Answer (B) is incorrect because 80% of the
increased volume was due to the increased industry
volume.
Answer (C) is correct. Based on the revised industry
volume, Xerbert should have sold 258,000 units
(10% x 2,580,000). Since 260,000 were actually
sold, the company increased its market share by
2,000 which is 20% of the 10,000 (260,000 250,000) increase.
[267] Source: CMA Samp Q3-4
Answer (A) is incorrect because 74,000 results from
the omission of all spoiled units from the computation.
Answer (B) is incorrect because 74,150 results from
the omission of normal spoilage from the
computation.
Answer (C) is incorrect because 74,600 results from
the omission of abnormal spoilage from the
computation.
Answer (D) is correct. Given no BWIP, the total
equivalent units for July equal 74,750.
Physical Equivalent
Units
Units
-------- ---------Started and completed during July
65,000
65,000
Normal spoilage (30% complete)
2,000
600
Abnormal spoilage (100% complete)
150
150
Ending work-in-process inventory (60% complete) 15,000
9,000
----------82,150
74,750
======
======
[268] Source: CMA 0683 4-7
Answer (A) is correct. According to the budget,
sales of 250 units would produce a contribution
margin of $700, or $2.80 per unit. Dividing the $448
of budgeted fixed costs by $2.80 gives a breakeven
point of 160 units. The 260 actual units sold
produced a contribution margin of $650, or $2.50
per unit. Dividing the $420 of fixed costs by $2.50
gives a breakeven point of 168 units. Consequently,
the actual breakeven point is 5% (8 ・160) above the
budget.
Answer (D) is incorrect because 4% is the
percentage increase in actual unit sales over budgeted
unit sales [(260 units - 250 units) ・250 units].
[270] Source: CMA 0683 4-9
Answer (A) is incorrect because the total variance
between actual and budgeted sales is $115,000
(favorable). The sales price variance is $65,000
(unfavorable) and the sales quantity variance is
$180,000 (favorable), for a total favorable variance
of $115,000. The sales price variance is unfavorable
because actual sales were less than budgeted sales,
and the sales quantity variance is favorable because
actual quantity exceeded budgeted quantity.
Answer (B) is incorrect because the total variance
between actual and budgeted sales is $115,000
(favorable). The sales price variance is $65,000
(unfavorable) and the sales quantity variance is
$180,000 (favorable), for a total favorable variance
of $115,000. The sales price variance is unfavorable
because actual sales were less than budgeted sales,
and the sales quantity variance is favorable because
actual quantity exceeded budgeted quantity.
Answer (C) is incorrect because the actual sales
price for Xeon was less than the budgeted sales
price, creating a $65,000 unfavorable sales price
variance.
Answer (D) is correct. First, compute what sales
would have been if all sales had been made at
budgeted prices. The budgeted prices were $6 and
$10 per unit, respectively. Actual sales in units
multiplied by the budgeted prices equals total sales of
$2,080,000. Since actual sales were only
$2,015,000, the variance of $65,000 is unfavorable
(fewer sales than budgeted).
[271] Source: CMA 0683 4-10
Answer (B) is incorrect because 6.67% is the
percentage difference between the actual and the
budgeted fixed costs [(420 - 448) ・448].
Answer (C) is incorrect because 6.67% is the
percentage difference between the actual and the
Answer (A) is incorrect because the variable quantity
(not unit cost) variance is $165,000 (unfavorable).
The variable quantity variance is unfavorable because
actual expenses are greater than budgeted expenses.
Answer (B) is incorrect because $137,000 is the
total variance for variable and fixed expenses. It is
unfavorable because actual expenses are greater than
budgeted expenses.
$320,000 ($224,000 ・.7) and taxes would be
$96,000. If sales equal $60 times X units and
variable costs are $40 times X units, the following is
the equation to solve for units sold (X):
Answer (C) is incorrect because $137,000 is the
total variance for variable and fixed expenses. It is
unfavorable because actual expenses are greater than
budgeted expenses.
$60X - $40X - $880,000 - $96,000 = 224,000 units
$20X = $1,200,000
X = 60,000 units
At a selling price of $60 each, the total revenue is
$3,600,000 ($60 x 60,000 units).
Answer (D) is correct. The proper procedure is to
calculate variable costs by multiplying actual units
sold by the budgeted costs per unit. The budgeted
costs were $3 and $7.50, respectively. The actual
costs ($3 x 130 = $390 and $7.50 x 130 = $975)
were identical to budgeted variable costs at the actual
volume, i.e., zero variance.
[272] Source: CMA 1285 4-4
Answer (A) is incorrect because $80,000 is the
income before the tax expense of $(24,000)
($80,000 x 30%).
Answer (B) is incorrect because ($800,000) is the
loss that would result if sales volume per year (instead
of per month) were 4,000 units.
Answer (B) is incorrect because $3,312,000 is the
annual sales revenue that results when the $96,000 of
income tax is ignored.
Answer (C) is incorrect because $1,656,000 is the
annual sales revenue when the $96,000 of income tax
is ignored and the sum of the fixed costs and net
income ($1,104,000 = $880,000 fixed costs +
$224,000 net income) is divided by the variable unit
cost of $40 (instead of the contribution margin of
$20).
Answer (D) is incorrect because $3,110,400 is the
annual sales revenue when the $96,000 of income is
subtracted from (instead of added to) the $224,000.
[275] Source: CMA 1285 4-7
Answer (C) is correct. The income statement for a
volume of 48,000 units (4,000 per month x 12
months) would appear as follows:
Sales ($60/unit)
$2,880,000
Variable manufacturing ($35/unit)
(1,680,000)
Variable selling ($5/unit)
(240,000)
---------Contribution margin
$ 960,000
Fixed costs
(880,000)
---------Income before tax
$ 80,000
Tax expense (30%)
(24,000)
---------Net income
$ 56,000
==========
Answer (D) is incorrect because a $(560,000) loss
would result if the $(800,000) loss was reduced for
the tax savings of $240,000 ($800,000 x 30%).
[273] Source: CMA 1285 4-5
Answer (A) is incorrect because 22,000 units is fixed
cost ($880,000) divided by variable costs ($40).
Answer (B) is correct. The breakeven point in units
equals fixed costs divided by the contribution margin
per unit. At a selling price of $60 per unit and with
variable costs of $40 per unit, the unit contribution
margin is $20. Thus, the breakeven point is 44,000
units ($880,000 ・$20).
Answer (C) is incorrect because the contribution
margin should reflect selling expenses.
Answer (D) is incorrect because there are no income
taxes at the breakeven point.
[274] Source: CMA 1285 4-6
Answer (A) is correct. The formula for solving this
problem is Sales - Variable costs - Fixed costs Taxes = $224,000. The $224,000 is equal to 70%
(the complement of the tax rate) of before-tax
income. Thus, before-tax income must equal
Answer (A) is incorrect because 30% is the
contribution margin percentage that results from
including manufacturing overhead as a prime cost.
Answer (B) is incorrect because 76% is the
contribution margin percentage that results from
dividing total variable costs by the sales price
($45.60 ・60).
Answer (C) is incorrect because 20% is the
contribution margin percentage that results from
treating all variable costs as prime costs.
Answer (D) is correct. Prime costs are direct
materials and direct labor. Since these two elements
totaled $28 ($16 + $12) before the increase, the new
total would be $33.60 ($28 x 1.2). In other words,
prime costs would increase by $5.60, and total
variable costs would increase to $45.60. Subtracting
$45.60 from the $60 selling price leaves a
contribution margin of $14.40. The contribution
margin percentage thus becomes 24% ($14.40 ・
$60).
[276] Source: CMA 0686 4-28
Answer (A) is incorrect because fixed costs should
be divided by the contribution margin, not unit
variable costs.
Answer (B) is incorrect because 91,000 units is total
cost ・selling price.
Answer (C) is incorrect because selling and
administrative costs are included in the contribution
margin.
Answer (D) is correct. The breakeven point in units is
found by dividing the fixed costs ($210,000) by
contribution margin per unit ($3). Variable costs are
$700,000 at 100,000 units, or $7 per unit. Selling
price is $10 per unit. Dividing $210,000 by $3 per
unit results in a breakeven point of 70,000 units.
[277] Source: CMA 0686 4-29
Answer (A) is incorrect because selling 100,000 units
results from ignoring incomes.
Answer (B) is correct. Since the tax rate is 40%, the
$90,000 would consist of 60% of before-tax income.
Thus, to earn an income of $90,000 after tax, the
before-tax income must be $150,000 ($90,000 ・
.6). Dividing the fixed costs of $210,000 plus the
desired before-tax income of $150,000 by the $3
contribution margin per unit gives a breakeven point
of 120,000 units.
Answer (C) is incorrect because 102,858 units
disregards the $50,000 of selling and administrative
costs in computing the contribution margin.
Answer (D) is incorrect because 145,000 units
results from using a 60% tax rate rather than a 40%
tax rate.
[278] Source: CMA 0686 4-30
Answer (A) is incorrect because fixed costs should
be divided by the contribution margin, not the unit
variable cost.
Answer (B) is correct. The breakeven point is fixed
costs divided by the contribution margin per unit.
With the increase, the new total for fixed costs would
be $241,500; the contribution margin per unit would
still be $3. The breakeven point is 80,500 units.
Answer (C) is incorrect because selling and
administrative costs are reflected in the contribution
margin.
Answer (D) is incorrect because 94,150 units is total
costs of $941,500 divided by selling price of $10.
year is $115,500 (110% x $105,000). The new
UCM is $6 ($9 selling price - $3 variable cost).
Accordingly, the BEP is 19,250 units ($115,500 ・
$6).
Answer (C) is incorrect because 20,000 is the
preceding year's BEP.
Answer (D) is incorrect because 22,000 is the
breakeven point if the current year's fixed costs of
$115,500 (110% x $105,000) is divided by last
year's contribution margin of $5.25.
[281] Source: CMA 0687 4-12
Answer (A) is correct. Since last year's after-tax
profit was $5,040, pretax net income must have been
$8,400 [$5,040 ・(1 - 40% tax rate)]. Because fixed
cost has been fully recovered at the BEP, all of the
UCM beyond that sales level is included in pre-tax
net income. The UCM was $5.25, so the units sold in
excess of the 20,000-unit BEP equaled 1,600
($8,400 ・$5.25). If 21,600 total units were sold last
year, an increase of 1,000 units results in sales of
22,600 units.
Answer (B) is incorrect because 21,960 units
assumes the last year's after-tax profit was the pretax
net income.
Answer (C) is incorrect because sales volume is
estimated to be 22,600 units [20,000 ・($8,400
pretax NI ・$5.25 UCM) ・1,000].
Answer (D) is incorrect because sales volume is
estimated to be 22,600 units [20,000 ・($8,400
pretax NI ・$5.25 UCM) ・1,000].
[282] Source: CMA 0687 4-13
[279] Source: CMA 0687 4-10
Answer (A) is incorrect because $9.00 is the
expected price, not the price with the same CMR.
Answer (A) is incorrect because $213,750 is the
sales revenue when fixed costs are not increased by
10%.
Answer (B) is incorrect because $8.25 is the sum of
the old UCM and the new unit variable cost.
Answer (B) is incorrect because $257,625 results
from using a 60% tax rate rather than a 40% tax rate.
Answer (C) is correct. Last year, unit variable cost
was $2.25, so the unit contribution margin (UCM)
was $5.25 ($7.50 price - $2.25), and the
contribution margin rate (CMR) was 70% ($5.25 ・
$7.50). If variable costs increase by one-third, the
new variable cost will be $3 [$2.25 x (4 ・3)]. If a
70% CMR is desired, the $3 variable cost will be
30% of sales, and the unit sales price will be $10 ($3
・30%).
Answer (C) is incorrect because $207,000 results
from failing to convert the after-tax income of
$22,500 to pre-tax income of $37,500 [$22,500 ・
(1 - 40% tax rate)].
Answer (D) is incorrect because $9.75 is the sum of
last year's sales price of $7.50 and last year's variable
cost of $2.25.
Answer (D) is correct. An after-tax net income of
$22,500 equals a pretax income of $37,500
[$22,500 ・(1 - 40% tax rate)]. With a UCM of $6
contributing toward the $153,000 total of fixed cost
($115,500) and desired profit ($37,500), 25,500
units ($153,000 ・$6) must be sold. At $9 per unit,
sales revenue is $229,500.
[283] Source: CMA 0687 4-14
[280] Source: CMA 0687 4-11
Answer (A) is incorrect because 17,500 is based on
the preceding year's fixed costs.
Answer (B) is correct. The breakeven point (BEP) in
units equals fixed cost divided by UCM. Fixed cost
for the previous year was $105,000 (20,000 units at
breakeven x $5.25 UCM). Fixed cost for the current
Answer (A) is incorrect because the sales quantity
(volume) variance focuses on the firm's aggregate
results. It assumes a constant product mix and an
average contribution margin for the composite unit.
The sales volume variance equals the budgeted
average UCM calculated for the composite unit
multiplied by the difference between the actual and
budgeted unit sales.
Answer (B) is incorrect because it is the rate of return
a potential investment must earn before it is
acceptable to management.
Answer (C) is incorrect because it is a nonsense
term.
Answer (D) is correct. The margin of safety measures
the amount by which sales may decline before losses
occur. It equals budgeted or actual sales minus sales
at the BEP. It may be stated in either units sold or
sales revenue.
[284] Source: CMA 1296 3-25
Answer (A) is incorrect because, given excess
capacity, any price less than $47 is advantageous.
Answer (D) is incorrect because $590,000 includes
the fixed and variable selling and administrative costs.
[287] Source: CMA 1290 3-24
Answer (A) is incorrect because ending inventory
was $1,200,000.
Answer (B) is correct. Under the absorption method,
unit cost is $30 ($12 direct materials + $9 direct
labor + $4 variable overhead + $5 fixed overhead).
Given beginning inventory of 35,000 units, the ending
inventory equals 40,000 units (35,000 BI + 130,000
produced - 125,000 sold). Hence, ending inventory
was $1,200,000 ($30 x 40,000 units).
Answer (B) is incorrect because, given excess
capacity, any price greater than $47 is uneconomical.
Answer (C) is incorrect because ending inventory
was $1,200,000.
Answer (C) is correct. The total unit cost includes
$20 of fixed costs ($17 + $3) that is not avoidable if
the units are purchased. Moreover, the company has
excess capacity. The opportunity cost of making the
table tops is zero because no production will be
displaced. Consequently, the relevant unit cost of
making the table tops is the $47 unit variable cost,
and the supplier's price must be less to justify the buy
decision.
Answer (D) is incorrect because ending inventory
was $1,200,000.
Answer (D) is incorrect because the decision to
reject a price of $50 or more may depend on
whether the firm must displace other production to
make the table tops.
[285] Source: CMA 1286 4-18
Answer (A) is incorrect because $400,000 does not
include $50,000 of variable factory overhead.
Answer (B) is correct. Under variable costing, the
only costs that are capitalized are the variable costs
of manufacturing. These include
[288] Source: CMA 1290 3-25
Answer (A) is incorrect because ending inventory
was $1,000,000.
Answer (B) is incorrect because ending inventory
was $1,000,000.
Answer (C) is correct. Using variable costing, the unit
cost of ending inventory is $25 ($12 direct materials
+ $9 direct labor + $4 variable overhead). Given
beginning inventory of 35,000 units, the ending
inventory equals 40,000 units (35,000 BI + 130,000
produced - 125,000 sold). Thus, ending inventory
was $1,000,000 ($25 x 40,000).
Answer (D) is incorrect because ending inventory
was $1,000,000.
[289] Source: CMA 1290 3-29
Direct materials used
$300,000
Direct labor
100,000
Variable factory overhead
50,000
-------Total inventoriable costs
$450,000
========
Answer (C) is incorrect because the $40,000 of
variable selling and administrative costs should not be
included in the inventoriable costs.
Answer (D) is incorrect because $530,000 is the
inventoriable cost under absorption (full) costing.
[286] Source: CMA 1286 4-19
Answer (A) is incorrect because $400,000 equals
prime costs.
Answer (B) is incorrect because $450,000 is the
inventoriable cost under variable costing.
Answer (C) is correct. The absorption method is
required for financial statements prepared according
to GAAP. It charges all costs of production to
inventories. The variable cost of materials
($300,000), direct labor ($100,000), variable factory
overhead ($50,000), and the fixed factory overhead
($80,000) are included. They total $530,000.
Answer (A) is correct. Absorption costing results in a
higher income figure than variable costing whenever
production exceeds sales because absorption costing
capitalizes some fixed factory overhead as part of
inventory. These costs are expensed during the
period incurred under variable costing. Consequently,
variable costing recognizes greater expenses and
lower income. The reverse is true when sales exceed
production. In that case, the absorption method
results in a lower income because some fixed costs of
previous periods absorbed by the beginning inventory
are expensed in the current period as cost of goods
sold. Variable costing income is never burdened with
fixed costs of previous periods.
Answer (B) is incorrect because an increase in
inventory results in a higher income under absorption
costing.
Answer (C) is incorrect because the important
relationship is between actual production and actual
sales, not between actual and planned production.
Answer (D) is incorrect because planned sales do not
determine actual income.
[290] Source: CMA 1290 3-28
[292] Source: CMA 1290 3-30
Answer (A) is correct. Under the absorption method,
all selling and administrative fixed costs are charged
to the current period. Accordingly, $980,000 of
selling expenses and $425,000 of actual fixed
administrative expenses were expensed during the
year. The fixed manufacturing costs must be
calculated after giving consideration to the increase in
inventory during the period (some fixed costs were
capitalized) and to the underapplied overhead. The
beginning finished goods inventory included 35,000
units, each of which had absorbed $5 of fixed
manufacturing overhead. Each unit produced during
the year also absorbed $5 of fixed manufacturing
overhead. Given that 125,000 of those units were
sold, cost of goods sold was debited for $625,000 of
fixed overhead (125,000 units x $5). At year-end,
the underapplied overhead was also added to cost of
goods sold. Because production was expected to be
140,000 units, the overhead application rate for the
$700,000 of planned fixed manufacturing overhead
was $5 per unit. Only 130,000 units were
manufactured. Hence, $650,000 ($5 x 130,000
units) of overhead was applied to units in process.
Because inventory increased from 35,000 to 40,000
units, $25,000 (5,000-unit increase x $5) of the
applied fixed manufacturing overhead for the period
was inventoried, not expensed. Actual overhead was
$715,000, so the underapplied overhead was
$65,000 ($715,000 - $650,000). This amount was
charged to cost of goods sold at year-end. The total
of the fixed costs expensed was therefore
$2,095,000 ($980,000 selling expenses + $425,000
administrative expenses + $625,000 standard
manufacturing overhead costs of units sold +
$65,000 underapplied overhead).
Answer (A) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
Answer (B) is correct. The difference is caused by
the capitalization of some of the fixed manufacturing
overhead. When inventories increase during the
period, the absorption method capitalizes that
overhead and transfers it to future periods. The
variable costing method expenses it in the current
period. Inventories increased by 5,000 units during
the period, and each of those units would have
included $5 of fixed manufacturing overhead under
absorption costing. Accordingly, $25,000 of fixed
manufacturing overhead would have been capitalized.
Recognizing $25,000 of fixed costs in the balance
sheet instead of the income statement results in a
$25,000 difference in income between the two
costing methods.
Answer (C) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
Answer (D) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
[293] Source: CMA 1290 3-26
Answer (A) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (B) is incorrect because the total fixed costs
on the absorption costing basis were $2,095,000.
Answer (B) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (C) is incorrect because the total fixed costs
on the absorption costing basis were $2,095,000.
Answer (C) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (D) is incorrect because the total fixed costs
on the absorption costing basis were $2,095,000.
Answer (D) is correct. At $70 per unit, actual sales
revenue was $8,750,000 for 125,000 units. Actual
variable costs of manufacturing were $25 per unit
($12 + $9 + $4). The unit costs incurred for the
actual production level of 130,000 units were the
same as the unit costs for a planned production level
of 140,000 units. These unit costs were the same for
units manufactured in both the current and previous
year. For example, total planned direct materials cost
for 140,000 units was $1,680,000, or $12 per unit.
The incurred unit cost was also $12 ($1,560,000 ・
130,000 units). Thus, total variable manufacturing
cost was $3,125,000 ($25 x 125,000 units).
Consequently, manufacturing contribution margin was
$5,625,000 ($8,750,000 - $3,125,000).
[291] Source: CMA 1290 3-27
Answer (A) is correct. The unit variable
manufacturing cost was $25 ($12 direct materials +
$9 direct labor + $4 variable overhead). Other
variable costs included selling expenses ($8 per unit)
and administrative expenses ($2 per unit). The unit
selling and administrative costs actually incurred for
sales of 125,000 units were the same as the planned
unit costs. For example, actual unit variable selling
expense was $8 ($1,000,000 ・125,000 units sold),
which equaled the planned unit cost. Thus, total unit
variable cost was $35 ($25 + $8 + $2). The total
expensed was $4,375,000 ($35 x 125,000 units
sold).
Answer (B) is incorrect because the total variable
cost expensed on the variable costing basis was
$4,375,000.
[294] Source: CMA 1292 3-5
Answer (A) is incorrect because manufacturing
supplies are variable costs inventoried under both
methods.
Answer (B) is incorrect because factory insurance is
Answer (C) is incorrect because the total variable
cost expensed on the variable costing basis was
$4,375,000.
a fixed manufacturing cost inventoried under
absorption costing but written off as a period cost
under variable costing.
Answer (D) is incorrect because the total variable
cost expensed on the variable costing basis was
$4,375,000.
Answer (C) is incorrect because direct labor cost is a
product cost under both methods.
Answer (D) is correct. Under absorption costing, all
manufacturing costs, both fixed and variable, are
treated as product costs. Under variable costing, only
variable costs of manufacturing are inventoried as
product costs. Fixed manufacturing costs are
expensed as period costs. Packaging and shipping
costs are not product costs under either method
because they are incurred after the goods have been
manufactured. Instead, they are included in selling
and administrative expenses for the period.
[295] Source: CMA 1292 3-6
Answer (A) is incorrect because ABC is appropriate
for external as well as internal purposes.
Answer (B) is incorrect because job-order costing is
acceptable for external reporting purposes.
Answer (C) is correct. Activity-based costing,
job-order costing, process costing, and standard
costing can all be used for both internal and external
purposes. Variable costing is not acceptable under
GAAP for external reporting purposes.
Answer (D) is incorrect because process costing is
acceptable for external reporting purposes.
[298] Source: CMA 1273 4-2
Answer (A) is incorrect because profit is a function of
both sales and production, so it will not always move
in the same direction as sales.
Answer (B) is incorrect because profit is a function of
both sales and production, so it will not always move
in the same direction as sales.
Answer (C) is correct. In an absorption costing
system, fixed overhead costs are included in
inventory. When sales exceed production, more
overhead is expensed under absorption costing due
to fixed overhead carried over from the prior
inventory. If sales increase over production, more
than one period's factory overhead is recognized as
expense. Accordingly, if the increase in factory
overhead expensed is greater than the contribution
margin of the increased units sold, there may be less
profit with an increased level of sales.
Answer (D) is incorrect because decreased output
will increase the unit cost of items sold. Fixed factory
overhead per unit will increase.
[296] Source: CMA 1292 3-26
[299] Source: CMA 1285 4-14
Answer (A) is incorrect because producing more of
the products requiring the most direct labor will
permit more fixed overhead to be capitalized in the
inventory account.
Answer (B) is incorrect because deferring expenses
such as maintenance will increase income in the
current period (but may result in long-range losses
caused by excessive down-time).
Answer (C) is incorrect because increasing
production without a concurrent increase in demand
applies more fixed costs to inventory.
Answer (D) is correct. Under an absorption costing
system, income can be manipulated by producing
more products than are sold because more fixed
manufacturing overhead will be allocated to the
ending inventory. When inventory increases, some
fixed costs are capitalized rather than expensed.
Decreasing production, however, will result in lower
income because more of the fixed manufacturing
overhead will be expensed.
Answer (A) is incorrect because $200,000 is the
operating income under variable costing.
Answer (B) is correct. Absorption costing net income
is computed as follows:
Sales (120,000 x $40)
$4,800,000
---------Variable production costs ($30 x 200,000 units)
$6,000,000
Fixed production costs
600,000
---------Total production costs (200,000 units)
$6,600,000
Ending inventory (80,000 x $33)
(2,640,000)
---------Cost of goods sold
$3,960,000
---------Gross profit
$ 840,000
Selling and administrative expenses
(400,000)
---------Operating income
$ 440,000
==========
[297] Source: CMA 1273 4-1
Answer (A) is incorrect because the cost of a unit of
product changing because of a change in number of
units manufactured is a characteristic of absorption
costing systems.
Answer (B) is correct. In a variable costing system,
only the variable costs are recorded as product costs.
All fixed costs are expensed in the period incurred.
Because changes in the relationship between
production levels and sales levels do not cause
changes in the amount of fixed manufacturing cost
expensed, profits more directly follow the trends in
sales.
Answer (C) is incorrect because idle facility variation
is a characteristic of absorption costing systems.
Answer (D) is incorrect because neither variable nor
absorption costing includes administrative costs in
inventory.
Answer (C) is incorrect because $600,000 is the
operating income that results from capitalizing
$240,000 fixed manufacturing costs and $160,000 of
selling and administrative costs (the $160,000 is
incorrect as all selling and administrative costs should
be expensed).
Answer (D) is incorrect because $840,000 is the
gross profit under absorption costing, i.e., before
selling and administrative expenses.
[300] Source: CMA 1285 4-15
Answer (A) is correct. The contribution margin from
manufacturing (sales - variable costs) is $10 ($40 $30) per unit sold, or $1,200,000 (120,000 units x
$10). The fixed costs of manufacturing ($600,000)
and selling and administrative costs ($400,000) are
deducted from the contribution margin to arrive at an
operating income of $200,000. The difference
between the absorption income of $440,000 and the
$200,000 of variable costing income is attributable to
capitalization of the fixed manufacturing costs under
the absorption method. Since 40% of the goods
produced are still in inventory (80,000 ・200,000),
40% of the $600,000 in fixed costs, or $240,000,
was capitalized under the absorption method. That
amount was expensed under the variable costing
method.
Answer (B) is incorrect because $440,000 is the
operating income under absorption costing.
considers all manufacturing costs to be inventoriable
as product costs. These costs include variable and
fixed manufacturing costs, whether direct or indirect.
The alternative to absorption is known as variable
(direct) costing.
Answer (D) is incorrect because conversion costs
include direct labor and factory overhead but not
direct materials.
[304] Source: CMA 0697 3-10
Answer (C) is incorrect because $800,000 is the
operating income if fixed costs of manufacturing are
not deducted.
Answer (A) is incorrect because fixed factory
overhead is treated differently under the two
methods.
Answer (D) is incorrect because $600,000 is the
operating income that results from capitalizing 40% of
both fixed manufacturing costs and selling and
administrative costs.
Answer (B) is correct. Under variable costing,
inventories are charged only with the variable costs of
production. Fixed manufacturing costs are expensed
as period costs. Absorption costing charges to
inventory all costs of production. If finished goods
inventory increases, absorption costing results in
higher income because it capitalizes some fixed costs
that would have been expensed under variable
costing. When inventory declines, variable costing
results in higher income because some fixed costs
capitalized under the absorption method in prior
periods are expensed in the current period.
[301] Source: CMA 0694 3-4
Answer (A) is correct. The breakeven point in units is
calculated by dividing the fixed costs by the
contribution margin per unit. If selling price is constant
and costs increase, the unit contribution margin will
decline, resulting in an increase of the breakeven
point.
Answer (B) is incorrect because a decrease in costs
will lower the breakeven point. The unit contribution
margin will increase.
Answer (C) is incorrect because an increase in the
selling price will also increase the unit contribution
margin, resulting in a lower breakeven point.
Answer (C) is incorrect because variable costs are
the same under either method.
Answer (D) is incorrect because gross margins will
be different. Fixed factory overhead is expensed
under variable costing and capitalized under the
absorption method.
[305] Source: CMA adap
Answer (D) is incorrect because both a cost
decrease and a sales price increase will increase the
unit contribution margin, resulting in a lower
breakeven point.
[302] Source: CMA 0697 3-2
Answer (A) is incorrect because variable costs will
change in total, but unit variable costs will be
constant.
Answer (B) is correct. The relevant range is the range
of activity over which unit variable costs and total
fixed costs are constant. The incremental cost of one
additional unit of production will be equal to the
variable cost.
Answer (C) is incorrect because actual fixed costs
should not vary greatly from budgeted fixed costs for
the relevant range.
Answer (D) is incorrect because the relevant range
can change whenever production activity changes; the
relevant range is merely an assumption used for
budgeting and control purposes.
[303] Source: CMA 0697 3-3
Answer (A) is incorrect because $3,000 is the value
of the by-product.
Answer (B) is correct. The NRV at split-off for each
of the joint products must be determined. Given that
Alfa has a $4 selling price and an additional $2 of
processing costs, the value at the split-off is $2 per
pound. the total value at split-off for 10,000 pounds
is $20,000. Betters has a $10 selling price and an
additional $2 of processing costs. Thus, the value at
split-off is $8 per pound. The total value of 5,000
pounds of Betters is therefore $40,000. The 1,000
pounds of Morefeed has a split-off value of $3 per
pound, or $3,000. Assuming that Morefeed (a
by-product) is inventoried (recognized in the
accounts when produced) and treated as a reduction
of joint costs, the allocable joint cost is $90,000
($93,000 - $3,000). (NOTE: Several other methods
of accounting for by-products are possible.) The total
net realizable value of the main products is $60,000
($20,000 Alfa + $40,000 Betters). The allocation to
Alfa is $30,000 [($20,000 ・$60,000) x $90,000].
Answer (C) is incorrect because $31,000 fails to
adjust the joint processing cost for the value of the
by-product.
Answer (D) is incorrect because $60,000 is the
amount allocated to Betters.
Answer (A) is incorrect because variable (direct)
costing does not inventory fixed factory overhead.
[306] Source: CMA 1293 3-7
Answer (B) is incorrect because variable (direct)
costing does not inventory fixed factory overhead.
Answer (C) is correct. Absorption (full) costing
Answer (A) is incorrect because $30,000 is the
amount allocated to Alfa when the by-product is
inventoried.
$50,000). Of this total value, $40,000 should be
Answer (B) is incorrect because $31,000 is the
amount allocated to Alfa when the by-product is not
inventoried.
Answer (C) is incorrect because $52,080 assumes
that a weighting method using caloric value is used.
Answer (D) is correct. The NRV of Alfa is $20,000,
and the NRV of Betters is $40,000. If the joint cost
is not adjusted for the value of the by-production, the
amount allocated to Betters is $62,000 {[$40,000 ・
($20,000 + $40,000)] x $93,000}.
[307] Source: CMA 1293 3-4
Answer (A) is incorrect because $3,000 is the value
of the by-product.
Answer (B) is incorrect because $30,000 is based on
the net realizable value method.
Answer (C) is incorrect because $31,000 is based
on the net realizable value method and fails to adjust
the joint processing cost for the value of the
by-product.
Answer (D) is correct. Joint cost is $93,000 and
Morefeed has a split-off value of $3,000 (see
preceding question). Assuming the latter amount is
treated as a reduction in joint cost, the allocable joint
cost is $90,000. The total physical quantity (volume)
of the two joint products is 15,000 pounds (10,000
Alfa + 5,000 Betters). Hence, $60,000 of the net
joint costs [(10,000 ・15,000) x $90,000] should be
allocated to Alfa.
[308] Source: CMA 1293 3-5
Answer (A) is incorrect because $39,208 is the
amount allocated to Alfa if the 1,000,000 calories
attributable to Morefeed is included in the
computation.
Answer (B) is incorrect because $39,600 is the
allocation to Alfa.
Answer (C) is incorrect because $40,920 is the
allocation to Alfa if the sales value of the by-product
is not treated as a reduction of joint cost.
Answer (D) is correct. The net allocable joint cost is
$90,000, assuming the value of Morefeed is
inventoried and treated as a reduction in joint costs.
The caloric value of Alfa is 44,000,000 (4,400 x
10,000 pounds), the caloric value of Betters is
56,000,000 (11,200 x 5,000 pounds), and the total
is 100,000,000. Of this total volume, Alfa makes up
44% and Betters 56%. Thus, $50,400 (56% x
$90,000) should be allocated to Betters.
allocated to Alfa [($40,000 ・$90,000) x $90,000].
Answer (C) is incorrect because $41,333 fails to
adjust the joint cost by the value of the by-product.
Answer (D) is incorrect because $50,000 is the joint
cost allocated to Betters.
[310] Source: CMA 1295 3-29
Answer (A) is correct. The total production costs
incurred are $10,000,000, consisting of crude oil of
$5,000,000, direct labor of $2,000,000, and factory
overhead of $3,000,000. The total physical output
was 660,000 barrels, consisting of 300,000 barrels
of Two Oil, 240,000 barrels of Six Oil, and 120,000
barrels of distillates. Thus, the allocation (rounded) is
$3,636,000 {[240,000 ・(300,000 + 240,000 +
120,000)] x $10,000,000}.
Answer (B) is incorrect because $3,750,000 is
based on the physical quantity of units sold, not units
produced.
Answer (C) is incorrect because $1,818,000 is the
amount that would be assigned to distillates.
Answer (D) is incorrect because Six Oil does not
compose 75% of the total output in barrels.
[311] Source: CMA 1295 3-30
Answer (A) is incorrect because $4,800,000 is the
amount that would be assigned to Six Oil.
Answer (B) is correct. The total production costs
incurred are $10,000,000, consisting of crude oil of
$5,000,000, direct labor of $2,000,000, and factory
overhead of $3,000,000. The total value of the
output is as follows:
Two Oil (300,000 x $20)
$ 6,000,000
Six Oil (240,000 x $30)
7,200,000
Distillates (120,000 x $15) 1,800,000
----------Total sales value
$15,000,000
===========
Because Two Oil composes 40% of the total sales
value ($6,000,000 ・$15,000,000), it will be
assigned 40% of the $10,000,000 of joint costs, or
$4,000,000.
Answer (C) is incorrect because $2,286,000 is
based on the relative sales value of units sold.
Answer (D) is incorrect because $2,500,000 is
based on the physical quantity of barrels sold.
[312] Source: CIA 1194 III-47
[309] Source: CMA 1293 3-6
Answer (A) is incorrect because $36,000 is based
on 40%, not 4/9.
Answer (B) is correct. The gross market value of
Alfa is $40,000 ($4 x 10,000 pounds), Betters has a
total gross value of $50,000 ($10 x 5,000 pounds),
and Morefeed has a split-off value of $3,000. If the
value of Morefeed is inventoried and treated as a
reduction in joint cost, the allocable joint cost is
$90,000 ($93,000 - $3,000). The total gross value
of the two main products is $90,000 ($40,000 +
Answer (A) is incorrect because $375,000 is the
total cost of R.
Answer (B) is incorrect because $390,000 is based
on the physical units method of allocating the joint
costs.
Answer (C) is correct. Total sales value at split-off is
$800,000 [(2,500 x $100) + (5,000 x $80) + (7,500
x $20)]. Product S accounts for 50% (5,000 x $80 =
$400,000) of the sales value and therefore $360,000
(50% x $720,000) of the joint costs. The total cost
of Product S is $510,000 ($360,000 allocated costs
+ $150,000 differential costs).
Answer (D) is incorrect because $571,463 uses the
sales value at split-off based on actual sales.
joint cost to be allocated to the Second Main
Product on a physical-volume basis is $1,500,000
{$2,400,000 x [150,000 pounds ・(90,000 pounds
+ 150,000 pounds)]}.
Answer (D) is incorrect because $1,575,000 does
not deduct by-product NRV from the joint cost.
[313] Source: CIA 1194 III-48
Answer (A) is correct. The net realizable value
(NRV) method is an appropriate method of
allocation when products cannot be sold at split-off.
Further processing of R, which is salable at split-off,
is not economical because the cost ($150,000)
exceeds the benefit [($150 - $100) x 2,500 units =
$125,000]. Thus, R's NRV is $250,000 ($100 price
at split-off x 2,500 units). However, S and T must be
processed further. S's NRV is $425,000 [($115 x
5,000 units) - $150,000], and T's NRV is $125,000
[($30 x 7,500 units) - $100,000]. Given that the
NRV of T is a reduction of joint cost, the total joint
cost to be allocated is therefore $595,000 ($720,000
- $125,000 NRV of T). Accordingly, based on the
NRV method, the joint cost allocated to R is
$220,370 {[$250,000 R's NRV ・($250,000 R's
NRV + $425,000 S's NRV)] x $595,000 allocable
joint cost}. Because further processing of R is
uneconomical, the total cost of R is $220,370.
Answer (B) is incorrect because $370,370 includes
additional processing costs.
Answer (C) is incorrect because $374,630 is the
joint cost allocated to S.
Answer (D) is incorrect because $595,000 is the
allocable joint cost.
[314] Source: CMA 1293 3-8
Answer (A) is correct. Joint costs are most often
assigned on the basis of relative sales values or net
realizable values. Basing allocations on physical
quantities, such as pounds, gallons, etc., is usually not
desirable because the costs assigned may have no
relationship to value. When large items have low
selling prices and small items have high selling prices,
the large items might always sell at a loss when
physical quantities are used to allocate joint costs.
Answer (B) is incorrect because physical quantities
are usually easy to measure.
Answer (C) is incorrect because additional
processing costs will have no more effect on the
allocation of joint costs based on physical quantities
than any other base.
Answer (D) is incorrect because the purpose of
allocating joint costs, under any method, is to
separate such costs on a unit basis.
[315] Source: CMA 1296 3-30
Answer (A) is incorrect because $1,200,000
assumes that the by-product is charged with a portion
of the net joint cost.
Answer (B) is incorrect because $1,260,000
assumes that the by-product is charged with a portion
of the gross joint cost.
Answer (C) is correct. The joint cost to be allocated
is $2,400,000 [$2,520,000 total joint cost - ($2 x
60,000 pounds of the by-product)]. Accordingly, the
[316] Source: Publisher
Answer (A) is correct. Total joint production costs
incurred were $9,000,000 ($4,000,000 +
$2,000,000 + $3,000,000). The total physical output
was 660,000 barrels (300,000 barrels of Grade One
+ 240,000 barrels of Grade Two + 120,000 barrels
of Grade Three). Thus, on a physical output basis,
Grade Two should be allocated $3,273,000
[$9,000,000 x (240,000 ・660,000)].
Answer (B) is incorrect because $3,375,000 is
based on the physical quantity of units sold, not units
produced.
Answer (C) is incorrect because $1,636,000 is the
amount assigned to Grade Three.
Answer (D) is incorrect because $3,512,000 is the
amount assigned to Grade Two if the relative sales
value method is used.
[317] Source: Publisher
Answer (A) is incorrect because $3,512,000 is the
amount assigned to Grade Two.
Answer (B) is correct. Total joint production costs
incurred were $9,000,000, ($4,000,000 +
$2,000,000 + $3,000,000). The sales values of the
three products are as follows:
Grade One (300,000 x $30)
$ 9,000,000
Grade Two (240,000 x $40)
9,600,000
Grade Three (120,000 x $50)
6,000,000
-----------Total sales value
$ 24,600,000
============
Consequently, Grade One should be assigned joint
costs of $3,293,000 [$9,000,000 x ($9,000,000 ・
$24,600,000)].
Answer (C) is incorrect because $1,636,000 is
based on the relative sales values of units sold, not
units produced.
Answer (D) is incorrect because $4,091,000 is
based on the physical quantity of barrels produced.
[318] Source: Publisher
Answer (A) is incorrect because $3,512,000 is the
total joint cost assigned to the output of Grade Two.
Answer (B) is correct. The total sales value of the oil
produced was determined in the preceding question
to be $24,600,000. The total sales value of Grade
Two was determined to be $9,600,000.
Accordingly, costs assigned to Grade Two on a
relative sales value basis (rounded) equal $3,512,000
[($4,000,000 + $3,000,000 + $2,000,000) x
($9,600,000 ・$24,600,000)]. Thus, the value of the
ending inventory of Grade Two should be
$1,756,000 [($3,512,000 ・240,000 barrels
produced) x 120,000 barrels in EI].
Answer (C) is incorrect because $1,636,000 is
based on the relative sales values of units sold.
Answer (D) is incorrect because $3,375,000 is the
total joint cost assigned to the output of Grade Two
based on the relative physical volume of units sold.
FC], and the reduced appropriation must be
$9,000,000 (90% x $10,000,000).
Answer (D) is incorrect because $10,000,000 is the
budgeted appropriation and 5,000 is the number of
people it would serve.
[321] Source: Publisher
[319] Source: Publisher
Answer (A) is correct. The absorption-costing
breakeven point in units sold equals the sum of (1)
the total fixed costs and (2) the product of the fixed
manufacturing cost application rate and the difference
between the BEP in units sold (X) and units
produced, with the sum divided by the UCM. Thus,
the absorption-costing breakeven point in units sold is
425,000 units:
($2 x 1,000,000 denominator capacity)
+ $1,500,000 + $2(X - 900,000)
X = ------------------------------------$6
$3,500,000 + $2X - $1,800,000
X = ----------------------------$6
$6X = $1,700,000 + $2X
X = 425,000
Answer (B) is incorrect because 583,333 units is the
variable-costing BEP.
Answer (C) is incorrect because 900,000 units is the
actual production level.
Answer (D) is incorrect because 1,000,000 units is
the capacity used to calculate the fixed overhead
application rate.
[320] Source: Publisher
Answer (A) is incorrect because $5,000,000 is the
fixed cost and 4,000 is the number served given a
reduced appropriation.
Answer (B) is incorrect because $8,333,333 and
$833 are the appropriation amount per patient annual
cost, respectively, that for the next year result from a
10% increase in the appropriation of the current year
instead of a 10% decrease in the next year's
appropriation.
Answer (C) is correct. This question applies CVP
analysis in a not-for-profit context in which the
agency wishes to assist as many people as possible.
Thus, a breakeven point must be calculated. Total
revenue (the appropriation) equals fixed cost plus the
product of unit variable cost (per-patient annual cost)
and the number of patients who can be assisted given
the available resources. The following are
simultaneous equations stated in the two unknowns:
X - 5,000 Y = $5,000,000
.9X - 4,000 Y = $5,000,000
Because X must equal 5,000Y + $5,000,000, the
second equation may be solved as follows for the
per-patient annual cost (Y):
.9(5,000 Y + $5,000,000) - 4,000Y =
Answer (A) is incorrect because $.05 results from
inverting the numerator and denominator in the
calculation.
Answer (B) is correct. The breakeven point in units is
equal to the fixed costs divided by the contribution
margin per unit. Thus, 44,000 = $880,000 ・CM, or
CM = $20.
Answer (C) is incorrect because $44.00 results from
using variable cost as part of the calculation.
Answer (D) is incorrect because $88.00 results from
dividing by an erroneous denominator.
[322] Source: Publisher
Answer (A) is incorrect because 250 results from
using an erroneous contribution margin.
Answer (B) is correct. The breakeven point is where
profit is zero and sales = fixed costs + variable costs,
so 10x = 4,000 + 2x. Thus, 8x = 4,000, or x = 500
units. Alternatively, dividing the $4,000 of fixed costs
by the $8 per unit contribution margin gives the same
result.
Answer (C) is incorrect because 800 results from
using the inverse of the contribution margin.
Answer (D) is incorrect because 2,000 results from
applying the 20% to fixed costs instead of sales.
[323] Source: Publisher
Answer (A) is incorrect because 5,514 results from
adding the profit margin to the contribution margin.
Answer (B) is incorrect because 9,273 is the
breakeven point.
Answer (C) is incorrect because 13,600 results from
using profit as the contribution margin.
Answer (D) is correct. Sales = Fixed Costs +
Variable Costs + Profit. The profit is the selling price
of the good multiplied by the percent profit that is
desired/stated. Thus,
$15x = $51,000 + $9.50x + .25($15x), or
$15x = $51,000 + $13.25x, or
$1.75x = $51,000, or
x = 29,143 bears
A trial-and-error approach could also be used to
solve this problem by preparing an income statement
for each of the four alternative production levels.
[324] Source: Publisher
$5,000,000
4,500y + $4,500,000 - 4,000Y = $5,000,000
500Y = $500,000
Y = $1,000
Accordingly, the budgeted appropriation (X) must be
$10,000,000 [(5,000 x $1,000) VC + $5,000,000
Answer (A) is incorrect because .67 is the inverse of
the degree of operating leverage.
Answer (B) is incorrect because .75 results from
adding fixed costs in the denominator.
Answer (C) is correct. The degree of operating
leverage (DOL) can be calculated from the formula
[Q(P - V)] ・[Q(P - V) - F], if Q is the number of
units sold, P is the unit selling price, V is the unit
variable cost, and F is the fixed cost. Thus, (4,000 x
75) ・[(4,000 x 75) - 100,000], or $300,000 ・
200,000 = 1.5.
Answer (D) is incorrect because 3.0 results from
failing to use contribution margin in the denominator.
[325] Source: CMA 1286 4-18
Answer (B) is incorrect because 0.2083 is the ratio
of the contribution margin of Division 2 to the
contribution margin of the whole company.
Answer (C) is incorrect because it is the ratio of
division net income to total net income.
Answer (D) is incorrect because it is the ratio of
division net income to total net income, with the
exception of president's salary.
[328] Source: Publisher
Answer (A) is incorrect because $800,000 equals
the prime costs.
Answer (A) is incorrect because the contribution of
Division 1 is $50,000, which is less than $105,000.
Answer (B) is correct. The only costs capitalized are
the variable costs of manufacturing. Prime costs
(direct materials and direct labor) are variable.
Answer (B) is incorrect because the contribution of
Division 2 is $50,000, which is less than $105,000.
Prime costs, direct materials,
and direct labor
$800,000
Variable manufacturing overhead 100,000
-------Total inventoriable costs
$900,000
========
Answer (C) is incorrect because $980,000 includes
the variable selling and other expenses.
Answer (D) is incorrect because $1,060,000 equals
inventoriable costs under absorption costing.
[326] Source: CMA 1286 4-19
Answer (A) is incorrect because $800,000 equals
prime costs.
Answer (B) is incorrect because $900,000 equals
inventoriable costs under variable costing.
Answer (C) is correct. The absorption method is
required for financial statements prepared according
to GAAP. It charges all costs of production to
inventories. The prime costs ($800,000), variable
manufacturing overhead ($100,000), and the fixed
manufacturing overhead ($160,000) are included.
They total $1,060,000.
Answer (D) is incorrect because $1,060,000
includes the fixed and variable selling and other
expenses.
[327] Source: Publisher
Answer (A) is correct. The contribution margin
equals sales minus variable costs. Direct costing
considers only variable costs as product costs, so the
contribution margin appears in a direct costing
income statement. Absorption costing treats both
variable and fixed costs as product costs. Thus,
variable costs are not stated separately, and the
contribution margin would not appear in the income
statement. Accordingly, the contribution margin for
the whole company is $480,000 ($1,000,000 net
revenue - $400,000 variable CGS - $120,000
variable selling and administrative costs), and the
contribution margin for Division 1 is $120,000
($300,000 net revenues - $140,000 variable CGS $40,000 variable selling and administrative costs).
Thus, the ratio of the contribution margin of Division
1 to the contribution margin of the whole company is
0.25.
Answer (C) is correct. The contribution margin for
Division 3 is $150,000 ($250,000 net revenue $100,000 total variable costs). The contribution
controllable by Division 3's manager is $130,000
($150,000 contribution margin - $20,000
controllable fixed cost). The total contribution by
Division 3 equals its net revenue minus all costs
traceable to it. Accordingly, the total contribution is
$105,000 ($130,000 controllable contribution $25,000 allocated but controllable by others).
Unallocated costs are excluded from the calculation.
If separate amounts are determined for the division's
contribution and the controllable contribution, the
difference between the division's and the manager's
performance may be ascertained (assuming
controllability of fixed costs can be assigned).
Answer (D) is incorrect because the contribution of
Division 4 is $65,000, which is less than $105,000.
[329] Source: Publisher
Answer (A) is incorrect because 167 units is the
result of adding variable cost to the sales price.
Answer (B) is incorrect because 250 units results
from a failure to subtract the variable cost from the
sales price.
Answer (C) is correct. At breakeven, the profit is
zero, therefore sales must be equal to fixed cost and
variable cost. In this case, the formula is
$400x = $200x + $100,000
$200x = $100,000
x = 500 units
Answer (D) is incorrect because 1,700 units results
from adding the after-tax profit objective to the fixed
cost.
[330] Source: Publisher
Answer (A) is incorrect because 1,250 units results
from a failure to subtract variable costs from the sales
price.
Answer (B) is incorrect because 1,700 units results
from using the after-tax profit, not the pretax profit
objective.
Answer (C) is incorrect because 2,000 units results
from a failure to include fixed cost in the equation.
Answer (D) is correct. The number of units to be
sold for Almo to achieve its after-tax profit objective
of $240,000 is the point where revenue equals total
costs plus the pretax profit objective. The pretax
profit objective is found by dividing the after-tax
profit objective by (1 - tax rate) or .6. Hence, the
formula to find the desired point is
$400x
$400x
$200x
x =
= $200x + $100,000 + ($240,000 ・.6)
= $200x + $100,000 + $400,000
= $500,000
2,500 units
[331] Source: Publisher
Answer (A) is incorrect because $157,200 results
from a failure to add in the first 5 months' revenue.
Answer (B) is incorrect because $160,800 is the
result of multiplying operating profit by .4 instead of
.6.
from a failure to subtract variable costs.
Answer (B) is correct. In a breakeven analysis, the
profit is equal to zero and sales must be equal to the
sum of fixed costs and variable costs. In the analysis,
there are two forms of revenue, $30 for the initial
consultation, and the inflow from favorable
settlements. Therefore, the formula is
$30x + ($2,000 x .2x x .3) = $4x + $1,491,980
$30x + $120x = $4x + $1,491,980
$146x = $1,491,980
x = $10,219 clients
Answer (C) is incorrect because 12,862 clients
results from a failure to add the $30 from the initial
consultation.
Answer (D) is incorrect because 57,384 clients
results from a failure to add the inflow from the
favorable settlements.
[334] Source: Publisher
Answer (C) is correct. The after-tax profit of a selling
price alternative is found by initially finding the year's
combined revenue. Therefore, the first 5 months'
revenue of $140,000 ($400 x 350) is added to the
final 7 months' revenue of $972,000 ($360 x 2,700)
to get a yearly revenue of $1,112,000. From this
number, the variable costs of $610,000 ($200 x
3,050) and the fixed costs of $100,000 are
subtracted to get an operating profit of $402,000.
The 40% tax rate is taken out of this amount by
multiplying the $402,000 by .6 (1 - .4) to get an
after-tax profit of $241,200.
Answer (D) is incorrect because $301,200 results
from a failure to subtract fixed costs from the
revenue.
Answer (A) is incorrect because 47.5 results from
averaging the possible outcomes without respect to
its probability.
Answer (B) is correct. The expected value in a
probability distribution is found by adding the values
created by multiplying each possible outcome by its
respective probability. Therefore, the expected value
is (20 x .10) + (30 x .30) + (55 x .40) + (85 x .20),
or 2 + 9 + 22 + 17, giving an expected value of 50
clients per day.
Answer (C) is incorrect because 52.5 results from
adding the high and low outcomes and dividing by 2.
Answer (D) is incorrect because 55 is the most
probable outcome, not the expected value.
[332] Source: Publisher
Answer (A) is incorrect because $1,327,700 results
from a failure to include fringe benefit expense.
Answer (B) is incorrect because $1,484,480 results
from a failure to include overtime wages expense.
Answer (C) is correct. In this problem, the fixed
expenses incurred are from advertising, rent, property
insurance, utilities, malpractice insurance,
depreciation, and wages and fringe benefits. The first
step is to add all of these expenses except for wages
and fringe benefits. Therefore, you must add
$500,000 from advertising, rent is $168,000 ($28 x
6,000), $22,000 for property insurance, $32,000 for
utilities, $180,000 for malpractice insurance, and
depreciation is $15,000 ($60,000 ・4). This total is
$917,000. The next step is to determine regular
wages of $403,200 [($25 + $20 + $15 + $10) x 16
hours x 360 days] plus overtime wages of $7,500
[(200 x $15 x 1.5) + (200 x $10 x 1.5)] to get total
wages of $410,700. This number multiplied by 40%
gives a fringe benefit expense of $164,280.
Therefore, total fixed expenses is equal to
$1,491,980 ($917,000 + $410,700 + $164,280).
Answer (D) is incorrect because $1,536,980 results
from depreciating all of the office equipment in the
first year.
[333] Source: Publisher
Answer (A) is incorrect because 9,947 clients results
[335] Source: Publisher
Answer (A) is incorrect because $667,550 results
from a failure to add the beginning balance of the
work-in-process inventory.
Answer (B) is incorrect because $675,600 is the cost
of goods available for sale under absorption costing.
Answer (C) is correct. The cost of goods available
for sale under the variable costing method is found by
adding the beginning balances of finished goods and
work-in-process inventories to the manufacturing
costs incurred. To find the beginning balances of the
variable inventories, fixed overhead must be
subtracted from the absorption inventory. The fixed
overhead is applied at $1 per direct labor hour
($25,000 of fixed overhead ・25,000 direct labor
hours). Therefore, the variable inventory balance for
finished goods is $16,950 [$18,000 - ($1,050 hours
x $1)], and the variable inventory balance for
work-in-process is $46,400 [$48,000 - (1,600
hours x $1)]. The manufacturing costs incurred are
found by adding the cost of direct materials,
$370,000, plus the cost of direct labor, $138,000
(23,000 hours x $6 per hour), plus the cost of
variable overhead, $142,600 (23,000 hours x $6.20
per hour) to get manufacturing costs of $650,600.
The application rates for direct labor and variable
overhead are found by dividing $150,000 and
$155,000 by 25,000 hours, respectively. Therefore,
the cost of goods available for sale is equal to
$713,950 ($16,950 + $46,400 + $650,600).
the contribution margin.
Answer (D) is incorrect because $716,600 results
from a failure to reduce the beginning balances by the
fixed overhead.
[336] Source: Publisher
Answer (A) is incorrect because $635,950 results
from a failure to decrease the inventory balances by
the fixed overhead.
Answer (C) is incorrect because $212,980 results
from a failure to subtract fixed selling expenses from
the contribution margin.
Answer (D) is incorrect because $243,730 results
from a failure to subtract fixed administrative
expenses from the contribution margin.
[339] Source: CMA Samp Q3-3
Answer (B) is correct. The variable manufacturing
cost of goods sold is found by subtracting the ending
balances of work-in-process and finished goods
inventories from cost of goods available for sale. The
ending balances of the inventories are found by
subtracting fixed overhead from the absorption
inventories. Therefore, the work-in-process ending
inventory is found by subtracting $2,100 (2,100
hours x $1) from $64,000 to get $61,900. The
ending finished goods balance is found by subtracting
$820 (820 hours x $1) from $14,000 to get
$13,180. Thus, the variable manufacturing cost of
goods sold is equal to $638,870 ($713,950 $61,900 - $13,180).
Answer (C) is incorrect because $652,050 results
from a failure to subtract the finished goods inventory.
Answer (D) is incorrect because $700,770 results
from a failure to subtract the work-in-process
inventory.
[337] Source: Publisher
Answer (A) is incorrect because $281,130 is the
result of subtracting the entire selling expense.
Answer (B) is correct. The contribution margin is
found by subtracting total variable costs from sales
revenue. In this example, variable costs are equal to
variable cost of goods sold plus variable selling
expenses. Since variable cost of goods sold has been
found to be $638,870, the only issue remaining is
selling expenses. Because the variable portion of
selling expenses is 5% of sales revenue, variable
selling expense is equal to $50,750 ($1,015,000 x
.05). Therefore, the contribution margin is equal to
$325,380 ($1,015,000 - $638,870 - $50,750).
Answer (C) is incorrect because $331,880 is the
result of subtracting the fixed portion of selling
expense.
Answer (D) is incorrect because $363,130 is the
result of subtracting the increase in selling expense
this year.
[338] Source: Publisher
Answer (A) is correct. The variable operating income
for a corporation is found by subtracting total fixed
costs from the contribution margin. In this example,
total fixed costs are comprised of factory overhead,
selling expenses, and administrative costs. With fixed
selling expenses being $44,250 ($95,000 $50,750), total fixed costs are equal to $156,650
($37,400 + $44,250 + $75,000). Therefore, with a
contribution margin of $325,380, variable operating
income is equal to $168,730 ($325,380 $156,650).
Answer (B) is incorrect because $206,130 results
from a failure to subtract fixed factory overhead from
Answer (A) is incorrect because unit sales multiplied
by the sales price equals sales revenue, but this
amount does not necessarily correlate with operating
income. A change in unit variable costs may cause
revenue and operating income to move in different
directions.
Answer (B) is incorrect because operating income is
not necessarily correlated positively or negatively with
finished goods inventory, however valued.
Answer (C) is correct. In a variable costing system,
only the variable costs are recorded as product costs.
All fixed costs are expensed in the period incurred.
Because changes in the relationship between
production levels and sales levels do not cause
changes in the amount of fixed manufacturing cost
expensed, profits more directly follow the trends in
sales, especially when the UCM (selling price per unit
- variable costs per unit) is constant. Unit sales times
the UCM equals the total CM, and operating income
(a pretax amount) equals the CM minus fixed costs of
operations. If the UCM is constant and fixed costs
are stable, the change in operating income will
approximate the change in the CM (UCM x unit
sales).
Answer (D) is incorrect because operating income is
not necessarily correlated positively or negatively with
finished goods inventory, however valued.
[340] Source: Publisher
Answer (A) is incorrect because it uses the variable
cost percentage in the denominator instead of the
contribution margin percentage.
Answer (B) is incorrect because it uses the same
contribution margin percentage (20%) in both
calculations.
Answer (C) is incorrect because it reverses the two
contribution margin percentages.
Answer (D) is correct. The original breakeven level
was:
$800,000
-------- = $2,500,000
.32
The new level is:
$700,000
-------- = $3,500,000
.20
Thus, there is an increase of $1,000,000.
[341] Source: Publisher
Answer (A) is correct. The $4 million breakeven
level was calculated as follows:
$1,200,000
---------- = $4,000,000
CM%
Solving for CM% results in CM% = 30%. Thus,
30% of every dollar, or $0.30, contributes towards
profits.
Answer (B) is incorrect because, when substituted
into the original breakeven formula, they would not
have produced a breakeven level of $4 million.
Answer (C) is incorrect because, when substituted
into the original breakeven formula, they would not
have produced a breakeven level of $4 million.
Answer (C) is correct. Indirect taxes are those levied
against someone other than individual taxpayers and
thus only indirectly affect the individual. Sales taxes
are levied against businesses and are then passed
along to the individual purchaser. Social Security
taxes are levied against both the employer and the
employee. Those levied against the employee are
direct taxes; those levied against the employer are
indirect.
Answer (D) is incorrect because personal income
taxes and Social Security taxes levied against the
employee are direct taxes.
[345] Source: CMA 0690 4-27
Answer (D) is incorrect because, when substituted
into the original breakeven formula, they would not
have produced a breakeven level of $4 million.
[342] Source: Publisher
Answer (A) is correct. Assume that sales were
previously $1,000, with profits of $150 (15% x
$1,000). If sales increase to $1,250, profits will
increase to $187.50 (15% x $1,250). The $37.50
increase is 25% of the previous $150.
Answer (B) is incorrect because profit margin
increases by 25%.
Answer (A) is incorrect because the effect is to
increase gains and decrease losses.
Answer (B) is correct. An accelerated method
reduces the book value of the asset more rapidly in
the early years of the useful life than does the
straight-line method. Hence, the effect of an early sale
is to increase the gain or decrease the loss that would
have been recognized under the straight-line method.
Answer (C) is incorrect because the effect is to
increase gains and decrease losses.
Answer (D) is incorrect because the effect is to
increase gains and decrease losses.
Answer (C) is incorrect because profit grows at the
same rate as sales.
[346] Source: Publisher
Answer (D) is incorrect because 15% of sales
translates to net income.
[343] Source: Publisher
Answer (A) is incorrect because a progressive tax is
a tax in which individuals with higher (lower) incomes
pay a higher (lower) percentage of their income in
tax. For example, income taxes are progressive.
Answer (B) is correct. With a regressive tax, the
percentage paid in taxes decreases as income
increases. For example, excise taxes and payroll
taxes are both regressive taxes. An excise tax is
regressive because its burden falls disproportionally
on lower-income persons. As personal income
increases, the percentage of income paid declines
because an excise tax is a flat amount per quality of
the good or service purchased.
Answer (C) is incorrect because a proportional tax is
a tax in which the individual pays a constant
percentage in taxes, regardless of income level. A
sales tax is a proportional tax.
Answer (D) is incorrect because a progressive tax is
a tax in which individuals with higher (lower) incomes
pay a higher (lower) percentage of their income in
tax. For example, income taxes are progressive.
[344] Source: CMA 0686 1-20
Answer (A) is incorrect because personal income
taxes and Social Security taxes levied against the
employee are direct taxes.
Answer (B) is incorrect because personal income
taxes and Social Security taxes levied against the
employee are direct taxes.
Answer (A) is incorrect because $17,700 is the gross
tax liability.
Answer (B) is incorrect because $15,300 is the net
tax liability found when incorrectly treating the tax
credit as a direct reduction in taxable income.
Answer (C) is correct. The first step in calculating
HCC's net tax liability is to subtract the exclusion for
tax-exempt interest from income, for a gross income
amount of $69,000 ($80,000 - $11,000). Next, the
deprecation deduction is subtracted from gross
income, for a taxable income of $59,000 ($69,000 $10,000). Then, the taxable income is multiplied by
the tax rate, for a gross tax liability of $17,700
($59,000 x 30%). Finally, net tax liability is
computed by subtracting the tax credits from the
gross tax liability. Therefore, HCC's net tax liability is
$9,700 ($17,700 - $8,000).
Answer (D) is incorrect because $2,000 is the net tax
liability found when incorrectly treating the exclusion
as a credit.
[347] Source: Publisher
Answer (A) is incorrect because an exclusion or
deduction reduces gross tax liability by the amount of
the exclusion or deduction multiplied by the tax rate.
Therefore, the exclusion will reduce HCC's gross tax
liability by $3,300 ($11,000 x .30), and the
deduction will reduce HCC's gross tax liability by
$3,000 ($10,000 x .30).
Answer (B) is incorrect because an exclusion or
deduction reduces gross tax liability by the amount of
the exclusion or deduction multiplied by the tax rate.
Therefore, the exclusion will reduce HCC's gross tax
liability by $3,300 ($11,000 x .30), and the
deduction will reduce HCC's gross tax liability by
$3,000 ($10,000 x .30).
Answer (C) is incorrect because an exclusion or
deduction reduces gross tax liability by the amount of
the exclusion or deduction multiplied by the tax rate.
Therefore, the exclusion will reduce HCC's gross tax
liability by $3,300 ($11,000 x .30), and the
deduction will reduce HCC's gross tax liability by
$3,000 ($10,000 x .30).
Answer (D) is correct. Credits directly reduce taxes,
whereas exclusions and deductions reduce income
prior to the computation of the gross tax liability.
Thus, the credit reduces the gross tax liability on a
dollar-for-dollar basis, or $8,000. An exclusion or
deduction reduces gross tax liability by the amount of
the exclusion or deduction multiplied by the tax rate.
Accordingly, the exclusion will reduce HCC's gross
tax liability by $3,300 ($11,000 x 30%), and the
deduction will reduce HCC's gross tax liability by
$3,000 ($10,000 x 30%). Gross income does not
reduce the gross tax liability; rather, it increases the
gross tax liability by $24,000 ($80,000 x 30%).
current earnings adjustment, and tax-exempt interest
on private activity bonds issued after August 7, 1986.
A sales commission accrued in the current year but
paid in the following year is not an example of an
AMT adjustment.
[350] Source: CMA 1294 1-29
Answer (A) is correct. An increase in the corporate
income tax rate might encourage a company to
borrow because interest on debt is tax deductible,
whereas dividends are not. Accordingly, an increase
in the tax rate means that the after-tax cost of debt
capital will decrease. Given equal interest rates, a firm
with a high tax rate will have a lower after-tax cost of
debt capital than a firm with a low tax rate.
Answer (B) is incorrect because increased
uncertainty encourages equity financing. Dividends do
not have to be paid in bad years, but interest on debt
is a fixed charge.
Answer (C) is incorrect because an increase in
interest rates discourages debt financing.
[348] Source: CMA 1291 2-11
Answer (A) is incorrect because warranty expenses
are not deductible until paid.
Answer (B) is incorrect because dividends on
common stock are never deductible by a
corporation; they are distributions of after-tax
income.
Answer (C) is incorrect because amounts accrued by
an accrual-basis taxpayer to be paid to a related
cash-basis taxpayer in a subsequent period are not
deductible until the latter taxpayer includes the items
in income. This rule effectively puts related taxpayers
on the cash basis.
Answer (D) is correct. Sec. 162(a) states that a
deduction is allowed for the ordinary and necessary
expenses incurred during the year in any trade or
business. A corporation may therefore deduct a
reasonable amount for compensation. Accrued
vacation pay is a form of compensation that results in
an allowable deduction for federal income tax
purposes.
[349] Source: CMA 1291 2-12
Answer (A) is incorrect because the gain on an
installment sale of real property in excess of
$150,000 is an adjustment to taxable income for
purposes of computing alternative minimum taxable
income.
Answer (B) is incorrect because mining exploration
and development costs are adjustments to taxable
income for purposes of computing alternative
minimum taxable income.
Answer (C) is incorrect because a charitable
contribution of appreciated property is an adjustment
to taxable income for purposes of computing
alternative minimum taxable income.
Answer (D) is correct. Taxable income is adjusted to
arrive at alternative minimum taxable income. Some
of the common adjustments include gains or losses
from long-term contracts, gains on installment sales of
real property, mining exploration and development
costs, charitable contributions of appreciated
property, accelerated depreciation, the accumulated
Answer (D) is incorrect because an increase in the
price-earnings ratio means that the return to
shareholders (equity investors) is declining; therefore,
equity capital is a more attractive financing alternative.
[351] Source: Publisher
Answer (A) is incorrect because a reorganization that
is a mere change in the form of investment is
nontaxable.
Answer (B) is incorrect because a like-kind exchange
allows for the deferral of gain.
Answer (C) is correct. Like-kind exchanges,
involuntary conversions, and tax-free reorganizations
are examples of transactions that result in the deferral
or nonrecognition of gain. A reorganization is
nontaxable when it is considered a mere change in
investment, not a disposition of assets.
Answer (D) is incorrect because an involuntary
conversion allows for the deferral of gain.
[352] Source: CMA 0689 4-9
Answer (A) is incorrect because the unit contribution
margin ratio is the unit contribution margin divided by
the unit selling price.
Answer (B) is correct. The $44.00 unit cost includes
fixed overhead as well as variable costs. Thus, it is
determined in accordance with full absorption
costing. The difference between selling price and the
full absorption (inventory) cost is gross profit (gross
margin).
Answer (C) is incorrect because the unit contribution
margin is the difference between unit selling price and
unit variable cost.
Answer (D) is incorrect because the unit gross profit
margin ratio is the unit gross profit divided by the unit
selling price.
[353] Source: CMA 0689 4-10
Answer (A) is incorrect because carrying cost is the
cost of holding inventory, e.g., insurance expense,
storage costs, and the opportunity cost of the
investment.
Answer (B) is incorrect because a sunk
(unavoidable) cost is irrelevant to a decision because
it has been or must be incurred.
Answer (C) is correct. A mixed (semivariable) cost
has fixed and variable components. An example is the
electric utility charge. It includes a minimum (fixed
cost) and a variable amount for usage above a certain
level.
Answer (D) is incorrect because committed costs
result when a going concern holds fixed assets.
Examples are insurance, long-term lease payments,
and depreciation.
[354] Source: CMA 0689 4-11
Answer (A) is incorrect because conversion costs are
incurred to transform raw materials into a finished
product. They include direct labor and factory
overhead.
Answer (B) is correct. The R&D costs have already
been incurred. Thus, they are costs resulting from a
past irrevocable decision. These sunk costs are
irrelevant to the decision because they are
unavoidable.
Answer (C) is incorrect because relevant costs are
those that must be weighed in making decisions
because they will vary among the options considered.
Answer (D) is incorrect because opportunity costs
are the returns from the alternative uses of resources.
These returns are forgone by using resources in a
specific way.
Answer (C) is correct. Committed costs result when
a going concern holds fixed assets. Examples are
insurance, long-term lease payments, and
depreciation. Committed costs tend not to be
variable in the short-run because they are the results
of capital budgeting decisions, e.g., the construction
of a plant and the purchase and installation of
equipment. For this reason, they are classified as
fixed overhead.
Answer (D) is incorrect because prime costs are the
variable costs of direct materials and direct labor.
[357] Source: CMA 1290 3-3
Answer (A) is incorrect because the direct method
does not make allocations to other service
departments.
Answer (B) is incorrect because the term variable
method is nonsensical.
Answer (C) is incorrect because the reciprocal
method recognizes reciprocal interdepartmental
service.
Answer (D) is correct. The three major methods of
allocating service department costs, in order of
increasing sophistication, are the direct method, the
step-down method, and the reciprocal (or
simultaneous-equations) method. The direct method
is the simplest. It involves allocating all service
department costs to production departments without
recognizing any service provided by one service
department to another. The step-down method is a
sequential process that allocates service costs among
service as well as production departments. However,
once a department's costs have been allocated, no
additional allocations are made back to that
department. The reciprocal method uses simultaneous
equations to recognize mutual services. The latter
method is the most complex.
[355] Source: CMA 0689 4-12
Answer (A) is correct. Advertising costs are
discretionary costs. Unlike engineered costs (such as
direct materials), a specific, measurable relationship
between a discretionary cost and its output is not
possible. Other examples are training costs, public
relations, and R&D.
Answer (B) is incorrect because opportunity costs
are the returns from the alternative uses of resources.
These returns are forgone when resources are used in
a specific way.
Answer (C) is incorrect because committed costs
result when a going concern holds fixed assets.
Examples are insurance, long-term lease payments,
and depreciation.
Answer (D) is incorrect because mixed costs are
those that include both variable and fixed elements.
[356] Source: CMA 0689 4-13
Answer (A) is incorrect because sunk costs are fixed
or variable costs that are unavoidable, for example,
because they have already been incurred.
[358] Source: CMA 1291 3-5
Answer (A) is incorrect because ROI does not have
to be maximized under the residual income approach.
Answer (B) is incorrect because maximizing the
imputed interest rate charge would diminish the
residual return.
Answer (C) is incorrect because the residual income
method is based on net income rather than cash
flows.
Answer (D) is correct. Residual income is the excess
of the return on an investment over the targeted
amount. This amount may be defined as the imputed
interest on invested capital. Some firms prefer to
measure managerial performance in terms of the
amount of residual income rather than the percentage
ROI. The principle is that the firm is expected to
benefit from expansion as long as residual income is
earned. Using a percentage ROI approach,
expansion might be rejected if it lowered ROI even
though residual income would increase.
[359] Source: CMA 1291 3-6
Answer (B) is incorrect because discretionary costs
are ordinarily not inventoriable. Examples of
discretionary costs include advertising and R&D
expenditures.
Answer (A) is correct. The purpose of the residual
income approach is to maximize income in excess of
an imputed interest charge on invested capital. Thus,
any returns in excess of the cost of capital are
beneficial to the firm. The cost of capital is a weighted
average of the various debt and equity components of
the capital structure.
Answer (B) is incorrect because to use only the cost
of new capital would ignore the contribution of old
capital to a department. The purpose of the residual
income approach is to maximize income in relation to
capital employed.
Answer (C) is incorrect because use of the average
ROI might result in rejection of projects with returns
in excess of the cost of capital.
Answer (D) is incorrect because the objective is to
maximize income in relation to costs; the comparison
is not to other years or averages.
[360] Source: CMA 0692 3-2
Answer (A) is incorrect because 30,000 units were
started and completed during the period.
Answer (B) is incorrect because 38,000 units were
transferred out, not to, the assembly department.
Answer (C) is incorrect because 40,800 equals the
equivalent units for conversion costs.
Answer (D) is correct. This problem seemingly asks
a technical question, but in reality was designed to
test the candidate's alertness. The equivalent units
transferred from the molding department are simply
the total units transferred from the molding
department--42,000 units.
[361] Source: CMA 0692 3-3
Answer (A) is incorrect because 30,000 units ignores
the 8,000 units in process at the beginning of the
period.
Answer (B) is correct. Direct materials are added
when the units are 60% complete as to conversion
costs. The beginning inventory of 8,000 units was
only 25% complete at the start of the period, and
42,000 units were transferred in. Given that the
ending inventory of 12,000 units was only 40%
complete, neither beginning nor ending inventory had
received direct materials in the assembly department.
Accordingly, the equivalent units in the assembly
department for direct materials must have been
38,000 units (8,000 units BI + 42,000 units
transferred in - 12,000 units EI).
Answer (C) is incorrect because 40,800 equals the
equivalent units for conversion costs, not direct
materials.
Answer (D) is incorrect because the 42,000 units
were transferred in during the month. Not all received
an input of direct materials.
[362] Source: CMA 0692 3-4
Answer (A) is incorrect because 34,800 units
assumes the beginning inventory was 100%
complete.
Answer (B) is correct. The equivalent units for
conversion costs equal total units to account for,
minus work done on beginning inventory, minus work
not done on ending inventory. Hence, the equivalent
units for conversion costs equal 40,800 units [50,000
units - (25% x 8,000 units) - (60% x 12,000 units)].
Answer (C) is incorrect because 42,800 units is the
answer derived using the weighted-average
assumption.
Answer (D) is incorrect because the ending inventory
was only 40% complete (not 60%), resulting in
equivalent units for those 12,000 items of 4,800 units.
[363] Source: CMA 1277 5-5
Answer (A) is incorrect because the difference in
total costs that results from selecting one alternative
instead of another is an incremental cost.
Answer (B) is incorrect because a cost that cannot
be avoided because it has already been incurred is a
sunk cost.
Answer (C) is correct. An imputed cost does not
entail any dollar outlay but is relevant to the
decision-making process.
Answer (D) is incorrect because a cost that continues
to be incurred even though there is no activity is a
fixed cost.
[364] Source: CMA 0678 4-6
Answer (A) is incorrect because manufacturing costs
incurred to produce units of output are inventoriable
(product) costs.
Answer (B) is incorrect because all costs associated
with manufacturing other than direct labor costs and
raw materials costs are overhead costs. Conversion
costs consist of both direct labor and overhead.
Answer (C) is correct. Conversion costs are the
direct labor, indirect materials, and factory overhead
incurred to convert raw materials and transferred-in
goods in a cost center to finished goods.
Answer (D) is incorrect because raw materials costs
and direct labor costs are prime costs.
[365] Source: CMA 0678 4-7
Answer (A) is incorrect because all costs associated
with manufacturing other than direct labor costs and
raw materials costs are overhead costs.
Answer (B) is incorrect because predetermined costs
are standard costs.
Answer (C) is incorrect because the sum of direct
labor and overhead is conversion cost.
Answer (D) is correct. Prime costs are raw materials
costs and direct labor costs.
[366] Source: CMA 0678 4-9
Answer (A) is incorrect because marketing, shipping,
etc., are selling and administrative costs.
Answer (B) is incorrect because costs that do not
change in total for a given period and relevant range
are fixed costs. Fixed costs also become
progressively smaller on a per unit basis as volume
increases.
Answer (C) is incorrect because manufacturing costs
incurred to produce output are inventoriable
(product) costs.
Answer (D) is correct. Variable costs fluctuate
directly and proportionately with sales or production
volume, facility usage, or other activity measure.
[367] Source: CMA 0678 4-10
Answer (A) is incorrect because costs incurred in a
current period to achieve objectives other than the
filling of orders by customers are known as
discretionary costs.
Answer (B) is incorrect because costs likely to
respond to the amount of attention devoted to them
by a specified manager are controllable costs.
Answer (A) is incorrect because normal spoilage
costs end up in inventory, not abnormal spoilage.
Answer (B) is incorrect because material variance
accounts are only charged for the variances in
material usage or material price, not the spoilage of
product.
Answer (C) is incorrect because, while charging
abnormal spoilage to manufacturing overhead is an
occasional practice, it is not the ordinary practice,
which is to charge it to a special loss account.
Answer (D) is correct. Abnormal spoilage is usually
charged to a special loss account because it is not
expected to occur under normal, efficient operating
conditions. Because it is unusual, it should be
separately reported as a period cost.
[371] Source: CMA 1282 4-101
Answer (C) is correct. Committed costs are required
as a result of past decisions. They are the fixed costs
of plant, equipment, and other items that are basic to
the entity. Because they result from long-term
decisions about capacity, they are unlikely to change
in the short run.
Answer (D) is incorrect because costs that fluctuate
with small changes in volume are variable costs.
Answer (A) is incorrect because property taxes and
interest charges are independent of production levels.
Answer (B) is incorrect because the president's
salary usually does not vary with production levels.
They are therefore fixed costs and are treated as
elements of overhead.
Answer (C) is incorrect because property taxes and
interest charges are independent of production levels.
[368] Source: CMA 0678 4-11
Answer (A) is correct. Discretionary costs are fixed
in the short-run because they arise from periodic
(e.g., annual) appropriation decisions by management
about the total to be incurred. Discretionary costs
have no well-defined input-output relationship; that is,
they are only indirectly related to filling customer
orders. Advertising and research are examples.
Answer (D) is correct. Variable costs vary directly
with the level of production. As production increases
or decreases, materials costs increase or decrease,
usually in direct proportion to production, sales, or
other activity measure.
[372] Source: CMA 0685 5-1
Answer (B) is incorrect because costs likely to
respond to the amount of attention devoted to them
by a specified manager are controllable costs.
Answer (A) is incorrect because some overhead
costs are variable but cannot be directly traced to a
particular product.
Answer (C) is incorrect because costs required as a
result of past decisions are committed costs.
Answer (B) is incorrect because it includes costs that
cannot be directly traced.
Answer (D) is incorrect because costs unaffected by
managerial decisions are costs such as committed
costs and depreciation that were determined by
decisions of previous periods.
Answer (C) is incorrect because it includes costs that
cannot be directly traced.
[369] Source: CMA 0678 4-12
Answer (A) is incorrect because costs incurred in a
current period to achieve objectives other than the
filling of orders by customers are discretionary costs.
Answer (B) is correct. Controllable costs are directly
regulated by management at a given level of
production within a given time span. For example,
fixed costs are not controllable.
Answer (C) is incorrect because costs required as a
result of past decisions are committed costs.
Answer (D) is incorrect because costs unaffected by
managerial decisions are costs such as committed
costs and depreciation that were determined by
decisions of previous periods.
[370] Source: CMA 0680 4-5
Answer (D) is correct. Prime costs are direct
materials and direct labor. They are directly
identifiable elements of production costs and are
directly traceable to the product.
[373] Source: CMA 0685 5-6
Answer (A) is incorrect because a variable cost is
one that varies directly with production activity.
Answer (B) is incorrect because conversion cost is
the cost of labor and overhead incurred to convert
raw materials into a finished product.
Answer (C) is incorrect because prime costs are the
costs of materials and labor that are directly traceable
to a cost objective.
Answer (D) is correct. A cost incurred for the benefit
of more than one cost objective is known as a
common cost. Allocation of common costs is a
persistent problem in responsibility accounting. For
example, how should the costs of corporate
headquarters be allocated to the segments of a
conglomerate? Common cost is also a synonym for
joint cost. In this sense, common costs are incurred in
the production of two or more inseparable products
(e.g., costs of refining petroleum into gasoline, diesel
fuel, kerosene, lubricating oils, etc.) up to the point at
which the products become separable (the split-off
point).
[374] Source: CMA 1285 4-25
$2,500,000 - .25 EWIP = $2,425,000
EWIP = $75,000 ・.25
EWIP = $300,000
Answer (B) is incorrect because the carrying value of
the work-in-process inventory is calculated as
follows: costs of goods manufactured ($2,425,000)
equals total manufacturing costs ($2,500,000), plus
beginning work-in-process (75% of EWIP), minus
ending work-in-process. The ending
work-in-process is $300,000.
Answer (A) is incorrect because total direct labor
cost is calculated as follows: total manufacturing cost
of $2,500,000 equals raw materials, plus direct
labor, plus factory overhead. Factory overhead is
30% of total manufacturing costs, or $750,000. If
factory overhead is 80% of direct labor, direct labor
cost is $937,500 ($750,000 ・80%).
Answer (C) is incorrect because the carrying value of
the work-in-process inventory is calculated as
follows: costs of goods manufactured ($2,425,000)
equals total manufacturing costs ($2,500,000), plus
beginning work-in-process (75% of EWIP), minus
ending work-in-process. The ending
work-in-process is $300,000.
Answer (B) is incorrect because total direct labor
cost is calculated as follows: total manufacturing cost
of $2,500,000 equals raw materials, plus direct
labor, plus factory overhead. Factory overhead is
30% of total manufacturing costs, or $750,000. If
factory overhead is 80% of direct labor, direct labor
cost is $937,500 ($750,000 ・80%).
Answer (D) is incorrect because the carrying value of
the work-in-process inventory is calculated as
follows: costs of goods manufactured ($2,425,000)
equals total manufacturing costs ($2,500,000), plus
beginning work-in-process (75% of EWIP), minus
ending work-in-process. The ending
work-in-process is $300,000.
Answer (C) is incorrect because total direct labor
cost is calculated as follows: total manufacturing cost
of $2,500,000 equals raw materials, plus direct
labor, plus factory overhead. Factory overhead is
30% of total manufacturing costs, or $750,000. If
factory overhead is 80% of direct labor, direct labor
cost is $937,500 ($750,000 ・80%).
Answer (D) is correct. Total manufacturing cost of
$2,500,000 is composed of raw materials, direct
labor, and factory overhead. Factory overhead is
30% of total manufacturing costs, or $750,000. If
factory overhead is 80% of direct labor cost, direct
labor cost is $937,500 ($750,000 ・80%).
[375] Source: CMA 1285 4-26
Answer (A) is incorrect because $750,000 is factory
overhead (30% x $2,500,000).
Answer (B) is correct. Factory overhead is 30% of
total manufacturing costs, or $750,000. Direct labor
is $937,500. Thus, raw materials must account for
the remaining $812,500 ($2,500,000 - $750,000 $937,500).
Answer (C) is incorrect because direct material is
$812,500 ($2,500,000 manufacturing costs $750,000 factory overhead - $937,500 direct labor
costs).
Answer (D) is incorrect because direct material is
$812,500 ($2,500,000 manufacturing costs $750,000 factory overhead - $937,500 direct labor
costs).
[376] Source: CMA 1285 4-27
Answer (A) is correct. Cost of goods manufactured
($2,425,000) equals total manufacturing costs
($2,500,000) plus beginning work-in-process (75%
of EWIP) minus ending work-in-process. The ending
work-in-process is $300,000.
$2,500,000 + .75 EWIP - EWIP = $2,425,000
[377] Source: CIA 0593 IV-3
Answer (A) is incorrect because direct labor hours is
a traditional base for assigning overhead costs to
production. However, it is not necessarily an
appropriate basis for assigning overhead costs
because direct labor is a small percentage of the total
cost of most products.
Answer (B) is incorrect because number of units
produced is an output related measure. Materials
handling costs should be related to an input measure.
Answer (C) is incorrect because the number of
vendors might be appropriate for receiving and
inspection, but materials handling in this situation
encompasses more than costs related to the number
of vendors.
Answer (D) is correct. Cost drivers should be related
to the costs accumulated in cost pools. The number
of parts used has a direct cause-and-effect
relationship with materials handling costs. The more
parts used, the more handling is involved.
[378] Source: CIA 1193 IV-1
Answer (A) is correct. The cost of small tools used in
mounting tires cannot be identified solely with the
manufacture of a specific automobile. This cost
should be treated as factory overhead because it is
identifiable with the production process.
Answer (B) is incorrect because tire costs are readily
and directly identifiable with each automobile and,
thus, are direct materials costs.
Answer (C) is incorrect because the cost of the
laborers who place tires on each automobile is readily
and directly identifiable with each automobile. Hence,
it is a direct labor cost.
Answer (D) is incorrect because delivery costs are
readily and directly identifiable with the tires
delivered. Thus, they are direct materials costs.
[379] Source: CIA 1193 IV-4
Answer (A) is incorrect because $20,000 only
includes other factory overhead. Indirect materials
and indirect labor should also be included.
Answer (B) is incorrect because $25,000 excludes
the indirect materials.
Answer (C) is correct. Factory (manufacturing)
overhead consists of all costs, other than direct
materials and direct labor, that are associated with
the manufacturing process. It includes both fixed and
variable costs. The factory overhead control account
should have the following costs:
Indirect materials
$ 5,000
Indirect labor ($45,000-$40,000)
5,000
Other factory overhead
20,000
------Total overhead
$30,000
=======
Answer (D) is incorrect because $45,000 is the total
labor cost.
allocation.
[382] Source: CIA 0592 IV-6
Answer (A) is incorrect because a quantity variance
is not recorded for scrap that is anticipated.
Furthermore, work-in-process inventory is credited
only when scrap is unique to a job.
Answer (B) is incorrect because an accounting entry
is not needed. The amount is not material.
Answer (C) is correct. Making a memorandum entry
at the time of recovery is appropriate. The value of
the scrap is then recognized at the time of sale. The
factory overhead control account is credited because
scrap is inevitable to the company's production
operations and not attributable to a specific job. This
accounting method has the effect of spreading the
revenue from scrap sales over all jobs or products.
Answer (D) is incorrect because normal scrap is not
the basis for recording a variance.
[383] Source: CIA 0594 III-70
[380] Source: CIA 1193 IV-5
Answer (A) is incorrect because the straight-time
wages times the overtime hours should still be treated
as direct labor.
Answer (B) is incorrect because only the overtime
premium times the overtime hours is charged to
overhead.
Answer (C) is incorrect because labor costs are not
related to repairs and maintenance expense.
Answer (D) is correct. Direct labor costs are wages
paid to labor that can feasibly be specifically
identified with the production of finished goods.
Factory overhead consists of all costs, other than
direct materials and direct labor, that are associated
with the manufacturing process. Thus, straight-time
wages would be treated as direct labor; however,
because the overtime premium cost is a cost that
should be borne by all production, the overtime hours
times the overtime premium should be charged to
manufacturing overhead.
[381] Source: CIA 1193 IV-3
Answer (A) is incorrect because the direct allocation
method ignores any services that are rendered by one
service department to another service department.
Answer (B) is incorrect because the step-down
allocation method allows for limited recognition of
services rendered by service departments to other
service departments.
Answer (C) is incorrect because the linear allocation
method is nonsensical.
Answer (D) is correct. The reciprocal method uses
simultaneous equations to allocate each service
department's costs. It allocates costs by explicitly
including the mutual services rendered among all
departments. When service departments render
services to each other, the use of the direct method
or the step-down method would not be theoretically
accurate. Accordingly, in such situations, the
reciprocal method would result in the most accurate
Answer (A) is correct. Job order costing is
appropriate when producing products with individual
characteristics and/or when identifiable groupings are
possible. Process costing should be used to assign
costs to similar products that are mass produced on a
continuous basis. Operations costing is a hybrid of
job order and process costing systems. It is used by
companies that manufacture goods that undergo
some similar and some dissimilar processes. Thus,
job order costing would be appropriate for auto
repair, operations costing for clothing manufacturing,
and process costing for oil refining.
Answer (B) is incorrect because custom printing
would not use process costing.
Answer (C) is incorrect because paint manufacturing
would not use operations costing.
Answer (D) is incorrect because motion picture
production would not use process costing.
[384] Source: Publisher
Answer (A) is correct. The correct entry to record a
purchase of materials on account is to increase the
appropriate asset and liability accounts. Materials are
charged to an inventory; the corresponding liability is
accounts payable. The asset account(s) could be
stores control and/or supplies or a number of other
accounts. Also, subsidiary ledgers may be used to
account for various individual items (a perpetual
inventory system). The term control implies that a
subsidiary ledger is being used.
Answer (B) is incorrect because the entry to record
the return of materials to suppliers debits accounts
payable and credits raw materials inventory.
Answer (C) is incorrect because this entry reclassifies
credit balances in accounts receivable as liabilities or
debit balances in accounts payable as assets.
Answer (D) is incorrect because this entry would
record the purchase of materials for cash.
[385] Source: Publisher
Answer (A) is incorrect because overhead must be
budgeted before a rate can be calculated.
Answer (B) is correct. Annual overhead application
rates smooth seasonal variability of overhead costs
and activity levels. If overhead were applied to the
product as incurred, the overhead rate per unit in
most cases would vary considerably from week to
week or month to month. The purpose of an annual
overhead application rate is to simulate constant
overhead throughout the year.
Answer (C) is incorrect because overhead
application rates are used to smooth seasonal
variability of overhead costs.
Answer (D) is incorrect because an overhead rate
applies overhead to the product.
[386] Source: Publisher
Answer (A) is correct. The overhead application rate
is established at the beginning of each year to
determine how much overhead to accumulate for
each job throughout the period. The estimated annual
overhead costs are divided by the annual activity level
or capacity in terms of units to arrive at the desired
rate.
Answer (B) is incorrect because actual overhead is
not known at the beginning of the period; the
overhead rate is predetermined.
Answer (C) is incorrect because the estimated
activity level is the rate's denominator.
Answer (D) is incorrect because the actual activity
level is not known until year-end. Also, activity is a
denominator value.
[387] Source: Publisher
Answer (A) is incorrect because direct labor hours is
appropriate when overhead is incurred uniformly by
all types of employees.
Answer (B) is incorrect because direct materials cost
would be inappropriate for a labor intensive industry.
Answer (C) is incorrect because machine hours is an
appropriate activity base when overhead varies with
machine time used.
Answer (D) is correct. In labor intensive industries,
overhead is usually allocated based on a labor activity
base. If more overhead is incurred by the more highly
skilled and paid employees, the overhead rate should
be based upon direct labor cost rather than direct
labor hours.
[388] Source: Publisher
Answer (A) is incorrect because theoretical
(maximum or ideal) capacity is the absolute capacity
assuming continuous operations, i.e., on Sundays,
holidays, etc., and can never be attained.
Answer (B) is correct. Overhead is applied
according to a rate found by dividing budgeted
overhead for a period by an estimated activity level.
If actual activity differs from the denominator value
(the predetermined activity level), a volume variance
will occur. This variance equals the amount of over-
or underapplied overhead attributable solely to the
difference between budgeted and actual activity. The
expected volume is that predicted for the period.
Thus, the use of expected volume as a denominator
should minimize expected over- or underapplied
overhead.
Answer (C) is incorrect because normal volume is an
average expected volume over a series of years. It
will vary from the expected volume on a
year-by-year basis.
Answer (D) is incorrect because practical capacity is
theoretical capacity adjusted downward for holidays,
maintenance time, etc. It is very difficult to attain.
[389] Source: Publisher
Answer (A) is correct. The larger the denominator in
the overhead application rate, the smaller the rate and
the lower the cost assigned to the product.
Theoretical capacity, which is the absolute capacity
during continuous operations, ignoring holidays,
maintenance time, etc., provides the largest
denominator in the ratio.
Answer (B) is incorrect because normal volume is
less than theoretical capacity.
Answer (C) is incorrect because practical capacity is
theoretical capacity adjusted downward for holidays,
maintenance time, etc.
Answer (D) is incorrect because minimum volume
relates to the lowest production level that would be
required to operate a particular function and would
result in the largest amount of applied overhead.
[390] Source: CIA 1185 IV-10
Answer (A) is incorrect because cost of goods sold
should be credited (not debited) for its share of
overapplied overhead.
Answer (B) is incorrect because cost of goods sold,
finished goods inventory, and work-in-process
inventory should be credited (not debited).
Answer (C) is incorrect because, although commonly
used, the immediate write-off method is not as
conceptually sound as the allocation among cost of
goods sold, finished goods inventory, and
work-in-process inventory.
Answer (D) is correct. Under a normal costing
system, overhead is applied to all jobs worked on
during the period at a predetermined rate. Because
cost of goods sold, finished goods inventory, and
work-in-process inventory all relate to these jobs,
each should be adjusted by its proportionate share of
over- or underapplied overhead. This apportionment
may be based on either the percentage of total
overhead (theoretically preferable) or the percentage
of total cost. The entry to close overapplied overhead
requires credits to these three accounts.
[391] Source: Publisher
Answer (A) is incorrect because a debit to cost of
goods sold and a credit to finished goods expenses
inventoried costs related to items sold.
Answer (B) is incorrect because the entry to close
the overhead accounts credits CGS when overhead
has been overapplied.
included in the calculation of gross margin.
Answer (C) is incorrect because debiting CGS and
crediting overhead applied does not close the
overhead accounts.
[395] Source: CMA 0690 4-2
Answer (D) is correct. Although not theoretically
sound, total under- or overapplied overhead is often
debited (credited) to CGS. The correct entry to close
the overhead accounts and to charge underapplied
overhead to CGS is to debit the factory overhead
applied account for the amount of overhead applied
for the period and to credit factory overhead control
for the amount of overhead actually incurred for the
period. The amount actually incurred exceeds the
amount of overhead applied because overhead is
underapplied. The difference is the amount charged
to CGS.
Answer (A) is correct. The sum of direct materials
used, direct labor, and factory overhead applied
(60% of direct labor) is $681,000.
Answer (B) is incorrect because $665,000 equals the
cost of goods manufactured.
Answer (C) is incorrect because $489,000 equals
the direct materials purchased plus direct labor.
Answer (D) is incorrect because $673,000 equals
the cost of goods sold.
[392] Source: Publisher
[396] Source: CMA 0690 4-3
Answer (A) is incorrect because, if the cost of goods
started last period and completed this period and the
cost of goods started and completed this period are
kept separate, separate layers will continue to
multiply as the units of product are passed through
additional WIP accounts. Thus, these costs are
combined before transfer to the next department.
Answer (B) is incorrect because, if the cost of goods
started last period and completed this period and the
cost of goods started and completed this period are
kept separate, separate layers will continue to
multiply as the units of product are passed through
additional WIP accounts. Thus, these costs are
combined before transfer to the next department.
Answer (C) is correct. Under FIFO, goods started
last period and completed this period are
differentiated from goods started and completed this
period. The goods started last period but completed
this period include the costs from last period as well
as this period's costs to complete, whereas goods
started and completed this period only include current
costs. In the weighted-average method, the costs of
the prior and current periods are averaged.
When the goods are transferred to the next
department or to finished goods under FIFO,
however, they are considered transferred out at one
average cost so that a multitude of layers of inventory
is not created. This procedure is consistent with the
basic concept of process costing.
Answer (D) is incorrect because, under FIFO, the
goods that were started last period and completed
this period are deemed to be completed first and
transferred first.
Answer (A) is correct. The cost of the goods
manufactured is the cost of goods completed during
the year. For a retailer, the equivalent is purchases.
The CGM for Alex is $665,000 [501,000 + (60% x
$300,000) + $235,000 - $251,000].
Answer (B) is incorrect because $681,000 equals
total manufacturing costs.
Answer (C) is incorrect because $673,000 is the
cost of goods sold.
Answer (D) is incorrect because $657,000 results
from adding ending inventory and subtracting
beginning inventory in the CGS calculation.
[397] Source: CMA 0690 4-4
Answer (A) is incorrect because $697,000 equals
prime cost, plus overhead applied, plus (instead of
minus) the change in the work-in-process.
Answer (B) is incorrect because $681,000 equals
prime cost plus overhead applied.
Answer (C) is correct. The calculation of the cost of
goods sold requires the preparation of a partial
income statement:
Beginning finished goods inventory
$125,000
Plus cost of goods manufactured
665,000
-------Goods available for sale
$790,000
Minus ending finished goods inventory (117,000)
-------Cost of goods sold
$673,000
========
[393] Source: CMA 0694 3-6
Answer (A) is incorrect because fixed indirect
manufacturing costs are included in the calculation of
gross margin.
Answer (B) is incorrect because fixed costs are also
included in the calculation of gross margin.
Answer (C) is correct. Gross margin or gross profit is
the excess of sales over cost of goods sold,
calculated on a full absorption basis. Cost of goods
sold would include all manufacturing costs, both fixed
and variable.
Answer (D) is incorrect because fixed costs are also
Answer (D) is incorrect because $657,000 results
from adding ending inventory and subtracting
beginning inventory in the CGS calculation.
[398] Source: CMA 0690 4-5
Answer (A) is incorrect because overapplied
overhead results in a credit to overhead control.
Answer (B) is incorrect because overhead is
overapplied.
Answer (C) is incorrect because overhead is
overapplied.
Answer (D) is correct. The factory overhead control
account should have a debit of $175,000 for the
actual costs incurred and a credit for the $180,000
(60% of direct labor) applied to production. Thus,
the net effect is a $5,000 credit balance resulting from
the overapplication of overhead.
[399] Source: CMA 0690 4-10
Answer (A) is incorrect because $50,000 is
abnormal spoilage.
Answer (B) is incorrect because $20,000 equals
normal spoilage for the month.
Answer (C) is incorrect because $70,000 is the sum
of normal spoilage and abnormal spoilage.
Answer (D) is correct. Normal spoilage is an
inventoriable cost of production that is charged to
cost of goods sold when the units are sold. Abnormal
spoilage is a period cost recognized when incurred.
The $50,000 of abnormal spoilage is therefore
expensed during May. In addition, 50% of the normal
spoilage is debited to cost of goods sold because
50% (25,000 ・50,000) of the units completed were
sold during the period. No spoilage is allocated to
work-in-process because inspection occurs after
completion. Thus, the normal spoilage expensed
during the month is $10,000 (50% x $20,000). Total
spoilage charged against revenue is $60,000
($50,000 + $10,000).
object, deciding how costs are to be aggregated
(accumulated in cost pools) prior to allocation, and
selecting the allocation base. Cost allocation is
necessary for, among other things, product costing,
pricing, investment and disinvestment decisions,
managerial performance measurement, make-or-buy
decisions, and determination of profitability.
However, an allocation of costs does not enable a
company to determine why the sales of a particular
product have increased. Many factors affect
consumer demand, such as advertising, consumer
confidence, availability of substitutes, and changes in
tastes. Cost allocation is an internal matter that does
not affect demand except to the extent it results in a
change in price.
Answer (C) is incorrect because cost allocation
permits a company to determine the profitability of a
product line and to decide whether to discontinue that
line.
Answer (D) is incorrect because make-or-buy
decisions depend on cost analyses.
[402] Source: CMA 0693 3-4
Answer (A) is incorrect because a cost accountant's
salary cannot be directly associated with a single
product. Cost accountants work with many different
products during a pay period.
Answer (B) is incorrect because warehouse rent is
not directly traceable to the Purchasing Department.
Other departments have influence over the level of
inventories stored.
[400] Source: CMA 1290 3-2
Answer (A) is incorrect because costs can be
controlled by the service departments without
allocation. However, allocation encourages cost
control by the production departments. If the costs
are allocated, managers have an incentive not to use
services indiscriminately.
Answer (B) is incorrect because allocation does not
affect the coordination of production activity.
Answer (C) is correct. Service department costs are
indirect costs allocated to production departments to
better determine overhead rates when the
measurement of full (absorption) costs is desired.
Overhead should be charged to production on some
equitable basis to provide information useful for such
purposes as allocation of resources, pricing,
measurement of profits, and cost reimbursement.
Answer (D) is incorrect because allocation of costs
has no effect on the efficiency of the provision of
services when the department that receives the
allocation has no control over the costs being
controlled.
[401] Source: CMA 0693 3-1
Answer (A) is incorrect because cost allocation
permits a company to determine the profitability of a
department and to make decisions relative to
expanding or contracting its operations.
Answer (B) is correct. According to SMA 2A,
allocation of costs is a distribution of costs that
cannot be directly assigned to the cost objects that
are assumed to have caused them. The process
entails choosing a cost object, determining the direct
and indirect costs that should be traced to the cost
Answer (C) is correct. A direct cost is one that can
be specifically associated with a single cost objective
in an economically feasible way. Thus, a production
supervisor's salary can be directly associated with the
department (s)he supervises.
Answer (D) is incorrect because directors' fees
cannot be directly associated with the Marketing
Department. Directors provide benefits to all
departments within a corporation.
[403] Source: CMA 1293 3-2
Answer (A) is correct. Service department costs
should be allocated to the production departments
that use the services. When service departments also
render services to each other, their costs are usually
allocated to each other before allocation to
production departments. A basis reflecting cause and
effect should be used to allocate service department
costs. Because of interactions among service
departments, the best allocation method is the
reciprocal (simultaneous-equations) method. It is
superior to the direct method because the latter
allocates no service costs to other service
departments. It is also superior to the step (or
step-down) method because this method allocates no
service cost back to service departments, the costs of
which have been allocated in a preceding step.
Answer (B) is incorrect because the step method is
less sophisticated than the reciprocal method.
Answer (C) is incorrect because the direct method
allocates service costs directly without consideration
of interactions with other service departments; the
direct method is the least sophisticated method.
Answer (D) is incorrect because accretion method is
a nonsense term.
Answer (A) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
[404] Source: CMA 1295 3-27
Answer (A) is correct. A cost that bears an
observable and known relationship to a quantifiable
activity base is known as an engineered cost.
Engineered costs have a clear relationship to output.
Direct materials would be an example of an
engineered cost.
Answer (B) is incorrect because an indirect cost does
not have a clear relationship to output.
Answer (C) is incorrect because a sunk cost is the
result of a past irrevocable action; it is not important
to future decisions.
Answer (D) is incorrect because a target cost is the
maximum allowable cost of a product and is
calculated before the product is designed or
produced.
Answer (B) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
Answer (C) is incorrect because $19,300 excludes
the predetermined manufacturing overhead.
Answer (D) is correct. The rework charge for direct
materials, indirect materials (supplies), direct labor,
and overhead applied on the basis of direct labor
cost is $40,300 [$5,000 + $300 + $14,000 + (1.5 x
$14,000)]. If an allowance for rework is included in a
company's manufacturing overhead budget, rework
of defective units is spread over all jobs or batches as
part of the predetermined overhead application rate.
Hence, the debit is to overhead control.
[408] Source: CIA 1196 III-93
[405] Source: CIA 0593 IV-6
Answer (A) is incorrect because assigning spoilage
costs to finished goods is an appropriate method of
accounting for normal spoilage traceable to a job or
process.
Answer (B) is incorrect because allocating spoilage
costs between finished goods and work-in-process is
an appropriate method of accounting for normal
spoilage traceable to a job or process, provided the
units in process have passed the inspection point.
Answer (C) is incorrect because charging spoilage
costs to manufacturing overhead is an appropriate
method of accounting for normal spoilage, assuming
the allowance for normal spoilage is incorporated into
the predetermined overhead rate.
Answer (D) is correct. Abnormal spoilage should be
written-off to a special account that is separately
reported in the income statement. Costs associated
with abnormal spoilage are not inventoried and are
therefore treated as a loss in the period of detection.
[406] Source: CIA 1194 III-46
Answer (A) is incorrect because waste is input
material that is either lost in the production process or
has no sales value.
Answer (B) is incorrect because scrap is input
material that has a relatively minor sales value at the
end of the production process.
Answer (C) is correct. Rejected units that are
discarded are classified as spoilage. Spoilage is
separated into abnormal or normal spoilage. Normal
spoilage is an inherent result of the normal production
process. Abnormal spoilage is spoilage that is not
expected to occur under normal, efficient operating
conditions.
Answer (D) is incorrect because rework costs are
incurred to make unacceptable units appropriate for
sale or use.
[407] Source: CIA 1193 IV-6
Answer (A) is incorrect because $1,440 (360 x
$4.00) ignores the manufacturing overhead.
Answer (B) is correct. Normal spoilage equals 1,140
units (4% x 28,500 good units), so abnormal spoilage
equals 360 units (1,500 total spoiled units - 1,140
units of normal spoilage). Given that .25 DLH is
needed to rework a spoiled unit, the loss from
abnormal spoilage is $4,140 {360 units x [(.25 x
$16) direct labor + (.25 x $30) manufacturing
overhead]}.
Answer (C) is incorrect because $3,450 [300 x
($4.00 + $7.50)] uses the wrong amount for
abnormal spoilage.
Answer (D) is incorrect because a loss should be
charged for abnormal spoilage. Total spoilage
exceeded the 4% normal rate.
[409] Source: CIA 1194 III-54
Answer (A) is incorrect because responsibility
centers are determined prior to budgeting, budgets
do not fix blame but rather measure performance,
and goal congruence is promoted but not ensured by
budgets.
Answer (B) is incorrect because responsibility
centers are determined prior to budgeting, budgets
do not fix blame but rather measure performance,
and goal congruence is promoted but not ensured by
budgets.
Answer (C) is correct. A budget is a realistic plan for
the future expressed in quantitative terms. The
process of budgeting forces a company to establish
goals, determine the resources necessary to achieve
those goals, and anticipate future difficulties in their
achievement. A budget is also a control tool because
it establishes standards and facilitates comparison of
actual and budgeted performance. Because a budget
establishes standards and accountability, it motivates
good performance by highlighting the work of
effective managers. Moreover, the nature of the
budgeting process fosters communication of goals to
company subunits and coordination of their efforts.
Budgeting activities by entities within the company
must be coordinated because they are
interdependent. Thus, the sales budget is a necessary
input to the formulation of the production budget. In
turn, production requirements must be known before
purchases and expense budgets can be developed,
and all other budgets must be completed before
preparation of the cash budget.
Answer (C) is incorrect because $7,500 unfavorable
equals the difference between the standard amount
allowed for the budgeted units to be produced and
the amount of direct materials used, multiplied by the
standard price per pound.
Answer (D) is incorrect because responsibility
centers are determined prior to budgeting, budgets
do not fix blame but rather measure performance,
and goal congruence is promoted but not ensured by
budgets.
Answer (D) is incorrect because $8,000 unfavorable
equals the difference between the budgeted finished
units and the actual finished units, multiplied by the
standard cost of a finished unit.
[413] Source: CIA 1195 III-84
[410] Source: CIA 1193 IV-27
Answer (A) is incorrect because a production budget
does not include revenues.
Answer (B) is incorrect because a cash budget does
not include non-cash items.
Answer (C) is incorrect because a capital budget
does not include revenues and costs.
Answer (D) is correct. A flexible budget includes
different cost levels for different levels of activity, for
example, sales. Hence, it is actually a series of
budgets. Thus, a budget based on the behavior of
costs and revenues over a range of sales is a flexible
budget.
Answer (A) is correct. Before redesign, productivity
equaled 4 units per hour (2,000 units ・500 hours).
After redesign, productivity equaled 4.2 units per
hour (2,520 units ・600 hours). Thus, the percentage
change in productivity was 5% [(4.2 - 4.0) ・4.0].
Answer (B) is incorrect because a 10% change
requires output of 2,640 units.
Answer (C) is incorrect because 20% is the
percentage change in labor hours per day.
Answer (D) is incorrect because 26% is the
percentage change in units of output per day.
[414] Source: CIA 0596 III-90
[411] Source: CIA 1196 III-80
Answer (A) is incorrect because $7,500 unfavorable
equals the difference between actual and budgeted
direct materials, multiplied by the standard price per
pound of direct materials.
Answer (B) is incorrect because zero equals the
difference between the budgeted direct materials
purchases at standard cost and the actual cost of the
direct materials.
Answer (C) is correct. The direct materials price
variance measures the difference between what was
actually paid for the goods purchased and the
standard price allowed for the goods purchased.
Thus, it equals the difference between actual price
and standard price, multiplied by the actual quantity
purchased. The direct materials price variance is
$5,000 favorable {[$2.50 - ($120,000 ・50,000
units)] x 50,000 units}.
Answer (D) is incorrect because $5,100 unfavorable
equals the difference between the standard and actual
costs of direct materials per pound, multiplied by the
actual pounds used instead of the actual pounds
purchased.
[412] Source: CIA 1196 III-81
Answer (A) is incorrect because inventory shrinkage
measures the effectiveness of internal control.
Answer (B) is incorrect because inventory turnover
measures the efficiency of asset usage.
Answer (C) is correct. A partial productivity measure
may be stated as the ratio of output to the quantity of
a single factor of production (e.g., materials, labor, or
capital). Partial productivity measures, for example,
the number of finished units per direct labor hour or
per pound of direct materials, are useful when
compared over time among different factories or with
benchmarks. A partial productivity measure
comparing results over time determines whether the
actual relationship between inputs and outputs has
improved or deteriorated.
Answer (D) is incorrect because scrap is neither an
input nor a good output.
[415] Source: CIA 1192 IV-17
Answer (A) is incorrect because Product A does
have the greatest contribution margin ratio (53%), but
when resources are limited, maximum profits are
achieved by maximizing dollar contribution margin per
limited or constraining factor, which in this case is
machine hours.
Answer (A) is correct. The direct materials efficiency
variance measures the difference between the actual
use of inputs and the budgeted quantity of inputs
allowed for the activity level achieved. The direct
materials efficiency variance equals the standard unit
price times the difference between inputs actually
used and standard inputs. The direct materials
efficiency variance is $500 favorable {[(32,000 x
1.60) - 51,000] x $2.50}.
Answer (B) is correct. When resources are limited,
maximum profits are achieved by maximizing dollar
contribution margin per limited or constraining factor.
In this situation, machine hours are the constraining
factor. Product B has a contribution margin per
machine hour of $28 [4 x ($18 - $11)], which is
greater than that of Product A [3 x ($15 - $7) =
$24], Product C [2 x ($20 - $10) = $20], or
Product D [3 x ($25 - $16) = $27].
Answer (B) is incorrect because $3,000 favorable
uses the amount of direct materials purchased instead
of the actual amount used.
Answer (C) is incorrect because Product C does
have the greatest dollar unit contribution margin
($10), but when resources are limited, maximum
profits are achieved by maximizing dollar contribution
margin per limited or constraining factor, which in this
case is machine hours.
Answer (D) is incorrect because Product D does
have the greatest selling price per unit ($25), but
when resources are limited, maximum profits are
achieved by maximizing dollar contribution margin per
limited or constraining factor, which in this case is
machine hours.
[416] Source: CIA 0592 IV-18
Answer (A) is incorrect because $100 F ($48,500 $48,600) is the direct labor price (rate) variance.
Answer (B) is correct. The total flexible budget direct
labor variance equals the difference between cost at
actual hours and actual wages and the cost at
standard hours and standard wages, or $1,900 U
($48,500 - $46,600).
Answer (C) is incorrect because the flexible budget
direct labor variance is unfavorable, not favorable.
Total actual cost exceeds the total flexible budget
amount.
Answer (D) is incorrect because $2,000 U ($48,600
- $46,600) is the direct labor efficiency (usage)
variance.
[417] Source: CIA 1195 III-96
Answer (A) is incorrect because a transfer at full cost
means that the selling division will not make a profit.
In addition, the selling division may be forgoing profits
that could be obtained by selling to outside
customers. Thus, full-cost transfer prices can lead to
suboptimal decisions.
Answer (B) is incorrect because a transfer at full cost
plus markup results in no incentive for the selling
division to control its costs. Hence, a sustained level
of management effort may not be maintained.
Answer (C) is incorrect because a transfer at variable
cost plus markup has the same weaknesses as full
cost plus markup.
Answer (D) is correct. A market price transfer price
promotes goal congruence and a sustained level of
management effort. It is also consistent with divisional
autonomy. A market transfer price is most
appropriate when the market is competitive,
interdivisional dependency is low, and buying in the
market involves no marginal costs or benefits.
[418] Source: CIA 1196 III-94
Answer (A) is correct. The outlay costs represent
cash outflows related to the production and transfer
of goods/services. The opportunity costs are the
maximum contribution forgone by the supplying
division if the goods/services are sold internally. An
opportunity cost will exist if the supplier has no idle
capacity and an external market exists. Thus, this
guideline should promote goal congruence (actions of
the divisional manager benefit the company and the
division), a sustained high level of managerial effort
(exertion toward a goal), and subunit autonomy
(freedom in decision making). The guideline will vary
depending on whether an external market exists and
whether the supplier has idle capacity.
Answer (B) is incorrect because the opportunity cost
of the buying division is irrelevant.
Answer (C) is incorrect because the full cost may not
represent the outlay cost incurred to the point of
transfer, and a markup is an arbitrary percentage.
The result may be suboptimization. For example, the
buyer may purchase at a lower price from an outside
supplier even though the price exceeds the company's
outlay cost.
Answer (D) is incorrect because, if the supplying
division recovers only its variable production costs, it
becomes a cost center for internal transfers. The
supplying division will earn no return on internal sales,
which could lead to suboptimization.
[419] Source: CIA 0595 III-95
Answer (A) is correct. Segment reporting is an
aspect of responsibility accounting. It facilitates
evaluation of company management and of the quality
of the economic investment in particular segments.
Answer (B) is incorrect because interdependence of
segments is not affected by reporting methods.
Answer (C) is incorrect because masking the effects
of intersegment transfers is a disadvantage of segment
reporting.
Answer (D) is incorrect because providing
information to competitors is a disadvantage of
segment reporting.
[420] Source: CIA 1196 III-97
Answer (A) is incorrect because rent is not
controllable at the product-line level.
Answer (B) is incorrect because advertising is not
controllable at the product-line level.
Answer (C) is correct. Commissions, cost of sales,
and salaries are all traceable to each of the product
lines and are therefore controllable. Administrative
expenses are common or corporate-level expenses,
advertising does not promote a specific product line,
and rent is paid on a building shared by all product
lines.
Answer (D) is incorrect because administration,
advertising, and rent are not controllable at the
product-line level.
[422] Source: CIA 1196 III-99
Answer (A) is incorrect because an increase of
$50,000 assumes the revenue will be lost and all of
its costs will be avoided.
Answer (B) is incorrect because a decrease of
$94,000 results from treating rent as an avoidable
cost.
Answer (C) is correct. The operating income will
decrease. Product Line 2 income will be lost, but
only the traceable costs of commissions, cost of
sales, and salaries will be avoided. Accordingly, the
decrease will be $234,000 [-$700,000 + ($14,000
+ 420,000 + 32,000)]. The other shared costs will
have to be absorbed by the two remaining product
lines.
Answer (D) is incorrect because an increase of
$416,000 subtracts the costs that will not be avoided
if Product Line 2 is dropped from the lost sales
revenue.
[423] Source: CIA 1196 III-100
Answer (A) is correct. Product Line 1 needs to
cover its variable out-of-pocket costs as a minimum
on this special-order product; therefore, any selling
price greater than the variable cost will contribute
towards profits. Thus, the minimum selling price of
the special-order product is the variable cost divided
by 1 minus the commission rate, or $15 [$14.70 ・
(1.0 - .02)].
Answer (B) is incorrect because $17.30 includes the
average cost of salaries (at the new volume level of
24,000 units) as a cost that needs to be covered
when determining the minimum selling price.
Answer (C) is incorrect because $27.50 is calculated
based on a full cost approach.
Answer (D) is incorrect because $30.20 adds all
costs and expenses (except cost of sales) and divides
them by the original volume level of 20,000 units to
determine the average operating costs. The new cost
of sales is added to the average operating costs to
determine the minimum selling price.
[424] Source: CIA 1194 III-42
Answer (A) is incorrect because fixed manufacturing
overhead costs are neither direct nor period costs.
Answer (B) is incorrect because fixed manufacturing
overhead costs are not period costs.
Answer (C) is incorrect because fixed manufacturing
overhead costs are not direct costs.
Answer (D) is correct. Using absorption costing,
fixed manufacturing overhead is included in
inventoriable (product) costs. Fixed manufacturing
overhead costs are indirect costs because they
cannot be directly traced to specific units produced.
[425] Source: CIA 0594 III-46
Answer (A) is incorrect because increasing
inventories increases absorption costing profit as a
result of capitalizing fixed factory overhead.
Answer (B) is incorrect because when sales volume
exceeds production, inventories decline. Thus, fixed
factory overhead expensed will be greater under
absorption costing.
Answer (C) is correct. Absorption (full) costing is the
accounting method that considers all manufacturing
costs as product costs. These costs include variable
and fixed manufacturing costs whether direct or
indirect. Variable (direct) costing considers only
variable manufacturing costs to be product costs, i.e.,
inventoriable. Fixed manufacturing costs are
considered period costs and are expensed as
incurred. If production is increased without increasing
sales, inventories will rise. However, all fixed costs
associated with production will be an expense of the
period under variable costing. Thus, this action will
not artificially increase profits and improve the
manager's review.
Answer (D) is incorrect because, under variable
costing, operating profit is a function of sales. Under
absorption costing, it is a function of sales and
production.
[426] Source: CIA 0596 III-86
Answer (A) is incorrect because $57,600 equals
10,000 units times $5.76 per unit (total budgeted
fixed manufacturing overhead ・500,000 units).
Answer (B) is correct. The difference between
variable costing and absorption costing is that the
former treats fixed manufacturing overhead as a
period cost. The latter method treats it as a product
cost. Given that sales exceeded production, both
methods expense all fixed manufacturing overhead
incurred during the year. However, 10,000 units
(510,000 sales - 500,000 production) manufactured
in a prior period were also sold. These units
presumably were recorded at $10 under variable
costing and $16 under absorption costing.
Consequently, absorption costing operating income is
$60,000 (10,000 units x $6) less than that under
variable costing.
Answer (C) is incorrect because $90,000 is the
difference between planned sales (495,000 units) and
actual sales (510,000 units), times the fixed
manufacturing overhead per unit ($6).
Answer (D) is incorrect because $120,000 is the
volume variance under absorption costing.
[427] Source: CIA 0596 III-80
Answer (A) is incorrect because $(120,000)
considers only the production costs of the good units
sold. Moreover, it includes fixed overhead, a cost
that is not affected by the choice of materials.
Answer (B) is incorrect because $120,000 considers
only the variable costs of the good units produced.
Answer (C) is correct. If a different direct material is
used, incremental revenue will be $1,500,000
{[(12% defect rate - 2%) x 300,000 units] x $50}.
Incremental cost will be $750,000 ($2.50 x 300,000
units). Thus, the net benefit will be $750,000
($1,500,000 - $750,000).
Answer (D) is incorrect because $1,425,000
includes only the incremental direct materials cost of
the increase in the number of good units produced.
[428] Source: CIA 0596 III-95
Answer (A) is incorrect because $61,300 is the
savings for 6 months.
Answer (B) is correct. The assumption is that a third
of the costs can be eliminated if the error rate is cut
by a third. Moreover, the study covered only a
6-month period, but annual savings are requested.
Thus, the savings for 6 months equals $61,300 {[(.03
- .02) x 33,000 invoices x $110 per invoice] +
($75,000 ・3) lost contribution margins}, and the
projected annual savings is $122,600 (2 x $61,300).
Answer (C) is incorrect because $222,600 assumes
the full amount of lost contribution margins can be
saved.
Answer (D) is incorrect because $267,800 assumes
the error rate will be reduced to 0%.
Answer (B) is incorrect because cost-benefit analysis
should not be ignored. An accounting system should
be selected on an objective basis.
[429] Source: CIA 1195 III-91
Answer (A) is incorrect because $9.70 omits all of
the fixed costs.
Answer (B) is incorrect because $11.05 bases the
cost per unit on 600,000 units.
Answer (C) is incorrect because $11.50 uses a fixed
cost per unit based on 600,000 units.
Answer (D) is correct. The company expects to incur
variable costs of $3,500,000 ($7 x 500,000 lbs.) and
fixed costs of $1,080,000 ($810,000 + $270,000).
To earn a 20% return on invested capital (20% x
$6,750,000 = $1,350,000), the company must
charge a price of $11.86 [($3,500,000 +
$1,080,000 + $1,350,000) ・500,000].
Answer (C) is incorrect because dictation of a
change by the board of directors implies a system
selection on an other than objective basis.
Answer (D) is correct. Changing to a different and/or
more expensive accounting system requires
cost-benefit analysis. Changes should be undertaken
only if the benefits of the proposed change exceed its
cost.
[433] Source: Publisher
Answer (A) is correct. Users, i.e., managers, must be
both willing and able to use new accounting systems.
Accordingly, they should be encouraged to
participate in the design and implementation of the
new system. If they do not, they may not understand
or want to use the new information.
[430] Source: CIA 1195 III-92
Answer (A) is correct. The minimum selling price
equals the incremental costs of the special order
(variable manufacturing costs, variable packaging
costs, distribution costs, and setup costs) divided by
the units ordered. The fixed costs do not change
because the manufacturer has excess capacity. Total
variable manufacturing costs are $190,000 [$40,000
x ($4.85 - $.45 + $.35)], distribution costs are
$32,000, and setup costs are $60,000. Thus, the
minimum unit price is $7.05 [($190,000 + $32,000 +
$60,000) ・$40,000].
Answer (B) is incorrect because the costs of
gathering and analyzing data are more direct costs of
changing managerial accounting systems and are
usually considered.
Answer (C) is incorrect because training costs for
staff are usually considered.
Answer (D) is incorrect because report preparation is
explicitly considered in systems development.
[434] Source: Publisher
Answer (B) is incorrect because $8.85 adds the
additional distribution costs to the original distribution
costs [$1.80 + .80].
Answer (A) is incorrect because the preparation of
tax returns is a typical controller's responsibility.
Answer (C) is incorrect because $9.05 adds an
amount for the fixed costs to the relevant costs.
Answer (B) is incorrect because external reporting is
a function of the controller.
Answer (D) is incorrect because $9.55 adds an
amount for the target return on investment to the
relevant costs.
Answer (C) is incorrect because the accounting
system helps to safeguard assets.
[431] Source: Publisher
Answer (A) is incorrect because managerial
accounting is future oriented.
Answer (B) is correct. Financial accounting is
primarily concerned with historical accounting, i.e.,
traditional financial statements, and with external
financial reporting to creditors and shareholders.
Managerial accounting applies primarily to the
planning and control of organizational operations,
considers nonquantitative information, and is usually
less precise.
Answer (C) is incorrect because financial accounting
is primarily concerned with quantitative information.
Answer (D) is incorrect because decision analysis
and implementation are characteristics of managerial
accounting.
[432] Source: Publisher
Answer (A) is incorrect because it is economically
irrational to implement a system in which the cost
exceeds the benefits.
Answer (D) is correct. Controllers are usually in
charge of budgets, accounting, accounting reports,
and related controls. Treasurers are most often
involved with control over cash, receivables,
short-term investments, financing, and insurance.
Thus, treasurers rather than controllers are concerned
with investor relations.
[435] Source: Publisher
Answer (A) is correct. Treasurers are usually
concerned with investing cash and near-cash assets,
the provision of capital, investor relations, insurance,
etc. Controllers, on the other hand, are responsible
for the reporting and accounting activities of an
organization, including financial reporting.
Answer (B) is incorrect because short-term financing
lies within the normal range of a treasurer's functions.
Answer (C) is incorrect because the treasurer has
custody of assets.
Answer (D) is incorrect because credit operations
are often within the treasurer's purview.
[436] Source: Publisher
Answer (A) is correct. Management accounting is
used by management for (1) control, (2) assurance of
accountability, (3) planning, (4) evaluation, and (5)
reporting. Management accounting includes the
following processes: (1) measurement, (2)
identification, (3) accumulation, (4) preparation, (5)
interpretation, (6) communication, and (7) analysis.
Marketing is supported by accounting data, but
management does not use management accounting
for marketing, per se. See SMA 1A, Objectives of
Management Accounting.
Answer (B) is incorrect because it is an explicit use of
management accounting by an organization's
management.
Answer (C) is incorrect because it is an explicit use
of management accounting by an organization's
management.
Answer (A) is incorrect because both tactical and
strategic goals should be attainable.
Answer (B) is incorrect because top management is
responsible for both types of goals.
Answer (C) is incorrect because both types of goals
may or may not address profitability.
Answer (D) is correct. Tactical goals are short term
and strategic goals are long range. Tactical goals
concern operational matters such as production,
materials procurement, and routine operating
expenses. Strategic goals may have a duration of 10
years or more. They concern such matters as new
product development, capital budgeting, major
financing, and business combinations.
[440] Source: Publisher
Answer (D) is incorrect because it is an explicit use
of management accounting by an organization's
management.
[437] Source: Publisher
Answer (A) is incorrect because it is superior to the
"ability to bear" criterion for allocating service and
administrative costs. See SMA 4B, Allocation of
Service and Administrative Costs.
Answer (B) is incorrect because it is superior to the
"ability to bear" criterion for allocating service and
administrative costs. See SMA 4B, Allocation of
Service and Administrative Costs.
Answer (C) is incorrect because it is superior to the
"ability to bear" criterion for allocating service and
administrative costs. See SMA 4B, Allocation of
Service and Administrative Costs.
Answer (D) is correct. Ability to bear, measured in
terms of the cost object's profitability, is not an
acceptable method because it has a dysfunctional
effect on management behavior. It penalizes high
performance instead of rewarding profitability.
[438] Source: Publisher
Answer (A) is incorrect because, in the growth stage,
growth is rapid, and net income and cash from
operations are positive. Investment requirements later
slacken, and positive operating cash flows result.
ROI improves.
Answer (B) is incorrect because, in the maturity
stage, revenues slow, net income remains positive,
investment of capital is low, and a high return is
earned on their assets employed.
Answer (C) is incorrect because, in the decline stage,
revenues decline and operations remain profitable,
but cash flows increase because of a reduction in
working capital.
Answer (A) is correct. According to SMA 5D,
Developing Comprehensive Competitor Intelligence,
objectives include early warning of opportunities and
threats, such as new acquisitions, alliances, products,
and services.
Answer (B) is incorrect because SMA 5D concerns
broad-scope competitive intelligence, not business
intelligence issues such as environmental scannings.
Answer (C) is incorrect because SMA 5D concerns
broad-scope competitive intelligence, not business
intelligence issues such as market research.
Answer (D) is incorrect because SMA 5D concerns
broad-scope competitive intelligence, not business
intelligence issues.
[441] Source: Publisher
Answer (A) is incorrect because effective capacity
management maximizes value delivered to customers.
Answer (B) is incorrect because effective capacity
management minimizes required future investment.
Answer (C) is correct. According to SMA 4Y,
Measuring the Cost of Capacity, maximizing the value
created within an organization starts with
understanding the nature and capabilities of all of the
company's resources. Capacity is defined from
several different perspectives. Managing capacity
cost starts when a product or process is first
envisioned. It continues through the subsequent
disposal of resources downstream. Effective capacity
cost management requires supporting effective
matching of a firm's resources with current and future
market opportunities.
Answer (D) is incorrect because effective capacity
management minimizes waste in the short,
intermediate, and long run.
[442] Source: Publisher
Answer (D) is correct. Revenue growth, negligible
profits, negative cash flows, and negative return on
assets are common during an organization's start-up
stage. This is in contrast to the growth stage, maturity
stage, and decline stage. See SMA 4D, Measuring
Entity Performance.
[439] Source: CMA 0697 3-13
Answer (A) is incorrect because estimates are used
in the calculation of direct material costs only if they
are sufficiently accurate.
Answer (B) is correct. Direct material costs consist
of quantities of materials that can be specifically
identified with the cost object in an economically
feasible manner priced at the unit price of direct
material. It includes sales taxes, customs duties, cost
of delivery, and is net of trade discounts, refunds, and
rebates. Cash discounts should be deducted from the
unit cost direct materials only if the rate of discount
exceeds reasonable interest rates, i.e., in effect are
trade discounts or rebates. See SMA 4A, Definition
of Measurement of Direct Material Cost.
[446] Source: Publisher
Answer (A) is incorrect because cost of capital is
used to make capital investment decisions so that
each investment returns more than the cost of capital.
Answer (C) is incorrect because purchasing,
receiving, inspection, and storage costs are not a
direct material cost, per se.
Answer (B) is incorrect because the cost of
maintaining working capital is based on the cost of
capital.
Answer (D) is incorrect because cash discounts
should not be reflected whether the discounts are
taken or not. If they are taken, they should be
recorded as an interest saving, not as a reduction in
the cost of materials.
Answer (C) is correct. The cost of capital is the
minimum, not maximum, rate of return that must be
earned on new investments so as not to dilute
shareholder interest. If new investments have a rate of
return less than the cost of capital, a loss will be
incurred on those investments. Thus, the cost of
[443] Source: Publisher
Answer (A) is incorrect because it is an attribute of
performance indicators.
Answer (B) is incorrect because it is an attribute of
performance indicators.
Answer (C) is incorrect because it is an attribute of
performance indicators.
Answer (D) is correct. A broad-based performance
indicator system must be forward looking, focus on
significant external as well as internal relationships,
and track nonfinancial as well as financial indicators.
Accordingly, they cannot rely on traditional,
historical, internal financial measures. See SMA 4U,
Developing Comprehensive Indicators.
[444] Source: Publisher
Answer (A) is incorrect because it ignores the tax
deductibility of interest payments.
Answer (B) is correct. The cost of debt capital is
simply the debt interest rate times (1 - the firm's tax
rate). Thus, if the tax rate is 40%, the effective cost of
debt capital is 60% times the interest rate because the
interest is tax deductible. See SMA 4A, Cost of
Capital.
Answer (C) is incorrect because it ignores the tax
deductibility of interest payments.
Answer (D) is incorrect because the capital asset
pricing model is one means of determining the cost of
common equity.
capital must be the minimum rate of return. See SMA
4A, Cost of Capital.
Answer (D) is incorrect because the performance of
individual investments, investment managers, and
others can be related to the cost of capital.
[447] Source: Publisher
Answer (A) is correct. Responsibility costs are
designed to motivate managers of a responsibility
center to act in the best interest of the organization.
Therefore, the costs should be allocated only if they
(1) can be influenced by the actions of the center's
management, (2) are helpful in measuring support
given to the responsibility center, (3) improve
comparability, or (4) are used in product pricing.
Whether the costs are from staff, line, or other
services has no bearing on whether they should be
allocated. Furthermore, some organizations
encourage the use of services such as consulting or
internal audit by not charging their costs to
responsibility centers. See SMA 4B, Allocation of
Service and Administrative Cost.
Answer (B) is incorrect because it provides
justification for allocating cost to responsibility
centers.
Answer (C) is incorrect because it provides
justification for allocating cost to responsibility
centers.
Answer (D) is incorrect because it provides
justification for allocating cost to responsibility
centers.
[448] Source: Publisher
[445] Source: CIA 1195 III-67
Answer (A) is incorrect because ROI is certain to
increase only if revenue increases and costs and
investment decrease.
Answer (B) is incorrect because ROI is certain to
increase only if revenue increases and costs and
investment decrease.
Answer (C) is incorrect because ROI is certain to
increase only if revenue increases and costs and
investment decrease.
Answer (D) is correct. An increase in revenue and a
decrease in costs will increase the ROI numerator. A
decrease in investment will decrease the denominator.
The ROI must increase in this situation.
Answer (A) is incorrect because 0.0743 is the simple
average.
Answer (B) is incorrect because 0.0820 is the cost of
common stock.
Answer (C) is incorrect because 0.0660 is the cost
of debt.
Answer (D) is correct. According to SMA 4A, the
cost of capital is defined as the composite cost of
various sources of funds included in a firm's capital
structure. It is the minimum rate of return that must be
earned on new investments that will not dilute the
interests of the shareholder. In this problem,
Company X has three sources of funds: debt,
common stock, and preferred stock. The cost of
debt capital is the after-tax cost of debt to the firm.
Given that the firm is taxed at 40% and interest is a
tax deduction, the cost to the firm is only 0.066 [(1.0
- 0.4) x (.11)]. The cost of preferred stock is the
annual dividend requirement divided by the current
price per share or the proceeds from issuance per
share. Thus, the component cost of preferred stock
for Company X is 0.075 ($2.25 ・30). The cost of
common stock is difficult to determine accurately, but
one of the most common estimations involves using
the capital asset pricing model to determine the cost.
Thus, the cost of common stock equals the risk-free
rate plus the product of beta for Company X and the
market risk premium. The component cost of
common stock for Company X is 0.082 [.04 + (.7 x
.06)]. To determine the weighted-average cost of
capital, each component cost is multiplied by its
respective weight in the company capital structure,
and these values are summed to arrive at 0.0733
[(.066 x .5) + (.082 x .4) + (.075 x .1)].
address these matters.
Answer (B) is incorrect because the code does not
address these matters.
Answer (C) is correct. Financial
managers/management accountants may not dis close
confidential information acquired in the course of their
work unless authorized or legally obligated to do so.
They must inform subordinates about the
confidentiality of information and monitor their
activities to maintain that confidentiality. Moreover,
financial managers/management accountants should
avoid even the appearance of using confidential
information to their unethical or illegal advantage.
Answer (D) is incorrect because other employment
may be accepted unless it constitutes a conflict of
interest.
[452] Source: Publisher
[449] Source: CMA 1296 3-30
Answer (A) is incorrect because $1,200,000
assumes that the by-product is charged with a portion
of the net joint cost.
Answer (B) is incorrect because $1,260,000
assumes that the by-product is charged with a portion
of the gross joint cost.
Answer (C) is correct. The joint cost to be allocated
is $2,400,000 [$2,520,000 total joint cost - ($2 x
60,000 pounds of the by-product)]. Accordingly, the
joint cost to be allocated to the Second Main
Product on a physical-volume basis is $1,500,000
{$2,400,000 x [150,000 pounds ・(90,000 pounds
+ 150,000 pounds)]}.
Answer (D) is incorrect because $1,575,000 does
not deduct by-product NRV from the joint cost.
Answer (A) is incorrect because the competence
standard pertains to the financial
manager/management accountant's responsibility to
maintain his/her professional skills and knowledge. It
also pertains to the performance of activities in a
professional manner.
Answer (B) is incorrect because legality is not
addressed in the IMA Code of Ethics.
Answer (C) is correct. Objectivity is the fourth part
of the IMA Code of Ethics. It requires that
information be communicated "fairly and objectively,"
and that all information that could reasonably
influence users be fully disclosed.
Answer (D) is incorrect because the confidentiality
standard concerns the financial manager/management
accountant's responsibility not to disclose or use the
firm's confidential information.
[450] Source: Publisher
Answer (A) is incorrect because this standard is
violated by a financial manager/management
accountant who fails to act upon discovering unethical
conduct.
Answer (B) is incorrect because this standard is
violated by a financial manager/management
accountant who fails to act upon discovering unethical
conduct.
Answer (C) is incorrect because this standard is
violated by a financial manager/management
accountant who fails to act upon discovering unethical
conduct.
Answer (D) is correct. A financial
manager/management accountant displays his/her
competence and objectivity and maintains integrity by
taking the appropriate action within the organization
to resolve an ethical problem. Failure to act would
condone wrongful acts, breach the duty to convey
unfavorable as well as favorable information,
undermine the organization's legitimate aims, discredit
the profession, and violate the duty of objectivity
owed to users of the subordinate's work product.
[451] Source: Publisher
Answer (A) is incorrect because the code does not
[453] Source: Publisher
Answer (A) is correct. One of the responsibilities of
the financial manager/management accountant under
the integrity standard is to "recognize and
communicate professional limitations or other
constraints that would preclude responsible judgment
or successful performance of an activity."
Answer (B) is incorrect because the objectivity
standard requires the financial manager/management
accountant to "disclose fully all relevant information
that could reasonably be expected to influence an
intended user's understanding of the reports,
comments, and recommendations presented."
Answer (C) is incorrect because the confidentiality
standard requires the financial manager/management
accountant to "refrain from disclosing confidential
information acquired in the course of his/her work
except when authorized, unless legally obligated to do
so."
Answer (D) is incorrect because the integrity
standard requires the financial manager/ management
accountant to "refuse any gift, favor, or hospitality
that would influence or would appear to influence
his/her actions."
[454] Source: Publisher
Answer (A) is incorrect because the integrity
standard requires the financial manager/management
accountant to "communicate unfavorable as well as
favorable information and professional judgments or
opinions."
Answer (B) is correct. One of the responsibilities of
the financial manager/management accountant under
the competence standard is to "maintain an
appropriate level of professional competence by
ongoing development of his/her knowledge and
skills."
Answer (C) is incorrect because one of the
suggestions from the "Resolution of Ethical Conflict"
paragraph is to "clarify relevant ethical issues by
confidential discussion with an objective advisor (e.g.,
IMA Ethics Counseling Service) to obtain a better
understanding of possible courses of action."
Answer (D) is incorrect because the confidentiality
standard requires the financial manager/management
accountant to "inform subordinates as appropriate
regarding the confidentiality of information acquired in
the course of their work and monitor their activities to
assure the maintenance of that confidentiality."
[455] Source: CMA 1
Answer (A) is incorrect because the competence
standard pertains to the financial
manager/management accountant's responsibility to
maintain his/her professional skills and knowledge. It
also pertains to the performance of activities in a
professional manner.
Answer (B) is incorrect because the confidentiality
standard concerns the financial manager/management
accountant's responsibility not to disclose or use the
firm's confidential information.
Answer (C) is correct. One of the responsibilities of
the financial manager/management accountant under
the integrity standard is to "recognize and
communicate professional limitations or other
constraints that would preclude responsible judgment
or successful performance of an activity."
Answer (D) is incorrect because objectivity is the
fourth part of the IMA Code of Ethics. It requires
that information be communicated "fairly and
objectively," and that all information that could
reasonably influence users be fully disclosed.
[456] Source: CMA 2
Answer (A) is incorrect because the competence
standard pertains to the financial
manager/management accountant's responsibility to
maintain his/her professional skills and knowledge. It
also pertains to the performance of activities in a
professional manner.
Answer (B) is incorrect because the confidentiality
standard concerns the financial manager/management
accountant's responsibility not to disclose or use the
firm's confidential information.
Answer (C) is correct. The integrity standard requires
the financial manager/management accountant to
"refuse any gift, favor, or hospitality that would
influence or would appear to influence his/her actions.
Answer (D) is incorrect because objectivity is the
fourth part of the IMA Code of Ethics. It requires
that information be communicated "fairly and
objectively," and that all information that could
reasonably influence users be fully disclosed.
[457] Source: CMA 3
Answer (A) is correct. One of the responsibilities of
the financial manager/management accountant under
the competence standard is to "maintain an
appropriate level of professional competence by
ongoing development of his/her knowledge and
skills." (S)he must also "perform professional duties in
accordance with relevant laws, regulations, and
technical standards." The third requirement under this
standard is to "prepare complete and clear reports
and recommendations after appropriate analyses of
relevant and reliable information."
Answer (B) is incorrect because the confidentiality
standard concerns the financial manager/management
accountant's responsibility not to disclose or use the
firm's confidential information.
Answer (C) is incorrect because the integrity
standard pertains to conflicts of interest, refusal of
gifts, professional limitations, professional
communications, avoidance of acts discreditable to
the profession, and refraining from activities that
prejudice the ability to carry out duties ethically.
Answer (D) is incorrect because objectivity is the
fourth part of the IMA Code of Ethics. It requires
that information be communicated "fairly and
objectively," and that all information that could
reasonably influence users be fully disclosed.