Table of Contents
Chapter 1
Introduction to Cost and Management Accounting in a Global
1-1 to 1-23
Business Environment
Chapter 2
Introduction to Cost Management
2-1 to 2-17
Chapter 3
Organizational Cost Flows
3-1 to 3-47
Chapter 4
Activity-Based Cost Systems for Management
4-1 to 4-25
Chapter 5
Job Order Costing
5-1 to 5-42
Chapter 6
Process Costing
6-1 to 6-30
Chapter 7
Special Production Issues: Lost Units and Accretion
7-1 to 7-41
Chapter 8
Implementing Quality Concepts
8-1 to 8-19
Chapter 9
Cost Allocation for Joint Products and By-Products
9-1 to 9-34
Chapter 10
Standard Costing
10-1 to 10-53
Chapter 11
Absorption/Variable Costing and Cost-Volume Profit Analysis
11-1 to 11-64
Chapter 12
Relevant Costing
12-1 to 12-36
Chapter 13
The Master Budget
13-1 to 13-32
Chapter 14
Capital Budgeting
14-1 to 14-43
Chapter 15
Financial Management
15-1 to 15-20
Chapter 16
Innovative Inventory and Production Management Techniques
16-1 to 16-31
Chapter 17
Emerging Management Practices
17-1 to 17-10
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized
18-1 to 18-38
Organizations
Chapter 19
Measuring and Rewarding Organizational
Performance
19-1 to 19-44
CHAPTER 1
INTRODUCTION TO COST AND MANAGEMENT
ACCOUNTING IN A GLOBAL BUSINESS ENVIRONMENT
MULTIPLE CHOICE
1.
In comparing financial and management accounting, which of the following more
accurately describes management accounting information?
a.
b.
c.
d.
historical, precise, useful
required, estimated, internal
budgeted, informative, adaptable
comparable, verifiable, monetary
ANSWER:
2.
EASY
Management and financial accounting are used for which of the following purposes?
a.
b.
c.
d.
Management accounting
internal
external
internal
external
ANSWER:
3.
c
a
Financial accounting
external
internal
internal
external
EASY
One major difference between financial and management accounting is that
a.
b.
c.
d.
financial accounting reports are prepared primarily for users external to the
company.
management accounting is not under the jurisdiction of the Securities and
Exchange Commission.
government regulations do not apply to management accounting.
all of the above are true.
ANSWER:
d
EASY
1–1
1–2
4.
Chapter 1
Introduction to Cost and Management Accounting In A Global Business Environment
Which of the following statements about management or financial accounting is false?
a.
b.
c.
d.
Financial accounting must follow GAAP.
Management accounting is not subject to regulatory reporting standards.
Both management and financial accounting are subject to mandatory
recordkeeping requirements.
Management accounting should be flexible.
ANSWER:
5.
is more concerned with the future than is financial accounting.
is less concerned with segments of a company than is financial accounting.
is more constrained by rules and regulations than is financial accounting.
all of the above are true.
ANSWER:
a
EASY
Modern management accounting can be characterized by its
a.
b.
c.
d.
flexibility.
standardization.
complexity.
precision.
ANSWER:
7.
EASY
Management accounting
a.
b.
c.
d.
6.
c
a
EASY
To meet decision-making needs, the process of gathering and analyzing information about
a company and its competitive environment is known as
a.
b.
c.
d.
business process reengineering.
process elimination.
business intelligence.
planning.
ANSWER:
c
MEDIUM
Chapter 1
8.
Introduction to Cost and Management Accounting In A Global Business Environment
In a global economy,
a.
b.
c.
d.
the trade of goods and services is focused on trade between or among countries on
the same continent.
the international movement of labor is prohibited except for multilingual persons.
the international flows of capital and information are common.
all of the above happen in a global economy.
ANSWER:
9.
EASY
Racketeer Influenced and Corrupt Organizations Act
Foreign Illegal Activities Act
Foreign Corrupt Practices Act
Federal Bribery and Corrupt Practices Act
ANSWER:
c
EASY
Which of the following is not a valid method for determining product cost?
a.
b.
c.
d.
arbitrary assignment
direct measurement
systematic allocation
cost-benefit measurement
ANSWER:
11.
c
Which of the following U.S. legislation relates to bribes being offered to foreign
officials?
a.
b.
c.
d.
10.
1–3
d
MEDIUM
Broadly speaking, cost accounting can be defined as a(n)
a.
b.
c.
d.
external reporting system that is based on activity-based costs.
system used for providing the government and creditors with information about a
company’s internal operations.
internal reporting system that provides product costing and other information used
by managers in performing their functions.
internal reporting system needed by manufacturers to be in compliance with Cost
Accounting Standards Board pronouncements.
ANSWER:
c
EASY
1–4
12.
Chapter 1
Introduction to Cost and Management Accounting In A Global Business Environment
Cost accounting is directed toward the needs of
a.
b.
c.
d.
regulatory agencies.
external users.
internal users.
stockholders.
ANSWER:
13.
b.
c.
d.
are legal standards set by the Institute of Management Accountants for use in all
manufacturing and professional businesses.
are set by the Cost Accounting Standards Board and are legally binding on all
manufacturers, but not service organizations.
do not exist except for those legal pronouncements for companies bidding or
pricing cost-related contracts with the government.
are developed by the Cost Accounting Standards Board, issued by the Institute of
Management Accountants, and are legally binding on CMAs.
ANSWER:
c
MEDIUM
Cost accounting is necessitated by
a.
b.
c.
d.
the high degree of conversion found in certain businesses.
regulatory requirements for manufacturing companies.
management’s need to be aware of all production activities.
management’s need for information to be used for planning and controlling
activities.
ANSWER:
15.
EASY
Cost accounting standards
a.
14.
c
a
MEDIUM
The process of ___________ causes the need for cost accounting.
a.
b.
c.
d.
conversion
sales
controlling
allocating
ANSWER:
a
EASY
Chapter 1
16.
Introduction to Cost and Management Accounting In A Global Business Environment
Financial accounting
a.
b.
c.
d.
is primarily concerned with internal reporting.
is more concerned with verifiable, historical information than is cost accounting.
focuses on the parts of the organization rather than the whole.
is specifically directed at management decision-making needs.
ANSWER:
17.
EASY
preparing budgets.
determining product cost.
providing managers with information necessary for control purposes.
determining performance standards.
ANSWER:
b
EASY
Which of the following topics is of more concern to management accounting than to cost
accounting?
a.
b.
c.
d.
generally accepted accounting principles
inventory valuation
cost of goods sold valuation
impact of economic conditions on company operations
ANSWER:
19.
b
Financial accounting and cost accounting are both highly concerned with
a.
b.
c.
d.
18.
1–5
d
MEDIUM
Cost and management accounting
a.
b.
c.
d.
require an entirely separate group of accounts than financial accounting uses.
focus solely on determining how much it costs to manufacture a product or
provide a service.
provide product/service cost information as well as information for internal
decision making.
are required for business recordkeeping as are financial and tax accounting.
ANSWER:
c
EASY
1–6
20.
Chapter 1
Introduction to Cost and Management Accounting In A Global Business Environment
The Institute of Management Accountants issues
a.
b.
c.
d.
Statements on Accounting Research for Managers.
Statements on Management Accounting.
Statements on Managerial and Cost Accounting.
Cost Accounting Standards.
ANSWER:
21.
is a legally enforceable contract with all management accountants.
should be viewed as a goal for professional behavior.
is a legally enforceable contract with all CPAs.
provides ways to measure departures from ethical behavior.
ANSWER:
EASY
Internal Revenue Service.
American Institute of CPAs.
Institute of Management Accountants.
Institute of Certified Management Accountants.
ANSWER:
c
EASY
The ethical standards established for management accountants are in the areas of
a.
b.
c.
d.
competence, licensing, reporting, and education.
budgeting, cost allocation, product costing, and insider trading.
competence, confidentiality, integrity, and objectivity.
disclosure, communication, decision making, and planning.
ANSWER:
24.
b
The organization whose primary function is to provide a means to share information
among cost and management accountants in the United States is the
a.
b.
c.
d.
23.
EASY
The Institute of Management Accountants’ Code of Ethics
a.
b.
c.
d.
22.
b
c
MEDIUM
Which of the following statements is true?
a.
b.
c.
d.
Management accounting is a subset of cost accounting.
Cost accounting is a subset of both management and financial accounting.
Management accounting is a subset of both cost and financial accounting.
Financial accounting is a subset of cost accounting.
ANSWER:
b
MEDIUM
Chapter 1
25.
Introduction to Cost and Management Accounting In A Global Business Environment
Which of the following statements is false?
a.
b.
c.
d.
A primary purpose of cost accounting is to determine valuations needed for
external financial statements.
A primary purpose of management accounting is to provide information to
managers for use in planning, controlling, and decision making.
The act of converting production inputs into finished products or services
necessitates cost accounting.
Two primary hallmarks of cost and management accounting are standardization of
procedures and use of generally accepted accounting principles.
ANSWER:
26.
MEDIUM
management style.
strategy.
mission statement.
operational mission.
ANSWER:
b
EASY
Strategy integrates which of the following?
a.
b.
c.
d.
Planning
yes
yes
yes
no
ANSWER:
28.
d
A long-term plan that fulfills the goals and objectives of an organization is known as a(n)
a.
b.
c.
d.
27.
1–7
c
Controlling
yes
no
yes
no
Decision making
no
no
yes
no
EASY
Which of the following is/are not considered by management in determining strategies
for the organization?
a.
b.
c.
d.
core competencies
environmental constraints
organizational structure
accounting basis
ANSWER:
d
EASY
1–8
29.
Chapter 1
Introduction to Cost and Management Accounting In A Global Business Environment
Which of the following is not a generic mission for organizational segments?
a.
b.
c.
d.
build
harvest
hold
save
ANSWER:
30.
save mission.
harvest mission.
build mission.
hold mission.
ANSWER:
c
EASY
Protecting current market share and competitive position is the major concern of the
a.
b.
c.
d.
save mission.
harvest mission.
build mission.
hold mission.
ANSWER:
32.
MEDIUM
Increasing market share, even if short-term earnings and cash flow suffer, is the major
concern of the
a.
b.
c.
d.
31.
d
d
EASY
Maximizing short-term earnings and cash flow, even at the expense of current market
share, is the primary concern of the
a.
b.
c.
d.
save mission.
harvest mission.
build mission.
hold mission.
ANSWER:
b
EASY
Chapter 1
33.
Introduction to Cost and Management Accounting In A Global Business Environment
The organizational units that require the highest level of strategic planning are those with
a ____________ mission.
a.
b.
c.
d.
hold
harvest
product life cycle
build
ANSWER:
34.
EASY
product life cycle.
target costing.
employee empowerment.
intellectual capital.
ANSWER:
a
EASY
To effectively use employee empowerment, an organization’s structure would likely
reflect
a.
b.
c.
d.
strategic resource management.
centralized management.
decentralized management.
contract management.
ANSWER:
36.
d
Segment mission is directly related to
a.
b.
c.
d.
35.
1–9
c
MEDIUM
An organizational structure in which all decision making is held by top managers is
known as ____________ management.
a.
b.
c.
d.
centralized
decentralized
strategic resource
activity-based
ANSWER:
a
EASY
1–10 Chapter 1
37.
Introduction to Cost and Management Accounting In A Global Business Environment
An organizational structure in which decision making is spread throughout different
levels of management is known as __________ management.
a.
b.
c.
d.
centralized
decentralized
strategic resource
activity-based
ANSWER:
38.
internal functions crucial to the success and survival of a company.
attributes that keep a firm from competing.
different for every organization.
considered influences on corporate strategies.
ANSWER:
b
EASY
Which of the following are potential constraints on organizational strategies being
considered by management?
a.
b.
c.
d.
Core
competencies
yes
no
yes
yes
ANSWER:
40.
EASY
Core competencies are not
a.
b.
c.
d.
39.
b
d
Technology
availability
yes
yes
no
yes
Monetary
capital resources
no
yes
yes
yes
EASY
The intangible assets of skill, knowledge, and information are also known as
a.
b.
c.
d.
intellectual capital.
business intelligence.
kaizen knowledge.
management style.
ANSWER:
a
EASY
Chapter 1
41.
Introduction to Cost and Management Accounting In A Global Business Environment 1–11
The norms of a company as they impact internal and external, as well as formal and
informal, transactions reflect
a.
b.
c.
d.
operational plans.
organizational culture.
organizational strategy.
strategic resource management.
ANSWER:
42.
environmental constraints.
operational constraints.
organizational constraints.
budgeting constraints.
ANSWER:
a
EASY
The manner in which managers react and interact with stakeholders in the organization is
a.
b.
c.
d.
strategic resource management.
the organizational value chain.
management style.
responsibility accounting.
ANSWER:
44.
EASY
Limitations on strategy options based on political barriers, legal, fiscal, and regulatory are
a.
b.
c.
d.
43.
b
c
EASY
The key link between managing resources and managing change in an organization is
a.
b.
c.
d.
responsibility accounting.
information.
strategies.
conversion activities.
ANSWER:
b
EASY
1–12 Chapter 1
45.
Introduction to Cost and Management Accounting In A Global Business Environment
Which of the following defines the details that are necessary to maintain and accomplish
the strategies of an organization?
a.
b.
c.
d.
Responsibility accounting
yes
yes
no
no
ANSWER:
46.
MEDIUM
decentralization.
centralization.
strategic resource management.
value chain.
ANSWER:
c
MEDIUM
Strategic resource management does not concerns itself with
a.
b.
c.
d.
the deployment of resources to support strategies.
how resources are to be deployed and redeployed over time.
how resources are used or recovered from changing processes.
how resource disposition will decrease customer and shareholder value.
ANSWER:
48.
Value chain
yes
yes
no
yes
Organizational planning for disposition of resources to create value for customers and
shareholders is known as
a.
b.
c.
d.
47.
c
Operational plans
yes
no
yes
no
d
MEDIUM
The set of processes that convert inputs into services and products that consumers use is
called
a.
b.
c.
d.
a core competency.
an operational plan.
the value chain.
the product life cycle.
ANSWER:
c
EASY
Chapter 1
49.
Introduction to Cost and Management Accounting In A Global Business Environment 1–13
The world has essentially become smaller because of
a.
b.
c.
d.
improved technology.
trade agreements.
better communications systems.
all of the above.
ANSWER:
50.
Introduction of the Internet
Introduction of the first consumer charge card
Introduction of wireless money transfers
Deregulation of the communications industry
ANSWER:
c
MEDIUM
Which of the following would most commonly reflect the highest e-commerce cost to a
large, global business?
a.
b.
c.
d.
Web site development
Internal network shutdowns from e-mail complaints
Losses from sales of pirated goods
Development of appropriate passwords for users
ANSWER:
52.
EASY
Which of the following was the earliest event of importance to the beginning of
e-commerce?
a.
b.
c.
d.
51.
d
a
MEDIUM
Which of the following would most commonly be viewed as the greatest negative for ecommerce customers?
a.
b.
c.
d.
Possibility for purchasing counterfeit goods
Privacy issues
Legal issues of redress
Site “friendliness” issues
ANSWER:
b
EASY
1–14 Chapter 1
53.
Introduction to Cost and Management Accounting In A Global Business Environment
At the start of Web site development, a U.S. company would probably be least concerned
with which of the following?
a.
b.
c.
d.
Site maintenance
Multiple languages
Data encryption
Site search function
ANSWER:
54.
North American Foreign Trade Agreement
New Age Free Trade Amendment
North American Free Trade Agreement
North Atlantic Federated Trade Agreement
ANSWER:
c
EASY
Which of the following statements is true?
a.
b.
c.
d.
Prior to economic integration, consumer choices were often made on the basis of
production location.
The General Agreement on Tariffs and Trade was established to reduce tariffs
among businesses in Europe and North America.
The majority of trade agreements currently in place emphasize the need for
consumers to purchase quality goods.
International trade agreements, while increasing availability of goods to
consumers, have decreased the need for international laws governing transactions.
ANSWER:
56.
EASY
NAFTA refers to which of the following?
a.
b.
c.
d.
55.
b
a
MEDIUM
A U.S. manufacturer of which of the following goods would be likely to face the most
cultural risks in operating globally?
a.
b.
c.
d.
Furniture
Automobiles
Clothing
Food
ANSWER:
d
MEDIUM
Chapter 1
57.
Introduction to Cost and Management Accounting In A Global Business Environment 1–15
A U.S. manufacturer of which of the following goods would be likely to face the fewest
cultural risks in operating globally?
a.
b.
c.
d.
Toys
Food
Clothing
Furniture
ANSWER:
58.
Asset expropriation
Inflation
Workplace diversity
All of the above
ANSWER:
a
EASY
Most American laws are
a.
b.
c.
d.
ethical foundations for living.
codified societal rules that have changed over time.
concerned with regulating public service companies.
designed to restrict foreign business competition.
ANSWER:
60.
MEDIUM
Which of the following would be considered a political risk in doing business globally?
a.
b.
c.
d.
59.
d
b
MEDIUM
The Foreign Corrupt Practices Act is directed at
a.
b.
c.
d.
U.S. businesses operating overseas.
foreign businesses operating in the U.S.
all businesses dealing with U.S. consumers.
U.S. businesses operating in developed nations.
ANSWER:
a
MEDIUM
1–16 Chapter 1
61.
Introduction to Cost and Management Accounting In A Global Business Environment
The behavioral norms in a company’s code of ethics should
a.
b.
c.
d.
be specific to the countries in which the company operates.
vary depending on an employee’s job level and global location.
engender consistent actions in all geographical segments.
require employees to act in accordance with local customs and traditions when in
non-domestic situations.
ANSWER:
62.
b.
c.
d.
Determination of whether there are local business practices that will impact
interactions with other parts of the world.
Determination of whether some business practices need to be adapted to fit local
laws in a specific locale.
Determination of whether there is compliance with all legal requirements on a
local level.
Determination of whether the “tone at the top” is appropriate in all organizational
segments.
ANSWER:
d
MEDIUM
A company may choose to avoid competition by selecting
a.
b.
c.
d.
Differentiation
strategy
no
no
yes
yes
ANSWER:
64.
MEDIUM
Texas Instruments has adopted a three-level approach to ethical integrity on a global
level. Which of the following is not part of that approach?
a.
63.
c
c
Business
intelligence analysis
no
yes
no
yes
Cost
leadership
no
no
yes
yes
MEDIUM
A company establishing a position of cost leadership would
a.
b.
c.
d.
emphasize the value of its product’s distinguishing features.
stress the cost efficiencies in its production processes.
match all competitors’ price changes.
all of the above are possible tactics.
ANSWER:
b
MEDIUM
Chapter 1
65.
Introduction to Cost and Management Accounting In A Global Business Environment 1–17
A company engaging in a confrontation strategy recognizes that
a.
b.
c.
d.
such a strategy is less profitable than attempting to avoid competition.
its products and services will always be priced higher than those of its
competitors.
competitors will be exploiting temporary opportunities for advantage and, thus,
the company must retain the advantage of low price.
the need for competitor analysis is much greater than the need for business
intelligence.
ANSWER:
66.
competitor analysis
competitive intelligence
business intelligence
confrontation analysis
ANSWER:
b
MEDIUM
The business intelligence system should provide management with
a.
b.
c.
d.
organizational strengths and weaknesses.
external markets, technologies, and competitors.
future trends and an environmental scan.
all of the above.
ANSWER:
68.
MEDIUM
In gathering information about the environment in which the organization operates, which
level of intelligence is most likely to provide an early warning of opportunities and
threats?
a.
b.
c.
d.
67.
a
d
MEDIUM
A business intelligence system provides information for management to use in
a.
b.
c.
d.
Decision-making
yes
no
no
yes
ANSWER:
a
EASY
Strategic planning
yes
yes
yes
no
Tactical planning
yes
yes
no
no
1–18 Chapter 1
69.
Introduction to Cost and Management Accounting In A Global Business Environment
The first step in the planning process is for managers to analyze the threats and
opportunities of the customers, competition, and environment in relationship to the
entity’s
a.
b.
c.
d.
strategic objectives.
financial goals.
strengths and weaknesses.
equity stakeholders.
ANSWER:
70.
strategic plans.
tactical plans.
wealth maximization strategies.
organizational cash flows.
ANSWER:
b
MEDIUM
To provide appropriate management incentives, accounting measurements should be tied
to the
a.
b.
c.
d.
generation of annual profits.
organization’s mission.
ability to rapidly develop new products.
business intelligence system.
ANSWER:
72.
MEDIUM
Organizational budgets typically reflect
a.
b.
c.
d.
71.
c
b
EASY
Which of the following statements is true?
a.
b.
c.
d.
All segments of an organization will have the same mission.
An organization’s products will not affect the determination of segment mission.
Product life cycle is affected by segment mission.
Segment mission is affected by product life cycle.
ANSWER:
d
MEDIUM
Chapter 1
73.
Introduction to Cost and Management Accounting In A Global Business Environment 1–19
Which of the following types of performance measurements are most appropriate for each
of the following segment misssions?
a.
b.
c.
d.
Build
Long-term
Long-term
Short-term
Short-term
ANSWER:
74.
strategic resource management
value chain analysis
cost-benefit analysis
activity-based costing
ANSWER:
d
MEDIUM
Strategic resource management is directly concerned with
a.
b.
c.
d.
strategy development.
resource deployment.
resource acquisition.
product life cycle management.
ANSWER:
76.
MEDIUM
Which of the following is generally viewed as improving organizational cost data?
a.
b.
c.
d.
75.
b
Harvest
Long-term
Short-term
Long-term
Short-term
b
MEDIUM
Strategic resource management issues
a.
b.
c.
d.
are primarily measurable by financial accounting data.
have few costs and benefits can that be ascertained.
often relate to nonmonetary benefits.
create current monetary costs and nonmonetary benefits.
ANSWER:
c
MEDIUM
1–20 Chapter 1
77.
Introduction to Cost and Management Accounting In A Global Business Environment
The value chain
a.
b.
c.
d.
reflects the production of goods within an organizational context.
is concerned with upstream suppliers, but not downstream customers.
results when all non-value-added activities are eliminated from a production
process.
is the foundation of strategic resource management.
ANSWER:
78.
d
MEDIUM
The agents of change in a business are the
a.
b.
c.
d.
employees.
members of the organizational value chain.
managers.
organizational stakeholders.
ANSWER:
c
MEDIUM
SHORT ANSWER/PROBLEMS
1.
What four areas are covered by the Standards of Ethical Conduct for Certified
Management Accountants? How are these areas defined?
ANSWER: The four areas covered by the Standards of Ethical Conduct for Certified
Management Accountants are: competence, confidentiality, integrity, and objectivity.
Competence means having the capacity to function in a particular manner.
Confidentiality means having the ability to maintain or keep information undisclosed.
Integrity is defined as adherence to a code of moral values. Objectivity is defined as
expressing or using facts without distortion by personal feelings or prejudices.
MEDIUM
2.
On what needs do (1) management accounting and (2) financial accounting focus?
ANSWER: Management accounting focuses on the needs of users inside an
organization. Managers need information related to planning, controlling, decision
making, and performance evaluation. Their needs are satisfied through the providing of
information designed for their particular uses. Financial accounting focuses on the needs
of users outside the organization, such as stockholders, creditors, and regulatory agencies.
These users require information that is in conformity with generally accepted accounting
principles and, thus, is standardized in the form of general purpose financial statements.
MEDIUM
Chapter 1
3.
Introduction to Cost and Management Accounting In A Global Business Environment 1–21
List and discuss the three missions for organization segments.
ANSWER: The three missions are build, hold, and harvest. The build mission is
concerned with increasing market share, regardless of whether short-term earnings and
cash flow suffer. A segment that operates under this mission will be a major user of
organizational cash. Segments that have low market shares in “high growth industries”
will typically be in a build mode.
The hold mission is concerned with maintaining current market share and market
position. In most instances, cash inflows will equal cash outflows.
The harvest mission is concerned with increasing short-term earnings and cash flow, even
at the expense of current market share. A business segment that follows a harvest
mission will be supplying cash to the organization.
MEDIUM
4.
What is strategic resource management and with what issues is it concerned?
ANSWER: Strategic resource management involves the organizational planning for
the deployment of resources to create value for customers and shareholders. Key
variables in SRM success are the management of information and of change in
responding to threats and opportunities. SRM is concerned with the following issues:
(1) how to deploy resources to support organizational strategies, (2) how resources are
used in or recovered from changing processes, (3) how customer and shareholder value
will serve as guides in the effective use of those resources, and (4) how to deploy and
redeploy resources over time.
MEDIUM
5.
List and discuss three organizational constraints with which management must deal when
making strategic decisions for the firm.
ANSWER: Although there are more than three constraints, the following provide brief
examples of possible constraints faced by management: (1) capital, (2) structure, and
(3) core competencies. Capital or the lack of capital is a major constraint for most
organizations. Organizations must decide where and how the spend the money that they
currently have access to and then decide if they can or want to borrow additional funds.
Structure is a short-term (for many firms) constraint that can be overcome by additions to
the equipment base and/or employee training. Thirdly, core competencies are the internal
functions that management has decided are important to the overall success and survival
of the organization. These competencies represent the potential competitive advantages
of the firm.
MEDIUM
1–22 Chapter 1
6.
Introduction to Cost and Management Accounting In A Global Business Environment
You are going to start a new e-commerce business. Discuss at least three positive factors
and three negative factors of such a business from your (the merchant’s) point of view.
ANSWERS will all differ, but should be based on information in Exhibit 1-5.
MEDIUM
7.
You are going to start a new e-commerce business. Discuss at least three positive factors
and three negative factors of such a business from your customer’s point of view.
ANSWERS will all differ, but should be based on information in Exhibit 1-5.
MEDIUM
8.
Every business, whether domestic or global, must operate under conditions of risk.
Discuss four types of operating risks involved in business and how these risks might
change when a business expands to global operations.
ANSWERS will all differ, but should be based on information in Exhibit 1-6.
MEDIUM
9.
Every business, whether domestic or global, must operate under conditions of risk.
Discuss three types of financial risks involved in business and how these risks might
change when a business expands to global operations.
ANSWERS will all differ, but should be based on information in Exhibit 1-6.
MEDIUM
10.
Every business, whether domestic or global, must operate under conditions of risk.
Discuss three types of information risks involved in business and how these risks might
change when a business expands to global operations.
ANSWERS will all differ, but should be based on information in Exhibit 1-6.
MEDIUM
Chapter 1
11.
Introduction to Cost and Management Accounting In A Global Business Environment 1–23
Most people would agree that a “moral free space” must exist relative to some business
decisions. Discuss the concept of “moral free space.”
ANSWER: Because all business practices cannot be categorized as either ethical or
unethical and because business practices may change over time, there must be a “moral
free space” that allows managers and employees to make decisions within the bounds of
reason. Decisions should be guided by an understanding of basic values and principles of
integrity—preferably shared within and supported by the organization.
MEDIUM
12.
Define value chain and provide a graphic of the interacting flows of information within
the value chain.
ANSWER: The value chain is the set of processes that convert inputs into products
and services for a firm’s customers. It includes both internal and external processes. It
encompasses both upstream and downstream entities. A depiction of the value chain and
its information flows is shown in Exhibit 1-12.
MEDIUM
CHAPTER 2
INTRODUCTION TO COST MANAGEMENT SYSTEMS
MULTIPLE CHOICE
1.
A management information system should do which of the following?
a.
b.
c.
d.
Collect data
yes
yes
no
yes
ANSWER:
2.
EASY
external demands for information.
external and internal demands for information.
internal demands for information.
the Accounting Department’s demands for information.
ANSWER:
c
EASY
Who of the following are external users of data gathered by a management information
system?
a.
b.
c.
d.
Creditors
yes
no
no
yes
ANSWER:
4.
Analyze data for management
yes
no
yes
yes
A management information system should emphasize satisfying
a.
b.
c.
d.
3.
b
Organize data for managers
no
yes
no
yes
d
Regulatory Bodies
no
no
yes
yes
Suppliers
yes
no
yes
yes
EASY
Which of the following is not a primary component of a control system?
a.
b.
c.
d.
operator
communications network
effector
assessor
ANSWER:
a
EASY
2–1
2–2
5.
Chapter 2
Which of the following would be considered a detector?
a.
b.
c.
d.
computer program
source document
variance report
all of the above
ANSWER:
6.
d
EASY
Feedback is reflected in which component of a management control system?
a.
b.
c.
d.
sensor
assessor
effector
detector
ANSWER:
c
EASY
Reactions to information provided by the management control system are
a.
b.
c.
d.
formulated in the organization’s strategic plan.
judgmental, and are based on interpretations and circumstances.
assessed by the communications network of the MCS.
determined as those activities that will be most efficient and effective given the
organization’s available technology.
ANSWER:
9.
EASY
A management control system may be referred to as a black box.
A management control system should serve as a guide to organizations.
A management control system should help implement strategies.
A management control system is separate from a cost management system.
ANSWER:
8.
b
Which of the following statements is false concerning a management control system?
a.
b.
c.
d.
7.
Introduction to Cost Management Systems
b
EASY
A cost management system should
a.
b.
c.
d.
identify and evaluate new activities.
determine whether the organization is effective and efficient.
identify the cost of consumed resources within the organization.
all of the above.
ANSWER:
d
EASY
Chapter 2
10.
Introduction to Cost Management Systems
A cost management system should provide information to
a.
b.
c.
d.
all functional areas of the organization.
only the accounting area of the organization.
only the production area of the organization.
organizational managers, but not to staff personnel.
ANSWER:
11.
use cost drivers to develop product costs
improve understanding of activities
develop organizational strategies
measure performance
ANSWER:
c
EASY
A cost management system will provide the means to develop
a.
b.
c.
d.
the most accurate product or service costs.
a reasonably accurate product or service cost given cost-benefit analysis.
a product or service cost that does not include any non-value-added overhead.
a costing system that traces all costs directly to individual products or services.
ANSWER:
13.
EASY
Which of the following is not a primary goal of a cost management system?
a.
b.
c.
d.
12.
a
b
EASY
The costs generated by the cost management system are used to
a.
b.
c.
d.
assess product/service profitability.
establish prices for products with significant competition.
determine underlying reasons for variations from standards.
all of the above.
ANSWER:
a
EASY
2–3
2–4
Chapter 2
14.
Information about the life-cycle performance of a product or service should be provided
in the
a.
b.
c.
d.
Financial accounting system
yes
yes
no
no
ANSWER:
15.
EASY
Financial accounting
system
no
yes
no
yes
ANSWER:
c
Cost accounting
system
no
yes
yes
yes
Cost management
system
yes
no
yes
no
EASY
A cost management system would be an integral part of implementing which of the
following?
a.
b.
c.
d.
Strategic resource
management
no
no
yes
yes
ANSWER:
17.
Cost management system
yes
no
yes
no
Cost control is an important function of the
a.
b.
c.
d.
16.
c
Introduction to Cost Management Systems
d
Core competency
assessment
yes
no
no
yes
Centralized
management
yes
no
yes
no
EASY
Which of the following organizational characteristics critically affect the design of a cost
management system?
a.
b.
c.
d.
Culture
yes
yes
no
no
ANSWER:
a
Critical success factors
yes
no
yes
yes
EASY
Mission
yes
yes
no
yes
Form
yes
no
yes
no
Chapter 2
18.
Introduction to Cost Management Systems
A cost management system
a.
b.
c.
d.
is finalized when the information currently being produced is the same as the
information currently desired.
can be generically designed to fit the information needs of the majority of
domestic (but not global) organizations.
must be continuously improved to adapt to changes in an organization’s internal
and external environment.
that has been appropriately designed from gap analysis, does not need to be
changed unless there is a change in organizational management or culture.
ANSWER:
19.
c
MEDIUM
In a highly regulated, monopolistic industry, such as the electrical utility or TV cable, a
cost management system is
a.
b.
c.
d.
of limited need because costs are typically passed along to customers via the rate
structure.
essential because of the need to provide the highest degree of cost efficiency
possible for customers.
critical to the needs of empowered employees making decisions at various levels
of the organizational hierarchy.
of no use because there is no attempt by management to control costs.
ANSWER:
20.
2–5
a
EASY
Which of the following statements is true?
a.
b.
c.
d.
A good cost management system is a key consideration in determining an
organization’s mission.
The organization’s mission is a critical success factor in assessing how to react to
competition.
Knowledge of an organization’s critical success factors help to clarify
organizational mission and develop a cost management system.
An organization must establish a position of cost leadership to compete in a global
business environment.
ANSWER:
c
EASY
2–6
21.
Chapter 2
Which of the following indicates the mission being pursued by a subunit that is
a.
b.
c.
d.
using cash?
save
build
harvest
build
ANSWER:
22.
c.
d.
MEDIUM
is only possible if a company has formed strategic alliances with its suppliers.
generally increases long-run product costs because of the need to develop new
production processes.
results in the ability of a firm to pursue a cost leadership competitive strategy.
may result in design flaws, a need for engineering change orders, and customer
“bad will.”
ANSWER:
d
EASY
An increase in the use of technology has caused
a.
b.
c.
d.
fewer costs to be susceptible to short-run control.
companies to be more flexible in responding to changing short-term conditions.
managers to be less concerned about capacity utilization because of the increased
ability to produce in large quantities.
a decline in the amount of fixed costs in an organization.
ANSWER:
24.
d
generating cash?
harvest
save
build
harvest
Reducing the time-to-market for a new product
a.
b.
23.
Introduction to Cost Management Systems
a
MEDIUM
Engaging in product design for manufacturability reduces
a.
b.
c.
d.
Training costs
yes
no
yes
no
ANSWER:
c
Preproduction design time
yes
yes
no
no
EASY
Assembly time
yes
yes
yes
no
Chapter 2
25.
Introduction to Cost Management Systems
Substantial reductions in product cost can be obtained by
a.
b.
c.
d.
decreasing capacity utilization.
using focused factory arrangements.
using tried and true manufacturing techniques.
using product life cycle accounting.
ANSWER:
26.
b.
c.
d.
EASY
the information being received by competitors’ managers to the information being
received by in-house managers.
the information needed to what is available.
current cost information to projected cost information.
budget figures to actual spending.
ANSWER:
b
EASY
Which of the following limits an organization’s ability to minimize the “gaps” found
when a gap analysis has been performed?
a.
b.
c.
d.
Limited resources
yes
yes
no
no
ANSWER:
28.
b
In conjunction with a cost management system, gap analysis refers to comparing
a.
27.
2–7
b
Number of managers
yes
no
yes
no
Technology capabilities
yes
yes
no
yes
EASY
Which of the following is considered a “feeder” system to the cost management system?
a.
b.
c.
d.
Payroll
yes
yes
no
yes
ANSWER:
Budgeting
no
yes
no
yes
b
EASY
Inventory valuation
yes
yes
no
no
2–8
29.
Chapter 2
Which of the following is a primary element of a cost management system?
a.
b.
c.
d.
Information
yes
no
yes
yes
ANSWER:
30.
Motivation
yes
yes
no
yes
Evaluation
yes
no
yes
no
EASY
Cost behavior
analysis
yes
no
yes
yes
ANSWER:
d
VA/NVA activity
identification
yes
yes
no
yes
Assignment of joint
costs to joint products
yes
yes
no
no
EASY
___________ refers to avoiding competition in making a product distinct from that of
competitors by adding value or features for which consumers are willing to pay more.
a.
b.
c.
d.
Kaizen
Differentiation
Confrontation
Cost leadership
ANSWER:
32.
d
Reporting
yes
yes
no
yes
As part of its control function, a cost management system is useful for
a.
b.
c.
d.
31.
Introduction to Cost Management Systems
b
EASY
Distinguishing a product by adding additional features or value is part of which of the
following competitive strategies?
a.
b.
c.
d.
Differentiation
yes
yes
yes
no
ANSWER:
a
Cost leadership
no
yes
no
yes
EASY
Confrontation
yes
yes
no
yes
Chapter 2
33.
Introduction to Cost Management Systems
A cost leadership strategy emphasizes
a.
b.
c.
d.
product features.
low prices.
just-in-time production capabilities.
short-run opportunities for cost minimization.
ANSWER:
34.
EASY
differentiation
cost leadership
confrontation
price fixing
ANSWER:
c
EASY
A commonly recognized critical success factor for most organizations is
a.
b.
c.
d.
Quality
yes
yes
no
no
ANSWER:
36.
b
Which of the following competitive strategies is least profitable?
a.
b.
c.
d.
35.
2–9
b
Decentralization
yes
no
yes
no
Short cycle time
yes
yes
no
yes
Responsiveness to change
no
yes
yes
no
EASY
In a decentralized organization,
a.
b.
c.
d.
all functions are delegated to subunit managers who are closest to the information.
subunits under the control of a single manager are normally grouped by
organizational structure.
it would be difficult to group geographically related subunits pursuing different
missions under the same manager.
functions such as financing and product/service pricing are typically retained by
top management.
ANSWER:
c
EASY
2–10
37.
Chapter 2
Organizational form directly affects which of the following?
a.
b.
c.
d.
Decision-making authority
no
yes
no
yes
ANSWER:
38.
Taxation
yes
yes
no
no
Mission
yes
no
yes
no
EASY
about the same importance as
less importance than
more importance than
a level of importance that depends on organizational size as compared to
ANSWER:
c
EASY
The performance measurement system should encourage each manager to act in a manner
that
a.
b.
c.
d.
makes the manager’s units profits as high as possible.
most positively supports the organization’s mission and competitive strategies.
increases his/her performance reward in the form of profit sharing.
reduces the need for informational elements in support of the manager’s planning
function.
ANSWER:
40.
b
Cost of capital
yes
yes
yes
yes
As an organization moves to decentralize its operations, an effective reporting system will
have ______________ when the organization was centralized.
a.
b.
c.
d.
39.
Introduction to Cost Management Systems
b
EASY
Performance reports are useful only to the extent that performance is measured against
a.
b.
c.
d.
a meaningful benchmark.
the performance of all other units or managers.
the budget as adopted for the period.
competitors’ achievements.
ANSWER:
a
EASY
Chapter 2
41.
Introduction to Cost Management Systems
The accounting function in an organization is expected to support managers in which of
the following functions?
a.
b.
c.
d.
Planning
yes
no
no
yes
ANSWER:
42.
Evaluating performance
no
no
yes
yes
EASY
kaizen costing.
reverse engineering.
computer simulation.
all of the above.
ANSWER:
c
EASY
The reward system for subunit managers of mature businesses should emphasize
a.
b.
c.
d.
long-term competitive prospects.
near-term profit and cash flow.
success in product design and development.
exceeding last year’s subunit profit.
ANSWER:
44.
c
Controlling
yes
yes
no
yes
Relating resource consumption and cost to alternative product and process designs can be
achieved through
a.
b.
c.
d.
43.
2–11
b
EASY
Profit sharing is a method of employee compensation that
a.
b.
c.
d.
allocates an equal amount of profit reward to each manager in the organization.
allows organizational profits to be divided among employees in a non-taxable
status.
is contingent based on the level of subunit profit generated.
is used in many foreign companies but is virtually nonexistent in most U.S.
organizations.
ANSWER:
c
EASY
2–12
45.
Chapter 2
Most managers evaluate decision alternatives based on how
a.
b.
c.
d.
much the decision will increase or decrease organizational profits.
the outcomes may affect selected performance measurement and reward criteria.
much the outcome will reduce the organization’s cost of capital.
easily the decision impacts can be quantified in the organization’s cost
management system.
ANSWER:
46.
MEDIUM
motivational
informational
reporting
all of the above
ANSWER:
a
EASY
Focus on cost control and assessing core competencies are part of which cost
management element?
a.
b.
c.
d.
motivational
informational
reporting
all of the above
ANSWER:
48.
b
Performance measurements and a reward system are part of which cost management
element?
a.
b.
c.
d.
47.
Introduction to Cost Management Systems
b
EASY
Which of the following should be able to provide the financial information needed for
budget preparation?
a.
b.
c.
d.
Cost management
system
no
no
yes
yes
ANSWER:
d
EASY
Financial accounting
system
yes
yes
no
yes
Cost accounting
system
yes
no
yes
yes
Chapter 2
49.
Introduction to Cost Management Systems
In the future competitive environment, companies will emphasize
a.
b.
c.
d.
achievement of financial results.
development of strategic alliances.
development of annual plans.
conformity to project expectations.
ANSWER:
50.
b.
c.
d.
EASY
causing companies to recognize that it may be more advantageous to confront,
rather than compete with, the competition.
making products in the maturity stage of their life cycle the basis on which firms
expect growth to be generated.
so companies spend less and less on product design and development because
products will not last as long as previously.
meaning that tools such as benchmarking and target costing become less
important in adapting to the competitive environment.
ANSWER:
a
MEDIUM
A responsibility accounting system provides information to top management about the
a.
b.
c.
d.
organizational responsibilities of each subunit manager.
performance of each organizational subunit and its manager.
ability of each subunit manager to ensure a satisfactory cost to revenue
relationship.
all of the above.
ANSWER:
52.
b
The life cycles of many products are becoming shorter
a.
51.
2–13
b
EASY
Which of the following should be considered in a cost management system design?
a.
b.
c.
d.
Cost
principles
yes
no
no
yes
ANSWER:
d
Personnel
training principles
yes
yes
no
no
EASY
Investment
management principles
yes
yes
no
yes
2–14
Chapter 2
Introduction to Cost Management Systems
SHORT ANSWER/PROBLEMS
1.
Discuss the four primary components of a control system.
ANSWER: The four components include the following: a detector which is a
measuring device that identifies what is happening in the controlled process; an assessor
that helps determine the significance of what is happening; an effector that changes the
behavior if indicated by the assessor; and a communications network that transmits
information between the detector and assessor and between the assessor and the effector.
MEDIUM
2.
Define a cost management system and indicate how it should help managers.
ANSWER: A cost management system is a set of formal methods developed for
planning and controlling an organization’s cost activities relative to the goals and
objectives of the organization. A cost management system should determine how
effective and efficient the organization’s activities are and identify the cost of resources
consumed in performing these activities. The system should also identify and evaluate
any new activities that may improve future performance of the organization while being
aware of the changing environment in which the business operates.
MEDIUM
3.
Discuss from where an organization receives information and what happens to
information within an organization.
ANSWER: An organization receives information from its external operating
environment that includes the following: competition, suppliers, creditors, and the
government. This information is then circulated throughout the organization in both a
vertical and horizontal direction. The information gathered by the organization is used for
planning, decision making, evaluating performance, and controlling within the
organization.
MEDIUM
Chapter 2
4.
Introduction to Cost Management Systems
2–15
Discuss the characteristics of an organization for which a true cost management system
would be appropriate.
ANSWER: The organization for which a true CMS would be appropriate would have
specified strategic goals to which its operating position is linked. Its technology, human
behavior, and information systems would be integrated as would its managerial and
operating systems. The organization would engage in intergroup coordination and
coordinated management through employee empowerment. A focus would be on cost
elimination rather than cost allocation—thus implying an activity-based management
approach. Performance evaluation would rely on both financial and nonfinancial
measurements. Finally, the company would utilize changing technologies and embrace
customer values and customer satisfaction as part of organizational culture. This
organization would be confronting high-quality worldwide competition.
MEDIUM
5.
What are the six primary goals of a cost management system? Illustrate how a CMS
achieves each of these goals.
ANSWER: The six goals of a cost management system are (1) to develop fairly
accurate product costs by using cost drivers, (2) to assess product and/or service life-cycle
performance, (3) to improve understanding of activities and processes, (4) to control
costs, (5) to measure performance, and (6) to pursue organizational strategies. The
illustrations given by the students should support details provided from pages 45–48 in
the text.
MEDIUM
6.
List and discuss the four stages in the design of a cost management system.
ANSWER: The four stages in designing a cost management system are (1) analyze,
(2) determine, (3) perform, and (4) assess. In the first stage, organizational structure,
culture, and form must be analyzed, as well as the mission and critical success factors of
the organization. The second stage involves determining what outputs are desired while
considering motivational, informational, and reporting elements of the organization. The
third stage involves performing gap analysis between desired output and current output.
The fourth stage is to assess the improvements generated by reducing the gap.
MEDIUM
2–16
7.
Chapter 2
Introduction to Cost Management Systems
Define confrontation strategy and indicate why many companies may believe it is the only
way to face competitors.
ANSWER: Confrontation strategy means that a company, while attempting to
differentiate its products or becoming a low-cost producer, meets the competition headon—knowing that any competitive advantage will last only a short time. Confrontation
may become the way of the future because of decreased product life cycles (companies
are better at reverse engineering and continuous improvement than in the past).
MEDIUM
8.
Name five items that would be considered critical success factors by most world-class
companies. Why is each of these factors so important to organizational longevity?
ANSWER: The five items most commonly named are timeliness (time-to-market),
quality, customer service, efficiency/cost control, and responsiveness to change. Each
student will have different ideas as to why these items are important, but the answer
should address the global business environment and thus, the increase in competition,
reduction in product life cycles, costs to obtain versus retain customers, litigation issues,
and so forth.
MEDIUM
9.
What are five ways that an organization could reduce product costs? Provide an example
of how each method would cause cost reduction.
ANSWER: The answer could include any of the following: (1) developing new
production processes, (2) capture learning curve and experience data, (3) increase
capacity, (4) use a focused factory arrangement, (5) design products for
manufacturability, (6) design products for logistical support, (7) design products for
reliability, (8) design products for maintainability, and (9) use advanced technology in
manufacturing products. Examples will differ by student.
MEDIUM
Chapter 2
10.
Introduction to Cost Management Systems
2–17
Discuss the three elements of a cost management system.
ANSWER: Motivational elements include performance measurements and the reward
structure of the organization. Support of the organizational mission and competitive
strategy are also considered motivational elements. Informational elements include
support of the budgeting process as well as support of cost reduction initiatives. Core
competencies assessment and make-or-outsource decision analyses are part of
informational elements. Emphasis is placed on product life cycle, and distinctions must
be made between value-added and non-value-added activities in the informational
elements of a cost management system. Lastly, reporting elements include the preparation
of financial statements and provision of details for responsibility accounting systems.
MEDIUM
CHAPTER 3
ORGANIZATIONAL COST FLOWS
MULTIPLE CHOICE
1.
The term “relevant range” as used in cost accounting means the range over which
a.
b.
c.
d.
costs may fluctuate.
cost relationships are valid.
production may vary.
relevant costs are incurred.
ANSWER:
2.
Total cost reaction
to increase in activity
remains constant
remains constant
increases
increases
ANSWER:
d
Cost per unit reaction
to increase in activity
remains constant
increases
increases
remains constant
EASY
When cost relationships are linear, total variable prime costs will vary in proportion to
changes in
a.
b.
c.
d.
direct labor hours.
total material cost.
total overhead cost.
production volume.
ANSWER:
4.
EASY
Which of the following defines variable cost behavior?
a.
b.
c.
d.
3.
b
d
EASY
Which of the following would not generally be considered a fixed overhead cost?
a.
b.
c.
d.
Straight-line
depreciation
no
yes
yes
no
ANSWER:
c
Factory
insurance
no
no
yes
yes
Units-of-production
depreciation
no
yes
no
no
EASY
3–1
3–2
5.
Chapter 3
An example of a fixed cost is
a.
b.
c.
d.
total indirect material cost.
total hourly wages.
cost of electricity.
straight-line depreciation.
ANSWER:
6.
EASY
expired cost.
fixed cost.
variable cost.
mixed cost.
ANSWER:
b
EASY
A(n) ________ cost increases or decreases in intervals as activity changes.
a.
b.
c.
d.
historical cost
fixed cost
step cost
budgeted cost
ANSWER:
8.
d
A cost that remains constant in total but varies on a per-unit basis with changes in activity
is called a(n)
a.
b.
c.
d.
7.
Organizational Cost Flows
c
EASY
When the number of units manufactured increases, the most significant change in unit
cost will be reflected as a(n)
a.
b.
c.
d.
increase in the fixed element.
decrease in the variable element.
increase in the mixed element.
decrease in the fixed element.
ANSWER:
d
EASY
Chapter 3
9.
Organizational Cost Flows
Which of the following always has a direct cause-effect relationship to a cost?
a.
b.
c.
d.
Predictor
yes
yes
no
no
ANSWER:
10.
MEDIUM
causes fixed costs to rise because of production changes.
has a direct cause-effect relationship to a cost.
can predict the cost behavior of a variable, but not a fixed, cost.
is an overhead cost that causes distribution costs to change in distinct increments
with changes in production volume.
ANSWER:
b
EASY
Product costs are deducted from revenue
a.
b.
c.
d.
as expenditures are made.
when production is completed.
as goods are sold.
to minimize taxable income.
ANSWER:
12.
c
Cost driver
yes
no
yes
no
A cost driver
a.
b.
c.
d.
11.
3–3
c
EASY
A selling cost is a(n)
a.
b.
c.
d.
product cost
yes
yes
no
no
ANSWER:
c
period cost
yes
no
yes
yes
EASY
inventoriable cost
no
no
no
yes
3–4
13.
Chapter 3
Which of the following is not a product cost component?
a.
b.
c.
d.
rent on a factory building
indirect production labor wages
janitorial supplies used in a factory
commission on the sale of a product
ANSWER:
14.
EASY
are generally expensed in the same period in which they are incurred.
are always variable costs.
remain unchanged over a given period of time.
are associated with the periodic inventory method.
ANSWER:
a
EASY
Period costs include
a.
b.
c.
d.
distribution costs
yes
no
no
yes
ANSWER:
16.
d
Period costs
a.
b.
c.
d.
15.
Organizational Cost Flows
a
outside processing costs
no
yes
no
yes
sales commissions
yes
yes
no
yes
EASY
The three primary inventory accounts in a manufacturing company are
a.
b.
c.
d.
Merchandise Inventory, Supplies Inventory, and Finished Goods Inventory.
Merchandise Inventory, Work in Process Inventory, and Finished Goods
Inventory.
Supplies Inventory, Work in Process Inventory, and Finished Goods Inventory.
Raw Material Inventory, Work in Process Inventory, and Finished Goods
Inventory.
ANSWER:
d
EASY
Chapter 3
17.
Organizational Cost Flows
Cost of Goods Sold is an
a.
b.
c.
d.
unexpired product cost.
expired product cost.
unexpired period cost.
expired period cost.
ANSWER:
18.
period costs.
prime costs.
overhead costs.
conversion costs.
ANSWER:
EASY
direct labor.
direct material.
factory depreciation.
supervisors’ salaries.
ANSWER:
b
EASY
Conversion of inputs to outputs is recorded in the
a.
b.
c.
d.
Work in Process Inventory account.
Finished Goods Inventory account.
Raw Material Inventory account.
both a and b.
ANSWER:
21.
c
Conversion cost does not include
a.
b.
c.
d.
20.
EASY
The indirect costs of converting raw material into finished goods are called
a.
b.
c.
d.
19.
b
a
EASY
The distinction between direct and indirect costs depends on whether a cost
a.
b.
c.
d.
is controllable or non-controllable.
is variable or fixed.
can be conveniently and physically traced to a cost object under consideration.
will increase with changes in levels of activity.
ANSWER:
c
MEDIUM
3–5
3–6
22.
Chapter 3
GSWS is a construction company that builds houses on special request. What is the
proper classification of the carpenters’ wages?
a.
b.
c.
d.
Product
yes
yes
no
no
ANSWER:
23.
Direct
no
no
yes
yes
ANSWER:
Direct
no
yes
no
yes
EASY
Fixed
no
yes
yes
no
d
EASY
Which of the following costs would be considered overhead in the production of
chocolate chip cookies?
a.
b.
c.
d.
flour
chocolate chips
sugar
oven electricity
ANSWER:
25.
b
Period
yes
no
no
yes
GSWS is a construction company that builds houses on special request. What is the
proper classification of the cost of the cement building slab used?
a.
b.
c.
d.
24.
Organizational Cost Flows
d
EASY
All costs related to the manufacturing function in a company are
a.
b.
c.
d.
prime costs.
direct costs.
product costs.
conversion costs.
ANSWER:
c
EASY
Chapter 3
26.
Organizational Cost Flows
Prime cost consists of
a.
b.
c.
d.
direct material
no
yes
yes
no
ANSWER:
27.
prime cost
no
yes
yes
yes
ANSWER:
overhead
no
no
yes
yes
EASY
d
product cost
yes
no
yes
yes
direct cost
yes
yes
no
yes
fixed cost
yes
no
yes
no
EASY
GSWS is a construction company that builds houses on special request. What is the
proper classification of indirect material used?
a.
b.
c.
d.
Prime
no
no
yes
yes
ANSWER:
29.
b
direct labor
yes
yes
no
yes
Plastic used to manufacture dolls is a
a.
b.
c.
d.
28.
3–7
Conversion
no
yes
yes
no
b
Variable
no
yes
yes
no
EASY
The term “prime cost” refers to
a.
b.
c.
d.
all manufacturing costs incurred to produce units of output.
all manufacturing costs other than direct labor and raw material costs.
raw material purchased and direct labor costs.
the raw material used and direct labor costs.
ANSWER:
d
EASY
3–8
30.
Chapter 3
In a perpetual inventory system, the sale of items for cash consists of two entries. One
entry is a debit to Cash and a credit to Sales. The other entry is a debit to
a.
b.
c.
d.
Work in Process Inventory and a credit to Finished Goods Inventory.
Finished Goods Inventory and a credit to Cost of Goods Sold.
Cost of Goods Sold and a credit to Finished Goods Inventory.
Finished Goods Inventory and a credit to Work in Process Inventory.
ANSWER:
31.
b.
c.
d.
EASY
beginning Work in Process Inventory plus purchases of raw material minus
ending Work in Process Inventory.
beginning Work in Process Inventory plus direct labor plus direct material used
plus overhead incurred minus ending Work in Process Inventory.
direct material used plus direct labor plus overhead incurred.
direct material used plus direct labor plus overhead incurred plus beginning Work
in Process Inventory.
ANSWER:
b
EASY
The final figure in the Schedule of Cost of Goods Manufactured represents the
a.
b.
c.
d.
cost of goods sold for the period.
total cost of manufacturing for the period.
total cost of goods started and completed this period.
total cost of goods completed for the period.
ANSWER:
33.
c
The formula to compute cost of goods manufactured is
a.
32.
Organizational Cost Flows
d
EASY
The formula for cost of goods sold for a manufacturer is
a.
b.
c.
d.
beginning Finished Goods Inventory plus Cost of Goods Manufactured minus
ending Finished Goods Inventory.
beginning Work in Process Inventory plus Cost of Goods Manufactured minus
ending Work in Process Inventory.
direct material plus direct labor plus applied overhead.
direct material plus direct labor plus overhead incurred plus beginning Work in
Process Inventory.
ANSWER:
a
EASY
Chapter 3
34.
Organizational Cost Flows
Which of the following replaces the retailing component “Purchases” in computing Cost
of Goods Sold for a manufacturing company?
a.
b.
c.
d.
direct material used
cost of goods manufactured
total prime cost
cost of goods available for sale
ANSWER:
35.
b
EASY
Which of the following would need to be allocated to a cost object?
a.
b.
c.
d.
direct material
direct labor
direct production costs
indirect production costs
ANSWER:
36.
3–9
d
EASY
Sonja Svenson earns $8 per hour and is paid time-and-a-half for work in excess of 40
hours per week. During a given week, she works 45 hours. How much of her week’s
wages should be charged to overhead?
a.
b.
c.
d.
$0
$20
$40
$60
ANSWER:
b
EASY
Use the following information for questions 37–40.
The following information has been taken from the cost records of T Co. for the past year:
Raw material used in production
Total manufacturing costs charged to
production during the year (includes
direct material, direct labor, and
overhead equal to 60% of direct labor cost)
Cost of goods available for sale
Selling and Administrative expenses
Inventories
Raw Material
Work in Process
Finished Goods
Beginning
$75
80
90
Ending
$ 85
30
110
$326
686
826
25
3–10
37.
Chapter 3
The cost of raw material purchased during the year was
a.
b.
c.
d.
$316.
$336.
$360.
$411.
ANSWER:
38.
$135.
$216.
$225.
$360.
ANSWER:
c
EASY
Cost of Goods Manufactured was
a.
b.
c.
d.
$636.
$716.
$736.
$766.
ANSWER:
40.
MEDIUM
Direct labor cost charged to production during the year was
a.
b.
c.
d.
39.
b
c
MEDIUM
Cost of Goods Sold was
a.
b.
c.
d.
$691.
$716.
$736.
$801.
ANSWER:
b
MEDIUM
Organizational Cost Flows
Chapter 3
Organizational Cost Flows
3–11
Use the following information for questions 41–44.
BCW Co. manufactures wood file cabinets. The following information is available for June
2001:
Raw Material Inventory
Work in Process Inventory
Finished Goods Inventory
41.
$58,500
$46,500
$43,500
$43,100
ANSWER:
c
MEDIUM
Direct labor is paid $9.60 per hour and overhead for the month was $9,600. What are
prime costs and conversion costs, respectively if there were 1,500 direct labor hours and
$21,000 of raw material was purchased?
a.
b.
c.
d.
$29,100 and $33,900
$33,900 and $24,000
$33,900 and $29,100
$24,000 and $33,900
ANSWER:
43.
Ending
$ 7,500
11,700
16,300
Direct labor is $9.60 per hour and overhead for the month was $9,600. Compute total
manufacturing costs for June, if there were 1,500 direct labor hours and $21,000 of raw
material was purchased.
a.
b.
c.
d.
42.
Beginning
$ 6,000
17,300
21,000
b
MEDIUM
Direct labor is paid $9.60 per hour and overhead for the month was $9,600. Cost of
Goods Manufactured, if there were 1,500 direct labor hours and $21,000 of raw material
was purchased is
a.
b.
c.
d.
$49,100.
$45,000.
$51,000.
$49,500.
ANSWER:
a
MEDIUM
3–12
44.
Chapter 3
Direct labor is paid $9.60 per hour and overhead for the month was $9,600. Cost of
Goods Sold, if there were 1,500 direct labor hours and $21,000 of raw material was
purchased is
a.
b.
c.
d.
$64,500.
$59,800.
$38,800.
$53,800.
ANSWER:
45.
MEDIUM
$26,400.
$34,100.
$37,300.
$29,600.
ANSWER:
a
EASY
If raw material used was $80,000 and Raw Material Inventory at the beginning and end of
the period, respectively, was $17,000 and $21,000, what was raw material purchases?
a.
b.
c.
d.
$76,000
$118,000
$84,000
$101,000
ANSWER:
47.
d
The beginning balance of Raw Material Inventory was $4,500; raw material purchases of
$29,600 were made during the month. At month end, $7,700 of raw material was on
hand. Raw material used during the month was
a.
b.
c.
d.
46.
Organizational Cost Flows
c
EASY
What is the beginning balance of Finished Goods Inventory if Cost of Goods Sold is
$107,000; the ending balance of Finished Goods Inventory is $20,000; and Cost of Goods
Manufactured is $50,000 less than Cost of Goods Sold?
a.
b.
c.
d.
$70,000
$77,000
$157,000
$127,000
ANSWER:
a
EASY
Chapter 3
Organizational Cost Flows
3–13
Use the following information pertaining to Arp Co.’s manufacturing operations for questions
48–50.
Inventories:
Raw material
Work in process
Finished goods
March 1
$18,000
9,000
27,000
Additional information for March:
Raw material purchased
Direct labor payroll
Direct labor rate per hour
Overhead rate per direct labor hour
48.
For March, prime cost incurred was
a.
b.
c.
d.
$75,000.
$69,000.
$45,000.
$39,000.
ANSWER:
49.
EASY
For March, conversion cost incurred was
a.
b.
c.
d.
$30,000.
$40,000.
$70,000.
$72,000.
ANSWER:
50.
a
c
EASY
For March, Cost of Goods Manufactured was
a.
b.
c.
d.
$118,000.
$115,000.
$112,000.
$109,000.
ANSWER:
a
EASY
March 31
$15,000
6,000
36,000
$42,000
30,000
7.50
10.00
3–14
51.
Chapter 3
Since overhead costs are indirect costs,
a.
b.
c.
d.
they require some process of allocation.
they can be easily traced to production.
a predetermined overhead rate is not advantageous.
they cannot be allocated.
ANSWER:
52.
direct
yes
yes
no
no
ANSWER:
EASY
indirect
yes
no
no
yes
d
EASY
An actual cost system differs from a normal cost system in that an actual cost system
a.
b.
c.
d.
assigns overhead as it occurs during the manufacturing cycle.
assigns overhead at the end of the manufacturing process.
does not assign overhead at all.
does not use an Overhead Control account.
ANSWER:
54.
a
Cost allocation is the assignment of ______ costs to one or more products using a
reasonable basis.
a.
b.
c.
d.
53.
Organizational Cost Flows
b
EASY
In a normal cost system, which of the following is used?
a.
b.
c.
d.
Actual direct materials
yes
yes
yes
no
ANSWER:
c
EASY
Actual direct labor
no
yes
yes
yes
Actual overhead
yes
yes
no
no
Chapter 3
55.
Organizational Cost Flows
Predetermined overhead rates are computed based on
a.
b.
c.
d.
estimated overhead costs
yes
yes
no
no
ANSWER:
56.
EASY
because of seasonal variability of overhead costs.
to help budget overhead costs.
to minimize the overhead cost assigned to products.
to maximize the overhead cost assigned to products.
ANSWER:
a
EASY
Which of the following is not a reason to use predetermined overhead rates?
a.
b.
c.
d.
to overcome the problems of assigning overhead to diverse types of products
to compensate for fluctuations in monthly overhead costs
to provide a means for assigning overhead during the period rather than at the end
of the period
to smooth out the amount of overhead cost assigned to products when monthly
production activity differs
ANSWER:
58.
a
estimated level of activity
yes
no
yes
no
One reason annual overhead application rates are used is
a.
b.
c.
d.
57.
3–15
a
MEDIUM
When a manufacturing company has a highly automated manufacturing plant producing
many different products, which of the following is the more appropriate basis of applying
manufacturing overhead costs to work in process?
a.
b.
c.
d.
direct labor hours
direct labor dollars
machine hours
cost of materials used
ANSWER:
c
EASY
3–16
59.
Chapter 3
A mixed cost has which of the following components?
a.
b.
c.
d.
Variable component
yes
yes
no
no
ANSWER:
60.
fixed costs.
total cost.
variable costs.
mixed costs.
ANSWER:
b
EASY
In the formula y = a + bX, a represents
a.
b.
c.
d.
mixed cost.
variable cost.
total cost.
fixed cost.
ANSWER:
62.
EASY
In the formula y = a + bX, y represents
a.
b.
c.
d.
61.
b
Fixed component
no
yes
no
yes
d
EASY
In relationship to changes in activity, variable overhead changes
a.
b.
c.
d.
in total
no
no
yes
yes
ANSWER:
per unit
no
yes
yes
no
d
EASY
Organizational Cost Flows
Chapter 3
63.
Organizational Cost Flows
In relationship to changes in activity, fixed overhead changes
a.
b.
c.
d.
in total
yes
no
no
yes
ANSWER:
64.
EASY
c
EASY
Weaknesses of the high-low method include all of the following except
a.
b.
c.
d.
only two observations are used to develop the cost function.
the high and low activity levels may not be representative.
the method does not detect if the cost behavior is nonlinear.
the mathematical calculations are relatively complex.
ANSWER:
d
EASY
If there is no “a” value in a linear cost equation, this is an indication that the cost is
a.
b.
c.
d.
fixed.
mixed.
variable.
either fixed or mixed.
ANSWER:
67.
c
variable cost per unit and total fixed costs increase.
fixed cost per unit and total variable cost increase.
total cost will increase and fixed cost per unit will decrease.
variable cost per unit and total cost increase.
ANSWER:
66.
per unit
yes
no
yes
no
If the level of activity increases,
a.
b.
c.
d.
65.
3–17
c
EASY
An outlier is
a.
b.
c.
d.
something that happens outside the organization that does not affect production.
always used in analyzing a mixed cost.
something that happens inside the organization that does not affect production.
never used in analyzing a mixed cost.
ANSWER:
d
EASY
3–18
68.
Chapter 3
Applied overhead consists of which of the following?
a.
b.
c.
d.
actual activity times predetermined overhead rate
estimated activity times predetermined overhead rate
actual activity times actual overhead rate
estimated activity times actual overhead rate
ANSWER:
69.
EASY
actual overhead.
applied overhead.
both would receive an equal number of debits.
impossible to determine without additional information.
ANSWER:
a
EASY
If underapplied overhead is considered to be immaterial, it is closed to which of the
following accounts?
a.
b.
c.
d.
Work in Process
yes
no
yes
no
ANSWER:
71.
a
If a company used two overhead accounts (actual overhead and applied overhead), the
one that would receive the most debits would be
a.
b.
c.
d.
70.
Organizational Cost Flows
d
Finished Goods
yes
yes
no
no
Cost of Goods Sold
yes
yes
no
yes
EASY
All other things being equal, if actual cost per unit is greater than budgeted cost per unit,
variable overhead will be
a.
b.
c.
d.
overapplied.
the same as fixed overhead.
underapplied.
applied to Finished Goods.
ANSWER:
c
EASY
Chapter 3
72.
Organizational Cost Flows
Overapplied overhead will result if
a.
b.
c.
d.
the plant is operated at less than expected capacity.
overhead costs incurred were greater than estimated overhead costs.
overhead costs incurred were less than overhead costs charged to production.
overhead costs incurred were greater than overhead charged to production.
ANSWER:
73.
Overhead is
underapplied
overapplied
overapplied
underapplied
ANSWER:
EASY
a
Cost of Goods Sold will
increase
decrease
increase
decrease
EASY
If actual overhead is less than applied overhead, which of the following will be true?
Upon closing,
a.
b.
c.
d.
Overhead is
underapplied
underapplied
overapplied
overapplied
ANSWER:
75.
c
Actual overhead exceeds applied overhead and the amount is immaterial. Which of the
following will be true? Upon closing,
a.
b.
c.
d.
74.
3–19
d
Cost of Goods Sold is
credited
debited
debited
credited
EASY
An item or event that has a cause-effect relationship with the incurrence of a variable cost
is called a
a.
b.
c.
d.
mixed cost.
predictor.
direct cost.
cost driver.
ANSWER:
d
EASY
3–20
76.
Chapter 3
Organizational Cost Flows
Caty Weymann owns a tailor shop and has gathered information on utility costs for the
past year. She has decided that utilities are a function of the hours worked during the
month. The following information is available and representative of her utility costs:
Low point
High point
Hours worked
1,300
1,680
Utility cost incurred
$ 903
1,074
If 1,425 hours are worked in a month, total utility cost (rounded to the nearest dollar)
using the high-low method should be
a.
b.
c.
d.
$947.
$954.
$959.
$976.
ANSWER:
77.
c
MEDIUM
Nevada Company uses a predetermined overhead application rate of $.30 per direct labor
hour. During the year it incurred $345,000 dollars of actual overhead, but it planned to
incur $360,000 of overhead. The company applied $363,000 of overhead during the year.
How many direct labor hours did the company plan to incur?
a.
b.
c.
d.
1,150,000
1,190,000
1,200,000
1,210,000
ANSWER:
c
EASY
Chapter 3
78.
Organizational Cost Flows
3–21
Smith Machinery had the following experience regarding power costs:
Month
Jan.
Feb.
Mar.
Apr.
Machine hours
300
600
400
200
Power cost
$680
720
695
640
Assume that management expects 500 machine hours in May. Using the high-low
method, calculate May’s power cost using machine hours as the basis for prediction.
a.
b.
c.
d.
$700
$705
$710
$1,320
ANSWER:
79.
a
EASY
Ashley Co. has developed the following flexible budget formula for monthly overhead:
For output of less than 200,000 units:
For output of 200,000 units or more:
$36,600 + $.80(units)
$43,000 + $.80(units)
How much overhead should Ashley expect if the firm plans to produce 200,000 units?
a.
b.
c.
d.
$52,600
$59,000
$196,600
$203,000
ANSWER:
80.
d
EASY
Sams Co. wants to develop a single predetermined overhead rate. The company’s
expected annual fixed overhead is $340,000 and its variable overhead cost per machine
hour is $2. The company’s relevant range is from 200,000 to 600,000 machine hours.
Sams expects to operate at 425,000 machine hours for the coming year. The plant’s
theoretical capacity is 850,000. The predetermined overhead rate per machine hour
should be
a.
b.
c.
d.
$2.40.
$2.57.
$2.80.
$2.85.
ANSWER:
c
EASY
3–22
Chapter 3
Organizational Cost Flows
The following information relates to Ciulla Co. and should be used for questions 81–82.
Month
Jan.
Feb.
Mar.
Apr.
May
81.
Cost
$750
775
550
650
570
Using the high-low method, what is the variable cost element?
a.
b.
c.
d.
$1.02
$.98
$1.31
$1.19
ANSWER:
82.
Usage
600
650
420
500
450
b
EASY
Using the high-low method, what is the fixed cost element (to the nearest whole dollar)?
a.
b.
c.
d.
$225
$138
$411
$364
ANSWER:
b
EASY
Use the following information for questions 83–86.
The records of XYZ Co. revealed the following data for 2001:
Work in Process
Finished Goods
Cost of Goods Sold
Direct Labor
Direct Material
$ 73,150
115,000
133,650
111,600
84,200
Chapter 3
83.
Organizational Cost Flows
Assume, for this question only, actual overhead is $98,700 and applied overhead is
$93,250. Manufacturing Overhead is
a.
b.
c.
d.
overapplied by $12,900.
underapplied by $18,350.
overapplied by $5,450.
underapplied by $5,450.
ANSWER:
84.
b.
c.
d.
EASY
Debit Work in Process $8,456; Finished Goods $13,294; Cost of Goods Sold
$15,450 and credit Overhead $37,200
Debit Overhead $37,200 and credit Work in Process $8,456; Finished Goods
$13,294; Cost of Goods Sold $15,450
Debit Work in Process $37,200 and credit Overhead $37,200
Debit Cost of Goods Sold $37,200 and credit Overhead $37,200
ANSWER:
a
MEDIUM
Assume that XYZ has underapplied overhead of $10,000 for 2001 and that this amount is
immaterial. What is the balance in Cost of Goods Sold after the underapplied overhead
is closed?
a.
b.
c.
d.
$133,650
$123,650
$143,650
$137,803
ANSWER:
86.
d
Assume that XYZ has underapplied overhead of $37,200 for 2001 and that this amount is
material. What journal entry is needed to close the Overhead account? (Round decimals
to nearest whole percent.)
a.
85.
3–23
c
EASY
Assume that XYZ has overapplied overhead of $25,000 for 2001 and that this amount is
material. What is the balance in Cost of Goods Sold after the overapplied overhead is
closed?
a.
b.
c.
d.
$123,267
$144,033
$158,650
$108,650
ANSWER:
a
MEDIUM
3–24
87.
Chapter 3
Organizational Cost Flows
Smart Company is relocating its facilities. The company estimates that it will take three
trucks to move office contents. If the per truck rental charge is $1,000 plus 25 cents per
mile, what is the expected cost to move 800 miles?
a.
b.
c.
d.
$1,000
$1,200
$2,400
$3,600
ANSWER:
d
EASY
Use the following information for questions 88 and 89.
Danny’s Crushing Service provided the following information:
Monthly handling cost
$19,000
$23,700
$30,000
88.
Using the high-low method, how much of Danny’s handling cost is made up of fixed
costs?
a.
b.
c.
d.
$9,000
$8,000
$7,250
$11,000
ANSWER:
89.
Miles traveled
20,000
28,000
40,000
b
EASY
Using the high-low method, what would Danny expect handling costs to be in a month in
which 32,000 miles are traveled?
a.
b.
c.
d.
$25,600
$25,800
$26,050
$17,600
ANSWER:
a
EASY
Chapter 3
90.
Organizational Cost Flows
3–25
(Appendix) The following information pertains to data that have been gathered in the
process of estimating a simple least squares regression:
Mean value of the dependent variable
Mean value of the independent variable
Coefficient of the independent variable
Number of observations
30
10
3
12
What is the “a” value for the least squares regression model?
a.
b.
c.
d.
20
6
0
The intercept term cannot be computed from the information given.
ANSWER:
91.
MEDIUM
(Appendix) In the equation y = $4,000 + $3X; y is the cost of workers’ compensation
insurance and X is direct labor hours. According to this equation, a 100-hour change in
total direct labor hours will change the cost of workers compensation insurance by
a.
b.
c.
d.
$4,000.
$300.
$4,300.
none of the above amounts.
ANSWER:
92.
c
b
MEDIUM
(Appendix) In the equation y = $4,000 + $3X; y is the cost of workers’ compensation
insurance and X is direct labor hours. Assume that the model is based on a least squares
regression estimate. If the mean value of direct labor hours was 2,000 in the observations
that were used to estimate the model’s parameters, what was the mean level of the cost of
workers’ compensation insurance?
a.
b.
c.
d.
$4,000
$2,000
$8,000
none of the above
ANSWER:
d
MEDIUM
3–26
93.
Chapter 3
Organizational Cost Flows
In a high-low model, which months’ observations would be used to compute the model’s
parameters?
a.
b.
c.
d.
2 and 5
1 and 6
2 and 6
4 and 5
Outboard Motor Co. is exploring different prediction models that can be used to forecast
indirect labor costs. One independent variable under consideration is machine hours.
Following are matching observations on indirect labor costs and machine hours for the
past six months:
Month
1
2
3
4
5
6
ANSWER:
Machine hours
300
400
240
370
200
225
a
EASY
Indirect labor costs
$20,000
$24,000
$17,000
$22,000
$13,000
$14,000
Chapter 3
Organizational Cost Flows
3–27
SHORT ANSWER/PROBLEMS
1.
What is the difference between a product cost and a period cost? Give three examples of
each. What is the difference between a direct cost and indirect cost? Give two examples
of each.
ANSWER: A product cost is one that is associated with making or acquiring
inventory. A period cost is any cost other than those associated with making or acquiring
products and is not considered inventory. Students will have a variety of examples, but
direct material, direct labor, and overhead are product costs. Selling and administrative
expenses are considered period costs. A direct cost is one that is physically and
conveniently traceable to a cost object. Direct material and direct labor are direct costs.
An indirect cost is one that cannot be conveniently traced to a cost object. Any type of
overhead cost is considered indirect.
MEDIUM
2.
Define relevant range and explain its significance.
ANSWER: The relevant range is that range of activity over which a variable cost
remains constant on a per-unit basis and a fixed cost remains constant in total. Managers
can review the various ranges of activity and the related effects on variable cost (per-unit)
and fixed cost (in total) to determine how a change in the range will affect costs and, thus,
the firm’s profitability.
MEDIUM
3.
Define a variable cost and a fixed cost. What causes changes in these costs? Give two
examples of each.
ANSWER: A variable cost is one that remains constant on a per-unit basis but varies
in total with changes in activity. Examples of variable costs include direct material,
direct labor, and (possibly) utilities. A fixed cost is one that remains constant in total but
varies on a per-unit basis with changes in activity. Examples of fixed costs include
straight-line depreciation, insurance, and the supervisor’s salary.
MEDIUM
3–28
4.
Chapter 3
Organizational Cost Flows
Given the following information, prepare the necessary journal entries, assuming that the
Raw Material Inventory account contains both direct and indirect material.
a.
b.
c.
d.
e.
f.
Purchased raw material on account $28,500.
Put material into production: $15,000 of direct material and $3,000 of indirect
material.
Accrued payroll of $90,000, of which 70 percent was direct and the remainder
was indirect.
Incurred and paid other overhead items of $36,000.
Transferred items costing $86,500 to finished goods.
Sold goods costing $71,300 on account for $124,700.
ANSWER:
a.
b.
c.
d.
e.
f.
MEDIUM
RM Inventory
A/P
WIP Inventory
Manufacturing OH
RM Inventory
WIP Inventory
Manufacturing OH
Salaries/Wages Payable
Manufacturing OH
Cash
FG Inventory
WIP Inventory
A/R
Sales
CGS
FG Inventory
28,500
28,500
15,000
3,000
18,000
63,000
27,000
90,000
36,000
36,000
86,500
86,500
124,700
124,700
71,300
71,300
Chapter 3
5.
Organizational Cost Flows
3–29
Prepare a Schedule of Cost of Goods Manufactured (in good form) for the Bulls
Company from the following information for June 2001:
Inventories
Raw Material
Work in Process
Finished Goods
Beginning
$ 6,700
17,700
29,730
Ending
$ 8,900
22,650
19,990
Additional information: purchases of raw material were $46,700; 19,700 direct labor
hours were worked at $11.30 per hour; overhead costs were $33,300.
ANSWER:
Bulls Company
Schedule of Cost of Goods Manufactured
For the Month Ended June 30, 2001
Work in Process (June 1)
Raw Mat. (June 1)
Purchases
Raw Mat. Available
Raw Mat. (June 30)
Raw Mat. Used
Direct Labor (19,700 × $11.30)
Manufacturing Overhead
Total Manufacturing Costs
Total Goods in Process
Work in Process (June 30)
Cost of Goods Manufactured
MEDIUM
$ 17,700
$ 6,700
46,700
53,400
(8,900 )
$ 44,500
222,610
33,300
300,410
$318,110
(22,650 )
$295,460
3–30
6.
Chapter 3
Organizational Cost Flows
In June 2001, the Bulls Company has Cost of Goods Manufactured of $296,000;
beginning Finished Goods Inventory of $29,730; and ending Finished Goods Inventory of
$19,990. Prepare an income statement in good form. (Ignore taxes.) The following
additional information is available:
Selling Expenses
Administrative Expenses
Sales
$ 40,500
19,700
475,600
ANSWER:
Bulls Company
Income Statement
For the Month Ended June 30, 2001
Sales
Cost of Goods Sold:
Finished Goods (June 1)
Cost of Goods Mf’d
Total Goods Available
Finished Goods (June 30)
Cost of Goods Sold
Gross Margin
Operating Expenses:
Selling
Administrative
Total Operating Expenses
Income from operations
MEDIUM
$475,600
$ 29,730
296,000
$325,730
(19,990 )
(305,740 )
$169,860
$40,500
19,700
(60,200 )
$109,660
Chapter 3
7.
Organizational Cost Flows
3–31
The following information is for the Forte Company for November.
Inventories
Raw Material
Work in Process
Finished Goods
Beginning
$17,400
31,150
19,200
Direct Labor
(21,000 DLH @ $13)
Raw Material Purchases
$120,000
Indirect Labor
11,200
Factory Supplies Used
350
Other Expenses:
Depr.—Factory Equipment
17,300
Ending
$13,200
28,975
25,500
Insurance—Office
Office Supplies Expense
Insurance—Factory
Depr. Office Equipment
Repair/Maintenance—Factory
2,570
900
1,770
3,500
7,400
Calculate total manufacturing costs, cost of goods manufactured, and cost of goods sold.
ANSWER:
Manufacturing Costs:
Raw Material (Nov. 1)
Purchases
Raw Material Available
Raw Material (Nov. 30)
Raw Material Used
Direct Labor (21,000 × $13)
Overhead:
Depr.—Factory Equipment
Repairs/Maintenance—Factory
Indirect Labor
Insurance—Factory
Factory Supplies Used
Total Overhead
Total Manufacturing Costs
MEDIUM
$ 17,400
120,000
$137,400
(13,200 )
$124,200
273,000
$17,300
7,400
11,200
1,770
350
38,020
$435,220
Cost of Goods Manufactured:
Total Manufacturing Costs
Work in Process (Nov. 1)
Work in Process (Nov. 30)
Cost of Goods Manufactured
$435,220
31,150
(28,975 )
$437,395
Cost of Goods Sold:
Finished Goods (Nov. 1)
Cost of Goods Manufactured
Total Goods Available
Finished Goods (Nov. 30)
Cost of Goods Sold
$ 19,200
437,395
$456,595
(25,500 )
$431,095
3–32
8.
Chapter 3
Organizational Cost Flows
From the following information for the Harris Company, compute prime costs and
conversion costs.
Inventories
Raw Material
Work in Process
Finished Goods
Beginning
$ 9,900
44,500
36,580
Ending
$ 7,600
37,800
61,300
Raw material purchased during the period cost $40,800; overhead incurred and paid or
accrued for the period was $21,750; and 23,600 direct labor hours were incurred at a rate
of $13.75 per hour.
ANSWER:
Prime Costs:
Raw Material (Beginning)
Purchases
Raw Material Available
Raw Material (Ending)
Raw Material Used
Direct Labor
Prime Costs
$ 9,900
40,800
$50,700
(7,600 )
(23,600 × $13.75 )
Conversion Costs:
Direct Labor (Above)
Overhead
Conversion Costs
$ 43,100
324,500
$367,600
$324,500
21,750
$346,250
MEDIUM
9.
What are three reasons that overhead must be allocated to products?
ANSWER: Overhead must be allocated because it is necessary to (1) determine fill
cost, (2) it can motivate managers, and (3) it allows managers to compare alternative
courses of action.
MEDIUM
Chapter 3
10.
Organizational Cost Flows
3–33
Why should predetermined overhead rates be used?
ANSWER: Predetermined overhead rates should be used for three reasons: (1) to
assign overhead to Work in Process during the production cycle instead of at the end of
the period; (2) to compensate for fluctuations in actual overhead costs that have no
bearing on activity levels; and (3) to overcome problems of fluctuations in activity levels
that have no impact on actual fixed overhead costs.
MEDIUM
11.
Discuss underapplied and overapplied overhead and its disposition at the end of the
period.
ANSWER: During the course of the production cycle, actual overhead costs are
incurred. When overhead is applied to Work in Process, it is commonly applied using a
predetermined rate. Overhead application at a predetermined rate may cause overhead to
be under- or overapplied. If actual overhead is greater than applied overhead, then
underapplied overhead results and a debit balance exists in the overhead account. If
applied overhead is greater than actual overhead, then overapplied overhead results and a
credit balance exists in the overhead account. If the amount of under- or overapplied
overhead is immaterial, it is closed directly to Cost of Goods Sold. If the amount is
material, it must be allocated among Work in Process, Finished Goods, and Cost of
Goods Sold.
MEDIUM
12.
Discuss the high-low method.
ANSWER: The high-low method is a technique for analyzing mixed costs. The highlow method analyzes changes at two levels of activity (the high end and the low end)
within the relevant range. The changes in cost and activity are calculated for these two
levels of activity. Dividing the change in cost by the change in activity determines the
variable cost element portion of the mixed cost. Once this is determined, the fixed
portion is computed by subtracting the variable element times either the high or low level
of activity from respectively, total cost at either the high or low level of activity.
MEDIUM
3–34
13.
Chapter 3
Organizational Cost Flows
The Warren Co. has the following data for 2001:
Direct Labor
Direct Material
Actual Overhead
Applied Overhead
Raw Material
Work in Process
Finished Goods
Cost of Goods Sold
$220,000
137,800
320,000
395,000
51,394
101,926
111,192
250,182
What is the amount of under- or overapplied overhead? Prepare the necessary journal
entry to dispose of under- or overapplied overhead.
ANSWER:
Applied Overhead
Actual Overhead
$395,000
320,000
$ 75,000 overapplied
WIP $101,926/$463,300=.22 × $75,000 = $16,500
FG $111,192/$463,300=.24 × $75,000 = $18,000
CGS $250,182/$463,300=.54 × $75,000 = $40,500
Manufacturing Overhead
Work in Process
Finished Goods
Cost of Goods Sold
MEDIUM
$75,000
$16,500
18,000
40,500
Chapter 3
14.
Organizational Cost Flows
3–35
The Ames Corp. has the following data relating to its power usage for the first six months
of the current year.
Month
Jan.
Feb.
Mar.
Apr.
May
June
Usage
500
550
475
425
450
725
(Kw)Cost
$450
455
395
310
380
484
Assume usage is within the relevant range of activity. Using the high-low method,
compute the cost formula. Ames Corp. estimates its power usage for July at 660 watts;
compute the total power cost for July.
ANSWER:
High
Low
Usage
725
425
300
Cost
$484
310
$174
$174/300 = $.58 × 425 = $246.50 Total variable cost
$310 (TC) – $246.50 (TVC) = $63.50 Fixed cost
At 660 kw, the total cost would be
$.58 × 660 = $382.80 (VC) + $63.50 (FC) = $446.30
MEDIUM
3–36
15.
Chapter 3
Organizational Cost Flows
The Volkers Co. applies overhead at the rate of 70 percent of direct labor. Volkers Co.
incurred $450,000 of direct labor during 2001. Volkers incurred actual overhead of
$367,000. (a) Compute the amount of under- or overapplied overhead for Volkers Co. for
2001. (b) Prepare the necessary journal entry to dispose of the under- or overapplied
overhead (assuming that the amount is immaterial).
ANSWER:
a.
$450,000 × 70% = $315,000 applied overhead
367,000 actual overhead
$ 52,000 underapplied overhead
b.
Cost of Goods Sold
Manufacturing Overhead
EASY
$52,000
$52,000
Chapter 3
16.
Organizational Cost Flows
3–37
Temporary Training, Inc., provides a personalized training program that is popular with
many companies. The number of programs offered over the last five months, and the
costs of offering these programs are as follows:
June
July
Aug.
Sept.
Oct.
a.
b.
Programs Offered
55
45
60
50
75
Costs Incurred
$15,400
14,050
18,000
14,700
19,000
Using the high-low method, compute the variable cost per program and the total
fixed cost per month.
(Appendix) Using the least squares regression method, compute the variable cost
per program and the total fixed cost per month.
ANSWER:
a.
Variable cost per program:
Change in costs
Change in activity
$19,000 – $14,050 = $165 per program
75 – 45
Fixed cost:
At high activity = $19,000 – (75 × $165) = $6,625 per month
At low activity = $14,050 – (45 × $165) = $6,625 per month
b.
x
55
45
60
50
75
285
y
$15,400
14,050
18,000
14,700
19,000
$81,150
xy
$ 847,000
632,250
1,080,000
735,000
1,425,000
$4,719,250
x2
3,025
2,025
3,600
2,500
5,625
16,775
x bar =
57
y bar = 16,230
b = 4,719,250 – 5(57)($16,230) divided by 16,775 – 5(57)(57)
b = 176.79
a = 16,230 – (176.79)(57)
a = 6,152.97
MEDIUM
3–38
17.
Chapter 3
Organizational Cost Flows
(Appendix) The facility manager asked for information to help in forecasting handling
costs. The following printout was generated using the least squares regression method.
Fixed cost
Variable cost per unit
Activity variable
a.
b.
$2550
1.85
units of production volume
Using the information from the printout, develop a cost function that can be used
to estimate handling costs at different volume levels.
Estimate handling costs if expected production for next month is 20,000 units.
ANSWER:
a.
Total handling costs = $2,550 + $1.85 (unit production)
b.
Total handling costs = $2,550 + ($1.85 × 20,000) = $39,550
MEDIUM
Chapter 3
18.
Organizational Cost Flows
3–39
The Jason Co. has the following information available regarding costs and revenues for
two recent months. Selling price is $20.
Sales revenue
Cost of goods sold
Gross profit
Less other expenses:
Advertising
Utilities
Salaries and commissions
Supplies (bags, cleaning supplies etc.)
Depreciation
Administrative costs
Total
Net income
April
$60,000
–36,000
$24,000
May
$100,000
– 60,000
$ 40,000
$
$
600
4,200
3,200
320
2,300
1,900
–12,520
$11,480
600
5,600
4,000
400
2,300
1,900
–14,800
$25,200
Required:
a.
Identify each of the company’s expenses (including cost of goods sold) as being
either variable, fixed, or mixed.
b.
By use of the high-low method, separate each mixed expense into variable and
fixed elements. State the cost formula for each mixed expense.
c.
What is the total cost equation?
d.
Estimate total cost if sales = $75,000.
3–40
Chapter 3
Organizational Cost Flows
ANSWER:
a.
Cost
Cogs
Advertising
Utilities
Salaries, Etc.
Supplies
Depreciation
Administration
b.
Utilities
$1,400
$40,000
April
36,000/60,000=60%
600
4,200/60,000= 7%
3,200/60,000=5.3%
320/60,000 .53%
2,300
1,900
May
60,000/100,000=60%
600
5,600/100,000=5.6%
4,000/100,000=4%
400/100,000=.4%
2,300
1,900
= 3.5% Sales
FC = $4,200 – (3.5% × 60,000) = $2,100
Salaries
$800/$40,000 = 2% Sales
FC = $3,200 – (2% × 60,000) = $2,000
Supplies
$80/$40,000 = .2% sales
FC = $320 – (.2% × $60,000) = $200
c.
Total FC = $600 + $2,300 + $1,900 + $2,100 + $2,000 + $200 = $9,100
Total VC = 60% + 3.5% + 2% + .2% = 65.7% sales
TC = $9,100 + 65.7% sales
d.
TC = $9100 + (65.7% × $75,000) = $58,375
MEDIUM
Behavior
V
F
M
M
M
F
F
Chapter 3
19.
Organizational Cost Flows
3–41
The following miscellaneous data has been collected for a manufacturing company for the
year ended 12/31/01.
Inventories:
Raw material
Work in process
Finished goods
Beginning
$50,000
40,000
60,000
Costs recorded during the year:
Purchases of raw material
Direct labor
Cost of goods sold
$195,000
150,000
595,000
Ending
$55,000
45,000
50,000
Required: Prepare a cost of goods manufactured statement showing how all unknown
amounts were determined.
ANSWER:
BEGIN WIP
+ DM (1)
+ DC
+ OH
– END WIP
= COGM (2)
$ 40,000
190,000
150,000
?
(45000 )
$585,000
(1) BEG RM
+ PURCHASE
– END RM
= DM
$ 50,000
195,000
(55,000 )
$190,000
(2) BEGIN FG
+ COGM
– END FG
= COGS
$ 60,000
?
(50,000 )
$595,000
MEDIUM
= $250,000
= $585,000
3–42
20.
Chapter 3
Organizational Cost Flows
(Appendix) A company owns two automobiles that are used by employees on company
business, usually for short trips. Mileage and expenses, excluding depreciation, by
quarters were as follows during a typical year (quarters instead of months are used to
simplify the arithmetic):
Quarter
First
Second
Third
Fourth
Mileage
3,000
3,500
2,000
3,500
12,000
Expenses
$ 550
560
450
600
$2,160
Required: Determine the variable cost per mile (nearest tenth of a cent) and the fixed
costs per quarter, using the method of lease squares.
ANSWER:
ST
1
2ND
3RD
4TH
X
3,000
3,500
2,000
3,500
12,000
Y
$550
560
450
600
$2,160
XY
$1,650,000
1,960,000
900,000
2,100,000
$6,610,000
_
X = 12,000/4 = 3,000/miles per quarter
_
Y = $2,160/4 = $540
b = $6,610,000 – 4 (3,000) ($540) = $130,000 = $.087/mile
$37,500,000 – 4 (3,000) (3,000) $1,500,000
a = $540 – ($.087) (3,000) = $279
TC = $279 + .087/mile
MEDIUM
X2
9,000,000
12,250,000
4,000,000
12,250,000
37,500,000
Chapter 3
21.
Organizational Cost Flows
3–43
In cost accounting we have three inventory accounts with which to work. Describe in
terms of the “cost accounting cycle” how these accounts relate to each other and how the
product costs flow through the accounts. In your answer name the inventory accounts and
the product costs.
ANSWER:
Material purchased from outside goes to RM inventory.
When work is being done, costs are accumulated in WIP inventory.
When goods are finished but not yet sold, costs are transferred to FG inventory.
There are three product costs:
Direct material—as material is needed in the production process, it is
requisitioned from RM inventory and transferred to WIP inventory.
Direct labor—cost of converting RM to FG. It is determined from an analysis of
time cards and tickets.
OH—at the beginning of the period
Estimated OH to get a predetermined
Estimated Activity
rate used to apply OH to production. OH app = Rate × actual activity
MEDIUM
3–44
22.
Chapter 3
Organizational Cost Flows
The following information was taken from the records of the Ucandu Corporation for the
month of January 2001. (There were no inventories of work in process or finished goods
on January 1.)
Sales during month
Manufacturing costs for month:
Direct material
Direct labor
Overhead costs applied
Overhead costs under-applied
Inventories, January 31:
Work in process
Finished goods
Units
8,000
Cost
$
?
32,000
20,000
15,000
800
1,000
2,000
?
?
Indirect manufacturing costs are applied on a direct labor cost basis. The under-applied
balance is due to seasonal variations and will be carried forward. The following cost
estimates have been submitted for the work in process inventory of January 31: material,
$3,000; direct labor, $2,000.
Required:
a.
Determine the number of units that were completed and transferred to finished
goods during the month.
b.
Complete the estimate of the cost of work in process on January 31.
c.
Prepare a manufacturing statement for the month.
d.
Determine the cost of each unit completed during the month.
e.
Determine the total amount debited to the Overhead Control accounts during the
month.
Chapter 3
Organizational Cost Flows
3–45
ANSWER:
a.
8,000 SOLD + 2,000 ENDING FG = 10,000 UNITS
b.
DM
DC
OH
$3,000
2,000
1,500
$6,500
$15,000 × $2,000
$20,000
c.
DM
DL
OH
– END WIP
= COGM
d.
COGM/COMPLETE UNITS =
e.
OH APPLIED
+ OH UNDERAPPLIED
ACTUAL OH
MEDIUM
$32,000
20,000
15,000
(6,500 )
$60,500
$ 60,500 = $6.05/UNIT
10,000 UNITS
$15,000
800
$15,800
3–46
23.
Chapter 3
Organizational Cost Flows
The Jones Co. had the following account balances:
Raw Material
Bal. 1/1
Debits
Bal. 12/31
30,000
420,000
Manufacturing Overhead
Credits
?
Debits
Bal. 12/31
70,000
320,000
110,000
400,000
Credits
?
Factory Wages Payable
810,000
Debits
179,000
Bal.1/1
Credits
Bal. 12/31
10,000
175,000
6,000
?
Finished Goods
Bal. 1/1
Credits
60,000
Work in Process
Bal. 1/1
Direct material
Direct labor
Overhead
385,000
40,000
Cost of Goods Sold
Credits
Debits
?
?
Debits
?
Bal. 12/31
130,000
Required:
a.
What was the cost of raw material put into production during the year?
b.
How much of the material from question 1 consisted of indirect material?
c.
How much of the factory labor cost for the year consisted of indirect labor?
d.
What was the cost of goods manufactured for the year?
e.
What was the cost of goods sold for the year (before considering under- or
overapplied overhead)?
f.
If overhead is applied to production on the basis of direct material, what rate was
in effect during the year?
g.
Was manufacturing overhead under- or overapplied? By how much?
h.
Compute the ending balance in the Work in Process Inventory account. Assume
that this balance consists entirely of goods started during the year. If $32,000 of
this balance is direct material cost, how much of it is direct labor cost?
Manufacturing overhead cost?
Chapter 3
Organizational Cost Flows
3–47
ANSWER:
a.
$30,000 + $420,000 – $60,000 = $390,000
b.
$390,000 – $320,000 DM = $70,000
c.
$175,000 – $110,000 DL = $65,000
d.
$810,000
e.
$40,000 + $810,000 – $130,000 = $720,000
f.
$400,000/$320,000 = 125% DM Cost
g.
OH Actual
OH Applied
OH Overapplied
h.
Beginning WIP
+ DM
+ DC
+ OH
– Ending WIP
= COGM
MEDIUM
$385,000
400,000
$ 15,000
$ 70,000
320,000
110,000
400,000
(90000 )
$810,000
DM
DL (To Balance)
FOH (1)
End WIP
$32000
18,000
40,000
$90,000
(1) $32,000 × 125% = $40,000
CHAPTER 4
ACTIVITY-BASED COST SYSTEMS FOR MANAGEMENT
MULTIPLE CHOICE
1.
An objective of activity-based management is to
a.
b.
c.
d.
eliminate the majority of centralized activities in an organization.
reduce or eliminate non-value-added activities incurred to make a product or
provide a service.
institute responsibility accounting systems in decentralized organizations.
all of the above
ANSWER:
2.
Activity analysis
yes
no
no
yes
ANSWER:
a
Cost driver analysis
yes
yes
no
no
EASY
Which of the following falls under the Activity-Based Management umbrella?
a.
b.
c.
d.
Continuous
improvement
no
yes
yes
no
ANSWER:
4.
EASY
Which of the following is/are part of activity-based management?
a.
b.
c.
d.
3.
b
c
Business process
reengineering
no
no
yes
yes
Activity-based
costing
yes
no
yes
no
EASY
The sum of the non-value-added time and the value-added time equals
a.
b.
c.
d.
inspection time.
production time.
the product life cycle.
cycle time.
ANSWER:
d
EASY
4–1
4–2
5.
Chapter 4
Which of the following add customer value?
a.
b.
c.
d.
setup time
storage time
idle time
processing time
ANSWER:
6.
EASY
idle time.
storage time.
non-value-added time.
value-added time.
ANSWER:
c
EASY
When a firm redesigns a product to reduce the number of component parts, the firm is
a.
b.
c.
d.
increasing consumer value.
increasing the value added to the product.
decreasing product variety.
decreasing non-value-added costs.
ANSWER:
8.
d
Lead time minus production time is equal to
a.
b.
c.
d.
7.
Activity-Based Cost Systems for Management
d
MEDIUM
Non-value-added activities that are necessary to businesses, but not costs that customers
are willing to pay for are known as
a.
b.
c.
d.
business-value-added activities.
long-term variable activities.
short-term variable activities.
superior business activities.
ANSWER:
a
MEDIUM
Chapter 4
9.
Activity-Based Cost Systems for Management
Which of the following would not be considered a value-added activity in the preparation
of a tax return?
a.
b.
c.
d.
printing a copy of the return for the client
printing a copy of the return for the IRS
installing tax software
checking for accuracy
ANSWER:
10.
Idle time
yes
no
yes
no
ANSWER:
EASY
b
Inspection time
yes
no
no
yes
Transfer time
no
no
yes
yes
EASY
A process map
a.
b.
c.
d.
should indicate only value-added activities.
is also known as a detailed flowchart.
should indicate only those steps/processes that are obvious in the production of
goods/services.
is also known as a value chart.
ANSWER:
12.
c
Which of the following is considered a value-added activity?
a.
b.
c.
d.
11.
4–3
b
EASY
A value chart should include which of the following?
a.
b.
c.
d.
Service time
yes
no
yes
yes
ANSWER:
d
Inspection time
no
no
yes
yes
EASY
Transfer time
yes
yes
no
yes
4–4
13.
Chapter 4
The actual time it takes to perform a specific task is called
a.
b.
c.
d.
inspection time.
service time.
transfer time.
quality time.
ANSWER:
14.
EASY
bottlenecks.
effectiveness.
efficiency.
quality.
ANSWER:
c
EASY
Which of the following is typically regarded as a cost driver in traditional accounting
practices?
a.
b.
c.
d.
number of purchase orders processed
number of customers served
number of transactions processed
number of direct labor hours worked
ANSWER:
16.
b
Manufacturing cycle efficiency is a measure of
a.
b.
c.
d.
15.
Activity-Based Cost Systems for Management
d
EASY
When a company is labor-intensive, the cost driver that is probably least significant
would be
a.
b.
c.
d.
direct labor hours.
direct labor dollars.
machine hours.
cost of materials used.
ANSWER:
c
EASY
Chapter 4
17.
Activity-Based Cost Systems for Management
An activity driver is used for which of the following reasons?
a.
b.
c.
d.
To measure demands
yes
yes
no
no
ANSWER:
18.
EASY
any activity that can be used to predict cost changes.
the attempt to control expenditures at a reasonable level.
the person who gathers and transfers cost data to the management accountant.
any activity that causes costs to be incurred.
ANSWER:
d
MEDIUM
Cost allocation bases in activity-based costing should be
a.
b.
c.
d.
cost drivers.
value-added activities.
activity centers.
processes.
ANSWER:
20.
a
To measure resources consumed
yes
no
yes
no
The term cost driver refers to
a.
b.
c.
d.
19.
4–5
a
EASY
Costs that are common to many different activities within an organization are known as
____________ costs.
a.
b.
c.
d.
product- or process-level
organizational-level
batch-level
unit-level
ANSWER:
b
EASY
4–6
21.
Chapter 4
In activity-based costing, cost reduction efforts are directed at specific
a.
b.
c.
d.
cost categories.
cost pools.
processes.
cost drivers.
ANSWER:
22.
EASY
A batch cost
no
yes
yes
no
ANSWER:
c
A value-added cost
no
yes
no
yes
A production cost
yes
no
yes
yes
EASY
Which of the following have an impact on long-term variable costs?
a.
b.
c.
d.
Product variety
no
no
yes
yes
ANSWER:
24.
d
Setup time is
a.
b.
c.
d.
23.
Activity-Based Cost Systems for Management
d
Product complexity
no
yes
no
yes
Process complexity
no
yes
yes
yes
MEDIUM
In allocating variable costs to products,
a.
b.
c.
d.
a volume-based cost driver should be used.
direct labor hours should always be used as the allocation base.
a company should use the same allocation base that it uses for fixed costs.
a company should never use more than one cost driver.
ANSWER:
a
EASY
Chapter 4
25.
Activity-Based Cost Systems for Management
In which of the following areas does attribute-based costing (ABCII) employ detailed
cost-benefit analyses relating to information on customer needs?
a.
b.
c.
d.
Reliability
no
yes
yes
no
ANSWER:
26.
The choices are too numerous.
The potential for errors is great.
Only a small percentage of available choices is normally selected.
All of the above are drawbacks.
ANSWER:
d
MEDIUM
Simultaneous engineering helps companies accomplish which of the following?
a.
b.
c.
d.
Reduces product
complexity
no
yes
yes
no
ANSWER:
28.
MEDIUM
Which of the following is not a drawback of mass customization?
a.
b.
c.
d.
27.
c
Durability
no
no
yes
yes
b
Reduces process
complexity
no
yes
no
yes
EASY
For traditional costing purposes, R&D costs are
a.
b.
c.
d.
capitalized and allocated over the product life cycle.
expensed as incurred.
capitalized and amortized over three years.
charged to the future accounting periods that receive the benefit of the R&D
expenditures.
ANSWER:
b
EASY
4–7
4–8
29.
Chapter 4
An accounting system that focuses on transactions is
a.
b.
c.
d.
an activity-based accounting system.
a product life cycle costing system.
a traditional accounting system.
all of the above.
ANSWER:
30.
EASY
activities.
processes.
departments.
costs.
ANSWER:
d
EASY
Today, traditional accounting methods are
a.
b.
c.
d.
still appropriate for financial reporting.
still appropriate for providing useful cost information to internal managers.
still appropriate for both internal and external financial reporting.
outdated for all purposes.
ANSWER:
32.
c
Traditionally, managers have focused cost reduction efforts on
a.
b.
c.
d.
31.
Activity-Based Cost Systems for Management
a
EASY
Product costing systems in use over the last 40 years
a.
b.
c.
d.
concentrated on using multiple cost pools and cost drivers.
were often technologically incapable of handling activity-based costing
information.
have generally been responsive to changes in the manufacturing environment.
have been appropriate for managerial decision purposes as long as they met the
requirements of generally accepted accounting principles.
ANSWER:
b
MEDIUM
Chapter 4
33.
Activity-Based Cost Systems for Management
Traditional overhead allocations result in which of the following situations?
a.
b.
c.
d.
Overhead costs are assigned as period costs to manufacturing operations.
High-volume products are assigned too much overhead, and low-volume products
are assigned too little overhead.
Low-volume products are assigned too much, and high-volume products are
assigned too little overhead.
The resulting allocations cannot be used for financial reports.
ANSWER:
34.
EASY
over-costs the product
under-costs the product
has no effect the product cost
cost per unit is unaffected by product volume
ANSWER:
a
EASY
Relative to traditional product costing, activity-based costing differs in the way costs are
a.
b.
c.
d.
processed.
allocated.
benchmarked.
incurred.
ANSWER:
36.
b
Traditionally, overhead has been assigned based on direct labor hours or machine hours.
What effect does this have on the cost of a high-volume item?
a.
b.
c.
d.
35.
4–9
b
EASY
Under activity-based costing, benchmarks for product cost should contain an allowance
for
a.
b.
c.
d.
idle time.
idle time and scrap materials.
spoilage.
none of the above.
ANSWER:
d
MEDIUM
4–10
37.
Chapter 4
In activity-based costing, final cost allocations assign costs to
a.
b.
c.
d.
departments.
processes.
products.
activities.
ANSWER:
38.
d
EASY
In allocating fixed costs to products in activity-based costing,
a.
b.
c.
d.
direct labor hours should always be used as the allocation base.
a company should use the same allocation base that it uses for variable costs.
a cost driver that is not volume-related should be used.
machine hours should always be used.
ANSWER:
c
MEDIUM
Of the following, which is the best reason for using activity-based costing?
a.
b.
c.
d.
to keep better track of overhead costs
to more accurately assign overhead costs to cost pools so that these costs are
better controlled
to better assign overhead costs to products
to assign indirect service overhead costs to direct overhead cost pools
ANSWER:
41.
EASY
departments.
processes.
products.
activities.
ANSWER:
40.
c
In activity-based costing, preliminary cost allocations assign costs to
a.
b.
c.
d.
39.
Activity-Based Cost Systems for Management
c
EASY
ABC should be used in which of the following situations?
a.
b.
c.
d.
single-product firms with multiple steps
multiple-product firms with only a single process
multiple-product firms with multiple processing steps
in all manufacturing firms
ANSWER:
c
EASY
Chapter 4
42.
Activity-Based Cost Systems for Management
The overhead of American manufacturing firms has risen in recent years due to
a.
b.
c.
d.
an increase in direct labor.
an increase in product variety.
the implementation of activity-based costing.
the cost of product life cycle planning.
ANSWER:
43.
c
MEDIUM
Global competition has forced American industry to
a.
b.
c.
d.
seek increased governmental regulation.
improve product quality and customer service.
narrow product lines.
decrease its social responsibility.
ANSWER:
b
EASY
The costs of non-quality work do not include
a.
b.
c.
d.
the cost of handling complaints.
the cost of scrap.
warranty costs.
original design costs.
ANSWER:
46.
MEDIUM
trace technology costs to products.
promote excellence standards.
identify only value-added activities.
analyze performance problems.
ANSWER:
45.
b
Activity-based costing and activity-based management are effective in helping managers
do all of the following except
a.
b.
c.
d.
44.
4–11
d
EASY
In the “new era” of manufacturing, good performance indicators are
a.
b.
c.
d.
production-based.
sales-based.
cost-based.
consumer-based.
ANSWER:
d
EASY
4–12
47.
Chapter 4
Traditional standard costs are inappropriate measures for performance evaluation in the
“new era” of manufacturing because they
a.
b.
c.
d.
build in allowances for non-value-adding activities.
are based on historical information.
don’t reflect current costs.
are ideal goals.
ANSWER:
48.
MEDIUM
the product life cycle.
lead time.
production time.
value-added time.
ANSWER:
b
EASY
For one product that a firm produces, the manufacturing cycle efficiency is 20 percent. If
the total production time is 12 hours, what is the total manufacturing time?
a.
b.
c.
d.
15.0 hours
60.0 hours
12.0 hours
2.4 hours
ANSWER:
50.
a
The amount of time between the development and the production of a product is
a.
b.
c.
d.
49.
Activity-Based Cost Systems for Management
b
EASY
Activity analysis allows managers to
a.
b.
c.
d.
classify activities so that processes can be eliminated.
devise ways to minimize or eliminate non-value-added activities.
evaluate process performance to gain competitive advantages.
all of the above.
ANSWER:
b
EASY
Chapter 4
51.
Activity-Based Cost Systems for Management
Which of the following statements about business-value-added activities (BVAs) is true?
a.
b.
c.
d.
BVAs reflect the same processes in all organizations.
A process map will not reflect BVAs because such activities are not essential to
process performance.
BVAs are actually value-added activities of an organization that relate to
administrative processes.
It is impossible to eliminate all BVAs in an organization.
ANSWER:
52.
MEDIUM
all steps in a process and the time it takes for them to be completed.
the value-added steps in a process and the time it takes for them to be completed.
the time and cost of all value-added steps in a process.
the time and costs of all value-added and non-value-added steps in a process.
ANSWER:
a
MEDIUM
In the pharmaceutical or food industries, quality control inspections would most likely be
viewed as
a.
b.
c.
d.
non-value-added activities.
business-value-added activities.
value-added-activities.
process-efficiency activities.
ANSWER:
54.
d
A value chart indicates
a.
b.
c.
d.
53.
4–13
c
DIFFICULT
A just-in-time manufacturing process should have substantially less of which of the
following than a traditional manufacturing process?
a.
b.
c.
d.
Idle time
yes
yes
yes
no
ANSWER:
c
Transfer time
yes
no
yes
yes
DIFFICULT
Value-added time
yes
no
no
yes
Cycle time
yes
yes
yes
no
4–14
55.
Chapter 4
Manufacturing cycle efficiency should be increased by employing which of the following
techniques?
a.
b.
c.
d.
JIT
Inventory
yes
yes
no
yes
ANSWER:
56.
Batch
Manufacturing
yes
no
no
yes
MEDIUM
all cost drivers identified should be used for cost accumulation.
the cost of measuring a driver does not exceed the benefits of using it.
only costs occurring at the unit-level should be assigned to products or services.
organizational/facility costs are non-value-added and should never be assigned to
products or services.
ANSWER:
b
MEDIUM
When cost driver analysis is used, organizational profit or loss can be determined by
subtracting
a.
b.
c.
d.
organizational costs from total margin provided by products.
organizational costs from total product revenue.
total product costs from total product revenue.
total unit, batch, product/process, and organizational level costs incurred for a
period from total product revenue.
ANSWER:
58.
b
Flexible
Manufacturing Systems
yes
yes
no
no
A key concept underlying cost driver analysis is that
a.
b.
c.
d.
57.
Activity-Based Cost Systems for Management
a
MEDIUM
An activity center is an organizational unit
a.
b.
c.
d.
that makes a single product or performs a single service.
in which only value-added activities are performed.
that incurs only unit, batch, or product/process level costs.
for which management wants separate activity information.
ANSWER:
d
EASY
Chapter 4
59.
Activity-Based Cost Systems for Management
The following items are used in tracing costs in an ABC system. In which order are they
used?
(1)
(2)
(3)
(4)
cost object
cost driver
activity driver
cost pool
a.
b.
c.
d.
1, 2, 3, 4
2, 3, 4, 1
2, 4, 3, 1
4, 3, 1, 2
ANSWER:
60.
DIFFICULT
variable.
fixed.
unit-based.
short-term.
ANSWER:
a
EASY
Tessia Company makes ten different styles of inexpensive feather masks. Which of the
following is this company most likely to have?
a.
b.
c.
d.
Product complexity
Process complexity
Product variety
Process customization
ANSWER:
62.
c
The “Rule of One” underlies the premise that all costs are
a.
b.
c.
d.
61.
4–15
c
EASY
Attribute-based costing (ABC II) employs which of the following in its cost-benefit
analyses?
a.
b.
c.
d.
Past costs
Long-term variable costs
Reengineered costs
Planned costs
ANSWER:
d
MEDIUM
4–16
63.
Chapter 4
Mass customization can be achieved through the use of
a.
b.
c.
d.
activity-based costing.
just-in-time inventory.
flexible manufacturing systems.
all of the above.
ANSWER:
64.
Product
variety
yes
yes
no
yes
ANSWER:
EASY
d
Product
complexity
no
yes
yes
no
Process
errors
no
yes
no
yes
Pareto
principle
yes
no
no
yes
DIFFICULT
The Pareto principle is important to consider when an organization is
a.
b.
c.
d.
assessing whether to employ activity-based costing versus attribute-based costing.
evaluating the number of activities that are value-added versus those that are nonvalue-added.
deciding whether to offer a product in one color versus in ten colors.
determining whether simultaneous engineering activities will be impacted by the
“Rule of One.”
ANSWER:
66.
c
Mass customization is closely associated with
a.
b.
c.
d.
65.
Activity-Based Cost Systems for Management
c
MEDIUM
Simultaneous engineering can be used to
a.
b.
c.
d.
reduce both product and process complexity.
integrate activity-based costing with value chain analysis.
reduce the time-to-market of new products through elimination of batch-level
activities.
reduce manufacturing cycle efficiency by reducing process waste.
ANSWER:
a
EASY
Chapter 4
67.
Activity-Based Cost Systems for Management
If only one or two overhead cost pools are used,
a.
b.
c.
d.
it will be easy to determine which products or services are creating the most costs.
overhead created by a specific product will be assigned to all products.
the reduction in cost accumulation and allocation time will raise company profits.
allocations should be made using only unit-based cost drivers.
ANSWER:
68.
EASY
automated one or more production processes.
introduced new products to its customers.
had its industry deregulated.
all of the above.
ANSWER:
d
EASY
Engaging in which of the following will result in radical changes being made to an
organization’s processes?
a.
b.
c.
d.
Continuous improvement
Benchmarking
Reengineering
Mass customization
ANSWER:
70.
b
A cost accumulation system should most likely be reevaluated when a company has
a.
b.
c.
d.
69.
4–17
c
MEDIUM
Use of activity-based costing and activity-based management requires
a.
b.
c.
d.
the creation of an environment for change in an organization.
elimination of all non-value-added activities in an organization.
that company processes be automated and the use of direct labor be minimal.
each process be fully mapped and all activities be identified as value-added or
non-value-added.
ANSWER:
a
EASY
4–18
71.
Chapter 4
Which of the following is most likely to make the implementation of ABC/ABM slow
and difficult?
a.
b.
c.
d.
The inability of all employees to understand the computations involved in ABC.
A lack of involvement by or support from upper management.
The need for dual costing systems.
An inability to eliminate all business-value-added activities.
ANSWER:
72.
b
MEDIUM
Activity-based costing and generally accepted accounting principles differ in that ABC
a.
b.
c.
d.
does not define product costs in the same manner as GAAP.
cannot be used to compute an income statement, but GAAP can.
is concerned only with costs generated from automated processes, but GAAP is
concerned with costs generated from both manual and automated processes.
information is useful only to managers, while GAAP information is useful to all
organizational stakeholders.
ANSWER:
73.
Activity-Based Cost Systems for Management
a
EASY
If activity-based costing is implemented in an organization without any other changes
being effected, total overhead costs will
a.
b.
c.
d.
be reduced because of the elimination of non-value-added activities.
be reduced because organizational costs will not be assigned to products or
services.
be increased because of the need for additional people to gather information on
cost drivers and cost pools.
remain constant and simply be spread over products differently.
ANSWER:
d
DIFFICULT
Chapter 4
74.
Activity-Based Cost Systems for Management
Kan Co. produces two products (A and B). Direct material and labor costs for Product A
total $35 (which reflects 4 direct labor hours); direct material and labor costs for Product
B total $22 (which reflects 1.5 direct labor hours). Three overhead functions are needed
for each product. Product A uses 2 hours of Function 1 at $10 per hour, 1 hour of
Function 2 at $7 per hour, and 6 hours of Function 3 at $18 per hour. Product B uses 1, 8,
and 1 hours of Functions 1, 2, and 3, respectively. Kan produces 800 units of A and 8,000
units of B each period. If total overhead is assigned to A and B on the basis of units
produced, Product A will have an overhead cost per unit of
a.
b.
c.
d.
$ 88.64.
$123.64.
$135.00.
none of the above.
ANSWER:
75.
MEDIUM
$84.00.
$88.64.
$110.64.
none of the above.
ANSWER:
b
MEDIUM
Use the information from #74. If total overhead is assigned to A and B on the basis of
direct labor hours, Product A will have an overhead cost per unit of
a.
b.
c.
d.
$51.32.
$205.28.
$461.88.
none of the above.
ANSWER:
77.
a
Use the information from #74. If total overhead is assigned to A and B on the basis of
units produced, Product B will have an overhead cost per unit of
a.
b.
c.
d.
76.
4–19
b
MEDIUM
Use the information from #74. If total overhead is assigned to A and B on the basis of
direct labor hours, Product B will have an overhead cost per unit of
a.
b.
c.
d.
$51.32.
$76.98.
$510.32.
none of the above.
ANSWER:
b
MEDIUM
4–20
78.
Chapter 4
Use the information from #74. If total overhead is assigned to A and B on the basis of
overhead activity hours used, the total product cost per unit assigned to Product A will be
a.
b.
c.
d.
$86.32.
$95.00.
$115.50.
none of the above.
ANSWER:
79.
c
MEDIUM
Use the information from #74. If total overhead is assigned to A and B on the basis of
overhead activity hours used, the total product cost per unit assigned to Product B will be
a.
b.
c.
d.
$115.50.
$73.32.
$34.60.
none of the above.
ANSWER:
80.
Activity-Based Cost Systems for Management
a
MEDIUM
JJ Corp. produces 50,000 units of Product Q and 6,000 units of Product Z during a
period. In that period, four set-ups were required for color changes. All units of Product Q
are black, which is the color in the process at the beginning of the period. A set-up was
made for 1,000 blue units of Product Z; a set-up was made for 4,500 red units of Product
Z; a set-up was made for 500 green units of Product Z. A set-up was then made to return
the process to its standard black coloration and the units of Product Q were run. Each setup costs $500. If set-up cost is assigned on a volume basis for the department, what is the
approximate per-unit set-up cost for Product Z?
a.
b.
c.
d.
$.010.
$.036.
$.040.
none of the above.
ANSWER:
b
MEDIUM
Chapter 4
81.
Activity-Based Cost Systems for Management
JJ Corp. produces 50,000 units of Product Q and 6,000 units of Product Z during a
period. In that period, four set-ups were required for color changes. All units of Product Q
are black, which is the color in the process at the beginning of the period. A set-up was
made for 1,000 blue units of Product Z; a set-up was made for 4,500 red units of Product
Z; a set-up was made for 500 green units of Product Z. A set-up was then made to return
the process to its standard black coloration and the units of Product Q were run. Each setup costs $500. If set-up cost is assigned on a volume for the department, what is the
approximate per-unit set-up cost for the red units of Product Z?
a.
b.
c.
d.
$.036.
$.111.
$.250.
none of the above.
ANSWER:
82.
b
MEDIUM
Use the information from #80. Assume that JJ Corp. has decided to allocate overhead
costs using levels of cost drivers. What would be the approximate per-unit set-up cost for
the blue units of Product Z?
a.
b.
c.
d.
$.04.
$.25.
$.50.
none of the above.
ANSWER:
83.
4–21
c
MEDIUM
Use the information from #80. Assume that JJ Corp. has decided to allocate overhead
costs using levels of cost drivers. What would be the approximate per-unit set-up cost for
the green units of Product Z?
a.
b.
c.
d.
$1.00.
$0.25.
$0.04.
none of the above.
ANSWER:
a
MEDIUM
4–22
Chapter 4
Activity-Based Cost Systems for Management
SHORT ANSWER/PROBLEMS
1.
Why are external performance measures preferred to internal performance measures in
American businesses today?
ANSWER: External performance measures are appropriate because businesses are
now oriented to external goals. For example, many firms are very concerned with
providing high-quality products and outstanding customer service. If these are appropriate
goals, consumer-based (external) measures must be employed to determine if the goals
are being achieved.
MEDIUM
2.
In activity-based costing, how are cost drivers selected?
ANSWER: Cost drivers are selected based on their underlying relationship to
organizational costs. Ideally, a causal relationship exists between the cost driver and a
cost pool. Once identified, cost drivers are used to allocate organizational costs to
activities and products and are the focus of cost control efforts.
MEDIUM
3.
Discuss the characteristics of a company for which ABC would be useful.
ANSWER: Companies having the following characteristics find ABC useful: (1) hardto-make products that show large profits and easy-to-make products that show losses; (2)
profit margins that are difficult to explain; (3) considerable automation that makes it
difficult to assign overhead to products that use machine hours or direct labor as bases;
(4) substantial overhead costs that are not in proportion to the number of products; and
(5) a wide variety of services or products.
MEDIUM
4.
ABC has been criticized for a variety of reasons. Discuss these criticisms.
ANSWER: One criticism is that ABC does not promote total quality management and
continuous improvement. Another criticism of ABC is that ABC does not adhere to
generally accepted accounting principles. An ABC system might allocate nonproduct
costs (research and development) to products, while not allocating some traditional
product costs (factory depreciation on machines) to products. A third criticism of ABC
relates to the cost of implementation. An ABC system takes considerable time to
implement, and therefore, it is very costly.
MEDIUM
Chapter 4
5.
Activity-Based Cost Systems for Management
4–23
How has the increase in product variety affected the costs of American business?
ANSWER: The increase in product variety has increased the overhead costs of
American firms. These costs include significant setup costs to switch from the production
of one product to another, costs of additional technology, inventory carrying costs,
purchasing costs, and scheduling costs.
MEDIUM
6.
Discuss the four different levels of costs that are now being identified. How should these
types of costs be treated under ABC?
ANSWER: The four different levels are unit-level costs, batch-level costs, product- or
process-level costs, and organizational or facility costs. Unit-level costs include direct
material, direct labor, and some traceable machine costs. These are incurred once for each
item produced and are considered part of total product cost. Batch-level costs include
machine setup, material handling, and purchasing or ordering costs. These are incurred
once for each batch of items produced and are allocated over the total number of units in
the batch. These are also considered part of total product cost. Product- or process-level
costs include engineering changes, design, and development costs. These are allocated to
the total number of units produced in the product line and are considered part of total
product cost. Organizational or facility costs include building depreciation, administrative
salaries, and organizational advertising. These costs are not product-related and should be
deducted from net product revenue.
MEDIUM
4–24
7.
Chapter 4
Activity-Based Cost Systems for Management
Box Co. manufactures hand-made pine storage boxes for a variety of clients. As
production manager, you have developed the following value chart:
Operation
Receiving materials
Storing materials
Handling materials
Cutting/measuring materials
Assembling materials
Building boxes
Attaching hinges
Inspection
a.
b.
c.
Average Number of Days
1
2
3
6
4
7
2
1
Determine the value-added activities and their total time.
Determine the non-value-added activities and their total time.
Calculate the manufacturing cycle efficiency.
ANSWER:
a.
Value-added activities
Cutting/measuring materials
Assembling materials
Building boxes
Attaching hinges
Total production time (days)
Time
6
4
7
2
19
b.
Non-value-added activities
Receiving
Storing
Handling
Inspection
Total nonproduction time (days)
Time
1
2
3
1
7
c.
Total lead time = 19 + 7 = 26 days
MCE = 19/26 = 73.1%
EASY
Chapter 4
8.
Activity-Based Cost Systems for Management
4–25
TriCo would like to institute an activity-based costing system to price products. The
company’s Purchasing Department incurs costs of $550,000 per year and has six
employees. Purchasing has determined the three major activities that occur during the
year.
Activity
Issuing purchase orders
Reviewing receiving
reports
Making phone calls
Allocation
Measure
# of purchase
orders
# of receiving
reports
# of phone calls
# of
People
1
Total
Cost
$150,000
2
$175,000
3
$225,000
During the year 50,000 phone calls were made in the department; 15,000 purchase orders
were issued; and 10,000 shipments were received. Product A required 200 phone calls,
150 receiving reports, and 50 purchase orders. Product B required 350 phone calls, 400
receiving reports, and 100 purchase orders.
a.
b.
Determine the amount of purchasing department cost that should be assigned to
each of these products.
Determine purchasing department cost per unit if 1,500 units of Product A and
3,000 units of Product B were manufactured during the year.
ANSWER:
a.
$150,000/15,000 = $10 per purchase order
$175,000/10,000 = $17.50 per receiving report
$225,000/50,000 = $4.50 per phone call
50 purchase orders ×$10
100 purchase orders × $10
150 receiving reports × $17.50
400 receiving reports × $17.50
200 phone calls × $4.50
350 phone calls × $4.50
Total cost
b.
Product A
$ 500
$1,000
2,625
7,000
900
$4,025
Product A= $4,025/1,500 = $2.68 per unit
Product B= $9,575/3,000 = $3.19 per unit
MEDIUM
Product B
1,575
$9,575
CHAPTER 5
JOB ORDER COSTING
MULTIPLE CHOICE
1.
Which of the following costing methods of valuation are acceptable in a job order costing
system?
a.
b.
c.
d.
Actual
Material
Cost
yes
yes
no
yes
ANSWER:
2.
Actual
Labor
Cost
no
yes
yes
yes
Predetermined
Overhead
Cost
yes
no
yes
yes
EASY
Which of the following costing systems allows management to quickly recognize
materials, labs, and overhead variances and take measures to correct them?
a.
b.
c.
d.
Actual Cost System
yes
yes
no
no
ANSWER:
3.
d
Standard
Material
Cost
yes
no
yes
yes
d
Normal Cost System
yes
no
yes
no
EASY
In a normal cost system, debits to Work in Process Inventory would not be made for
a.
b.
c.
d.
actual overhead.
applied overhead.
actual direct material.
actual direct labor.
ANSWER:
a
EASY
5–1
5–2
4.
Chapter 5
Which of the following are drawbacks to applying actual overhead to production?
a.
b.
c.
d.
A delay occurs in assigning costs to jobs or products.
Fluctuations in quantities produced during a period could cause varying per-unit
charges for fixed overhead.
Seasonality of overhead costs may cause distortions in job or product costs.
All of the above.
ANSWER:
5.
b.
c.
d.
EASY
Job Order Costing
homogeneous products
and large quantities
homogeneous products
and small quantities
heterogeneous products
and large quantities
heterogeneous products
and small quantities
ANSWER:
d
Process Costing
heterogeneous products
and small quantities
heterogeneous products
and large quantities
homogeneous products
and small quantities
homogeneous products
and large quantities
EASY
A credit to Work in Process Inventory represents
a.
b.
c.
d.
work still in process.
raw material put into production.
the application of overhead to production.
the transfer of completed items to Finished Goods Inventory.
ANSWER:
7.
d
Job order costing and process costing have which of the following characteristics?
a.
6.
Job Order Costing
d
EASY
Additional accounts that comprise the balance of a single general account is a
a.
b.
c.
d.
worksheet.
journal.
subsidiary ledger.
book of original entry.
ANSWER:
c
EASY
Chapter 5
8.
Job Order Costing
In a job order costing system, the dollar amount of the entry that debits Finished Goods
Inventory and credits Work in Process Inventory is the sum of the costs charged to all
jobs
a.
b.
c.
d.
started in process during the period.
in process during the period.
completed and sold during the period.
completed during the period.
ANSWER:
9.
EASY
cost of goods manufactured in the year.
ending Work in Process Inventory.
total manufacturing costs to account for.
cost of goods available for sale.
ANSWER:
c
EASY
Which of the following would be least likely to be supported by subsidiary accounts or
ledgers in a company that employs a job order costing system?
a.
b.
c.
d.
Work in Process Inventory
Raw Material Inventory
Accounts Payable
Supplies Inventory
ANSWER:
11.
d
Total manufacturing costs for the year plus beginning Work in Process Inventory cost
equals
a.
b.
c.
d.
10.
5–3
d
EASY
A journal entry includes a debit to Work in Process Inventory and a credit to Raw
Material Inventory. The explanation for this would be that
a.
b.
c.
d.
indirect material was placed into production.
raw material was purchased on account.
direct material was placed into production.
direct labor was utilized for production.
ANSWER:
c
EASY
5–4
12.
Chapter 5
The source document that records the amount of raw material that has been requested by
production is the
a.
b.
c.
d.
job order cost sheet.
bill of lading.
interoffice memo.
material requisition.
ANSWER:
13.
EASY
job number.
quantity required.
unit cost.
purchase order number.
ANSWER:
d
EASY
Which of the following statements about job order cost sheets is true?
a.
b.
c.
d.
All job order cost sheets serve as the general ledger control account for Work in
Process Inventory.
Job order cost sheets can serve as subsidiary ledger information for both Work in
Process Inventory and Finished Goods Inventory.
If material requisition forms are used, job order cost sheets do not need to be
maintained.
Job order cost sheets show costs for direct material and direct labor, but not for
manufacturing overhead since it is an applied amount.
ANSWER:
15.
d
A material requisition form should show all of the following information except
a.
b.
c.
d.
14.
Job Order Costing
b
EASY
Clyde Jenkins is an auditor for the General Accounting Office. Clyde is investigating
invoices sent by Proper Paper Products charging the Army $30 per roll for toilet paper.
Proper Paper uses a job order costing system. Where should Clyde look to find total
production costs related to the toilet paper?
a.
b.
c.
d.
material requisition form
bill of materials
sales invoice
job order cost sheet
ANSWER:
d
EASY
Chapter 5
16.
Job Order Costing
The primary accounting document in a job order costing system is a(n)
a.
b.
c.
d.
bill of materials.
job order cost sheet.
employee time sheet.
materials requisition.
ANSWER:
17.
EASY
Finished Goods Inventory.
Raw Material Inventory.
Work in Process Inventory.
Supplies Inventory.
ANSWER:
c
EASY
The __________ provides management with an historical summation of total costs for a
given product.
a.
b.
c.
d.
job order cost sheet
employee time sheet
material requisition form
bill of lading
ANSWER:
19.
b
The cost sheets for incomplete jobs at the end of the period comprise the subsidiary
ledger for
a.
b.
c.
d.
18.
5–5
a
EASY
Which of the following journal entries records the accrual of the cost of indirect labor
used in production?
a.
b.
c.
d.
debit Work in Process Inventory, credit Wages Payable
debit Work in Process Inventory, credit Manufacturing Overhead
debit Manufacturing Overhead, credit Work in Process Inventory
debit Manufacturing Overhead, credit Wages Payable
ANSWER:
d
EASY
5–6
20.
Chapter 5
In job order costing, payroll taxes paid by the employer for factory employees are
commonly accounted for as
a.
b.
c.
d.
direct labor cost.
manufacturing overhead cost.
indirect labor cost.
administrative cost.
ANSWER:
21.
EASY
the insurance company sent the company a refund of its policy premium.
overhead for insurance was applied to production.
insurance for production equipment expired.
insurance was paid on production equipment.
ANSWER:
c
EASY
The journal entry to apply overhead to production includes a credit to Manufacturing
Overhead control and a debit to
a.
b.
c.
d.
Finished Goods Inventory.
Work in Process Inventory.
Cost of Goods Sold.
Raw Material Inventory.
ANSWER:
23.
b
The logical explanation for an entry that includes a debit to Manufacturing Overhead
control and a credit to Prepaid Insurance is
a.
b.
c.
d.
22.
Job Order Costing
b
EASY
Production overhead does not include the costs of
a.
b.
c.
d.
factory depreciation and supplies.
factory employees’ cafeteria departments.
production line workers.
the maintenance department for the factory.
ANSWER:
c
EASY
Chapter 5
24.
Job Order Costing
In a job order costing system, the use of indirect material would usually be reflected in the
general ledger as an increase in
a.
b.
c.
d.
stores control.
work in process control.
manufacturing overhead applied.
manufacturing overhead control.
ANSWER:
25.
EASY
rates are applied within a range of 35 to 60 percent of direct labor.
is performed at the beginning of the period.
rates fluctuate during the period with changes in production quantities.
rates are calculated by dividing budgeted overhead by a budgeted quantity of some
cost driver.
ANSWER:
d
EASY
A credit to the Manufacturing Overhead control account represents the
a.
b.
c.
d.
actual cost of overhead incurred.
actual cost of overhead paid this period.
amount of overhead applied to production.
amount of indirect material and labor used during the period.
ANSWER:
27.
d
Manufacturing overhead application
a.
b.
c.
d.
26.
5–7
c
EASY
The journal entry to record the incurrence and payment of overhead costs for factory
insurance requires a debit to
a.
b.
c.
d.
Cash and a credit to Manufacturing Overhead.
Manufacturing Overhead and a credit to Accounts Payable.
Manufacturing Overhead and a credit to Cash.
Work in Process Inventory and a credit to Cash.
ANSWER:
c
EASY
5–8
28.
Chapter 5
The source document that records the amount of time an employee worked on a job and
his/her pay rate is the
a.
b.
c.
d.
job order cost sheet.
employee time sheet.
interoffice memo.
labor requisition form.
ANSWER:
29.
EASY
at the end of a period.
as jobs are completed.
at the end of a period or as jobs are completed, whichever is earlier.
at the end of a period or as jobs are completed, whichever is later.
ANSWER:
c
EASY
In a job order costing system, the subsidiary ledger for Finished Goods Inventory is
comprised of
a.
b.
c.
d.
all job order cost sheets.
job order cost sheets for all uncompleted jobs.
job order cost sheets for all completed jobs not yet sold.
job order cost sheets for all ordered, uncompleted, and completed jobs.
ANSWER:
31.
b
Overhead is applied to jobs in a job order costing system
a.
b.
c.
d.
30.
Job Order Costing
c
EASY
Underapplied overhead resulting from unanticipated and immaterial price increases for
overhead items should be written off by
a.
b.
c.
d.
decreasing Cost of Goods Sold.
increasing Cost of Goods Sold.
decreasing Cost of Goods Sold, Work in Process Inventory, and Finished Goods
Inventory.
increasing Cost of Goods Sold, Work in Process Inventory, and Finished Goods
Inventory.
ANSWER:
b
EASY
Chapter 5
32.
Job Order Costing
Overapplied overhead would result if
a.
b.
c.
d.
the plant were operated at less than normal capacity.
overhead costs incurred were less than costs charged to production.
overhead costs incurred were unreasonably small in relation to units produced.
overhead costs incurred were greater than costs charged to production.
ANSWER:
33.
EASY
transfer of completed items to Finished Goods Inventory.
costs of items sold.
selling price of items sold.
the cost of goods manufactured.
ANSWER:
b
EASY
In a perpetual inventory system, a transaction that requires two journal entries (or one
compound entry) is needed when
a.
b.
c.
d.
raw materials are purchased on account.
goods are sold for either cash or on account.
goods are finished and transferred out of Work in Process Inventory.
overhead is applied to Work in Process Inventory.
ANSWER:
35.
b
Debits to Cost of Goods Sold typically represent the
a.
b.
c.
d.
34.
5–9
b
EASY
Which of the following organizations would be most likely to use a job order costing
system?
a.
b.
c.
d.
the loan department of a bank
the check clearing department of a bank
a manufacturer of processed cheese food
a manufacturer of video cassette tapes
ANSWER:
a
MEDIUM
5–10
36.
Chapter 5
Which of the following organizations would most likely not use a job order costing
system?
a.
b.
c.
d.
Avondale Shipbuilders
Pickle and Weymann, Attorneys-at-Law
Atlantic City Saltwater Taffy
Century City Construction Company
ANSWER:
37.
EASY
standards cannot be used.
an average cost per unit within a job cannot be computed.
costs are accumulated by departments and averaged among all jobs.
overhead is typically assigned to jobs on the basis of some cost driver.
ANSWER:
d
EASY
When job order costing is used, the primary focal point of cost accumulation is the
a.
b.
c.
d.
department.
supervisor.
item.
job.
ANSWER:
39.
c
In a job order costing system,
a.
b.
c.
d.
38.
Job Order Costing
d
EASY
What is the best cost accumulation procedure to use when many batches, each differing as
to product specifications, are produced?
a.
b.
c.
d.
job order
process
actual
standard
ANSWER:
a
EASY
Chapter 5
40.
Job Order Costing
Which of the following could not be used in job order costing?
a.
b.
c.
d.
standards
an average cost per unit for all jobs
normal costing
overhead allocation based on the job’s direct labor hours
ANSWER:
41.
b
EASY
Product costing is not concerned with cost
a.
b.
c.
d.
assignment.
origination.
identification.
measurement.
ANSWER:
42.
5–11
b
EASY
Which of the following statements is false?
a.
b.
c.
d.
While the use of standard costing is acceptable for job order costing systems,
actual cost records should still be maintained.
It is normally more time-consuming for a company to use standard costs in a job
order costing system.
Standards can be used in a job order costing system, if the company usually
produces items that are similar in nature.
Standard costs may be used for material, labor, or both material and labor in a job
order costing environment.
ANSWER:
b
EASY
5–12
43.
Chapter 5
Job Order Costing
C Co. uses a job order costing system. During April 2001, the following costs appeared in
the Work in Process Inventory account:
Beginning balance
Direct material used
Direct labor incurred
Applied overhead
Cost of goods manufactured
$ 24,000
70,000
60,000
48,000
185,000
C Co. applies overhead on the basis of direct labor cost. There was only one job left in
WIP Inventory at the end of April which contained $5,600 of overhead. What amount of
direct material was included in this job?
a.
b.
c.
d.
$4,400
$4,480
$6,920
$8,000
ANSWER:
44.
a
MEDIUM
Q Co. is a print shop that produces jobs to customer specifications. During January 2001,
Job #1253 was worked on and the following information is available:
Direct material used
Direct labor hours worked
Machine time used
Direct labor rate per hour
Overhead application rate per
hour of machine time
What was the total cost of Job #1253 for January?
a.
b.
c.
d.
$3,025
$2,812
$2,770
$2,713
ANSWER:
d
EASY
$2,500
15
6
$7
$18
Chapter 5
Job Order Costing
5–13
Use the following information for questions 45–47.
Ark Co. uses a job order costing system. At the beginning of January, the company had 2 jobs in
process with the following costs:
Job #456
Job #461
Direct Material
$3,400
1,100
Direct Labor
$510
289
Overhead
$255
?
Ark pays its workers $8.50 per hour and applies overhead on a direct labor hour basis.
45.
What is the overhead application rate per direct labor hour?
a.
b.
c.
d.
$0.50
$2.00
$4.25
$30.00
ANSWER:
46.
EASY
How much overhead was included in the cost of Job #461 at the beginning of January?
a.
b.
c.
d.
$144.50
$153.00
$2,200.00
$2,456.50
ANSWER:
47.
c
a
EASY
During January, Ark employees worked on Job #479. At the end of the month, $714 of
overhead had been applied to this job. Total Work in Process Inventory at the end of the
month was $6,800 and all other jobs had a total cost of $3,981. What amount of direct
material is included in Job #479?
a.
b.
c.
d.
$677
$1,391
$2,142
$4,658
ANSWER:
a
MEDIUM
5–14
48.
Chapter 5
Job Order Costing
Black Corp. manufactures products on a job order basis. The job cost sheet for Job #329
shows the following for March:
Direct material
Direct labor (100 hours @ $7.25)
Machine hours incurred
Predetermined overhead rate per
machine hour
$5,000
$725
40
$26
At the end of March, what total cost appears on the job cost sheet for Job #329?
a.
b.
c.
d.
$5,725
$5,765
$6,765
$8,325
ANSWER:
49.
c
EASY
Products at Green Manufacturing are sent through two production departments:
Fabricating and Finishing. Overhead is applied to products in the Fabricating Dept. based
on 150 percent of direct labor cost and $18 per machine hour in Finishing. The following
information is available about Job #639:
Direct material
Direct labor cost
Direct labor hours
Machine hours
Overhead applied
Fabricating
$1,590
?
22
5
429
What is the total cost of Job #639?
a.
b.
c.
d.
$2,647
$3,005
$3,093
$3,203
ANSWER:
d
MEDIUM
Finishing
$580
48
6
15
?
Chapter 5
50.
Job Order Costing
5–15
Carolina Co. applies overhead to jobs at the rate of 40 percent of direct labor cost. Direct
material of $1,250 and direct labor of $1,400 were expended on Job #44 during June. At
May 31, the balance of Job #44 was $2,800. The June 30th balance is
a.
b.
c.
d.
$3,210.
$4,760.
$5,450.
$6,010.
ANSWER:
d
EASY
Use the following information for questions 51–56.
Adams Co. uses a job order costing system and the following information is available from its
records. The company has 3 jobs in process: #5, #8, and #12.
Raw material used
Direct labor per hour
Overhead applied based on
direct labor cost
$120,000
$8.50
120%
Direct material was requisitioned as follows for each job respectively: 30 percent, 25 percent, and
25 percent; the balance of the requisitions was considered indirect. Direct labor hours per job are
2,500; 3,100; and 4,200; respectively. Indirect labor is $33,000. Other actual overhead costs
totaled $36,000.
51.
What is the prime cost of Job #5?
a.
b.
c.
d.
$42,250
$57,250
$73,250
$82,750
ANSWER:
52.
b
MEDIUM
What is the total amount of overhead applied to Job #8?
a.
b.
c.
d.
$18,250
$26,350
$30,000
$31,620
ANSWER:
d
MEDIUM
5–16
53.
Chapter 5
What is the total amount of actual overhead?
a.
b.
c.
d.
$36,000
$69,000
$93,000
$99,960
ANSWER:
54.
MEDIUM
$69,000
$99,960
$132,960
$144,000
ANSWER:
b
MEDIUM
If Job #12 is completed and transferred, what is the balance in Work in Process Inventory
at the end of the period if overhead is applied at the end of the period?
a.
b.
c.
d.
$96,700
$99,020
$170,720
$139,540
ANSWER:
56.
c
How much overhead is applied to Work in Process?
a.
b.
c.
d.
55.
Job Order Costing
c
DIFFICULT
Assume the balance in Work in Process Inventory was $18,500 on June 1 and $25,297 on
June 30. The balance on June 30 represents one job that contains direct material of
$11,250. How many direct labor hours have been worked on this job (rounded to the
nearest hour)?
a.
b.
c.
d.
751
1,324
1,653
2,976
ANSWER:
a
MEDIUM
Chapter 5
Job Order Costing
5–17
Use the following information for questions 57–60.
The following information pertains to XYZ Co. for September 2001.
Direct Material
$3,200
?
5,670
Job #123
Job #125
Job #201
Direct Labor
$4,500
5,000
?
Overhead
?
?
$5,550
XYZ Co. applies overhead for Job #123 at 140 percent of direct labor cost and at 150 percent of
direct labor cost for Jobs #125 and #201. The total cost of Jobs #123 and #125 is identical.
57.
What amount of overhead is applied to Job #123?
a.
b.
c.
d.
$4,800
$5,550
$6,300
$7,500
ANSWER:
58.
EASY
What amount of overhead is applied to Job #125?
a.
b.
c.
d.
$8,325
$7,500
$7,000
$5,000
ANSWER:
59.
c
b
EASY
What is the amount of direct material for to Job #125?
a.
b.
c.
d.
$1,950
$1,500
$3,700
$7,500
ANSWER:
b
MEDIUM
5–18
60.
Chapter 5
Job Order Costing
Assume that Jobs #123 and #201 are incomplete at the end of September. What is the
balance in Work in Process Inventory at that time?
a.
b.
c.
d.
$18,920
$22,620
$28,920
$30,120
ANSWER:
c
MEDIUM
Use the following information for questions 61–63.
Baker Co. has two departments (Processing and Packaging) and uses a job order costing system.
Baker applies overhead in Processing based on machine hours and on direct labor cost in
Packaging. The following information is available for July:
Machine hours
Direct labor cost
Applied overhead
61.
Packaging
1,000
$23,000
$51,750
What is the overhead application rate per machine hour for Processing?
a.
b.
c.
d.
$22.00
$1.24
$17.80
$0.81
ANSWER:
62.
Processing
2,500
$44,500
$55,000
a
EASY
What is the overhead application rate for Packaging?
a.
b.
c.
d.
$23.00
$51.75
$2.25
$0.44
ANSWER:
c
EASY
Chapter 5
63.
Job Order Costing
5–19
Which of the following conclusions would be reasonable to draw from the Baker Co.’s
overhead application system?
a.
b.
c.
d.
The Processing Department has many unskilled workers.
The Processing Department is highly automated.
The Packaging Department is more cost-efficient than the Processing Department.
The Packaging Department would be a good candidate for downsizing.
ANSWER:
b
EASY
Use the following information for questions 64 and 65.
Zew Co. has a job order costing system and an overhead application rate of 120 percent of direct
labor cost. Job #33 is charged with direct material of $12,000 and overhead of $7,200. Job #34
has direct material of $2,000 and direct labor of $9,000.
64.
What amount of direct labor cost has been charged to Job #33?
a.
b.
c.
d.
$6,000
$8,640
$7,200
$14,400
ANSWER:
65.
a
EASY
What is the total cost of Job #34?
a.
b.
c.
d.
$30,200
$21,800
$11,000
$10,800
ANSWER:
b
EASY
5–20
Chapter 5
Job Order Costing
Use the following information for questions 66 and 67.
Kool Co. uses a job order costing system. Assume that Job #101 is the only one in process. The
following information is available:
Budgeted direct labor hours
Budgeted overhead
Direct labor cost
66.
9,000
$110,500
$0.20
$5.00
$5.38
$38.89
ANSWER:
c
EASY
What is the total cost of Job #101 assuming that overhead is applied at the rate of 135
percent of direct labor cost (rounded to the nearest whole dollar)?
a.
b.
c.
d.
$192,650
$268,250
$275,000
$329,675
ANSWER:
68.
Budgeted machine hours
Direct material
What is the overhead application rate if Kool uses a predetermined overhead application
rate based on direct labor hours (rounded to the nearest whole dollar)?
a.
b.
c.
d.
67.
65,000
$350,000
$70,000
c
EASY
At the end of the last fiscal year, Baehr Company had the following account balances:
Overapplied overhead
Cost of Goods Sold
Work in Process Inventory
Finished Goods Inventory
$ 6,000
$980,000
$ 38,000
$ 82,000
If the most common treatment of assigning overapplied overhead was used, the final
balance in Cost of Goods Sold would have been
a.
b.
c.
d.
$985,340.
$974,660.
$974,000.
$986,000.
ANSWER:
c
EASY
Chapter 5
69.
Job Order Costing
5–21
Carley Products has no Work in Process or Finished Goods inventories at the close of
business on December 31, 2000. The balances of Carley’s accounts as of December 31,
2001, are as follows:
Cost of goods sold
Selling & administrative expenses
Sales
Manufacturing overhead control
Manufacturing overhead applied
$2,040,000
900,000
3,600,000
700,000
648,000
Carley Products’ pretax income for 2001 is
a.
b.
c.
d.
$608,000.
$660,000.
$712,000.
undeterminable from the information given.
ANSWER:
70.
eliminate the data entry function for the accounting system.
automate the data collection and data entry functions.
use accounting software to change the focal point of the job order system.
create an Intranet to share information between competitors.
ANSWER:
b
EASY
As data input functions are automated, Intranet data becomes more
a.
b.
c.
d.
complicated to access.
manufacturing, but not accounting, oriented.
real-time accessible.
expensive to install, but easier to use.
ANSWER:
72.
MEDIUM
The trend in job order costing is to
a.
b.
c.
d.
71.
a
c
EASY
Software manufacturing modules are
a.
b.
c.
d.
available from major middle-market vendors.
available only for companies using process costing systems.
not commonly available for middle-market production firms.
not commonly available for integration with traditional accounting systems.
ANSWER:
a
MEDIUM
5–22
73.
Chapter 5
The use of standard material or labor costs in job order costing
a.
b.
c.
d.
is similar to the use of predetermined overhead rates in a normal costing system.
will keep actual costs of jobs from fluctuating due to changes in component costs.
is appropriate for any company making a units to customer specification.
all of the above.
ANSWER:
74.
EASY
effectiveness
complexity
homogeneity
efficiency
ANSWER:
d
EASY
A company producing which of the following would be most likely to use a price
standard for material?
a.
b.
c.
d.
furniture
NFL-logo jackets
picture frames
none of the above
ANSWER:
76.
a
After the completion of production, standard and actual costs are compared to determine
the ______ of the production process.
a.
b.
c.
d.
75.
Job Order Costing
b
MEDIUM
A company producing which of the following would be most likely to use a time standard
for labor?
a.
b.
c.
d.
mattresses
picture frames
floral arrangements
stained-glass windows
ANSWER:
a
MEDIUM
Chapter 5
77.
Job Order Costing
A service organization would be most likely to use a predetermined overhead rate based
on
a.
b.
c.
d.
machine hours.
standard material cost.
direct labor.
number of complaints.
ANSWER:
78.
EASY
estimate costs of future jobs.
establish realistic job selling prices.
evaluate job performance.
all of the above.
ANSWER:
d
EASY
As product variety increases,
a.
b.
c.
d.
job order costing becomes less useful.
production lot sizes decrease.
standard costs in job order costing systems cannot be used.
all of the above.
ANSWER:
80.
c
By knowing specific job costs, managers are better able to
a.
b.
c.
d.
79.
5–23
b
MEDIUM
A job order costing system is likely to provide better
(1)
(2)
(3)
inventory valuations for financial statements.
control over inventory.
information about ability to accept additional production work.
a.
b.
c.
d.
(1)
yes
no
no
yes
ANSWER:
(2)
no
yes
no
yes
(3)
no
yes
no
yes
d
DIFFICULT
5–24
81.
Chapter 5
In a production environment that manufactures goods to customer specifications, a job
order costing system
a.
b.
c.
d.
can be used only if standard costs are used for materials and labor.
will provide reasonable product cost information only when all jobs utilize
approximately the same quantities of material and labor.
may be maintained using either actual or predetermined overhead rates.
emphasizes that large customers create the most costs even though they also
provide the most revenues.
ANSWER:
82.
c
DIFFICULT
Kauai Mfg. Co. produces beach chairs. Chair frames are all the same size, but can be
made from plastic, wood, or aluminum. Regardless of frame choice, the same sailcloth is
used for the seat on all chairs. Kauai has set a standard for sailcloth of $9.90 per square
yard and each chair requires 1 square yard of material. Kauai produced 500 plastic chairs,
100 wooden chairs, and 250 aluminum chairs during June. The total cost for 1,000 square
yards of sailcloth during the month was $10,000. At the end of the month, 50 square
yards of sailcloth remained in inventory. The unfavorable material price variance for
sailcloth purchases for the month was
a.
b.
c.
d.
$100.
$495.
$1,090.
$1,585.
ANSWER:
83.
Job Order Costing
a
MEDIUM
Use the information from #13. Assuming that there was no sailcloth in inventory at the
beginning of June, the unfavorable material quantity variance for the month was
a.
b.
c.
d.
$495.
$500.
$990.
$1,000.
ANSWER:
c
MEDIUM
Chapter 5
84.
Job Order Costing
5–25
Use the information from #13. Kauai Mfg. Co. could set a standard cost for which of the
following?
a.
b.
c.
d.
Frame
cost
yes
no
yes
no
ANSWER:
Predetermined
OH rate
yes
no
no
yes
d
Labor
rate
yes
no
no
yes
DIFFICULT
SHORT ANSWER/PROBLEMS
1.
Compare and contrast job order and process costing systems.
ANSWER: Job order costing is characterized by the production of small quantities of
heterogeneous distinct or unique items. Items are produced according to customer
specifications and, at a minimum, direct material and direct labor costs can be traced to
specific jobs. Process costing is characterized by the production of large quantities of
homogeneous (alike or similar in nature) items. Specific items cannot be identified with
specific costs during the production process.
MEDIUM
2.
Discuss actual costing, normal costing, and standard costing.
ANSWER: Actual costing, normal costing, or standard costing may be used in either a
job order costing or process costing system. Actual costing assigns the actual cost of all
direct material, direct labor, and overhead to the units produced. Normal costing uses
actual direct material and direct labor cost and a predetermined overhead application rate
to cost products. Standard costing establishes “norms” for direct material and direct labor
quantities and/or costs and uses a predetermined (standard) overhead rate for the
application of overhead to determine product cost.
MEDIUM
5–26
3.
Chapter 5
Job Order Costing
What is a “job” as defined in a job order costing system?
ANSWER: A job is a single unit or a group of like items that is produced to customer
specifications. A job is separately identifiable from other jobs. Each job is treated as a
cost object, and costs (typically actual direct material, actual direct labor, and overhead
applied using a predetermined rate) are attached to each job as it flows through the
production process.
MEDIUM
4.
What information should be contained in a subsidiary ledger for Work in Process
Inventory in a job order costing system?
ANSWER: The Work in Process Inventory subsidiary ledger should contain
information on all incomplete jobs. This information will include the amount of direct
material and direct labor costs in production, as well as the amount of overhead applied to
each job. The subsidiary ledger for Work in Process Inventory is composed of all job cost
sheets for uncompleted jobs and substantiates the balance in the general ledger Work in
Process Inventory control account.
MEDIUM
5.
Discuss the basic forms used in a job order costing system.
ANSWER: The forms used in a job order costing system include (1) a job order cost
sheet which records all the financial and significant production data (actual or standard,
and possibly budgeted) relating to a particular job; (2) a material requisition form which
records the costs and quantities of material that has been requisitioned for a particular job;
and (3) an employee time sheet which records the jobs worked on by an employee and the
amount of time spent on each job.
MEDIUM
Chapter 5
6.
Job Order Costing
5–27
Prepare the necessary journal entries from the following information for TriCo, which
uses a perpetual inventory system.
a.
b.
c.
d.
e.
f.
g.
Purchased raw material on account, $56,700.
Requisitioned raw material for production as follows: direct material—80 percent
of purchases; indirect material—15 percent of purchases.
Direct labor wages of $33,100 are accrued as are indirect labor wages of $12,500.
Overhead incurred and paid for is $66,900.
Overhead is applied to production based on 110 percent of direct labor cost.
Goods costing $97,600 were completed during the period.
Goods costing $51,320 were sold on account for $77,600.
ANSWER:
a.
b.
c.
d.
e.
f.
g.
Raw Material Inventory
A/P
WIP Inventory
MOH
Raw Material Inventory
WIP Inventory
MOH
Wages Payable
MOH
Cash
WIP Inventory
MOH
FG Inventory
WIP Inventory
CGS
FG Inventory
A/R
Sales
MEDIUM
56,700
56,700
45,360
8,505
53,865
33,100
12,500
45,600
66,900
66,900
36,410
36,410
97,600
97,600
51,320
51,320
77,600
77,600
5–28
Chapter 5
Job Order Costing
Use the following information for questions 7–10.
Glass Co. uses a job order costing system and develops its predetermined overhead rate based on
machine hours. The company has two jobs in process at the end of the cycle, Jobs #17 and #19.
Budgeted overhead
Budgeted machine hours
Raw material
Labor cost
7.
$100,300
85,000
$ 63,000
$ 50,000
What is the overhead application rate?
ANSWER:
$100,300  85,000= $1.18 per MH
EASY
8.
What amount of overhead is charged to Jobs #17 and #19? Machine hours are split
between Jobs #17 and #19—65 percent and 35 percent, respectively. Actual machine
hours equal budgeted machine hours.
ANSWER:
OH Applied = MH Cost × POHR
#17 85,000 × 65%= 55,250 × $1.18 = $65,195
#19 85,000 × 35%= 29,750 × $1.18 = $35,105
EASY
9.
Fifty-four percent of raw material belongs to Job #17 and 38 percent belongs to Job #19,
and the balance is considered indirect material. What amount of raw material used was
allocated to overhead as indirect material?
ANSWER:
54% + 38% = 92%; this means that 8% is indirect or $5,040
(.08 × $63,000).
EASY
10.
Labor cost was split 25 percent and 70 percent, respectively, between Jobs #17 and #19
for direct labor. The remainder was indirect labor cost. What are the total costs of Jobs
#17 and #19?
ANSWER:
DM
DL
MOH
MEDIUM
Job #17
$ 34,020
12,500
65,195
$111,715
Job #19
$23,940
35,000
35,105
$94,045
Chapter 5
11.
Job Order Costing
5–29
Can standard costing be used in job order costing? If so, what conditions must exist? If
not, explain why.
ANSWER: Yes. Firms that use job order costing can also base their costs on
standards. Each job must be fairly similar to each other job. Standards may be used for
the prices of material and labor if the jobs use basically the same kind of material and
labor. If jobs are homogeneous enough, standards can also be used for materials and labor
quantities. Some companies may choose to only use price standards, others only quantity
standards, and others may use both price and quantity standards.
MEDIUM
5–30
12.
Chapter 5
Job Order Costing
ABC Company manufactures custom-built conveyor systems for factory and commercial
operations. Lisa French is the cost accountant for ABC and she is in the process of
educating a new employee, Julie English, about the job order costing system that ABC
uses. (The system is based on normal costs; overhead is applied based on direct labor cost
and rounded to the next whole dollar.) Lisa gathers the following job order cost records
for May:
Job No.
667
669
670
671
672
Direct
Materials
$ 5,901
18,312
406
51,405
9,615
Direct
Labor
$1,730
1,810
500
9,500
550
Applied OH
$ 1,990
2,082
575
10,925
633
Total
Cost
$ 9,621
22,204
1,481
71,830
10,798
To explain the missing job number, Lisa informed Julie that Job #668 had been
completed in April. She also told her that Job #667 was the only job in process at the
beginning of May. At that time, the job had been assigned $4,300 for direct material and
$900 for direct labor. At the end of May, Job #671 had not been completed; all others
had. Lisa asked Julie several questions to determine whether she understood the job
order system.
Required: Help Julie answer the following questions:
a.
What is the predetermined overhead rate used by ABC Company?
b.
What was the total cost of beginning Work in Process inventory?
c.
What was total prime cost incurred for the month of May?
d.
What was cost of goods manufactured for May?
Chapter 5
Job Order Costing
5–31
ANSWER:
a.
Use any job started in May:
Rate =
MOH
DL COST
b.
DM
DL
FOH
c.
Prime Cost =DM + DL
JOB $670
$575
$500
= 115%/DL Cost
$4,300
900
1,035 ($900 × 115%)
$6,235
DM = $85,639 – 4,300 = $81,339
DL = 14,090 – 900 = 13,190
$94,529
d.
EASY
COGM = $9,621 + 22,204 + 1,481 + 10,798 = $44,104
5–32
13.
Chapter 5
Job Order Costing
James Co. uses a job order costing system and has the following information for the first
week of June 2002:
1.
Direct labor and direct materials used:
Job No.
498
506
507
508
509
511
512
Total
Direct Material
$1,500
960
415
345
652
308
835
$5,015
Direct Labor Hours
116
16
18
42
24
10
30
256
2.
The direct labor wage rate is $4 per hour.
3.
The overhead rate is $5 per direct labor hour.
4.
Actual overhead costs for the week, $1,480.
5.
Jobs completed: Nos. 498, 506, and 509.
6.
The factory had no work in process at the beginning of the week.
Required:
a.
Prepare a summary that will show the total cost assigned to each job.
b.
Compute the amount of overhead over- or underapplied during the week.
c.
Calculate the cost of the work in process at the end of the week.
Chapter 5
Job Order Costing
5–33
ANSWER:
a.
Job No.
498
506
507
508
509
511
512
b.
Actual MOH
Applied MOH
Underapplied
$1,480
1,280
$ 200
c.
JOB 507
508
511
512
Ending WIP
$ 577
723
398
1,105
$2,803
EASY
DM
$1,500
960
415
345
652
308
835
$5,015
DL
$ 464
64
72
168
96
40
120
$1,024
OH
$ 580
80
90
210
120
50
150
$1,280
Total
$2,544
1,104
577
723
868
398
1,105
$7,319
5–34
14.
Chapter 5
Job Order Costing
The Watson Tool Corporation, which commenced operations on August 1, employs a job
order costing system. Overhead is charged at a normal rate of $2.50 per direct labor hour.
The actual operations for the month of August are summarized as follows:
a.
Purchases of raw material, 25,000 pieces @ $1.20/piece.
b.
Material and labor costs charged to production:
Job No.
101
102
103
104
105
c.
Units
10,000
8,800
16,000
8,000
20,000
Material
$4,000
3,600
7,000
3,200
8,000
Direct
labor cost
$6,000
5,400
9,000
4,800
3,600
Direct
labor hours
3,000
2,700
4,500
2,400
1,800
Actual overhead costs incurred:
Variable
Fixed
$18,500
15,000
d.
Completed jobs: 101, 102, 103, and 104
e.
Sales—$105,000. All units produced on Jobs 101, 102, and 103 were sold.
Required: Compute the following balances on August 31:
a.
Material inventory
b.
Work in process inventory
c.
Finished goods inventory
d.
Cost of goods sold
e.
Under- or overapplied overhead
Chapter 5
Job Order Costing
ANSWER:
a.
$30,000 – ($4,000 + $3,600 + $7,000 + $3,200 + $8,000) = $4,200
b.
Job #105 $8,000 + $3,600 + ($1,800 × 2.50) = $16,100
c.
Job #104 $3,200 + $4,800 + ($2,400 × 2.50) = $14,000
d.
Job # 101 $4,000 + $6,000 + ($3,000 × 2.50) = $17,500
102 $3,600 + $5,400 + ($2,700 × 2.50) = 15,750
103 $7,000 + $9,000 + ($4,500 × 2.50)
27,250
$60,500
e.
Applied 14,400 × $2.50 = $36,000
Actual
33,500
Overapplied
$ 2,500
MEDIUM
5–35
5–36
15.
Chapter 5
Job Order Costing
You are asked to bring the following incomplete accounts of Ticker Printing Inc. up to
date through January 31, 2001. Consider the data that appear in the T-accounts as well as
additional information given in items (a) through (i).
Ticker’s job order costing system has two direct cost categories (direct material and direct
manufacturing labor) and one indirect cost pool (manufacturing overhead, which is
allocated using direct manufacturing labor costs).
Materials Inventory Control
12/31/2000
Balance 15,000
Work in Process Inventory Control
Wages Payable Control
1/31/2001
Balance 3,000
Manufacturing Department
Overhead Control
January 2001
Charges 57,000
Manufacturing Overhead Control
Finished Goods Inventory Control
12/31/2000
Balance 20,000
Cost of Goods Sold
Additional Information:
a.
Manufacturing department overhead is allocated using a budgeted rate set every
December. Management forecasts next year’s overhead and next year’s direct
manufacturing labor costs. The budget for 2001 is $400,000 of direct
manufacturing labor and $600,000 of manufacturing overhead.
b.
The only job unfinished on January 31, 2001 is No. 419, on which direct
manufacturing labor costs are $2,000 (125 direct manufacturing labor hours) and
direct material costs are $8,000.
c.
Total material placed into production during January is $90,000.
d.
Cost of goods completed during January is $180,000.
e.
Material inventory as of January 31, 2001 is $20,000.
f.
Finished goods inventory as of January 31, 2001 is $15,000.
g.
All plant workers earn the same wage rate. Direct manufacturing labor hours for
January totals 2,500. Other labor and supervision totals $10,000.
h.
The gross plant payroll on January paydays totals $52,000. Ignore withholdings.
All personnel are paid on a weekly basis.
i.
All “actual” manufacturing department overhead incurred during January has
already been posted.
Chapter 5
Job Order Costing
5–37
Required:
a.
Material purchased during January
b.
Cost of Goods Sold during January
c.
Direct Manufacturing Labor Costs incurred during January
d.
Manufacturing Overhead Allocated during January
e.
Balance, Wages Payable Control, December 31, 2000
f.
Balance, Work in Process Inventory Control, January 31, 2001
g.
Balance, Work in Process Inventory Control, December 31, 2000
h.
Balance, Finished Goods Inventory Control, January 31, 2001
i.
Manufacturing Overhead underapplied or overapplied for January
ANSWER
a.
$15,000 + Purchases – $20,000 = $90,000. Purchases = $95,000
b.
$20,000 + $180,000 – $15,000 = $185,000
c.
DL = $2,000 = $16/HR × 2,500 HRS = $40,000
125
d.
$600,000 = 150% DL cost × $40,000 = $60,000
$400,000
e.
BEGIN + $50,000 – $52,000 = $3,000
f.
$2,000 + ($2,000 × 150%) + $8,000 = $13,000
g.
BEGIN + $90,000 + $40,000 + $60,000 – $180,000 = $13,000
h.
$20,000 + $180,000 – $185,000 = END = $15,000
i.
APPLIED $60,000
ACTUAL 57,000
$ 3,000 overapplied
DIFFICULT
BEGIN = $5,000
BEGIN = $3,000
5–38
16.
Chapter 5
Job Order Costing
The Smith Company manufactures special purpose machines to order. On 1/1/2001 there
were two jobs in process, 405 and 406. The following costs were applied to them in
2000:
Job No.
Direct material
Direct labor
Overhead
Total
405
$ 5,000
4,000
4,400
$13,400
406
$ 8,000
3,000
3,300
$14,300
During January of 2001, the following transactions took place:
*
*
Raw material costing $40,000 was purchased on account.
Jobs #407, 408, and 409 were started and the following costs were applied to
them:
Direct materials
Direct labor
*
*
*
*
*
*
*
407
$3,000
5,000
JOB
408
$10,000
6,000
409
$ 7,000
4,000
Job $405 and Job #406 were completed after incurring additional direct labor
costs of $2,000 and $4,000, respectively
Wages paid to production employees during January totaled $25,000.
Depreciation for the month of January totaled $10,000.
Utilities bills in the amount of $10,000 were paid for December 2000 operations.
Utilities bills totaling $12,000 were received for January operations.
Supplies costing $2,000 were used.
Miscellaneous overhead expenses totaled $24,000 for January.
Actual overhead is applied to individual jobs at the end of each month using a rate based
on actual direct labor costs.
Required:
a.
Determine the January 2001 overhead rate.
b.
Determine the cost of each job.
c.
Prepare a statement of cost of goods manufactured.
Chapter 5
Job Order Costing
5–39
ANSWER:
a.
MOH $4,000 + $10,000 + $12,000 + $2,000 + $24,000 = $52,000 = $2.4762/dl cost
$21,000 dl cost
b.
DM
DC
MOH
BB
c.
Beg WIP
+ DM
+ DL
+ MOH
– End WIP
MEDIUM
JOB
#405
—
$ 2,000
4,952
13,400
$20,352
JOB
#406
—
$ 4,000
9,905
14,300
$28,205
$27,700
20,000
21,000
52,000
72,143
$48,557
JOB
#407
$ 3,000
5,000
12,381
—
$20,381
JOB
#408
$10,000
6,000
14,857
—
$30,857
JOB
#409
$ 1,000
4,000
9,905
—
$20,905
= $ 20,000
=
21,000
=
52,000
=
27,700
$120,700
5–40
17.
Chapter 5
Job Order Costing
Fred Company employs a job order costing system. Only three jobs—Job #105, Job
#106, and Job #107—were worked on during November and December. Job #105 was
completed December 10; the other two jobs were still in production on December 31, the
end of the company’s operating year. Job cost sheets on the three jobs follow:
Job Cost Sheet
Job #105
Job #106
Job #107
November costs incurred:
Direct material
Direct labor
Manufacturing overhead
$16,500
13,000
20,800
$ 9,300
7,000
11,200
December cost incurred:
Direct materials
Direct labor
Manufacturing overhead
—
4,000
?
8,200
6,000
?
—
—
—
$
21,300
10,000
?
The following additional information is available:
a.
Manufacturing overhead is assigned to jobs on the basis of direct labor cost.
b.
Balances in the inventory accounts at November 30 were as follows:
Raw Material
Work in Process
Finished Goods
$40,000
?
85,000
Chapter 5
Job Order Costing
5–41
Required:
a.
Prepare T-accounts for Raw Material, Work in Process Inventory, Finished Goods
Inventory, and Manufacturing Overhead Control. Enter the November 30
inventory balances given previously; in the case of Work in Process Inventory,
compute the November 30 balance and enter it into the Work in Process Inventory
T-account.
b.
Prepare journal entries for December as follows:
1.
Prepare an entry to record the issue of materials into production and post
the entry to appropriate T-accounts. (In the case of direct material, it is not
necessary to make a separate entry for each job.) Indirect materials used
during December totaled $4,000.
2.
Prepare an entry to record the incurrence of labor cost and post the entry to
appropriate T-accounts. (In the case of direct labor, it is not necessary to
make a separate entry for each job.) Indirect labor cost totaled $8,000 for
December.
3.
Prepare an entry to record the incurrence of $19,000 in various actual
manufacturing overhead costs for December (credit Accounts Payable).
c.
What apparent predetermined overhead rate does the company use to assign
overhead cost to jobs? Using this rate, prepare a journal entry to record the
application of overhead cost to jobs for December (it is not necessary to make a
separate entry for each job). Post this entry to appropriate T-accounts.
d.
As stated earlier, Job #105 was completed during December. Prepare a journal
entry to show the transfer of this job off of the production line and into the
finished good warehouse. Post the entry to appropriate T-accounts.
e.
Determine the balance at December 31 in the Work in Process inventory account.
How much of this balance consists of the cost of Job #106? Job #107?
5–42
Chapter 5
Job Order Costing
ANSWER:
a.
RM Inventory
BB 40,000
31,500
b.
c.
1.
WIP Inventory
BB 77,800
29,500 60,700
20,000
32,000
98,600
WIP INV
MOH
RM INV
2.
WIP INV
MOH CONTROL
PAYROLL
3.
MOH CONTROL
A/P
e.
29,500
4,000
33,500
20,000
8,000
28,000
19,000
19,000
160%/DL COST × $20,000 = $32,000
WIP INV
32,000
MOH CONTROL
d.
FG Inventory
BB 85,000
60,700
FG INV
60,700
WIP INV
106 = $51,300
WIP INV
BB
DM
DC
FOH
MEDIUM
32,000
60,700
98,600 <
107 = $47,300
JOB #105
$50,300
0
4,000
6,400
$60,700
JOB #106
$27,500
8,200
6,000
9,600
$51,300
JOB #107
—
$21,300
10,000
16,000
$47,300
MOH Control
4,000
8,000 32,000
19,000
CHAPTER 6
PROCESS COSTING
MULTIPLE CHOICE
1.
Which cost accumulation procedure is most applicable in continuous mass-production
manufacturing environments?
a.
b.
c.
d.
standard
actual
process
job order
ANSWER:
2.
engage in road and bridge construction.
produce sailboats made to customer specifications.
produce bricks for sale to the public.
construct houses according to customer plans.
ANSWER:
c
EASY
A producer of ________ would not use a process costing system.
a.
b.
c.
d.
gasoline
potato chips
blank videotapes
stained glass windows
ANSWER:
4.
EASY
Process costing is used in companies that
a.
b.
c.
d.
3.
c
d
EASY
A process costing system is used by a company that
a.
b.
c.
d.
produces heterogeneous products.
produces items by special request of customers.
produces homogeneous products.
accumulates costs by job.
ANSWER:
c
EASY
6–1
6–2
5.
Chapter 6
Which is the best cost accumulation procedure to use for continuous mass production of
like units?
a.
b.
c.
d.
actual
standard
job order
process
ANSWER:
6.
d.
EASY
units completed by a production department in the period.
number of units worked on during the period by a production department.
number of whole units that could have been completed if all work of the period
had been used to produce whole units.
identifiable units existing at the end of the period in a production department.
ANSWER:
c
MEDIUM
In a process costing system using the weighted average method, cost per equivalent unit
for a given cost component is found by dividing which of the following by EUP?
a.
b.
c.
d.
only current period cost
current period cost plus the cost of beginning inventory
current period cost less the cost of beginning inventory
current period cost plus the cost of ending inventory
ANSWER:
8.
d
Equivalent units of production are equal to the
a.
b.
c.
7.
Process Costing
b
EASY
The weighted average method is thought by some accountants to be inferior to the FIFO
method because it
a.
b.
c.
d.
is more difficult to apply.
only considers the last units worked on.
ignores work performed in subsequent periods.
commingles costs of two periods.
ANSWER:
d
MEDIUM
Chapter 6
9.
Process Costing
The first step in determining the cost per EUP per cost component under the weighted
average method is to
a.
b.
c.
d.
add the beginning Work in Process Inventory cost to the current period’s
production cost.
divide the current period’s production cost by the equivalent units.
subtract the beginning Work in Process Inventory cost from the current period’s
production cost.
divide the current period’s production cost into the EUP.
ANSWER:
10.
MEDIUM
started and completed during the period.
residing in beginning Work in Process Inventory.
residing in ending Work in Process Inventory.
uncompleted in Work in Process Inventory.
ANSWER:
b
MEDIUM
EUP calculations for standard process costing are the same as
a.
b.
c.
d.
the EUP calculations for weighted average process costing.
the EUP calculations for FIFO process costing.
LIFO inventory costing for merchandise.
the EUP calculations for LIFO process costing.
ANSWER:
12.
a
The difference between EUP calculated using FIFO and EUP calculated using weighted
average is the equivalent units
a.
b.
c.
d.
11.
6–3
b
MEDIUM
In a FIFO process costing system, which of the following are assumed to be completed
first in the current period?
a.
b.
c.
d.
units started this period
units started last period
units transferred out
units still in process
ANSWER:
b
EASY
6–4
13.
Chapter 6
To compute equivalent units of production using the FIFO method of process costing,
work for the current period must be stated in units
a.
b.
c.
d.
completed during the period and units in ending inventory.
completed from beginning inventory, units started and completed during the
period, and units partially completed in ending inventory.
started during the period and units transferred out during the period.
processed during the period and units completed during the period.
ANSWER:
14.
MEDIUM
the goods produced are homogeneous.
there is no beginning Work in Process Inventory.
there is no ending Work in Process Inventory.
beginning and ending Work in Process Inventories are each 50 percent complete.
ANSWER:
b
EASY
The primary difference between the FIFO and weighted average methods of process
costing is
a.
b.
c.
d.
in the treatment of beginning Work in Process Inventory.
in the treatment of current period production costs.
in the treatment of spoiled units.
none of the above.
ANSWER:
16.
b
The FIFO method of process costing will produce the same cost of goods transferred out
amount as the weighted average method when
a.
b.
c.
d.
15.
Process Costing
a
EASY
Material is added at the beginning of a process in a process costing system. The beginning
Work in Process Inventory for the process was 30 percent complete as to conversion
costs. Using the FIFO method of costing, the number of equivalent units of material for
the process during this period is equal to the
a.
b.
c.
d.
beginning inventory this period for the process.
units started this period in the process.
units started this period in the process plus the beginning Work in Process
Inventory.
units started and completed this period plus the units in ending Work in Process
Inventory.
ANSWER:
d
MEDIUM
Chapter 6
17.
Process Costing
In a cost of production report using process costing, transferred-in costs are similar to the
a.
b.
c.
d.
cost of material added at the beginning of production.
conversion cost added during the period.
cost transferred out to the next department.
cost included in beginning inventory.
ANSWER:
18.
EASY
debit Work in Process Inventory #2, credit Finished Goods Inventory.
debit Finished Goods Inventory, credit Work in Process Inventory #1.
debit Finished Goods Inventory, credit Work in Process Inventory #2.
debit Cost of Goods Sold, credit Work in Process Inventory #2.
ANSWER:
c
EASY
Transferred-in cost represents the cost from
a.
b.
c.
d.
the last department only.
the last production cycle.
all prior departments.
the current period only.
ANSWER:
20.
a
In a process costing system, the journal entry to record the transfer of goods from
Department #2 to Finished Goods Inventory is a
a.
b.
c.
d.
19.
6–5
c
EASY
Which of the following is(are) the same between the weighted average and FIFO methods
of calculating EUPs?
a.
b.
c.
d.
Units to
account for
no
yes
yes
yes
ANSWER:
d
EUP
calculations
yes
yes
no
no
EASY
Total cost to
account for
no
yes
no
yes
6–6
Chapter 6
21.
Process costing techniques should be used in assigning costs to products
a.
b.
c.
d.
if a product is manufactured on the basis of each order received.
when production is only partially completed during the accounting period.
if a product is composed of mass-produced homogeneous units.
whenever standard-costing techniques should not be used.
ANSWER:
22.
EASY
strict FIFO.
modified FIFO.
weighted average costing.
normal costing.
ANSWER:
b
MEDIUM
A process costing system
a.
b.
c.
d.
cannot use standard costs.
restates Work in Process Inventory in terms of completed units.
accumulates costs by job rather than by department.
assigns direct labor and manufacturing overhead costs separately to units of
production.
ANSWER:
24.
c
Averaging the total cost of completed beginning inventory and units started and
completed over all units transferred out is known as
a.
b.
c.
d.
23.
Process Costing
b
EASY
A process costing system does which of the following?
a.
b.
c.
d.
Calculates EUPs
no
no
yes
yes
ANSWER:
c
EASY
Assigns costs to inventories
no
yes
yes
no
Chapter 6
25.
Process Costing
A process costing system
a.
b.
c.
d.
Calculates average cost
per whole unit
yes
no
yes
no
ANSWER:
26.
EASY
job order and standard costing systems.
job order and process costing systems.
process and standard costing systems.
job order and normal costing systems.
ANSWER:
b
EASY
When standard costs are used in process costing,
a.
b.
c.
d.
variances can be measured during the production period.
total costs rather than current production and current costs are used.
process costing calculations are made simpler.
the weighted average method of calculating EUPs makes computing transferredout costs easier.
ANSWER:
28.
d
Determines total units to
account for
yes
no
no
yes
A hybrid costing system combines characteristics of
a.
b.
c.
d.
27.
6–7
d
MEDIUM
Short Company transferred 5,500 units to Finished Goods Inventory during June. On June
1, the company had 300 units on hand (40 percent complete as to both material and
conversion costs). On June 30, the company had 800 units (10 percent complete as to
material and 20 percent complete as to conversion costs). The number of units started and
completed during June was
a.
b.
c.
d.
5,200.
5,380.
5,500.
6,300.
ANSWER:
a
EASY
6–8
29.
Chapter 6
Brown Co. started 9,000 units in October. The company transferred out 7,000 finished
units and ended the period with 3,500 units that were 40 percent complete as to both
material and conversion costs. Beginning Work in Process Inventory units were
a.
b.
c.
d.
500.
600.
1,500.
2,000.
ANSWER:
30.
c
EASY
X Co. had beginning Work in Process Inventory of 5,000 units that were 40 percent
complete as to conversion costs. X started and completed 42,000 units this period and had
ending Work in Process Inventory of 12,000 units. How many units were started this
period?
a.
b.
c.
d.
54,000
59,000
42,000
47,000
ANSWER:
31.
Process Costing
a
MEDIUM
Winn Co. uses a weighted average process costing system. Material is added at the start
of production. Winn Co. started 13,000 units into production and had 4,500 units in
process at the start of the period that were 60 percent complete as to conversion costs. If
Winn transferred out 11,750 units, how many units were in ending Work in Process
Inventory?
a.
b.
c.
d.
1,250
3,500
5,750
3,000
ANSWER:
c
EASY
Chapter 6
32.
Process Costing
Murphy Co. uses a weighted average process costing system and started 30,000 units this
month. Murphy had 12,000 units that were 20 percent complete as to conversion costs in
beginning Work in Process Inventory and 3,000 units that were 40 percent complete as to
conversion costs in ending Work in Process Inventory. What are equivalent units for
conversion costs?
a.
b.
c.
d.
37,800
42,000
40,200
40,800
ANSWER:
33.
c
EASY
Kim Co. makes small metal containers. The company began December with 250
containers in process that were 30 percent complete as to material and 40 percent
complete as to conversion costs. During the month, 5,000 containers were started. At
month end, 1,700 containers were still in process (45 percent complete as to material and
80 percent complete as to conversion costs). Using the weighted average method, what
are the equivalent units for conversion costs?
a.
b.
c.
d.
4,610
4,910
3,450
4,560
ANSWER:
34.
6–9
b
MEDIUM
Zammillo Co. uses a FIFO process costing system. The company had 5,000 units that
were 60 percent complete as to conversion costs at the beginning of the month. The
company started 22,000 units this period and had 7,000 units in ending Work in Process
Inventory that were 35 percent complete as to conversion costs. What are equivalent units
for material, if material is added at the beginning of the process?
a.
b.
c.
d.
18,000
22,000
25,000
27,000
ANSWER:
b
EASY
6–10
35.
Chapter 6
Process Costing
Lisa Co. makes fabric-covered hatboxes. The company began August with 500 boxes in
process that were 100 percent complete as to cardboard, 80 percent complete as to cloth,
and 60 percent complete as to conversion costs. During the month, 3,300 boxes were
started. On August 31, 350 boxes were in process (100 percent complete as to cardboard,
70 percent complete as to cloth, and 55 percent complete as to conversion costs). Using
the FIFO method, what are equivalent units for cloth?
a.
b.
c.
d.
3,450
3,295
3,395
3,595
ANSWER:
b
MEDIUM
Use the following information for questions 36–38.
Forte Co. has the following information for May:
Beginning Work in Process Inventory
(70% complete as to conversion)
Started
Ending Work in Process Inventory
(10% complete as to conversion)
6,000 units
24,000 units
8,500 units
Beginning WIP Inventory Costs:
Material
$23,400
Conversion
50,607
Current Period Costs:
Material
Conversion
$31,500
76,956
All material is added at the start of the process and all finished products are transferred out.
36.
How many units were transferred out in May?
a.
b.
c.
d.
15,500
18,000
21,500
24,000
ANSWER:
c
EASY
Chapter 6
37.
Process Costing
Assume that weighted average process costing is used. What is the cost per equivalent
unit for material?
a.
b.
c.
d.
$1.83
$1.05
$0.55
$1.31
ANSWER:
38.
6–11
a
MEDIUM
Assume that FIFO process costing is used. What is the cost per equivalent unit for
conversion?
a.
b.
c.
d.
$7.03
$3.44
$4.24
$5.71
ANSWER:
c
MEDIUM
6–12
Chapter 6
Process Costing
Use the following information for questions 39–46.
The December 25th Co. makes wreaths in two departments: Forming and Decorating. Forming
began the month with 500 wreaths in process that were 100 percent complete as to material and
40 percent complete as to conversion. During the month, 6,500 wreaths were started. At month
end, Forming had 2,100 wreaths that were still in process that were 100 percent complete as to
material and 50 percent complete as to conversion. Assume Forming uses the weighted average
method of process costing. Costs in the Forming Department are as follows:
Beginning Work in Process Costs:
Material
$1,000
Conversion
1,500
Current Costs:
Material
$3,200
Conversion
5,045
The Decorating Department had 600 wreaths in process at the beginning of the month that were
80 percent complete as to material and 90 percent complete as to conversion. The department had
300 units in ending Work in Process that were 50 percent complete as to material and 75 percent
complete as to conversion. Decorating uses the FIFO method of process costing, and costs
associated with Decorating are:
Beginning WIP Inventory:
Transferred In
$1,170
Material
4,320
Conversion
6,210
Current Period:
Transferred In
?
Material
$67,745
Conversion
95,820
39.
How many units were transferred to Decorating during the month?
a.
b.
c.
d.
7,000
600
4,900
5,950
ANSWER:
c
EASY
Chapter 6
40.
Process Costing
What was the cost transferred out of Forming during the month?
a.
b.
c.
d.
$6,419
$5,341
$8,330
$8,245
ANSWER:
41.
MEDIUM
7,700
8,000
8,600
7,400
ANSWER:
b
DIFFICULT
Disregard your answer to question 39. Assume 8,000 units were transferred to
Decorating. Compute the number of equivalent units in Decorating for material.
a.
b.
c.
d.
8,000
8,450
8,330
7,970
ANSWER:
43.
c
Disregard your answer to question 39. Assume 8,000 units were transferred to
Decorating. Compute the number of equivalent units as to costs in Decorating for the
transferred-in cost component.
a.
b.
c.
d.
42.
6–13
d
MEDIUM
Disregard your answer to question 39. Assume 8,000 units were transferred to
Decorating. Compute the number of equivalent units in Decorating for conversion.
a.
b.
c.
d.
7,985
8,465
8,360
7,925
ANSWER:
a
MEDIUM
6–14
44.
Chapter 6
Disregard your answer to question 40. Assume that 8,000 units were transferred to
Decorating at a total cost of $16,000. What is the material cost per equivalent unit in
Decorating?
a.
b.
c.
d.
$8.80
$8.65
$8.50
$9.04
ANSWER:
45.
c
MEDIUM
Disregard your answer to question 40. Assume that 8,000 units were transferred to
Decorating at a total cost of $16,000. What is the conversion cost per equivalent unit in
Decorating?
a.
b.
c.
d.
$12.00
$12.78
$11.32
$11.46
ANSWER:
46.
Process Costing
a
MEDIUM
Assume the material cost per EUP is $8.00 and the conversion cost per EUP is $15 in
Decorating. What is the cost of completing the units in beginning inventory?
a.
b.
c.
d.
$11,940
$960
$1,380
$1,860
ANSWER:
d
MEDIUM
Chapter 6
Process Costing
6–15
Use the following information for questions 47–51.
BCW Co. adds material at the start to its production process and has the following information
available for November:
Beginning Work in Process Inventory
(40% complete as to conversion)
Started this period
Ending Work in Process Inventory
(25% complete as to conversion)
Transferred out
47.
29,500
39,000
36,500
34,500
ANSWER:
a
MEDIUM
Calculate equivalent units of production for material using FIFO.
a.
b.
c.
d.
36,800
32,000
39,000
37,125
ANSWER:
49.
2,500 units
?
Compute the number of units started and completed in November.
a.
b.
c.
d.
48.
7,000 units
32,000 units
b
EASY
Calculate equivalent units of production for conversion using FIFO.
a.
b.
c.
d.
34,325
30,125
37,125
39,000
ANSWER:
a
MEDIUM
6–16
50.
Chapter 6
Calculate equivalent units of production for material using weighted average.
a.
b.
c.
d.
34,325
32,000
37,125
39,000
ANSWER:
51.
Process Costing
d
EASY
Calculate equivalent units of production for conversion using weighted average.
a.
b.
c.
d.
39,925
37,125
34,325
38,375
ANSWER:
b
MEDIUM
Use the following information for questions 52–63.
Storey Co. adds material at the start of production. February information for the company
follows:
Beginning Work in Process Inventory
(45% complete as to conversion)
Started this period
Ending Work in Process Inventory
(80% complete as to conversion)
Beginning Work in Process Inventory Costs:
Material
$24,500
Conversion
68,905
Current Period Costs:
Material
Conversion
52.
$ 75,600
130,053
How many units must be accounted for?
a.
b.
c.
d.
128,200
138,200
130,000
118,200
ANSWER:
c
EASY
10,000 units
120,000 units
8,200 units
Chapter 6
53.
Process Costing
What is the total cost to account for?
a.
b.
c.
d.
$205,653
$299,058
$ 93,405
$274,558
ANSWER:
54.
b
EASY
What are the equivalent units for material using the weighted average method?
a.
b.
c.
d.
120,000
128,360
130,000
123,860
ANSWER:
c
EASY
What are the equivalent units for material using the FIFO method?
a.
b.
c.
d.
130,000
125,500
111,800
120,000
ANSWER:
57.
EASY
120,000
111,800
121,800
130,000
ANSWER:
56.
b
How many units were started and completed in the period?
a.
b.
c.
d.
55.
6–17
d
EASY
What are the equivalent units for conversion using the weighted average method?
a.
b.
c.
d.
128,360
123,440
130,000
120,000
ANSWER:
a
MEDIUM
6–18
58.
Chapter 6
What are the equivalent units for conversion using the FIFO method?
a.
b.
c.
d.
128,360
123,860
118,360
122,860
ANSWER:
59.
c
MEDIUM
What is the conversion cost per equivalent unit using the weighted average method?
a.
b.
c.
d.
$1.61
$1.55
$1.05
$1.01
ANSWER:
b
MEDIUM
What is the cost of units completed using the weighted average?
a.
b.
c.
d.
$266,742
$282,576
$278,400
$237,510
ANSWER:
62.
MEDIUM
$.58
$.62
$.77
$.82
ANSWER:
61.
b
What is the material cost per equivalent unit using the weighted average method?
a.
b.
c.
d.
60.
Process Costing
b
DIFFICULT
What is the conversion cost per equivalent unit using the FIFO method?
a.
b.
c.
d.
$1.05
$.95
$1.61
$1.55
ANSWER:
a
MEDIUM
Chapter 6
63.
Process Costing
6–19
What is the cost of all units transferred out using the FIFO method?
a.
b.
c.
d.
$204,624
$191,289
$287,004
$298,029
ANSWER:
c
DIFFICULT
Use the following information relating to I M Cute Co. for questions 64–73.
Beginning inventory (30% complete as to Material B
and 60% complete for conversion)
Started this cycle
Ending inventory (50% complete as to Material B
and 80% complete for conversion)
700 units
2,000 units
500 units
Beginning inventory costs:
Material A
$14,270
Material B
5,950
Conversion
5,640
Current Period costs:
Material A
Material B
Conversion
$40,000
70,000
98,100
Material A is added at the start of production, while Material B is added uniformly throughout
the process.
64.
Assuming a weighted average method of process costing, compute EUP units for
Materials A and B.
a.
b.
c.
d.
2,700 and 2,280, respectively
2,700 and 2,450, respectively
2,000 and 2,240, respectively
2,240 and 2,700, respectively
ANSWER:
b
EASY
6–20
65.
Chapter 6
Assuming a FIFO method of process costing, compute EUP units for Materials A and B.
a.
b.
c.
d.
2,700 and 2,280, respectively
2,700 and 2,450, respectively
2,000 and 2,240, respectively
2,450 and 2,880, respectively
ANSWER:
66.
MEDIUM
2,600
2,180
2,000
2,700
ANSWER:
a
MEDIUM
Assuming a FIFO method of process costing, compute EUP for conversion.
a.
b.
c.
d.
2,240
2,180
2,280
2,700
ANSWER:
68.
c
Assuming a weighted average method of process costing, compute EUP for conversion.
a.
b.
c.
d.
67.
Process Costing
b
MEDIUM
Assuming a weighted average method of process costing, compute the average cost per
unit for Material A.
a.
b.
c.
d.
$20.10
$20.00
$31.25
$31.00
ANSWER:
a
MEDIUM
Chapter 6
69.
Process Costing
Assuming a FIFO method of process costing, compute the average cost per EUP for
Material A.
a.
b.
c.
d.
$31.25
$20.10
$20.00
$31.00
ANSWER:
70.
MEDIUM
$20.10
$31.25
$20.00
$31.00
ANSWER:
b
MEDIUM
Assuming a weighted average method of process costing, compute the average cost per
EUP for Material B.
a.
b.
c.
d.
$20.00
$31.25
$20.10
$31.00
ANSWER:
72.
c
Assuming a FIFO method of process costing, compute the average cost per EUP for
Material B.
a.
b.
c.
d.
71.
6–21
d
MEDIUM
Assuming a FIFO method of process costing, compute the average cost per EUP for
conversion.
a.
b.
c.
d.
$45.50
$45.00
$43.03
$47.59
ANSWER:
b
MEDIUM
6–22
73.
Chapter 6
Process Costing
Assuming a weighted average method of process costing, compute the average cost per
EUP for conversion.
a.
b.
c.
d.
$39.90
$45.00
$43.03
$47.59
ANSWER:
a
DIFFICULT
THE FOLLOWING MULTIPLE CHOICE RELATES TO MATERIAL COVERED IN
THE APPENDIX OF THE CHAPTER.
74.
Which of the following is subtracted from weighted average EUP to derive FIFO EUP?
a.
b.
c.
d.
beginning WIP EUP completed in current period
beginning WIP EUP produced in prior period
ending WIP EUP not completed
ending WIP EUP completed
ANSWER:
b
EASY
SHORT ANSWER/PROBLEMS
1.
Discuss the assignment of costs to transferred-out inventories in both process costing
methods.
ANSWER: The assignment of costs in a process costing system first involves
determining total production costs. These costs are then assigned to units completed and
transferred out during the period and to the units in Work in Process Inventory at the end
of the period. To assign costs, the cost per equivalent unit must be established using
either the FIFO or weighted average method. The cost per EUP is then multiplied by the
number of equivalent units in the component being costed. Transferred-out costs using
the weighted average method are computed as the number of units transferred times the
total price per equivalent unit. When using FIFO, transferred-out units are computed as
follows: the costs in beginning WIP are added to the current period costs to complete the
units which sums to the total cost of beginning WIP; the units started and completed are
priced at current period costs; the total of the costs of beginning inventory and units
started and completed are then transferred out.
MEDIUM
Chapter 6
2.
Process Costing
6–23
Discuss process costing in a multidepartment atmosphere.
ANSWER: When a business has more than one department in its production process,
products are transferred from Department A to Department B and so on. As the products
are transferred from department to department so, too, must the costs be transferred.
When products are transferred, the units and costs are treated as input material in the next
department. The new department may add additional material or may simply add
conversion costs and finish the products. The total cost of the products is a cumulative
total from all departments within the process.
MEDIUM
3.
Discuss standard costing as used in conjunction with process costing.
ANSWER: When standard costing is used in conjunction with process costing, the
costing procedure is simplified. Standard costing eliminates the calculation in each new
period of a new production cost because the standards are established as on going norms
for (at least) a one-year period of time. Standard costing in a process costing system is
essentially a FIFO system that permits variances to be recognized during the period.
MEDIUM
4.
What are two alternative calculations that can be used to either check an equivalent units
answer or to obtain the answer initially?
ANSWER: One alternative method of calculating equivalent units for weighted
average is to determine units transferred out and add to that the equivalent units of ending
work in process. Another alternative method of calculating equivalent units for FIFO is to
determine equivalent units of production under weighted average and subtract the
beginning work in process equivalent units that were completed in the last period. Both of
these methods may be used to “check” original answers.
MEDIUM
6–24
Chapter 6
Process Costing
Use the following information for questions 5–7.
VanBuren Co. has the following information available for November:
Beginning Work in Process Inventory
(25% complete as to conversion)
Started
Ending Work in Process Inventory
(30% complete as to conversion)
10,000 units
120,000 units
30,000 units
Beginning Work in Process Inventory Costs:
Material
$2,100
Conversion
2,030
Current Period Costs:
Material
Conversion
$ 33,000
109,695
All material is added at the start of production and all products completed are transferred out.
Chapter 6
5.
Process Costing
6–25
Prepare an equivalent units schedule using the (a) FIFO and (b) weighted average
method.
ANSWER:
VanBuren Company
Schedule of Equivalent Units for
Fifo and Weighted Average
November 30, 20XX
Beg. WIP
Started
To Acct. For
FIFO
10,000
120,000
130,000
Beg. WIP
S&C
End. WIP
Acct. For
10,000
90,000
30,000
130,000
(a)
BWIP
S&C
EWIP
EUP
FIFO
Mat.
0
90,000
30,000
120,000
CC
7,500
90,000
9,000
106,500
Beg. WIP
Started
To Acct. For
Weighted Average
10,000
120,000
130,000
TO
EI
Acct. for
100,000
30,000
130,000
(b) Weighted Average
Mat.
CC
TO
EI
EUP
100,000
30,000
130,000
100,000
9,000
109,000
MEDIUM
6.
Prepare a schedule showing the computation for cost per equivalent unit assuming the
(a) FIFO and (b) weighted average method.
ANSWER:
VanBuren Company
Schedule of Average Cost Per Unit
FIFO and Weighted Average
November 30, 20XX
(a) FIFO
Mat.
CC
$ 33,000
$ 109,695
 120,000
 106,500
$
.275
$
1.03
$1.305
MEDIUM
(b) Weighted Average
Mat.
CC
$ 35,100
$111,725
130,000
109,000
$
.27
$ 1.025
$1.295
6–26
7.
Chapter 6
Process Costing
Prepare a schedule showing the assignment of costs assuming the (a) FIFO and (b)
weighted average method.
ANSWER:
VanBuren Company
Schedule of Assigned Costs
FIFO and Weighted Average
November 30, 20XX
(a) FIFO
Beginning Work in Process
To complete (7,500 × $1.03) =
Started and Completed
90,000 × $1.305 =
Total costs transferred out
Ending Work in Process
30,000 × $ .275 =
9,000 × $1.03 =
$ 4,130
7,725
$11,855
117,450
$129,305
Total costs accounted for
8,250
9,270
$ 17,520
$146,825
(b) Weighted Average
Completed
100,000 × $1.295 =
$129,500
Ending Work in Process
30,000 × $ .27 =
9,000 × $1.025 =
Total costs accounted for
DIFFICULT
$
$
8,100
9,225
$ 17,325
$146,825
Chapter 6
8.
Process Costing
6–27
The Valentine’s Day Company has two processing departments, Cooking and Packaging.
Ingredients are placed into production at the beginning of the process in Cooking, where
they are formed into various shapes. When finished, they are transferred into Packaging,
where the candy is placed into heart and tuxedo boxes and covered with foil. All material
added in Packaging is considered as one material for convenience. Since the boxes
contain a variety of candies, they are considered partially complete until filled with the
appropriate assortment. The following information relates to the two departments for
February 2001:
Cooking Department:
Beginning WIP (30% complete as to conversion)
Units started this period
Ending WIP (60% complete as to conversion)
Packaging Department:
Beginning WIP (90% complete as to material,
80% complete as to conversion)
Units started during period
Ending WIP (80% complete as to material
and 80% complete as to conversion)
a.
b.
4,500 units
15,000 units
2,400 units
1,000 units
?
500 units
Determine equivalent units of production for both departments using the weighted
average method.
Determine equivalent units of production for both departments using the FIFO
method.
6–28
Chapter 6
ANSWER:
a.
Cooking Department
Mat.
17,100
2,400
19,500
CC
17,100
1,440
18,540
Packaging Department
T. In
Trans. Out
17,600
EWIP
500
TOTAL EUP
18,100
Mat.
17,600
400
18,000
Trans. Out
EWIP
TOTAL EUP
b.
CC
17,600
400
18,000
Cooking Department
Mat.
0
12,600
2,400
15,000
CC
3,150
12,600
1,440
17,190
Packaging Department
T. In
BWIP
0
S&C
16,600
EWIP
500
TOTAL EUP
17,100
Mat.
100
16,600
400
17,100
BWIP
S&C
EWIP
TOTAL EUP
DIFFICULT
CC
200
16,600
400
17,200
Process Costing
Chapter 6
9.
Process Costing
6–29
The following costs were accumulated by Department 2 of H Company during July:
Beginning Inventory
Current Period Cost
Cost Transferred
from Dept. 1
$ 17,050
184,000
$ 201,050
Material
CC
5,450
104,000
$ 109,450
$
$ 34,000
$ 34,000
Total
$ 22,500
322,000
$ 344,500
Production for July in Department 2 (in units):
WIP—July 1
Complete period transferred
WIP—July 31
2,000 60% complete
20,000
5,000 40% complete
Materials are not added in Department 2 until the very end of processing Department 2.
Required: Compute the cost of units completed and the value of ending WIP for:
a.
Average inventory assumption
b.
FIFO inventory assumption
6–30
Chapter 6
Process Costing
ANSWER:
a.
Average inventory assumption
Complete
Eq—End WIP
EP—WA
Dept 1
20,000
5,000
25,000
MAT
20,000
0
20,000
CC
20,000
2,000
22,000
Unit
Cost
$201,050 = $8.042 $34,000 = $1.70
25,000
20,000
$109,450 = $4.975
22,000
End WIP
Dept 1 = 5,000 × $8.042
CC = 2,000 units × $4.975
= $40,210
= 9,950
$50,160
= $14.717
COGM = $344,500 – $50,160 = $294,340
b.
FIFO inventory assumption
Complete
Eq-End WIP
– Eq-Begin
EP-WA
Unit
Cost
End WIP
Dept 1
20,000
5,000
(2,000 )
23,000
$184,000 = $8.00
23,000
MAT
20,000
0
0
20,000
$34,000 = $1.70
20,000
Dept 1 = 5,000 units × $8.00
CC = 2,000 units × $5.00
COGM = $344,500 – $50,000 = $294,500
MEDIUM
CC
20,000
2,000
(1,200 )
20,800
$104,000 = $5.00
20,800
= $40,000
= 10,000
$50,000
= $14.70
CHAPTER 7
SPECIAL PRODUCTION ISSUES: LOST UNITS AND ACCRETION
MULTIPLE CHOICE
1.
Shrinkage should be treated as
a.
b.
c.
d.
defective units.
spoiled units.
miscellaneous expense.
a reduction of overhead.
ANSWER:
2.
not be sold through normal channels of distribution.
be sold through normal channels of distribution.
not be reprocessed to a sufficient quality level.
also be called a spoiled unit.
ANSWER:
b
EASY
A unit that is rejected at a quality control inspection point, but that can be reworked and
sold, is referred to as a
a.
b.
c.
d.
spoiled unit.
scrap unit.
abnormal unit.
defective unit.
ANSWER:
4.
EASY
Economically reworked units may
a.
b.
c.
d.
3.
b
d
EASY
Spoiled units are
a.
b.
c.
d.
units that cannot be economically reworked to bring them up to standard.
units that can be economically reworked to bring them up to standard.
the same as defective units.
considered abnormal losses.
ANSWER:
a
EASY
7–1
7–2
5.
Chapter 7
The cost of abnormal losses (net of disposal costs) should be written off as
a.
b.
c.
d.
Product cost
yes
yes
no
no
ANSWER:
6.
Abnormal loss
yes
yes
no
no
ANSWER:
EASY
d
Normal loss
yes
no
no
yes
EASY
If abnormal spoilage occurs in a job order costing system, has a material dollar value, and
is related to a specific job, the recovery value of the spoiled goods should be
a.
b.
c.
d.
debited to
a scrap inventory account
the specific job in process
a loss account
factory overhead
ANSWER:
8.
c
Period cost
no
yes
yes
no
Which of the following would fall within the range of tolerance for a production cycle?
a.
b.
c.
d.
7.
Special Production Issues: Lost Units and Accretion
a
credited to
the specific job in process
overhead
the specific job in process
sales
MEDIUM
If normal spoilage is detected at an inspection point within the process (rather than at the
end), the cost of that spoilage should be
a.
b.
c.
d.
included with the cost of the units sold during the period.
included with the cost of the units completed in that department during the period.
allocated to ending work in process units and units transferred out based on their
relative values.
allocated to the good units that have passed the inspection point.
ANSWER:
d
MEDIUM
Chapter 7
9.
Special Production Issues: Lost Units and Accretion
A continuous loss
a.
b.
c.
d.
occurs unevenly throughout a process.
never occurs during the production process.
always occurs at the same place in a production process.
occurs evenly throughout the production process.
ANSWER:
10.
c
EASY
The method of neglect handles spoilage that is
a.
b.
c.
d.
discrete and abnormal.
discrete and normal.
continuous and abnormal.
continuous and normal.
ANSWER:
d
MEDIUM
Normal spoilage is defined as unacceptable production that
a.
b.
c.
d.
arises because of a special job or process.
occurs in on-going operations.
is caused specifically by human error.
is in excess of that which is expected.
ANSWER:
13.
EASY
adding the correct ingredients to make a bottle of ketchup
putting the appropriate components together for a stereo
adding the wrong components when assembling a stereo
putting the appropriate pieces for a bike in the box
ANSWER:
12.
d
Which of the following would be considered a discrete loss in a production process?
a.
b.
c.
d.
11.
7–3
b
EASY
When the cost of good units are increased and lost units are not included in an equivalent
unit schedule, these units are considered
a.
b.
c.
d.
normal and discrete.
normal and continuous.
abnormal and discrete.
abnormal and continuous.
ANSWER:
b
EASY
7–4
14.
Chapter 7
The net cost of normal spoilage in a job order costing system in which spoilage is
common to all jobs should be
a.
b.
c.
d.
assigned directly to the jobs that caused the spoilage.
charged to manufacturing overhead during the period of the spoilage.
charged to a loss account during the period of the spoilage.
allocated only to jobs that are completed during the period.
ANSWER:
15.
MEDIUM
written off as a period cost.
never shown in EUP schedules.
treated as a product cost.
both b and c.
ANSWER:
c
EASY
Normal spoilage units resulting from a continuous process
a.
b.
c.
d.
are extended to the EUP schedule.
result in a higher unit cost for the good units produced.
result in a loss being incurred.
cause estimated overhead to increase.
ANSWER:
17.
b
Normal spoilage is
a.
b.
c.
d.
16.
Special Production Issues: Lost Units and Accretion
b
EASY
When normal spoilage is discovered at a discrete inspection point and the degree of
completion of ending work in process has not reached the level of completion of the
inspection point, normal spoilage is handled by
a.
b.
c.
d.
prorating the spoilage cost between units transferred out and units in ending work
in process.
extending the spoiled units to the EUP schedule.
assigning the normal spoilage costs to the units transferred out and those in
beginning inventory.
both b and c.
ANSWER:
d
MEDIUM
Chapter 7
18.
Special Production Issues: Lost Units and Accretion
In a job order costing system, the net cost of normal spoilage is equal to
a.
b.
c.
d.
estimated disposal value plus the cost of spoiled work.
the cost of spoiled work minus estimated spoilage cost.
the units of spoiled work times the predetermined overhead rate.
the cost of spoiled work minus the estimated disposal value.
ANSWER:
19.
Beginning
Inventory
no
yes
no
yes
ANSWER:
MEDIUM
b
Ending
Inventory
yes
yes
no
no
Units Started
& Completed
yes
yes
yes
no
MEDIUM
The cost of normal discrete losses is
a.
b.
c.
d.
absorbed by all units past the inspection point on an equivalent unit basis.
absorbed by all units in ending inventory.
considered a period cost.
written off as a loss on an equivalent unit basis.
ANSWER:
21.
d
Taylor Co. has a production process in which the inspection point is at 65 percent of
conversion. The beginning inventory for July was 35 percent complete and ending
inventory was 80 percent complete. Normal spoilage costs would be assigned to which of
the following groups of units, using FIFO costing?
a.
b.
c.
d.
20.
7–5
a
EASY
When spoilage is discovered at a discrete point in the production process,
a.
b.
c.
d.
equivalent units for the spoilage are shown in the EUP schedule.
its cost, if normal, should be assigned to the units transferred out.
its cost, if abnormal, should be assigned to the good units produced.
both a and c.
ANSWER:
a
EASY
7–6
22.
Chapter 7
When the cost of lost units must be assigned, and those same units must be included in an
equivalent unit schedule, these units are considered
a.
b.
c.
d.
normal and discrete.
normal and continuous.
abnormal and discrete.
abnormal and continuous.
ANSWER:
23.
MEDIUM
spoilage that is forecasted or planned.
spoilage that is in excess of planned.
accounted for as a product cost.
debited to Cost of Goods Sold.
ANSWER:
b
EASY
Which of the following accounts is credited when abnormal spoilage is written off in an
actual cost system?
a.
b.
c.
d.
Miscellaneous Revenue
Loss from Spoilage
Finished Goods
Work in Process
ANSWER:
25.
d
Abnormal spoilage is
a.
b.
c.
d.
24.
Special Production Issues: Lost Units and Accretion
d
EASY
Which of the following types of spoilage cost is considered a product cost?
a.
b.
c.
d.
Abnormal spoilage
yes
yes
no
no
ANSWER:
c
EASY
Normal spoilage
yes
no
yes
no
Chapter 7
26.
Special Production Issues: Lost Units and Accretion
Abnormal spoilage can be
a.
b.
c.
d.
continuous
yes
no
yes
no
ANSWER:
27.
good units
yes
no
yes
no
ANSWER:
EASY
d
lost units
yes
no
no
yes
EASY
The cost of abnormal continuous losses is
a.
b.
c.
d.
considered a product cost.
absorbed by all units in ending inventory and transferred out on an equivalent unit
basis.
written off as a loss on an equivalent unit basis.
absorbed by all units past the inspection point.
ANSWER:
29.
c
discrete
no
no
yes
yes
The cost of abnormal discrete units must be assigned to
a.
b.
c.
d.
28.
7–7
c
EASY
Which of the following statements is false? The cost of rework on defective units, if
a.
b.
c.
d.
abnormal, should be assigned to a loss account.
normal and if actual costs are used, should be assigned to material, labor and
overhead costs of the good production.
normal and if standard costs are used, should be considered when developing the
overhead application rate.
abnormal, should be prorated among WIP, FG, and CGS.
ANSWER:
d
MEDIUM
7–8
30.
Chapter 7
A process that generates continuous defective units
a.
b.
c.
d.
never requires a quality control point.
requires a quality control point at the end of the process.
requires quality control points every time new materials are added to the
production process.
requires quality control points at the beginning of the production process.
ANSWER:
31.
MEDIUM
accretion.
reworked units.
complex procedure.
undetected spoilage.
ANSWER:
a
EASY
When material added in a successor department increases the number of units, the
a.
b.
c.
d.
extra units are treated like spoilage.
unit cost of the transferred-in units is decreased.
costs associated with the extra units are maintained separately for financial
reporting purposes.
unit cost of the transferred-in units is increased.
ANSWER:
33.
b
The addition of material in a successor department that causes an increase in volume is
called
a.
b.
c.
d.
32.
Special Production Issues: Lost Units and Accretion
b
EASY
Which of the following is not a question that needs to be answered in regard to quality
control?
a.
b.
c.
d.
What happens to the spoiled units?
What is the actual cost of spoilage?
How can spoilage be controlled?
Why does spoilage happen?
ANSWER:
a
MEDIUM
Chapter 7
34.
Special Production Issues: Lost Units and Accretion
In regard to spoilage, management should be most concerned with which of the
following?
a.
b.
c.
d.
accounting for spoilage
controlling spoilage
planning for spoilage
inspecting spoilage
ANSWER:
b
EASY
Use the following information for questions 35–46.
The following information is available for K Co. for June:
Started this month
Beginning WIP
(40% complete)
Normal spoilage (discrete)
Abnormal spoilage
Ending WIP
(70% complete)
Transferred out
Beginning Work in Process Costs:
Material
Conversion
Current Costs:
Material
Conversion
80,000 units
7,500 units
1,100 units
900 units
13,000 units
72,500 units
$10,400
13,800
$120,000
350,000
All materials are added at the start of production and the inspection point is at the end of the
process.
35.
What are equivalent units of production for material using FIFO?
a.
b.
c.
d.
80,000
79,100
78,900
87,500
ANSWER:
a
MEDIUM
7–9
7–10
36.
Chapter 7
What are equivalent units of production for conversion costs using FIFO?
a.
b.
c.
d.
79,700
79,500
81,100
80,600
ANSWER:
37.
b
EASY
What are equivalent units of production for conversion costs using weighted average?
a.
b.
c.
d.
83,600
82,700
82,500
81,600
ANSWER:
a
EASY
What is cost per equivalent unit for material using FIFO?
a.
b.
c.
d.
$1.63
$1.37
$1.50
$1.56
ANSWER:
40.
MEDIUM
86,600
87,500
86,400
85,500
ANSWER:
39.
d
What are equivalent units of production for material using weighted average?
a.
b.
c.
d.
38.
Special Production Issues: Lost Units and Accretion
c
EASY
What is cost per equivalent unit for conversion costs using FIFO?
a.
b.
c.
d.
$4.00
$4.19
$4.34
$4.38
ANSWER:
c
EASY
Chapter 7
41.
Special Production Issues: Lost Units and Accretion
What is cost per equivalent unit for material using weighted average?
a.
b.
c.
d.
$1.49
$1.63
$1.56
$1.44
ANSWER:
42.
$4.19
$4.41
$4.55
$4.35
ANSWER:
EASY
$75,920
$58,994
$56,420
$53,144
ANSWER:
b
MEDIUM
What is the cost assigned to abnormal spoilage using FIFO?
a.
b.
c.
d.
$1,350
$3,906
$5,256
$6,424
ANSWER:
45.
d
What is the cost assigned to ending inventory using FIFO?
a.
b.
c.
d.
44.
EASY
What is cost per equivalent unit for conversion costs using weighted average?
a.
b.
c.
d.
43.
a
c
MEDIUM
What is the cost assigned to normal spoilage and how is it classified using weighted
average?
a.
b.
c.
d.
$6,193 allocated between WIP and Transferred Out
$6,424 assigned to units Transferred Out
$6,193 assigned to loss account
$6,424 assigned to units Transferred Out
ANSWER:
b
MEDIUM
7–11
7–12
46.
Chapter 7
Special Production Issues: Lost Units and Accretion
What is the total cost assigned to goods transferred out using weighted average?
a.
b.
c.
d.
$435,080
$429,824
$428,656
$423,400
ANSWER:
b
DIFFICULT
Use the following for questions 47–57.
The following information is available for OP Co. for the current year:
Beginning Work in Process
(75% complete)
Started
Ending Work in Process
(60% complete)
Abnormal spoilage
Normal spoilage (continuous)
Transferred out
14,500 units
75,000 units
16,000
2,500
5,000
66,000
units
units
units
units
Costs of Beginning Work in Process:
Material
$25,100
Conversion
50,000
Current Costs:
Material
$120,000
Conversion
300,000
All materials are added at the start of production.
47.
Using weighted average, what are equivalent units for material?
a.
b.
c.
d.
82,000
89,500
84,500
70,000
ANSWER:
48.
c
EASY
Using weighted average, what are equivalent units for conversion costs?
a.
b.
c.
d.
80,600
78,100
83,100
75,600
ANSWER:
b
EASY
Chapter 7
49.
Special Production Issues: Lost Units and Accretion
What is the cost per equivalent unit for material using weighted average?
a.
b.
c.
d.
$1.72
$1.62
$1.77
$2.07
ANSWER:
50.
$4.62
$4.21
$4.48
$4.34
ANSWER:
MEDIUM
$31,000
$15,500
$30,850
none of the above
ANSWER:
d
EASY
Assume that the cost per EUP for material and conversion are $1.75 and $4.55,
respectively. What is the cost assigned to ending Work in Process?
a.
b.
c.
d.
$100,800
$87,430
$103,180
$71,680
ANSWER:
53.
c
What is the cost assigned to normal spoilage using weighted average?
a.
b.
c.
d.
52.
MEDIUM
What is the cost per equivalent unit for conversion costs using weighted average?
a.
b.
c.
d.
51.
a
d
EASY
Using FIFO, what are equivalent units for material?
a.
b.
c.
d.
75,000
72,500
84,500
70,000
ANSWER:
d
EASY
7–13
7–14
54.
Chapter 7
Using FIFO, what are equivalent units for conversion costs?
a.
b.
c.
d.
72,225
67,225
69,725
78,100
ANSWER:
55.
EASY
$1.42
$1.66
$1.71
$1.60
ANSWER:
c
EASY
Using FIFO, what is the cost per equivalent unit for conversion costs?
a.
b.
c.
d.
$4.46
$4.15
$4.30
$3.84
ANSWER:
57.
b
Using FIFO, what is the cost per equivalent unit for material?
a.
b.
c.
d.
56.
Special Production Issues: Lost Units and Accretion
a
EASY
Assume that the FIFO EUP cost for material and conversion are $1.50 and $4.75,
respectively. Using FIFO what is the total cost assigned to the units transferred out?
a.
b.
c.
d.
$414,194
$339,094
$445,444
$396,975
ANSWER:
a
DIFFICULT
Chapter 7
Special Production Issues: Lost Units and Accretion
7–15
Use the following information for questions 58–65.
T Co. has the following information for July:
Units started
Beginning Work in Process: (35% complete)
Normal spoilage (discrete)
Abnormal spoilage
Ending Work in Process: (70% complete)
Transferred out
Beginning Work in Process Costs:
Material
$15,000
Conversion
10,000
100,000
20,000
3,500
5,000
14,500
97,000
units
units
units
units
units
units
All materials are added at the start of the production process. T Co. inspects goods at 75 percent
completion as to conversion.
58.
What are equivalent units of production for material, assuming FIFO?
a.
b.
c.
d.
100,000
96,500
95,000
120,000
ANSWER:
59.
MEDIUM
What are equivalent units of production for conversion costs, assuming FIFO?
a.
b.
c.
d.
108,900
103,900
108,650
106,525
ANSWER:
60.
a
d
MEDIUM
Assume that the costs per EUP for material and conversion are $1.00 and $1.50,
respectively. What is the amount of the period cost for July using FIFO?
a.
b.
c.
d.
$0
$9,375
$10,625
$12,500
ANSWER:
c
MEDIUM
7–16
61.
Chapter 7
Assume that the costs per EUP for material and conversion are $1.00 and $1.50,
respectively. Using FIFO, what is the total cost assigned to the transferred-out units
(rounded to the nearest dollar)?
a.
b.
c.
d.
$245,750
$244,438
$237,000
$224,938
ANSWER:
62.
DIFFICULT
107,000
116,500
120,000
115,000
ANSWER:
c
EASY
What are equivalent units of production for conversion costs assuming weighted average
is used?
a.
b.
c.
d.
113,525
114,400
114,775
115,650
ANSWER:
64.
b
What are equivalent units of production for material assuming weighted average is used?
a.
b.
c.
d.
63.
Special Production Issues: Lost Units and Accretion
a
EASY
Assume that the costs per EUP for material and conversion are $1.00 and $1.50,
respectively. What is the cost assigned to normal spoilage, using weighted average, and
where is it assigned?
a.
b.
c.
d.
Value
$7,437.50
$7,437.50
$8,750.00
$8,750.00
ANSWER:
b
Assigned To
Units transferred out and EI
Units transferred out
Units transferred out and EI
Units transferred out
EASY
Chapter 7
65.
Special Production Issues: Lost Units and Accretion
Assume that the costs per EUP for material and conversion are $1.00 and $1.50,
respectively. Assuming that weighted average is used, what is the cost assigned to ending
inventory?
a.
b.
c.
d.
$29,725.00
$37,162.50
$38,475.00
$36,250.00
ANSWER:
66.
EASY
its minimum tolerance for defects.
its maximum tolerance for defects.
a decision to seek world-class status as a manufacturer.
its automated quality limits.
ANSWER:
b
EASY
World-class companies
a.
b.
c.
d.
believe that “Six-Sigma” is the best AQL to have.
have performed well if their defect percentage is greater than their AQL.
continuously attempt to raise their AQL.
all of the above.
ANSWER:
68.
a
A company’s AQL represents
a.
b.
c.
d.
67.
7–17
c
MEDIUM
Six Sigma translates into a rate of 3.4 defects per
a.
b.
c.
d.
million items processed.
billion items processed.
thousand items processed.
hundred items processed.
ANSWER:
a
EASY
7–18
69.
Chapter 7
The concept of Six Sigma is directly related to
a.
b.
c.
d.
Variation elimination
no
no
yes
yes
ANSWER:
70.
d
JIT Inventory
no
yes
yes
no
MEDIUM
Performing services with zero errors is viewed as a(an)
a.
b.
c.
d.
reasonable goal for all service organizations.
impossible goal for any service organization.
laudable goal for most service organizations.
goal equivalent to achieving Six-Sigma performance.
ANSWER:
71.
Special Production Issues: Lost Units and Accretion
c
MEDIUM
Which of the following would be the most likely cause of an increase in the number of
units in a department?
a.
b.
c.
d.
Bulk packaging
Expansion of material
Heat processing
All of the above
ANSWER:
b
MEDIUM
SHORT ANSWER/PROBLEMS
1.
How is the cost of reworking defective items accounted for?
ANSWER: Reworked units are also known as defective units. These units can be
reprocessed and sold or sold as is as irregulars. Rework cost is classified as either a
product or period cost. If rework is considered normal and actual costing is used, the cost
is added to current Work in Process and is assigned to all units produced. If rework is
abnormal, the cost is allocated to a loss account for the period.
MEDIUM
Chapter 7
2.
Special Production Issues: Lost Units and Accretion
7–19
Discuss the accounting treatment of spoilage in a job order costing system.
ANSWER: If the spoilage is common to all jobs, is normal, and can be estimated, the
net cost is applied to production using a predetermined overhead rate that was set by
including the spoilage estimate in estimated overhead. If spoilage pertains to a particular
job and is normal, the disposal value of the spoiled goods should be removed from that
particular job. If the spoilage is abnormal, the net cost should be charged to a loss account
and credited to the particular Work in Process job that created the spoilage.
MEDIUM
3.
Discuss why units are lost during production.
ANSWER: In most production processes, losses are anticipated to a certain degree.
Losses may be classified as normal and abnormal depending on management’s
expectations. A normal loss is one that is expected, while an abnormal loss is one that
exceeds the normal loss. The losses may result in spoiled or defective units. Spoiled units
cannot be economically reworked; defective units can be. Losses can occur on a
continuous or a discrete basis. Quality control points are established at the end of and/or
within the process to inspect goods and remove from further processing those units that
are either spoiled or defective.
MEDIUM
4.
Discuss how spoilage is treated in EUP computations.
ANSWER: If spoilage is normal and continuous, the calculations for EUP do not
include this spoilage (method of neglect), and the good units simply absorb the cost of
such spoilage. If spoilage is normal and discrete, the equivalent units are used in the EUP
calculations, and the spoilage cost is assigned to all units that passed through the
inspection point during the current period. If the spoilage is abnormal and either discrete
or continuous, the equivalent units are used in EUP calculations and costed at the cost per
EUP; the total cost is then assigned to a loss account.
MEDIUM
7–20
Chapter 7
Special Production Issues: Lost Units and Accretion
Use this data for questions 5 and 6.
The following information is available for Paas Co. for January 2001. All materials are added at
the start of production.
Beginning Work in Process: (80% complete)
Started
Normal spoilage (continuous)
Abnormal spoilage
Ending Work in Process: (55% complete)
Transferred out
Beginning Work in Process Costs:
Material
$ 14,000
Conversion
45,000
Current Costs:
Material
50,000
Conversion
175,000
Total Costs
$ 284,000
8,000
35,000
6,000
2,500
15,000
19,500
units
units
units
units
units
units
Chapter 7
5.
Special Production Issues: Lost Units and Accretion
7–21
Prepare a cost of production report for January using FIFO.
ANSWER:
BI 8,000 + Started 35,000 = Accountable for 43,000
Paas Co.
Cost Report
January 31, 2001
BWIP
S&C
EWIP
Norm
Abnorm.
Acctd. for
8,000
11,500
15,000
6,000
2,500
43,000
Material
0
11,500
15,000
0
2,500
29,000
Material: $50,000/29,000 = $1.72
Conversion Costs: $175,000/23,850 = $7.34
Cost Assignment:
Ending Work in Process
15,000 × $1.72 =
$ 25,800
8,250 × $7.34 =
60,555
Abnormal Spoilage
2,500 × $9.06 =
Cost Transferred Out
$284,000 – 86,355 – 22,650 =
Total costs accounted for
MEDIUM
$ 86,355
22,650
174,995
$ 284,000
CC
1,600
11,500
8,250
0
2,500
23,850
7–22
6.
Chapter 7
Special Production Issues: Lost Units and Accretion
Prepare the cost of production report assuming weighted average.
ANSWER:
BI 8,000 + Started 35,000 = Accountable for 43,000
Paas Company
Cost Report
January 31, 2001
TO
EWIP
Norm
Abnorm.
Acctd. for
19,500
15,000
6,000
2,500
43,000
Material
19,500
15,000
0
2,500
37,000
Material: $64,000/37,000 = $1.73
Conversion Costs: $220,000/30,250 = $ 7.27
Cost Assignment:
Ending Work in Process
15,000 × $1.73 =
8,250 × $7.27 =
Abnormal Spoilage
2,500 × $9.00 =
$25,950
59,978
Transferred Out
$284,000 – 85,928 – 22,500 =
Total costs accounted for
MEDIUM
$ 85,928
22,500
175,572
$ 284,000
CC
19,500
8,250
0
2,500
30,250
Chapter 7
7.
Special Production Issues: Lost Units and Accretion
7–23
MJ Company manufactures picture frames of all sizes and shapes and uses a job order
costing system. There is always some spoilage in each production run. The following
costs relate to the current run:
Estimated overhead (exclusive of spoilage)
Spoilage (estimated)
Sales value of spoiled frames
Labor hours
$160,000
$ 25,000
$ 11,500
100,000
The actual cost of a spoiled picture frame is $7.00. During the year 170 frames are
considered spoiled. Each spoiled frame can be sold for $4. The spoilage is considered a
part of all jobs.
a.
b.
c.
Labor hours are used to determine the predetermined overhead rate. What is the
predetermined overhead rate per direct labor hour?
Prepare the journal entry needed to record the spoilage.
Prepare the journal entry if the spoilage relates only to Job #12 rather than being a
part of all production runs.
ANSWER:
a.
$160,000 + $25,000 – $11,500 = $173,500
$173,500/100,000 = $1.735 per DLH
b.
Disposal Value of Spoiled Work
Manufacturing Overhead
Work in Process Inventory
680
510
Disposal Value of Spoiled Work
Work in Process Inventory—Job #12
680
c.
MEDIUM
1,190
680
7–24
8.
Chapter 7
Special Production Issues: Lost Units and Accretion
I Eat Yogurt Company produces yogurt in two departments—Mixing and Finishing. In
Mixing, all ingredients except fruit are added at the start of production. In Finishing, fruit
is added and then the mixture is placed into containers. Adding the fruit to the basic
yogurt mixture increases the volume transferred in by the number of gallons of fruit
added. Any spoilage that occurs is in the Finishing Department. Spoilage is detected just
before the yogurt is placed into containers or at the 98 percent completion point. All
spoilage is abnormal.
Finishing Department
BWIP (100% fruit, 0% container, 30% CC)
Gallons transferred in
Gallons of fruit added
EWIP (100% fruit, 0% container, 60% CC)
Gallons transferred out
Abnormal spoilage
BWIP Costs:
Transferred In
Fruit
CC
Current Costs:
Transferred In
Fruit
Containers
CC
Total Costs
$
5,000 gallons
5,500
1,200
1,700 gallons
9,000
1,000
9,700
10,500
15,000
12,400
54,000
11,000
98,000
$ 210,600
Prepare a cost of production report for September 2001. The company uses weighted
average.
Chapter 7
Special Production Issues: Lost Units and Accretion
ANSWER:
7–25
I Eat Yogurt Co.
Cost Report
September 30, 2001
BWIP
Trans. In
Fruit
Acctble. For
5,000
5,500
1,200
11,700
TO
EWIP
AS
TI
9,000
1,700
1,000
11,700
Fruit
9,000
1,700
1,000
11,700
Container
9,000
0
0
9,000
CC
9,000
1,020
980
11,000
TI
$ 9,700
12,400
$22,100
11,700
$1.89
Fruit
$10,500
54,000
$64,500
11,700
$5.51
Container
$
0
11,000
$11,000
9,000
$1.22
CC
$ 15,000
98,000
$113,000
11,000
$10.27
Costs:
BWIP
Current
EUP
Per unit
Cost Assignment:
EWIP
1,700 × $1.89 =
$ 3,213
1,700 × $5.51 =
9,367
1,020 × $10.27 =
10,475
Spoilage
1,000 × $1.89 =
$ 1,890
1,000 × $5.51 =
5,510
980 × $10.27 =
10,065
Transferred Out
$210,600 – 23,055 – 17,465 =
Total accounted for
MEDIUM
$ 23,055
17,465
170,080
$ 210,600
7–26
9.
Chapter 7
Special Production Issues: Lost Units and Accretion
In Dept 1 material is added at the beginning, in Dept 2 material is added at the end.
Normal losses in Department 1 should not exceed 5 percent of the units started; losses are
found at an inspection point located 70 percent of the way through the production
process. The normal loss in Department 2 is 3 percent of the units transferred in; losses
are determined at an inspection point at the end of the production process.
The following production and cost data are available for January 2001.
PRODUCTION RECORDS
(IN UNITS)
Beginning inventory
Started or transferred in
Ending inventory
Spoiled units
Transferred out
Dept. 1
6,000
150,000
18,000
9,000
?
Dept. 2
3,000
?
15,000
6,000
111,000
COST RECORD
Beginning inventory
Preceding department
Material
Conversion
Current period:
Preceding department
Material
Conversion
n/a
$3,000
2,334
$6,690
0
504
n/a
$36,000
208,962
$230,910*
740
52,920
*This is not the amount derived from your calculations. Use this amount so that you do
not carry forward any possible cost errors from Department 1.
The beginning and ending inventory units in Department 1 are, respectively, 10 percent
and 60 percent complete as to conversion. In Department 2, the beginning and ending
units are, respectively, 40 percent and 80 percent complete as to conversion.
Assume spoilage in Department 1 is continuous and discrete in Department 2. Use FIFO
in Department 1 and weighted average in Department 2.
Chapter 7
Special Production Issues: Lost Units and Accretion
7–27
ANSWER:
Complete
+ Equiv End
+ Abn Loss
– Equiv Beg
EP
Department 1
Mat
CC
129,000
129,000
18,000
10,800
1,500
1,050
148,500
140,850
(6,000 )
(600 )
142,500
140,250
Unit Cost
+ Norm Loss
EP
Unit Cost
TI
TI
111,000
15,000
2,130
3,870
132,000
Department 2
.
Mat
CC
111,000 111,000
0
12,000
2,130
2,130
3,870
3,870
117,000 129,000
$6,690 + 230,910 = $1.80
132,000
Mat
$36,000 = $0.25
142,500
Mat
$740 = $0.01
117,000
CC
$208,962 = $1.49
140,250
CC
$504 + 52,920 = $0.41
129,000
End WIP
18,000 × $0.25 = $ 4 500
10,800 × $1.49 = 16,092
$20,592
End WIP
15,000 × $1.80 = $27,000
12,000 × $0.41 = 4,920
$31,920
ABN Loss
1,500 × $0.25 =
1,050 × $1.49 =
ABN Loss
2,130 × $2.22 =
$ 375
1,565
$1,940
COGM (Department 1)
$ 250,296 – 20,592 – 1,940 = $ 227,764
DIFFICULT
$4,729
COGM (Department 2)
$291,764 – $31,920 – $4,729 = $255,115
7–28
10.
Chapter 7
Special Production Issues: Lost Units and Accretion
All material is added at the beginning of the process.
Costs
Beginning inventory
Current period
Total costs
Material
$ 30,000
885,120
$915,120
Conversion
$ 3,600
335,088
$338,688
UNITS
Beginning inventory (30% complete—conversion)
Started
Completed
Ending inventory (70% complete—conversion)
Normal spoilage
Total
$ 33,600
1,220,208
$1,253,808
6,000
180,000
152,000
20,000
4,800
units
units
units
units
units
Required: Find ending WIP inventory, abnormal loss, and COGM. Assume that, for
conversion costs, abnormal shrinkage is 60 percent.
Chapter 7
Special Production Issues: Lost Units and Accretion
7–29
ANSWER:
Units Complete
+ Equivalents Ending WIP
+ Abnormal Loss
= Equivalent Production—WA
= Equivalent Begin WIP
= Equivalent Production—FIFO
Mat
152,000
20,000
9,200
181,200
(6,000 )
175,200
Unit Costs:
WA
Mat
$915,120 = $5.05
181,200
FIFO
Mat
CC
CC
$338,688 = $1.97
171,520
Ending WIP
Material 20,000 × $5.05
CC
14,000 × $1.97
Abnormal Spoilage
Material 9,200 × $5.05
CC
5,520 × $1.97
$101,000
27,580
$128,580
$ 46,460
10,874
$ 57,334
Cost of Good Transferred
$1,253,808 – 128,580 – 57,334 = $1,067,894
MEDIUM
CC
152,000
14,000
5,520 (9,200 × .6)
171,520
(1,800 )
169,720
$885,120 = $5.05
175,200
$335,088 = $1.97
169,720
7–30
11.
Chapter 7
Special Production Issues: Lost Units and Accretion
Department 1 uses FIFO costing and Department 2 uses weighted average.
Units are introduced into the process in Department 1 (this is the only material added in
Department 1). Spoilage occurs continuously through the department and normal
spoilage should not exceed 10 percent of the units started.
Department 2 adds material (packaging) at the 75 percent completion point; this material
does not cause an increase in the number of units being processed. A quality control
inspection takes place when the goods are 80 percent complete. Spoilage should not
exceed 5 percent of the units transferred in from Department 1.
The following production cost data are applicable for operations for May 2001:
Department 1 Production Data
Beginning inventory (65% complete)
Units started
Units completed
Units in ending inventory (40% complete)
Department 1 Cost Data
Beginning inventory:
Material
Conversion
Current period:
Material
Conversion
Total costs to account for
Department 2 Production Data
Beginning inventory (90% complete)
Units transferred in
Units completed
Units in ending inventory (20% complete)
Department 2 Cost Data
Beginning inventory:
Transferred in
Material
Conversion
Current period:
Transferred in
Material`
Conversion
Total costs to account for
1,000
25,000
22,000
2,800
$1,550
2,300
$3,850
$38,080
78,645
116,725
$120,575
8,000
22,000
24,000
4,500
$40,800
24,000
4,320
$113,700*
53,775
11,079
$ 69,120
178,554
$247,674
*This may not be the same amount determined for Department 1; ignore any difference
and use this figure.
Chapter 7
Special Production Issues: Lost Units and Accretion
7–31
Required:
a.
Compute the equivalent units of production in each department.
b.
Determine the cost per equivalent unit in each department and compute the cost
transferred out, the cost in ending inventory, and the cost of spoilage (if necessary).
ANSWER:
a.
1
Mat
CC
Complete
+ End WIP
22,000
2,800
24,800
22,000
1,120 (2,800 × 4)
23,120
– Beg WIP
(1,000 )
(650 ) (1,000 × .65)
23,800 22,470
Mat =
$38,080
23,800
=
$1.60
CC =
$78,645
22,470
=
$3.50
End WIP = 2,800 × $1.60 =
= 1,120 × $3.50
$ 4,480
3.920
$ 8,400
COGM = $120,575 – 8,400 = $112,175
b.
2
Complete
+ End WIP
+ Normal
+ Abnormal
TI
Mat
CC
24,000
4,500
1,100
400
30,000
24,000
0
1,100
400
25,500
24,000
900
880
320
26,100
End WIP
4,500 × $5.15
900 × $0.59
$23,175
531
$23,706
COGM = $247,674 – 23,706 – 3,469 = $220,499
MEDIUM
Mat =
$ 77,775
25,500
= $3.05
CC =
$ 15,399
26,100
= $0.59
TI =
$154,500
30,000
= $5.15
Abn Loss
400 × $3.05
320 × $0.59
400 × $5.15
$1,220
189
2,060
$3,469
7–32
12.
Chapter 7
Special Production Issues: Lost Units and Accretion
Consider the following data for a cooking department for the month of January:
Physical
Units
Work in process, beginning inventory*
Started during current period
To account for
Good units completed and transferred out during current period:
From beginning work in process
Started and completed
Good units completed
Spoiled units
Work in process, ending inventory~
Accounted for
11,000
74,000
85,000
11,000
50,000
61,000
8,000
16,000
85,000
*Direct material, 100% complete; conversion costs, 25% complete
~Direct material, 100% complete; conversion costs, 75% complete
Inspection occurs when production is 100 percent completed. Normal spoilage is 11
percent of good units completed and transferred out during the current period.
The following cost data are available:
Work in process, beginning inventory:
Direct material
Conversion costs
Costs added during current period:
Direct material
Conversion costs
Costs to account for
$220,000
30,000
$ 250,000
1,480,000
942,000
$2,672,000
Required: Prepare a detailed cost of production report. Use the FIFO method.
Distinguish between normal and abnormal spoilage.
Chapter 7
Special Production Issues: Lost Units and Accretion
7–33
ANSWER:
Normal Sp = 11% × 61,000 = 6,710 units FIFO
Abnormal Sp = 8,000 – 6,710 = 1,290 units
Mat
Complete
+ End
+ Ab Sp
– Ave
– Beg
FIFO
61,000
16,000
1,290
78,290
(11,000 )
67,290
CC
61,000
12,000
1,290
74,290
(2,750 )
71,540
Mat =
$1,480,000
67,290
= $22.00
CC =
$942,000
71,540
= 13.17
$35.17
WIP
Material 16,000 × $22.00
CC
12,000 × $13.17
Loss = 1,290 × $35.17
$352,000
158,040
$510,040
45,369
COGM = $2,672,000 – 510,040 – 45,369 = $2,116,591
MEDIUM
7–34
13.
Chapter 7
Special Production Issues: Lost Units and Accretion
In the Lamination Department, varnish is added when the goods are 60 percent complete
as to overhead. The units that are spoiled during processing are found upon inspection at
the end of production. Spoilage is considered discrete.
Production Data for March 2001
Beginning inventory (80% complete as to labor,
70% complete as to overhead)
Transferred in during month
Ending inventory (40% complete as to labor,
20% complete as to overhead)
Normal spoilage (found during final quality inspection)
1,000 units
7,450 units
1,500 units
100 units
Abnormal spoilage—found at 30% completion of direct labor and
15% of conversion; the sanding machine was misaligned and
scarred the chairs
200 units
All other units were transferred to finished goods
Cost Data for March 2001
Beginning work in process inventory:
Prior department costs
Varnish
Direct labor
Overhead
Current period costs:
Prior department costs
Varnish
Direct labor
Overhead
Total costs to account for
$7,510
950
2,194
5,522
$ 16,176
$68,540
7,015
23,000
56,782
155,337
$171,513
Required: Determine the proper disposition of the March costs for the Laminating
Department using the weighted average method.
Chapter 7
Special Production Issues: Lost Units and Accretion
7–35
ANSWER:
TI
6,650
1,500
100
200
8,450
Complete
+ end
+ normal
+ abnormal
Unit Cost
$76,050 = $9
8,450
End WIP
DL
MOH
TI
Abnormal Loss
DL
MOH
TI
MAT
6,650
0
100
0
6,750
$7,965 = $1.18
6,750
600 × $3.40
300 × $8.80
1,500 × $9.00
= $ 2,040
=
2,640
= 13,500
$18,180
60 × $3.40
30 × $8.80
200 × $9.00
= $ 204
=
264
=
1,800
$ 2,268
COGM = $171,513 – 18,180 – 2,268 = $151,065
MEDIUM
DL
6,650
600
100
60
7,410
$25,194 = $3.40
7,410
MOH
6,650
300
100
30
7,080
$62,304 = $8.80
7,080
7–36
14.
Chapter 7
Special Production Issues: Lost Units and Accretion
Tons of Shad employs a weighted average process costing system for its products. One
product passes through three departments (Molding, Assembly, and Finishing) during
production. The following activity took place in the Finishing Department during March
2001:
Units in beginning inventory
Units transferred in from Assembly
Units spoiled
Good units transferred out
4,200
42,000
2,100
33,600
The costs per equivalent unit of production for each cost failure area as follows:
Cost of prior departments
Raw material
Conversion
Total cost per EUP
$5.00
1.00
3.00
$9.00
Raw material is added at the beginning of the Finishing process without changing the
number of units being processed. Work in process inventory was 40 percent complete as
to conversion on March 31. All spoilage was discovered at final inspection. Of the total
units spoiled, 1,680 were within normal limits.
Required:
a.
Calculate the equivalent units of production
b.
Determine the cost of units transferred out of Finishing
c.
Determine the cost of ending Work in Process Inventory
d.
The portion of the total transferred in cost associated with beginning Work in
Process Inventory amounted to $18,900. What is the current period cost that was
transferred in from Assembly to Finishing?
e.
Determine the cost associated with abnormal spoilage for the month.
Chapter 7
Special Production Issues: Lost Units and Accretion
7–37
ANSWER:
a.
TI
33,600
10,500
1,680
420
46,200
Complete
+ Equiv WIP
+ Normal Sp
+ Abnor Sp
b.
33,600 × $9
1,680 × $9
$302,400
15,120
$317,520
c.
10,500 × $5
10,500 × $1
4,200 × $3
$52,500
10,500
12,600
$75,600
Mat
33,600
10,500
1,680
420
46,200
TC = 46,200 × $5
46,200 × $1
39,900 × $3
COGM = $396,900 – 75,600 – 3,780 = $317,520
d.
$5 = $18,900 + X
46,200
X = $231,000 – 18,900 = $212,100
e.
ABN = 420 × $9 = $3,780
420 × $9 = $3,780
MEDIUM
CC
33,600
4,200
1,680
420
39,900
$231,000
46,200
119,700
$396,900
7–38
15.
Chapter 7
Special Production Issues: Lost Units and Accretion
Department 2 adds new material to the units received from Department 1 at the end of
process. A normal loss occurs early in processing. Production and cost data for
Department 2 for the month of September are as follows:
Production record (in units):
In process, September 1—
75% complete for processing cost
Received from Department 1
Completed and transferred to finished goods
Lost in processing (normal)
In process, September 30—
2/3 complete for process cost
Cost Record:
Work in process inventory, September 1:
Preceding department cost
Processing cost
Cost from preceding department in September
Material cost for September
Processing cost for September
4,000
20,000
16,000
2,000
6,000
$ 620
2,000
$2,620
1,800
4,800
10,200
Required: Determine the following for Department 2 under (a) weighted average the
method of costing and (b) the FIFO method of costing: (1) unit costs for each cost
component, (2) cost of production transferred to finished goods, (3) cost of work in
process inventory of September 30.
Chapter 7
Special Production Issues: Lost Units and Accretion
7–39
ANSWER:
Equivalent production
Units complete
+ Equiv. ending WIP
= Equiv. prod. average
– Equiv. begin. WIP
= Equiv. prod. FIFO
Unit Cost Average
TI = $620 + 1,800
22,000
TI
16,000
6,000
22,000
(4,000 )
18,000
Material
16,000
0
16,000
0
16,000
Conv. cost
16,000
4,000
20,000
(3,000 )
17,000
= $0.11
Unit Cost FIFO
TI = $1,800
18,000
= $0.10
Mat = $4,800
16,000
= $0.30
Mat = $4,800
16,000
= $0.30
CC = $2,000 + 10,200
20,000
= $0.61
CC = $10,200
17,000
= $0.60
End. WIP—WA
PD 6,000 × $0.11 =
CC 4,000 × $0.61 =
$ 660.00
2,440.00
$3,100.00
End. WIP—FIFO
6,000 × $0.10 =
$ 600.00
4,000 × $0.60 =
2,400.00
$3,000.00
Cost of Goods Complete
WA
$19,420 – 3,100 =
MEDIUM
$16,320.00
FIFO
$19,420 – 3,000 = $16,420.00
7–40
16.
Chapter 7
Special Production Issues: Lost Units and Accretion
The formula for a chemical compound requires one pound of Chemical X and one pound
of Chemical Y. In the simplest sense, one pound of Chemical X is processed in
Department A and transferred to Department B for further processing where one pound of
Chemical Y is added when the process is 50 percent complete. When the processing is
complete in Department B, the finished compound is transferred to finished goods. The
process is continuous, operating 24 hours a day.
Normal spoilage occurs in Department A. Five percent of material is lost in the first
few seconds of processing. No spoilage occurs in Department B.
The following data are available for the month of October 2001:
Units in process, October 1
Stage of completion of beginning inventory
Units started or transferred in
Units transferred out
Units in process, October 31
Stage of completion of ending inventory
Units of Chemical Y added in Department B
Dept. A
8,000
3/4
50,000
46,500
?
1/3
Dept. B
10,000
3/10
?
?
?
1/5
44,500
Required:
a.
Prepare a schedule showing finished equivalents for Chemical X and for
conversion cost for Department A using the FIFO method.
b.
Determine for Department B the number of units of good product completed
during October and the number of units in process on October 31.
c.
Prepare a schedule for Department B showing finished equivalents for preceding
department cost, cost of Chemical Y, and conversion cost using the FIFO method.
Chapter 7
Special Production Issues: Lost Units and Accretion
7–41
ANSWER:
a.
c.
Mat
46,500
9,000
(8,000 )
47,500
b.
CC
46,500
3,000
(6,000 )
43,500
PD
44,500
12,000
(10,000 )
46,500
Mat
44,500
0
0
44,500
CC
44,500
2,400
(3,000 )
43,900
Since the material in the second department goes in at the 50 percent point and the ending
WIP inventory is only at the 20 percent point, units complete is the same as the
equivalents of material 44,500, given that units started plus units in beginning WIP are
equal to units complete plus ending WIP 10,000 + 46,500 – 44,500 = 12,000 units in
ending WIP.
MEDIUM
CHAPTER 8
IMPLEMENTING QUALITY CONCEPTS
MULTIPLE CHOICE
1.
An all-inclusive definition of quality views it as the ability of products/services to
a.
b.
c.
d.
only meet internal design specifications.
meet the customer’s stated or implied needs.
be produced using all value-added production activities.
be produced with no rework costs.
ANSWER:
2.
EASY
Which of the following is false as it relates to quality?
a.
b.
c.
d.
Quality is the total of all characteristics of a product or service that impacts on its
ability to meet the needs of a specific person.
Quality must always be viewed from the user’s perspective.
Quality is never concerned with what the user thinks, feels, or deems important.
The definition of quality has evolved through time and is more currently
comprehensive than in the past.
ANSWER:
3.
b
c
EASY
Productivity is measured by the
a.
b.
c.
d.
total quantity of output generated from a limited amount of input during a time
period.
quantity of good output generated from a specific amount of input during a time
period.
quantity of good output generated from the quantity of good input used during a
time period.
total quantity of input used to generate total quantity of output for a time period.
ANSWER:
b
MEDIUM
8–1
8–2
4.
Chapter 8
Which of the following can be used to indicate factors that slow down or cause
unnecessary work in a process?
a.
b.
c.
d.
activity analysis
total quality management
cost of quality
all of the above
ANSWER:
5.
EASY
value-neutral activities
value-added activities
non-value-added activities
none of the above
ANSWER:
c
EASY
Which of the following would typically be viewed as non-value-added activities?
a.
b.
c.
d.
Moving
material
yes
no
no
yes
ANSWER:
7.
a
Which of the following are undesirable from a consumer perspective but are frequently
needed?
a.
b.
c.
d.
6.
Implementing Quality Concepts
d
Inspecting
raw material
yes
no
yes
yes
Attaching product
components
yes
no
no
no
Storing
finished goods
no
yes
yes
yes
EASY
__________ places the primary responsibility for quality on the maker or producer.
a.
b.
c.
d.
Pareto analysis
Quality control
Benchmarking
Activity analysis
ANSWER:
b
EASY
Chapter 8
8.
Implementing Quality Concepts
All attempts to reduce variability and defects in products reflect the implementation of
a.
b.
c.
d.
activity analysis.
statistical process control.
quality control.
control charts.
ANSWER:
9.
d
MEDIUM
A control chart graphs
a.
b.
c.
d.
actual process results relative to a range of acceptable variation.
expected process results relative to upper and lower control limits.
actual process results relative to value-added and non-value-added activities.
the cost of process malfunctions relative to the cost of reducing process variations.
ANSWER:
a
EASY
The addition or removal of product or service characteristics to satisfy additional needs,
especially price, reflect the ________ of a product or service.
a.
b.
c.
d.
value
grade
quality
durability
ANSWER:
12.
EASY
total quality control.
statistical process control.
total quality management.
all of the above.
ANSWER:
11.
c
Control charts are appropriate devices in
a.
b.
c.
d.
10.
8–3
b
MEDIUM
Value reflects the ability of a product to
a.
b.
c.
d.
provide the best quality at any price.
have all possible product and service characteristics.
meet the majority of a customer’s needs at the lowest possible price.
have the longest technical or service life and the best warranty.
ANSWER:
c
MEDIUM
8–4
13.
Chapter 8
Comparing the way a “best-in-class” company performs a specific activity (such as
distribution) is called
a.
b.
c.
d.
process benchmarking.
results benchmarking.
total quality management benchmarking.
SPC benchmarking.
ANSWER:
14.
d
EASY
Benchmarking against direct competitors creates the risk of
a.
b.
c.
d.
creating products or services with identical specifications.
becoming stagnant relative to process improvements.
being taken over by the competitors to prevent a loss of ideas.
all of the above.
ANSWER:
b
MEDIUM
Reverse engineering is used in
a.
b.
c.
d.
statistical process control.
process benchmarking.
results benchmarking.
price fixing.
ANSWER:
17.
EASY
identify its strengths and weaknesses.
imitate those ideas that are readily transferable.
improve on methods in use by others.
all of the above.
ANSWER:
16.
a
Benchmarking allows a company to
a.
b.
c.
d.
15.
Implementing Quality Concepts
c
MEDIUM
Benchmarking against noncompetitors is extremely important in
a.
b.
c.
d.
process benchmarking.
results benchmarking.
reverse engineering.
all of the above.
ANSWER:
a
MEDIUM
Chapter 8
18.
Implementing Quality Concepts
Benchmarking
a.
b.
c.
d.
identifies “best-in-class” companies
yes
no
yes
no
ANSWER:
19.
EASY
Compares BIC’s
products and
processes
with own
yes
yes
no
yes
ANSWER:
d
Copies BIC’s
products and
processes
directly
yes
no
no
no
Improves on
BIC’s products
and
processes
yes
no
yes
yes
EASY
Which of the following is not a step in benchmarking procedures?
a.
b.
c.
d.
analyze the “positive gap”
engage in continuous improvement
analyze the “negative gap”
identify “best-in-class” companies
ANSWER:
21.
c
analyzes the “negative gap”
no
yes
yes
no
Benchmarking does which of the following activities relative to a “best-in-class” (BIC)
company?
a.
b.
c.
d.
20.
8–5
a
MEDIUM
Which of the following is not a critical element in a total quality management system?
a.
b.
c.
d.
employee involvement
activity-based costing
continuous improvement
problem prevention emphasis
ANSWER:
b
MEDIUM
8–6
22.
Chapter 8
A total quality system should be designed to promote a reorientation of thinking from an
emphasis on
a.
b.
c.
d.
internal quality improvements to an emphasis on external benchmarking.
the planning process to an emphasis on the performance evaluation process.
inspection to an emphasis on prevention.
process benchmarking to an emphasis on results benchmarking.
ANSWER:
23.
MEDIUM
what the company’s customers want
who the company’s customers are
how the company’s processes are designed
what the components of the company’s product are
ANSWER:
b
EASY
Total quality management is inseparable from the concept of
a.
b.
c.
d.
ISO certification.
centralized organizational structure.
continuous improvement.
the product life cycle.
ANSWER:
25.
c
Which of the following is the first element of knowledge needed by a company wanting
to pursue total quality management?
a.
b.
c.
d.
24.
Implementing Quality Concepts
c
EASY
A company will not achieve world-class status unless a quality focus
a.
b.
c.
d.
allows that company to achieve one or more major quality awards.
becomes an integral part of the organization’s culture.
emphasizes the elimination of all quality costs for compliance and
noncompliance.
has been mandated by management for workers to pursue.
ANSWER:
b
EASY
Chapter 8
26.
Implementing Quality Concepts
Which of the following statements is true?
a.
b.
c.
d.
The more customers a company has, the better off the company is.
A company should spare no expense to provide customer satisfaction.
Most customers stop doing business with a company because of poor product or
service quality.
Cost-benefit analysis can help identify customers that cost more than they are
worth to the company.
ANSWER:
27.
EASY
external failure, internal failure, prevention, and carrying.
external failure, internal failure, prevention, and appraisal.
external failure, internal failure, training, and appraisal.
warranty, product liability, training, and appraisal.
ANSWER:
b
EASY
The number of product defects discovered by consumers is what kind of performance
indicator?
a.
b.
c.
d.
Qualitative
yes
no
no
yes
ANSWER:
29.
d
The four categories of product quality costs are
a.
b.
c.
d.
28.
8–7
b
Quantitative
no
yes
yes
no
EASY
Money spent on employee training is a
a.
b.
c.
d.
prevention cost.
appraisal cost.
empowerment cost.
Pareto cost.
ANSWER:
a
EASY
Financial
no
no
yes
no
Nonfinancial
yes
yes
no
yes
8–8
30.
Chapter 8
Production quality is affected by
a.
b.
c.
d.
worker productivity.
the amount of failure costs incurred.
worker skill level.
just-in-time suppliers.
ANSWER:
31.
EASY
appraisal costs
no
no
yes
yes
ANSWER:
d
failure costs
no
yes
no
yes
EASY
Product quality includes all of the following except
a.
b.
c.
d.
appeal.
performance.
durability.
price.
ANSWER:
33.
c
Mistakes not eliminated by prevention costs may cause
a.
b.
c.
d.
32.
Implementing Quality Concepts
d
EASY
Recalls are fairly common events for automobile manufacturers. The costs of recalling
and repairing a car create
a.
b.
c.
d.
internal failure costs
yes
yes
no
yes
ANSWER:
a
EASY
external failure costs
yes
yes
yes
no
prevention costs
no
yes
no
yes
Chapter 8
34.
Implementing Quality Concepts
An appraisal cost is created by
a.
b.
c.
d.
installing automated technology.
reworking products.
verifying procedures.
rescheduling and setup.
ANSWER:
35.
EASY
prevention costs
yes
no
yes
yes
ANSWER:
c
appraisal costs
no
yes
yes
yes
internal failure costs
no
yes
no
yes
EASY
Management can decide where to concentrate its quality prevention dollars using
a.
b.
c.
d.
statistical process control charts.
just-in-time inventory systems.
a feedback loop.
Pareto analysis.
ANSWER:
37.
c
Compliance costs include
a.
b.
c.
d.
36.
8–9
d
EASY
Historically, the cost of quality has been
a.
b.
c.
d.
included in account balances for items such as Work in Process Inventory and
marketing expenses.
detailed in various “cost of quality” account balances on the Income Statement.
immaterial because no accounts were developed to detail these amounts.
generally spent in the prevention rather than the appraisal category.
ANSWER:
a
EASY
8–10
38.
Chapter 8
A significant cost of quality that is not recorded in the accounting records is the
a.
b.
c.
d.
failure cost for a customer complaint center.
cost of reworking products to bring them up to specification.
opportunity costs of forgone future sales.
appraisal cost for product equipment.
ANSWER:
39.
EASY
last year’s quality costs.
current period budgeted quality costs.
total quality costs for the period.
both a and b.
ANSWER:
d
EASY
Which of the following is not one of the three objectives of a quality program?
a.
b.
c.
d.
Product quality should be consistent to always meet the purchaser’s need(s).
A quality program should give management confidence that the quality is and will
be at a constant level.
A quality program should give customers confidence that the intended quality will
be achieved in products.
Product quality should always vary because customers change their wants and
needs over time.
ANSWER:
41.
c
A cost of quality report compares current period quality costs in specified categories to
a.
b.
c.
d.
40.
Implementing Quality Concepts
d
MEDIUM
The most visible embodiment of total quality management in the United States is
a.
b.
c.
d.
being awarded the Deming Prize.
achieving ISO 9000 certification.
meeting industry standards.
receiving the Baldrige Award.
ANSWER:
d
EASY
Chapter 8
42.
Implementing Quality Concepts
Which of the following are categories judged for the Baldrige Award?
a.
b.
c.
d.
Customer
focus
yes
yes
yes
no
Leadership
yes
yes
no
no
MEDIUM
international guidelines for quality standards.
provisions regarding benchmarking activities in the European Union.
guidelines for appropriate expenditures on the various categories of quality costs.
all of the above.
ANSWER:
a
EASY
(Appendix) The ISO 9000 standards
a.
b.
c.
d.
indicate which companies’ products are better than those of competitors.
allow management to decide how to meet the standards for quality assurance.
include specific directives about product design, material procurement, and
environmental responsibilities.
compose a program of quality assurance under which companies are registered by
the International Organizational for Standardization.
ANSWER:
45.
a
Use of SPC and
Pareto analysis
no
yes
no
no
(Appendix) The ISO 9000 series refers to
a.
b.
c.
d.
44.
Business
results
yes
yes
yes
no
Benchmarking
no
yes
yes
no
ANSWER:
43.
8–11
b
EASY
(Appendix) A quality audit involves a review of
a.
b.
c.
d.
manufacturing
processes
yes
no
no
yes
ANSWER:
d
cost of
quality standards
yes
yes
no
no
EASY
quality
documentation
yes
yes
no
yes
8–12
46.
Chapter 8
(Appendix) Registration under ISO 9000 is
a.
b.
c.
d.
required for all companies doing business internationally.
required for all European companies doing business in Europe.
not required for U.S. companies unless they use European suppliers.
required for all companies producing regulated products to be sold in the
European Union.
ANSWER:
d
EASY
Use the following information for questions 47–51.
Total defective units
Number of units reworked
Number of customer units returned
Profit for a good unit
Profit for a defective unit
Cost to rework a defective unit
Cost of a returned unit
Total prevention cost
Total appraisal cost
47.
1,000
750
150
$40
$25
$10
$15
$10,000
$5,000
The profit lost by selling defective units not reworked is
a.
b.
c.
d.
$25,000.
$15,000.
$18,750.
$3,750.
ANSWER:
48.
Implementing Quality Concepts
d
MEDIUM
The total rework cost is
a.
b.
c.
d.
$7,500.
$15,000.
$2,500.
$3,750.
ANSWER:
a
MEDIUM
Chapter 8
49.
Implementing Quality Concepts
The cost of processing customer returns is
a.
b.
c.
d.
$9,000.
$2,500.
$22,500.
$2,250.
ANSWER:
50.
MEDIUM
$15,000.
$13,500.
$11,250.
$8,250.
ANSWER:
b
MEDIUM
The total quality cost is
a.
b.
c.
d.
$15,000.
$15,750.
$28,500.
$11,250.
ANSWER:
52.
d
The total failure cost is
a.
b.
c.
d.
51.
8–13
c
MEDIUM
The profit lost by selling defective units at Logan Company totals $1,440. The total
rework cost for 700 units is $28,000. The difference between the profit earned on a good
unit and a defective unit is $12. How many total defective units did Logan Company
produce?
a.
b.
c.
d.
120
740
736
820
ANSWER:
d
MEDIUM
8–14
53.
Chapter 8
Implementing Quality Concepts
Coffin Company’s cost of compliance is $58,000. Appraisal cost is $21,000 and failure
cost is $32,000. The company’s total quality cost is
a.
b.
c.
d.
$53,000.
$79,000.
$90,000.
$111,000.
ANSWER:
c
MEDIUM
SHORT ANSWER/PROBLEMS
1.
Discuss the four kinds of quality costs.
ANSWER: Prevention costs are incurred to prevent product or service defects and
decrease the number of nonconforming units produced. These costs include items such as
quality training programs, quality reporting, quality audits, and quality circles. Raw
material vendors are selected with the understanding that all delivered materials meet
acceptable quality limits.
Appraisal costs arise from determining whether products are in agreement with their
specifications. These costs include inspection of raw material, supervising appraisal
activities, and product acceptance or sampling finished batches to see if they meet
specifications.
Failure costs make up the other two types of quality costs. Internal failure costs result
when the products don’t meet specifications and must be reworked or discarded. These
costs include scrap, rework, retesting, and design changes. High-quality prevention
should eliminate internal failure costs. External failure costs occur when buyers note
defects after delivery. These costs can be very high and include lost sales from poor
performance of the product, returns due to poor quality, warranties, and product liability.
MEDIUM
Chapter 8
2.
Implementing Quality Concepts
8–15
What is the relationship between the incurrence of the various types of quality costs and
the quantity of output that meets specification?
ANSWER: As the number of conforming units increases, both types of failure costs
decrease rapidly. To decrease failure costs, more prevention costs must be incurred.
Identifying defective products before they leave the factory can decrease the external
failure costs immensely. Although, such identification may increase internal failure costs.
A greater emphasis on prevention will decrease appraisal costs and also failure costs.
Thus, over time, overall quality costs will decrease.
MEDIUM
3.
What is continuous improvement? How does it relate to total quality management?
ANSWER: Continuous improvement is behavior that encourages employees, either
production or service, to perform their tasks better as time passes. Thus, because product
or service quality levels improve, continuous improvement is directly related to TQM.
Employees are also encouraged to “group think” and brainstorm in quality circles to
recognize and correct problems in the business environment.
MEDIUM
4.
Discuss the concept of total quality management.
ANSWER: TQM is a company-wide quality system that emphasizes employee
involvement in improving product or service quality throughout the firm. It uses a
continuous improvement process that is always striving to update upon the existing
system. It uses techniques that encourage employees to make suggestions about how the
product or production process can be improved. TQM necessitates an internal managerial
system of decision making, controlling, and planning. TQM involves continuous
improvement that exceeds customer/client expectations.
MEDIUM
5.
How do control charts mesh with the concept of total quality control (TQC)?
ANSWER: Control charts are graphical, statistical presentations that identify
occurrences of products or services as to whether they fall within some measure of
performance. Upper and lower limits of acceptability are displayed on the chart. TQC
expects all products to meet specifications. Thus, no measures of units or services
performed should exceed these limits.
MEDIUM
8–16
6.
Chapter 8
Implementing Quality Concepts
Compare and contrast four characteristics of product quality and of service quality.
ANSWER: Exhibit 8-2 provides eight characteristics of product quality and Exhibit
8-3 provides five characteristics of service quality. Depending on the characteristics
chosen, student answers will differ. There should, however, be some discussion of a
primary difference in that a product tends to last for some time, while a service is
typically for a moment in time. Given this difference, it is important that product quality
characteristics address longer-term issues (such as durability and serviceability) than a
service quality might.
MEDIUM
7.
Discuss the relationship between benchmarking and total quality management (TQM).
ANSWER: TQM is a system of the organization that emphasizes continuous
improvement processes that meet or exceed customer quality expectations. It emphasizes
quality principles throughout the firm. Benchmarking is the process of investigating,
comparing, and evaluating a company’s processes, products, and/or services against those
of companies believed to be the “best in class.” Benchmarking stresses quality
improvement by finding out how other firms are doing what you do better and attempting
to pattern your own processes after what these firms are doing and striving to improve
those processes. Benchmarking has been implemented by many firms that have adopted
JIT and that have insisted their suppliers do the same. These firms gain insight on how to
follow JIT by communicating with other firms.
MEDIUM
8.
Compare and contrast results benchmarking and process benchmarking.
ANSWER: Results benchmarking is associated with quality but is concerned with
whether the final product meets product/service specifications. Process benchmarking
focuses on practices of competitors or non-competitors that are considered “best-in-class”
and tries to adopt features with which the questioning company has problems
MEDIUM
Chapter 8
9.
Implementing Quality Concepts
8–17
Discuss increased competition and improved problem solving skills as they relate to
benchmarking.
ANSWER: Increased competition and improved problem solving skills are two
benefits of benchmarking. Benchmarking helps companies become more competitive in
their markets by examining what competitors do in relation to organization practices.
Once these differences are determined, the organization will be in a better position to
make changes that will help make the organization more competitive. Benchmarking also
increases problem-solving skills among employees in the organization by providing a
framework in which to operate more effectively. An increase in problem solving ability
should promote teamwork with the organization, which is critical to not only
benchmarking, but to total quality control.
Use the following information to answer questions 10–14.
Total defective units
Number of units reworked
Number of customer units returned
Profit for a good unit
Profit for a defective unit
Cost to rework a defective unit
Cost of a returned unit
Total prevention cost
Total appraisal cost
10.
1,500
800
200
$50
$30
$12
$20
$17,500
$9,500
Compute the profit lost by selling defective units not reworked.
ANSWER:
Z = (D – Y) (P1 – P2 ) = (1,500 – 800)($50 – $30) = $14,000
MEDIUM
11.
Compute the total rework cost.
ANSWER:
R = (Y) (r) = (800) ($12) = $9,600
MEDIUM
12.
Compute the cost of processing customer returns.
ANSWER:
W = (Dr) (w) = (200) ($20) = $4,000
MEDIUM
8–18
13.
Chapter 8
Implementing Quality Concepts
What is the total failure cost?
ANSWER:
F = Z + R + W = $14,000 + $9,600 + $4,000 = $27,600
MEDIUM
14.
Determine the total quality cost.
ANSWER:
T = K + A + F = $17,500 + $9,500 + $27,600 = $54,600
MEDIUM
Use the following information for questions 15 and 16.
Widget Company, which began operations on Jan. 2, 2001, has just finished its first year of
business. Widget makes decorative outdoor furniture. The firm manufactured 2,500 pieces of
furniture during the year: 2,400 were sold at garden centers for $456,000; 100 pieces were
defective and could only be sold as scrap metal (25 pounds each and can be sold for $2.50 per
pound). No defective units could be reworked. During the year the following costs were incurred:
Total appraisal cost
Total prevention cost
Total production cost
Total selling and administrative cost
15.
$9,000
25,700
250,000
70,000
Compute the total profits lost by Widget from selling scrap units during its first year of
operations.
ANSWER:
Price for good units: $456,000  2,400 = $190
Price for defective units: $6,250*  100 = $ 62.50
*25 pounds × 100 pieces × $2.50/pound.
Profits lost: 100 × ($190.00 – $62.50) = $12,750
MEDIUM
Chapter 8
16.
Implementing Quality Concepts
Compute the total quality cost incurred by Widget.
ANSWER:
Prevention cost
Appraisal cost
Total failure cost
MEDIUM
$25,700
9,000
12,750
$47,450
8–19
CHAPTER 9
COST ALLOCATION FOR JOINT PRODUCTS AND BY-PRODUCTS
MULTIPLE CHOICE
1.
If a company obtains two salable products from the refining of one ore, the refining
process should be accounted for as a(n)
a.
b.
c.
d.
mixed cost process.
joint process.
extractive process.
reduction process.
ANSWER:
2.
c.
d.
obtain a cost per unit for financial statement purposes.
provide accurate management information on production costs of each type of
product.
compute variances from expected costs for each joint product.
allow the use of high-low analysis by the company.
ANSWER:
a
EASY
Joint costs are allocated to which of the following products?
a.
b.
c.
d.
By-products
yes
yes
no
no
ANSWER:
4.
EASY
Joint costs are allocated to joint products to
a.
b.
3.
b
c
Scrap
yes
no
no
yes
EASY
Joint cost allocation is useful for
a.
b.
c.
d.
decision making.
product costing.
control.
evaluating managers’ performance.
ANSWER:
b
EASY
9–1
9–2
5.
Chapter 9
Joint costs are useful for
a.
b.
c.
d.
setting the selling price of a product.
determining whether to continue producing an item.
evaluating management by means of a responsibility reporting system.
determining inventory cost for accounting purposes.
ANSWER:
6.
a
EASY
Each of the following is a method to allocate joint costs except
a.
b.
c.
d.
relative sales value.
relative net realizable value.
relative weight, volume, or linear measure.
average unit cost.
ANSWER:
d
EASY
Joint costs are most frequently allocated based upon relative
a.
b.
c.
d.
profitability.
conversion costs.
prime costs.
sales value.
ANSWER:
9.
EASY
direct material, direct labor, and overhead
direct material and direct labor only
direct labor and overhead only
overhead and direct material only
ANSWER:
8.
d
Which of the following components of production are allocable as joint costs when a
single manufacturing process produces several salable products?
a.
b.
c.
d.
7.
Cost Allocation for Joint Products and By-Products
d
EASY
When allocating joint process cost based on tons of output, all products will
a.
b.
c.
d.
be salable at split-off.
have the same joint cost per ton.
have a sales value greater than their costs.
have no disposal costs at the split-off point.
ANSWER:
b
EASY
Chapter 9
10.
Cost Allocation for Joint Products and By-Products
If two or more products share a common process before they are separated, the joint costs
should be assigned in a manner that
a.
b.
c.
d.
assigns a proportionate amount of the total cost to each product on a quantitative
basis.
maximizes total earnings.
minimizes variations in unit production costs.
does not introduce an element of estimation into the process of accumulating costs
for each product.
ANSWER:
11.
d.
EASY
finished unit of product that has no sales value.
residual of the production process that has limited sales value.
residual of the production process that can be reworked for sale as an irregular
unit of product.
residual of the production process that has no sales value.
ANSWER:
b
EASY
Waste created by a production process is
a.
b.
c.
d.
accounted for in the same manner as defective units.
accounted for as an abnormal loss.
material that can be sold as an irregular product.
discarded rather than sold.
ANSWER:
13.
a
Scrap is defined as a
a.
b.
c.
12.
9–3
d
EASY
While preparing a salad, you remove the core of a head of lettuce. This core would be
classified as
a.
b.
c.
d.
defective.
shrinkage.
waste.
scrap.
ANSWER:
c
EASY
9–4
14.
Chapter 9
Which of the following is/are synonyms for joint products?
a.
b.
c.
d.
Main products
no
yes
yes
no
ANSWER:
15.
EASY
2 × 4 studs
sawdust
wood chips
tree bark
ANSWER:
a
EASY
Company Q produces three products from a joint process. The products can be sold at
split-off or processed further. In deciding whether to sell at split-off or process further,
management should
a.
b.
c.
d.
allocate the joint cost to the products based on relative sales value prior to making
the decision.
allocate the joint cost to the products based on a physical quantity measure prior
to making the decision.
subtract the joint cost from the total sales value of the products before determining
relative sales value and making the decision.
ignore the joint cost in making the decision.
ANSWER:
17.
b
Co-products
no
yes
no
yes
In a lumber mill, which of the following would most likely be considered a primary
product?
a.
b.
c.
d.
16.
Cost Allocation for Joint Products and By-Products
d
EASY
By-products are
a.
b.
c.
d.
allocated a portion of joint production cost.
not sufficient alone, in terms of sales value, for management to justify undertaking
the joint process.
also known as scrap.
the primary reason management undertook the production process.
ANSWER:
b
EASY
Chapter 9
18.
Cost Allocation for Joint Products and By-Products
Which of the following statements is true regarding by-products or scrap?
a.
b.
c.
d.
Process costing is the only method that should result in by-products or scrap.
Job order costing systems will never have by-products or scrap.
Job order costing systems may have instances where by-products or scrap result
from the production process.
Process costing will never have by-products or scrap from the production process.
ANSWER:
19.
By-products
no
yes
yes
no
ANSWER:
MEDIUM
b
Waste
no
no
yes
yes
EASY
Under an acceptable method of costing by-products, inventory costs of the by-product are
based on the portion of the joint production cost allocated to the by-product
a.
b.
c.
d.
but any subsequent processing cost is debited to the cost of the main product.
but any subsequent processing cost is debited to revenue of the main product.
plus any subsequent processing cost.
minus any subsequent processing cost.
ANSWER:
21.
c
Which of the following has sales value?
a.
b.
c.
d.
20.
9–5
c
EASY
Which of the following is a false statement about scrap and by-products?
a.
b.
c.
d.
Both by-products and scrap are salable.
A by-product has a higher sales value than does scrap.
By-products and scrap are the primary reason that management undertakes the
joint process.
Both scrap and by-products are incidental outputs to the joint process.
ANSWER:
c
EASY
9–6
Chapter 9
22.
The split-off point is the point at which
a.
b.
c.
d.
output is first identifiable as individual products.
joint costs are allocated to joint products.
some products may first be sold.
all of the above.
ANSWER:
23.
c.
d.
EASY
its marketability will be enhanced.
the incremental cost of further processing will be less than the incremental
revenue of further processing.
the joint cost assigned to it is not already greater than its prospective selling price.
both a and b.
ANSWER:
d
EASY
Which of the following would not be considered a sunk cost?
a.
b.
c.
d.
direct material cost
direct labor cost
joint cost
building cost
ANSWER:
25.
d
A product may be processed beyond the split-off point if management believes that
a.
b.
24.
Cost Allocation for Joint Products and By-Products
d
EASY
The definition of a sunk cost is
a.
b.
c.
d.
a cost that cannot be recovered regardless of what happens.
a cost that relates to money poured into the ground.
considered the original cost of an item.
also known as an opportunity cost.
ANSWER:
a
EASY
Chapter 9
26.
Cost Allocation for Joint Products and By-Products
The net realizable value approach mandates that the NRV of the by-products/scrap be
treated as
a.
b.
c.
d.
an increase in joint costs.
a sunk cost.
a reduction of joint costs.
a cost that can be ignored totally.
ANSWER:
27.
insignificant
yes
no
no
yes
ANSWER:
b
significant
yes
yes
no
no
EASY
Approximated net realizable value at split-off for joint products is computed as
a.
b.
c.
d.
selling price at split-off minus further processing and disposal costs.
final selling price minus further processing and disposal costs.
selling price at split-off minus allocated joint processing costs.
final selling price minus a normal profit margin.
ANSWER:
29.
EASY
The net realizable value approach is normally used when the NRV is expected to be
a.
b.
c.
d.
28.
c
b
EASY
Which of the following is a commonly used joint cost allocation method?
a.
b.
c.
d.
high-low method
regression analysis
approximated sales value at split-off method
weighted average quantity technique
ANSWER:
c
EASY
9–7
9–8
30.
Chapter 9
Incremental separate costs are defined as all costs incurred between ___________ and the
point of sale.
a.
b.
c.
d.
inception
split-off point
transfer to finished goods inventory
point of addition of disposal costs
ANSWER:
31.
EASY
sunk costs.
incremental separate costs.
joint cost.
committed costs.
ANSWER:
b
EASY
Incremental revenues and costs need to be considered when using which allocation
method?
a.
b.
c.
d.
Physical measures
yes
yes
no
no
ANSWER:
33.
b
All costs that are incurred between the split-off point and the point of sale are known as
a.
b.
c.
d.
32.
Cost Allocation for Joint Products and By-Products
c
Sales value at split-off
yes
no
no
yes
MEDIUM
The method of pricing by-products/scrap where no value is assigned to these items until
they are sold is known as the
a.
b.
c.
d.
net realizable value at split-off point method.
sales value at split-off method.
realized value approach.
approximated net realizable value at split-off method.
ANSWER:
c
MEDIUM
Chapter 9
34.
Cost Allocation for Joint Products and By-Products
Relative sales value at split-off is used to allocate
a.
b.
c.
d.
costs beyond split-off
yes
yes
no
no
ANSWER:
35.
EASY
For purposes of allocating joint costs to joint products using the relative sales value at
split-off method, the costs beyond split-off
a.
b.
c.
d.
are allocated in the same manner as the joint costs.
are deducted from the relative sales value at split-off.
are deducted from the sales value at the point of sale.
do not affect the allocation of the joint costs.
ANSWER:
36.
c
joint costs
yes
no
yes
no
d
EASY
Not-for-profit organizations are required by the _______ to allocate joint costs.
a.
b.
c.
d.
AICPA
FASB
CASB
GASB
ANSWER:
a
DIFFICULT
9–9
9–10
Chapter 9
Cost Allocation for Joint Products and By-Products
Use the following information for questions 37–45.
P.O.P. Co. produces two products from a joint process: X and Z. Joint processing costs for this
production cycle are $8,000.
X
Z
Sales price
per yard at
split-off
$6.00
9.00
Yards
1,500
2,200
Disposal
cost per
yard at
split-off
$3.50
5.00
Further
processing
per yard
$1.00
3.00
Final sale
price per
yard
$ 7.50
11.25
If X and Z are processed further, no disposal costs will be incurred or such costs will be borne by
the buyer.
37.
Using a physical measure, what amount of joint processing cost is allocated to X (round
to the nearest dollar)?
a.
b.
c.
d.
$4,000
$4,757
$5,500
$3,243
ANSWER:
38.
EASY
Using a physical measure, what amount of joint processing cost is allocated to Z (round
to the nearest dollar)?
a.
b.
c.
d.
$4,000
$3,243
$5,500
$4,757
ANSWER:
39.
d
d
EASY
Using sales value at split-off, what amount of joint processing cost is allocated to X
(round to the nearest dollar)?
a.
b.
c.
d.
$5,500
$2,500
$4,000
$3,243
ANSWER:
b
MEDIUM
Chapter 9
40.
Cost Allocation for Joint Products and By-Products
Using sales value at split-off, what amount of joint processing cost is allocated to Z
(round to the nearest dollar)?
a.
b.
c.
d.
$5,500
$4,000
$2,500
$4,757
ANSWER:
41.
MEDIUM
$4,000
$5,610
$2,390
$5,500
ANSWER:
c
MEDIUM
Using net realizable value at split-off, what amount of joint processing cost is allocated to
Z (round to the nearest dollar)?
a.
b.
c.
d.
$5,500
$4,000
$2,390
$5,610
ANSWER:
43.
a
Using net realizable value at split-off, what amount of joint processing cost is allocated to
X (round to the nearest dollar)?
a.
b.
c.
d.
42.
9–11
d
MEDIUM
Using approximated net realizable value at split-off, what amount of joint processing cost
is allocated to X (round to the nearest dollar)?
a.
b.
c.
d.
$3,090
$5,204
$4,000
$2,390
ANSWER:
a
MEDIUM
9–12
44.
Chapter 9
Using approximated net realizable value at split-off, what amount of joint processing cost
is allocated to Z (round to the nearest dollar)?
a.
b.
c.
d.
$2,796
$4,910
$4,000
$2,390
ANSWER:
45.
Cost Allocation for Joint Products and By-Products
b
MEDIUM
Which products would be processed further?
a.
b.
c.
d.
only X
only Z
both X and Z
neither X or Z
ANSWER:
a
MEDIUM
Use the following information for questions 46–51.
Tiny Co. produces three products: Bo, Mo, and Lo from the same process. Joint costs for this
production run are $2,100.
Bo
Mo
Lo
Pounds
800
1,100
1,500
Sales price
per lb. at
split-off
$6.50
8.25
8.00
Disposal
cost per
lb. at
split-off
$ 3.00
4.20
4.00
Further
processing
per pound
$2.00
3.00
3.50
Final
sales price
per pound
$ 7.50
10.00
10.50
If the products are processed further, Tiny Co. will incur the following disposal costs upon sale:
Bo, $3.00; Mo, $2.00; and Lo, $1.00.
46.
Using a physical measurement method, what amount of joint processing cost is allocated
to Bo (round to the nearest dollar)?
a.
b.
c.
d.
$700
$679
$927
$494
ANSWER:
d
EASY
Chapter 9
47.
Cost Allocation for Joint Products and By-Products
Using a physical measurement method, what amount of joint processing cost is allocated
to Mo (round to the nearest dollar)?
a.
b.
c.
d.
$494
$679
$927
$700
ANSWER:
48.
EASY
$700
$416
$725
$959
ANSWER:
c
MEDIUM
Using sales value at split-off, what amount of joint processing cost is allocated to Lo
(round to the nearest dollar)?
a.
b.
c.
d.
$959
$725
$700
$416
ANSWER:
50.
b
Using sales value at split-off, what amount of joint processing cost is allocated to Mo
(round to the nearest dollar)?
a.
b.
c.
d.
49.
9–13
a
MEDIUM
Using net realizable value at split-off, what amount of joint processing cost is allocated to
Bo (round to the nearest dollar)?
a.
b.
c.
d.
$706
$951
$700
$444
ANSWER:
d
MEDIUM
9–14
51.
Chapter 9
Cost Allocation for Joint Products and By-Products
Using net realizable value at split-off, what amount of joint processing cost is allocated to
Lo (round to the nearest dollar)?
a.
b.
c.
d.
$706
$951
$444
$700
ANSWER:
b
MEDIUM
Use the following information for questions 52 and 53.
DED Co. is placing an ad in the local paper to advertise its products. The ad will run for one
week at a total cost of $5,500. DED has four categories of products as follows:
Hardware
Hand Tools
Lawn Furniture
Light Fixtures
52.
Expected sales
value
$35,000
15,000
64,500
25,500
What amount of advertising cost should be allocated to hardware, assuming DED
allocates based on percent of floor space occupied?
a.
b.
c.
d.
$1,375
$1,100
$2,475
$ 825
ANSWER:
53.
% of floor space
occupied
20%
15
45
20
b
EASY
Assume that DED decides to allocate based on expected sales value. What amount of
advertising cost should be allocated to light fixtures (round to the nearest dollar)?
a.
b.
c.
d.
$1,375
$589
$1,002
$2,534
ANSWER:
c
MEDIUM
Chapter 9
Cost Allocation for Joint Products and By-Products
9–15
Use the following information for questions 54–59.
Rax produces four products from the same process: Cep, Dap, Eek, and Gok. Joint product costs
are $9,000. (Round all answers to the nearest dollar.)
Barrels
750
1,000
1,400
2,000
Cep
Dap
Eek
Gok
Sales price
per barrel
at split-off
$10.00
8.00
11.00
15.00
Disposal
cost
per barrel
at split-off
$6.50
4.00
7.00
9.50
Further
processing
costs
$2.00
2.50
4.00
4.50
Final
sales
price
per barrel
$13.50
10.00
15.50
19.50
If Rax sells the products after further processing, the following disposal costs will be incurred:
Cep, $2.50; Dap, $1.00; Eek, $3.50; Gok, $6.00.
54.
Using a physical measurement method, what amount of joint processing cost is allocated
to Dap?
a.
b.
c.
d.
$1,748
$2,447
$1,311
$3,495
ANSWER:
55.
MEDIUM
Using a physical measurement method, what amount of joint processing cost is allocated
to Eek?
a.
b.
c.
d.
$3,495
$2,447
$1,748
$1,311
ANSWER:
56.
a
b
MEDIUM
Using sales value at split-off, what amount of joint processing cost is allocated to Dap?
a.
b.
c.
d.
$4,433
$2,276
$1,108
$1,182
ANSWER:
d
MEDIUM
9–16
57.
Chapter 9
Using sales value at split-off, what amount of joint processing cost is allocated to Gok?
a.
b.
c.
d.
$4,433
$1,182
$1,108
$2,276
ANSWER:
58.
a
MEDIUM
Using net realizable value at split-off, what amount of joint processing cost is allocated to
Cep?
a.
b.
c.
d.
$1,550
$1,017
$4,263
$2,170
ANSWER:
59.
Cost Allocation for Joint Products and By-Products
b
MEDIUM
Using net realizable value at split-off, what amount of joint processing cost is allocated to
Eek?
a.
b.
c.
d.
$1,017
$1,550
$2,170
$4,263
ANSWER:
c
MEDIUM
Chapter 9
Cost Allocation for Joint Products and By-Products
9–17
Use the following information for questions 60–63.
Sun Co. produces three products from the same process that has joint processing costs of $4,100.
Products RR, SS, and TT are produced in the following gallons per month, respectively: 250,
400, and 750. Sun also incurred advertising costs of $60,000; the ad was used to run sales for all
three products. They occupy floor space in the following ratio: 5:4:9. (Round all answers to the
nearest dollar.)
60.
Using gallons as the physical measurement, what amount of joint processing cost is
allocated to SS?
a.
b.
c.
d.
$2,196
$1,171
$1,367
$732
ANSWER:
61.
EASY
Using gallons as the physical measurement, what amount of joint processing cost is
allocated to TT?
a.
b.
c.
d.
$2,196
$732
$1,367
$1,171
ANSWER:
62.
b
a
EASY
Assume that Sun chooses to allocate its advertising cost among the three products. What
amount of advertising cost is allocated to RR using the floor space ratio?
a.
b.
c.
d.
$20,000
$17,806
$1,139
$16,667
ANSWER:
d
EASY
9–18
63.
Chapter 9
Assume that Sun chooses to allocate its advertising cost among the three products. What
amount of advertising cost is allocated to SS using the floor space ratio?
a.
b.
c.
d.
$911
$14,244
$13,333
$20,000
ANSWER:
64.
c
EASY
Love Co. manufactures products A and B from a joint process. Sales value at split-off
was $700,000 for 10,000 units of A, and $300,000 for 15,000 units of B. Using the sales
value at split-off approach, joint costs properly allocated to A were $140,000. Total joint
costs were
a.
b.
c.
d.
$98,000.
$200,000.
$233,333.
$350,000.
ANSWER:
65.
Cost Allocation for Joint Products and By-Products
b
EASY
Lite Co. manufactures products X and Y from a joint process that also yields a byproduct, Z. Revenue from sales of Z is treated as a reduction of joint costs. Additional
information is as follows:
Units produced
Joint costs
Sales value at
split-off
X
20,000
?
Products
Y
20,000
?
Z
10,000
?
Total
50,000
$262,000
$300,000
$150,000
$10,000
$460,000
Joint costs were allocated using the sales value at split-off approach. The joint costs
allocated to product X were
a.
b.
c.
d.
$75,000.
$100,800.
$150,000.
$168,000.
ANSWER:
d
EASY
Chapter 9
Cost Allocation for Joint Products and By-Products
9–19
SHORT ANSWER/PROBLEMS
1.
Briefly discuss the four decisions that management must make concerning joint
processes.
ANSWER: The four decisions that managers must make regarding joint processes are
as follows. They must try to determine what joint costs, selling costs, and separate
processing costs are expected to occur when certain products are manufactured. Next,
management must decide on the best use of resources that are available. Managers must
next classify, as joint products and/or by-products/scrap, the output of production. The
last decision that must be made is whether some or all of the products will be processed
further or sold at split-off. This decision is made based on the incremental costs that
would be incurred to process further and the incremental revenue if processed further.
Joint production costs are irrelevant to this decision.
MEDIUM
2.
Briefly discuss the six steps in the allocation process.
ANSWER: The six steps are as follows:
1.
Choose the basis on which to allocate joint cost.
2.
List all values that comprise the basis.
3.
Add up all the values in the list (#2).
4.
Determine the percentage of the total each item in #2 is.
5.
Multiply the percentage by the cost being allocated.
6.
For valuation purposes, divide the prorated cost by equivalent units of production.
MEDIUM
3.
Discuss briefly the three monetary measurement techniques of joint cost allocation.
ANSWER: The sales value at split-off method assigns costs based only on the
weighted proportions of the total sales values of the joint products without consideration
of disposal costs at the split-off point. To use this method, all products must be salable at
the split-off point. The net realizable value method assigns costs based on the product’s
proportional net realizable value at the split-off point. Net realizable value is equal to
product sales revenue at split-off minus any costs necessary to prepare and dispose of the
product.
Approximated net realizable value at split-off method requires that a simulated net
realizable value at split-off be calculated. This is equal to final sales price minus
incremental separate costs. Incremental separate costs refer to all costs that are incurred
between split-off and the point of sale.
MEDIUM
9–20
4.
Chapter 9
Cost Allocation for Joint Products and By-Products
Briefly discuss the restrictions and requirements on service organizations and notforprofits that relate to joint cost allocation.
ANSWER: Service and not-for-profit organizations incur costs that may be considered
joint in nature, such as advertising and printing of multipurpose documents. Service
organizations are not required to allocate these costs to the items worked on, delivered, or
advertised but may choose to do so for a better matching of revenues and expenses. Notfor-profits are required by the AICPA to allocate these costs among the activities of
fundraising, accomplishing an organizational program, or conducting an administrative
function.
MEDIUM
5.
Briefly discuss the net realizable value at split-off point method of allocating joint costs.
ANSWER: The net realizable value at split-off method assigns joint costs based on
each product’s proportional NRV at the split-off point. NRV is equal to sales price minus
costs that are necessary to prepare and dispose of the product. To use this method, all
products must be salable at the split-off point.
MEDIUM
6.
Why is the net realizable value of scrap used to lower estimated overhead costs in setting
a predetermined overhead rate in a job order costing situation in which scrap is expected
on most jobs?
ANSWER: The net realizable value of scrap is used in this way because the amount
received from the sale of scrap is considered to be a reduction of the total cost incurred in
the production process. This process is similar to the treatment of sales values of assets
purchased and then sold in a “basket” of goods. The estimated cost of scrap is used in
setting overhead rates; therefore, when the scrap is sold the amount received should be a
reduction of total overhead.
MEDIUM
Chapter 9
Cost Allocation for Joint Products and By-Products
9–21
Use the following information for questions 7 and 8.
BL Company produces only two products and incurs joint processing costs that total $3,750.
Products Aba and Ibi are produced in the following quantities during each month: 4,500 and
6,000 gallons, respectively. BL also runs one ad each month that advertises both products at a
cost of $1,500. The selling price per gallon for the two products are $20 and $17.50, respectively.
7.
What amount of joint processing costs is allocated to each product based on gallons
produced?
ANSWER:
A = 4,500/10,500 × $3,750 = $1,607
I = 6,000/10,500 × $3,750 = $2,143
EASY
8.
What amount of advertising cost is allocated to each product based on sales value?
ANSWER:
A = 4,500 × $20.00 = $ 90,000/$195,000 × $1,500 = $692
I = 6,000 × $17.50 = 105,000/$195,000 × $1,500 = $808
$195,000
MEDIUM
9–22
Chapter 9
Cost Allocation for Joint Products and By-Products
Use the following information for questions 9 and 10.
GAB Company produces three products from the same process and incurs joint processing costs
of $3,000.
Mat
Nat
Qat
Gallons
2,300
1,100
500
Sales price
per gallon
at split-off
$ 4.50
6.00
10.00
Disposal
cost per
gallon at
split-off
$1.25
3.00
8.00
Further
processing
costs
$1.00
2.00
2.00
Final sales
price per
gallon
$ 7.00
10.00
15.00
Disposal costs for the products if they are processed further are:
Mat, $3.00; Nat, $5.50; Qat, $1.00.
9.
What amount of joint processing cost is allocated to the three products using sales value
at split-off?
ANSWER:
M = 2,300 × $ 4.50 = $10,350/$21,950 × $3,000 = $1,415
N = 1,100 × $ 6.00 = $ 6,600 $21,950 × $3,000 = $902
Q = 500 × $10.00 = $ 5,000/$21,950 × $3,000 = $683
$21,950
MEDIUM
10.
What amount of joint processing cost is allocated to the three products using net
realizable value at split-off?
ANSWER: Sales price minus disposal cost*
$4.50 – $1.25 = $3.25
$6.00 – $3.00 = 3.00
$10.00 – $8.00 = 2.00
M = 2,300 × $ 3.25* = $ 7,475 /$11,775 × $3,000 = $1,904
N = 1,100 × $ 3.00* = $ 3,300 /$11,775 × $3,000 = $ 841
Q = 500 × $ 2.00* =
$ 1,000 /$11,775 × $3,000 = $ 255
$11,775
MEDIUM
Chapter 9
11.
Cost Allocation for Joint Products and By-Products
9–23
A company produces two main products jointly, A and B, and C, which is a by-product of
B. A and B are produced form the same raw material. C is manufactured from the
residue of the process creating B.
Costs before separation are apportioned between the two main products by the net
realizable value method. The net revenue realized from the sale of C is deducted from
the cost of B. Data for April were as follows:
Costs before separation
Costs after separation:
A
B
C
$ 200,000
50,000
32,000
4,000
Production for April, in pounds:
A
B
C
Sales for April:
A
B
C
800,000
200,000
20,000
640,000 pounds @ $.4375
180,000 pounds @ .65
20,000 pounds @ .30
Required: Determine the gross profit for April.
9–24
Chapter 9
Cost Allocation for Joint Products and By-Products
ANSWER:
NRV C
REVENUE 20,000 × .30 = $6,000
COST
(4,000 )
NRV
$2,000
NRV:
A (800,000 × $.4375) = $350,000 – $50,000 =
$300,000
B (200,000 × $.65) = $130,000 – ($32,000 – $2,000) = 100,000
$400,000
ALLOCATION:
A ($300,000/$400,000 × $200,000 = $150,000
B ($100,000/$400,000 × $200,000 =
50,000
UNIT COST:
A ($150,000 + $50,000)/800,000 = $ .25
B ($50,000 + $30,000)/200,000 = $ .40
GROSS PROFIT:
A ($ .4375 – $.25) × 640,000 =
B ($ .65 – $.40) × 180,000 =
DIFFICULT
$120,000
45,000
$165,000
Chapter 9
12.
Cost Allocation for Joint Products and By-Products
9–25
The total joint cost of producing 2,000 pounds of Product A; 1,000 pounds of Product B;
and 1,000 pounds of Product C is $7,500. Selling price per pound of the three products
are $15 for Product A; $10 for Product B; and $5 for Product C. Joint cost is allocated
using the sales value method.
Required:
a.
Compute the unit cost of Product A if all three products are main products.
b.
Compute the unit cost of Product A if Products A and B are main products and
Product C is a by-product for which the cost reduction method is used.
9–26
Chapter 9
Cost Allocation for Joint Products and By-Products
ANSWER:
a.
SALES VALUE
UNIT COST
A 2,000 × $15 = $30,000/$45,000 × $7,500 = $5,000/2,000 = $2.50
b.
B 1,000 x $10
$10,000/$45,000 x $7,500 = $1,667/1,000 = $1.67
C 1,000 x $5
$ 5,000/$45,000 x $7,500 = $ 833/1,000 = $ .83
$45,000
$7,500
TO ALLOCATE: $7,500 – $5,000 = $2,500
SALES VALUE
UNIT COST
A 2,000 × $15 = $30,000/$40,000 × $2,500 = $1,875/2,000 = $.9375
B 1,000 × $10 = $10,000/$40,000 × $2,500 = $ 625/1,000 = $.625
$40,000
$2,500
EASY
Chapter 9
13.
Cost Allocation for Joint Products and By-Products
9–27
A Manufacturing Company makes three products: A and B are considered main products
and C a by-product.
Production and sales for the year were:
220,000 lbs. of Product A, salable at $6.00
180,000 lbs. of Product B, salable at $3.00
50,000 lbs. of Product C, salable at $.90
Production costs for the year:
Joint costs
Costs after separation:
Product A
Product B
Product C
$276,600
320,000
190,000
6,900
Required: Using the by-product revenue as a cost reduction and net realizable value
method of assigning joint costs, compute unit costs (a) if C is a by-product of the process
and (b) if C is a by-product of B.
9–28
Chapter 9
Cost Allocation for Joint Products and By-Products
ANSWER:
a.
JOINT COST
– NRV C
TO ALLOCATE
$276,600
(38,100) (50,000 – $.90) – $6,900
$238,500
SALES VALUE – COST AFTER SEPARATION = NRV
220,000 × $6 = $1,320,000 – $320,000 = $1,000,000
180,000 × $3 = $ 540,000 – $190,000 =
350,000
$1,350,000
ALLOCATION
$1,000,000/$1,350,000 × $238,500 = $176,667
$ 350,000/$1,350,000 × $238,500 = 61,833
$238,500
UNIT COST:
A ($176,667 + $320,000)/220,000 = $2.26
B ($61,833 + $190,000)/180,000 = $1.40
b.
NRV
A $1,000,000 =
$1,000,000/$1,388,100 × $276,600 = $199,265
B $350,000 + $38100 =
388,100/$1,388,100 × $276,600 = $ 77,335
$1,388,100
UNIT COST
A ($199,265 + $320,000)/220,000 = $2.36
B ($77,335 + $151,900)/180,000 = $1.27
MEDIUM
Chapter 9
14.
Cost Allocation for Joint Products and By-Products
9–29
Smith Co. processes raw material in Department 1 from which come two main products,
A and B, and a by-product, C. A is further processed in Department 2, B in Department
3, and C in Department 4. The value of the by-product reduces the cost of the main
products, and sales value is used to allocate joint costs.
Cost Incurred:
Production:
A
B
C
Selling Price:
A
B
C
Dept 1
$90,000
Dept 2
$10,000
Dept 3
$8,000
10,000 lbs.
20,000 lbs.
10,000 lbs.
$10/lb.
$5/lb.
$2/lb.
Required:
a.
Compute unit costs for A and B.
b.
Ending inventory consists of 5,000 lbs. of B and 1,000 lbs. of C.
What is the value of the inventory?
c.
Recompute a and b allocating cost based on net realizable value.
Dept 4
$10,000
9–30
Chapter 9
Cost Allocation for Joint Products and By-Products
ANSWER:
a.
JOINT COST
– SALES VALUE
$90,000
(20,000 ) (10,000 × $2)
$70,000
SALES VALUE
A 10,000 × $10 = $100,000/$200,000 × $70,000 = $35,000
B 20,000 × $ 5 = 100,000/$200,000 × $70,000 = $35,000
$200,000
UNIT COST
A ($35,000 + $10,000)/10,000 = $4.50
B ($35,000 + $8,000)/20,000 = $2.15
b.
ENDING INVENTORY
B 5,000 × $2.15 = $10,750
C 1,000 × $2.00 = 2,000
$12,750
c.
NRV
A $100,000 – $10,000 = $ 90,000/$182,000 × $70,000 = $34,615
B $100,000 – $8,000 =
92,000/$182,000 × $70,000 = 35,385
$182,000
$70,000
UNIT COST
A ($34,615 + $10,000)/10,000 = $4.46
B ($35,385 + $8,000)/20,000 = $2.17
ENDING INVENTORY
B 5,000 × $2.17 = $10,850
C 1,000 × $2.00 =
2,000
$12,850
MEDIUM
Chapter 9
15.
Cost Allocation for Joint Products and By-Products
9–31
Three identifiable product lines, Products A, B, and C, are obtained in fixed quantities
from a basic processing operation. The cost of the basic operation is $320,000 for a yield
of 5,000 tons of Product A; 2,000 tons of Product B; and 1,000 tons of Product C. The
basic processing cost is allocated to the product lines in proportion to the relative weight
produced.
Beltway Products Company does both the basic processing work and the further
refinement of the three product lines. After the basic operation, the products can be sold
at the following prices per metric ton:
Product A—$60
Product B—$53
Product C—$35
Costs to refine each of the three product lines follow:
A
Variable cost per metric ton
Total fixed cost
$8
$20,000
Product Lines
B
C
$7
$4
$16,000
$6,000
The fixed cost of the refining operation will not be incurred if the product line is not
refined.
The refined products can be sold at the following prices per metric ton:
Product A—$75
Product B—$65
Product C—$40
Required:
a.
Determine the total unit cost of each product line in a refined state.
b.
Which of the three product lines, if any, should be refined and which should be
sold after the basic processing operation? Show computations.
9–32
Chapter 9
Cost Allocation for Joint Products and By-Products
ANSWER:
a.
WT
A 5,000
B 2,000
C 1,000
8,000
ALLOCATION
5,000/8,000 × $320,000 = $200,000
2,000/8,000 × $320,000 = 80,000
1,000/8,000 × $320,000 = 40,000
$320,000
UNIT COST
A ($200,000 + $20,000)/5,000 + $8 = $52
B ($80,000 + $16,000)/2,000 + $7 = $55
C ($40000 + $6,000)/1,000 + $4 =
$50
b.
CHANGE IN REVENUE – CHANGE IN COST = CHANGE IN PROFIT
A $75–$60 = $15 – ($20,000/5,000) + $8 = + $3
B $65–$53 = $12 – ($16,000/2,000) + $7 = – $3
C $40–$35 = $5 – ($6,000/1,000) + $4 =
– $5
Therefore, process only Product A.
MEDIUM
Chapter 9
16.
Cost Allocation for Joint Products and By-Products
9–33
The Stone Company produced three joint products at a joint cost of $100,000. These
products were processed further and sold as follows:
Product
A
B
C
Sales
$245,000
330,000
175,000
Additional Processing Costs
$200,000
300,000
100,000
The company has had an opportunity to sell at split-off directly to other processors. If
that alternative had been selected, sales would have been: A, $56,000; B, $28,000; and
C, $56,000.
The company expects to operate at the same level of production and sales in the
forthcoming year.
Required: Consider all the available information and assume that all costs incurred after
split-off are variable.
a.
Could the company increase net income by altering its processing decisions? If
so, what would be the expected overall net income?
b.
Which products should be processed further and which should be sold at split-off?
9–34
Chapter 9
Cost Allocation for Joint Products and By-Products
ANSWER:
a.
Currently NI is
Sales
Additional Processing Costs
– JC
$750,000
(600,000 )
$150,000
(100,000 )
$ 50,000
NI can be increased by $11,000 if A is not processed.
b.
EASY
 Sales
–  Cost
NI/(LOSS)
A
$189,000
(200,000 )
$(11,000 )
B
$302,000
(300,000 )
$ 2,000
C
$119,000
(100,000 )
$ 19,000
CHAPTER 10
STANDARD COSTING
MULTIPLE CHOICE
1.
A primary purpose of using a standard cost system is
a.
b.
c.
d.
to make things easier for managers in the production facility.
to provide a distinct measure of cost control.
to minimize the cost per unit of production.
b and c are correct.
ANSWER:
2.
direct material only.
direct labor only.
direct material and direct labor only.
direct material, direct labor, and overhead.
ANSWER:
d
EASY
Which of the following statements regarding standard cost systems is true?
a.
b.
c.
d.
Favorable variances are not necessarily good variances.
Managers will investigate all variances from standard.
The production supervisor is generally responsible for material price variances.
Standard costs cannot be used for planning purposes since costs normally change
in the future.
ANSWER:
4.
EASY
The standard cost card contains quantities and costs for
a.
b.
c.
d.
3.
b
a
EASY
In a standard cost system, Work in Process Inventory is ordinarily debited with
a.
b.
c.
d.
actual costs of material and labor and a predetermined overhead cost for overhead.
standard costs based on the level of input activity (such as direct labor hours
worked).
standard costs based on production output.
actual costs of material, labor, and overhead.
ANSWER:
c
EASY
10–1
10–2
5.
Chapter 10
A standard cost system may be used in
a.
b.
c.
d.
job order costing, but not process costing.
process costing, but not job order costing.
either job order costing or process costing.
neither job order costing nor process costing.
ANSWER:
6.
EASY
product costing.
planning.
controlling.
all of the above.
ANSWER:
d
EASY
A purpose of standard costing is to
a.
b.
c.
d.
replace budgets and budgeting.
simplify costing procedures.
eliminate the need for actual costing for external reporting purposes.
eliminate the need to account for year-end underapplied or overapplied
manufacturing overhead.
ANSWER:
8.
c
Standard costs may be used for
a.
b.
c.
d.
7.
Standard Costing
b
EASY
Standard costs
a.
b.
c.
d.
are estimates of costs attainable only under the most ideal conditions.
are difficult to use with a process costing system.
can, if properly used, help motivate employees.
require that significant unfavorable variances be investigated, but do not require
that significant favorable variances be investigated.
ANSWER:
c
EASY
Chapter 10
9.
Standard Costing
A bill of material does not include
a.
b.
c.
d.
quantity of component inputs.
price of component inputs.
quality of component inputs.
type of product output.
ANSWER:
10.
c.
d.
EASY
tracks the cost and quantity of material through an operation.
tracks the network of control points from receipt of a customer’s order through the
delivery of the finished product.
specifies tasks to make a unit and the times allowed for each task.
charts the shortest path by which to arrange machines for completing products.
ANSWER:
c
MEDIUM
A total variance is best defined as the difference between total
a.
b.
c.
d.
actual cost and total cost applied for the standard output of the period.
standard cost and total cost applied to production.
actual cost and total standard cost of the actual input of the period.
actual cost and total cost applied for the actual output of the period.
ANSWER:
12.
b
An operations flow document
a.
b.
11.
10–3
d
EASY
The term standard hours allowed measures
a.
b.
c.
d.
budgeted output at actual hours.
budgeted output at standard hours.
actual output at standard hours.
actual output at actual hours.
ANSWER:
c
EASY
10–4
13.
Chapter 10
A large labor efficiency variance is prorated to which of the following at year-end?
a.
b.
c.
d.
Cost of Goods Sold
no
no
yes
yes
ANSWER:
14.
d.
FG
Inventory
no
yes
no
yes
EASY
magnitude of the variance
trend of the variances over time
likelihood that an investigation will reduce or eliminate future occurrences of the
variance
whether the variance is favorable or unfavorable
ANSWER:
d
EASY
At the end of a period, a significant material quantity variance should be
a.
b.
c.
d.
closed to Cost of Goods Sold.
allocated among Raw Material, Work in Process, Finished Goods, and Cost of
Goods Sold.
allocated among Work in Process, Finished Goods, and Cost of Goods Sold.
carried forward as a balance sheet account to the next period.
ANSWER:
16.
d
WIP
Inventory
no
yes
no
yes
Which of the following factors should not be considered when deciding whether to
investigate a variance?
a.
b.
c.
15.
Standard Costing
c
EASY
When computing variances from standard costs, the difference between actual and
standard price multiplied by actual quantity used yields a
a.
b.
c.
d.
combined price-quantity variance.
price variance.
quantity variance.
mix variance.
ANSWER:
b
EASY
Chapter 10
17.
Standard Costing
A company wishing to isolate variances at the point closest to the point of responsibility
will determine its material price variance when
a.
b.
c.
d.
material is purchased.
material is issued to production.
material is used in production.
production is completed.
ANSWER:
18.
b.
c.
d.
EASY
the difference between the actual cost of material purchased and the standard cost
of material purchased.
the difference between the actual cost of material purchased and the standard cost
of material used.
primarily the responsibility of the production manager.
both a and c.
ANSWER:
a
EASY
The sum of the material price variance (calculated at point of purchase) and material
quantity variance equals
a.
b.
c.
d.
the total cost variance.
the material mix variance.
the material yield variance.
no meaningful number.
ANSWER:
20.
a
The material price variance (computed at point of purchase) is
a.
19.
10–5
d
EASY
A company would most likely have an unfavorable labor rate variance and a favorable
labor efficiency variance if
a.
b.
c.
d.
the mix of workers used in the production process was more experienced than the
normal mix.
the mix of workers used in the production process was less experienced than the
normal mix.
workers from another part of the plant were used due to an extra heavy production
schedule.
the purchasing agent acquired very high quality material that resulted in less
spoilage.
ANSWER:
a
EASY
10–6
21.
Chapter 10
If actual direct labor hours (DLHs) are less than standard direct labor hours allowed and
overhead is applied on a DLH basis, a(n)
a.
b.
c.
d.
favorable variable overhead spending variance exists.
favorable variable overhead efficiency variance exists.
favorable volume variance exists.
unfavorable volume variance exists.
ANSWER:
22.
EASY
labor rate variance
actual hours of labor used
reason for the labor variances
efficiency of the labor force
ANSWER:
c
EASY
(Appendix) The total labor variance can be subdivided into all of the following except
a.
b.
c.
d.
rate variance.
yield variance.
learning curve variance.
mix variance.
ANSWER:
24.
b
If all sub-variances are calculated for labor, which of the following cannot be
determined?
a.
b.
c.
d.
23.
Standard Costing
c
EASY
The standard predominantly used in Western cultures for motivational purposes is a(n)
_____________________ standard.
a.
b.
c.
d.
expected annual
ideal
practical
theoretical
ANSWER:
c
EASY
Chapter 10
25.
Standard Costing
Which of the following standards can commonly be reached or slightly exceeded by
workers in a motivated work environment?
a.
b.
c.
d.
Ideal
no
no
yes
no
ANSWER:
26.
b
Ideal
yes
no
no
no
ANSWER:
Expected annual
no
yes
no
no
EASY
Practical
no
no
yes
no
a
Expected annual
no
yes
yes
no
EASY
Which of the following capacity levels has traditionally been used to compute the fixed
overhead application rate?
a.
b.
c.
d.
expected annual
normal
theoretical
prior year
ANSWER:
28.
Practical
no
yes
yes
yes
Management would generally expect unfavorable variances if standards were based on
which of the following capacity measures?
a.
b.
c.
d.
27.
10–7
a
EASY
A company has a favorable variable overhead spending variance, an unfavorable variable
overhead efficiency variance, and underapplied variable overhead at the end of a period.
The journal entry to record these variances and close the variable overhead control
account will show which of the following?
a.
b.
c.
d.
VOH spending
variance
debit
credit
debit
credit
ANSWER:
b
VOH efficiency
variance
credit
debit
credit
debit
MEDIUM
VMOH
credit
credit
debit
debit
10–8
29.
Chapter 10
Ronald Corp. incurred 2,300 direct labor hours to produce 600 units of product. Each unit
should take 4 direct labor hours. Ronald applies variable overhead to production on a
direct labor hour basis. The variable overhead efficiency variance
a.
b.
c.
d.
will be unfavorable.
will be favorable.
will depend upon the capacity measure selected to assign overhead to production.
is impossible to determine without additional information.
ANSWER:
30.
b.
c.
d.
MEDIUM
using more or fewer actual hours than the standard hours allowed for the
production achieved.
paying a higher/lower average actual overhead price per unit of the activity base
than the standard price allowed per unit of the activity base.
larger/smaller waste and shrinkage associated with the resources involved than
expected.
both b and c are causes.
ANSWER:
d
MEDIUM
Which of the following are considered controllable variances?
a.
b.
c.
d.
VOH spending
yes
no
no
yes
ANSWER:
32.
b
A variable overhead spending variance is caused by
a.
31.
Standard Costing
d
Total overhead budget
yes
no
yes
yes
Volume
yes
yes
no
no
MEDIUM
A company may set predetermined overhead rates based on normal, expected annual, or
theoretical capacity. At the end of a period, the fixed overhead spending variance would
a.
b.
c.
d.
be the same regardless of the capacity level selected.
be the largest if theoretical capacity had been selected.
be the smallest if theoretical capacity had been selected.
not occur if actual capacity were the same as the capacity level selected.
ANSWER:
a
EASY
Chapter 10
33.
Standard Costing
The variance least significant for purposes of controlling costs is the
a.
b.
c.
d.
material quantity variance.
variable overhead efficiency variance.
fixed overhead spending variance.
fixed overhead volume variance.
ANSWER:
34.
c.
d.
EASY
best controlled on a unit-by-unit basis of products produced.
mostly incurred to provide the capacity to produce and are best controlled on a
total basis at the time they are originally negotiated.
constant on a per-unit basis at all different activity levels within the relevant
range.
best controlled as to spending during the production process.
ANSWER:
b
MEDIUM
The variance most useful in evaluating plant utilization is the
a.
b.
c.
d.
variable overhead spending variance.
fixed overhead spending variance.
variable overhead efficiency variance.
fixed overhead volume variance.
ANSWER:
36.
d
Fixed overhead costs are
a.
b.
35.
10–9
d
EASY
A favorable fixed overhead volume variance occurs if
a.
b.
c.
d.
there is a favorable labor efficiency variance.
there is a favorable labor rate variance.
production is less than planned.
production is greater than planned.
ANSWER:
d
EASY
10–10
37.
Chapter 10
The fixed overhead application rate is a function of a predetermined activity level. If
standard hours allowed for good output equal the predetermined activity level for a given
period, the volume variance will be
a.
b.
c.
d.
zero.
favorable.
unfavorable.
either favorable or unfavorable, depending on the budgeted overhead.
ANSWER:
38.
EASY
fixed overhead volume variance.
fixed overhead spending variance.
noncontrollable variance.
controllable variance.
ANSWER:
b
EASY
Total actual overhead minus total budgeted overhead at the actual input production level
equals the
a.
b.
c.
d.
variable overhead spending variance.
total overhead efficiency variance.
total overhead spending variance.
total overhead volume variance.
ANSWER:
40.
a
Actual fixed overhead minus budgeted fixed overhead equals the
a.
b.
c.
d.
39.
Standard Costing
c
EASY
A favorable fixed overhead spending variance indicates that
a.
b.
c.
d.
budgeted fixed overhead is less than actual fixed overhead.
budgeted fixed overhead is greater than applied fixed overhead.
applied fixed overhead is greater than budgeted fixed overhead.
actual fixed overhead is less than budgeted fixed overhead.
ANSWER:
d
EASY
Chapter 10
41.
Standard Costing
An unfavorable fixed overhead volume variance is most often caused by
a.
b.
c.
d.
actual fixed overhead incurred exceeding budgeted fixed overhead.
an over-application of fixed overhead to production.
an increase in the level of the finished inventory.
normal capacity exceeding actual production levels.
ANSWER:
42.
EASY
unfavorable capacity variance.
favorable material and labor usage variance.
favorable volume variance.
unfavorable manufacturing overhead variance.
ANSWER:
c
EASY
In analyzing manufacturing overhead variances, the volume variance is the difference
between the
a.
b.
c.
d.
amount shown in the flexible budget and the amount shown in debit side of the
overhead control account.
predetermined overhead application rate and the flexible budget application rate
times actual hours worked.
budget allowance based on standard hours allowed for actual production for the
period and the amount budgeted to be applied during the period.
actual amount spent for overhead items during the period and the overhead
amount applied to production during the period.
ANSWER:
44.
d
In a standard cost system, when production is greater than the estimated unit or
denominator level of activity, there will be a(n)
a.
b.
c.
d.
43.
10–11
c
MEDIUM
Variance analysis for overhead normally focuses on
a.
b.
c.
d.
efficiency variances for machinery and indirect production costs.
volume variances for fixed overhead costs.
the controllable variance as a lump-sum amount.
the difference between budgeted and applied variable overhead.
ANSWER:
a
MEDIUM
10–12
45.
Chapter 10
The efficiency variance computed on a three-variance approach is
a.
b.
c.
d.
equal to the variable overhead efficiency variance computed on the four-variance
approach.
equal to the variable overhead spending variance plus the variable overhead
efficiency variance computed on the four-variance approach.
computed as the difference between applied variable overhead and actual variable
overhead.
computed as actual variable overhead minus the flexible budget for variable
overhead based on actual hours worked.
ANSWER:
46.
EASY
is less expensive to operate and maintain.
does not result in underapplied or overapplied overhead.
is more effective in assigning overhead costs to products.
is easier to develop.
ANSWER:
c
MEDIUM
Under the two-variance approach, the volume variance is computed by subtracting
_________ based on standard input allowed for the production achieved from budgeted
overhead.
a.
b.
c.
d.
applied overhead
actual overhead
budgeted fixed overhead plus actual variable overhead
budgeted variable overhead
ANSWER:
48.
a
The use of separate variable and fixed overhead rates is better than a combined rate
because such a system
a.
b.
c.
d.
47.
Standard Costing
a
EASY
The overhead variance calculated as total budgeted overhead at the actual input
production level minus total budgeted overhead at the standard hours allowed for actual
output is the
a.
b.
c.
d.
efficiency variance.
spending variance.
volume variance.
budget variance.
ANSWER:
a
EASY
Chapter 10
49.
Standard Costing
Analyzing overhead variances will not help in
a.
b.
c.
d.
controlling costs.
evaluating performance.
determining why variances occurred.
planning costs for future production cycles.
ANSWER:
50.
c
EASY
In a just-in-time inventory system,
a.
b.
c.
d.
practical standards become ideal standards.
ideal standards become expected standards.
variances will not occur because of the zero-defects basis of JIT.
standard costing cannot be used.
ANSWER:
51.
10–13
b
MEDIUM
A company using very tight (high) standards in a standard cost system should expect that
a.
b.
c.
d.
no incentive bonus will be paid.
most variances will be unfavorable.
employees will be strongly motivated to attain the standards.
costs will be controlled better than if lower standards were used.
ANSWER:
b
EASY
10–14
Chapter 10
Standard Costing
Use the following information for questions 52–55. (Round all answers to the nearest dollar.)
The following July information is for Kingston Company:
52.
Standards:
Material
Labor
3.0 feet per unit @ $4.20 per foot
2.5 hours per unit @ $7.50 per hour
Actual:
Production
Material
Labor
2,750 units produced during the month
8,700 feet used; 9,000 feet purchased @ $4.50 per foot
7,000 direct labor hours @ $7.90 per hour
What is the material price variance (calculated at point of purchase)?
a.
b.
c.
d.
$2,700 U
$2,700 F
$2,610 F
$2,610 U
ANSWER:
53.
EASY
What is the material quantity variance?
a.
b.
c.
d.
$3,105 F
$1,050 F
$3,105 U
$1,890 U
ANSWER:
54.
a
d
MEDIUM
What is the labor rate variance?
a.
b.
c.
d.
$3,480 U
$3,480 F
$2,800 U
$2,800 F
ANSWER:
c
EASY
Chapter 10
55.
Standard Costing
10–15
What is the labor efficiency variance?
a.
b.
c.
d.
$1,875 U
$938 U
$1,875 U
$1,125 U
ANSWER:
b
MEDIUM
Use the following information for questions 56–60.
Timothy Company has the following information available for October when 3,500 units were
produced (round answers to the nearest dollar).
Standards:
Material
Labor
3.5 pounds per unit @ $4.50 per pound
5.0 hours per unit @ $10.25 per hour
Actual:
Material purchased 12,300 pounds @ $4.25
Material used
11,750 pounds
17,300 direct labor hours @ $10.20 per hour
56.
What is the labor rate variance?
a.
b.
c.
d.
$875 F
$865 F
$865 U
$875 U
ANSWER:
57.
b
EASY
What is the labor efficiency variance?
a.
b.
c.
d.
$2,050 F
$2,050 U
$2,040 U
$2,040 F
ANSWER:
a
EASY
10–16
58.
Chapter 10
What is the material price variance (based on quantity purchased)?
a.
b.
c.
d.
$3,075 U
$2,938 U
$2,938 F
$3,075 F
ANSWER:
59.
d
EASY
What is the material quantity variance?
a.
b.
c.
d.
$2,250 F
$2,250 U
$225 F
$2,475 U
ANSWER:
60.
Standard Costing
a
EASY
Assume that the company computes the material price variance on the basis of material
issued to production. What is the total material variance?
a.
b.
c.
d.
$2,850 U
$5,188 U
$5,188 F
$2,850 F
ANSWER:
c
MEDIUM
Chapter 10
Standard Costing
10–17
Use the following information for questions 61–64.
The following March information is available for Batt Manufacturing Company when it
produced 2,100 units:
61.
Standard:
Material
Labor
2 pounds per unit @ $5.80 per pound
3 direct labor hours per unit @ $10.00 per hour
Actual:
Material
Labor
4,250 pounds purchased and used @ $5.65 per pound
6,300 direct labor hours at $9.75 per hour
What is the material price variance?
a.
b.
c.
d.
$637.50 U
$637.50 F
$630.00 U
$630.00 F
ANSWER:
62.
EASY
What is the material quantity variance?
a.
b.
c.
d.
$275 F
$290 F
$290 U
$275 U
ANSWER:
63.
b
c
EASY
What is the labor rate variance?
a.
b.
c.
d.
$1,575 U
$1,575 F
$1,594 U
$0
ANSWER:
b
EASY
10–18
64.
Chapter 10
Standard Costing
What is the labor efficiency variance?
a.
b.
c.
d.
$731.25 F
$731.25 U
$750.00 F
none of the above
ANSWER:
d
EASY
Use the following information for questions 65–74.
Redd Co. uses a standard cost system for its production process and applies overhead based on
direct labor hours. The following information is available for August when Redd made 4,500
units:
65.
Standard:
DLH per unit
Variable overhead per DLH
Fixed overhead per DLH
Budgeted variable overhead
Budgeted fixed overhead
2.50
$1.75
$3.10
$21,875
$38,750
Actual:
Direct labor hours
Variable overhead
Fixed overhead
10,000
$26,250
$38,000
Using the one-variance approach, what is the total overhead variance?
a.
b.
c.
d.
$6,062.50 U
$3,625.00 U
$9,687.50 U
$6,562.50 U
ANSWER:
66.
c
EASY
Using the two-variance approach, what is the controllable variance?
a.
b.
c.
d.
$5,812.50 U
$5,812.50 F
$4,375.00 U
$4,375.00 F
ANSWER:
a
EASY
Chapter 10
67.
Standard Costing
Using the two-variance approach, what is the noncontrollable variance?
a.
b.
c.
d.
$3,125.00 F
$3,875.00 U
$3,875.00 F
$6,062.50 U
ANSWER:
68.
c
MEDIUM
Using the three-variance approach, what is the efficiency variance?
a.
b.
c.
d.
$9,937.50 F
$2,187.50 F
$2,187.50 U
$2,937.50 F
ANSWER:
b
MEDIUM
Using the three-variance approach, what is the volume variance?
a.
b.
c.
d.
$3,125.00 F
$3,875.00 F
$3,875.00 U
$6,062.50 U
ANSWER:
71.
EASY
$4,375 U
$3,625 F
$8,000 U
$15,750 U
ANSWER:
70.
b
Using the three-variance approach, what is the spending variance?
a.
b.
c.
d.
69.
10–19
c
MEDIUM
Using the four-variance approach, what is the variable overhead spending variance?
a.
b.
c.
d.
$4,375.00 U
$4,375.00 F
$8,750.00 U
$6,562.50 U
ANSWER:
c
MEDIUM
10–20
72.
Chapter 10
Using the four-variance approach, what is the variable overhead efficiency variance?
a.
b.
c.
d.
$2,187.50 U
$9,937.50 F
$2,187.50 F
$2,937.50 F
ANSWER:
73.
c
MEDIUM
Using the four-variance approach, what is the fixed overhead spending variance?
a.
b.
c.
d.
$7,000 U
$3,125 F
$750 U
$750 F
ANSWER:
74.
Standard Costing
d
EASY
Using the four-variance approach, what is the volume variance?
a.
b.
c.
d.
$3,125 F
$3,875 F
$6,063 U
$3,875 U
ANSWER:
d
MEDIUM
Chapter 10
Standard Costing
10–21
Use the following information for questions 75–84.
Spots Inc. uses a standard cost system for its production process. Spots applies overhead based
on direct labor hours. The following information is available for July:
Standard:
Direct labor hours per unit
Variable overhead per hour
Fixed overhead per hour
(based on 11,990 DLHs)
Actual:
Units produced
Direct labor hours
Variable overhead
Fixed overhead
75.
4,400
8,800
$29,950
$42,300
$7,950 U
$25 F
$7,975 U
$10,590 U
ANSWER:
a
MEDIUM
Using the four-variance approach, what is the variable overhead efficiency variance?
a.
b.
c.
d.
$9,570 F
$9,570 U
$2,200 F
$2,200 U
ANSWER:
77.
$3.00
Using the four-variance approach, what is the variable overhead spending variance?
a.
b.
c.
d.
76.
2.20
$2.50
c
MEDIUM
Using the four-variance approach, what is the fixed overhead spending variance?
a.
b.
c.
d.
$15,900 U
$6,330 U
$6,930 U
$935 F
ANSWER:
b
MEDIUM
10–22
78.
Chapter 10
Using the four-variance approach, what is the volume variance?
a.
b.
c.
d.
$6,930 U
$13,260 U
$0
$2,640 F
ANSWER:
79.
$23,850 U
$23,850 F
$14,280 F
$14,280 U
ANSWER:
MEDIUM
$11,770 F
$2,200 F
$7,975 U
$5,775 U
ANSWER:
b
MEDIUM
Using the three-variance approach, what is the volume variance?
a.
b.
c.
d.
$13,260 U
$2,640 F
$6,930 U
$0
ANSWER:
82.
d
Using the three-variance approach, what is the efficiency variance?
a.
b.
c.
d.
81.
MEDIUM
Using the three-variance approach, what is the spending variance?
a.
b.
c.
d.
80.
a
c
MEDIUM
Using the two-variance approach, what is the controllable variance?
a.
b.
c.
d.
$21,650 U
$16,480 U
$5,775 U
$12,080 U
ANSWER:
d
MEDIUM
Standard Costing
Chapter 10
83.
Standard Costing
Using the two-variance approach, what is the noncontrollable variance?
a.
b.
c.
d.
$26,040 F
$0
$6,930 U
$13,260 U
ANSWER:
84.
MEDIUM
$19,010 U
$6,305 U
$12,705 U
$4,730 U
ANSWER:
a
MEDIUM
Actual fixed overhead is $33,300 (12,000 machine hours) and fixed overhead was
estimated at $34,000 when the predetermined rate of $3.00 per machine hour was set. If
11,500 standard hours were allowed for actual production, applied fixed overhead is
a.
b.
c.
d.
$33,300.
$34,000.
$34,500.
not determinable without knowing the actual number of units produced.
ANSWER:
86.
c
Using the one-variance approach, what is the total variance?
a.
b.
c.
d.
85.
10–23
c
EASY
One unit requires 2 direct labor hours to produce. Standard variable overhead per unit is
$1.25 and standard fixed overhead per unit is $1.75. If 330 units were produced this
month, what total amount of overhead is applied to the units produced?
a.
b.
c.
d.
$990
$1,980
$660
cannot be determined without knowing the actual hours worked
ANSWER:
a
EASY
10–24
87.
Chapter 10
Standard Costing
Union Company uses a standard cost accounting system. The following overhead costs
and production data are available for August:
Standard fixed OH rate per DLH
Standard variable OH rate per DLH
Budgeted monthly DLHs
Actual DLHs worked
Standard DLHs allowed for
actual production
Overall OH variance—favorable
$1
$4
40,000
39,500
39,000
$2,000
The total applied manufacturing overhead for August should be
a.
b.
c.
d.
$195,000.
$197,000.
$197,500.
$199,500.
ANSWER:
88.
a
EASY
Universal Company uses a standard cost system and prepared the following budget at
normal capacity for January:
Direct labor hours
Variable OH
Fixed OH
Total OH per DLH
Actual data for January were as follows:
Direct labor hours worked
Total OH
Standard DLHs allowed for
capacity attained
24,000
$48,000
$108,000
$6.50
22,000
$147,000
21,000
Using the two-way analysis of overhead variances, what is the controllable variance for
January?
a.
b.
c.
d.
$3,000 F
$5,000 F
$9,000 F
$10,500 U
ANSWER:
a
MEDIUM
Chapter 10
89.
Standard Costing
10–25
The following information is available from the Tyro Company:
Actual OH
Fixed OH expenses, actual
Fixed OH expenses, budgeted
Actual hours
Standard hours
Variable OH rate per DLH
$15,000
$7,200
$7,000
3,500
3,800
$2.50
Assuming that Tyro uses a three-way analysis of overhead variances, what is the overhead
spending variance?
a.
b.
c.
d.
$750 F
$750 U
$950 F
$1,500 U
ANSWER:
90.
a
MEDIUM
Martin Company uses a two-way analysis of overhead variances. Selected data for the
April production activity are as follows:
Actual variable OH incurred
Variable OH rate per MH
Standard MHs allowed
Actual MHs
$196,000
$6
33,000
32,000
Assuming that budgeted fixed overhead costs are equal to actual fixed costs, the
controllable variance for April is
a.
b.
c.
d.
$2,000 F.
$4,000 U.
$4,000 F.
$6,000 F.
ANSWER:
a
MEDIUM
10–26
91.
Chapter 10
Standard Costing
Air Inc. uses a standard cost system. Overhead cost information for October is as follows:
Total actual overhead incurred
$12,600
Fixed overhead budgeted
$3,300
Total standard overhead rate per MH
$4
Variable overhead rate per MH
$3
Standard MHs allowed for actual production 3,500
What is the total overhead variance?
a.
b.
c.
d.
$1,200 F
$1,200 U
$1,400 F
$1,400 U
ANSWER:
c
EASY
Use the following information for questions 92–95.
Standard Company has developed standard overhead costs based on a capacity of 180,000
machine hours as follows:
Standard costs per unit:
Variable portion
2 hours @ $3 = $ 6
Fixed portion
2 hours @ $5 = 10
$16
During April, 85,000 units were scheduled for production, but only 80,000 units were actually
produced. The following data relate to April:
Actual machine hours used were 165,000.
Actual overhead incurred totaled $1,378,000 ($518,000 variable plus $860,000 fixed).
All inventories are carried at standard cost.
92.
The variable overhead spending variance for April was
a.
b.
c.
d.
$15,000 U.
$23,000 U.
$38,000 F.
$38,000 U.
ANSWER:
b
MEDIUM
Chapter 10
93.
Standard Costing
The variable overhead efficiency variance for April was
a.
b.
c.
d.
$15,000 U.
$23,000 U.
$38,000 F.
$38,000 U.
ANSWER:
94.
a
MEDIUM
The fixed overhead spending variance for April was
a.
b.
c.
d.
$40,000 U.
$40,000 F.
$60,000 F.
$60,000 U.
ANSWER:
95.
10–27
b
MEDIUM
The fixed overhead volume variance for April was
a.
b.
c.
d.
$60,000 U.
$60,000 F.
$100,000 F.
$100,000 U.
ANSWER:
d
MEDIUM
10–28
Chapter 10
Standard Costing
THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN
THE APPENDIX OF THE CHAPTER.
Use the following information for questions 96–101. (Round all answers to the nearest dollar and
percents to the nearest whole percent.)
Xtra Klean manufactures a cleaning solvent. The company employs both skilled and unskilled
workers. Skilled workers class C are paid $12 per hour, while unskilled workers class D are paid
$7 per hour. To produce one 55-gallon drum of solvent requires 4 hours of skilled labor and 2
hours of unskilled labor. The solvent requires 2 different materials: A and B. The standard and
actual material information is given below:
Standard:
Material A: 30.25 gallons @ $1.25 per gallon
Material B: 24.75 gallons @ $2.00 per gallon
Actual:
Material A: 10,716 gallons purchased and used @ $1.50 per gallon
Material B: 17,484 gallons purchased and used @ $1.90 per gallon
Skilled labor hours: 1,950 @ $11.90 per hour
Unskilled labor hours: 1,300 @ $7.15 per hour
During the current month Xtra Klean manufactured 500 55-gallon drums. (Round all
answers to the nearest whole dollar.)
96.
What is the total material price variance?
a.
b.
c.
d.
$877 F
$877 U
$931 U
$931 F
ANSWER:
97.
c
MEDIUM
What is the total material mix variance?
a.
b.
c.
d.
$3,596 F
$3,596 U
$4,864 F
$4,864 U
ANSWER:
b
DIFFICULT
Chapter 10
98.
Standard Costing
What is the total material yield variance?
a.
b.
c.
d.
$1,111 U
$1,111 F
$2,670 U
$2,670 F
ANSWER:
99.
a
MEDIUM
What is the labor mix variance?
a.
b.
c.
d.
$1,083 U
$2,588 U
$1,083 F
$2,588 F
ANSWER:
c
DIFFICULT
What is the labor yield variance?
a.
b.
c.
d.
$2,583 U
$2,583 F
$1,138 F
$1,138 U
ANSWER:
102.
DIFFICULT
$0
$1,083 U
$2,583 U
$1,083 F
ANSWER:
101.
a
What is the labor rate variance?
a.
b.
c.
d.
100.
10–29
a
DIFFICULT
The sum of the material mix and material yield variances equals
a.
b.
c.
d.
the material purchase price variance.
the material quantity variance.
the total material variance.
none of the above.
ANSWER:
b
EASY
10–30
103.
Chapter 10
Standard Costing
The sum of the labor mix and labor yield variances equals
a.
b.
c.
d.
the labor efficiency variance.
the total labor variance.
the labor rate variance.
nothing because these two variances cannot be added since they use different
costs.
ANSWER:
a
EASY
SHORT ANSWER/PROBLEMS
1.
List and discuss briefly the three standards of attainability.
ANSWER: Expected standards reflect what is actually expected to occur in the future
period. This standard takes into consideration waste and inefficiencies and makes
allowances for them.
Practical standards can be reached or exceeded most of the time with reasonable effort.
This standard allows for normal, unavoidable time problems or delays.
Ideal standards provide for no inefficiencies of any type. This standard does not allow for
normal operating delays or human limitations.
MEDIUM
2.
Discuss briefly the type of information contained on (a) a bill of materials and (b) an
operations flow document.
ANSWER: (a) A bill of materials contains the identification of components, a
description of components, and the quantity of each material required for a product. (b)
An operations flow document contains an identification number, descriptions of the tasks
to be performed, the departments doing the work, and standard number of hours and/or
minutes to perform each task.
MEDIUM
Chapter 10
3.
Standard Costing
10–31
Define the following terms: standard cost system, total variance, material price variance,
and labor efficiency variance.
ANSWER: A standard cost system records both standard costs and actual costs in the
accounting records. This process allows for better cost control because actual costs can be
easily compared to standard costs.
A total variance is the difference between actual input cost for material or labor and the
standard cost for material or labor for the output produced.
The material price variance is the difference between the actual price paid for material
and the standard price of the material times the actual quantity used or purchased.
The labor efficiency variance compares the number of hours actually worked with the
standard hours allowed for the production achieved and values this difference at the
standard labor rate.
MEDIUM
4.
Discuss how establishing standards benefits the following management functions:
performance evaluation and decision making.
ANSWER: Performance evaluation is enhanced by the use of standard costs because it
allows management to pinpoint deviations from standard costs and points out variances.
The variances are analyzed and individual responsibility can be assessed for the
variances, depending on the nature of the causes.
The availability of standard cost information facilitates many decisions. These costs can
be used in budgeting, cost estimates for jobs, and determining contributions made by
various product lines; and, thus, can be used to decide whether to add new lines or drop
old lines.
MEDIUM
5.
Discuss why standards may need to be changed after they have been in effect for some
period of time.
ANSWER: Standards may need to be changed from time to time because of changing
economic conditions, availability of materials, quality of materials, and labor rates or skill
levels. Standards should be reviewed periodically to assure management that current
standards are being established and used.
MEDIUM
10–32
6.
Chapter 10
Standard Costing
Discuss how variable and fixed overhead application rates are calculated.
ANSWER: The variable overhead application rate is calculated by dividing total
budgeted variable overhead by its related level of activity. Any level of activity within the
relevant range may be selected since VOH cost per unit is constant throughout the
relevant range. The fixed overhead application rate is calculated by dividing total
budgeted fixed overhead by the specific capacity level expected for the period.
MEDIUM
7.
Discuss how variances are disposed of at the end of a production cycle.
ANSWER: After variances are calculated and recorded, journal entries must be
prepared at the end of the period to properly dispose of those variances. Unfavorable
variances have debit balances and favorable variances have credit balances. Disposition
of these variances depends on their combined level of materiality. If the variances are
immaterial, they are closed to CGS. If they are significant in amount, the material price
variance is prorated among the RM, WIP, FG, and CGS accounts. All other variances are
prorated among WIP, FG, and CGS.
MEDIUM
8.
Why are fixed overhead variances considered noncontrollable?
ANSWER: Management has limited ability to control fixed overhead costs in the short
run because these costs are incurred to provide the capacity to produce. Fixed costs can be
controllable to a limited extent at the point of commitment; therefore, the FOH spending
variance can be considered, in part, controllable.
On the other hand, the volume variance arises solely because management has selected a
specific level of activity on which to calculate the FOH application rate. If actual activity
differs at all from this selected base, a volume variance will occur. Production levels are
controllable to a very limited extent in the production area. Production is more often
related to ability to sell and demand; thus, these levels are not controllable by the
production manager.
MEDIUM
Chapter 10
9.
Standard Costing
10–33
Provide the correct term for each of the following definitions:
a.
b.
c.
d.
e.
f.
g.
h.
a cost that fluctuates with large changes in level of activity
a range of activity over which costs behave as predicted
the capacity level at which a firm believes it will operate at during the coming
production cycle
the difference between actual variable overhead and budgeted variable overhead
based on inputs
the difference between total actual overhead and total applied overhead
the difference between total budgeted overhead based on inputs and applied
overhead
the difference between total actual overhead and total budgeted overhead based on
output
the difference between actual fixed overhead and budgeted fixed overhead
ANSWERS:
a.
step fixed cost
b.
relevant range
c.
expected annual capacity
d.
variable overhead
spending variance
MEDIUM
e.
f.
g.
h.
total overhead variance
volume variance
efficiency variance
fixed overhead
spending variance
10–34
Chapter 10
Standard Costing
Use the following information for questions 10 and 11.
ABC Company has the following information available for the current year:
Standard:
Material
Labor
Actual:
Material
Labor
10.
3.5 feet per unit @ $2.60 per foot
5 direct labor hours @ $8.50 per unit
95,625 feet used (100,000 feet purchased @ $2.50 per foot)
122,400 direct labor hours incurred per unit @ $8.35 per hour
25,500 units were produced
Compute the material purchase price and quantity variances.
ANSWER:
Material price variance:
100,000 × $2.50 = $250,000
100,000 × $2.60 = 260,000
$ 10,000 F
Material quantity variance:
95,625 × $2.60 = $248,625
89,250 × $2.60 =
232,050
$ 16,575 U
MEDIUM
11.
Compute the labor rate and efficiency variances.
ANSWER:
Labor rate variance:
122,400 × $8.35 = $1,022,040
122,400 × $8.50 = 1,040,400
$ 18,360 F
Labor efficiency variance:
122,400 × $8.50 = $1,040,400
127,500 × $8.50 = 1,083,750
$ 43,350 F
Chapter 10
Standard Costing
10–35
Use the following information for questions 12–14.
OP Co. applies overhead based on direct labor hours and has the following available for
November:
Standard:
Direct labor hours per unit
Variable overhead per DLH
Fixed overhead per DLH
(based on 8,900 DLHs)
Actual:
Units produced
Direct labor hours
Variable overhead
Fixed overhead
5
$.75
$1.90
1,800
8,900
$6,400
$17,500
MEDIUM
12.
Compute all the appropriate variances using the two-variance approach.
ANSWER:
Actual ($6,400 + $17,500)
Budget Variance:
BFOH (8,900 × $1.90)
VOH (1,800 × 5 × $.75)
Volume Variance:
Applied OH:
(1,800 × 5 × $2.65)
MEDIUM
$23,900
$240 U
$16,910
6,750
$23,660
$190 F
$23,850
10–36
13.
Chapter 10
Standard Costing
Compute all the appropriate variances using the three-variance approach.
ANSWER:
Actual
Spending Variance:
Flexible Budget Based on Actual Input
BFOH
$16,910
VOH (8,900 × $.75)
Efficiency Variance:
Flexible Budget Based on Standard DLHs
BFOH
$16,910
VOH (1,800 × 5 × $.75)
Volume Variance:
Applied OH:
(1,800 × 5 × $2.65)
$23,900
$315 U
6,675
$23,585
$75 F
6,750
$23,660
$190 F
$23,850
MEDIUM
14.
Compute all the appropriate variances using the four-variance approach.
ANSWER:
Actual VOH
Variable Spending Variance:
Flex. Bud. Based on Actual
Input Hours (8,900 × $.75)
Variable Efficiency Variance:
Applied VOH
(1,800 × 5 × $.75)
Actual FOH
FOH Spending Variance:
BUDGETED FOH
$16,910
FOH Volume Variance:
Applied FOH
(1,800 × 5 × $1.90)
MEDIUM
$6,400
$275 F
$6,675
$75 F
$6,750
$17,500
$590 U
$190 F
$17,100
Chapter 10
15.
Standard Costing
10–37
The Hawaii Co. has made the following information available for its production facility
for June 2001. Fixed overhead was estimated at 19,000 machine hours for the production
cycle. Actual machine hours for the period were 18,900, which generated 3,900 units.
Material purchased (80,000 pieces)
Material quantity variance
Machine hours used (18,900 hours)
VOH spending variance
Actual fixed overhead
Actual labor cost
Actual labor hours
$314,000
$6,400 U
$50 U
$60,000
$40,120
5,900
Hawaii’s standard costs are as follows:
Direct material
Direct labor
Variable overhead
(applied on a machine hour basis)
Fixed overhead
(applied on a machine hour basis)
Determine the following items:
a.
material purchase price variance
b.
standard quantity allowed for material
c.
total standard cost of material allowed
d.
actual quantity of material used
e.
labor rate variance
f.
standard hours allowed for labor
g.
total standard cost of labor allowed
h.
labor efficiency variance
i.
actual variable overhead incurred
j.
standard machine hours allowed
k.
variable overhead efficiency variance
l.
budgeted fixed overhead
m.
applied fixed overhead
n.
fixed overhead spending variance
o.
volume variance
p.
total overhead variance
20 pieces @ $4 per piece
1.5 hours @ $6 per hour
4.8 hours @ $2.50 per hour
4.8 hours @ $3 per hour
10–38
Chapter 10
ANSWER:
a.
actual material cost
actual pieces at standard cost (80,000 × $4)
material purchase price variance
Standard Costing
$314,000
320,000
$ 6,000 F
b.
3,900 units × 20 pieces per unit = 78,000 standard quantity allowed
c.
total standard cost of material (78,000 × $4) $312,000
d.
standard cost of actual material used
$312,000 + $6,400 U quantity variance
$318,400  $4 = 79,600 actual pieces used
$318,400
e.
actual labor cost
5,900 actual DLHs × $6
labor rate variance
$40,120
35,400
$ 4,720 U
f.
3,900 units × 1.5 standard hours per unit
g.
5,850 SHA × $6
$35,100
h.
actual hours × standard rate (from e)
standard cost of labor allowed (from g)
labor efficiency variance
$35,400
35,100
$ 300 U
i.
actual machine hours × standard VOH rate (18,900 × $2.50)
VOH spending variance
actual VOH
$47,250
50 U
$47,300
j.
3,900 units × 4.8 standard hours per unit = 18,720 MH allowed
k.
standard hours allowed (from j) × standard VOH rate
(18,720 × $2.50)
actual machine hours × standard rate (from i)
(18,900 × $2.50)
variable overhead efficiency variance
5,850 SHA
$46,800
47,250
$ 450 U
l.
19,000 machine hours × $3
$57,000
m.
3,900 units × 4.8 hours per unit × $3.00
$56,160
n.
actual fixed overhead
budgeted fixed overhead (from l)
fixed overhead spending variance
$60,000
57,000
$ 3,000 U
o.
budgeted fixed overhead (from l)
applied fixed overhead (from m)
volume variance
$57,000
56,160
$ 840 U
p.
total actual overhead
[$60,000 + $47,300 (from i)]
total applied overhead (18,720 SHA × $5.50)
Total overhead variance
DIFFICULT
$107,300
$
102,960
4,340 U
Chapter 10
Standard Costing
THE FOLLOWING PROBLEMS RELATE TO MATERIAL COVERED IN THE
APPENDIX OF THE CHAPTER.
Use the following information for questions 16 and 17.
The following information is available for Raxco for the current year:
Standard:
Material X: 3.0 pounds per unit @ $4.20 per pound
Material Y: 4.5 pounds per unit @ $3.30 per pound
Class S labor: 3 hours per unit @ $10.50 per hour
Class US labor: 7 hours per unit @ $8.00 per hour
Actual:
Material X: 3.6 pounds per unit @ $4.00 per pound (purchased and used)
Material Y: 4.4 pounds per unit @ $3.25 per pound (purchased and used)
Class S labor: 3.8 hours per unit @ $10.60 per hour
Class US labor: 5.7 hours per unit @ $7.80 per hour
Raxco produced a total of 45,750 units.
10–39
10–40
16.
Chapter 10
Standard Costing
Compute the material price, mix, and yield variances (round to the nearest dollar).
ANSWER:
Standard:
X
Y
3.0/7.5 = 40%
4.5/7.5 = 60%
Actual:
X 3.6 × 45,750 × $4.00 =
Y 4.4 × 45,750 × $3.25 =
$ 658,800
654,225
$1,313,025
$43,005 F price
Actual × Standard Prices:
X 3.6 × 45,750 × $4.20 =
Y 4.4 × 45,750 × $3.30 =
$ 691,740
664,290
$1,356,030
$16,470 U mix
Standard Qty. × Actual Mix × Standard Prices:
X 40% × 366,000* × $4.20 = $ 614,880
Y 60% × 366,000 × $3.30 =
724,680
$1,339,560
$83,722 U yield
Standard x Standard:
X 40% × 343,125** × $4.20 = $ 576,450
Y 60% × 343,125 × $3.30 =
679,388
$1,255,838
*(45,750 × 8 = 366,000)
**(45,750 × 7.5 = 343,125)
DIFFICULT
Chapter 10
17.
Standard Costing
10–41
Compute the labor rate, mix, and yield variances (round to the nearest dollar).
ANSWER:
Standard: S 3/10 = 30%
US 7/10 = 70%
Actual × Actual Prices:
S
3.8 × 45,750 × $10.60 =
US 5.7 × 45,750 × $7.80 =
Actual: S
3.8/9.5 = 40%
US 5.7/9.5 = 60%
$1,842,810
2,034,045
$3,876,855
$34,770 F rate
Actual × Standard Prices:
S
3.8 × 45,750 × $10.50 =
US 5.7 × 45,750 × $ 8.00 =
$1,825,425
2,086,200
$3,911,625
$108,656 U mix
Standard Qty. × Actual Mix × Standard Prices:
S
30% × 434,625* × $10.50 = $1,369,069
US 70% × 434,625 × $ 8.00 =
2,433,900
$3,802,969
$200,156 F yield
Standard × Standard:
S
30% × 457,500** × $10.50 = $1,441,125
US 70% × 457,500 × $ 8.00 =
2,562,000
$4,003,125
*(45,750 × 9.5 = 434,625)
**(45,750 × 10 = 457,500)
DIFFICULT
10–42
18.
Chapter 10
Standard Costing
(Appendix) Saksena Corp. produces a product using the following standard proportions
and costs of material:
Material A
Material B
Material C
Standard shrinkage (33 1/3%)
Net weight and cost
Pounds
50
40
60
150
50
100
Cost Per
Pound
$5.00
6.00
3.00
4.4667
6.70
A recent production run yielding 100 output pounds required an input of:
Material A
Material B
Material C
Amount
40
50
65
Required: Material price, mix, and yield variances.
Cost Per
Pound
$5.15
6.00
2.80
Amount
$250.00
240.00
180.00
$670.00
______
$670.00
Chapter 10
Standard Costing
10–43
ANSWER:
MATERIAL PRICE VARIANCE
MATERIAL A
MATERIAL B
MATERIAL C
($5.15 – 5.00) × 40 = $ 6 U
($6.00 – 6.00) × 50 =
0
($2.80 – 3.00) × 65 = 13 F
$ 7F
ACT Q
ACT MIX
STD P
ACT Q
STD MIX
STD P
MIX VARIANCE
A
B
C
40 × $5 = $200
50 × $6 = $300
65 × $3 = $195
$695
YIELD VARIANCE
51 2/3 × $5 = $258.33
41 1/3 × $6 = $248.00
62 × $3 = $186.00
$692.33
$2.67 UNF
MEDIUM
STD Q
STD MIX
STD P
50 × $5 = $250
40 × $6 = $240
60 × $3 = $180
$670
$22.33 UNF
10–44
19.
Chapter 10
Standard Costing
Sample Company began business early in January, 2001, using a standard costing for its
single product. With standard capacity set at 10,000 standard productive hours per
month, the following standard cost sheet was set up for one unit of product:
Direct material—5 pieces @ $2.00
Direct labor (variable)—1 sph @ $3.00
Manufacturing overhead:
Fixed—1 sph @ $3.00
Variable—1 sph @ $2.00
$10.00
3.00
$3.00
2.00
5.00
Fixed costs are incurred evenly throughout the year. The following unfavorable variances
from standard costs were recorded during the first month of operations:
Material price
Material usage
Labor rate
Labor efficiency
Overhead volume
Overhead budget (2 variance analysis)
$
0
4,000
800
300
6,000
1,000
Required: Determine the following: (a) fixed overhead budgeted for a year; (b) the
number of units completed during January assuming no work in process at January 31;
(c) debits made to the Work in Process account for direct material, direct labor, and
manufactuirng overhead; (d) number of pieces of material issued during January; (e)
total of direct labor payroll recorded for January; (f) total of manufacturing overhead
recorded in January.
ANSWER:
a.
$3 × 10,000 × 12 = $360,000
b.
$6,000/$3 = 2,000 under 10,000 – 2,000 = 8,000 units
c.
DM = 8,000 × $10 = $80,000, DL = 8,000 × $3 = $24000,
MOH = 8,000 × $5 = $40,000
d.
STD Q = 40,000 (X – 40,000) × $2 = $4,000 unf, X = 42,000 pieces issued
e.
$24,000 + $800 + $300 = $25,100
f.
$40,000 + $6,000 + $1,000 = $47,000
MEDIUM
Chapter 10
20.
Standard Costing
10–45
A firm producing one product has a budgeted overhead of $100,000, of which $20,000 is
variable. The budgeted direct labor is 10,000 hours.
Required: Fill in the blanks.
a.
b.
Production
Flexible Budget
Applied
Volume
Variance
120%
____________
____________
____________
100%
____________
____________
____________
80%
____________
____________
____________
60%
____________
____________
____________
What is the budget variance at the 80 percent level if the actual overhead incurred
is $87,000?
ANSWER:
TOTAL COST EQUATION = $80,000 FIX + 20,000 ($2) variable
10,000
per unit
a.
A = $80,000 + (12,000 × $2) = $104,000
B = $80,000 + (10,000 × $2) = $100,000
C = $80,000 + ( 8,000 × $2) = $ 96,000
D = $80,000 + ( 6,000 × $2) = $ 92,000
APPLICATION RATE = $100,000
10,000 UNITS = $10/unit
b.
BUDGET VARIANCE = ACTUAL FOH – BUDGETED FOH
$9,000 FAV = $87,000 – $96,000
MEDIUM
10–46
21.
Chapter 10
Standard Costing
Berry Co. manufactures a product effective in controlling beetles. The company uses a
standard cost system and a flexible budget. Standard cost of a gallon is as follows:
Direct material:
2 quarts of A
4 quarts of B
Total direct material
$14
16
$30
Direct labor:
2 hours
Manufacturing overhead
Total
16
12
$58
The flexible budget system provides for $50,000 of fixed overhead at normal capacity of
10,000 direct labor hours. Variable overhead is projected at $1 per direct labor hour.
Actual results for the period indicated the following:
Production:
Direct material:
A
B
Direct labor:
Overhead:
5,000 gallons
12,000 quarts purchased at a cost of $7.20/quart; 10,500
quarts used
20,000 quarts purchased at a cost of $3.90/quart; 19,800
quarts used
9,800 hours worked at a cost of $79,380
Fixed
$48,100
Variable
21,000
Total overhead
$69,100
Required:
1.
What is the application rate per direct labor hour, the total overhead cost equation,
the standard quantity for each material, and the standard hours?
2.
Compute the following variances:
a.
Total material price variance
b.
Total material quantity variance
c.
Labor rate variance
d.
Labor efficiency variance
e.
MOH volume variance
f.
MOH efficiency variance
g.
MOH spending variance, both fixed and variable
Chapter 10
Standard Costing
10–47
ANSWER:
1.
App rate = $6/DLH
TOHC = $50,000 + $1/DLH
Std O (A) 5,000 × 2 = 10,000
(B) 5,000 × 4 = 20,000
Std Hrs. 5,000 × 2 = 10,000
2.
a.
1. ($7.20 – $7.00) × 12,000 = $2,400 U
2. ($3.90 – $4.00) × 20,000 = 2,000 F
$ 400 U
b.
1. (10,500 – 10,000) × $7.00 = $3,500 U
2. (19,800 – 20,000) × $4.00 =
800 F
$2,700 U
c.
$79,380 – (9,800 × $8) = $980 U
d.
(9,800 – 10,000) × $8 = $1600 F
e.
(10,000 – 10,000) × $5 = 0
f.
(9,800 – 10,000) × $1 = $200 F
g.
Fix Spd
Var Spd
MEDIUM
$48,100 – $50,000 = $1,900 F
$21,000 – (9,800 × $1) = $11,200 U
10–48
22.
Chapter 10
Standard Costing
(Appendix) Mac is concerned about the large unfavorable labor quantity variance that
arose in his department last month. He has had a small favorable variance for several
months, and he thinks his crew worked just as effectively last month as in previous
months. This makes him believe that something must be wrong with the calculations, but
he admits he doesn’t understand them. The variance was reported as follows:
Standard labor cost of output (120,000 pounds @ $0.0645)
Actual labor hours at standard wage rate
Labor quantity variance
$7,740
(8,585 )
$ (845 )
The product is made in batches that start with 1,200 pounds of material. The standard
calls for the following labor quantities for each batch:
Labor Class
Class A
Class B
Class C
Total
Standard
Wage Rate
$4.50
4.00
3.00
Standard
Labor Hours
3
6
9
18
Standard
Labor Cost
$13.50
24.00
27.00
$64.50
The material is of uneven quality, and the product yield from a batch varies with the
quality of the material used. The standard output is 1,000 pounds, resulting in a standard
labor cost of $0.0645 a pound.
Mac’s workforce is a crew of 12 workers. The standard crew consists of two Class A
workers, four Class B workers, and six Class C workers. Lower-rated employees cannot
do the work of the higher-rated employees, but the reverse is possible with some slight
loss in efficiency and a resulting increase in labor hours.
The standard work day is nine hours. Last month had 23 working days, for a total of 207
standard working hours.
Last month, 165,000 pounds of material were used to produce 120,000 pounds of
product. The actual amounts of labor used were as follows:
Labor Class
Class A
Class B
Class C
Total
Labor Hours
390
980
970
2,340
Labor Rate
$4.50
4.00
3.00
Labor Cost
$1,755
3,920
2,910
$8,585
Mac’s workforce last month, assigned to him by the personnel department, consisted of
two Class A workers, five Class B workers, and five Class C workers.
Required: Find the labor mix and yield variances.
Chapter 10
Standard Costing
10–49
ANSWER:
STD Q
A 120,000 × 3 = 360
1,000
B
120
× 6 = 720
C
120
× 9 = 1,080
ACT HRS
ACT MIX
STD P
ACT HRS
STD MIX
STD P
MIX VARIANCE
A
B
C
390 × $4.50 = $1,755
980 × $4.00 = $3,920
970 × $3.00 = $2,910
$8,585
YIELD VARIANCE
390 × $4.50 =
$1,755
780 × $4.00 =
$3,120
1,170 × $3.00 = $3,510
$8,385
$200 UNF
MEDIUM
STD HRS
STD MIX
STD P
$645 UNF
360 × $4.50 = $1,620
720 × $4.00 = $2,880
1,080 × $3.00 = $3,240
$7,740
10–50
23.
Chapter 10
Standard Costing
(Appendix) Smith Corp. operates a factory. One of its departments has three kinds of
employees on its direct labor payroll, classified as pay grades A, B, and C. The
employees work in 10-person crews in the following proportions:
Pay Grade
A
B
C
Total
No. of
Workers in
Standard Crew
6
3
1
10
Standard
Hourly
Wage Rate
$4
6
8
Standard
Cost per
Crew Hour
$24
18
8
$50
The work crews can’t work short-handed. To keep a unit operating when one of the
regular crew members is absent, the head of the department first tries to reassign one of
the department’s other workers from indirect labor operations.
If no one in the department is able to step in, plant management will pull maintenance
department workers off their regular work, if possible, and assign them temporarily to the
department. These maintenance workers are all classified as Grade D employees, with a
standard wage rate of $10 an hour.
The following data relate to the operations of the department during the month of May:
1.
Actual work time, 1,000 crew hours.
2.
Actual direct labor hours:
Grade A, 5,400 hours.
Grade B, 3,200 hours.
Grade C, 1,300 hours.
Grade D, 100 hours.
3.
Standard crew hours for actual output, 980.
Required: Compute labor rate, mix, and yield variances.
Chapter 10
Standard Costing
10–51
ANSWER:
ACT HRS
ACT MIX
STD RATE
ACT HRS
STD MIX
STD RATE
MIX VARIANCE
A
B
C
D
5,400 × $4 = $21,600
3,200 × $6 =
19,200
1,300 × $8 =
10,400
100 × $10 =
1,000
$52,200
STD HRS
STD MIX
STD RATE
YIELD VARIANCE
6,000 × $4 = $24,000
3,000 × $6 = 18,000
1,000 × $8 =
8,000
$50,000
MIX VARIANCE
= $2,200 UNF
YIELD VARIANCE = $1,000 UNF
RATE VARIANCE = $ 800 UNF ($53,000 – $52,200)
MEDIUM
5,880 × $4 = $23,520
2,940 × $6 = 17,640
980 × $8 =
7,840
$49,000
10–52
24.
Chapter 10
Standard Costing
(Appendix) The Fred Company manufactures a certain product by mixing three kinds of
materials in large batches. The blendmaster has the responsibility for maintaining the
quality of the product, and this often requires altering the proportions of the various
ingredients. Standard costs are used to provide material control information. The
standard material inputs per batch are:
Material A
Material B
Material C
Total batch
Quantity
(pounds)
420
70
10
500
Price
(per pound)
$0.06
0.12
0.25
Standard Cost
of Material
$25.20
8.40
2.50
$36.10
The finished product is packed in 50-pound boxes; the standard material cost of each box
is, therefore, $3.61.
During January, the following materials were put in process:
Material A
Material B
Material C
Total
181,000 lbs.
33,000
6,000
220,000 lbs.
Inventories in process totaled 5,000 pounds at the beginning of the month and 8,000
pounds at the end of the month. It is assumed that these inventories consisted of
materials in their standard proportions. Finished output during January amounted to
4,100 boxes.
Required: Compute the total material quantity variance for the month and break it down
into mix and yield components.
Chapter 10
Standard Costing
10–53
ANSWER:
MATERIAL QUANTITY VARIANCE
A
B
C
(181,000 – 172,200) × $0.06 =
(33,000 – 28,700) × $0.12 =
(6,000 – 4,100) × $0.25 =
ACT Q
ACT Mix
STD P
A
B
C
$ 528 UNF
516 UNF
475 UNF
$1,519
ACT Q
STD MIX
STD P
181,000 × $0.06 = $10,860
33,000 × $0.12 =
3,960
6,000 × $0.25 =
1,500
$16,320
184,800 × $0.06 = $11,076
30,800 × $0.12 =
3,696
4,400 × $0.25 =
1,100
$15,872
MIX VARIANCE =
$ 436 UNF
YIELD VARIANCE = $1,083 UNF
Total
$1,519 UNF
MEDIUM
STD Q
STD MIX
STD P
172,200 × $0.06 = $10,332
28,700 × $0.12 =
3,444
4,100 × $0.25 =
1,025
$14,801
CHAPTER 11
ABSORPTION/VARIABLE COSTING AND COST-VOLUME-PROFIT ANALYSIS
MULTIPLE CHOICE
1.
Consider the following three product costing alternatives: process costing, job order
costing, and standard costing. Which of these can be used in conjunction with absorption
costing?
a.
b.
c.
d.
job order costing
standard costing
process costing
all of them
ANSWER:
2.
absorption costing.
variable costing.
direct costing.
standard costing.
ANSWER:
a
EASY
Another name for absorption costing is
a.
b.
c.
d.
full costing.
direct costing.
job order costing.
fixed costing.
ANSWER:
4.
EASY
In a recent period, Marvel Co. incurred $20,000 of fixed manufacturing overhead and
deducted $30,000 of fixed manufacturing overhead. Marvel Co. must be using
a.
b.
c.
d.
3.
d
a
EASY
If a firm produces more units than it sells, absorption costing, relative to variable costing,
will result in
a.
b.
c.
d.
higher income and assets.
higher income but lower assets.
lower income but higher assets.
lower income and assets.
ANSWER:
a
MEDIUM
11–1
11–2
5.
Chapter 11
Under absorption costing, fixed manufacturing overhead could be found in all of the
following except the
a.
b.
c.
d.
work-in-process account.
finished goods inventory account.
Cost of Goods Sold.
period costs.
ANSWER:
6.
EASY
only on the balance sheet.
only on the income statement.
on both the balance sheet and income statement.
on neither the balance sheet nor income statement.
ANSWER:
c
EASY
Under absorption costing, if sales remain constant from period 1 to period 2, the company
will report a larger income in period 2 when
a.
b.
c.
d.
period 2 production exceeds period 1 production.
period 1 production exceeds period 2 production.
variable production costs are larger in period 2 than period 1.
fixed production costs are larger in period 2 than period 1.
ANSWER:
8.
d
If a firm uses absorption costing, fixed manufacturing overhead will be included
a.
b.
c.
d.
7.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
a
MEDIUM
The FASB requires which of the following to be used in preparation of external financial
statements?
a.
b.
c.
d.
variable costing
standard costing
activity-based costing
absorption costing
ANSWER:
d
EASY
Chapter 11
9.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
An ending inventory valuation on an absorption costing balance sheet would
a.
b.
c.
d.
sometimes be less than the ending inventory valuation under variable costing.
always be less than the ending inventory valuation under variable costing.
always be the same as the ending inventory valuation under variable costing.
always be greater than or equal to the ending inventory valuation under variable
costing.
ANSWER:
10.
EASY
treatment of fixed manufacturing overhead.
treatment of variable production costs.
acceptability for external reporting.
arrangement of the income statement.
ANSWER:
b
EASY
Which of the following is not associated with absorption costing?
a.
b.
c.
d.
functional format
gross margin
period costs
contribution margin
ANSWER:
12.
d
Absorption costing differs from variable costing in all of the following except
a.
b.
c.
d.
11.
11–3
d
EASY
Unabsorbed fixed overhead costs in an absorption costing system are
a.
b.
c.
d.
fixed manufacturing costs not allocated to units produced.
variable overhead costs not allocated to units produced.
excess variable overhead costs.
costs that cannot be controlled.
ANSWER:
a
EASY
11–4
13.
Chapter 11
Profit under absorption costing may differ from profit determined under variable costing.
How is this difference calculated?
a.
b.
c.
d.
Change in the quantity of all units in inventory times the relevant fixed costs per
unit.
Change in the quantity of all units produced times the relevant fixed costs per
unit.
Change in the quantity of all units in inventory times the relevant variable cost per
unit.
Change in the quantity of all units produced times the relevant variable cost per
unit.
ANSWER:
14.
a
EASY
What factor, related to manufacturing costs, causes the difference in net earnings
computed using absorption costing and net earnings computed using variable costing?
a.
b.
c.
d.
Absorption costing considers all costs in the determination of net earnings,
whereas variable costing considers fixed costs to be period costs.
Absorption costing allocates fixed overhead costs between cost of goods sold and
inventories, and variable costing considers all fixed costs to be period costs.
Absorption costing “inventories” all direct costs, but variable costing considers
direct costs to be period costs.
Absorption costing “inventories” all fixed costs for the period in ending finished
goods inventory, but variable costing expenses all fixed costs.
ANSWER:
15.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
b
EASY
The costing system that classifies costs by functional group only is
a.
b.
c.
d.
standard costing.
job order costing.
variable costing.
absorption costing.
ANSWER:
d
EASY
Chapter 11
16.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
A functional classification of costs would classify “depreciation on office equipment”
as a
a.
b.
c.
d.
product cost.
general and administrative expense.
selling expense.
variable cost.
ANSWER:
17.
EASY
process costing.
job order costing.
variable costing.
absorption costing.
ANSWER:
c
EASY
Under variable costing, which of the following are costs that can be inventoried?
a.
b.
c.
d.
variable selling and administrative expense
variable manufacturing overhead
fixed manufacturing overhead
fixed selling and administrative expense
ANSWER:
19.
b
The costing system that classifies costs by both functional group and behavior is
a.
b.
c.
d.
18.
11–5
b
EASY
Consider the following three product costing alternatives: process costing, job order
costing, and standard costing. Which of these can be used in conjunction with variable
costing?
a.
b.
c.
d.
job order costing
standard costing
process costing
all of them
ANSWER:
d
EASY
11–6
20.
Chapter 11
Another name for variable costing is
a.
b.
c.
d.
full costing.
direct costing.
standard costing.
adjustable costing.
ANSWER:
21.
EASY
only on the balance sheet.
only on the income statement.
on both the balance sheet and income statement.
on neither the balance sheet nor income statement.
ANSWER:
b
EASY
Under variable costing,
a.
b.
c.
d.
all product costs are variable.
all period costs are variable.
all product costs are fixed.
product costs are both fixed and variable.
ANSWER:
23.
b
If a firm uses variable costing, fixed manufacturing overhead will be included
a.
b.
c.
d.
22.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
a
EASY
How will a favorable volume variance affect net income under each of the following
methods?
a.
b.
c.
d.
Absorption
reduce
reduce
increase
increase
ANSWER:
c
Variable
no effect
increase
no effect
reduce
EASY
Chapter 11
24.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Variable costing considers which of the following to be product costs?
a.
b.
c.
d.
Fixed
Mfg. Costs
yes
yes
no
no
ANSWER:
25.
Variable
Mfg. Costs
yes
yes
yes
yes
Variable
Selling & Adm.
no
yes
yes
no
EASY
costs are classified by their behavior.
costs are always lower.
it is required for external reporting.
it justifies higher product prices.
ANSWER:
a
EASY
The difference between the reported income under absorption and variable costing is
attributable to the difference in the
a.
b.
c.
d.
income statement formats.
treatment of fixed manufacturing overhead.
treatment of variable manufacturing overhead.
treatment of variable selling, general, and administrative expenses.
ANSWER:
27.
d
Fixed
Selling & Adm.
no
no
no
no
The variable costing format is often more useful to managers than the absorption costing
format because
a.
b.
c.
d.
26.
11–7
b
EASY
Which of the following costs will vary directly with the level of production?
a.
b.
c.
d.
total manufacturing costs
total period costs
variable period costs
variable product costs
ANSWER:
d
EASY
11–8
28.
Chapter 11
On the variable costing income statement, the difference between the “contribution
margin” and “income before income taxes” is equal to
a.
b.
c.
d.
the total variable costs.
the Cost of Goods Sold.
total fixed costs.
the gross margin.
ANSWER:
29.
EASY
deducted in the period that they are incurred.
inventoried until the related products are sold.
treated like period costs.
inventoried until the related products have been completed.
ANSWER:
b
EASY
In the application of “variable costing” as a cost-allocation process in manufacturing,
a.
b.
c.
d.
variable direct costs are treated as period costs.
nonvariable indirect manufacturing costs are treated as product costs.
variable indirect manufacturing costs are treated as product costs.
nonvariable direct costs are treated as product costs.
ANSWER:
31.
c
For financial reporting to the IRS and other external users, manufacturing overhead costs
are
a.
b.
c.
d.
30.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
c
EASY
A basic tenet of variable costing is that period costs should be currently expensed. What
is the rationale behind this procedure?
a.
b.
c.
d.
Period costs are uncontrollable and should not be charged to a specific product.
Period costs are generally immaterial in amount and the cost of assigning the
amounts to specific products would outweigh the benefits.
Allocation of period costs is arbitrary at best and could lead to erroneous decision
by management.
Because period costs will occur whether production occurs, it is improper to
allocate these costs to production and defer a current cost of doing business.
ANSWER:
d
MEDIUM
Chapter 11
32.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Which of the following is a term more descriptive of the type of cost accounting often
called “direct costing”?
a.
b.
c.
d.
out-of-pocket costing
variable costing
relevant costing
prime costing
ANSWER:
33.
EASY
only direct costs
only variable production costs
all variable costs
all variable and fixed manufacturing costs
ANSWER:
b
EASY
Which of the following must be known about a production process in order to institute a
variable costing system?
a.
b.
c.
d.
the variable and fixed components of all costs related to production
the controllable and non-controllable components of all costs related to
production
standard production rates and times for all elements of production
contribution margin and break-even point for all goods in production
ANSWER:
35.
b
What costs are treated as product costs under variable (direct) costing?
a.
b.
c.
d.
34.
11–9
a
EASY
Why is variable costing not in accordance with generally accepted accounting principles?
a.
b.
c.
d.
Fixed manufacturing costs are treated as period costs under variable costing.
Variable costing procedures are not well known in industry.
Net earnings are always overstated when using variable costing procedures.
Variable costing ignores the concept of lower of cost or market when valuing
inventory.
ANSWER:
a
EASY
11–10
36.
Chapter 11
Which of the following is an argument against the use of direct (variable) costing?
a.
b.
c.
d.
Absorption costing overstates the balance sheet value of inventories.
Variable factory overhead is a period cost.
Fixed manufacturing overhead is difficult to allocate properly.
Fixed manufacturing overhead is necessary for the production of a product.
ANSWER:
37.
b.
c.
d.
EASY
The cost of a unit of product changes because of changes in the number of units
manufactured.
Profits fluctuate with sales.
An idle facility variation is calculated.
None of the above.
ANSWER:
b
EASY
An income statement is prepared as an internal report. Under which of the following
methods would the term contribution margin appear?
a.
b.
c.
d.
Absorption costing
no
no
yes
yes
ANSWER:
39.
d
Which of the following statements is true for a firm that uses variable costing?
a.
38.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
b
Variable costing
no
yes
no
yes
EASY
In an income statement prepared as an internal report using the variable costing method,
fixed manufacturing overhead would
a.
b.
c.
d.
not be used.
be used in the computation of operating income but not in the computation of the
contribution margin.
be used in the computation of the contribution margin.
be treated the same as variable manufacturing overhead.
ANSWER:
b
EASY
Chapter 11
40.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Variable costing has an advantage over absorption costing for which of the following
purposes?
a.
b.
c.
d.
analysis of profitability of products, territories, and other segments of a business
determining the CVP relationship among the major factors of selling price, sales
mix, and sales volume
minimizing the effects of inventory changes on net income
all of the above
ANSWER:
41.
EASY
selling expenses
general and administrative expense
product contribution margin
total contribution margin
ANSWER:
d
EASY
A firm presently has total sales of $100,000. If its sales rise, its
a.
b.
c.
d.
net income based on variable costing will go up more than its net income based on
absorption costing.
net income based on absorption costing will go up more than its net income based
on variable costing.
fixed costs will also rise.
per unit variable costs will rise.
ANSWER:
43.
d
In the variable costing income statement, which line separates the variable and fixed
costs?
a.
b.
c.
d.
42.
11–11
a
MEDIUM
CVP analysis requires costs to be categorized as
a.
b.
c.
d.
either fixed or variable.
fixed, mixed, or variable.
product or period.
standard or actual.
ANSWER:
a
EASY
11–12
44.
Chapter 11
With respect to fixed costs, CVP analysis assumes total fixed costs
a.
b.
c.
d.
per unit remain constant as volume changes.
remain constant from one period to the next.
vary directly with volume.
remain constant across changes in volume.
ANSWER:
45.
EASY
fixed costs decrease.
variable costs remain constant.
costs decrease.
costs remain constant.
ANSWER:
c
EASY
According to CVP analysis, a company could never incur a loss that exceeded its total
a.
b.
c.
d.
variable costs.
fixed costs.
costs.
contribution margin.
ANSWER:
47.
d
CVP analysis relies on the assumptions that costs are either strictly fixed or strictly
variable. Consistent with these assumptions, as volume decreases total
a.
b.
c.
d.
46.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
c
EASY
CVP analysis is based on concepts from
a.
b.
c.
d.
standard costing.
variable costing.
job order costing.
process costing.
ANSWER:
b
EASY
Chapter 11
48.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Cost-volume-profit analysis is a technique available to management to understand better
the interrelationships of several factors that affect a firm’s profit. As with many such
techniques, the accountant oversimplifies the real world by making assumptions. Which
of the following is not a major assumption underlying CVP analysis?
a.
b.
c.
d.
All costs incurred by a firm can be separated into their fixed and variable
components.
The product selling price per unit is constant at all volume levels.
Operating efficiency and employee productivity are constant at all volume levels.
For multi-product situations, the sales mix can vary at all volume levels.
ANSWER:
49.
EASY
contribution margin per unit.
fixed cost per unit.
total costs per unit.
all of the above.
ANSWER:
a
EASY
Which of the following factors is involved in studying cost-volume-profit relationships?
a.
b.
c.
d.
product mix
variable costs
fixed costs
all of the above
ANSWER:
51.
d
In CVP analysis, linear functions are assumed for
a.
b.
c.
d.
50.
11–13
d
EASY
Cost-volume-profit relationships that are curvilinear may be analyzed linearly by
considering only
a.
b.
c.
d.
fixed and mixed costs.
relevant fixed costs.
relevant variable costs.
a relevant range of volume.
ANSWER:
d
EASY
11–14
52.
Chapter 11
After the level of volume exceeds the break-even point
a.
b.
c.
d.
the contribution margin ratio increases.
the total contribution margin exceeds the total fixed costs.
total fixed costs per unit will remain constant.
the total contribution margin will turn from negative to positive.
ANSWER:
53.
Decrease in
fixed cost
yes
yes
yes
no
ANSWER:
EASY
b
Increase in direct
labor cost
yes
no
no
yes
Increase in
selling price
yes
yes
no
no
EASY
At the break-even point, fixed costs are always
a.
b.
c.
d.
less than the contribution margin.
equal to the contribution margin.
more than the contribution margin.
more than the variable cost.
ANSWER:
55.
b
Which of the following will decrease the break-even point?
a.
b.
c.
d.
54.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
b
EASY
The method of cost accounting that lends itself to break-even analysis is
a.
b.
c.
d.
variable.
standard.
absolute.
absorption.
ANSWER:
a
EASY
Chapter 11
56.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Given the following notation, what is the break-even sales level in units?
SP = selling price per unit, FC = total fixed cost, VC = variable cost per unit
a.
b.
c.
d.
SP/(FC/VC)
FC/(VC/SP)
VC/(SP – FC)
FC/(SP – VC)
ANSWER:
57.
net income
fixed costs
contribution margin
variable costs
ANSWER:
d
MEDIUM
If a firm’s net income does not change as its volume changes, the firm(‘s)
a.
b.
c.
d.
must be in the service industry.
must have no fixed costs.
sales price must equal $0.
sales price must equal its variable costs.
ANSWER:
59.
EASY
Consider the equation X = Sales – [(CM/Sales) × (Sales)]. What is X?
a.
b.
c.
d.
58.
d
d
MEDIUM
Break-even analysis assumes over the relevant range that
a.
b.
c.
d.
total variable costs are linear.
fixed costs per unit are constant.
total variable costs are nonlinear.
total revenue is nonlinear.
ANSWER:
a
EASY
11–15
11–16
60.
Chapter 11
To compute the break-even point in units, which of the following formulas is used?
a.
b.
c.
d.
FC/CM per unit
FC/CM ratio
CM/CM ratio
(FC+VC)/CM ratio
ANSWER:
61.
EASY
FC/CM per unit
VC/CM
FC/CM ratio
VC/CM ratio
ANSWER:
c
EASY
The contribution margin ratio always increases when the
a.
b.
c.
d.
variable costs as a percentage of net sales increase.
variable costs as a percentage of net sales decrease.
break-even point increases.
break-even point decreases.
ANSWER:
63.
a
A firm’s break-even point in dollars can be found in one calculation using which of the
following formulas?
a.
b.
c.
d.
62.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
b
EASY
In a multiple-product firm, the product that has the highest contribution margin per unit
will
a.
b.
c.
d.
generate more profit for each $1 of sales than the other products.
have the highest contribution margin ratio.
generate the most profit for each unit sold.
have the lowest variable costs per unit.
ANSWER:
c
EASY
Chapter 11
64.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
_____________ focuses only on factors that change from one course of action to another.
a.
b.
c.
d.
Incremental analysis
Margin of safety
Operating leverage
A break-even chart
ANSWER:
65.
EASY
was presently operating at a volume that is below the break-even point.
present fixed costs were less than its contribution margin.
variable costs exceeded its fixed costs.
degree of operating leverage is greater than 100.
ANSWER:
a
EASY
The margin of safety is a key concept of CVP analysis. The margin of safety is the
a.
b.
c.
d.
contribution margin rate.
difference between budgeted contribution margin and actual contribution margin.
difference between budgeted contribution margin and break-even contribution
margin.
difference between budgeted sales and break-even sales.
ANSWER:
67.
a
The margin of safety would be negative if a company(‘s)
a.
b.
c.
d.
66.
11–17
d
EASY
Management is considering replacing an existing sales commission compensation plan
with a fixed salary plan. If the change is adopted, the company’s
a.
b.
c.
d.
break-even point must increase.
margin of safety must decrease.
operating leverage must increase.
profit must increase.
ANSWER:
c
MEDIUM
11–18
68.
Chapter 11
As projected net income increases the
a.
b.
c.
d.
degree of operating leverage declines.
margin of safety stays constant.
break-even point goes down.
contribution margin ratio goes up.
ANSWER:
69.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
a
MEDIUM
A managerial preference for a very low degree of operating leverage might indicate that
a.
b.
c.
d.
an increase in sales volume is expected.
a decrease in sales volume is expected.
the firm is very unprofitable.
the firm has very high fixed costs.
ANSWER:
b
MEDIUM
Use the following information for questions 70–73.
Young Corporation has the following standard costs associated with the manufacture and sale of
one of its products:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling expenses
Fixed SG&A expense
$3.00 per unit
2.50 per unit
1.80 per unit
4.00 per unit (based on an estimate
of 50,000 units per year)
.25 per unit
$75,000 per year
During 2001, its first year of operations, Young manufactured 51,000 units and sold 48,000. The
selling price per unit was $25. All costs were equal to standard.
70.
Under absorption costing, the standard production cost per unit for 2001 was
a.
b.
c.
d.
$11.30.
$7.30.
$11.55.
$13.05.
ANSWER:
a
EASY
Chapter 11
71.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Under variable costing, the standard production cost per unit for 2001 was
a.
b.
c.
d.
$11.30.
$7.30.
$7.55.
$11.55.
ANSWER:
72.
EASY
Based on variable costing, the income before income taxes for the year was
a.
b.
c.
d.
$570,600.
$560,000.
$562,600.
$547,500.
ANSWER:
73.
b
c
MEDIUM
The volume variance under absorption costing is
a.
b.
c.
d.
$8,000 F.
$4,000 F.
$4,000 U.
$8,000 U.
ANSWER:
b
MEDIUM
11–19
11–20
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Use the following information for questions 74–76.
The following information is available for X Co. for its first year of operations:
Sales in units
Production in units
Manufacturing costs:
Direct labor
Direct material
Variable overhead
Fixed overhead
Net income (absorption method)
Sales price per unit
74.
$30,000
($7,500)
$67,500
can’t be determined from the information given
ANSWER:
b
MEDIUM
What was the total amount of SG&A expense incurred by X Co.?
a.
b.
c.
d.
$30,000
$62,500
$6,000
can’t be determined from the information given
ANSWER:
76.
$3 per unit
5 per unit
1 per unit
$100,000
$30,000
$40
What would X Co. have reported as its income before income taxes if it had used variable
costing?
a.
b.
c.
d.
75.
5,000
8,000
b
MEDIUM
Based on variable costing, what would X Co. show as the value of its ending inventory?
a.
b.
c.
d.
$120,000
$64,500
$27,000
$24,000
ANSWER:
c
EASY
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–21
Use the following information for questions 77–79.
The following information has been extracted from P Co.’s financial records for its first year of
operations:
Units produced
Units sold
Variable costs per unit:
Direct material
Direct labor
Manufacturing overhead
SG&A
Fixed costs:
Manufacturing overhead
SG&A
77.
$70,000
30,000
$21,000 higher than it would be under variable costing.
$70,000 higher than it would be under variable costing.
$30,000 higher than it would be under variable costing.
higher than it would be under variable costing, but the exact difference cannot be
determined from the information given.
ANSWER:
a
MEDIUM
Based on absorption costing, the Cost of Goods Manufactured for P Co.’s first year
would be
a.
b.
c.
d.
$200,000.
$270,000.
$300,000.
$210,000.
ANSWER:
79.
$8
9
3
4
Based on absorption costing, P Co.’s income in its first year of operations will be
a.
b.
c.
d.
78.
10,000
7,000
b
MEDIUM
Based on absorption costing, what amount of period costs will P Co. deduct?
a.
b.
c.
d.
$70,000
$79,000
$30,000
$58,000
ANSWER:
d
MEDIUM
11–22
80.
Chapter 11
For its most recent fiscal year, a firm reported that its contribution margin was equal to 40
percent of sales and that its net income amounted to 10 percent of sales. If its fixed costs
for the year were $60,000, how much were sales?
a.
b.
c.
d.
$150,000
$200,000
$600,000
can’t be determined from the information given
ANSWER:
81.
b
MEDIUM
At its present level of operations, a small manufacturing firm has total variable costs
equal to 75 percent of sales and total fixed costs equal to 15 percent of sales. Based on
variable costing, if sales change by $1.00, income will change by
a.
b.
c.
d.
$0.25.
$0.10.
$0.75.
can’t be determined from the information given.
ANSWER:
82.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
a
EASY
You obtain the following information regarding fixed production costs from a
manufacturing firm for fiscal year 2001:
Fixed costs in the beginning inventory
Fixed costs incurred this period
$ 16,000
100,000
Which of the following statements is not true:
a.
b.
c.
d.
The maximum amount of fixed production costs that this firm could deduct using
absorption costs in 2001 is $116,000.
The maximum difference between this firm’s 2001 income based on absorption
costing and its income based on variable costing is $16,000.
Using variable costing, this firm will deduct no more than $16,000 for fixed
production costs.
If this firm produced substantially more units than it sold in 2001, variable costing
will probably yield a lower income than absorption costing.
ANSWER:
c
MEDIUM
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–23
Use the following information for questions 83–86.
Simple Corp. produces a single product. The following cost structure applied to its first year of
operations, 2001:
Variable costs:
SG&A
$2 per unit
Production
$4 per unit
Fixed costs (total cost incurred for the year):
SG&A
$14,000
Production
$20,000
83.
Assume for this question only that during 2001 Simple Corp. manufactured 5,000 units
and sold 3,800. There was no beginning or ending work-in-process inventory. How much
larger or smaller would Simple Corp.’s income be if it uses absorption rather than
variable costing?
a.
b.
c.
d.
The absorption costing income would be $6,000 larger.
The absorption costing income would be $6,000 smaller.
The absorption costing income would be $4,800 larger.
The absorption costing income would be $4,000 smaller.
ANSWER:
84.
MEDIUM
Assume for this question only that Simple Corp. manufactured and sold 5,000 units in
2001. At this level of activity it had an income of $30,000 using variable costing. What
was the sales price per unit?
a.
b.
c.
d.
$16.00
$18.80
$12.80
$14.80
ANSWER:
85.
c
b
MEDIUM
Assume for this question only that Simple Corp. produced 5,000 units and sold 4,500
units in 2001. If Simple uses absorption costing, it would deduct period costs of
a.
b.
c.
d.
$24,000.
$34,000.
$27,000.
$23,000.
ANSWER:
d
MEDIUM
11–24
86.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Assume for this question only that Simple Corp. manufactured 5,000 units and sold 4,000
in 2001. If Simple employs a costing system based on variable costs, the company would
end 2001 with a finished goods inventory of
a.
b.
c.
d.
$4,000.
$8,000.
$6,000.
$5,000.
ANSWER:
a
MEDIUM
Use the following information for questions 87–89.
The following information was extracted from the first year absorption-based accounting records
of Confused Co.
Total fixed costs incurred
Total variable costs incurred
Total period costs incurred
Total variable period costs incurred
Units produced
Units sold
Unit sales price
87.
What is Cost of Goods Sold for Confused Co.’s first year?
a.
b.
c.
d.
$80,000
$90,000
$48,000
can’t be determined from the information given
ANSWER:
88.
$100,000
50,000
70,000
30,000
20,000
12,000
$12
c
DIFFICULT
If Confused Co. had used variable costing in its first year of operations, how much
income (loss) before income taxes would it have reported?
a.
b.
c.
d.
($6,000)
$54,000
$26,000
$2,000
ANSWER:
d
DIFFICULT
Chapter 11
89.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Based on variable costing, if Confused had sold 12,001 units instead of 12,000, its
income before income taxes would have been
a.
b.
c.
d.
$9.50 higher.
$11.00 higher.
$8.50 higher.
$8.33 higher.
ANSWER:
90.
11–25
c
MEDIUM
Z Corp. incurred the following costs in 2001 (its first year of operations) based on
production of 10,000 units:
Direct material
Direct labor
Variable product costs
Fixed product costs (in total)
$5 per unit
$3 per unit
$2 per unit
$100,000
When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was listed at
$100,000. Based on this information, which of the following statements must be true:
a.
b.
c.
d.
Z Corp. sold all 10,000 units that it produced.
Z Corp. sold 5,000 units.
Z Corp. had a very profitable year.
From the information given, one cannot tell whether Z Corp.’s financial
statements were prepared based on variable or absorption costing.
ANSWER:
b
MEDIUM
11–26
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Use the following information for questions 91–93.
Three new companies (X, Y, and Z) began operations on January 1, 2001. Consider the following
operating costs that were incurred by these companies during the complete calendar year 2001:
Production in units
Sales price per unit
Fixed production costs
Variable production costs
Variable SG&A
Fixed SG&A
91.
Company Z
10,000
$10
$30,000
$10,000
$30,000
$10,000
Company X
Company Y
Company Z
All of the companies will report the same income.
ANSWER:
d
MEDIUM
Based on sales of 7,000 units, which company will report the greater income before
income taxes for 2001 under variable costing?
a.
b.
c.
d.
Company X
Company Y
Company Z
All of the companies will report the same income.
ANSWER:
93.
Company Y
10,000
$10
$20,000
$20,000
$20,000
$20,000
Based on sales of 7,000 units, which company will report the greater income before
income taxes for 2001 under absorption costing?
a.
b.
c.
d.
92.
Company X
10,000
$10
$10,000
$30,000
$10,000
$30,000
a
MEDIUM
Based on sales of 10,000 units, which company will report the greater income before
income taxes for 2001 under variable costing?
a.
b.
c.
d.
Company X
Company Y
Company Z
All of the companies will report the same income before income taxes.
ANSWER:
d
MEDIUM
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–27
Use the following information for questions 94–96.
JV Co. produces a single product that sells for $7.00 per unit. Standard capacity is 100,000 units
per year; 100,000 units were produced and 80,000 units were sold during the year. Manufacturing
costs and selling and administrative expenses are presented below.
There were no variances from the standard variable costs. Any under- or overapplied overhead is
written off directly at year-end as an adjustment to cost of goods sold.
Direct material
Direct labor
Manufacturing overhead
Selling & Admin.
Fixed costs
$0
0
150,000
80,000
Variable costs
$1.50 per unit produced
1.00 per unit produced
0.50 per unit produced
0.50 per unit sold
JV had no inventory at the beginning of the year.
94.
In presenting inventory on the balance sheet at December 31, the unit cost under
absorption costing is
a.
b.
c.
d.
$2.50.
$3.00.
$3.50.
$4.50.
ANSWER:
95.
MEDIUM
What is the net income under variable costing?
a.
b.
c.
d.
$50,000
$80,000
$90,000
$120,000
ANSWER:
96.
d
a
MEDIUM
What is the net income under absorption costing?
a.
b.
c.
d.
$50,000
$80,000
$90,000
$120,000
ANSWER:
b
MEDIUM
11–28
97.
Chapter 11
A firm has fixed costs of $200,000 and variable costs per unit of $6. It plans on selling
40,000 units in the coming year. To realize a profit of $20,000, the firm must have a sales
price per unit of at least
a.
b.
c.
d.
$11.00.
$11.50.
$10.00.
$10.50.
ANSWER:
98.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
b
MEDIUM
A firm has fixed costs of $200,000 and variable costs per unit of $6. It plans on selling
40,000 units in the coming year. If the firm pays income taxes on its income at a rate of
40 percent, what sales price must the firm use to obtain an after-tax profit of $24,000 on
the 40,000 units?
a.
b.
c.
d.
$11.60
$11.36
$12.00
$12.50
ANSWER:
c
DIFFICULT
Use the following information for questions 99–102.
Below is an income statement for Bender Co. for 2001:
Sales
Variable costs
Contribution margin
Fixed costs
Profit before taxes
99.
$400,000
(125,000 )
$275,000
(200,000 )
$ 75,000
What is Bender’s degree of operating leverage?
a.
b.
c.
d.
3.67
5.33
1.45
2.67
ANSWER:
a
MEDIUM
Chapter 11
100.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Based on the cost and revenue structure on the income statement, what was Bender’s
break-even point for 2001 in dollars?
a.
b.
c.
d.
$200,000
$325,000
$300,000
$290,909
ANSWER:
101.
d
MEDIUM
What was Bender’s margin of safety for 2001?
a.
b.
c.
d.
$200,000
$75,000
$100,000
$109,091
ANSWER:
102.
11–29
d
EASY
Assuming that the fixed costs are expected to remain at $200,000 for 2002 and the sales
price per unit and variable costs per unit are also expected to remain constant, how much
profit before taxes will be produced if the company anticipates 2002 sales rising to 130
percent of the 2001 level?
a.
b.
c.
d.
$97,500
$195,000
$157,500
A prediction cannot be made from the information given.
ANSWER:
c
MEDIUM
11–30
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Use the following information for questions 103 and 104.
Timberline produces and sells a single product. Information on its costs for 2001 follow:
Variable costs:
SG&A
Production
Fixed costs:
SG&A
Production
103.
$15.00
$11.40
$9.60
$10.00
ANSWER:
a
MEDIUM
In 2002, Timberline estimates that it will produce and sell 4,000 units. The variable costs
per unit and the total fixed costs are expected to be the same as in 2001. However, it
anticipates a sales price of $16 per unit. What is Timberline’s projected margin of safety
in 2002?
a.
b.
c.
d.
$7,000
$20,800
$18,400
$13,000
ANSWER:
105.
$12,000 per year
$15,000 per year
Assume Timberline produced and sold 5,000 units in 2001. At this level of activity, it
produced a profit of $18,000. What was Timberline’s sales price per unit?
a.
b.
c.
d.
104.
$2 per unit
$4 per unit
b
MEDIUM
Story Manufacturing incurs annual fixed costs of $250,000 in producing and selling
“Tales.” Estimated unit sales for 2001 are 125,000. An after-tax income of $75,000 is
desired by management. The company projects its income tax rate at 40 percent. What is
the maximum amount that Story can expend for variable costs per unit and still meet its
profit objective if the sales price per unit is estimated at $6?
a.
b.
c.
d.
$3.37
$3.59
$3.00
$3.70
ANSWER:
c
MEDIUM
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–31
Use the following information for questions 106 and 107.
The following information relates to financial projections of Big Co. for 2001:
Projected sales
Projected variable costs
Projected fixed costs
Projected unit sales price
106.
How many units would Big Co. need to sell in 2001 to earn a profit before taxes of
$10,000?
a.
b.
c.
d.
25,714
10,000
8,571
12,000
ANSWER:
107.
d
MEDIUM
If Big Co. achieves its projections in 2001, what will be its degree of operating leverage?
a.
b.
c.
d.
6.00
1.20
1.68
2.40
ANSWER:
108.
60,000 units
$2.00 per unit
$50,000 per year
$7.00
b
MEDIUM
Signal Co. manufactures a single product. For 2001, the company had sales of $90,000,
variable costs of $50,000, and fixed costs of $30,000. Signal expects its cost structure and
sales price per unit to remain the same in 2002, however total sales are expected to jump
by 20 percent. If the 2002 projections are realized, net income in 2002 should exceed net
income in 2001 by
a.
b.
c.
d.
100 percent.
80 percent.
20 percent.
50 percent.
ANSWER:
b
MEDIUM
11–32
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Use the following information for questions 109–111.
Diversified Corp. manufactures and sells two products: X and Y. The operating results of the
company for 2001 follow:
Sales in units
Sales price per unit
Variable costs per unit
Product X
2,000
$10
7
Product Y
3,000
$5
3
In addition, the company incurred total fixed costs in the amount of $9,000.
109.
How many total units would the company have needed to sell to breakeven in 2001?
a.
b.
c.
d.
3,750
750
3,600
1,800
ANSWER:
110.
MEDIUM
If the company would have sold a total of 6,000 units in 2001, consistent with CVP
assumptions how many of those units would you expect to be Product Y?
a.
b.
c.
d.
3,000
4,000
3,600
3,500
ANSWER:
111.
a
c
MEDIUM
How many units would the company have needed to sell in 2001 to produce a profit of
$12,000?
a.
b.
c.
d.
8,750
20,000
10,000
8,400
ANSWER:
a
MEDIUM
Chapter 11
112.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–33
Below is an income statement for Jewell Co. for 2002:
Sales
Variable costs
Contribution margin
Fixed costs
Profit before taxes
$ 300,000
(150,000 )
$ 150,000
(100,000 )
$ 50,000
What was the company’s margin of safety in 2002?
a.
b.
c.
d.
$50,000
$100,000
$150,000
$25,000
ANSWER:
113.
b
MEDIUM
Below is an income statement for Jewell Co. for 2002:
Sales
Variable costs
Contribution margin
Fixed costs
Profit before taxes
$300,000
(150,000 )
$150,000
(100,000 )
$ 50,000
If the unit sales price for Jewell’s sole product was $10, how many units would it have
needed to sell in 2002 to produce a profit of $40,000?
a.
b.
c.
d.
27,500
29,000
28,000
can’t be determined from the information given
ANSWER:
114.
c
MEDIUM
A firm estimates that it will sell 100,000 units of its sole product in the coming period. It
projects the sales price at $40 per unit, the CM ratio at 60 percent, and profit at $500,000.
What is the firm budgeting for fixed costs in the coming period?
a.
b.
c.
d.
$1,600,000
$2,400,000
$1,100,000
$1,900,000
ANSWER:
d
MEDIUM
11–34
115.
Chapter 11
Hat Co. manufactures a western-style hat that sells for $10 per unit. This is its sole
product and it has projected the break-even point at 50,000 units in the coming period. If
fixed costs are projected at $100,000, what is the projected contribution margin ratio?
a.
b.
c.
d.
80 percent
20 percent
40 percent
60 percent
ANSWER:
116.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
b
MEDIUM
Brando Co. manufactures little boxes of “bad attitudes.” Each box sells for $15. The
firm’s projected costs for 2002 are listed below:
Variable costs per unit:
Production
SG&A
Fixed costs:
Production
SG&A
Estimated volume
$5
1
$40,000
60,000
20,000 units
What is Brando’s projected margin of safety for 2002?
a.
b.
c.
d.
$133,333
$150,000
$80,000
$100,000
ANSWER:
a
MEDIUM
Chapter 11
117.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–35
Brando Co. manufactures little boxes of “bad attitudes.” Each box sells for $15. The
firm’s projected costs for 2002 are listed below:
Variable costs per unit:
Production
SG&A
Fixed costs:
Production
SG&A
Estimated volume
$5
1
$40,000
60,000
20,000 units
What is Brando’s projected degree of operating leverage for 2002?
a.
b.
c.
d.
2.25
1.80
3.75
1.67
ANSWER:
a
MEDIUM
Use the following information for questions 118–120.
Below are income statements that apply to three companies: A, B, and C:
Company A
$100
(10 )
$90
(30 )
$ 60
Sales
Variable costs
Contribution margin
Fixed costs
Profit before taxes
118.
Company B
$100
(20 )
$80
(20 )
$ 60
Company C
$100
(30 )
$70
(10 )
$ 60
Within the relevant range, if sales go up by $1 for each firm, which firm will experience
the greatest increase in profit?
a.
b.
c.
d.
Company A
Company B
Company C
can’t be determined from the information given
ANSWER:
a
EASY
11–36
119.
Chapter 11
Within the relevant range, if sales go up by one unit for each firm, which firm will
experience the greatest increase in net income?
a.
b.
c.
d.
Company A
Company B
Company C
can’t be determined from the information given
ANSWER:
120.
EASY
Company A
Company B
Company C
They all have the same margin of safety.
ANSWER:
c
MEDIUM
Alan is interested in entering the catfish farming business. He estimates if he enters this
business, his fixed costs would be $50,000 per year and his variable costs would equal 30
percent of sales. If each catfish sells for $2, how many catfish would Alan need to sell to
generate a profit that is equal to 10 percent of sales?
a.
b.
c.
d.
40,000
41,667
35,000
No level of sales can generate a 10 percent net return on sales.
ANSWER:
122.
d
At sales of $100, which firm has the highest margin of safety?
a.
b.
c.
d.
121.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
b
DIFFICULT
The following information pertains to Nova Co.’s cost-volume-profit relationships:
Break-even point in units sold
Variable costs per unit
Total fixed costs
1,000
$500
$150,000
How much will be contributed to profit before taxes by the 1,001st unit sold?
a.
b.
c.
d.
$650
$500
$150
$0
ANSWER:
c
MEDIUM
Chapter 11
123.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–37
Information concerning Label Corporation’s Product A follows:
Sales
Variable costs
Fixed costs
$300,000
240,000
40,000
Assuming that Label increased sales of Product A by 20 percent, what should the profit
from Product A be?
a.
b.
c.
d.
$20,000
$24,000
$32,000
$80,000
ANSWER:
124.
c
MEDIUM
Lindsay Company reported the following results from sales of 5,000 units of Product A
for June:
Sales
Variable costs
Fixed costs
Operating income
$200,000
(120,000 )
(60,000 )
$ 20,000
Assume that Lindsay increases the selling price of Product A by 10 percent in July. How
many units of Product A would have to be sold in July to generate an operating income of
$20,000?
a.
b.
c.
d.
4,000
4,300
4,500
5,000
ANSWER:
a
MEDIUM
11–38
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN
THE APPENDIX OF THE CHAPTER.
125.
On a break-even chart, the break-even point is located at the point where the total
a.
b.
c.
d.
revenue line crosses the total fixed cost line.
revenue line crosses the total contribution margin line.
fixed cost line intersects the total variable cost line.
revenue line crosses the total cost line.
ANSWER:
126.
rate at which profit changes as volume changes.
rate at which the contribution margin changes as volume changes.
ratio of increase of total fixed costs.
total costs per unit.
ANSWER:
b
MEDIUM
In a CVP graph, the area between the total cost line and the total revenue line represents
total
a.
b.
c.
d.
contribution margin.
variable costs.
fixed costs.
profit.
ANSWER:
128.
EASY
In a CVP graph, the slope of the total revenue line indicates the
a.
b.
c.
d.
127.
d
d
EASY
In a CVP graph, the area between the total cost line and the total fixed cost line yields the
a.
b.
c.
d.
fixed costs per unit.
total variable costs.
profit.
contribution margin.
ANSWER:
b
EASY
Chapter 11
129.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
If SAB Company’s fixed costs were to increase, the effect on a profit-volume graph
would be that the
a.
b.
c.
d.
contribution margin line would shift upward parallel to the present line.
contribution margin line would shift downward parallel to the present line.
slope of the contribution margin line would be more pronounced (steeper).
slope of the contribution margin line would be less pronounced (flatter).
ANSWER:
130.
b
MEDIUM
If SAB Company’s variable costs per unit were to increase but its unit selling price stays
constant, the effect on a profit-volume graph would be that the
a.
b.
c.
d.
contribution margin line would shift upward parallel to the present line.
contribution margin line would shift downward parallel to the present line.
slope of the contribution margin line would be pronounced (steeper).
slope of the contribution margin line would be less pronounced (flatter).
ANSWER:
131.
11–39
d
EASY
The most useful information derived from a cost-volume-profit chart is the
a.
b.
c.
d.
amount of sales revenue needed to cover enterprise variable costs.
amount of sales revenue needed to cover enterprise fixed costs.
relationship among revenues, variable costs, and fixed costs at various levels of
activity.
volume or output level at which the enterprise breaks even.
ANSWER:
c
EASY
SHORT ANSWER/PROBLEMS
1.
Why do managers frequently prefer variable costing to absorption costing for internal
use?
ANSWER: Managers may prefer variable costing because it classifies costs both by
their function and their behavior. When costs are classified by behavior, managers can
more accurately predict how total costs will change when volume changes. With more
accurate information, managers can make better production and pricing decisions.
MEDIUM
11–40
2.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Why is variable costing not used extensively in external reporting?
ANSWER: Variable costing is not used extensively outside of the firm because
absorption costing is required by GAAP and the IRS.
MEDIUM
3.
How can a company produce both variable and absorption costing information from a
single accounting system?
ANSWER: Firms only have one accounting information system. This system will be
based on either variable or absorption costing. If the system needs to provide information
in both the variable and absorption formats, the system’s accounting information can be
converted from one format to the other. The conversion requires an adjustment to the
product inventory accounts and the amount of product costs charged against the period’s
income. The conversion is typically easier if standard costing is employed.
MEDIUM
4.
What are the major differences between variable and absorption costing?
ANSWER: The major difference between variable costing and absorption costing is in
the way each defines product cost. While absorption costing includes fixed manufacturing
overhead as a product cost, variable costing treats it as a cost of the period. A secondary
difference between the two methods is the format of the income statement. Absorption
costing utilizes the traditional income statement format that categorizes costs by their
function only. Variable costing uses an income statement format that categorizes costs by
both their function and behavior.
MEDIUM
5.
Why is absorption costing not used for CVP analysis?
ANSWER: Absorption costing is not used in break-even analysis because it presents a
classification of costs by function rather than by behavior. Without a behavioral
classification of costs, it is impossible to predict how total costs change as volume
changes.
MEDIUM
Chapter 11
6.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–41
How do changes in volume affect the break-even point?
ANSWER: Within the relevant range, the break-even point does not change. This is
due to the linearity assumptions that apply to total revenues, fixed costs, and variable
costs.
MEDIUM
7.
What major assumption do multiproduct firms need to make in using CVP analysis that
single-product firms need not make?
ANSWER: The assumption that must be imposed is a constant sales mix. A
multiproduct firm assumes that (within the relevant range) the sales mix is constant. This
permits CVP analysis to be performed using a unit of the constant sales mix.
MEDIUM
8.
What important information is conveyed by the margin of safety calculation in CVP
analysis?
ANSWER: The break-even point in CVP analysis is critical because it divides
profitable levels of operation from unprofitable levels of operation. The margin of safety
gives managers an idea of the extent to which sales can fall before operations will become
unprofitable.
MEDIUM
11–42
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Use the following information for questions 9–11.
Limpin Co. manufactures and sells walking canes. The following income statement applies to
2001, its first year of operations:
Sales (800 units @ $15)
Cost of Goods Sold
Gross Margin
Selling, general, and administrative expenses
Operating income
$12,000
(8,000 )
$ 4,000
(3,000 )
$ 1,000
Other information:
1.
The company produced 1,000 units during the year.
2.
Variable SG&A expenses are $1 per cane.
3.
Variable production costs are $7 per cane.
4.
There was no ending work-in-process inventory.
9.
How much fixed manufacturing overhead did the Limpin Co. incur in 2001?
ANSWER: The Cost of Goods Sold is based on sales of 800 units and is recorded at
$8,000. This $8,000 is comprised of $5,600 of variable product costs ($7 × 800).
Therefore, $2,400 of the Cost of Goods Sold is fixed. Given that the firm sold 80 percent
of its output (800/1,000), $2,400 must be 80 percent of the total fixed manufacturing
overhead incurred. This sets the total fixed manufacturing overhead costs incurred at
$3,000.
MEDIUM
10.
What were the total variable costs incurred in 2001?
ANSWER: The total variable product costs would be $5,600/.80 = $7,000. The total
variable SG&A would be $1 × 800 =$800. Total variable costs incurred are $7,000 +
$800 = $7,800.
MEDIUM
11.
If the Limpin Co. adopted variable costing, the ending finished goods inventory for 2001
would be carried at what value?
ANSWER:
EASY
The answer is 200 units × $7 = $1,400.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–43
Use the following information for questions 12–14.
The Crown Co. manufactures toasters. The company hired a cost accountant in its first year of
operations, 2001, to explain to management how its costs behaved. After studying various
documents and industry data, the cost accountant announced that the total SG&A expenses that
the firm can expect to incur in any period is captured by the equation: Y = $50,000 + $10X,
where Y is the total SG&A expense incurred and X is the number of units sold. Also, the
accountant announced that the total product costs incurred in any period could be captured by the
formula Y = $100,000 + $6X, where Y is the total manufacturing cost incurred and X is the
number of units produced. In 2001, the firm produced 10,000 units and sold 9,000 of them at $35
each.
12.
According to the accountant’s equations, what would be the total of all costs incurred by
the firm in 2001?
ANSWER: Total production costs are based on the number of units produced and
would be: (10,000 × $6) + $100,000 = $160,000. Total period costs would be based on
the number of units sold and would be: (9,000 × $10) + $50,000 = $140,000. The total of
all costs would be $160,000 + $140,000 = $300,000.
MEDIUM
13.
If the firm’s costs conformed exactly to the accountant’s equations, how much income
before income taxes would be reported for 2001 if the firm uses absorption costing?
ANSWER:
Sales ($35 × 9,000)
Cost of Goods Sold:
Beg. fin. goods inventory
Cost of Goods Manufactured
Goods available
Ending inventory
Cost of Goods Sold
Gross margin
Less period costs
Income before income taxes
MEDIUM
$315,000
$
0
160,000
$160,000
(16,000 )
(144,000 )
$171,000
(140,000 )
$ 31,000
11–44
14.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
If the firm’s costs conformed exactly to the accountant’s equations, how much income
before income taxes would be reported for 2001 if the firm uses variable costing?
ANSWER:
Sales
Less variable costs:
Product costs ($6 × 9,000)
Period costs ($10 × 9,000)
Contribution margin
Less fixed costs:
Product costs
Period costs
Income before income taxes
$315,000
$54,000
90,000
$100,000
50,000
(144,000 )
$171,000
(150,000 )
$ 21,000
MEDIUM
15.
Stanley Corp. produces a single product. The following is a cost structure applied to its
first year of operations, 2001:
Sales price
Variable costs:
SG&A
Production
Fixed costs (total cost incurred for the year):
SG&A
Production
$15 per unit
$2 per unit
$4 per unit
$14,000
$20,000
During 2001, Stanley Corp. manufactured 5,000 units and sold 3,800. There was no
beginning or ending work-in-process inventory.
a.
b.
c.
How much income before income taxes would be reported if Stanley uses
absorption costing?
How much income before income taxes would be reported if variable costing was
used?
Show why the two costing methods give different income amounts.
Chapter 11
ANSWER:
a.
b.
c.
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Income under absorption costing is:
Sales $15 × 3,800 =
COGS 3,800 × ($4 + $20,000/5,000)
GM
Oper. Exp.
VSE $2 × 3,800 =
FSE
Absorption income before income taxes
$57,000
30,400
$26,600
$ 7,600
14,000
Income under variable costing:
CMU = SP – VProd.Cost – VSGA = $15 – $4 – $2 = $9
×Vol. sold 3,800
CM
Less: FC – Production
SG&A
Variable costing income before income taxes
Reason for difference in income:
Fixed costs expensed under absorp. costing
COGS 3,800 × $20,000/5,000 units
Fixed SG&A
Total
Fixed costs expensed under variable costing
Fixed SG&A
Fixed Production
Total FC
Difference in FC expensed under two methods
This is also the difference in income amounts.
MEDIUM
11–45
(21,600 )
$ 5,000
$34,200
(20,000 )
(14,000 )
$ 200
$15,200
14,000
$29,200
$14,000
20,000
$34,000
$ 4,800
11–46
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Use the following information for questions 16 and 17.
Information relating to the 2001 operations of McNickle Corp. follows:
Sales
Variable costs
Contribution margin
Fixed costs
Profit before taxes
16.
$120,000
(36,000 )
$ 84,000
(70,000 )
$ 14,000
McNickle’s break-even point for 2001 was 1,000 units. Compute McNickle’s sales price
per unit.
ANSWER:
The break-even point is found by dividing the fixed costs by the CM ratio.
The CM ratio is:
$84,000/$120,000 = 70%. Breakeven would then be:
$70,000/.70 = $100,000. Since we also know that the break-even point is defined
as 1,000 units, it must follow that the unit sales price is $100,000/1,000 = $100.
MEDIUM
17.
Compute McNickle’s degree of operating leverage for 2001.
ANSWER: The degree of operating leverage is computed as the contribution margin
divided by profit before taxes: $84,000/$14,000 = 6.
MEDIUM
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–47
Use the following information for questions 18 and 19.
Dos Co. manufactures and sells 2 products: A and B. The projected information on these two
products for 2002 is:
Sales in units
Sales price per unit
Variable costs per unit
Product A
4,000
$12
8
Product B
1,000
$8
4
Total fixed costs for the company are projected at $10,000.
18.
Compute Dos Co.’s projected break-even point for 2002 in total units.
ANSWER: The company anticipates a sales mix consisting of 4 units of Product A
and 1 unit of Product B. The total contribution margin for one unit of sales mix would be
$20. This consists of $16 of contribution margin from the 4 units of Product A and $4 of
contribution margin from 1 unit of Product B.
The overall company breakeven is found by dividing total fixed costs by the contribution
margin on one unit of sales mix: $10,000/$20 = 500 units. The 500 units of sales mix
contain 500 × 5 units of product for a total of 2,500. Of the 2,500 total units, 2,000 are
units of Product A and 500 are units of Product B.
MEDIUM
19.
How many units would the company need to sell to produce an income before income
taxes equal to 15 percent of sales?
ANSWER: Again, using a unit of sales mix as the unit of analysis, one unit of sales
mix sells for $56. Since the contribution margin is $20 on one unit of sales mix, the CM
ratio on one unit of sales mix is $20/$56 = .3571. This implies that variable costs as a
percentage of sales are equal to 1 – .3571 = .6429. Income before income taxes equal to
15 percent of sales can be found by solving a formula of the following type:
Sales – VC – FC = Income before income taxes
In this particular case, we solve the following formula:
Sales – (.6429 × Sales) – $10,000 = (.15 × Sales)
Solving for Sales, we get $48,286. We can find out how many units of sales mix are
required to generate sales of $48,286 by dividing $48,286 by $56 = 863. These 863 units
of sales mix each contain 5 units of product, so the correct answer would be 863 × 5 =
4,315 units of product, 3,452 of Product A and 863 of Product B.
MEDIUM
11–48
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Use the following information for questions 20 and 21.
P Corp. predicts it will produce and sell 40,000 units of its sole product in 2001. At that level of
volume, it projects a sales price of $30 per unit, a contribution margin ratio of 40 percent, and
fixed costs of $5 per unit.
20.
What is the company’s projected breakeven for 2001 in dollars and units?
ANSWER: Given the CM ratio of 40 percent, and the Sales price per unit of $30, the
CM per unit must be $30 × .40 = $12. The total fixed costs would be projected at $5 ×
40,000 = $200,000. Breakeven would be: $200,000/$12 = 16,667 units. This would also
equate to $500,000 of sales.
MEDIUM
21.
What would the company’s projected profit be if it produced and sold 30,000 units?
ANSWER:
Projected profit would be:
Sales (30,000 × $30)
Variable costs (30,000 × $18)
Contribution margin
Fixed costs
Profit
MEDIUM
$900,000
(540,000 )
$360,000
(200,000 )
$160,000
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–49
Questions 22 and 23 are based on the following data pertaining to two types of products
manufactured by Korn Corp.:
Product Y
Product Z
Per unit
Sales price
Variable costs
$120
$ 70
$500
$200
Fixed costs total $300,000 annually. The expected mix in units is 60 percent for Product Y and
40 percent for Product Z.
22.
How much is Korn’s break-even point sales in units?
ANSWER:
BEP units = FC/(unit SP – unit VC) or unit CM(UMC)
For multiple products, use the weighted CM with weights based on units of sales weights.
BEP = FC / [60% ($120 – $70) + 40% ($500 – $200)]
= $300,000/ ($30/u + $120/u) = 2,000 units
MEDIUM
23.
What are Korn’s break-even point sales in dollars?
ANSWER:
BEP dollars = FC/CMR
For multiple products, use weighted CMR with weights based on sales dollars as weights
or sales mix.
Sales mix is 60 percent and 40 percent in units or in dollars.
Weighted average CMR = WACM/WASale
WACMR = [60% ($120 – $70) + 40% ($500 – $200)] ÷ (60% × $120) + (40% × $500)
WACMR = [$30 + $120] ÷ [$72 + $200] = .551
BEP sales = 2,000 × $272 = $544,000
MEDIUM
11–50
24.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
“This makes no sense at all,” said Bill Sharp, president of Essex Company. “We sold the
same number of units this year as we did last year, yet our profits have more than
doubled. Who made the goof—the computer or the people who operate it?” The
statements to which Mr. Sharp was referring are shown here (absorption costing basis):
Sales (20,000 units each year)
Less cost of good sold
Gross margin
Less selling and administrative expenses
Income before income taxes
2001
$700,000
460,000
$240,000
200,000
$ 40,000
2002
$700,000
400,000
$300,000
200,000
$100,000
The company was organized on January 1, 2001, so the previous statements show the
results of its first two years of operation. In the first year, the company produced and sold
20,000 units; in the second year, the company again sold 20,000 units, but it increased
production in order to have a stock of units on hand, as shown here:
Production in units
Sales in units
Variable production cost per unit
Fixed overhead costs (total)
2001
20,000
20,000
$8
$300,000
2002
25,000
20,000
$8
$300,000
Fixed overhead costs are applied to units of product on a basis of each year’s production.
(The company produces and sells a single product.) Variable selling and administrative
expenses are $1 per unit sold.
Required:
1.
Compute the cost of single unit of product for each year under:
a.
absorption costing.
b.
variable costing.
2.
What is the value of ending inventory in 2002 under:
a.
full cost?
b.
variable cost?
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
ANSWER:
1.
2.
a
Variable man.
Fixed man.
2001
$ 8
15
$23
b.
Variable man.
a.
5,000 × $23 = $115,000
b.
5,000 × 20 = 100,000
MEDIUM
2001
$8
2002
$ 8
12
$20
2002
$8
2001
$300,000 = $15
20,000
2002
$300,000 = $12
25,000
11–51
11–52
25.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
The following data have been taken from the records of a company:
Production in units during 2001
Units sold during 2001
Selling price per unit
Standard variable costs per unit:
Material and labor
Indirect manufacturing costs
Selling & administrative expenses
Fixed costs budgeted for year:
Indirect manufacturing costs
Selling & administrative expenses
200,000
190,000
$15.00
$8.00
2.00
1.00
$11.00
$400,000
300,000
$700,000
Required:
1.
Determine the income (loss) before income taxes for the year 2001 under
(a) absorption costing and (b) variable costing.
2.
What is the value of ending inventory under (a) absorption costing and
(b) variable costing?
3.
Reconcile the difference in the two incomes.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
ANSWER:
1.
(a.)
Sales
– COG S (190,000 × 12)
– SLA
Income before income taxes
$2,850,000
2,280,000
$ 570,000
490,000
$ 80,000
2.
(a.)
$12 × 10,000 = $120,000
(b.)
$10 × 10,000 = $100,000
11–53
(b.)
Sales
– VC (190,000 × 11)
CM
– FC
Income before income taxes
PRODUCT COST
ABSORPTION
VARIABLE
VAR $10
FIX
3.
 NI = (200,000 – 190,000) × $2 = $20,000
MEDIUM
$2,850,000
2,090,000
$ 760,000
700,000
$ 60,000
2
$12
$10
(400,000)
(200,000)
___
$10
11–54
26.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Actual costs for Sonic, Inc. for the past year were as follows:
Direct material (2 pounds @ $5)
Direct labor (3 hours @ $10)
Variable selling and administrative
Fixed selling and administrative
$10 per unit
$30 per unit
$2 per unit
$80,000
During the year, 10,000 units were produced and 9,000 units were sold. There were no
beginning inventories. Thirty thousand direct labor hours were worked during the year.
Actual overhead for the year totaled $252,000 of which $140,000 was fixed. Selling
price = $100/unit.
Budgeted fixed overhead was $150,000 and the expected activity level was 30,000 direct
labor hours. Variable overhead was budgeted at 3 direct labor hours per unit and $4 per
direct labor hour.
The company uses a normal costing system and overhead variances are closed to cost of
goods sold.
Required:
a.
Determine the unit cost using variable costing.
b.
Determine the unit cost using absorption costing.
c.
Using variable costing, determine the contribution margin, and variable costing
income.
d.
Using absorption costing, determine the gross margin, and absorption costing
income.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–55
ANSWER:
a.
DM
DL
V-FOH (3 × $4)
$10
30
12
$52
b.
DM
DL
V-FOH
F-FOH (3 × $5)
$10
30
12
15
$67
c.
$150,000 = $5
30,000
Sell Price
$100
– VAR Cost
54 ($52 + $2)
CM
$ 46 × 9,000 units =
– FC
= Income before income taxes (STD)
+ favorable VAR-FOH SPD VAR
Income before income taxes (actual)
$414,000
(230,000 )
$184,000
8,000
$192,000
Variable FOH spending variance = $112,000 – (30,000 × $4) = $8,000 F
d.
SP
$100
– COGS
67
GM
$ 33 × 9,000 units =
– S&A EXP (9,000 × $2) + $80,000
Income before income taxes (STD)
+ Favorable variance
Income before income taxes actual
MEDIUM
$297,000
(98,000 )
$199,000
8,000
$207,000
11–56
27.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Sports Innovators has developed a new design to produce hurdles that are used in track
and field competition. The company’s hurdle design is innovative in that the hurdle
yields when hit by a runner and its height is extraordinarily easy to adjust. Management
estimates expected annual capacity to be 90,000 units; overhead is applied using expected
annual capacity. The company’s cost accountant predicts the following 2001 activities
and related costs:
Standard unit variable manufacturing costs
Variable unit selling expense
Fixed manufacturing overhead
Fixed selling and administrative expenses
Selling price per unit
Units of sales
Units of production
Units in beginning inventory
$12
$5
$480,000
$136,000
$35
80,000
85,000
10,000
Other than any possible under- or overapplied fixed overhead, management expects no
variances from the previous manufacturing costs. Under- or overapplied fixed overhead
is to be written off to Cost of Goods Sold.
Required:
1.
Determine the amount of under- or overapplied fixed overhead using (a) variable
costing and (b) absorption costing.
2.
Prepare projected income statements using (a) variable costing and (b) absorption
costing.
3.
Reconcile the incomes derived in part 2.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
ANSWER:
1.
2.
3.
a.
$0
b.
(90,000 – 85,000) × $5.33 = $26,650 U
a.
Sales (80,000 × $35) =
– VC (80,000 × $17) =
CM
– FC
Income before income taxes
$2,800,000
(1,360,000 )
$1,440,000
(616,000 )
$ 824,000
b.
Sales (80,000 × $35)
– COGS ($17.33 × 80,000)
GM
– S&A
Income before income (STD)
– VOL VAR
Income before income taxes
$2,800,000
(1,386,400 )
$1,413,600
(536,000 )
$ 877,600
(26,650 )
$ 850,950
5,000 × $5.33 = $26,650.
MEDIUM
11–57
11–58
28.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
On December 30, 2001, a bomb blast destroyed the bulk of the accounting records of the
Horne Division, a small one-product manufacturing division that uses standard costs and
flexible budgets. All variances are written off as additions to (or deductions from)
income; none are pro-rated to inventories. In addition, the chief accountant mysteriously
disappeared. You have the task of reconstructing the records for the year 2001. The
general manager has said that the accountant has been experimenting with both
absorption costing and variable costing.
The records are a mess, but you have gathered the following data for 2001:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
Cash on hand, December 31, 2001
Sales
Actual fixed indirect manufacturing costs
Accounts receivable, December 31, 2001
Standard variable manufacturing costs per unit
Variances from standard of all variable manufacturing costs
Operating income, absorption-costing basis
Accounts payable, December 31, 2001
Gross profit, absorption costing at standard
(before deducting variances)
Total liabilities
Unfavorable budget variance, fixed manufacturing costs
Notes receivable from chief accountant
Contribution margin, at standard (before deducting variances)
Direct-material purchases, at standard prices
Actual selling and administrative costs (all fixed)
$10
$128,000
21,000
20,000
1
$5,000 U
$14,400
18,000
22,400
100,000
1,000 U
4,000
48,000
50,000
6,000
These do not necessarily have to be solved in any particular order. Ignore income taxes.
Required:
1.
Operating income on a variable-costing basis.
2.
Number of units sold.
3.
Number of units produced.
4.
Number of units used as the denominator to obtain fixed indirect cost application
rate per unit on absorption-costing basis.
5.
Did inventory (in units) increase or decrease? Explain.
6.
By now much in dollars did the inventory level change (a) under absorption
costing, (b) under variable costing?
7.
Variable manufacturing cost of goods sold, at standard prices.
8.
Manufacturing cost of goods sold at standard prices, absorption costing.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
11–59
ANSWER:
1.
CM
– FC
Operating Income (STD)
– unfavorable variances
Operating Income (actual)
$48,000
(26,000 )
$22,000
(6,000 )
$16,000
Actual fix mfg
– unfavorable VAR
fix cost @STD
2.
Sales
– CM
= VC
$128,000
(48,000 )
$ 80,000/$1 UNIT = 80,000 units sold
3.
Sales
– GM
COGS
$128,000
(22,400 )
$105,600/80,000 = $1.32
Difference in OI = (P – S) × fix mfg/unit
$(1,600) = (P – 80,000) × $.32 P = 75,000
4.
OI – absorption cost = $22,400 – $6,000 =
variances
– other VAR
VOL VAR
$16,400
(14,400)
$ 2,000
6,000
$ 4,000
OI STD
OI ACT
UNF
UNF
FAV
$4,000 F = (75,000 – X) × $.32
X = 62,500 units produced
5.
Inventory decreased. OI absorption is less than OI variable.
6.
Absorption cost 5,000 units × $1.32 = $6,600
Variable cost 5,000 units × $1 = $5,000
7.
80,000 units × $1 = $80,000
8.
80,000 × $1.32 = $105,600
DIFFICULT
$21,000
(1,000 )
$20,000
11–60
29.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
Smith Company produces and sells two products: A and B in the ratio of 3A to 5B.
Selling prices for A and B are, respectively, $1,200 and $240; respective variable costs
are $480 and $160. The company’s fixed costs are $1,800,000 per year.
Compute the volume of sales in units of each product needed to:
Required:
a.
breakeven.
b.
earn $800,000 of income before income taxes.
c.
earn $800,000 of income after income taxes, assuming a 30 percent tax rate.
d.
earn 12 percent on sales revenue in before-tax income.
e.
earn 12 percent on sales revenue in after-tax income, assuming a 30 percent tax
rate.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
ANSWER:
A
SP
– VC
CM
$1,200
(480 )
$ 720
B
SP
– VC
CM
$240
(160 )
$ 80
Weighted CM = (3 × $720) + (5 × $80) = $2,560
a.
$1,800,000 = 703.125
$2,560
A = 704 × 3 = 2,112 units
B = 704 × 5 = 3,520
b.
$1,800,000 + $800,000 = 1015.625
$2,560
A = 1,016 × 3 = 3,048 units
B = 1,016 × 5 = 5,080
c.
$800,000/1 – .3 = $1,142,857
$1,800,000 + $1,142,857 = 1,149.55
$2,560
d.
SP = (3 × $1,200) + (5 × $240) = $4,800
X = $1,800,000 + $.12X = $4,354,839
$2,560/$4,800
A = ($4,354,839 × .75)/$1200 = 2,722 units
B = ($4,354,839 × .25/$240 = 4,537
e.
X = $1,800,000 + $.12X
1 – .3 = $4,973,684
$2,560/$4,800
A = ($4,973,684 × .75)/$1,200 = 3,109 units
B = ($4,973,684 × .25/$240 = 5,181
MEDIUM
A = 1,150 × 3 = 3,450 units
B = 1,150 × 5 = 5,750
11–61
11–62
30.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
The Jones Company makes three products. Data follow:
Selling price
Variable costs
Product A
$10
7
Product B
$20
12
Product C
$40
16
Total annual fixed costs are $840,000. The firm’s experience has been that about 20
percent of dollar sales come from product A, 60 percent from B, and 20 percent from C.
Required:
a.
Compute break-even in sales dollars.
b.
Determine the number of units to be sold at the break-even point.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
ANSWER:
a.
SP
– VC
= CM
CMR
A
$10
(7 )
$ 3
30%
B
$20
(12 )
$ 8
40%
C
$40
(16 )
$24
60%
CMR = (.2 × 30%) + (.6 × 40%) + (.2 × 60%) = 42%
BE = $840,000/.42 = $2,000,000
b.
A ($2,000,000 × .20)/$10 = 40,000 units
B ($2,000,000 × .60)/$20 = 60,000 units
C ($2,000,000 × .20)/$40 = 10,000 units
MEDIUM
11–63
11–64
31.
Chapter 11
Absorption/Variable Costing and Cost-Volume-Profit Analysis
The Fred Company sells two products, A and B, with contribution margin ratios of 40 and
30 percent and selling prices of $5 and $2.50 a unit. Fixed costs amount to $72,000 a
month. Monthly sales average 30,000 units of product A and 40,000 units of product B.
Required:
a.
Assuming that three units of product A are sold for every four units of product B,
calculate the dollar sales volume necessary to breakeven.
b.
As part of its cost accounting routine, Fred Company assigns $36,000 in fixed costs to
each product each month. Calculate the break-even dollar sales volume for each product.
c.
Fred Company is considering spending an additional $9,700 a month on advertising,
giving more emphasis to product A and less emphasis to product B. If its analysis is
correct, sales of product A will increase to 40,000 units a month, but sales of product B
will fall to 32,000 units a month. Recalculate the break-even sales volume, in dollars, at
this new product mix. Should the proposal to spend the additional $9,700 a month be
accepted?
ANSWER:
a.
CM = (3 × $2) + (4 × $.75) = $9
SP = (3 × $5) = (4 × $2.50) = $25
BE = $72,000 = $400,000
$9/$25
b.
A = $36,000 = $90,000
.4
c.
CM = (5 × $2) + (4 × $.75) = $13
SP = (5 × $5) + (4 × $2.50) = $35
B = $36,000 = $120,000
.3
BE = $72,000 + $9,700 = $219,962
$13/35
OLD NEW
CM A = 30,000 × $2 = $60,000
B = 40,000 × $.75 = 30,000
$90,000
– FC
(72,000 )
OI
$18,000
CM A = 40,000 × $2 = $ 80,000
B = 32,000 × $.75 =
24,000
$104,000
– FC
(81,700 )
OI
$ 22,300
At current sales levels increase advertising.
MEDIUM
CHAPTER 12
RELEVANT COSTING
MULTIPLE CHOICE
1.
Which of the following is not a characteristic of relevant costing information? It is
a.
b.
c.
d.
associated with the decision under consideration.
significant to the decision maker.
readily quantifiable.
related to a future endeavor.
ANSWER:
2.
a future cost.
avoidable.
sunk.
a product cost.
ANSWER:
b
EASY
Relevant costs are
a.
b.
c.
d.
all fixed and variable costs.
all costs that would be incurred within the relevant range of production.
past costs that are expected to be different in the future.
anticipated future costs that will differ among various alternatives.
ANSWER:
4.
EASY
A fixed cost is relevant if it is
a.
b.
c.
d.
3.
c
d
EASY
Which of the following is the least likely to be a relevant item in deciding whether to
replace an old machine?
a.
b.
c.
d.
acquisition cost of the old machine
outlay to be made for the new machine
annual savings to be enjoyed on the new machine
life of the new machine
ANSWER:
a
EASY
12–1
12–2
5.
Chapter 12
If a cost is irrelevant to a decision, the cost could not be
a.
b.
c.
d.
a sunk cost.
a future cost.
a variable cost.
an incremental cost.
ANSWER:
6.
EASY
incremental fixed costs
all costs of inventory
total variable costs that are the same in the considered alternatives
the cost of a fixed asset that could be used in all the considered alternatives
ANSWER:
a
EASY
The term incremental cost refers to
a.
b.
c.
d.
the profit foregone by selecting one choice instead of another.
the additional cost of producing or selling another product or service.
a cost that continues to be incurred in the absence of activity.
a cost common to all choices in question and not clearly or feasibly allocable to
any of them.
ANSWER:
8.
d
Which of the following costs would be relevant in short-term decision making?
a.
b.
c.
d.
7.
Relevant Costing
b
EASY
A cost is sunk if it
a.
b.
c.
d.
is not an incremental cost.
is unavoidable.
has already been incurred.
is irrelevant to the decision at hand.
ANSWER:
c
EASY
Chapter 12
9.
Relevant Costing
Most___________ are relevant to decisions to acquire capacity, but not to short-run
decisions involving the use of that capacity.
a.
b.
c.
d.
sunk costs
incremental costs
fixed costs
prime costs
ANSWER:
10.
sunk costs
yes
yes
no
yes
ANSWER:
EASY
d
historical costs
yes
no
no
yes
allocated costs
no
no
yes
yes
EASY
In deciding whether an organization will keep an old machine or purchase a new
machine, a manager would ignore the
a.
b.
c.
d.
estimated disposal value of the old machine.
acquisition cost of the old machine.
operating costs of the new machine.
estimated disposal value of the new machine.
ANSWER:
12.
c
Irrelevant costs generally include
a.
b.
c.
d.
11.
12–3
b
EASY
The potential rental value of space used for production activities
a.
b.
c.
d.
is a variable cost of production.
represents an opportunity cost of production.
is an unavoidable cost.
is a sunk cost of production.
ANSWER:
b
EASY
12–4
13.
Chapter 12
The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is
a.
b.
c.
d.
the total manufacturing cost of the component.
the total variable cost of the component.
the fixed manufacturing cost of the component.
zero.
ANSWER:
14.
Variable
costs
no
yes
no
yes
ANSWER:
EASY
d
Avoidable fixed
costs
yes
no
no
yes
Unavoidable fixed
costs
yes
yes
yes
no
EASY
In a make or buy decision, the opportunity cost of capacity could
a.
b.
c.
d.
be considered to decrease the price of units purchased from suppliers.
be considered to decrease the cost of units manufactured by the company.
be considered to increase the price of units purchased from suppliers.
not be considered since opportunity costs are not part of the accounting records.
ANSWER:
16.
d
Which of the following are relevant in a make or buy decision?
a.
b.
c.
d.
15.
Relevant Costing
a
EASY
Which of the following are relevant in a make or buy decision?
a.
b.
c.
d.
Prime costs
yes
yes
yes
no
ANSWER:
b
Sunk costs
yes
no
no
no
EASY
Incremental costs
yes
yes
no
yes
Chapter 12
17.
Relevant Costing
In a make or buy decision, the reliability of a potential supplier is
a.
b.
c.
d.
an irrelevant decision factor.
relevant information if it can be quantified.
an opportunity cost of continued production.
a qualitative decision factor.
ANSWER:
18.
EASY
maintaining a long-term relationship with suppliers
quality control is critical
utilization of idle capacity
part is critical to product
ANSWER:
a
EASY
When a scarce resource, such as space, exists in an organization, the criterion that should
be used to determine production is
a.
b.
c.
d.
contribution margin per unit.
selling price per unit.
contribution margin per unit of scarce resource.
total variable costs of production.
ANSWER:
20.
d
Which of the following qualitative factors favors the buy choice in a make or buy
decision for a part?
a.
b.
c.
d.
19.
12–5
c
EASY
Fixed costs are ignored in allocating scarce resources because
a.
b.
c.
d.
they are sunk.
they are unaffected by the allocation of scarce resources.
there are no fixed costs associated with scarce resources.
fixed costs only apply to long-run decisions.
ANSWER:
b
EASY
12–6
21.
Chapter 12
The minimum selling price that should be acceptable in a special order situation is equal
to total
a.
b.
c.
d.
production cost.
variable production cost.
variable costs.
production cost plus a normal profit margin.
ANSWER:
22.
EASY
direct labor
equipment depreciation
variable cost of utilities
opportunity cost of production
ANSWER:
b
EASY
The _______________ prohibits companies from pricing products at different amounts
unless these differences reflect differences in the cost to manufacture, sell, or distribute
the products.
a.
b.
c.
d.
Internal Revenue Service
Governmental Accounting Office
Sherman Antitrust Act
Robinson-Patman Act
ANSWER:
24.
c
Which of the following costs is irrelevant in making a decision about a special order
price if some of the company facilities are currently idle?
a.
b.
c.
d.
23.
Relevant Costing
d
EASY
An ad hoc sales discount is
a.
b.
c.
d.
an allowance for an inferior quality of marketed goods.
a discount that an ad hoc committee must decide on.
brought about by competitive pressures.
none of the above.
ANSWER:
c
MEDIUM
Chapter 12
25.
Relevant Costing
A manager is attempting to determine whether a segment of the business should be
eliminated. The focus of attention for this decision should be on
a.
b.
c.
d.
the net income shown on the segment’s income statement.
sales minus total expenses of the segment.
sales minus total direct expenses of the segment.
sales minus total variable expenses and avoidable fixed expenses of the segment.
ANSWER:
26.
EASY
contribution margin per hour of machine time.
gross margin per unit.
contribution margin per unit.
sales price per unit.
ANSWER:
c
EASY
For a particular product in high demand, a company decreases the sales price and
increases the sales commission. These changes will not increase
a.
b.
c.
d.
sales volume.
total selling expenses for the product.
the product contribution margin.
the total variable cost per unit.
ANSWER:
28.
d
Assume a company produces three products: A, B, and C. It can only sell up to 3,000
units of each product. Production capacity is unlimited. The company should produce the
product (or products) that has (have) the highest
a.
b.
c.
d.
27.
12–7
c
EASY
An increase in direct fixed costs could reduce all of the following except
a.
b.
c.
d.
product line contribution margin.
product line segment margin.
product line operating income.
corporate net income.
ANSWER:
a
EASY
12–8
29.
Chapter 12
When a company discontinues a segment, total corporate costs may decrease in all of the
following categories except
a.
b.
c.
d.
variable production costs.
allocated common costs.
direct fixed costs.
variable period costs.
ANSWER:
30.
EASY
segment variable costs
segment fixed costs
costs allocated to the segment
period costs
ANSWER:
c
EASY
K Co. uses 10,000 units of a part in its production process. The costs to make a part are:
direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed
overhead, $30. K Co. has received a quote of $55 from a potential supplier for this part. If
K Co. buys the part, 70 percent of the applied fixed overhead would continue. K Co.
would be better off by
a.
b.
c.
d.
$50,000 to manufacture the part.
$150,000 to buy the part.
$40,000 to buy the part.
$160,000 to manufacture the part.
ANSWER:
32.
b
In evaluating the profitability of a specific organizational segment, all _______________
would be ignored.
a.
b.
c.
d.
31.
Relevant Costing
c
MEDIUM
P Co. has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of $50, and Product Y has a contribution
margin of $64. Product X requires 5 hours of machine time, and Product Y requires 8
hours of machine time. If P wants to dedicate 80 percent of its machine time to the
product that will provide the most income, P will have a total contribution margin of
a.
b.
c.
d.
$250,000.
$240,000.
$210,000.
$200,000.
ANSWER:
b
DIFFICULT
Chapter 12
33.
Relevant Costing
12–9
Down Co. has 3 divisions: R, S, and T. Division R’s income statement shows the
following for the year ended December 31, 2001:
Sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
Net loss
$1,000,000
(800,000 )
$ 200,000
$100,000
250,000
(350,000 )
$ (150,000 )
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60
percent are avoidable if the division is closed. All of the selling expenses relate to the
division and would be eliminated if Division R were eliminated. Of the administrative
expenses, 90 percent are applied from corporate costs. If Division R were eliminated,
Down Co. income would
a.
b.
c.
d.
increase by $150,000.
decrease by $ 75,000.
decrease by $155,000.
decrease by $215,000.
ANSWER:
34.
c
MEDIUM
Sandow Co. is currently operating at a loss of $15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for $35 per unit. Costs
associated with the product are: direct material, $6; direct labor, $10; variable overhead,
$3; applied fixed overhead, $4; and variable selling expenses, $2. The special order
would allow the use of a slightly lower grade of direct material, thereby lowering the
price per unit by $1.50 and selling expenses would be decreased by $1. If Sandow wants
this special order to increase the total net income for the firm to $10,000, what sales price
must be quoted for each of the 5,000 units?
a.
b.
c.
d.
$23.50
$24.50
$27.50
$34.00
ANSWER:
a
MEDIUM
12–10
35.
Chapter 12
Relevant Costing
Q Co. produces a part that has the following costs per unit:
Direct material
Direct labor
Variable overhead
Fixed overhead
Total
$ 8
3
1
5
$17
Z Corp. can provide the part to Q for $19 per unit. Q Co. has determined that 60 percent
of its fixed overhead would continue if it purchased the part. However, if Q no longer
produces the part, it can rent that portion of the plant facilities for $60,000 per year. Q Co.
currently produces 10,000 parts per year. Which alternative is preferable and by what
margin?
a.
b.
c.
d.
Make—$20,000
Make—$50,000
Buy—$10,000
Buy—$40,000
ANSWER:
36.
c
MEDIUM
Armstrong Co. has 15,000 units in inventory that had a production cost of $3 per unit.
These units cannot be sold through normal channels due to a significant technology
change. These units could be reworked at a total cost of $23,000 and sold for $28,000.
Another alternative is to sell the units to a junk dealer for $8,500. The relevant cost for
Armstrong to consider in making its decision is
a.
b.
c.
d.
$45,000 of original product costs.
$23,000 for reworking the units.
$68,000 for reworking the units.
$28,000 for selling the units to the junk dealer.
ANSWER:
b
EASY
Chapter 12
Relevant Costing
12–11
Use the following information for questions 37 and 38.
37.
R Corp. sells a product for $18 per unit, and the standard cost card for the product shows
the following costs:
Direct material
Direct labor
Overhead (80% fixed)
Total
$ 1
2
7
$10
R received a special order for 1,000 units of the product. The only additional cost to R
would be foreign import taxes of $1 per unit. If R is able to sell all of the current
production domestically, what would be the minimum sales price that R would consider
for this special order?
a.
b.
c.
d.
$18.00
$11.00
$5.40
$19.00
ANSWER:
38.
d
EASY
Assume that R has sufficient idle capacity to produce the 1,000 units. If R wants to
increase its operating profit by $5,600, what would it charge as a per-unit selling price?
a.
b.
c.
d.
$18.00
$10.00
$11.00
$16.60
ANSWER:
c
MEDIUM
12–12
39.
Chapter 12
Relevant Costing
Handy Combs, Inc. makes and sells brushes and combs. It can sell all of either product it
can make. The following data are pertinent to each respective product:
Units of output per machine hour
Selling price per unit
Product cost per unit
Direct material
Direct labor
Variable overhead
Brushes
8
$12.00
Combs
20
$4.00
$1.00
2.00
0.50
$1.20
0.10
0.05
Total fixed overhead is $380,000.
The company has 40,000 machine hours available for production. What sales mix will
maximize profits?
a.
b.
c.
d.
320,000 brushes and 0 combs
0 brushes and 800,000 combs
160,000 brushes and 600,000 combs
252,630 brushes and 252,630 combs
ANSWER:
40.
a
EASY
Boston Shoe Cobblers has been asked to submit a bid on supplying 1,000 pairs of military
dress boots to the Pentagon. The company’s costs per pair of boots are as follows:
Direct material
Direct labor
Variable overhead
Variable selling cost (commission)
Fixed overhead (allocated)
Fixed selling and administrative cost
$8
6
3
3
2
1
Assuming that there would be no commission on this potential sale, the lowest price the
firm can bid is some price greater than
a.
b.
c.
d.
$23.
$20.
$17.
$14.
ANSWER:
c
EASY
Chapter 12
41.
Relevant Costing
12–13
Schoof Company has two sales territories—North and South. Financial information for
the two territories for 2001 follows:
Sales
Direct costs:
Variable
Fixed
Allocated common costs
Net income (loss)
North
$980,000
South
$750,000
(343,000 )
(450,000 )
(275,000 )
$ (88,000 )
(225,000 )
(325,000 )
(175,000 )
$ 25,000
Because the company is in a start-up stage, corporate management feels that the North
sales territory is creating too much of a cash drain on the company and it should be
eliminated. If North is discontinued, one sales manager (whose salary is $40,000 per year)
will be relocated to the South territory. By how much would Schoof’s income change if
the North territory is eliminated?
a.
b.
c.
d.
increase by $88,000
increase by $48,000
decrease by $267,000
decrease by $227,000
ANSWER:
d
MEDIUM
12–14
Chapter 12
Relevant Costing
Use the following information for questions 42–45.
Big City Motors is trying to decide whether it should keep its existing car washing machine or
purchase a new one that has technological advantages (which translate into cost savings) over the
existing machine. Information on each machine follows:
Original cost
Accumulated depreciation
Annual cash operating costs
Current salvage value of old machine 2,000
Salvage value in 10 years
Remaining life
42.
500
10 yrs.
1,000
10 yrs.
sunk cost.
irrelevant cost.
future avoidable cost.
opportunity cost.
ANSWER:
b
EASY
The $9,000 cost of the original machine represents a(n)
a.
b.
c.
d.
sunk cost.
future relevant cost.
historical relevant cost.
opportunity cost.
ANSWER:
44.
New machine
$20,000
0
4,000
The $4,000 of annual operating costs that are common to both the old and the new
machine are an example of a(n)
a.
b.
c.
d.
43.
Old machine
$9,000
5,000
9,000
a
EASY
The $20,000 cost of the new machine represents a(n)
a.
b.
c.
d.
sunk cost.
future relevant cost.
future irrelevant cost.
opportunity cost.
ANSWER:
b
EASY
Chapter 12
45.
Relevant Costing
12–15
The estimated $500 salvage value of the existing machine in 10 years represents a(n)
a.
b.
c.
d.
sunk cost.
opportunity cost of selling the existing machine now.
opportunity cost of keeping the existing machine for 10 years.
opportunity cost of keeping the existing machine and buying the new machine.
ANSWER:
b
EASY
Use the following information for questions 46 and 47.
Robco manufactures and sells FM radios. Information on last year’s operations (sales and
production of the 2000 model) follows:
Sales price per unit
Costs per unit:
Direct material
Direct labor
Overhead (50% variable)
Selling costs (40% variable)
Production in units
Sales in units
46.
7
4
6
10
10,000
9,500
At this time (April 2001), the 2001 model is in production and it renders the 2000 model
radio obsolete. If the remaining 500 units of the 2000 model radios are to be sold through
regular channels, what is the minimum price the company would accept for the radios?
a.
b.
c.
d.
$30
$27
$18
$4
ANSWER:
47.
$30
d
MEDIUM
Assume that the remaining 2000 model radios can be sold through normal channels or to
a foreign buyer for $6 per unit. If sold through regular channels, the minimum acceptable
price will be
a.
b.
c.
d.
$30.
$33.
$10.
$4.
ANSWER:
c
MEDIUM
12–16
Chapter 12
Relevant Costing
Use the following information for questions 48–50.
The Chip Division of Supercomp Corp. produces a high-quality computer chip. Unit production
costs (based on capacity production of 100,000 units per year) follow:
Direct material
Direct labor
Overhead (20% variable)
Other information:
Sales price
SG&A costs (40% variable)
48.
$100
$72
$81
$94
ANSWER:
d
MEDIUM
Assume, for this question only, that the Chip Division is operating at a level of 70,000
chips per year. What is the minimum price that the division would consider on a “special
order” of 1,000 chips to be distributed through normal channels?
a.
b.
c.
d.
$78
$95
$100
$81
ANSWER:
50.
100
15
Assume, for this question only, that the Chip Division is producing and selling at
capacity. What is the minimum selling price that the division would consider on a
“special order” of 1,000 chips on which no variable period costs would be incurred?
a.
b.
c.
d.
49.
$50
20
10
a
MEDIUM
Assume, for this question only, that the Chip Division is presently operating at a level of
80,000 chips per year. Accepting a “special order” on 2,000 chips at $88 will
a.
b.
c.
d.
increase total corporate profits by $4,000.
increase total corporate profits by $20,000.
decrease total corporate profits by $14,000.
decrease total corporate profits by $24,000.
ANSWER:
b
MEDIUM
Chapter 12
Relevant Costing
12–17
Use the following information for questions 51–53.
The capital budgeting committee of the Virginia Iron Works is evaluating the possibility of
replacing its old pipe-bending machine with a more advanced model. Information on the existing
machine and the new model follows:
Original cost
Market value now
Market value in year 5
Annual cash operating costs
Remaining life
51.
20,000
10,000
5 yrs.
$30,000 of annual savings in operating costs.
$20,000 of salvage in 5 years on the new machine.
lost sales resulting from the inefficient existing machine.
$400,000 cost of the new machine.
ANSWER:
a
EASY
The $80,000 market value of the existing machine is
a.
b.
c.
d.
a sunk cost.
an opportunity cost of keeping the old machine.
irrelevant to the equipment replacement decision.
an historical cost.
ANSWER:
53.
New machine
$400,000
The major opportunity cost associated with the continued use of the existing machine is
a.
b.
c.
d.
52.
Existing machine
$200,000
80,000
0
40,000
5 yrs.
b
EASY
If the company buys the new machine and disposes of the existing machine, corporate
profit over the five-year life of the new machine will be ____________________ than the
profit that would have been generated had the existing machine been retained for five
years.
a.
b.
c.
d.
$150,000 lower
$170,000 lower
$230,000 lower
$150,000 higher
ANSWER:
a
MEDIUM
12–18
54.
Chapter 12
Relevant Costing
Golden, Inc. has been manufacturing 5,000 units of Part 10541, which is used in the
manufacture of one of its products. At this level of production, the cost per unit of
manufacturing Part 10541 is as follows:
Direct material
Direct labor
Variable overhead
Fixed overhead applied
Total
$ 2
8
4
6
$20
Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit.
Golden has determined that it could use the facilities currently used to manufacture Part
10541 to manufacture Part RAC and generate an operating profit of $4,000. Golden has
also determined that two-thirds of the fixed overhead applied will continue even if Part
10541 is purchased from Brown. To determine whether to accept Brown’s offer, the net
relevant costs to make are
a.
b.
c.
d.
$70,000.
$84,000.
$90,000.
$95,000.
ANSWER:
55.
b
MEDIUM
Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year at
a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay’s predictions,
240,000 batons will be sold at the regular price of $5.00 each. In addition, a special order
was placed for 60,000 batons to be sold at a 40 percent discount off the regular price. The
unit relevant cost per unit for Relay’s decision is
a.
b.
c.
d.
$1.50.
$2.50.
$3.00.
$4.00.
ANSWER:
b
MEDIUM
Chapter 12
56.
Relevant Costing
12–19
Big City Motors is trying to decide whether it should keep its existing car washing
machine or purchase a new one that has technological advantages (which translate into
cost savings) over the existing machine. Information on each machine follows:
Original cost
Accumulated depreciation
Annual cash operating costs
Current salvage value of old machine
Salvage value in 10 years
Remaining life
Old machine
$9,000
5,000
9,000
2,000
500
10 yrs.
New machine
$20,000
0
4,000
1,000
10 yrs.
The incremental cost to purchase the new machine is
a.
b.
c.
d.
$11,000.
$20,000.
$13,000.
$18,000.
ANSWER:
d
EASY
THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN
THE APPENDIX OF THE CHAPTER.
57.
The objective in solving the linear programming problem is to determine the optimal
levels of the
a.
b.
c.
d.
coefficients.
dependent variables.
independent variables.
slack variables.
ANSWER:
58.
c
EASY
A linear programming problem can have
a.
b.
c.
d.
no more than three resource constraints.
only one objective function.
no more than two dependent variables for each constraint equation.
no more than three independent variables.
ANSWER:
b
EASY
12–20
59.
Chapter 12
A linear programming model must
a.
b.
c.
d.
have only one objective function.
have as many independent variables as it has constraint equations.
have at least two dependent variables for each equation.
consider only the constraints that can be expressed as inequalities.
ANSWER:
60.
the independent variables.
the dependent variables in the constraint equations.
the coefficients of the objective function.
iso-cost lines.
ANSWER:
EASY
defined only by binding constraints on the optimal solution.
defined as the solution space that satisfies all constraints.
identified by iso-cost and iso-profit lines.
identified by all of the above.
ANSWER:
b
EASY
A linear programming solution
a.
b.
c.
d.
always involves more than one constraint.
always involves a corner point.
is the one with the highest vertex coordinates.
is provided by the input-output coefficients.
ANSWER:
63.
b
The feasible region for an LP solution is
a.
b.
c.
d.
62.
EASY
In a linear programming problem, constraints are indicated by
a.
b.
c.
d.
61.
a
b
EASY
The objective function and the resource constraints have the same
a.
b.
c.
d.
dependent variables.
coefficients.
independent variables.
all of the above.
ANSWER:
c
EASY
Relevant Costing
Chapter 12
64.
Relevant Costing
Which of the following items continuously checks for an improved solution from the one
previously computed?
a.
b.
c.
d.
An algorithm
yes
yes
no
no
ANSWER:
65.
Surplus
yes
yes
no
no
ANSWER:
EASY
Slack
yes
no
yes
no
c
EASY
____________________ programming relates to a variety of techniques that are used to
allocate limited resources among activities to achieve a specific objective.
a.
b.
c.
d.
Integer
Input-output
Mathematical
Regression
ANSWER:
67.
a
Simplex method
yes
no
no
yes
Which of the following variables is associated with the “less than or equal to”
constraints?
a.
b.
c.
d.
66.
12–21
c
EASY
The graphical approach to solving a linear programming problem becomes much more
complex when there are more than two
a.
b.
c.
d.
constraints
yes
no
yes
no
ANSWER:
c
decision variables
no
yes
yes
no
EASY
12–22
68.
Chapter 12
Relevant Costing
The feasible region for a graphical solution to a profit maximization problem includes
a.
b.
c.
d.
all vertex points.
all points on every resource constraint line.
the origin.
all of the above.
ANSWER:
c
EASY
Use the following information for questions 69–71.
In the two following constraint equations, X and Y represent two products (in units) produced by
the Generic Co.
Constraint 1: 3X + 5Y < 4,200
Constraint 2: 5X + 2Y > 3,000
69.
What is the maximum number of units of Product X that can be produced?
a.
b.
c.
d.
4,200
3,000
600
1,400
ANSWER:
70.
MEDIUM
What is the feasible range for the production of Y?
a.
b.
c.
d.
840 to 1,500 units
0 to 840 units
0 to 631 units
0 to 1500 units
ANSWER:
71.
d
b
MEDIUM
A solution of X = 500 and Y = 600 would violate
a.
b.
c.
d.
Constraint 1.
Constraint 2.
both constraints.
neither constraint.
ANSWER:
a
EASY
Chapter 12
72.
Relevant Costing
12–23
One constraint in an LP problem is:
12X + 7Y > 4,000.
If the optimal solution is X = 100 and Y = 500, this resource has
a.
b.
c.
d.
slack variable of 700.
surplus variable of 700.
output coefficient of 700.
none of the above.
ANSWER:
73.
b
EASY
Consider the following linear programming problem and assume that non-negativity
constraints apply to the independent variables:
Max CM = $14X + $23Y
Subject to
Constraint 1: 4X + 5Y < 3,200
Constraint 2: 2X + 6Y < 2,400
Which of the following are feasible solutions to the linear programming problem?
a.
b.
c.
d.
X = 600, Y = 240
X = 800, Y = 640
X = 0, Y = 400
X = 1,200, Y = 0
ANSWER:
74.
c
MEDIUM
Contracting with vendors outside the organization to obtain or acquire goods and/or
services is called
a.
b.
c.
d.
target costing.
insourcing.
outsourcing.
product harvesting.
ANSWER:
c
EASY
12–24
75.
Chapter 12
Which of the following activities within an organization would be least likely to be
outsourced?
a.
b.
c.
d.
accounting
data processing
transportation
product design
ANSWER:
76.
EASY
contract vendor.
lessee.
network organization.
centralized insourcer.
ANSWER:
a
EASY
Costs forgone when an individual or organization chooses one option over another are
a.
b.
c.
d.
budgeted costs.
sunk costs.
historical costs.
opportunity costs.
ANSWER:
78.
d
An outside firm selected to provide services to an organization is called a
a.
b.
c.
d.
77.
Relevant Costing
d
EASY
Which of the following costs would not be accounted for in a company’s recordkeeping
system?
a.
b.
c.
d.
an unexpired cost
an expired cost
a product cost
an opportunity cost
ANSWER:
d
EASY
Chapter 12
Relevant Costing
12–25
SHORT ANSWER/PROBLEMS
1.
Why is depreciation expense irrelevant to most managerial decisions, even when it is a
future cost?
ANSWER: Depreciation expense is simply the systematic write-off of a sunk cost (the
cost of a long-lived asset). Depreciation expense is therefore always irrelevant unless it
pertains to an asset that is not yet acquired.
MEDIUM
2.
What is an opportunity cost and why is it a relevant cost?
ANSWER: An opportunity cost is not a “cost” in the traditional out-of-pocket sense.
Opportunity costs are benefits that are sacrificed to pursue one alternative rather than
another. Once an alternative is selected, the opportunity costs associated with that
alternative will not appear directly in the accounting records of the firm as other costs of
that alternative will. These costs are, however, relevant because the company is giving up
one set of benefits to accept a second set. Rational decision making assumes that the
chosen alternative provides the greater benefit.
MEDIUM
3.
Define segment margin and explain why it is a relevant measure of a segment’s
contribution to overall organizational profitability.
ANSWER: Segment margin is the amount of income that remains after deducting all
avoidable (both variable and fixed) costs from sales. This measure is the appropriate
gauge of a segment’s viability because it is a direct measure of how total organizational
profits would change if the segment was discontinued.
MEDIUM
4.
What is the relationship between scarce resources and an organization’s production
capacity?
ANSWER: In the long run, capacity is likely to be constrained by two fundamental
resources: labor and machinery. However, in the short run, additional constraints can
push capacity to levels below labor and machine capacity. Constraints can be induced by
raw material shortages, interruptions in distribution channels, labor strikes in the plants of
suppliers of important components, or governmental restrictions on markets (gas
rationing, Quotas).
MEDIUM
12–26
5.
Chapter 12
Relevant Costing
Under what circumstances is the sum of variable production and selling costs the
appropriate minimum price for special orders?
ANSWER: Variable costs would serve as the bottom price for a special order only if
the special order could be produced on production capacity that would otherwise be idle.
Whenever presently employed capacity is partially or wholly surrendered to produce a
special order, the special order price would be based on both variable costs and the profit
sacrificed on the best alternative use of the capacity.
MEDIUM
6.
Why are fixed costs generally more relevant in long-run decisions than short-run
decisions?
ANSWER: In the long run, all costs are relevant. In the short run, many costs that
apply to the existing production technology are sunk. In particular, depreciation charges
and lease payments on long-term assets are unavoidable. In the long run, these assets are
replaced and, thus their associated costs are relevant in the replacement decision.
MEDIUM
Chapter 12
Relevant Costing
12–27
Use the following information for questions 7–9.
Farmer Billy grows corn in a small rural area of Texas. Billy’s costs per bushel of corn (based on
an average yield of 130 bushels per acre) follow:
Direct material
Direct labor
Variable overhead
Fixed overhead
Variable selling costs
Fixed selling costs
$1.10
0.40
0.30
0.60
0.10
0
Billy defines direct material costs as seed, fertilizer, water, and other chemicals. The variable
overhead costs represent maintenance and repair costs of machinery. The fixed overhead costs
are completely comprised of depreciation expense on machinery and real estate taxes.
7.
Assume that the current date is March 15. On this date, Farmer Billy must make a
decision as to whether he is financially better off to plant his farm to corn or leave his
land idle (no income is derived from idle land). Corn prices have been severely depressed
in recent years and Farmer Billy’s best guess is that corn prices will be around $2.00 per
bushel at the time his crop is ready for harvest. Should Billy plant corn or leave his land
idle? Explain.
ANSWER: Billy should make his decision by comparing the incremental income from
planting the corn crop to the incremental expenses that would be incurred to grow,
harvest, and market the crop. The incremental revenue is simply the $2.00 per bushel and
the incremental costs are all variable costs ($1.10 + $0.40 + $0.30 + $0.10 = $1.90).
Based on this comparison, Farmer Billy would be $13 per acre better off to plant than to
let his land remain idle.
MEDIUM
12–28
8.
Chapter 12
Relevant Costing
Assume for this question only that Billy decided to plant the corn. It is now harvest time
and Billy’s actual costs are the same as those listed previously. A local oil refiner has
approached Billy about converting his crop to grain alcohol (used to make gasohol) rather
than selling his grain to the local grain elevator. If Billy converts the grain to alcohol, he
will incur additional costs of $0.60 per bushel and he will be able to sell his crop to the
oil refiner for the equivalent of $2.50 per bushel. Otherwise, Billy can sell his corn crop
to the local grain elevator for $1.85 per bushel. If Billy elects to sell the grain to the
refinery, he will not incur the variable selling costs. What should Billy do? Support your
answer with calculations.
ANSWER: Billy’s alternatives are to sell the corn as a grain or as alcohol. This
decision can be made by comparing the incremental costs to convert the grain to alcohol
to the increase in price he can receive for marketing the crop as alcohol rather than grain.
By converting the crop to alcohol, Billy increases his total revenue by $0.75 per bushel
($2.60 – $1.85) and he incurs additional costs of $0.50 ($0.60 for the additional
processing, less the $0.10 savings on the variable grain marketing costs). Thus, by
converting the grain to alcohol, Billy could increase his net income by $0.25 per bushel.
MEDIUM
9.
Assume that the current date is March 15. On this date, Farmer Billy must make a
decision as to whether he is financially better off to plant his farm to corn, leave his land
idle (no income is derived from idle land), or rent his land to another farmer for $50 per
acre. Corn prices have been severely depressed in recent years and Farmer Billy’s best
guess is that corn prices will be around $2.00 per bushel at the time his crop is ready for
harvest. What should Billy do? Show calculations.
ANSWER: It has already been determined (answer to #80) that planting corn is
preferred to leaving the land idle (by $13 per acre). By renting the land, Farmer Billy is
even better off. Under the rental alternative, Farmer Billy is $37 per acre better off than if
he plants corn ($50 – $13). By renting the land, Billy avoids all costs except the fixed
production costs ($0.60 per bushel or $78 per acre).
MEDIUM
Chapter 12
10.
Relevant Costing
12–29
Lisa and Yvette make and sell the “Kitchen Mystic,” a wall hanging depicting a witch.
The Kitchen Mystics are sold at specialty shops for $50 each. The capacity of the plant is
15,000 Mystics per year. Costs to manufacture and sell each wall hanging are as follows:
Direct material
Direct labor
Variable overhead
Fixed overhead
Variable selling expenses
$ 5.00
6.00
8.00
10.00
2.50
Lisa and Yvette have been approached by an English company about purchasing 2,500
Mystics. The company is currently making and selling 15,000 per year. The English
company wants to attach its own label, which increases costs by $.50 each. No selling
expenses would be incurred on this order. Lisa and Yvette believe that they must make an
additional $1 on each wall hanging to accept this offer.
a.
b.
What is the opportunity cost per unit of selling to the English organization?
What is the minimum selling price that should be set?
ANSWER:
a.
Opportunity cost = Selling price minus total variable costs $50 – ($5 + $6 + $8 +
$2.50) = $28.50
b.
Direct material ($5.00 + $.50)
Direct labor
Variable overhead
Fixed overhead
Variable selling
Opportunity cost [from (a) less
fixed overhead included]
Extra amount required to accept offer
Minimum price
MEDIUM
$ 5.50
6.00
8.00
10.00
0
18.50
1.00
$49.00
12–30
11.
Chapter 12
Relevant Costing
Tiny Tim’s Accounting Service provides two types of services: audit and tax. All
company personnel can perform either service. In efforts to market its services, Tiny
Tim’s relies on radio and billboards for advertising. Information on Tiny Tim’s projected
operations for 2001 follows:
Revenue per billable hour
Variable cost of professional labor
Material cost per billable hour
Allocated fixed costs per year
Projected billable hours for 2001
a.
b.
Taxes
$
30
20
3
200,000
10,000
What is Tiny Tim’s projected profit or (loss) for 2001?
If $1 spent on advertising could increase either audit services billable time by 1
hour or tax services billable time by 1 hour, on which service should the
advertising dollar be spent?
ANSWER:
a.
Revenue:
14,000 × $35
10,000 × $30
Variable Costs:
Labor:
14,000 × $25
10,000 × $20
Material:
14,000 × $2
10,000 × $3
Contribution margin
Fixed costs
Profit (loss)
b.
Audit
$
35
25
2
100,000
14,000
Audit
Tax
Total
$ 300,000
$ 490,000
300,000
$490,000
(350,000 )
(200,000 )
(350,000 )
(200,000 )
(30,000 )
$ 70,000
(200,000 )
$(130,000 )
(28,000 )
(30,000 )
$ 182,000
(300,000 )
$(118,000 )
(28,000 )
$112,000
(100,000 )
$ 12,000
Each billable hour of audit services generates $8 of contribution margin
($35 – $25 – $2), tax services generates $7 of contribution margin
($30 – $20 – $3). The advertising should be spent on the audit services.
MEDIUM
Chapter 12
12.
Relevant Costing
12–31
Timothy Warren operates a woodworking shop that makes tables and chairs. He has 25
employees working 40 hours per week, and he has 750 hours per week available in
machine time. Timothy knows that he must make at least four chairs for every table. He
has also determined the following additional requirements:
Table
Chair
Labor
hours
5
3
Machine
hours
2
1
Contribution
margin
$18
4
Write the object function and constraints for the above problem.
ANSWER:
Objective function: Max CM--> 18X + 4Y
Subject to:
4X – Y > 0
5X + 3Y  1,000
2X + Y  750
X = # of tables
Y = # of chairs
13.
Define and discuss outsourcing.
ANSWER: Outsourcing occurs when an organization “farms out” some of its normal
business activities or processes. Several areas that are most frequently outsourced by an
organization include payroll, accounting, transportation, and possibly legal. When a
company outsources some of its functions, it is able to divert more energy to those areas
that produce a firm’s core competencies or have the ability to create revenues for the firm.
MEDIUM
12–32
14.
Chapter 12
Relevant Costing
The management of Smith Industries has been evaluating whether the company should
continue manufacturing a component or buy it from an outside supplier. A $100 cost per
component was determined as follows:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$ 15
40
10
35
$100
Smith Industries uses 4,000 components per year. After Jones Corp. submitted a bid of
$80 per component, some members of management felt they could reduce costs by buying
from outside and discontinuing production of the component. If the component is
obtained from Jones Corp., Smith’s unused production facilities could be leased to
another company for $50,000 per year.
Required:
a.
Determine the maximum amount per unit Smith could pay an outside supplier.
b.
Indicate if the company should make or buy the component and the total dollar
difference in favor of that alternative.
c.
Assume the company could eliminate one production supervisor with a salary of
$30,000 if the component is purchased from an outside supplier. Indicate if the
company should make or buy the component and the total dollar difference in
favor of that alternative.
ANSWER:
a.
Cost to make = incremental manufacturing cost and opportunity cost
= DM + DL + V – FOH + OP COST
$77.50 = $15 + $40 + $10 + ($50,000/4,000 units)
b.
Make: Save ($80.00 – $77.50) × 4,000 = $10,000
c.
Incremental mfg. = $65 + ($30,000/4,000) = $72.50
+ opportunity cost $50,000/4,000
= 12.50
To make
$85.00
Buy: Save ($85 – $80) × 4,000 units = $20,000
MEDIUM
Chapter 12
15.
Relevant Costing
12–33
Brown Corp is working at full production capacity producing 10,000 units of a unique
product, XYZ. Manufacturing costs per unit for XYZ follow:
Direct material
Direct manufacturing labor
Manufacturing overhead
$ 2
3
5
$10
The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed
costs of $30,000 (at full capacity of 10,000 units). The non-manufacturing costs, all
variable, are $4 per unit, and the selling price is $20 per unit. A customer, the Miami Co.,
has asked Brown to produce 2,000 units of a modification of XYZ to be called ABC.
ABC would require the same manufacturing processes as XYZ and the Miami Co. has
offered to share equally the non-manufacturing costs with Brown. ABC will sell at $15
per unit.
Required:
a.
What is the opportunity cost to Brown of producing the 2,000 units of ABC
(assume that no overtime is worked)?
b.
The Jones Co. has offered to produce 2,000 units of XYZ for Brown, so Brown
can accept the Miami offer. Jones would charge Brown $14 per unit for the XYZ.
Should Brown accept the Jones offer?
c.
Suppose Brown had been working at less than full capacity producing 8,000 units
of XYZ at the time the ABC offer was made. What is the minimum price Brown
should accept for ABC under these conditions (ignoring the $15 price mentioned
previously)?
12–34
Chapter 12
Relevant Costing
ANSWER:
a.
XYZ
SP
– VC
= CM
$ 20
(11 )
$ 9
($2 + $3 + $2 + $4)
× 2,000 units =
$18,000
ABC
SP
– VC
= CM
$15
(9 )
$ 6
($2 + $3 + $2 + $2)
× 2,000 units =
12,000
Opportunity cost
$ 6,000
b.
Make ($15 – $14) = $1 × 2,000 units = $2,000 without giving up any current production
= DO IT.
c.
The variable cost to make and sell = $11 ($2 + $3 + $2 + $4) would be the minimum.
Any price over $11 would increase the contribution margin.
MEDIUM
Chapter 12
16.
Relevant Costing
12–35
The Davis Company normally produces 150,000 units of AB per year. Due to an
economic downturn, the company has some idle capacity. AB sells for $15 per unit.
The firm’s production, marketing, and administration costs at its normal capacity are:
Direct material
Direct labor
Variable overhead
Fixed overhead
($450,000/150,000 units)
Variable marketing costs
Fixed marketing and administrative costs
($210,000/150,000 units)
Total
Per Unit
$1.00
2.00
1.50
3.00
1.05
1.40
$9.95
Required:
a.
Compute the firm’s operating income before income taxes if the firm produced
and sold 110,000 units in 2001.
b.
For 2002, the firm expects to sell the same number of units as it sold in 2001.
However, in a trade newspaper, the firm noticed an invitation to bid on selling AB
to a state government. There are no marketing costs associated with the order if
Davis is awarded the contract. The company wishes to prepare a bid for 40,000
units at its full manufacturing cost plus $ 0.25 per unit. How much should it bid?
If Davis is successful at getting the contract, what would be its effect on operating
income?
c.
Assume that the company is awarded the contract on January 2, 2002, and in
addition it also receives an order from a foreign vendor for 40,000 units at the
regular price of $15 per unit. The foreign shipment will require the firm to incur
its normal marketing costs. The government contract contains a 10-day escape
clause (i.e., the firm can reject the contract within 10 days without any penalty). If
the firm accepts the government contract, overtime pay at 1½ times the straight
time rate will be paid on the 40,000 units. In addition, fixed overhead will
increase by $60,000 and variable overhead will behave in its normal pattern. The
company has the capacity to product both orders. Decide the following:
1.
Should the firm accept the foreign offer? Show the effect on operating
income of accepting the order.
2.
Assuming the foreign order is accepted, should the firm accept the
government order? Show the effect on operating income of accepting the
government order.
12–36
Chapter 12
Relevant Costing
ANSWER:
a.
Sales (110,000 × $15)
– VC (110,000 × $5.55)
= CM
– FC ($450,000 + $210,000)
= Operating Income
b.
Full cost to manufacture = $7.50
+ profit
.25
Bid
$7.75
SP
– VC
CM
c.
$1,650,000
(610,500 )
$1,039,500
(660,000 )
$ 379,500
$7.75
(4.50 )
$3.25 × 40,000 units = $130,000 increase in operating income.
1.
SP
$15.00
– VC
(6.55 ) ($1 + $3 + $1.50 + $1.05)
CM
$ 8.45 × 40,000 =
$338,000
– FC
(60,000 )
Increase in Operating Income
$278,000
2.
Both orders can be accepted even if the increased costs of $40,000 for labor and
$60,000 for fixed overhead are assigned to the government order.
DIFFICULT
CHAPTER 13
THE MASTER BUDGET
MULTIPLE CHOICE
1.
A budget aids in
a.
b.
c.
d.
communication.
motivation.
coordination.
all of the above.
ANSWER:
2.
Planning
Controlling
Organizing
Staffing
ANSWER:
b
EASY
The preparation of an organization’s budget
a.
b.
c.
d.
forces management to look ahead and try to see the future of the organization.
requires that the entire management team work together to make and carry out the
yearly plan.
makes performance review possible at all levels of management.
all of the above.
ANSWER:
4.
EASY
Measuring the firm’s performance against established objectives is part of which of the
following functions?
a.
b.
c.
d.
3.
d
d
EASY
Which of the following is a basic element of effective budgetary control?
a.
b.
c.
d.
cost behavior patterns
cost-volume-profit analysis
standard costing
all of the above
ANSWER:
a
EASY
13–1
13–2
5.
Chapter 13
When actual performance varies from the budgeted performance, managers will be more
likely to revise future budgets if the variances were
a.
b.
c.
d.
controllable rather than uncontrollable.
uncontrollable rather than controllable.
favorable rather than unfavorable.
small.
ANSWER:
6.
b
EASY
A budget is
a.
b.
c.
d.
a planning tool.
a control tool.
a means of communicating goals to the firm’s divisions.
all of the above.
ANSWER:
d
EASY
Ineffective budgets and/or control systems are characterized by the use of
a.
b.
c.
d.
budgets as a planning tool only and disregarding them for control purposes.
budgets for motivation.
budgets for coordination.
the budget for communication.
ANSWER:
9.
MEDIUM
annual budget.
industry price and cost structure.
talents possessed by its managers.
board of directors.
ANSWER:
8.
b
External factors that cause the achievement of company goals are the
a.
b.
c.
d.
7.
The Master Budget
a
EASY
Strategic planning is
a.
b.
c.
d.
planning activities for promoting products for the future.
planning for appropriate assignments of resources.
setting standards for the use of important but hard-to-find materials.
stating and establishing long-term plans.
ANSWER:
d
EASY
Chapter 13
10.
The Master Budget
Key variables that are identified in strategic planning are
a.
b.
c.
d.
normally controllable if they are internal.
seldom if ever controllable.
normally controllable if they occur in a domestic market.
normally uncontrollable if they are internal.
ANSWER:
11.
c
EASY
Which of the following statements is true?
a.
b.
c.
d.
All organizations have the same set of budgets.
All organizations are required to budget.
Budgets are a quantitative expression of an organization’s goals and objectives.
Budgets should never be used to evaluate performance.
ANSWER:
c
EASY
Which of the following is not an “operating” budget?
a.
b.
c.
d.
sales budget
production budget
purchases budget
capital budget
ANSWER:
14.
EASY
middle
top
middle and top
operational
ANSWER:
13.
a
Tactical planning usually involves which level of management?
a.
b.
c.
d.
12.
13–3
d
EASY
The master budget is a static budget because it
a.
b.
c.
d.
is geared to only one level of production and sales.
never changes from one year to the next.
covers a preset period of time.
always contains the same operating and financial budgets.
ANSWER:
a
EASY
13–4
15.
Chapter 13
The master budget is a
a.
b.
c.
d.
static budget.
flexible budget.
qualitative expression of a prior goal.
qualitative expression of a future goal.
ANSWER:
16.
d
EASY
Which of the following is usually perceived as being the master budget’s greatest
advantage to management?
a.
b.
c.
d.
performance analysis
increased communication
increased coordination
required planning
ANSWER:
d
EASY
Chronologically, the first part of the master budget to be prepared would be the
a.
b.
c.
d.
sales budget.
production budget.
cash budget.
pro forma financial statements.
ANSWER:
19.
EASY
an operating budget.
a capital budget.
pro forma financial statements.
all of the above.
ANSWER:
18.
a
The master budget usually includes
a.
b.
c.
d.
17.
The Master Budget
a
EASY
An example of a recurring short-term plan is
a.
b.
c.
d.
a probable product line change.
expansion of plant and facilities.
a unit sales forecast.
a change in marketing strategies.
ANSWER:
c
EASY
Chapter 13
20.
The Master Budget
If the chief accountant of a firm has to prepare an operating budget for the coming year,
the first budget to be prepared is the
a.
b.
c.
d.
sales budget.
cash budget.
purchases budget.
capital budget.
ANSWER:
21.
EASY
capital budget.
cash budget.
purchases budget.
pro forma balance sheet.
ANSWER:
a
EASY
Budgeted production for a period is equal to
a.
b.
c.
d.
the beginning inventory + sales – the ending inventory.
the ending inventory + sales – the beginning inventory.
the ending inventory + the beginning inventory – sales.
sales – the beginning inventory + purchases.
ANSWER:
23.
a
It is least likely that a production budget revision would cause a revision in the
a.
b.
c.
d.
22.
13–5
b
EASY
Chronologically, in what order are the sales, purchases, and production budgets prepared?
a.
b.
c.
d.
sales, purchases, production
sales, production, purchases
production, sales, purchases
purchases, sales, production
ANSWER:
b
EASY
13–6
24.
Chapter 13
The material purchases budget tells a manager all of the following except the
a.
b.
c.
d.
quantity of material to be purchased each period.
quantity of material to be consumed each period.
cost of material to be purchased each period.
cash payment for material each period.
ANSWER:
25.
EASY
sales
material usage
revenues
general and administrative
ANSWER:
b
EASY
The amount of raw material purchased in a period may be different than the amount of
material used that period because
a.
b.
c.
d.
the number of units sold may be different from the number of units produced.
finished goods inventory may fluctuate during the period.
the raw material inventory may increase/decrease during the period.
companies often pay for material in the period after it is purchased.
ANSWER:
27.
d
Of the following budgets, which one is least likely to be determined by the dictates of top
management?
a.
b.
c.
d.
26.
The Master Budget
c
MEDIUM
A purchases budget is
a.
b.
c.
d.
not affected by the firm’s policy of granting credit to customers.
the same thing as a production budget.
needed only if a firm does not pay for its merchandise in the same period as it is
purchased.
affected by a firm’s inventory policy only if the firm purchases on credit.
ANSWER:
a
EASY
Chapter 13
28.
The Master Budget
13–7
Which of the following equations can be used to budget purchases?
(BI = beginning inventory, EI = ending inventory desired, CGS = budgeted cost of goods
sold, P = budgeted purchases)
a.
b.
c.
d.
P = CGS + BI – EI
P = CGS + BI
P = CGS + EI + BI
P = CGS + EI – BI
ANSWER:
29.
material purchases budget.
production budget.
pro forma income statement.
cash budget.
ANSWER:
a
EASY
A company that maintains a raw material inventory, which is based on the following
month’s production needs, will purchase less material than it uses in a month where
a.
b.
c.
d.
sales exceed production.
production exceeds sales.
planned production exceeds the next month’s planned production.
planned production is less than the next month’s planned production.
ANSWER:
31.
EASY
Both the budgeted quantity of material to be purchased and the budgeted quantity of
material to be consumed can be found in the
a.
b.
c.
d.
30.
d
c
MEDIUM
If a company has a policy of maintaining an inventory of finished goods at a specified
percentage of the next month’s budgeted sales, budgeted production for January will
exceed budgeted sales for January when budgeted
a.
b.
c.
d.
February sales exceed budgeted January sales.
January sales exceed budgeted December sales.
January sales exceed budgeted February sales.
December sales exceed budgeted January sales.
ANSWER:
a
MEDIUM
13–8
32.
Chapter 13
Depreciation on the production equipment would appear in which of the following
budgets?
a.
b.
c.
d.
cash budget
production budget
selling and administrative expense budget
manufacturing overhead budget
ANSWER:
33.
EASY
production
sales
cash
purchases
ANSWER:
b
EASY
The budgeted amount of selling and administrative expense for a period can be found in
the
a.
b.
c.
d.
sales budget.
cash budget.
pro forma income statement.
pro forma balance sheet.
ANSWER:
35.
d
The selling, general, and administrative expense budget is based on the _______________
budget.
a.
b.
c.
d.
34.
The Master Budget
c
EASY
Which of the following represents a proper sequencing in which the budgets below are
prepared?
a.
b.
c.
d.
Direct Material Purchases, Cash, Sales
Production, Sales, Income Statement
Sales, Balance Sheet, Direct Labor
Sales, Production, Manufacturing Overhead
ANSWER:
d
EASY
Chapter 13
36.
The Master Budget
The detailed plan for the acquisition and replacement of major portions of property, plant,
and equipment is known as the
a.
b.
c.
d.
capital budget.
purchases budget.
commitments budget.
treasury budget.
ANSWER:
37.
EASY
labor budget.
pro forma income statement.
selling, general, and administrative expense budget.
cash budget.
ANSWER:
d
EASY
The cash budget ignores all
a.
b.
c.
d.
dividend payments.
sales of capital assets.
noncash accounting accruals.
sales of common stock.
ANSWER:
39.
a
The budgeted payment for labor cost each period would be found in the
a.
b.
c.
d.
38.
13–9
c
EASY
Which of the following items would not be found in the financing section of the cash
budget?
a.
b.
c.
d.
cash payments for debt retirement
cash payments for interest
dividend payments
payment of accounts payable
ANSWER:
d
EASY
13–10
40.
Chapter 13
The primary reason that managers impose a minimum cash balance in the cash budget is
a.
b.
c.
d.
because management needs discretionary cash for unforeseen business
opportunities.
managers lack discipline to control their spending.
that it protects the organization from the uncertainty of the budgeting process.
that it makes the financial statements look more appealing to creditors.
ANSWER:
41.
EASY
pro forma financial statements.
cash budget.
capital budget
production budget.
ANSWER:
a
EASY
The pro forma income statement is not a component of the
a.
b.
c.
d.
master budget.
financial budgets.
operating budgets.
capital budget.
ANSWER:
43.
c
Chronologically, the last part of the master budget to be prepared would be the
a.
b.
c.
d.
42.
The Master Budget
c
EASY
A pro forma financial statement is
a.
b.
c.
d.
a financial statement for past periods.
a projected or budgeted financial statement.
presented for the form but contains no dollar amounts.
a statement of planned production.
ANSWER:
b
EASY
Chapter 13
44.
The Master Budget
A master budget contains which of the following?
a.
b.
c.
d.
Sales
yes
no
no
yes
ANSWER:
45.
a
Pro forma statements
yes
yes
no
yes
EASY
production budget.
sales budget.
purchases budget.
pro forma income statement.
ANSWER:
d
EASY
A budget that includes a 12-month planning period at all times is called a ____________
budget.
a.
b.
c.
d.
pro forma
flexible
master
continuous
ANSWER:
47.
Production
yes
no
no
no
The budgeted cost of products to be sold in a future period would be found in the
a.
b.
c.
d.
46.
13–11
d
EASY
The method of budgeting that adds one month’s budget to the end of the plan when the
current month’s budget is dropped from the plan is called ____________ budgeting.
a.
b.
c.
d.
long-term
operations
incremental
continuous
ANSWER:
d
EASY
13–12
48.
Chapter 13
Slack in operating budgets
a.
b.
c.
d.
results from unintentional managerial acts.
makes an organization more efficient and effective.
requires managers to work harder to achieve the budget.
is greater when managers are allowed to participate in the budgeting process.
ANSWER:
49.
d
EASY
Budget slack is a condition in which
a.
b.
c.
d.
demand is low at various times of the year.
excess machine capacity exists in some areas of the plant.
there is an intentional overestimate of expenses or an underestimate of revenues.
managers grant favored employees extra time off.
ANSWER:
50.
The Master Budget
c
EASY
E Co. has the following expected pattern of collections on credit sales: 70 percent
collected in the month of sale, 15 percent in the month after the month of sale, and 14
percent in the second month after the month of sale. The remaining 1 percent is never
collected. At the end of May, E Co. has the following accounts receivable balances:
From April sales
From May sales
$21,000
48,000
E’s expected sales for June are $150,000. What were total sales for April?
a.
b.
c.
d.
$150,000
$72,414
$70,000
$140,000
ANSWER:
d
MEDIUM
Chapter 13
51.
The Master Budget
Ball Company has a policy of maintaining an inventory of finished goods equal to 30
percent of the following month’s sales. For the forthcoming month of March, Ball has
budgeted the beginning inventory at 30,000 units and the ending inventory at 33,000 units.
This suggests that
a.
b.
c.
d.
February sales are budgeted at 10,000 units less than March sales.
March sales are budgeted at 10,000 units less than April sales.
February sales are budgeted at 3,000 units less than March sales.
March sales are budgeted at 3,000 units less than April sales.
ANSWER:
52.
13–13
b
MEDIUM
Budgeted sales for the first six months of 2001 for Henry Corp. are listed below:
UNITS:
JANUARY
6,000
FEBRUARY
7,000
MARCH
8,000
APRIL
7,000
MAY
5,000
JUNE
4,000
Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent
of the next month’s budgeted sales. If Henry Corp. plans to produce 6,000 units in June,
what are budgeted sales for July?
a.
b.
c.
d.
3,600 units
1,000 units
9,000 units
8,000 units
ANSWER:
53.
c
DIFFICULT
McGill Co. manufactures card tables. The company has a policy of maintaining a finished
goods inventory equal to 40 percent of the next month’s planned sales. Each card table
requires 3 hours of labor. The budgeted labor rate for the coming year is $13 per hour.
Planned sales for the months of April, May, and June are respectively 4,000; 5,000; and
3,000 units. The budgeted direct labor cost for June for McGill Co. is $136,500. What are
budgeted sales for July for McGill Co.?
a.
b.
c.
d.
3,500 units
4,250 units
4,000 units
3,750 units
ANSWER:
b
DIFFICULT
13–14
54.
Chapter 13
The Master Budget
Budgeted sales for K Inc. for the first quarter of 2001 are shown below:
UNITS:
JANUARY
35,000
FEBRUARY
25,000
MARCH
32,000
The company has a policy that requires the ending inventory in each period to be 10
percent of the following period’s sales. Assuming that the company follows this policy,
what quantity of production should be scheduled for February?
a.
b.
c.
d.
24,300 units
24,700 units
25,000 units
25,700 units
ANSWER:
55.
d
MEDIUM
Budgeted sales for the first six months of 2001 for Henry Corp. are listed below:
UNITS:
JANUARY
6,000
FEBRUARY
7,000
MARCH
8,000
APRIL
7,000
MAY
5,000
JUNE
4,000
Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent
of the next month’s budgeted sales. How many units has Henry Corp. budgeted to produce
in the first quarter of 2001?
a.
b.
c.
d.
21,400 units
20,600 units
19,000 units
23,000 units
ANSWER:
a
DIFFICULT
Chapter 13
56.
The Master Budget
13–15
Production of Product X has been budgeted at 200,000 units for May. One unit of X
requires 2 lbs. of raw material. The projected beginning and ending materials inventory for
May are:
Beginning inventory: 2,000 lbs.
Ending inventory: 10,000 lbs.
How many lbs. of material should be purchased during May?
a.
b.
c.
d.
192,000
208,000
408,000
416,000
ANSWER:
57.
c
MEDIUM
X Co. manufactures toy airplanes. Information on X Co.’s labor costs follow:
Sales commissions
Administration
Indirect factory labor
Direct factory labor
$5 per plane
$10,000 per month
$3 per plane
$5 per plane
The following information applies to the upcoming month of July for X Co.:
Budgeted production
Budget sales
1,200 units
1,000 units
What amount of budgeted labor cost would appear in the July selling, general, and
administrative expense budget?
a.
b.
c.
d.
$10,000
$16,000
$15,000
$23,000
ANSWER:
c
MEDIUM
13–16
58.
Chapter 13
McGill Co. manufactures card tables. The company has a policy of maintaining a finished
goods inventory equal to 40 percent of the next month’s planned sales. Each card table
requires 3 hours of labor. The budgeted labor rate for the coming year is $13 per hour.
Planned sales for the months of April, May, and June are respectively 4,000; 5,000; and
3,000 units. What is McGill Co.’s budgeted direct labor cost for May?
a.
b.
c.
d.
$54,600
$163,800
$226,200
$179,400
ANSWER:
59.
The Master Budget
b
DIFFICULT
X Co. manufactures toy airplanes. Information on X Co.’s labor costs follow:
Sales commissions
Administration
Indirect factory labor
Direct factory labor
$5 per plane
$10,000 per month
$3 per plane
$5 per plane
The following information applies to the upcoming month of July for X Co.:
Budgeted production
Budget sales
1,200 units
1,000 units
What is X Co.’s budgeted factory labor cost for July?
a.
b.
c.
d.
$8,000
$15,600
$25,600
$9,600
ANSWER:
d
MEDIUM
Chapter 13
60.
The Master Budget
13–17
E Co. has the following expected pattern of collections on credit sales: 70 percent
collected in the month of sale, 15 percent in the month after the month of sale, and 14
percent in the second month after the month of sale. The remaining 1 percent is never
collected.
At the end of May, E Co. has the following accounts receivable balances:
From April sales
From May sales
$21,000
48,000
E’s expected sales for June are $150,000. How much cash will E Co. expect to collect in
June?
a.
b.
c.
d.
$127,400
$129,000
$148,600
$152,520
ANSWER:
61.
c
DIFFICULT
For the month of October, P Corp. predicts total cash collections to be $1 million. Also for
October, P Corp. estimates that its beginning cash balance will be $50,000 and that it will
borrow cash in the amount of $70,000. If P Corp. estimates an ending cash balance of
$30,000 for October, what must its projected cash disbursements be?
a.
b.
c.
d.
$1,090,000
$1,120,000
$1,070,000
$1,020,000
ANSWER:
a
MEDIUM
13–18
62.
Chapter 13
The Master Budget
Volkers Hospital has provided you with the following budget information for April:
Cash collections
April 1 cash balance
Cash disbursements
$876,000
23,000
978,600
Volkers has a policy of maintaining a minimum cash balance of $20,000 and borrows only
in $1,000 increments. How much will Volkers borrow in April?
a.
b.
c.
d.
$80,000
$79,600
$99,000
$100,000
ANSWER:
d
MEDIUM
Use the following information for questions 63–65.
Beginning cash balance
Cash collections
Cash disbursements
Cash excess (shortage)
Borrowing (repayments)
Ending cash
63.
In CASE A, what are the budgeted cash collections?
a.
b.
c.
d.
$700
$500
$300
$400
ANSWER:
64.
CASE A
$ 100
?
500
?
300
200
CASH BUDGET
CASE B
$ 300
400
?
?
100
200
c
MEDIUM
In CASE B, what are the budgeted cash disbursements?
a.
b.
c.
d.
$600
$700
$500
$400
ANSWER:
a
MEDIUM
CASE C
$ 700
?
600
400
?
100
Chapter 13
65.
The Master Budget
13–19
In CASE C, what are the budgeted cash collections?
a.
b.
c.
d.
$200
$300
$400
$500
ANSWER:
b
MEDIUM
Use the following information for questions 66–69.
Beginning cash
Cash collections
Cash disbursements
Cash excess (shortage)
Borrowing (repayments)
Ending Cash
66.
What is the correct value of item A in the cash budget?
a.
b.
c.
d.
$200
$300
$400
$900
ANSWER:
67.
QTR 1
$300
900
B
200
?
200
CASH BUDGET
QTR 2
QTR 3
QTR 4
$200
$ ?
$?
700
C
?
?
600
?
(400 )
?
?
600
(300 )
0
?
200
?
b
EASY
What is the correct value of item B in the cash budget?
a.
b.
c.
d.
$1,000
$1,200
$800
$700
ANSWER:
a
MEDIUM
YEAR
$ A
3,300
3,500
?
?
D
13–20
68.
Chapter 13
What is the correct value of item C in the cash budget?
a.
b.
c.
d.
$1,400
$1,200
$900
$700
ANSWER:
69.
a
MEDIUM
Managers may be more willing to accept a budget if
a.
b.
c.
d.
it is continuous.
it is imposed.
it is very hard to attain.
they can participate in its development.
ANSWER:
d
EASY
(Appendix) A budget manual should include which of the following?
a.
b.
c.
d.
a list of specific budgetary activities to be performed
original, revised, and approved budgets
a calendar of scheduled budgetary activities
all of the above
ANSWER:
72.
MEDIUM
$200
$300
$400
$1,000
ANSWER:
71.
c
What is the correct value of item D in the cash budget?
a.
b.
c.
d.
70.
The Master Budget
d
EASY
Which of the following is not true about an imposed budget?
a.
b.
c.
d.
It reduces the budgeting process time frame.
It uses the knowledge of top management as it relates to resource availability.
It enhances coordination.
It increases the feeling of teamwork.
ANSWER:
d
EASY
Chapter 13
73.
The Master Budget
A disadvantage of participatory budgets is that
a.
b.
c.
d.
there is a high degree of acceptance of the goals and objectives by operating
management.
they are usually more realistic.
they lead to better morale and higher motivation.
they usually require more time to prepare.
ANSWER:
74.
13–21
d
EASY
The master budget
a.
b.
c.
d.
reflects the determination of an organization’s cost of capital.
serves as a managerial tool for the organization.
includes only an organization’s pro forma financial statements.
utilizes only information from the financial accounting system.
ANSWER:
b
EASY
SHORT ANSWER/PROBLEMS
1.
Explain why managers might want to build slack into a budget.
ANSWER: Building slack into the budget allows managers to achieve the budgeted
level of performance with less effort. Thus, they have a higher probability of achieving the
budget and any bonus or compensation that may be tied to that performance standard.
MEDIUM
2.
What role does the budgeting activity play in managerial compensation and performance
evaluation?
ANSWER: Once set, the budget is not only a plan for the organization, but it becomes
a standard against which actual performance may be compared. Recognizing the budget as
a performance standard, organizations may base employee compensation (to some extent)
on how well actual performance compares to the budgeted performance. Such a
compensatory arrangement frequently involves a bonus plan that permits bonuses to go up
as performance relative to the budget goes up.
MEDIUM
13–22
3.
Chapter 13
The Master Budget
Why will there frequently be a difference between the budgeted cost of material in the
material purchases budget and the budgeted cash disbursement for material in the cash
budget?
ANSWER: Because firms do not necessarily pay for material in the same period in
which they are purchased, the amounts in these two budgets will frequently differ. The
material purchases budget is based on the cost of material purchased in a period while the
cash budget only reflects expected actual payments for material in the period.
MEDIUM
4.
Explain why different types of organizations will have different sets of budgets.
ANSWER: We may think of the set of budgets as the plan for producing outputs and
acquiring inputs. As different organizations have different inputs and outputs, we would
naturally expect them to have different budgets. For example, a retailing firm would find
no need for a production budget because it does not manufacture anything. On the other
hand, the need for a production budget in a manufacturing organization is obvious.
Likewise, governmental organizations will have budgets that are different than private
organizations.
MEDIUM
5.
Why have many managers in recent years moved toward emphasizing employee
participation in the budgeting process rather than simply imposing the budget on the
employees?
ANSWER: Many managers believe that the quality of the budget is enhanced through
employee participation. This is attributable in part to the fact that many employees possess
technical information that management does not have. Through the budgeting process this
technical information is imparted to management. Further, participation in the budgeting
process may lead employees to be more attentive to the budget and feel like a more
important part of the organizational team. Employees feel more committed to meeting a
budget they helped prepare. Preparing a budget gives the preparer management training,
which makes him or her better prepared for advancement in the company.
MEDIUM
Chapter 13
6.
The Master Budget
13–23
The I. M. Broke Co. has the following collection pattern for its accounts receivable:
40 percent in the month of sale
50 percent in the month following the sale
8 percent in the second month following the sale
2 percent uncollectible
The company has recent credit sales as follows:
April:
May:
June:
$200,000
420,000
350,000
How much should the company expect to collect on its receivables in June?
ANSWER:
JUNE COLLECTIONS
From April sales: $200,000 × .08
From May sales: 420,000 × .50
From June sales: 350,000 × .40
Total
MEDIUM
$ 16,000
210,000
140,000
$366,000
13–24
Chapter 13
The Master Budget
Use the following information for questions 7 and 8.
7.
Barnes Company manufactures three products (A, B, and C) from three raw materials (X,
Y, and Z). The following table indicates the number of pounds of each material that is
required to manufacture each type of product:
Product
A
B
C
Material X
2
2
3
Material Y
3
1
2
Material Z
2
2
2
The company has a policy of maintaining an inventory of finished goods on all three
products equal to 25 percent of the next month’s budgeted sales. Listed below is the sales
budget for the first quarter of 2001:
Month
Jan.
Feb.
Mar.
Product A
10,000
9,000
11,000
Product B
11,000
12,000
10,000
Product C
12,000
8,000
10,000
Assuming that the company meets its required inventory policy, prepare a production
budget for the first 2 months of 2001 for each of the three products.
ANSWER:
Required ending inventory
Projected sales
Total production needs
Less the beginning inventory
Budgeted production
Product A
January
February
2,250
2,750
10,000
9,000
12,250
11,750
(2,500 )
(2,250 )
9,750
9,500
Required ending inventory
Projected sales
Total production needs
Less the beginning inventory
Budgeted production
Product B
January
February
3,000
2,500
11,000
12,000
14,000
14,500
(2,750 )
(3,000 )
11,250
11,500
Required ending inventory
Projected sales
Total production needs
Less the beginning inventory
Budgeted production
Product C
January
February
2,000
2,500
12,000
8,000
14,000
10,500
(3,000 )
(2,000 )
11,000
8,500
MEDIUM
Chapter 13
8.
The Master Budget
13–25
Unit costs of materials X, Y, and Z are respectively $4, $3, and $5. The Barnes Company
has a policy of maintaining its raw material inventories at 50 percent of the next month’s
production needs. Assuming that this policy is satisfied, prepare a material purchases
budget for all three materials in both pounds and dollars for January.
ANSWER:
Prod.
× lbs.
Tot.
Product A
Jan.
Feb.
9,750
9,500
×2
×2
19,500 19,000
Material X Purchases
Product B
Jan.
Feb.
11,250 11,500
×2
×2
22,500 23,000
Required EI (19,000 + 23,000 + 25,500) × .50 =
Needed: (19,500 + 22,500 + 33,000) =
Total raw material X needed:
Less: BI (75,000 × .50)
Material X to be purchased in January (pounds):
Multiply by cost of Material X per lb.:
Budgeted Cost of Material X for January:
Prod.
× lbs.
Tot.
Product A
Jan.
Feb.
9,750
9,500
×3
×3
29,250 28,500
Material Y Purchases
Product B
Jan.
Feb.
11,250 11,500
×1
×1
11,250 11,500
Required EI (28,500 + 11,500 + 17,000) × .50 =
Needed: (29,250 + 11,250 + 22,000) =
Total raw material Y needed:
Less BI (62,500 × .50)
Material Y to be purchased in January (pounds):
Multiply by cost of Material Y per lb.:
Budgeted Cost of Material Y for January:
Product C
Jan.
Feb.
11,000
8,500
×3
×3
33,000 25,500
33,750
75,000
108,750
(37,500 )
71,250
× $4
$285,000
Product C
Jan.
Feb.
11,000
8,500
×2
×2
22,000 17,000
28,500
62,500
91,000
(31,250 )
59,750
× $3
$179,250
13–26
Chapter 13
Prod.
× lbs.
Tot.
Product A
Jan.
Feb.
9,750
9,500
×2
×2
19,500 19,000
Material Z Purchases
Product B
Jan.
Feb.
11,250 11,500
×2
×2
22,500 23,000
Required EI (19,000 + 23,000 + 17,000) × .50 =
Needed: (19,500 + 22,500 + 22,000) =
Total raw material Z needed:
Less BI (64,000 × .50)
Material Z to be purchased in January (pounds):
Multiply by cost of Material Z per lb.:
Budgeted Cost of Material Z for January:
The budgeted cost of all materials to be purchased in
Jan. would be $285,000 + $179,250 + $307,500 =
DIFFICULT
The Master Budget
Product C
Jan.
Feb.
11,000
8,500
×2
×2
22,000 17,000
29,500
64,000
93,500
(32,000 )
61,500
×5
$307,500
$771,750
Chapter 13
The Master Budget
13–27
Use the following information for questions 9 and 10.
9.
Farr Music Inc. sells Baldwin pianos. The following information regarding operating costs
has been extracted from budgets of Farr Music for December of this year and the first few
months of next year:
Payroll
Insurance
Rent
Depreciation
Taxes
Dec.
$12,000
4,000
6,000
2,000
1,200
Jan.
$13,000
4,000
6,000
2,000
1,400
Feb.
$22,000
4,000
6,000
2,000
2,300
Mar.
$16,000
4,000
6,000
2,000
2,000
In addition to the above operating costs, enough pianos are purchased each month to
maintain the inventory at 40 percent of the projected next month’s sales. The firm is
expected to be in compliance with this policy on December 1. Budgeted sales are:
Budgeted sales in units:
Dec.
40
Jan.
45
Feb.
60
Mar.
50
Apr.
40
The average cost of a piano is $500. Merchandise is paid for in the month following its
purchase. All other expenses are paid in the month in which they are incurred. Prepare a
budget of the cash disbursements for Farr Music Inc. for the first three months of next
year.
First, prepare a purchases budget for December through March for the pianos.
ANSWER:
Required ending inventory
Projected sales
Total pianos needed
Less the beginning inventory
Pianos to be purchased
× the cost of the piano
Budgeted purchases
Dec.
18
40
58
(16 )
42
× $500
$21,000
Payroll
Insurance
Rent
Taxes
Merchandise purchases
Total
Budgeted cash disbursements
Jan.
Feb.
Mar.
$13,000
$22,000
$16,000
4,000
4,000
4,000
6,000
6,000
6,000
1,400
2,300
2,000
21,000
25,500
28,000
$45,400
$59,800
$56,000
MEDIUM
Jan.
24
45
69
(18 )
51
× $500
$25,500
Feb.
20
60
80
(24 )
56
× $500
$28,000
Mar.
16
50
66
(20 )
46
× $500
$23,000
13–28
10.
Chapter 13
The Master Budget
The average cost of a piano is $500. Merchandise is paid for in the month following its
purchase. All other expenses are paid in the month in which they are incurred. On average,
a piano sells for $1,500. Of each sale, 40 percent of the sales price is collected in the
month of sale. The balance is collected in the month following the sale. Prepare a cash
budget for the first three months of next year. The beginning cash balance on January 1 is
budgeted to be $50,000.
ANSWER:
Beginning cash
Cash collections:
Dec. sales
Jan. sales
Feb. sales
Mar. Sales
Cash available
Less cash disb.
Ending cash
MEDIUM
CASH BUDGET
FARR MUSIC INC.
Jan.
Feb.
$50,000
$ 67,600
36,000
27,000
_______
113,000
(45,400 )
$ 67,600
40,500
36,000
_______
144,100
(59,800 )
$ 84,300
Mar.
$ 84,300
54,000
30,000
168,300
(56,000 )
$112,300
Chapter 13
11.
The Master Budget
13–29
Shown below are the totals from 2002 period budgets.
Revenue budget
Materials usage from production budget
Labor cost budget
Manufacturing overhead budget
General and administrative budget
Capital expenditure budget
Work in Progress Inventories:
Beginning of 2002
End of 2002
Finished Goods Inventory:
Beginning of 2002
End of 2002
Tax Rate
$100,000
15,000
20,000
20,000
30,000
20,000
10,000
5,000
15,000
10,000
40%
Required: Prepare a forecasted Income Statement for 2002.
ANSWER:
Revenue
Less: COGS
COGM
RM used (production budget)
DL (labor budget)
Mfg. OH (OH budget)
Current Mfg. costs
Plus: Beg. WIP
Total In-Process
Less: End WIP
COGM
Plus: Beg. FG
Goods Avail. for Sale
Less: End FG
COGS
Gross Margin
Less: G & A expense budget
Income before income taxes
Less: taxes @ 40%
Net Income
MEDIUM
$100,000
$ 15,000
20,000
20,000
$ 55,000
10,000
$ 65,000
(5,000 )
$ 60,000
15,000
$ 75,000
(10,000 )
65,000
$ 35,000
(30,000 )
$ 5,000
(2,000 )
$ 3,000
13–30
12.
Chapter 13
The Master Budget
The following are forecasts of sales and purchases for a company.
April
May
June
Sales
$80,000
90,000
85,000
Purchases
$30,000
40,000
30,000
All sales are on credit. Records show that 70 percent of the customers pay the month of the
sale, 20 percent pay the month after the sale, and the remaining 10 percent pay the second
month after the sale. Purchases are all paid the following month at a 2 percent discount.
Cash disbursements for operating expenses in June were $5,000.
Required: Prepare a schedule of cash receipts and disbursement for June.
ANSWER:
Schedules of Cash Receipts and Disbursements for June
Cash Receipts:
From current month sale (June)
From 1 month prior sale (May)
From 2 month prior sale (April)
Total cash receipts
Cash Disbursements:
May purchases @ 98% (less discount)
Operating expenses
Total cash disbursements
Net increase in cash for June
MEDIUM
(.7 × 85,000)
(.2 × 90,000)
(.1 × 80,000)
$59,500
18,000
8,000
$85,500
(.98 × 40,000)
$39,200
5,000
$44,200
$41,300
Chapter 13
13.
The Master Budget
13–31
Flour International is in the building construction business. In 2002, it is expected that 40
percent of a month’s sales will be collected in cash, with the balance being collected the
following month. Of the purchases, 50 percent are paid the following month, 30 percent
are paid in two months, and the remaining 20 percent are paid during the month of
purchase. The sales force receives $2,000 a month base pay plus a 2 percent commission.
Labor expenses are expected to be $4,000 a month. Other operating expenses are expected
to run about $2,000 a month, including $500 for depreciation. The ending cash balance for
2001 was $4,500.
2001—Actual
November
December
2002—Budgeted
January
February
March
Sales
Purchases
$80,000
90,000
$70,000
80,000
70,000
90,000
30,000
70,000
60,000
50,000
Required:
a.
Prepare a cash budget and determine the projected ending cash balances for the
first three months of 2002.
b.
Determine the months that the company would either borrow or invest cash.
13–32
Chapter 13
ANSWER:
a.
Sales
Purchases
2001
Nov.
$80,000
70,000
Dec.
$90,000
80,000
Cash Receipts:
Beginning cash balance
From current month sales
From prior month sales
Total cash receipts
Total cash available
Cash Disbursements:
From Purchases:
Current month @ 20%
From 1 mo. prior purchases @ 50%
From 2 mo. prior purchases @ 30%
Total payments on purchases
Labor expense
Sales salaries
Commissions @ 2% of sales
Other expenses exclude depr. ($500)
Total cash disbursements
Ending cash balance
b.
Borrow—March; invest—January and February
DIFFICULT
The Master Budget
Jan.
$70,000
70,000
2002
Feb.
$90,000
60,000
Mar.
$30,000
50,000
Jan.
$ 4,500
$28,000
54,000
$82,000
$86,500
Feb.
$ 2,600
$36,000
42,000
$78,000
$80,600
Mar.
$ 300
$12,000
54,000
$66,000
$66,300
$14,000
40,000
21,000
$75,000
4,000
2,000
1,400
1,500
$83,900
$ 2,600
$12,000
35,000
24,000
$71,000
4,000
2,000
1,800
1,500
$80,300
$ 300
$10,000
30,000
21,000
$61,000
4,000
2,000
600
1,500
$69,100
$ (2,800 )
CHAPTER 14
CAPITAL BUDGETING
MULTIPLE CHOICE
1.
Which of the following capital budgeting techniques ignores the time value of money?
a.
b.
c.
d.
payback period
net present value
internal rate of return
profitability index
ANSWER:
2.
net present value
internal rate of return
payback period
profitability index
ANSWER:
c
EASY
In comparing two projects, the ___________ is often used to evaluate the relative
riskiness of the projects.
a.
b.
c.
d.
payback period
net present value
internal rate of return
discount rate
ANSWER:
4.
EASY
Which of the following capital budgeting techniques may potentially ignore part of a
project’s relevant cash flows?
a.
b.
c.
d.
3.
a
a
EASY
Which of the following capital budgeting techniques does not routinely rely on the
assumption that all cash flows occur at the end of the period?
a.
b.
c.
d.
internal rate of return
net present value
profitability index
payback period
ANSWER:
d
EASY
14–1
14–2
5.
Chapter 14
Assume that a project consists of an initial cash outlay of $100,000 followed by equal
annual cash inflows of $40,000 for 4 years. In the formula X = $100,000/$40,000, X
represents the
a.
b.
c.
d.
payback period for the project.
profitability index of the project.
internal rate of return for the project.
project’s discount rate.
ANSWER:
6.
EASY
net present value.
payback period.
internal rate of return.
profitability index.
ANSWER:
b
EASY
The payback method assumes that all cash inflows are reinvested to yield a return equal
to
a.
b.
c.
d.
the discount rate.
the hurdle rate.
the internal rate of return.
zero.
ANSWER:
8.
a
All other factors equal, a large number is preferred to a smaller number for all capital
project evaluation measures except
a.
b.
c.
d.
7.
Capital Budgeting
d
EASY
The payback method measures
a.
b.
c.
d.
how quickly investment dollars may be recovered.
the cash flow from an investment.
the economic life of an investment.
the profitability of an investment.
ANSWER:
a
EASY
Chapter 14
9.
Capital Budgeting
If investment A has a payback period of three years and investment B has a payback
period of four years, then
a.
b.
c.
d.
A is more profitable than B.
A is less profitable than B.
A and B are equally profitable.
the relative profitability of A and B cannot be determined from the information
given.
ANSWER:
10.
EASY
length of time over which the investment will provide cash inflows.
length of time over which the initial investment is recovered.
shortest length of time over which an investment may be depreciated.
shortest length of time over which the net present value will be positive.
ANSWER:
b
EASY
Which of the following capital budgeting techniques has been criticized because it fails to
consider investment profitability?
a.
b.
c.
d.
payback method
accounting rate of return
net present value method
internal rate of return
ANSWER:
12.
d
The payback period is the
a.
b.
c.
d.
11.
14–3
a
EASY
The time value of money is explicitly recognized through the process of
a.
b.
c.
d.
interpolating.
discounting.
annuitizing.
budgeting.
ANSWER:
b
EASY
14–4
13.
Chapter 14
The time value of money is considered in long-range investment decisions by
a.
b.
c.
d.
assuming equal annual cash flow patterns.
investing only in short-term projects.
assigning greater value to more immediate cash flows.
ignoring depreciation and tax implications of the investment.
ANSWER:
14.
EASY
method of financing the project under consideration
timing of cash flows relating to the project
impact of the project on income taxes to be paid
amounts of cash flows relating to the project
ANSWER:
a
EASY
As to a capital investment, net cash inflow is equal to the
a.
b.
c.
d.
cost savings resulting from the investment.
sum of all future revenues from the investment.
net increase in cash receipts over cash payments.
net increase in cash payments over cash receipts.
ANSWER:
16.
c
When using one of the discounted cash flow methods to evaluate the desirability of a
capital budgeting project, which of the following factors is generally not important?
a.
b.
c.
d.
15.
Capital Budgeting
c
EASY
In a discounted cash flow analysis, which of the following would not be consistent with
adjusting a project’s cash flows to account for higher-than-normal risk?
a.
b.
c.
d.
increasing the expected amount for cash outflows
increasing the discounting period for expected cash inflows
increasing the discount rate for cash outflows
decreasing the amount for expected cash inflows
ANSWER:
c
MEDIUM
Chapter 14
17.
Capital Budgeting
When a project has uneven projected cash inflows over its life, an analyst may be forced
to use ___________________ to find the project’s internal rate of return.
a.
b.
c.
d.
a screening decision
a trial-and-error approach
a post investment audit
a time line
ANSWER:
18.
EASY
prime rate.
discount rate.
cutoff rate.
internal rate of return.
ANSWER:
b
EASY
A firm’s discount rate is typically based on
a.
b.
c.
d.
the interest rates related to the firm’s bonds.
a project’s internal rate of return.
its cost of capital.
the corporate Aa bond yield.
ANSWER:
20.
b
The interest rate used to find the present value of a future cash flow is the
a.
b.
c.
d.
19.
14–5
c
EASY
In capital budgeting, a firm’s cost of capital is frequently used as the
a.
b.
c.
d.
internal rate of return.
accounting rate of return.
discount rate.
profitability index.
ANSWER:
c
EASY
14–6
21.
Chapter 14
The net present value method assumes that all cash inflows can be immediately
reinvested at the
a.
b.
c.
d.
cost of capital.
discount rate.
internal rate of return.
rate on the corporation’s short-term debt.
ANSWER:
22.
EASY
a decrease in the marginal tax rate
a decrease in the discount rate
a decrease in the rate of depreciation
an increase in the life expectancy of the depreciable asset
ANSWER:
b
MEDIUM
To reflect greater uncertainty (greater risk) about a future cash inflow, an analyst could
a.
b.
c.
d.
increase the discount rate for the cash flow.
decrease the discounting period for the cash flow.
increase the expected value of the future cash flow before it is discounted.
extend the acceptable length for the payback period.
ANSWER:
24.
b
Which of the following changes would not decrease the present value of the future
depreciation deductions on a specific depreciable asset?
a.
b.
c.
d.
23.
Capital Budgeting
a
EASY
A change in the discount rate used to evaluate a specific project will affect the project’s
a.
b.
c.
d.
life.
payback period.
net present value.
total cash flows.
ANSWER:
c
EASY
Chapter 14
25.
Capital Budgeting
For a project such as plant investment, the return that should leave the market price of the
firm’s stock unchanged is known as the
a.
b.
c.
d.
cost of capital.
net present value.
payback rate.
internal rate of return.
ANSWER:
26.
MEDIUM
interest expense is deductible for tax purposes.
principal payments on debt are deductible for tax purposes.
the cost of capital is a deductible expense for tax purposes.
dividend payments to stockholders are deductible for tax purposes.
ANSWER:
a
EASY
The basis for measuring the cost of capital derived from bonds and preferred stock,
respectively, is the
a.
b.
c.
d.
pre-tax rate of interest for bonds and stated annual dividend rate less the expected
earnings per share for preferred stock.
pre-tax rate of interest for bonds and stated annual dividend rate for preferred
stock.
after-tax rate of interest for bonds and stated annual dividend rate less the
expected earnings per share for preferred stock.
after-tax rate of interest for bonds and stated annual dividend rate for preferred
stock.
ANSWER:
28.
a
The pre-tax cost of capital is higher than the after-tax cost of capital because
a.
b.
c.
d.
27.
14–7
d
MEDIUM
The combined weighted average interest rate that a firm incurs on its long-term debt,
preferred stock, and common stock is the
a.
b.
c.
d.
cost of capital.
discount rate.
cutoff rate.
internal rate of return.
ANSWER:
a
EASY
14–8
29.
Chapter 14
The weighted average cost of capital that is used to evaluate a specific project should be
based on the
a.
b.
c.
d.
mix of capital components that was used to finance a project from last year.
overall capital structure of the corporation.
cost of capital for other corporations with similar investments.
mix of capital components for all capital acquired in the most recent fiscal year.
ANSWER:
30.
EASY
callable.
participating.
cumulative.
convertible.
ANSWER:
d
MEDIUM
The weighted average cost of capital approach to decision making is not directly affected
by the
a.
b.
c.
d.
value of the common stock.
current budget for capital expansion.
cost of debt outstanding.
proposed mix of debt, equity, and existing funds used to implement the project.
ANSWER:
32.
b
Debt in the capital structure could be treated as if it were common equity in computing
the weighted average cost of capital if the debt were
a.
b.
c.
d.
31.
Capital Budgeting
b
EASY
The ___________________ is the highest rate of return that can be earned from the most
attractive, alternative capital project available to the firm.
a.
b.
c.
d.
accounting rate of return
internal rate of return
hurdle rate
opportunity cost of capital
ANSWER:
d
MEDIUM
Chapter 14
33.
Capital Budgeting
If an analyst desires a conservative net present value estimate, she will assume that all
cash inflows occur at
a.
b.
c.
d.
mid year.
the beginning of the year.
year end.
irregular intervals.
ANSWER:
34.
EASY
It would increase the net present value of the proposal.
It would decrease the net present value of the proposal.
It would not affect the net present value of the proposal.
Potentially it could increase or decrease the net present value of the new lathe.
ANSWER:
a
EASY
The net present value method of evaluating proposed investments
a.
b.
c.
d.
measures a project’s internal rate of return.
ignores cash flows beyond the payback period.
applies only to mutually exclusive investment proposals.
discounts cash flows at a minimum desired rate of return.
ANSWER:
36.
c
The salvage value of an old lathe is zero. If instead, the salvage value of the old lathe was
$20,000, what would be the impact on the net present value of the proposal to purchase a
new lathe?
a.
b.
c.
d.
35.
14–9
d
EASY
Which of the following statements is true regarding capital budgeting methods?
a.
b.
c.
d.
The Fisher rate can never exceed a company’s cost of capital.
The internal rate of return measure used for capital project evaluation has more
conservative assumptions than the net present value method, especially for
projects that generate a positive net present value.
The net present value method of project evaluation will always provide the same
ranking of projects as the profitability index method.
The net present value method assumes that all cash inflows can be reinvested at
the project’s cost of capital.
ANSWER:
d
EASY
14–10
37.
Chapter 14
Capital Budgeting
A company is evaluating three possible investments. Information relating to the company
and the investments follow:
Fisher rate for the three projects
Cost of capital
7%
8%
Based on this information, we know that
a.
b.
c.
d.
all three projects are acceptable.
none of the projects are acceptable.
the capital budgeting evaluation techniques profitability index, net present value,
and internal rate of return will provide a consistent ranking of the projects.
the net present value method will provide a ranking of the projects that is superior
to the ranking obtained using the internal rate of return method.
ANSWER:
38.
equal zero.
equal 1.
equal -1.
be undefined.
ANSWER:
b
EASY
If the profitability index for a project exceeds 1, then the project’s
a.
b.
c.
d.
net present value is positive.
internal rate of return is less than the project’s discount rate.
payback period is less than 5 years.
accounting rate of return is greater than the project’s internal rate of return.
ANSWER:
40.
MEDIUM
If a project generates a net present value of zero, the profitability index for the project
will
a.
b.
c.
d.
39.
c
a
EASY
If a project’s profitability index is less than 1, the project’s
a.
b.
c.
d.
discount rate is above its cost of capital.
internal rate of return is less than zero.
payback period is infinite.
net present value is negative.
ANSWER:
d
EASY
Chapter 14
41.
Capital Budgeting
The profitability index is
a.
b.
c.
d.
the ratio of net cash flows to the original investment.
the ratio of the present value of cash flows to the original investment.
a capital budgeting evaluation technique that doesn’t use discounted values.
a mandatory technique when capital rationing is used.
ANSWER:
42.
EASY
internal rate of return
payback period
profitability index
accounting rate of return
ANSWER:
c
MEDIUM
If the total cash inflows associated with a project exceed the total cash outflows
associated with the project, the project’s
a.
b.
c.
d.
net present value is greater than zero.
internal rate of return is greater than zero.
profitability index is greater than 1.
payback period is acceptable.
ANSWER:
44.
b
Which method of evaluating capital projects assumes that cash inflows can be reinvested
at the discount rate?
a.
b.
c.
d.
43.
14–11
b
EASY
The net present value and internal rate of return methods of decision making in capital
budgeting are superior to the payback method in that they
a.
b.
c.
d.
are easier to implement.
consider the time value of money.
require less input.
reflect the effects of sensitivity analysis.
ANSWER:
b
EASY
14–12
45.
Chapter 14
If an investment has a positive net present value, the
a.
b.
c.
d.
internal rate of return is higher than the discount rate.
discount rate is higher than the hurdle rate of return.
internal rate of return is lower than the discount rate of return.
hurdle rate of return is higher than the discount rate.
ANSWER:
46.
EASY
cost of capital.
discount rate.
cutoff rate.
internal rate of return.
ANSWER:
d
EASY
For a profitable company, an increase in the rate of depreciation on a specific project
could
a.
b.
c.
d.
increase the project’s profitability index.
increase the project’s payback period.
decrease the project’s net present value.
increase the project’s internal rate of return.
ANSWER:
48.
a
The rate of interest that produces a zero net present value when a project’s discounted
cash operating advantage is netted against its discounted net investment is the
a.
b.
c.
d.
47.
Capital Budgeting
d
MEDIUM
Which of the following capital expenditure planning and control techniques has been
criticized because it might mistakenly imply that earnings are reinvested at the rate of
return earned by the investment?
a.
b.
c.
d.
payback method
accounting rate of return
net present value method
internal rate of return
ANSWER:
d
EASY
Chapter 14
49.
Capital Budgeting
If the discount rate that is used to evaluate a project is equal to the project’s internal rate
of return, the project’s _____________ is zero.
a.
b.
c.
d.
profitability index
internal rate of return
present value of the investment
net present value
ANSWER:
50.
EASY
decreases.
increases.
stays the same.
can move up or down depending on whether the firm’s cost of capital is high or
low.
ANSWER:
b
MEDIUM
When a profitable corporation sells an asset at a loss, the after-tax cash flow on the sale
will
a.
b.
c.
d.
exceed the pre-tax cash flow on the sale.
be less than the pre-tax cash flow on the sale.
be the same as the pre-tax cash flow on the sale.
increase the corporation’s overall tax liability.
ANSWER:
52.
d
As the marginal tax rate goes up, the benefit from the depreciation tax shield
a.
b.
c.
d.
51.
14–13
a
MEDIUM
In a typical (conservative assumptions) after-tax discounted cash flow analysis,
depreciation expense is assumed to accrue at
a.
b.
c.
d.
the beginning of the period.
the middle of the period.
the end of the period.
irregular intervals over the life of the investment.
ANSWER:
c
EASY
14–14
53.
Chapter 14
The pre-tax and after-tax cash flows would be the same for all of the following items
except
a.
b.
c.
d.
the liquidation of working capital at the end of a project’s life.
the initial (outlay) cost of an investment.
the sale of an asset at its book value.
a cash payment for salaries and wages.
ANSWER:
54.
EASY
tax-deductible cash flows.
non-tax-deductible cash flows.
accounting accruals.
all of the above.
ANSWER:
d
MEDIUM
A project’s after-tax net present value is increased by all of the following except
a.
b.
c.
d.
revenue accruals.
cash inflows.
depreciation deductions.
expense accruals.
ANSWER:
56.
d
The after-tax net present value of a project is affected by
a.
b.
c.
d.
55.
Capital Budgeting
a
EASY
Multiplying the depreciation deduction by the tax rate yields a measure of the
depreciation tax
a.
b.
c.
d.
shield.
benefit.
payable.
loss.
ANSWER:
b
EASY
Chapter 14
57.
Capital Budgeting
Annual after-tax corporate net income can be converted to annual after-tax cash flow by
a.
b.
c.
d.
adding back the depreciation amount.
deducting the depreciation amount.
adding back the quantity (t × depreciation deduction), where t is the corporate tax
rate.
deducting the quantity [(1– t) × depreciation deduction], where t is the corporate
tax rate.
ANSWER:
58.
EASY
net cash flow.
income as measured by accounting rules.
net cash flow plus depreciation.
income as measured by tax rules.
ANSWER:
d
EASY
Which of the following best represents a screening decision?
a.
b.
c.
d.
determining which project has the highest net present value
determining if a project’s internal rate of return exceeds the firm’s cost of capital
determining which projects are mutually exclusive
determining which are the best projects
ANSWER:
60.
a
Income taxes are levied on
a.
b.
c.
d.
59.
14–15
b
EASY
Below are pairs of projects. Which pair best represents independent projects?
a.
b.
c.
d.
buy computer; buy software package
buy computer #1; buy computer #2
buy computer; buy computer security system
buy computer; repave parking lot
ANSWER:
d
EASY
14–16
61.
Chapter 14
Which of the following are tax deductible under U.S. tax law?
a.
b.
c.
d.
interest payments to bondholders
preferred stock dividends
common stock dividends
all of the above
ANSWER:
62.
EASY
an appropriate response to uncertainty in cash flow projections.
useful in measuring the variance of the Fisher rate.
typically conducted in the post investment audit.
useful to compare projects requiring vastly different levels of initial investment.
ANSWER:
a
MEDIUM
If management judges one project in a mutually inclusive set to be acceptable for
investment,
a.
b.
c.
d.
all the other projects in the set are rejected.
only one other project in the set can be accepted.
all other projects in the set are also accepted.
only one project in the set will be rejected.
ANSWER:
64.
a
Sensitivity analysis is
a.
b.
c.
d.
63.
Capital Budgeting
c
EASY
All other factors equal, which of the following would affect a project’s internal rate of
return, net present value, and payback period?
a.
b.
c.
d.
an increase in the discount rate
a decrease in the life of the project
an increase in the initial cost of the project
all of the above
ANSWER:
c
EASY
Chapter 14
65.
Capital Budgeting
14–17
(Present value tables needed to answer this question.) Tiger Inc. bought a piece of
machinery with the following data:
Useful life
Yearly net cash inflow
Salvage value
Internal rate of return
Cost of capital
6 years
$45,000
–0–
18%
14%
The initial cost of the machinery was
a.
b.
c.
d.
$157,392.
$174,992.
$165,812.
impossible to determine from the information given.
ANSWER:
66.
MEDIUM
(Appendix) Microsoft Co. is considering the purchase of a $100,000 machine that is
expected to result in a decrease of $15,000 per year in cash expenses. This machine,
which has no residual value, has an estimated useful life of 10 years and will be
depreciated on a straight-line basis. For this machine, the accounting rate of return would
be
a.
b.
c.
d.
10 percent.
15 percent.
30 percent.
35 percent.
ANSWER:
67.
a
c
MEDIUM
An investment project is expected to yield $10,000 in annual revenues, has $2,000 in
fixed costs per year, and requires an initial investment of $5,000. Given a cost of goods
sold of 60 percent of sales, what is the payback period in years?
a.
b.
c.
d.
2.50
5.00
2.00
1.25
ANSWER:
a
MEDIUM
14–18
68.
Chapter 14
A project has an initial cost of $100,000 and generates a present value of net cash inflows
of $120,000. What is the project’s profitability index?
a.
b.
c.
d.
.20
1.20
.80
5.00
ANSWER:
69.
b
MEDIUM
(Present value tables needed to answer this question.) C Corp. faces a marginal tax rate of
35 percent. One project that is currently under evaluation has a cash flow in the fourth
year of its life that has a present value of $10,000 (after-tax). C Corp. assumes that all
cash flows occur at the end of the year and the company uses 11 percent as its discount
rate. What is the pre-tax amount of the cash flow in year 4? (Round to the nearest dollar.)
a.
b.
c.
d.
$15,181
$23,356
$9,868
$43,375
ANSWER:
70.
Capital Budgeting
b
DIFFICULT
(Present value tables needed to answer this question.) The Salvage Co. is considering the
purchase of a new ocean-going vessel that could potentially reduce labor costs of its
operation by a considerable margin. The new ship would cost $500,000 and would be
fully depreciated by the straight-line method over 10 years. At the end of 10 years, the
ship will have no value and will be sunk in some already polluted harbor. The Salvage
Co.’s cost of capital is 12 percent, and its marginal tax rate is 40 percent. What is the
present value of the depreciation tax benefit of the new ship? (Round to the nearest
dollar.)
a.
b.
c.
d.
$113,004
$282,510
$169,506
$200,000
ANSWER:
a
DIFFICULT
Chapter 14
71.
Capital Budgeting
(Present value tables needed to answer this question.) Salvage Co. is considering the
purchase of a new ocean-going vessel that could potentially reduce labor costs of its
operation by a considerable margin. The new ship would cost $500,000 and would be
fully depreciated by the straight-line method over 10 years. At the end of 10 years, the
ship will have no value and will be sunk in some already polluted harbor. The Salvage
Co.’s cost of capital is 12 percent, and its marginal tax rate is 40 percent. If the ship
produces equal annual labor cost savings over its 10-year life, how much do the annual
savings in labor costs need to be to generate a net present value of $0 on the project?
(Round to the nearest dollar.)
a.
b.
c.
d.
$68,492
$114,154
$88,492
$147,487
ANSWER:
72.
14–19
c
DIFFICULT
Pebble Co. recently sold a used machine for $40,000. The machine had a book value of
$60,000 at the time of the sale. What is the after-tax cash flow from the sale, assuming
the company’s marginal tax rate is 20 percent?
a.
b.
c.
d.
$40,000
$60,000
$44,000
$32,000
ANSWER:
c
MEDIUM
14–20
Chapter 14
Capital Budgeting
Use the following information for questions 73 and 74.
Fordem Co. is considering an investment in a machine that would reduce annual labor costs by
$30,000. The machine has an expected life of 10 years with no salvage value. The machine
would be depreciated according to the straight-line method over its useful life. The company’s
marginal tax rate is 30 percent.
73.
(Present value tables needed to answer this question.) Assume that the company will
invest in the machine if it generates an internal rate of return of 16 percent. What is the
maximum amount the company can pay for the machine and still meet the internal rate of
return criterion?
a.
b.
c.
d.
$180,000
$210,000
$187,500
$144,996
ANSWER:
74.
d
MEDIUM
(Present value tables needed to answer this question.) Assume the company pays
$250,000 for the machine. What is the expected internal rate of return on the machine?
a.
b.
c.
d.
between 8 and 9 percent
between 3 and 4 percent
between 17 and 18 percent
less than 1 percent
ANSWER:
b
MEDIUM
Chapter 14
Capital Budgeting
14–21
Use the following information for questions 75 and 76.
The net after-tax cash flows associated with two projects under consideration by Novelle Co.
follow:
Project 1
$(300,000 )
80,000
Initial investment
Cash flows years 1–5
75.
(Present value tables needed to answer this question.) What is the Fisher rate for these
two projects?
a.
b.
c.
d.
less than 1 percent
between 7 and 8 percent
between 4 and 5 percent
between 6 and 7 percent
ANSWER:
76.
b
DIFFICULT
(Present value tables needed to answer this question.) Assume that the company can
potentially accept both projects, one project, or neither project. Which project(s) would
the company accept if it estimates its weighted average cost of capital is 9 percent?
a.
b.
c.
d.
both projects
Project 1
Project 2
neither project
ANSWER:
77.
Project 2
$(100,000 )
30,000
a
MEDIUM
(Present value tables needed to answer this question.) A project under consideration by
the White Corp. would require a working capital investment of $200,000. The working
capital would be liquidated at the end of the project’s 10-year life. If White Corp. has an
after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent, what is the
present value of the working capital cash flow expected to be received in year 10?
a.
b.
c.
d.
$36,868
$77,100
$53,970
$23,130
ANSWER:
b
MEDIUM
14–22
78.
Chapter 14
Capital Budgeting
(Present value tables needed to answer this question.) B Company is considering two
alternative ways to depreciate a proposed investment. The investment has an initial cost
of $100,000 and an expected five-year life. The two alternative depreciation schedules
follow:
Year 1 depreciation
Year 2 depreciation
Year 3 depreciation
Year 4 depreciation
Year 5 depreciation
Method 1
$20,000
$20,000
$20,000
$20,000
$20,000
Method 2
$40,000
$30,000
$20,000
$10,000
$0
Assuming that the company faces a marginal tax rate of 40 percent and has a cost of
capital of 10 percent, what is the difference between the two methods in the present value
of the depreciation tax benefit?
a.
b.
c.
d.
$7,196
$0
$2,878
$6,342
ANSWER:
c
DIFFICULT
Use the following information for questions 79 and 80.
Blues Bros. Inc. is considering an investment in a computer that is capable of producing various
images that are useful in the production of commercial art. The computer would cost $20,000
and have an expected life of eight years. The computer is expected to generate additional annual
net cash receipts (before-tax) of $6,000 per year. The computer will be depreciated according to
the straight-line method and the firm’s marginal tax rate is 25 percent.
79.
What is the after-tax payback period for the computer project?
a.
b.
c.
d.
7.62 years
3.90 years
4.44 years
3.11 years
ANSWER:
b
MEDIUM
Chapter 14
80.
Capital Budgeting
14–23
(Present value tables needed to answer this question.) What is the after-tax net present
value of the proposed project (using a 16 percent discount rate)?
a.
b.
c.
d.
$2,261
$(454)
$6,062
$(4,797)
ANSWER:
a
MEDIUM
Use the following information for questions 81–83.
Hefty Investment Co. is considering an investment in a labor-saving machine. Information on
this machine follows:
Cost
Salvage value in five years
Estimated life
Annual depreciation
Annual reduction in existing costs
81.
(Present value tables needed to answer this question.) What is the internal rate of return
on this project (round to the nearest 1/2%)?
a.
b.
c.
d.
37.5%
25.0%
10.5%
13.5%
ANSWER:
82.
$30,000
$0
5 years
$6,000
$8,000
c
MEDIUM
(Present value tables needed to answer this question.) Assume for this question only that
Hefty Co. uses a discount rate of 16 percent to evaluate projects of this type. What is the
project’s net present value?
a.
b.
c.
d.
$(6,283)
$(3,806)
$(23,451)
$(22,000)
ANSWER:
b
MEDIUM
14–24
83.
Chapter 14
Capital Budgeting
What is the payback period on this investment?
a.
b.
c.
d.
4 years
2.14 years
3.75 years
5 years
ANSWER:
c
MEDIUM
Use the following information for questions 84 and 85.
L&M Ironworks is considering a proposal to sell an existing lathe and purchase a new computeroperated lathe. Information on the existing lathe and the computer-operated lathe follow:
Cost
Accumulated depreciation
Salvage value now
Salvage value in 4 years
Annual depreciation
Annual cash operating costs
Remaining useful life
84.
Computer-operated
lathe
$300,000
0
60,000
75,000
50,000
4 years
What is the payback period for the computer-operated lathe?
a.
b.
c.
d.
1.87 years
2.00 years
3.53 years
3.29 years
ANSWER:
85.
Existing
lathe
$100,000
60,000
20,000
0
10,000
200,000
4 years
a
MEDIUM
(Present value tables needed to answer this question.) If the company uses 10 percent as
its discount rate, what is the net present value of the proposed new lathe purchase?
a.
b.
c.
d.
$236,465
$256,465
$195,485
$30,422
ANSWER:
a
MEDIUM
Chapter 14
Capital Budgeting
14–25
Use the following information for questions 86 and 87.
The Allendale Co. has recently evaluated a proposal to invest in cost-reducing production
technology. According to the evaluation, the project would require an initial investment of
$17,166 and would provide equal annual cost savings for five years. Based on a 10 percent
discount rate, the project generates a net present value of $1,788. The project is not expected to
have any salvage value at the end of its five-year life.
86.
(Present value tables needed to answer this question.) What are the expected annual cost
savings of the project?
a.
b.
c.
d.
$3,500
$4,000
$4,500
$5,000
ANSWER:
87.
d
MEDIUM
(Present value tables needed to answer this question.) What is the project’s expected
internal rate of return?
a.
b.
c.
d.
10%
11%
13%
14%
ANSWER:
d
MEDIUM
Use the following information for questions 88–90.
R Co. is involved in the evaluation of a new computer-integrated manufacturing system. The
system has a projected initial cost of $1,000,000. It has an expected life of six years, with no
salvage value, and is expected to generate annual cost savings of $250,000. Based on R Co.’s
analysis, the project has a net present value of $57,625.
88.
(Present value tables needed to answer this question.) What discount rate did the
company use to compute the net present value?
a.
b.
c.
d.
10%
11%
12%
13%
ANSWER:
b
MEDIUM
14–26
89.
Chapter 14
What is the project’s profitability index?
a.
b.
c.
d.
1.058
.058
.945
1.000
ANSWER:
90.
MEDIUM
between 12.5 and 13.0 percent
between 11.0 and 11.5 percent
between 11.5 and 12.0 percent
between 13.0 and 13.5 percent
ANSWER:
a
MEDIUM
(Present value tables needed to answer this question.) Ann recently invested in a project
that promised an internal rate of return of 15 percent. If the project has an expected
annual cash inflow of $12,000 for six years, with no salvage value, how much did Ann
pay for the project?
a.
b.
c.
d.
$35,000
$45,414
$72,000
$31,708
ANSWER:
92.
a
(Present value tables needed to answer this question.) What is the project’s internal rate
of return?
a.
b.
c.
d.
91.
Capital Budgeting
b
MEDIUM
Louis recently invested in a project that has an expected annual cash inflow of $7,000 for
10 years, and an expected payback period of 3.6 years. How much did Louis invest in the
project?
a.
b.
c.
d.
$19,444
$36,000
$25,200
$40,000
ANSWER:
c
MEDIUM
Chapter 14
93.
Capital Budgeting
14–27
The McNally Co. is considering an investment in a project that generates a profitability
index of 1.3. The present value of the cash inflows on the project is $44,000. What is the
net present value of this project?
a.
b.
c.
d.
$10,154
$13,200
$57,200
$33,846
ANSWER:
a
MEDIUM
THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN
THE APPENDICES OF THE CHAPTER.
94.
If r is the discount rate, the formula [1/(1 + r)] refers to the
a.
b.
c.
d.
future value interest factor associated with r for one period.
present value of some future cash flow.
present value interest factor associated with r for one period.
future value interest factor for an annuity with a duration of r periods.
ANSWER:
95.
EASY
Future value is the
a.
b.
c.
d.
sum of dollars-in discounted to time zero.
sum of dollars-out discounted to time zero.
difference of dollars-in and dollars-out.
value of dollars-in minus dollars-out for future periods adjusted for any interestcompounding factor.
ANSWER:
96.
c
d
MEDIUM
All other things being equal, as the time period for receiving an annuity lengthens,
a.
b.
c.
d.
the related present value factors increase.
the related present value factors decrease.
the related present value factors remain constant.
it is impossible to tell what happens to present value factors from the information
given.
ANSWER:
a
EASY
14–28
97.
Chapter 14
Which of the following indicates that the first cash flow is at the end of a period?
a.
b.
c.
d.
Ordinary annuity
yes
yes
no
no
ANSWER:
98.
EASY
future value of X in one period.
future value interest factor associated with r.
present value of X.
present value interest factor associated with r.
ANSWER:
a
EASY
The capital budgeting technique known as accounting rate of return uses
a.
b.
c.
d.
salvage value
no
no
yes
yes
ANSWER:
100.
a
Annuity due
no
yes
yes
no
Assume that X represents a sum of money that Bill has available to invest in a project that
will yield a return of r. In the formula Y = X(1 + r), Y represents the
a.
b.
c.
d.
99.
Capital Budgeting
d
time value of money
no
yes
yes
no
EASY
In computing the accounting rate of return, the __________ level of investment should be
used as the denominator.
a.
b.
c.
d.
average
initial
residual
cumulative
ANSWER:
a
EASY
Chapter 14
Capital Budgeting
14–29
Use the following information for questions 101 and 102.
Jimmy’s Retail is considering an investment in a delivery truck. Jimmy has found a used truck
that he can purchase for $8,000. He estimates the truck would last six years and increase his
store’s net cash revenues by $2,000 per year. At the end of six years, the truck would have no
salvage value and would be discarded. Jimmy will depreciate the truck using the straight-line
method.
101.
What is the accounting rate of return on the truck investment (based on average profit and
average investment)?
a.
b.
c.
d.
25.0%
50.0%
16.7%
8.3%
ANSWER:
102.
MEDIUM
What is the payback period on the investment in the new truck?
a.
b.
c.
d.
12 years
6 years
4 years
2 years
ANSWER:
103.
a
c
MEDIUM
(Present value tables needed to answer this question.) Debb borrows $50,000 from her
bank on January 1, 2001. She is to repay the loan in equal annual installments over 30
years. How much is her annual repayment if the bank charges 10 percent interest?
a.
b.
c.
d.
$1,667
$4,200
$2,865
$5,304
ANSWER:
d
MEDIUM
14–30
104.
Chapter 14
(Present value tables needed to answer this question.) Bill Hawkins has just turned 65. He
has $100,000 to invest in a retirement annuity. One investment company has offered to
pay Bill $10,000 per year for 15 years (payments to begin in one year) in exchange for an
immediate $100,000 payment. If Bill accepts the offer from the investment company,
what is his expected return on the $100,000 investment (assume a return that is
compounded annually)?
a.
b.
c.
d.
between 5 and 6 percent
between 6 and 7 percent
between 7 and 8 percent
between 8 and 9 percent
ANSWER:
105.
a
MEDIUM
(Present value tables needed to answer this question.) Cramden Armored Car Co. is
considering the acquisition of a new armored truck. The truck is expected to cost
$300,000. The company’s discount rate is 12 percent. The firm has determined that the
truck generates a positive net present value of $17,022. However, the firm is uncertain as
to whether its has determined a reasonable estimate of the salvage value of the truck. In
computing the net present value, the company assumed that the truck would be salvaged
at the end of the fifth year for $60,000. What expected salvage value for the truck would
cause the investment to generate a net present value of $0? Ignore taxes.
a.
b.
c.
d.
$30,000
$0
$55,278
$42,978
ANSWER:
106.
Capital Budgeting
a
MEDIUM
(Present value tables needed to answer this question.) Booker Steel Inc. is considering an
investment that would require an initial cash outlay of $400,000 and would have no
salvage value. The project would generate annual cash inflows of $75,000. The firm’s
discount rate is 8 percent. How many years must the annual cash flows be generated for
the project to generate a net present value of $0?
a.
b.
c.
d.
between 5 and 6 years
between 6 and 7 years
between 7 and 8 years
between 8 and 9 years
ANSWER:
c
MEDIUM
Chapter 14
107.
Capital Budgeting
A capital budget is used by management to determine
a.
b.
c.
d.
in what to invest
no
no
yes
yes
ANSWER:
108.
14–31
d
how much to invest
no
yes
no
yes
EASY
The weighted average cost of capital represents the
a.
b.
c.
d.
cost of bonds, preferred stock, and common stock divided by the three sources.
equivalent units of capital used by the organization.
overall cost of capital from all organization financing sources.
overall cost of dividends plus interest paid by the organization.
ANSWER:
c
EASY
SHORT ANSWER/PROBLEMS
1.
In a net present value analysis, how can an analyst explicitly and formally consider the
influence of risk on the present value of certain cash flows?
ANSWER: An analyst could do at least three different things to explicitly account
for risk. The analyst could: (1) adjust the discount rate to reflect the risk of the cash flow,
(2) adjust the discounting period of the cash flow, or (3) adjust the expected amount of
the cash flow up or down to reflect the risk.
MEDIUM
2.
What factors influence the present value of the depreciation tax benefit?
ANSWER: The depreciation tax benefit is primarily affected by three factors: the
depreciation rate or method, the tax rate, and the discount rate.
MEDIUM
14–32
3.
Chapter 14
Capital Budgeting
Why is it important for managers to be able to rank projects?
ANSWER: Managers need to be able to rank projects for two primary reasons. First,
managers need to be able to select the best project from a set of projects that are directly
competing with each other (particularly in the case of mutually exclusive projects).
Second, even when projects are not directly competing with each other, managers may
have a limited supply of capital that has to be allocated to the most worthy of the projects.
MEDIUM
4.
If it is assumed that managers act to maximize the value of the firm, what can also be
assumed about the existing mix of capital components relative to the set of all viable
alternative mixes of capital components?
ANSWER: It can be assumed that the existing mix of capital components is the one
that minimizes the cost of capital (which, therefore, maximizes the value of the firm).
MEDIUM
5.
Does a project that generates a positive internal rate of return also have a positive net
present value? Explain.
ANSWER: No. A positive IRR does not necessarily mean that a project will also have
a positive NPV. Only if the IRR is greater than the discount rate that is used in the NPV
calculation will the NPV be positive.
MEDIUM
6.
Why is the profitability index a better basis than net present value to compare projects
that require different levels of investment?
ANSWER: The profitability index relates the magnitude of the net present value to the
magnitude of the initial investment. Thus, the PI gives some indication of relative
profitability. The NPV itself provides no direct indication of the level of investment that
is required to generate the NPV and therefore provides no indication of relative
profitability.
MEDIUM
Chapter 14
7.
Capital Budgeting
14–33
(Appendix) What is the major advantage of the accounting rate of return relative to the
other techniques that can be used to evaluate capital projects?
ANSWER: The accounting rate of return has two major advantages relative to the
other capital budgeting techniques. First, it may be more compatible as an investment
criterion with criteria that are used to evaluate managerial and segment performance
particularly for investment centers that are evaluated on an ROI or RI basis. Second, the
accounting rate of return can be generated from accounting data and is therefore easy to
track over the life of the investment.
MEDIUM
8.
Why is it important for organizations to conduct post investment audits of capital
projects?
ANSWER: The post investment audit provides management with an opportunity to
evaluate the actual performance of the investment relative to expected performance. If
possible, management can take corrective action when actual performance is poor relative
to the expected performance. Management can also use the post investment audit to
evaluate the performance of those who provided the original information about the
investment and those who are in charge of the investment. In addition, management may
use the information from the post investment audit to improve the evaluation process of
future capital projects.
MEDIUM
9.
How are capital budgeting models affected by potential investments in automated
equipment investment decisions?
ANSWER: Discount rates for present value calculations often far exceed a firm’s cost
of capital. Automated machinery is very costly and may be at a disadvantage in
discounted cash flow methods. Qualitative factors associated with automated equipment
may not receive any weight or value in current capital budgeting methods. Automated
equipment is often interrelated with other investments and should be bundled to reflect
this synergism. Finally, there is the opportunity cost of not automating when competitors
automate and your firm doesn’t.
MEDIUM
14–34
10.
Chapter 14
Capital Budgeting
(Present value tables needed to answer this question.) Managers of the Jonathan Co.
realize that the present value of the depreciation tax benefit is affected by the discount
rate, the tax rate, and the depreciation rate. They have recently purchased a machine for
$100,000 and they are trying to decide which depreciation method to use. There are only
two alternatives available, and they must make an irrevocable selection of one method or
the other right now. They have no uncertainty about the company’s discount rate (it is 10
percent), but they are highly uncertain about the direction of future tax rates. The
company’s uncertainty stems from the fact that the existing tax rate is 30 percent, but
congress is presently debating tax legislation that would dramatically increase the rate. If
the legislation is passed it would go into affect in two years (after the Jonathan Co. has
claimed two years of depreciation). How high would tax rates need to be in two years for
the Jonathan Co. to be indifferent between depreciation Method 2 and depreciation
Method 1 below?
Year 1
Year 2
Year 3
Year 4
Year 5
Method 1
$30,000
$40,000
$10,000
$10,000
$10,000
Method 2
$10,000
$15,000
$25,000
$25,000
$25,000
Difference
$(20,000 )
$(25,000 )
$15,000
$15,000
$15,000
ANSWER: No matter what happens, the tax rate for the next two years is 30 percent.
Using the differences in depreciation amounts, one can determine the difference in
present values between the two methods at the end of year 2 when the tax rate is expected
to change.
Present value calculations for years 1 and 2:
Year 1 ($20,000) × .30 × .9091 =
$ (5,455)
Year 2 ($25,000) × .30 × .8265 =
$ (6,199)
Total present value difference at end $ (11,654)
So, after the first two years, Method 1 has generated $11,654 more present value than
Method 2. This simply means that at the point of indifference, Method 2 would be
required to generate $11,654 more present value than Method 1 in the last three years. For
the last three years of the project’s life, the difference in depreciation amounts is $15,000.
This $15,000 amount can be used in the following equation to solve for the tax rate that
yields a present value of $11,654:
$11,654 = $15,000 × tax rate × (.7513 + .6830 + .6209)
$11,654 = $30,828 × tax rate
Tax rate = $11,654/$30,828
Tax rate = 37.8%
Thus, an increase in the tax rate to about 37.8 percent would cause management to be
indifferent between the two depreciation methods.
DIFFICULT
Chapter 14
Capital Budgeting
14–35
Use the following information for question 11.
XL Corp. is considering an investment that will require an initial cash outlay of $200,000 to
purchase non-depreciable assets. The project promises to return $60,000 per year (after-tax) for
eight years with no salvage value. The company’s cost of capital is 11 percent.
11.
(Present value tables needed to answer this question.) The company is uncertain about its
estimate of the life expectancy of the project. How many years must the project generate
the $60,000 per year return for the company to at least be indifferent about its
acceptance? (Do not consider the possibility of partial year returns.)
ANSWER: Dividing $200,000/$60,000, gives the annuity discount factor (3.3333) for
11 percent associated with the minimal required time for this project to be successful.
According to the tables in Appendix A, the project will have a positive net present value
if the cash flows last through year 5.
MEDIUM
Use the following information for questions 12–14.
Treble Co. is considering an investment in a new product line. The investment would require an
immediate outlay of $100,000 for equipment and an immediate investment of $200,000 in
working capital. The investment is expected to generate a net cash inflow of $100,000 in year 1,
$150,000 in year 2, and $200,000 in years 3 and 4. The equipment would be scrapped (for no
salvage) at the end of the fourth year and the working capital would be liquidated. The equipment
would be fully depreciated by the straight-line method over its four-year life.
12.
(Present value tables needed to answer this question.) If Treble uses a discount rate of 16
percent, what is the NPV of the proposed product line investment?
ANSWER:
Cash flow
Investment
Working cap.
Cash inflow
Cash inflow
Cash inflow
Cash inflow
Working cap.
Net present value
MEDIUM
Year
0
0
1
2
3
4
4
Amount
$(100,000 )
$(200,000 )
100,000
150,000
200,000
200,000
200,000
Discount factor
1.00
1.00
.8621
.7432
.6407
.5523
.5523
Present value
$(100,000 )
(200,000 )
86,210
111,480
128,140
110,460
110,460
$246,750
14–36
13.
Chapter 14
Capital Budgeting
What is the payback period for the investment?
ANSWER: After the first two years, $250,000 of the original $300,000 investment
would be recouped. It would take one-quarter of the third year ($50,000/$200,000) to
recoup the last $50,000. Thus, the payback period is 2.25 years.
MEDIUM
14.
(Present value tables needed to answer this question.) Jane has an opportunity to invest in
a project that will yield four annual payments of $12,000 with no salvage. The first
payment will be received in exactly one year. On low-risk projects of this type, Jane
requires a return of 6 percent. Based on this requirement, the project generates a
profitability index of 1.03953.
a.
b.
How much is Jane required to invest in this project?
What is the internal rate of return on Jane’s project?
ANSWER:
a.
The present value of the $12,000 annuity is found by multiplying $12,000 by the
annuity discount factor associated with 6 percent interest for four years: $12,000 ×
3.4651 = $41,581.20.
From the information on the profitability index, it is known that the present value
of the cash inflows is 1.03953 times the initial investment. Thus, the initial
investment is$41,581.20/1.03953 = $40,000.
b.
By dividing $40,000 by the annual cash inflow of $12,000, it is determined that
the discount factor associated with the IRR is 3.3333. This discount factor is
associated with an interest rate that lies between 7 and 8 percent. Using
interpolation, the IRR is computed to be approximately 7.72 percent.
MEDIUM
Chapter 14
15.
Capital Budgeting
14–37
(Present value tables needed to answer this question.) Wood Productions is considering
the purchase of a new movie camera, which will be used for major motion pictures. The
new camera will cost $30,000, have an eight-year life, and create cost savings of $5,000
per year. The new camera will require $700 of maintenance each year. Wood Productions
uses a discount rate of 9 percent.
a.
b.
Compute the net present value of the new camera.
Determine the payback period.
ANSWER:
a.
Cost savings per year
Maintenance per year
Net cash flows per year
$5,000
(700 )
$4,300
Cash
Discount factor
$30,000
1.0000
4,300
5.5348
Net present value of investment
b.
Present value
$(30,000.00 )
23,799.64
$ (6,200.36 )
Payback equals $30,000/$4,300 = 6.976 years
MEDIUM
14–38
16.
Chapter 14
Capital Budgeting
(Present value tables needed to answer this question.) XYZ Co. is interested in
purchasing a state-of-the-art widget machine for its manufacturing plant. The new
machine has been designed to basically eliminate all errors and defects in the widgetmaking production process. The new machine will cost $150,000, and have a salvage
value of $70,000 at the end of its seven-year useful life. XYZ has determined that cash
inflows for years 1 through 7 will be as follows: $32,000; $57,000; $15,000; $28,000;
$16,000; $10,000, and $15,000, respectively. Maintenance will be required in years 3 and
6 at $10,000 and $7,000 respectively. XYZ uses a discount rate of 11 percent and wants
projects to have a payback period of no longer than five years.
a.
Compute the net present value of the new machine.
b.
Compute the firm’s profitability index.
c.
Compute the payback period.
d.
Evaluate this investment proposal for XYZ Co.
Chapter 14
Capital Budgeting
ANSWER:
a.
Year
Cash flow
1
$150,000
1
32,000
2
57,000
3
5,000
4
28,000
5
16,000
6
3,000
7
15,000
7
70,000
Net present value
14–39
Discount factor
1.0000
.9009
.8116
.7312
.6587
.5935
.5346
.4817
.4817
Present value
$(150,000.00 )
28,828.80
46,261.20
3,656.00
18,443.60
9,496.00
1,603.80
7,225.50
33,719.00
$
(766.10 )
b.
Profitability index equals present value of cash flows divided by investment:
$149,233.90/$150,000 = .995
c.
Payback period is 6.11 years, computed as follows:
Year
1
2
3
4
5
6
7
Cash Flow
$32,000
57,000
5,000
28,000
16,000
3,000
85,000
Cumulative Cash Flow
$ 32,000
89,000
94,000
122,000
138,000
141,000
226,000
$150,000 – $141,000 = $9,000/$85,000 = .11
d.
The project is quantitatively unacceptable because it has a negative NPV, a lessthan-one PI, and a payback period of over six years. However, the NPV and PI are
extremely close to being acceptable. Because the new machine will provide XYZ
zero-defect production, the investment may be desirable if additional qualitative
factors are considered such as improved competitive position, customer
satisfaction, goodwill generated, improved product quality and reliability, and a
desire to be in the forefront of manufacturing capability. XYZ may want to
attempt to quantify these benefits and reevaluate the machine’s acceptability as an
investment.
DIFFICULT
14–40
17.
Chapter 14
Capital Budgeting
(Present value tables needed to answer this question.) The Ruth Company has been
operating a small lunch counter for the convenience of employees. The counter occupies
space that is not needed for any other business purpose. The lunch counter has been
managed by a part-time employee whose annual salary is $3,000. Yearly operations have
consistently shown a loss as follows:
Receipts
Expenses for food, supplies (in cash)
Salary
Net Loss
$20,000
$19,000
3,000
22,000
$(2,000 )
A company has offered to sell Ruth automatic vending machines for a total cost of
$12,000. Sales terms are cash on delivery. The old equipment has zero disposal value.
The predicted useful life of the equipment is 10 years, with zero scrap value. The
equipment will easily serve the same volume that the lunch counter handled. Z catering
company will completely service and supply the machines. Prices and variety of food and
drink will be the same as those that prevailed at the lunch counter. The catering company
will pay 5 percent of gross receipts to the Ruth Company and will bear all costs of food,
repairs, and so forth. The part-time employee will be discharged. Thus, Ruth’s only cost
will be the initial outlay for the machines.
Consider only the two alternatives mentioned.
Required:
a.
What is the annual income difference between alternatives?
b.
Compute the payback period.
c.
Compute:
1.
The net present value if relevant cost of capital is 20 percent.
2.
Internal rate of return.
d.
Management is very uncertain about the prospective revenue from the vending
equipment. Suppose that the gross receipts amounted to $14,000 instead of
$20,000. Repeat the computation in part c.1.
What would be the minimum amount of annual gross receipts from the vending
equipment that would justify making the investment? Show computations.
e.
Chapter 14
Capital Budgeting
ANSWER:
a.
Old loss $(2,000)
New receipts $20,000 × 5% = $ 1,000
Depr. $12,000/10 yrs. =
(1,200 )
New (Loss)
$ (200 )
b.
Change in annual cash inflow is $3,000
Payback = $12,000/$3,000 = 4 yrs.
c.
1.
PV of inflow $3,000 × 4.1925 = $12,577.50
PV of outflow $12,000 × 1.0 = (12,000.00 )
NPV
$ 577.50
2.
IRR is approximately 23%
d.
Change in inflow = $2,700
PV inflow $2,700 × 4.1925 = $11,319.75
PV outflow $12,000 × 1.0 = (12,000.00)
NPV
$ (680.25 )
e.
$12,000/4.1925 = $2,862.25
Receipts = ($2,862.25 – $2,000)/.05 = $17,245
MEDIUM
14–41
14–42
18.
Chapter 14
Capital Budgeting
The Sun Corp. is contemplating the acquisition of an automatic car wash. The following
information is relevant:
The cost of the car wash is $160,000
The anticipated revenue from the car wash is $100,000 per annum.
The useful life of the car wash is 10 years.
Annual operating costs are expected to be:
Salaries
$30,000
Utilities
9,600
Water usage
4,400
Supplies
6,000
Repairs/maintenance
10,000
The firm uses straight-line depreciation.
The salvage value for the car wash is zero.
The company’s cutoff points are as follows:
Payback
3 years
Accounting rate of return
18%
Internal rate of return
18%
Ignore income taxes.
Required:
a.
Compute the annual cash inflow.
b.
Compute the net present value.
c.
Compute internal rate of return.
d.
Compute the payback period.
e.
Compute the profitability index.
f.
Should the car wash be purchased?
Chapter 14
Capital Budgeting
14–43
ANSWER:
a.
Revenue
– cash expenses
Annual inflow
b.
PV inflow $40,000 × 4.4941 =
PV outflow $160,000 × 1.0 =
NPV =
c.
IRR factor = $160,000/$40,000 = 4.0 which is approximately 23%
d.
Payback = $160,000/$40,000 = 4 yrs.
e.
$179,764/$160,000 = 1.123525
f.
Car wash exceeds minimum on SRR and IRR, but not payback.
Looks good to me.
MEDIUM
$100,000
(60,000 )
$ 40,000
$179,764
(160,000 )
$ 19,764
CHAPTER 15
FINANCIAL MANAGEMENT
MULTIPLE CHOICE
1.
A logical structure of activities designed to analyze and evaluate management of
expenditures is a cost
a.
b.
c.
d.
consciousness system.
understanding system.
avoidance system.
control system.
ANSWER:
2.
the original budget.
actual costs for the prior period.
a flexible budget.
a static budget.
ANSWER:
c
EASY
When the organizational output is difficult to define, management may rely on
___________ for cost control.
a.
b.
c.
d.
qualitative measures
program budgeting
surrogate measures of output
all of the above
ANSWER:
4.
EASY
For cost control purposes, actual costs should be compared to
a.
b.
c.
d.
3.
d
d
EASY
Setting organizational goals and objectives and preparing a budget are aspects of control
a.
b.
c.
d.
during an event.
before an event.
after an event.
before, during, and after an event.
ANSWER:
b
EASY
15–1
15–2
5.
Chapter 15
Which of the following does not create a specific price level change?
a.
b.
c.
d.
change in production technology
change in the rate of inflation
changes due to supply and demand
changes in the number of competing suppliers
ANSWER:
6.
EASY
higher this period and lower in future periods.
higher this period and higher in future periods.
lower this period and higher in future periods.
lower this period and lower in future periods.
ANSWER:
a
EASY
Spending levels in prior years are often the basis of
a.
b.
c.
d.
traditional budgets.
zero-base budgets.
variance targets.
engineered cost analyses.
ANSWER:
8.
b
As the economy becomes more and more depressed, a company’s management decides to
slash spending on research and development. What is the likely effect of this action on
net income? Net income will be
a.
b.
c.
d.
7.
Financial Management
a
EASY
Minimizing period-by-period increases in unit variable costs and total fixed costs defines
efforts of cost
a.
b.
c.
d.
control.
avoidance.
containment.
reduction.
ANSWER:
c
EASY
Chapter 15
9.
Financial Management
Cost containment practices by a firm would not be effective for cost increases caused by
a.
b.
c.
d.
inflation.
a reduction in the quantity of an input purchased.
normal seasonality.
a reduction in the number of suppliers.
ANSWER:
10.
EASY
inflation/deflation
changes in quantities purchased
technological change
changes in supply chain costs
ANSWER:
b
MEDIUM
The greatest degree of control for committed fixed costs is exerted
a.
b.
c.
d.
in the post-investment audit.
during the life of the investment.
prior to acquisition.
by equipment operators.
ANSWER:
12.
a
All of the following are explanations of cost changes. Which of these influences can be
substantially affected by cost containment measures?
a.
b.
c.
d.
11.
15–3
c
EASY
Careful analysis of the capital budget is an important control activity for
a.
b.
c.
d.
variable costs.
discretionary costs.
committed costs.
period costs.
ANSWER:
c
EASY
15–4
13.
Chapter 15
An effective control system functions before, during, and after an event. However, little
control is possible during the event for most
a.
b.
c.
d.
variable manufacturing costs.
variable period costs.
discretionary fixed costs.
committed fixed costs.
ANSWER:
14.
b.
c.
d.
EASY
management decides to incur in the current period to enable the company to
achieve objectives other than the filling of orders placed by customers.
are likely to respond to the amount of attention devoted to them by a specified
manager.
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.
fluctuate in total in response to small changes in the rate of utilization of capacity.
ANSWER:
c
EASY
A committed fixed cost can
a.
b.
c.
d.
never be eliminated.
be eliminated in the short term and in the long term.
be eliminated in the long term but not in the short term.
be eliminated in the short term but not in the long term.
ANSWER:
16.
d
The term “committed costs” refers to costs that
a.
15.
Financial Management
c
EASY
Which of the following is an example of a committed fixed cost?
a.
b.
c.
d.
investment in production facilities
advertising
preventive maintenance
employee training programs
ANSWER:
a
EASY
Chapter 15
17.
Financial Management
A company would be reducing its discretionary costs if it
a.
b.
c.
d.
fired a production supervisor.
closed its research and development department.
successfully negotiated a reduction in its factory rent.
reduced its direct labor costs by hiring temporary workers.
ANSWER:
18.
MEDIUM
program budgeting.
zero-base budgeting.
capital budgeting.
flexible budgeting.
ANSWER:
d
MEDIUM
Most discretionary costs relate to
a.
b.
c.
d.
plant and equipment acquisitions.
long-term investments.
basic personnel costs.
service activities.
ANSWER:
20.
b
If a discretionary cost can be treated like an engineered cost, cost control may be achieved
through the use of
a.
b.
c.
d.
19.
15–5
d
EASY
If a cost can be reduced to zero in the short run without significantly harming the
organization, the cost is a
a.
b.
c.
d.
variable cost.
committed cost.
discretionary cost.
product cost.
ANSWER:
c
EASY
15–6
21.
Chapter 15
Discretionary costs are often difficult to control because
a.
b.
c.
d.
it is difficult to measure the cost.
they cannot be changed in the short run.
they cannot be changed from period to period.
it is difficult to measure the benefits of discretionary activities.
ANSWER:
22.
MEDIUM
managerial training programs
managerial labor costs
factory utilities
factory rent
ANSWER:
a
EASY
The level of discretionary costs
a.
b.
c.
d.
are set by management for one period at a time.
cannot be changed in the short run.
are determined when capital investment is undertaken.
always varies with sales.
ANSWER:
24.
d
Which of the following is likely to be a discretionary cost in most organizations?
a.
b.
c.
d.
23.
Financial Management
a
EASY
Which of the following is not a factor that directly affects the budget for a discretionary
cost?
a.
b.
c.
d.
the importance of the activity to the achievement of the organization’s goals
last period’s budget
the expected level of operations
managerial negotiations in the budgeting process
ANSWER:
b
EASY
Chapter 15
25.
Financial Management
If an actual discretionary cost is exactly equal to the budgeted level of that cost, which of
the following statements is true?
a.
b.
c.
d.
Funds were appropriately spent.
The discretionary activity was efficient.
The discretionary activity was effective.
None of the above.
ANSWER:
26.
MEDIUM
organizational policies and managerial preferences.
the budgeted amount from the prior period.
the level of long-term investment.
an organization’s internal control.
ANSWER:
a
MEDIUM
The term “discretionary costs” refers to
a.
b.
c.
d.
costs that management decides to incur in the current period to enable the
company to achieve objectives other than the filling of orders placed by
customers.
costs that are likely to respond to the amount of attention devoted to them by a
specified manager.
costs that 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.
amortization of costs that were capitalized in previous periods.
ANSWER:
28.
d
Discretionary activities in an organization are determined based on
a.
b.
c.
d.
27.
15–7
a
EASY
Avoidable costs are usually
a.
b.
c.
d.
committed.
common.
discretionary.
joint.
ANSWER:
c
EASY
15–8
29.
Chapter 15
Which of the following is least likely to be a discretionary cost?
a.
b.
c.
d.
salaries of salespeople
advertising
maintenance
insurance
ANSWER:
30.
EASY
product or period costs.
discretionary or committed.
direct or common.
sunk or avoidable.
ANSWER:
b
EASY
If economic activity slows down, total costs could easily decline in which of the
following categories?
a.
b.
c.
d.
variable costs and committed fixed costs
variable costs and discretionary fixed costs
variable costs only
committed fixed costs only
ANSWER:
32.
a
For cost control purposes, fixed costs are classified as
a.
b.
c.
d.
31.
Financial Management
b
EASY
Usually, with respect to a variable cost, optimal control is exerted when the cost
a.
b.
c.
d.
can be controlled prior to incurrence.
is compared to its budget amount.
increases steadily over time.
is closely monitored.
ANSWER:
d
EASY
Chapter 15
33.
Financial Management
Which kind of costs could be eliminated by closing a sales office?
a.
b.
c.
d.
Direct
yes
yes
yes
no
ANSWER:
34.
c.
d.
a
Committed
no
yes
no
yes
MEDIUM
incurring committed fixed costs is less risky than using discretionary costs.
managers are usually responsible for committed fixed costs but not for
discretionary fixed costs.
incurring discretionary fixed costs rather than committed fixed costs gives a
company more flexibility in controlling costs.
companies are using more discretionary fixed costs because labor is easier to
“remove” than technology.
ANSWER:
c
EASY
The distinction between avoidable and unavoidable costs is similar to the distinction
between
a.
b.
c.
d.
variable costs and fixed costs.
variable costs and mixed costs.
step-variable costs and fixed costs.
discretionary costs and committed costs.
ANSWER:
36.
Discretionary
yes
no
no
no
A major difference between committed and discretionary fixed costs is that
a.
b.
35.
15–9
d
MEDIUM
The maximum allowable expenditure is the
a.
b.
c.
d.
appropriation.
allowance.
allocation.
committed fixed cost.
ANSWER:
a
EASY
15–10
37.
Chapter 15
If a firm is successful in meeting its output goal for a period, the firm has been
a.
b.
c.
d.
efficient.
effective.
profitable.
exercising cost containment measures.
ANSWER:
38.
EASY
qualitative measures of inputs and outputs.
a match of inputs in one period with outputs in subsequent periods.
a causal relationship between inputs and outputs.
a ratio of planned output to actual output.
ANSWER:
c
EASY
A ratio of outputs to inputs is a(n)
a.
b.
c.
d.
effectiveness measure.
efficiency measure.
qualitative measure.
cost reduction measure.
ANSWER:
40.
b
A reasonable measure of efficiency relies on
a.
b.
c.
d.
39.
Financial Management
b
EASY
A small manufacturing company recently stated its sales goal for a period was $100,000.
At this level of activity, its budgeted expenses were $80,000. Its actual sales were
$100,000, but its actual expenses were $85,000. This company operated
a.
b.
c.
d.
effectively and efficiently.
neither effectively nor efficiently.
effectively but not efficiently.
efficiently but not effectively.
ANSWER:
c
EASY
Chapter 15
41.
Financial Management
Master Corp. has a sales goal of $500,000 for the coming year. Based on this level of
activity, Master budgets its total expenses at $450,000. Actual sales are $480,000 and
actual costs are $460,000. Master Corp.’s operations were
a.
b.
c.
d.
both efficient and effective.
neither efficient nor effective.
efficient but not effective.
effective but not efficient.
ANSWER:
42.
EASY
a flexible budget variance.
an efficiency measure.
required in program budgeting.
an effectiveness measure.
ANSWER:
d
EASY
A cost that is found to bear an observable and known relationship to a quantifiable
activity base is a(n)
a.
b.
c.
d.
discretionary cost.
product cost.
period cost.
engineered cost.
ANSWER:
44.
b
The difference between actual sales and budgeted sales is
a.
b.
c.
d.
43.
15–11
d
EASY
Control of engineered costs is frequently achieved through the use of
a.
b.
c.
d.
zero-base budgeting.
program budgeting.
standards.
cash budgeting.
ANSWER:
c
EASY
15–12
45.
Chapter 15
A variance represents the difference between a budgeted and an actual cost. Thus, the
variance measures
a.
b.
c.
d.
only controllable cost differences.
only uncontrollable cost differences.
both uncontrollable and controllable cost differences.
the effectiveness of management.
ANSWER:
46.
c
EASY
Assume actual output exceeds the level of output in the original budget. You would
expect costs in which of the following categories to exceed the original budget?
a.
b.
c.
d.
total variable costs
committed fixed costs
discretionary fixed costs
all of the above
ANSWER:
47.
Financial Management
a
EASY
An organization plans to produce and sell 50,000 units. It actually produces and sells
45,000 units. You would expect total costs to be below the planned level due to cost
a.
b.
c.
d.
consciousness.
control.
reductions.
behavior.
ANSWER:
d
EASY
Chapter 15
Financial Management
15–13
The following information is provided for the IHM Co. for June 2001, and is to be used for
questions 48–51.
Actual
1,800 units
8,900 DLHs @ $10.50 per DLH
Variable OH $6,400
Fixed OH $17,500
48.
What is the price variance?
a.
b.
c.
d.
$4,450 F
$4,450 U
$1,000 F
$1,000 U
ANSWER:
49.
$4,450 F
$4,450 U
$1,000 F
$1,000 U
ANSWER:
c
MEDIUM
What is the spending variance?
a.
b.
c.
d.
$590 U
$590 F
$190 F
$190 U
ANSWER:
51.
MEDIUM
What is the efficiency variance?
a.
b.
c.
d.
50.
b
a
MEDIUM
What is the volume variance?
a.
b.
c.
d.
$590 U
$590 F
$190 F
$190 U
ANSWER:
c
MEDIUM
Standard
5 DLHs per unit @ $10.00 per DLH
VOH rate per DLH $ .75
FOH rate per DLH $1.90
Budgeted FOH $16,910
15–14
Chapter 15
Financial Management
THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN
THE APPENDIX OF THE CHAPTER.
52.
Program budgeting typically begins with a(n)
a.
b.
c.
d.
zero funding level for all organizational activities.
statement of the quantity of input activities required.
analysis of potential organizational contributors.
definition of the organization’s objectives in terms of output results.
ANSWER:
53.
program
zero-base
capital
cash
ANSWER:
a
EASY
Surrogate measures of output are required in
a.
b.
c.
d.
zero-base budgeting.
program budgeting.
capital budgeting.
cash budgeting.
ANSWER:
55.
EASY
A charitable organization that has well-defined objectives but tremendous flexibility in
meeting those objectives might increase its efficiency substantially by using
__________________ budgeting.
a.
b.
c.
d.
54.
d
b
EASY
Zero-base budgeting requires managers to
a.
b.
c.
d.
justify expenditures that are increases over the prior period’s budgeted amount.
justify all expenditures, not just increases over last year’s amount.
maintain a full-year budget intact at all times.
maintain a budget with zero increases over the prior period.
ANSWER:
b
EASY
Chapter 15
56.
Financial Management
Zero-base budgeting differs from other budgeting techniques in several ways. Zero-base
budgeting
a.
b.
c.
d.
is less expensive than other methods.
is more widely used than any other method.
requires more time than other methods.
can only be used in governmental settings.
ANSWER:
57.
15–15
c
EASY
Budgeting is frequently difficult in government because
a.
b.
c.
d.
governmental managers are usually inexperienced.
governmental managers are not motivated to be cost conscious.
it is difficult to identify the output of governmental units.
it is difficult to identify the inputs of governmental units.
ANSWER:
c
EASY
SHORT ANSWER/PROBLEMS
1.
What factors make discretionary costs difficult to control?
ANSWER: Discretionary costs are difficult to control because it is difficult to identify
the exact benefits of discretionary activities and the relationship of these activities to the
organization’s output and goals. Thus, it is difficult to decide at what level a discretionary
activity should be funded or if it should be funded at all based on the lack of a definite
causal relationship between the discretionary activity and the firm’s output and goals.
MEDIUM
2.
(Appendix) What kinds of organizations are more likely to use program budgeting?
ANSWER: Program budgeting is more likely to be found in organizations that have
difficulty in defining their outputs. Such organizations are frequently not-for-profit or
governmental organizations.
MEDIUM
15–16
3.
Chapter 15
Financial Management
What are the differences between committed fixed costs and discretionary fixed costs?
ANSWER: Committed fixed costs are those costs that flow from the basic existence of
the organization. These are the direct costs of the organization’s long-term investments
(such as plant and equipment) and the costs of essential personnel. These costs can only
be changed in the long run without significantly affecting the organization. Discretionary
fixed costs are all fixed costs that do not fit into the committed category. This includes
the costs of auxiliary service activities including activities that could be discontinued in
the short run without adversely affecting the long-run viability of the organization.
MEDIUM
4.
When can a discretionary fixed cost be subjected to control methods that are used for
engineered costs?
ANSWER: When a discretionary cost is repetitive and can be related to some
fundamental activity measure (such as machine hours or units of output), it may be
treated like an engineered cost. With a repetitive cost that can be related to an activity
base, performance standards can be developed and flexible budget variances can be
computed and used as cost control tools.
MEDIUM
5.
What factors influence the total level of discretionary costs in an organization?
ANSWER: Organizations tend to fund discretionary activities at different levels
depending on the state of the economy and the original profit level. When management
anticipates unfavorable economic conditions or downturns in profitability, discretionary
costs may be reduced. Likewise, they may be increased as economic conditions improve.
Total discretionary expenditures will also vary as certain activities lose their funding and
new discretionary activities are initiated.
MEDIUM
6.
How does strategic staffing fit in with departmental staffing?
ANSWER: Strategic staffing is based on a department’s needs related to its long-range
objectives and those of the overall company. The department looks at its needs to see how
a combination of temporary and permanent personnel fills the bill. By using temporary
personnel, flexible staffing is provided that helps insulate the jobs of permanent
personnel. Also, when temporary personnel are used by a department, the overall cost of
organizational fringe benefits is reduced, thereby saving funds for other needs.
MEDIUM
Chapter 15
7.
Financial Management
15–17
Discuss the various elements of the cost control process.
ANSWER: Cost understanding is one element of a cost control system. An
organization needs to understand that costs may change from one period to the next or
understand why costs differ from budgeted amounts. Total variable costs will
increase/decrease with different levels of activity. Costs can also change due to
inflation/deflation creating general price-level changes. Costs also change because of
supply/supplier cost adjustments. Lastly, costs may change because of quantity purchased
by the organization.
Cost containment is another element of the cost control process. Cost containment is
defined as the practice of minimizing, to the extent possible, period-to-period increases in
per-unit variable and total fixed costs. Cost containment is possible for costs that rise due
to competition, seasonal variations, and quantities purchased.
A third element of the cost control process is cost avoidance. Cost avoidance is defined as
the practice of finding acceptable alternatives to high-cost products and/or not spending
money for unnecessary goods/services.
A final element of the cost control process is cost reduction. Cost reduction means
lowering current costs especially for goods/services that may not be needed currently.
Exhibit 15–5 provides a visual to the implementation of a cost control system.
MEDIUM
8.
PJW has made the following information available for January 2001:
Actual
1,500 units produced
2,400 DLH used @ $10.25 per DLH
Standards
2 DLH per unit @ $10
Assume that PJW hires part-time employees for production of these units.
Compute the price and efficiency variances.
ANSWER:
MEDIUM
2,400 × $10.25
2,400 × $10.00
Price variance
$24,600
24,000
$ 600 U
2,400 × $10.00
(1,500 × 2) × $10.00
Efficiency variance
$24,000
30,000
$ 6,000 F
15–18
9.
Chapter 15
Financial Management
SAF has provided the following information for July 2001:
Actual
800 units produced
Actual DL cost $6,750
Standards
2 DLH per unit @ $5.00
$1 fixed overhead per DLH
Assume that SAF hires full-time employees who are paid a total of $6,500 per month.
Compute the spending and volume variances.
ANSWER:
Actual labor cost
Budgeted labor cost
Spending variance
$6,750
6,500
$ 250 U
Budgeted labor cost
(800 × 2) × $5
Volume variance
$6,500
8,000
$1,500 F
MEDIUM
10.
GSWS provided the following information for 2001 relative to the times and costs to
prepare a simple last will and testament:
Standards
2 DLH @ $50 per DLH
Actual
500 simple wills were prepared during the year
1,100 DLHs utilized during the year @ $52 per DLH
Compute the price and efficiency variances.
ANSWER:
MEDIUM
1,100 × $52
1,100 × $50
Price variance
$57,200
55,000
$ 2,200 U
1,100 × $50
(500 × 2) × $50
Efficiency variance
$55,000
50,000
$ 5,000 U
Chapter 15
Financial Management
15–19
Use the following information for questions 11–13.
Big Corp. manufactures and sells baseball bats. For a recent period, its production and sales
objectives were each set at 20,000 units. Also, for this period the firm had estimated costs as
follows:
Variable production costs
Variable selling costs
Committed fixed costs
Discretionary fixed costs
11.
$3 per unit
$2 per unit
$30,000 per period
$40,000 per period
For this question only, assume that Big Corp. actually produced and sold 18,000 bats. Big
Corp.’s operations for the period would (on an overall basis) be regarded as efficient if
total costs were below what amount?
ANSWER: First, remember how fixed and variable costs change when volume
changes. Fixed costs remain constant in total and variable costs remain constant on a perunit basis. To be regarded as efficient, the company’s costs would need to be at or below
the flexible budget for 18,000 units. The flexible budget for all costs would be:
[18,000 × ($3 + $2)] + $30,000 + $40,000 = $90,000 + $70,000 = $160,000
MEDIUM
12.
For this question only, assume Big Corp. actually produced and sold 19,000 bats. At this
level of operation, Big Corp.’s total costs were $170,000. Evaluate Big Corp.’s success in
terms of effectiveness and efficiency.
ANSWER: Big Corp. was not entirely effective in reaching its goal because its
objective was to produce and sell 20,000 bats. It only produced and sold 19,000. Its
operations would still be regarded as efficient if it contained costs below the flexible
budget for 19,000 units, which would be:
[19,000 × ($3 + $2)] + $30,000 + $40,000 = $95,000 + $70,000 = $165,000.
Since its actual costs were $170,000, the company was neither effective nor efficient in
achieving its operating objectives.
MEDIUM
15–20
13.
Chapter 15
Financial Management
Note that the budget for discretionary fixed costs is $40,000. If actual discretionary fixed
costs were $50,000, could cost control have still been effective? Explain.
ANSWER: Yes, cost control could have been effective. Company managers may have
deliberately and consciously overspent on certain items because of opportunities or
challenges that emerged during the period. For example, advertising expenses may have
been increased because new competitors entered the baseball bat market, or research and
development expenditures may have been boosted because of the discovery of a new
metal alloy that could revolutionize the baseball bat market. Another explanation would
be that cost control was effective, but costs increased dramatically for uncontrollable
reasons (severe inflation).
MEDIUM
CHAPTER 16
INNOVATIVE INVENTORY AND
PRODUCTION MANAGEMENT TECHNIQUES
MULTIPLE CHOICE
1.
Which of the following is not an ordering cost?
a.
b.
c.
d.
cost of receiving inventory
cost of preparing the order
cost of the merchandise ordered
cost of storing the inventory
ANSWER:
2.
an ordering cost.
a carrying cost.
a purchasing cost.
a cost of not carrying goods in stock.
ANSWER:
a
EASY
A _____________ system of production control is paced by product demand.
a.
b.
c.
d.
EOQ
ABC
push
pull
ANSWER:
4.
EASY
The cost of receiving inventory is regarded as
a.
b.
c.
d.
3.
d
d
EASY
Which of the following statements is false concerning electronic data interchange?
a.
b.
c.
d.
Electronic data interchange (EDI) is essential in a pull system.
One of the benefits realized by EDI organizations is a faster processing of
transactions.
Electronic data interchange is essential in a push system.
Electronic data interchange refers to computer-to-computer exchange of
information.
ANSWER:
c
MEDIUM
16–1
16–2
5.
Chapter 16
_____________ is a “pull” system of production and inventory control.
a.
b.
c.
d.
EDI
EOQ
JIT
ABC
ANSWER:
6.
a
EASY
Reducing setup time is a major aspect of
a.
b.
c.
d.
all push inventory systems.
the determination of safety stock quantities.
a JIT system.
an EOQ system.
ANSWER:
c
EASY
Reducing inventory to the lowest possible levels is a major focus of
a.
b.
c.
d.
JIT.
push inventory systems.
EOQ.
ABC.
ANSWER:
9.
EASY
a company’s vendors.
employees.
inspection of finished goods inventory.
a good product warranty.
ANSWER:
8.
c
In a JIT system, the quality of each product begins with
a.
b.
c.
d.
7.
Innovative Inventory and Production Management Techniques
a
EASY
JIT is a philosophy concerned with
a.
b.
c.
d.
when to do something.
how to do something.
where to do something.
how much of something should be done.
ANSWER:
a
EASY
Chapter 16
10.
Innovative Inventory and Production Management Techniques
When JIT is implemented, which of the following changes in the accounting system
would not be expected?
a.
b.
c.
d.
fewer cost allocations
elimination of standard costs
combining labor and overhead into one product cost category
combing raw material and materials in work-in-process into one product cost
category
ANSWER:
11.
MEDIUM
EOQ systems.
push systems in general.
JIT.
pull systems in general.
ANSWER:
c
EASY
Just-in-time (JIT) inventory systems
a.
b.
c.
d.
result in a greater number of suppliers for each production process.
focus on a “push” type of production system.
can only be used with automated production processes.
result in inventories being either greatly reduced or eliminated.
ANSWER:
13.
b
Striving for flexibility in the number of products that can be produced in a short period of
time is characteristic of
a.
b.
c.
d.
12.
16–3
d
EASY
The JIT philosophy does not focus on
a.
b.
c.
d.
standardizing parts used in products.
eliminating waste in the production process.
finding the absolute lowest price for purchased parts.
improving quality of output.
ANSWER:
c
EASY
16–4
14.
Chapter 16
In a JIT manufacturing environment, product costing information is least important for
use in
a.
b.
c.
d.
work in process inventory valuation.
pricing decisions.
product profitability analysis.
make-or-buy decisions.
ANSWER:
15.
MEDIUM
cost of specific-purpose equipment
cost of equipment maintenance
property taxes on the plant
salary of a manufacturing cell worker
ANSWER:
c
EASY
With JIT manufacturing, which of the following costs would be considered a direct
product cost?
a.
b.
c.
d.
insurance on the plant
repair parts for machinery
janitors’ salaries
salary of the plant supervisor
ANSWER:
17.
a
With JIT manufacturing, which of the following costs would be considered an indirect
product cost?
a.
b.
c.
d.
16.
Innovative Inventory and Production Management Techniques
b
MEDIUM
Which of the following statements is not true?
a.
b.
c.
d.
JIT manufacturing strives for zero inventories.
JIT manufacturing strives for zero defects.
JIT manufacturing uses manufacturing cells.
JIT manufacturing utilizes long lead time and few deliveries.
ANSWER:
d
EASY
Chapter 16
18.
Innovative Inventory and Production Management Techniques
The JIT environment has caused a reassessment of product costing techniques. Which of
the following statements is true with respect to this reassessment?
a.
b.
c.
d.
Traditional cost allocations based on direct labor are being questioned and
criticized.
The federal government, through the SEC, is responsible for the reassessment.
The reassessment is caused by the replacement of machine hours with labor hours.
None of the above is true.
ANSWER:
19.
b.
c.
d.
MEDIUM
employees are retrained on different equipment, but the plant layout generally
remains unchanged.
new machinery and equipment must be purchased from franchised JIT dealers.
machinery and equipment are moved into small autonomous production lines
called islands or cells.
new, more efficient machinery and equipment are purchased and installed in the
original plant layout.
ANSWER:
c
MEDIUM
Which of the following describes the effect on direct labor when management adopts the
JIT philosophy?
a.
b.
c.
d.
Each direct labor person performs a single task, thereby allowing that person to
reach his or her theoretical potential.
Because each person runs a single machine in a JIT environment, there are more
employees classified as direct labor.
The environment becomes more labor-intensive.
Machine operators are expected to run several different types of machines, help
set up for production runs, and identify and repair machinery needing
maintenance.
ANSWER:
21.
a
When a firm adopts the just-in-time method of management,
a.
20.
16–5
d
MEDIUM
JIT concepts
a.
b.
c.
d.
can be effectively implemented in organizations that are only partially automated.
are only appropriate for use with CIM systems.
involve shifting from a capital-intensive to a labor-intensive process.
require full computerization of the JIT manufacturing process.
ANSWER:
a
EASY
16–6
22.
Chapter 16
According to JIT philosophy,
a.
b.
c.
d.
inventories of finished goods always should be available to meet customer
demand.
push-through manufacturing flows are the most efficient.
maintaining inventories wastes resources and frequently covers up poor work or
other problems.
long production runs and large production lot sizes take advantage of economies
of scale.
ANSWER:
23.
MEDIUM
uses a job order costing system.
classifies processing costs as raw (or direct) material, direct labor, and overhead.
is more complex than in other types of manufacturing environments.
follows process costing procedures whereby costs are accumulated by the process
(cell) and attached to units processed for the period.
ANSWER:
d
MEDIUM
An implication of the demand-pull nature of the JIT production process is that
a.
b.
c.
d.
finished goods inventories must be available to meet customer demand, although
raw material is delivered on an as-needed basis.
more storage space for inventories is necessary.
finished products are packaged and shipped to customers immediately, thus
requiring minimal finished goods inventories.
problem areas become less visible as inventories are reduced.
ANSWER:
25.
c
Accounting for product costs in a JIT environment
a.
b.
c.
d.
24.
Innovative Inventory and Production Management Techniques
c
MEDIUM
In accounting for JIT operations, the Raw Material Inventory account
a.
b.
c.
d.
is closely monitored to ensure that materials are always on hand in time.
can be expected to have a larger balance than with traditional manufacturing
methods.
is combined with the Work In Process Inventory account.
is combined with the Finished Goods Inventory account.
ANSWER:
c
EASY
Chapter 16
26.
Innovative Inventory and Production Management Techniques
A kanban plays an important role in
a.
b.
c.
d.
JIT.
EOQ.
ABC.
CPM.
ANSWER:
27.
EASY
Focused factory arrangements
Economic order quantity
Multiprocess handling
Activity-based management
ANSWER:
b
MEDIUM
The term “cell” is used to describe
a.
b.
c.
d.
a grouping of one or more automated machines within a company.
a storage bin for “C” type inventory in an ABC inventory system.
files in a CAD/CAM system.
a factory’s area of conversion activity.
ANSWER:
29.
a
____________________ may involve relocation or plant modernization by a vendor.
a.
b.
c.
d.
28.
16–7
a
EASY
In a production cell,
a.
b.
c.
d.
an individual worker may be expected to operate several different machines, do
setups, and perform preventive maintenance on the equipment.
each worker becomes an expert in the operation of a single piece of equipment.
machines are arranged so that similar machines are grouped together.
clear separation is maintained between those workers who operate the machinery
and those workers who set up and maintain the machinery.
ANSWER:
a
MEDIUM
16–8
30.
Chapter 16
U-shaped groupings of workers and machines that improve materials handling and flow
are known as
a.
b.
c.
d.
manufacturing cells.
efficiency stations.
multi-flow modules.
productivity islands.
ANSWER:
31.
EASY
More flexibility
no
no
yes
yes
ANSWER:
d
Less process involvement
no
yes
yes
no
EASY
The process of _________ occurs when equipment is programmed to stop when a certain
situation arises.
a.
b.
c.
d.
throughput
automation
backflushing
information sharing
ANSWER:
33.
a
For workers in a multiprocess handling situation, which of the following happens?
a.
b.
c.
d.
32.
Innovative Inventory and Production Management Techniques
b
EASY
The connection of two or more flexible manufacturing systems via a host computer and a
networking information system is known as
a.
b.
c.
d.
computer integrated
manufacturing
yes
yes
no
no
ANSWER:
b
EASY
electronic data
interchange
yes
no
no
yes
Chapter 16
34.
Innovative Inventory and Production Management Techniques
A key element of Japan’s success in world markets is
a.
b.
c.
d.
the elimination of waste in all operations.
automation of the billing function.
inefficient labor forces in competing countries.
the verification procedures incorporated into computer programs.
ANSWER:
35.
Standard costs
yes
no
yes
no
ANSWER:
EASY
c
Minimal variances from standards
no
no
yes
yes
EASY
Which of the following areas offers an opportunity to eliminate waste?
a.
b.
c.
d.
raw material and labor
space and production time
recordkeeping and working capital
all of the above
ANSWER:
37.
a
Backflush costing is concerned with which of the following?
a.
b.
c.
d.
36.
16–9
d
EASY
Flexible manufacturing systems are
a.
b.
c.
d.
designed to provide more flexibility in a firm’s manufacturing process by using
computer-aided machinery.
the same as computer-aided design systems.
commonly used by firms that need to make large quantities of one product.
are very complicated and cause increased defect rates in output.
ANSWER:
a
EASY
16–10
38.
Chapter 16
Kaizen means
a.
b.
c.
d.
doing it the Japanese way.
continuous improvement.
employee empowerment.
implementation of a centralized organizational structure.
ANSWER:
39.
a
EASY
The peak level of unit sales will occur in which stage of the product life cycle?
a.
b.
c.
d.
growth
maturity
decline
introduction
ANSWER:
b
EASY
For product life cycle costing, R&D costs are
a.
b.
c.
d.
expensed as incurred.
capitalized and allocated over the life cycle.
deducted as period costs.
charged to specific departments as incurred.
ANSWER:
42.
EASY
target costing.
product life cycle costing.
activity-based costing.
responsibility costing.
ANSWER:
41.
b
The process that determines an allowable product cost while setting market price and
allowing for an acceptable profit margin is known as
a.
b.
c.
d.
40.
Innovative Inventory and Production Management Techniques
b
EASY
An important focus in product life cycle costing is
a.
b.
c.
d.
the activity base.
the target cost.
the cost driver.
variable costs.
ANSWER:
b
EASY
Chapter 16
43.
Innovative Inventory and Production Management Techniques
Projected sales price minus a reasonable profit equals
a.
b.
c.
d.
the standard cost.
contribution margin.
projected Cost of Goods Sold.
target cost.
ANSWER:
44.
EASY
30%
50%
70%
90%
ANSWER:
d
EASY
Which of the following fluctuate over the product life cycle?
a.
b.
c.
d.
sales price per unit
the types of costs that are incurred
product profitability
all of the above
ANSWER:
46.
d
Approximately what percentage of future product costs is determined in the development
stage of the product life cycle?
a.
b.
c.
d.
45.
16–11
d
EASY
In which of the following stages of the product life cycle would operating losses not be
expected?
a.
b.
c.
d.
growth
development
introduction
decline
ANSWER:
a
EASY
16–12
47.
Chapter 16
During which stage of the product life cycle will a company witness the highest profit?
a.
b.
c.
d.
development
maturity
growth
decline
ANSWER:
48.
EASY
design specifications
manufacturing processes
impact on product costs when different inputs resources are used
all of the above
ANSWER:
d
EASY
Ongoing efforts to reduce costs, increase product quality, and/or improve production
process once manufacturing has begun is known as
a.
b.
c.
d.
cost management.
kaizen costing.
target costing.
life-cycle costing.
ANSWER:
50.
c
Cost tables are databases that provide information on which of the following?
a.
b.
c.
d.
49.
Innovative Inventory and Production Management Techniques
b
EASY
Kaizen costing is used for which of the following types of products?
a.
b.
c.
d.
New products
yes
no
no
yes
ANSWER:
b
Existing products
yes
yes
no
no
EASY
Chapter 16
51.
Innovative Inventory and Production Management Techniques
A mandate to reduce costs, increase product quality, and/or improve production processes
through continuous improvement is known as
a.
b.
c.
d.
kaizen costing.
activity-based costing.
the theory of constraints.
mass customization.
ANSWER:
52.
EASY
the cost of special orders.
the level of activities that are non-value-added.
product variety.
period costs.
ANSWER:
b
EASY
The projected sales price for a new product (which is still in the development stage of the
product life cycle) is $50. The company has estimated the life-cycle cost to be $30 and the
first-year cost to be $60. On this type of product, the company requires a $12 per unit
profit. What is the target cost of the new product?
a.
b.
c.
d.
$60
$30
$38
$42
ANSWER:
54.
a
If life-cycle costs exceed the target cost of a product, managers will strive to reduce
a.
b.
c.
d.
53.
16–13
c
EASY
The theory of constraints can
a.
b.
c.
d.
identify what limitations exist with raw material suppliers.
follows a methodology similar to linear programming.
be ignored since it assumes too many estimates in the production cycle.
show where bottlenecks exist and sets the limit of output to these bottlenecks.
ANSWER:
d
EASY
16–14
55.
Chapter 16
Placing quality inspection points ahead of bottlenecks will reduce
a.
b.
c.
d.
product flow.
the number of defective products.
the influence of constraints on production flow.
the critical path time.
ANSWER:
56.
MEDIUM
precede bottlenecks.
follow bottlenecks.
be placed at the end of all production processes.
be placed at random points in the manufacturing process.
ANSWER:
a
EASY
The flow of goods through a production process cannot be at a faster rate than the slowest
bottleneck is the definition for
a.
b.
c.
d.
mass customization.
business process reengineering.
the theory of constraints.
the Pareto principle.
ANSWER:
58.
c
Quality inspection points should
a.
b.
c.
d.
57.
Innovative Inventory and Production Management Techniques
c
EASY
Bottlenecks are
a.
b.
c.
d.
machine constraints in the production line.
machine constraints that restrict the production cycle so idle time at other
processes occurs.
useful for identifying any production spot slowdown.
restrictions on raw material sources but not the quantity of output.
ANSWER:
b
EASY
Chapter 16
59.
Innovative Inventory and Production Management Techniques
In analyzing production flow, a bottleneck is
a.
b.
c.
d.
an intermediate inventory.
always off the critical path.
a capacity constraint.
related to a non-value-adding activity.
ANSWER:
60.
EASY
Period-by-period basis
yes
yes
no
no
ANSWER:
b
Life-cycle basis
yes
no
yes
no
EASY
Which approaches to costing should be associated with each of the following life-cycle
stages?
a.
b.
c.
d.
Development
Kaizen
Target
Target
Kaizen
ANSWER:
62.
c
Product profit margins are typically judged on a
a.
b.
c.
d.
61.
16–15
c
Introduction
Target
Standard
Kaizen
Standard
Maturity
Standard
Kaizen
Standard
Target
MEDIUM
In the introduction stage of a product's life-cycle, which of the following type of costs
typically may create losses rather than profits?
a.
b.
c.
d.
advertising
assembly
design
overhead
ANSWER:
a
MEDIUM
16–16
63.
Chapter 16
Most studies have indicated that what percent of a product's total life-cycle costs are
determined in the development/design stage?
a.
b.
c.
d.
60%–70%
70%–80%
80%–90%
90%–95%
ANSWER:
64.
EASY
kaizen costing
target costing
standard costing
process costing
ANSWER:
b
MEDIUM
Which of the following formulas is the best representation of the concept of target
costing?
a.
b.
c.
d.
target cost + profit margin = selling price
selling price – target cost = profit margin
selling price – profit margin = target cost
target cost – standard cost = profit margin
ANSWER:
66.
c
Which of the following costing methods is the most effective in controlling a product's
total life-cycle cost?
a.
b.
c.
d.
65.
Innovative Inventory and Production Management Techniques
c
EASY
Successful product development should include
a.
b.
c.
d.
kaizen costing.
value engineering.
kanban implementation.
all of the above.
ANSWER:
b
MEDIUM
Chapter 16
67.
Innovative Inventory and Production Management Techniques
Value engineering seeks to obtain increased
a.
b.
c.
d.
product life-cycle and reduced direct labor inputs.
planning team membership and reduced time-to-market.
product performance ratio and reduced substitute goods.
product functionality and reduced costs.
ANSWER:
68.
DIFFICULT
can be applied to services if they are sufficiently uniform.
can be applied to services only if they are automated.
can be applied to services that are performed in a manufacturing environment.
cannot be applied to services.
ANSWER:
a
MEDIUM
Kaizen costing helps to
a.
b.
c.
d.
reduce product costs of products in the design and development stage.
keep the target cost as the primary focus after a product enters production.
keep profit margin relatively stable as product price declines over the product life
cycle.
reduce the cost of engineering change orders during each stage of the product life
cycle.
ANSWER:
70.
d
Target costing
a.
b.
c.
d.
69.
16–17
c
DIFFICULT
In which life-cycle stage are product quality improvements and stable selling prices likely
to occur?
a.
b.
c.
d.
introduction
growth
maturity
decline
ANSWER:
b
MEDIUM
16–18
71.
Chapter 16
From a cost management view, research and development cost represents
a.
b.
c.
d.
a life-cycle investment
a period expense.
an unearned revenue.
a risk reserve.
ANSWER:
72.
Computers
yes
no
yes
yes
ANSWER:
MEDIUM
c
Furniture
yes
yes
no
no
Textbooks
yes
yes
no
yes
Automobiles
yes
no
yes
yes
MEDIUM
Kanban is the Japanese word for
a.
b.
c.
d.
production.
just-in-time.
card.
target costing.
ANSWER:
74.
a
Life-cycle costing is especially important in which of the following types of companies?
a.
b.
c.
d.
73.
Innovative Inventory and Production Management Techniques
c
EASY
JIT seeks to
a.
b.
c.
d.
reduce production cost while increasing quality.
radically redesign the production process for effectiveness.
modify all non-value-added activities.
all of the above.
ANSWER:
a
DIFFICULT
Chapter 16
75.
Innovative Inventory and Production Management Techniques
The JIT philosophy indicates that inventory, as well as which of the following, should be
eliminated?
a.
b.
c.
d.
Suppliers
yes
yes
no
no
ANSWER:
76.
Employees
yes
no
yes
no
Business-ValueAdded Activities
yes
no
no
yes
MEDIUM
variable overhead allocation methodologies.
fixed overhead allocation methodologies.
variable and fixed overhead allocation methodologies.
the financial accounting requirement to expense research and development as
incurred.
ANSWER:
b
MEDIUM
Goods will flow through a production process at the rate of the
a.
b.
c.
d.
slowest part of the process.
fastest part of the process.
average of all the parts of the process.
time standards set using externally calibrated benchmarks.
ANSWER:
78.
d
Storage
yes
yes
no
yes
Companies have often produced significant amounts of unwanted inventory because of
a.
b.
c.
d.
77.
16–19
a
MEDIUM
A machine constraint creates
a.
b.
c.
d.
an autonomation.
a bottleneck.
a push inventory system.
the need for third-party logistics.
ANSWER:
b
EASY
16–20
79.
Chapter 16
In a production process with a machine constraint, if a quality control point is to be
established, it should be set up
a.
b.
c.
d.
within the machine's processes.
directly after the machine has performed its functions.
immediately before the machine.
at the end of the production process.
ANSWER:
80.
Innovative Inventory and Production Management Techniques
c
EASY
Managing constraints is a process of
a.
b.
c.
d.
backflush costing.
design for manufacturability.
just-in-time redesign.
continuous improvement.
ANSWER:
d
MEDIUM
THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN
THE APPENDIX OF THE CHAPTER.
81.
(Appendix) The Whitehead Co. produces quality jewelry items for various retailers. For
the coming year, it has estimated it will consume 500 ounces of gold. Its carrying costs
for a year are $2 per ounce. No safety stock is maintained. If the EOQ is 100 ounces, what
is the cost per order?
a.
b.
c.
d.
$40
$20
$5
$25
ANSWER:
82.
b
MEDIUM
(Appendix) The Whitehead Co. produces quality jewelry items for various retailers. For
the coming year, it has estimated it will consume 500 ounces of gold. Its carrying costs
for a year are $2 per ounce. No safety stock is maintained. If the EOQ is 100 ounces, what
would be the estimate for Whitehead’s total carrying costs for the coming year?
a.
b.
c.
d.
$200
$250
$100
$1,000
ANSWER:
c
MEDIUM
Chapter 16
83.
Innovative Inventory and Production Management Techniques
(Appendix) A firm estimates that its annual carrying cost for material X is $.30 per lb. If
the firm requires 50,000 lbs. per year, and ordering costs are $100 per order, what is the
EOQ (rounded to the nearest pound)?
a.
b.
c.
d.
5,774 lbs.
4,082 lbs.
1,732 lbs.
1,225 lbs.
ANSWER:
84.
a
MEDIUM
(Appendix) Z Corp.’s EOQ for Material A is 500 units. This EOQ is based on:
Annual demand
Ordering costs
5,000 units
$12.50
What is the annual carrying cost per unit for Material A?
a.
b.
c.
d.
$0.50
$2.00
$2.50
$5.00
ANSWER:
85.
16–21
a
MEDIUM
(Appendix) Z Corp.’s EOQ for Material A is 500 units. This EOQ is based on:
Annual demand
Ordering costs
5,000 units
$12.50
What are Z Corp.’s total annual ordering costs for Material A?
a.
b.
c.
d.
$6,000
$600
$125
$1,000
ANSWER:
c
MEDIUM
16–22
86.
Chapter 16
(Appendix) Clear View Co. manufactures various glass products including a car window.
The setup cost to produce the car window is $1,200. The cost to carry a window in
inventory is $3 per year. Annual demand for the car window is 12,000 units. What is the
most economical production run (rounded to the nearest unit)?
a.
b.
c.
d.
6,000 units
3,000 units
9,295 units
3,098 units
ANSWER:
87.
d
MEDIUM
(Appendix) Clear View Co. manufactures various glass products including a car window.
The setup cost to produce the car window is $1,200. The cost to carry a window in
inventory is $3 per year. Annual demand for the car window is 12,000 units. If the annual
demand for the car window was to increase to 15,000 units,
a.
b.
c.
d.
the number of setups would decrease.
the total carrying costs would increase.
the economic order quantity would decline.
all of the above would occur.
ANSWER:
88.
Innovative Inventory and Production Management Techniques
b
EASY
(Appendix) A company has estimated its economic order quantity for Part A at 2,400
units for the coming year. If ordering costs are $200 and carrying costs are $.50 per unit
per year, what is the estimated total annual usage?
a.
b.
c.
d.
6,000 units
28,800 units
7,200 units
2,400 units
ANSWER:
c
MEDIUM
Chapter 16
89.
Innovative Inventory and Production Management Techniques
(Appendix) A company annually consumes 10,000 units of Part C. The carrying cost of
this part is $2 per year and the ordering costs are $100. The company uses an order
quantity of 500 units. By how much could the company reduce its total costs if it
purchased the economic order quantity instead of 500 units?
a.
b.
c.
d.
$500
$2,000
$2,500
$0
ANSWER:
90.
MEDIUM
250 units
1,000 units
500 units
2,000 units
ANSWER:
a
MEDIUM
(Appendix) Which of the following tells management “when” to order?
a.
b.
c.
d.
safety stock level
order point
the economic order quantity
the Pareto inventory analysis
ANSWER:
92.
a
(Appendix) A company annually consumes 10,000 units of Part C. The carrying cost of
this part is $2 per year and the ordering costs are $100. The company uses an order
quantity of 500 units. If the company operates 200 days per year, and the lead time for
ordering Part C is 5 days, what is the order point?
a.
b.
c.
d.
91.
16–23
b
EASY
(Appendix) Which of the following affects the order point?
a.
b.
c.
d.
daily usage
lead time
safety stock
all of the above
ANSWER:
d
EASY
16–24
93.
Chapter 16
(Appendix) A decrease in the lead time would reduce the
a.
b.
c.
d.
order point.
safety stock.
economic order quantity.
ordering costs.
ANSWER:
94.
d
EASY
(Appendix) If no safety stock is carried, the average inventory is equal to the
a.
b.
c.
d.
order point/2.
order point × 2.
economic order quantity/2.
economic order quantity × 2.
ANSWER:
c
EASY
(Appendix) The role of safety stock in an organization is to
a.
b.
c.
d.
reduce the lead time for an order to be received.
reduce the probability of a stockout.
reduce the order point.
decrease the economic order quantity.
ANSWER:
97.
EASY
cost of a stockout.
probability of a stockout.
carrying cost of stock.
economic order quantity.
ANSWER:
96.
a
(Appendix) The size of the safety stock is directly affected by all of the following, except
the
a.
b.
c.
d.
95.
Innovative Inventory and Production Management Techniques
b
EASY
(Appendix) The optimal size of the safety stock is defined by the point where the
a.
b.
c.
d.
costs of carrying the safety stock equal stockout costs.
setup costs equal stockout costs.
ordering costs equal stockout costs.
reorder point equals safety stock.
ANSWER:
a
MEDIUM
Chapter 16
98.
Innovative Inventory and Production Management Techniques
(Appendix) If a company carries safety stock and its annual carrying costs per unit are
$0.30, what formula yields the total annual carrying costs?
a.
b.
c.
d.
$0.30 × [(EOQ/2) + Safety stock)]
$0.30 × (EOQ + Safety stock)
$0.30 × [(EOQ × 2) + Safety stock)]
$0.30 × (EOQ – Safety stock)
ANSWER:
99.
EASY
10,000 gallons
38,000 gallons
48,000 gallons
58,000 gallons
ANSWER:
d
MEDIUM
(Appendix) Blanchard Corp. operates its factory 300 days per year. Its annual
consumption of Material Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of
Material Y and its lead time is 12 business days. If the EOQ for Material Y is 30,000
gallons, and the carrying cost per gallon per year is $.25, what is the total annual carrying
cost for Material Y?
a.
b.
c.
d.
$3,750
$7,500
$6,250
$10,000
ANSWER:
101.
a
(Appendix) Blanchard Corp. operates its factory 300 days per year. Its annual
consumption of Material Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of
Material Y and its lead time is 12 business days. What is the order point for Material Y?
a.
b.
c.
d.
100.
16–25
c
MEDIUM
(Appendix) Blanchard Corp. consumes 1,200,000 gallons of Material Y per year. Its order
quantity is 30,000 gallons. It maintains a safety stock of 10,000 gallons and its annual
carrying costs are $0.25 per gallon per year. If the ordering cost is $20 per order, what are
the total annual ordering costs?
a.
b.
c.
d.
$600
$800
$8,300
$1,200
ANSWER:
b
MEDIUM
16–26
102.
Chapter 16
(Appendix) R Corp.’s order quantity for Material T is 5,000 lbs. If the company maintains
a safety stock of T at 500 lbs., and its order point is 1,500 lbs., what is the lead time
assuming daily usage is 50 lbs.?
a.
b.
c.
d.
30 days
100 days
10 days
20 days
ANSWER:
103.
MEDIUM
$1,000
$600
$100
$1,100
ANSWER:
b
MEDIUM
(Appendix) For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its
average inventory (taking into account the safety stock) is 8,000 pounds. What is the
apparent order quantity?
a.
b.
c.
d.
16,000 lbs.
6,000 lbs.
10,000 lbs.
21,000 lbs.
ANSWER:
105.
d
(Appendix) R Corp.’s order quantity for Material T is 5,000 lbs. If the company maintains
a safety stock of T at 500 lbs., and its order point is 1,500 lbs., what would be the total
annual carrying costs assuming the carrying cost per unit is $0.20?
a.
b.
c.
d.
104.
Innovative Inventory and Production Management Techniques
b
MEDIUM
(Appendix) In an ABC inventory analysis, the items that are most likely to be controlled
with a red-line system are the
a.
b.
c.
d.
A items.
B items.
C items.
items on a perpetual inventory.
ANSWER:
c
EASY
Chapter 16
106.
Innovative Inventory and Production Management Techniques
(Appendix) Which of the following might be appropriate for items in the “C” category of
an ABC inventory analysis?
a.
b.
c.
d.
a red-line system
a two-bin system
a periodic inventory system
all of the above
ANSWER:
107.
d
MEDIUM
(Appendix) All other factors equal, a decrease in the order quantity will
a.
b.
c.
d.
decrease the annual carrying costs.
decrease the annual ordering costs.
increase the lead time.
reduce the safety stock.
ANSWER:
a
EASY
(Appendix) The economic order quantity is not affected by the
a.
b.
c.
d.
estimate of the annual material consumption.
cost of insuring a unit of inventory for a year.
cost of purchase-order forms.
safety stock level.
ANSWER:
110.
MEDIUM
company’s weighted average cost of capital
cost of purchase requisition forms
cost of insuring inventory
cost of a stockout
ANSWER:
109.
d
(Appendix) The __________________ would not affect the economic order quantity.
a.
b.
c.
d.
108.
16–27
d
EASY
(Appendix) A decrease in the price of a raw material could result in a(n)
a.
b.
c.
d.
increase in the lead time.
increase in the EOQ.
decrease in the order point.
increase in the setup costs.
ANSWER:
b
MEDIUM
16–28
111.
Chapter 16
(Appendix) The number of orders that will be submitted each year for raw material is
given by which formula?
a.
b.
c.
d.
Economic order quantity × order point
Total annual material needs/economic order quantity
Order point/economic order quantity
Total annual material needs/safety stock
ANSWER:
112.
Innovative Inventory and Production Management Techniques
b
EASY
(Appendix) The economic production run quantity directly affects the
a.
b.
c.
d.
order point for raw material inventories.
safety stock for finished goods inventory.
level of finished goods inventory.
lead time for producing finished goods inventory.
ANSWER:
c
MEDIUM
SHORT ANSWER/PROBLEMS
1.
Why may a JIT control system be useful in disclosing a firm’s inefficiencies and
problems?
ANSWER: The JIT control system is based on a philosophy that inventory is
undesirable. Subscribers to the JIT philosophy believe inventory reductions expose
organizational problems and inefficiencies. These problems and inefficiencies may not be
brought to management’s attention if inventories are not pushed to lower and lower
levels. They would remain hidden and undetectable at higher levels of inventory.
MEDIUM
2.
(Appendix) What is the purpose of the EOQ model?
ANSWER: The purpose of the EOQ model is to identify the least cost quantity of a
material to be purchased at each order point. The model explicitly considers the carrying
and ordering costs and identifies the purchase quantity that minimizes the total of these
costs.
MEDIUM
Chapter 16
3.
Innovative Inventory and Production Management Techniques
16–29
Why does a “push” based inventory control system generate larger inventory levels than a
“pull” system?
ANSWER: Larger levels of inventory exist by design in push production control
systems. The inventory buffers permit lower levels of communication between business
segments, permit longer production runs, and protect the firm from environmental
uncertainties and unforeseen interruptions in production or supplies.
MEDIUM
4.
What does the term “pull” mean in the context of production control?
ANSWER: Pull simply refers to the fact that the pace and level of production are
geared to product demand. Each work center sets the pace for the next upstream work
center. Customer demand paces the final downstream work center.
MEDIUM
5.
Why might it be necessary to make adjustments to the accounting system in a firm that
adopts JIT?
ANSWER: JIT production control systems foster automation and reduced levels of
inventory. Consequently, raw material inventories and direct labor costs may be too small
to warrant separate cost pools—they can be combined with other cost pools.
Additional adjustments may be necessary to accommodate standard costs, which are
constantly adjusted to reflect the latest technological changes in production methods.
Also, more costs could be traced to specific products and fewer costs would have to be
allocated.
MEDIUM
6.
What is the relationship between warehouse space and the length of production runs?
ANSWER: Longer production runs increase the levels of specific inventories. To
accommodate long production runs, significant warehouse space needs to be available for
storing intermediate and final products.
MEDIUM
16–30
7.
Chapter 16
Innovative Inventory and Production Management Techniques
Why is it important for a company to be (geographically) close to its suppliers to
implement a JIT inventory control system?
ANSWER: The geographical proximity is important to minimize shipping and
handling costs of supplies and materials. Geographical proximity also facilitates frequent
communication and joint planning between a supplier and customer.
MEDIUM
8.
Bell Company estimates that it will consume 400,000 units of Part A in the coming year.
The ordering cost for this unit is $3.20. What would be the carrying costs per unit if the
EOQ model indicates that it is optimal to place exactly 50 orders for the upcoming year?
ANSWER: If projected usage for the year is 400,000 units, the EOQ would be 8,000
units (400,000/50). To determine the carrying costs per unit, the following equation is
solved:
8,000 = [(2  400,000  $3.20 / CC] , where CC is the carrying cost per unit.
Solving the equation, CC = $0.04 per unit.
MEDIUM
9.
Bell Company estimates that it will consume 400,000 units of Part A in the coming year.
The ordering cost for this unit is $3.20. Bell Company wants to maintain a safety stock of
1,000 units, and its factory operates 200 days per year. What is the order point if the lead
time is 2 days?
ANSWER: The order point = (daily usage × lead time) + safety stock daily usage =
400,000/200 = 2,000; lead time = 2 days, safety stock = 1,000
Order point = (2,000 × 2) + 1,000 = 5,000 units
MEDIUM
Chapter 16
10.
Innovative Inventory and Production Management Techniques
16–31
How does adopting a JIT system affect the firm’s relationship with suppliers and how
must suppliers change their way of doing business?
ANSWER: The JIT manufacturer will limit the number of suppliers to a few. Longterm contracts are entered into with suppliers. Suppliers’ raw material must be top quality
with no defects.
Small quantities of raw material are delivered frequently and little or no raw material is
maintained by the buyer.
Suppliers must be located close enough to the JIT buyer to deliver small quantities very
quickly. The supplier must agree to providing a top-quality product to its JIT customer.
MEDIUM
11.
Identify and discuss how sales and costs are affected during the five stages of the product
life cycle.
ANSWER: The five stages of the product life cycle are (1) development, (2) introduction, (3) growth, (4) maturity, and (5) decline. In the development stage, no
production costs or sales exist, but R & D costs are extremely high. During the
introduction stage low unit sales exist while high advertising costs are evident. The
growth stage sees increasing unit sales and decreasing production costs per unit. The
maturity stage witnesses peak unit sales and a stabilization of production costs per unit.
During the decline stage unit sales decrease while production costs per unit increase.
MEDIUM
12.
Discuss differences in approach and potential usage between target and kaizen costing.
ANSWER: Target costing is considered a procedural approach that is used to
determine a maximum allowable cost for a product, while kaizen costing is a mandate to
reduce costs, increase product quality, and/or improve production process through
continuous improvement. Target costing has a large potential for cost reduction in lifelong product cost because these costs are embedded in the product during design and
development. Kaizen costing has limited potential in cost reduction of existing products,
but may be useful in target costing in the future.
MEDIUM
CHAPTER 17
EMERGING MANAGEMENT PRACTICES
MULTIPLE CHOICE
1.
The focus of BPR is improving
a.
b.
c.
d.
products.
processes.
cost reduction.
decision making.
ANSWER:
2.
employee layoffs.
outsourcing initiatives.
technology acquisition.
plant expansion.
ANSWER:
d
EASY
BPR stands for
a.
b.
c.
d.
business product reengineering.
business purchase reengineering.
business process reengineering.
business process reduction.
ANSWER:
4.
EASY
BPR is not associated with
a.
b.
c.
d.
3.
b
c
EASY
Who is not involved in the successful implementation of BPR?
a.
b.
c.
d.
investors
customers
suppliers
top management
ANSWER:
a
EASY
17–1
17–2
5.
Chapter 17
Which of the following is not a trend promoting the increased use of BPR?
a.
b.
c.
d.
advancement of technology
pursuit of increased quality
price competition caused by globalization
business expansion
ANSWER:
6.
d
EASY
An advantage of downsizing is
a.
b.
c.
d.
decreased costs in the long run.
layoffs.
one-time losses.
reduced communication.
ANSWER:
a
EASY
Outsourcing and marketing worldwide enable firms to
a.
b.
c.
d.
develop new markets.
reduce input costs.
manage effects of peaks and valleys in local economies.
all of the above.
ANSWER:
9.
EASY
reduction in workforce.
restructuring of processes.
elimination of noncore businesses.
all of the above.
ANSWER:
8.
d
Downsizing results in a(n)
a.
b.
c.
d.
7.
Emerging Management Practices
d
EASY
Diversity applies to differences in
a.
b.
c.
d.
race.
religion.
culture.
all of the above.
ANSWER:
d
EASY
Chapter 17
10.
Emerging Management Practices
ERP stands for
a.
b.
c.
d.
enterprise resource production.
enterprise resource purchasing.
enterprise resource planning.
enterprise resource processing.
ANSWER:
11.
packaged software.
methods of examining processes.
ways to downsize.
ways to expand geographical operations.
ANSWER:
EASY
improve quality.
improve service.
reduce overhead.
all of the above.
ANSWER:
d
EASY
Data mining is used to
a.
b.
c.
d.
uncover quality problems.
study customer retention.
identify cost drivers.
all of the above.
ANSWER:
14.
a
ERP systems should help a company
a.
b.
c.
d.
13.
EASY
ERP systems are
a.
b.
c.
d.
12.
c
d
EASY
Data mining
a.
b.
c.
d.
is packaged software.
is a method of examining processes.
uses statistical techniques to solve problems.
is a way to downsize.
ANSWER:
c
EASY
17–3
17–4
15.
Chapter 17
A strategic alliance is a
a.
b.
c.
d.
packaged software.
way for two companies to jointly contribute to the supply chain.
way to downsize.
method of examining processes.
ANSWER:
16.
d
EASY
(A) __________ allows a company to accomplish a technology swap.
a.
b.
d.
d.
data mining
strategic alliance
diversity
BPR
ANSWER:
b
EASY
_____________ is a philosophy of increasing a firm’s performance by involving all
workers.
a.
b.
c.
d.
Open-book management
Data mining
Diversity
Strategic alliance
ANSWER:
19.
EASY
joint ventures.
technology swaps.
licensing.
all of the above.
ANSWER:
18.
b
Strategic alliances take the form of
a.
b.
c.
d.
17.
Emerging Management Practices
a
EASY
Disclosing detailed financial information to all employees is a characteristic of
a.
b.
c.
d.
open-book management.
data mining.
diversity.
strategic alliance.
ANSWER:
a
EASY
Chapter 17
20.
Emerging Management Practices
_____________ is a way of teaching accounting concepts to financially unsophisticated
employees.
a.
b.
c.
d.
Data mining
Open-book management
Game playing
BPR
ANSWER:
21.
EASY
mine data.
form strategic alliances.
win.
use ERP.
ANSWER:
c
EASY
For game playing to work, motivation must come from
a.
b.
c.
d.
individual employees.
lower management.
the board of directors.
upper management.
ANSWER:
23.
c
To make game playing successful, the employees must be able to
a.
b.
c.
d.
22.
17–5
d
EASY
_____________ is a characteristic of a company that is best suited for open-book
management.
a.
b.
c.
d.
Large size
Decentralized management
Centralized management
Service-oriented
ANSWER:
b
EASY
17–6
24.
Chapter 17
EMS stands for
a.
b.
c.
d.
environmental manufacturing system.
employee management system.
emergency medical services.
environmental management system.
ANSWER:
25.
d
EASY
____________ is (are) a strategy for dealing with environmental effects.
a.
b.
c.
d.
End-of-pipe strategies
Process improvements
Pollution prevention
All of the above
ANSWER:
26.
Emerging Management Practices
d
EASY
EMS has to do with handling
a.
b.
c.
d.
pollution.
manufacturing.
scrap.
by-products.
ANSWER:
a
EASY
SHORT ANSWER/PROBLEMS
1.
Define business process reengineering (BPR).
ANSWER: Business process reengineering is a tool to achieve large, quick gains in
effectiveness or efficiency through redesigning the execution of specific business
functions. It is a method of examining processes to identify and then eliminate, reduce,
or replace functions and processes that add little customer value to products or services.
BPR is designed to bring radical changes to an organization’s operations. BPR is often
associated with employee layoffs, outsourcing initiatives, and technology acquisition.
MEDIUM
Chapter 17
2.
Emerging Management Practices
17–7
Why has BPR usage increased?
ANSWER:
1.
The advancement of technology has made possible electronic remittance of
accounts payable and the use of robotic equipment to move and assemble
components in a manufacturing facility. Advancements in technology have
improved efficiencies throughout the supply chain.
2.
The pursuit of increased quality is necessary because global competition allows
consumers to purchase products and services from the highest quality providers in
the world. BPR is a useful tool for increasing quality because it focuses attention
on processes associated with poor quality and indicates ways in which quality can
be improved by replacing, changing, or eliminating those processes.
3.
BPR usage is increasing because of the increase in price competition caused by
globalization. To successfully compete on the basis of price, firms must identify
ways to become more efficient and thus reduce costs.
MEDIUM
3.
What is downsizing and how is it accomplished?
ANSWER: Downsizing is any management action that reduces employment upon
restructuring operations in response to competitive pressures. Events typical of
downsizing are reduction of the workforce, restructuring of jobs and processes, and
reduction or elimination of noncore businesses.
MEDIUM
4.
To what does workforce diversity refer?
ANSWER: It refers to the fact that companies often find that their employees have
very diverse backgrounds such as religion, race, values, work habits, cultures, political
ideologies, and education levels.
MEDIUM
17–8
5.
Chapter 17
Emerging Management Practices
What are enterprise resource planning systems (ERPs)?
ANSWER: They are packaged software programs that allow companies to:
(1) automate and integrate the majority of their business processes, (2) share common
data and practices across the entire enterprise, and (3) produce and assess information in a
real-time environment. ERP software includes brand names such as SAP, R/3,
PeopleSoft, and Baan.
MEDIUM
6.
Define a strategic alliance.
ANSWER: It is an interorganizational agreement that goes beyond normal
customer/supplier arrangements involving two or more firms with complimentary core
competencies to jointly contribute to the supply chain.
EASY
7.
What forms can strategic alliances take?
ANSWER: Strategic alliances can take the forms of joint ventures, equity investment,
licensing, joint R&D arrangements, technology swaps, and exclusive buyer/seller
agreements.
EASY
8.
What is open-book management?
ANSWER: It is a philosophy about increasing a firm’s performance by involving all
workers and ensuring that all workers have access to operational and financial
information necessary to achieve performance improvements.
EASY
Chapter 17
9.
Emerging Management Practices
17–9
What are the principles of open-book management?
ANSWER:
1.
Turn the management of a business into a game that employees can win.
2.
Open the books and share financial and operating information with employees.
3.
Teach the employees to understand the company’s financial statements.
4.
Show employees how their work influences financial results.
5.
Link nonfinancial measures to financial results.
6.
Target priority areas and empower employees to make improvements.
7.
Review results together and keep employees accountable.
8.
Post results and celebrate successes.
9.
Distribute bonus awards based on employee contributions to financial outcomes.
10.
Share the ownership of the company with employees (i.e., stock options).
MEDIUM
10.
How should employees be motivated so open-book management will succeed?
ANSWER: The obvious way for upper management to motivate workers is to link
their compensation to increases in profits from the effective use of the financial and
operating information provided to them.
EASY
11.
What are the characteristics of firms best-suited to open-book management?
ANSWER: Characteristics of best-suited firms are small size, decentralized
management, a history of employee empowerment, and the presence of trust between
employees and managers.
EASY
12.
Define an environmental management system (EMS).
ANSWER: EMS is a system that accounts for both environmental costs and the impact
of environmental issues in every aspect of operations. Accountants are increasingly
concerned with measuring business performance with regard to environmental issues and
management of environmental cost. In the future, investors are likely to evaluate a
company’s environmental track record along with its financial record when making
financial decisions. Primary environmental issues are energy consumption and pollution.
MEDIUM
17–10
13.
Chapter 17
Emerging Management Practices
What are the three generic strategies for dealing with environmental effects of
operations?
ANSWER:
1.
End-of-pipe strategies. With this approach, managers produce the waste or
pollutant and then find a way to clean it up.
2.
Process improvements. This approach involves changes to recycle wastes
internally, reduce production of waste, or adopt production processes that generate
no waste.
3.
Pollution prevention. This approach involves eliminating production of
pollutants.
MEDIUM
14.
What is data mining and how is it used?
ANSWER: Data mining uses statistical techniques and is useful in uncovering quality
problems, studying customer retention, determining which promotions generate the
greatest sales impact, and identifying cost drivers.
EASY
CHAPTER 18
RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING
IN DECENTRALIZED ORGANIZATIONS
MULTIPLE CHOICE
1.
Which of the following is more characteristic of a decentralized than a centralized
business structure?
a.
b.
c.
d.
The firm’s environment is stable.
There is little confidence in lower-level management to make decisions.
The firm grows very quickly.
The firm is relatively small.
ANSWER:
2.
more elaborate accounting control systems.
potential costs of poor decisions.
additional training costs.
slow response time to changes in local conditions.
ANSWER:
d
EASY
Transfer pricing is primarily incurred in
a.
b.
c.
d.
foreign corporations exporting their products.
decentralized organizations.
multinational corporations domiciled in the U.S.
closely held corporations.
ANSWER:
4.
EASY
Costs of decentralization include all of the following except
a.
b.
c.
d.
3.
c
b
EASY
In a decentralized company in which divisions may buy goods from one another, the
transfer pricing system should be designed primarily to
a.
b.
c.
d.
increase the consolidated value of inventory.
allow division managers to buy from outsiders.
minimize the degree of autonomy of division managers.
aid in the appraisal and motivation of managerial performance.
ANSWER:
d
EASY
18–1
18–2
5.
Chapter 18
When the majority of authority is maintained by top management personnel, the
organization is said to be
a.
b.
c.
d.
centralized.
decentralized.
composed of cost centers.
engaged in transfer pricing activities.
ANSWER:
6.
EASY
responsibility accounting
operations-research accounting
control accounting
budgetary accounting
ANSWER:
a
EASY
In a responsibility accounting system, costs are classified into categories on the basis of
a.
b.
c.
d.
fixed and variable costs.
prime and overhead costs.
administrative and nonadministrative costs.
controllable and noncontrollable costs.
ANSWER:
8.
a
What term identifies an accounting system in which the operations of the business are
broken down into reportable segments, and the control function of a foreperson, sales
manager, or supervisor is emphasized?
a.
b.
c.
d.
7.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
d
EASY
When used for performance evaluation, periodic internal reports based on a responsibility
accounting system should not
a.
b.
c.
d.
be related to the organization chart.
include allocated fixed overhead.
include variances between actual and budgeted controllable costs.
distinguish between controllable and noncontrollable costs.
ANSWER:
b
EASY
Chapter 18
9.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
A ___________ is a document that reflects the revenues and/or costs that are under the
control of a particular manager.
a.
b.
c.
d.
quality audit report
responsibility report
performance evaluation report
project report
ANSWER:
10.
EASY
cost
revenue
responsibility
investment
ANSWER:
c
EASY
In evaluating the performance of a profit center manager, he/she should be evaluated on
a.
b.
c.
d.
all revenues and costs that can be traced directly to the unit.
all revenues and costs under his/her control.
the variable costs and the revenues of the unit.
the same costs and revenues on which the unit is evaluated.
ANSWER:
12.
b
The cost object under the control of a manager is called a(n) __________________
center.
a.
b.
c.
d.
11.
18–3
b
EASY
If a division is set up as an autonomous profit center, then goods should not be
transferred
a.
b.
c.
d.
in at a cost-based transfer price.
out at a cost-based transfer price.
in or out at cost-based transfer price.
to other divisions in the same company.
ANSWER:
b
MEDIUM
18–4
13.
Chapter 18
Performance evaluation measures in an organization
a.
b.
c.
d.
affect the motivation of subunit managers to transact with one another.
always promote goal congruence.
are less motivating to managers than overall organizational goals.
must be the same for all managers to eliminate suboptimization.
ANSWER:
14.
MEDIUM
goal congruence.
centralization.
suboptimization.
maximization.
ANSWER:
c
EASY
A major benefit of cost-based transfers is that
a.
b.
c.
d.
it is easy to agree on a definition of cost.
costs can be measured accurately.
opportunity costs can be included.
they provide incentives to control costs.
ANSWER:
16.
a
A management decision may be beneficial for a given profit center, but not for the entire
company. From the overall company viewpoint, this decision would lead to
a.
b.
c.
d.
15.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
c
MEDIUM
An internal reconciliation account is not required for internal transfers based on
a.
b.
c.
d.
market value.
dual prices.
negotiated prices.
cost.
ANSWER:
d
MEDIUM
Chapter 18
17.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
The most valid reason for using something other than a full-cost-based transfer price
between units of a company is because a full-cost price
a.
b.
c.
d.
is typically more costly to implement.
does not ensure the control of costs of a supplying unit.
is not available unless market-based prices are available.
does not reflect the excess capacity of the supplying unit.
ANSWER:
18.
MEDIUM
variable cost.
market price.
full cost.
production cost.
ANSWER:
b
MEDIUM
A transfer pricing system is also known as
a.
b.
c.
d.
investment center accounting.
a revenue allocation system.
responsibility accounting.
a charge-back system.
ANSWER:
20.
b
To avoid waste and maximize efficiency when transferring products among divisions in a
competitive economy, a large diversified corporation should base transfer prices on
a.
b.
c.
d.
19.
18–5
d
EASY
The maximum of the transfer price negotiation range is
a.
b.
c.
d.
determined by the buying division.
set by the selling division.
influenced only by internal cost factors.
negotiated by the buying and selling division.
ANSWER:
a
EASY
18–6
21.
Chapter 18
The presence of idle capacity in the selling division may increase
a.
b.
c.
d.
the incremental costs of production in the selling division.
the market price for the good.
the price that a buying division is willing to pay on an internal transfer.
a negotiated transfer price.
ANSWER:
22.
MEDIUM
system is very complex to be the most fair to the buying and selling units
effect on subunit performance measures is not easily determined
system should reflect organizational goals
transfer price remains constant for a period of at least two years
ANSWER:
c
MEDIUM
With two autonomous division managers, the price of goods transferred between the
divisions needs to be approved by
a.
b.
c.
d.
corporate management.
both divisional managers.
both divisional managers and corporate management.
corporate management and the manager of the buying division.
ANSWER:
24.
a
Which of the following is a consistently desirable characteristic in a transfer pricing
system?
a.
b.
c.
d.
23.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
b
EASY
The minimum potential transfer price is determined by
a.
b.
c.
d.
incremental costs in the selling division.
the lowest outside price for the good.
the extent of idle capacity in the buying division.
negotiations between the buying and selling division.
ANSWER:
a
EASY
Chapter 18
25.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
As the internal transfer price is increased,
a.
b.
c.
d.
overall corporate profits increase.
profits in the buying division increase.
profits in the selling division increase.
profits in the selling division and the overall corporation increase.
ANSWER:
26.
accounts receivable and CGS.
CGS and finished goods.
finished goods and accounts receivable.
finished goods and intracompany sales.
ANSWER:
d
EASY
In an internal transfer, the buying division records the transaction by
a.
b.
c.
d.
debiting accounts receivable.
crediting accounts payable.
debiting intracompany CGS.
crediting inventory.
ANSWER:
28.
EASY
In an internal transfer, the selling division records the event by crediting
a.
b.
c.
d.
27.
c
b
EASY
Top management can preserve the autonomy of division managers and encourage an
optimal level of internal transactions by
a.
b.
c.
d.
selecting performance evaluation measures that are consistent with the
achievement of overall corporate goals.
selecting division managers who are most concerned about their individual
performance.
prescribing transfer prices between segments.
setting up all organizational units as revenue centers.
ANSWER:
a
MEDIUM
18–7
18–8
29.
Chapter 18
To evaluate the performance of individual departments, interdepartmental transfers of a
product should preferably be made at prices
a.
b.
c.
d.
equal to the market price of the product.
set by the receiving department.
equal to fully-allocated costs of the producing department.
equal to variable costs to the producing department.
ANSWER:
30.
EASY
responsibility accounting.
the use of profit centers.
the use of cost centers.
a transfer pricing system.
ANSWER:
d
MEDIUM
External factors considered in setting transfer prices in multinational firms typically do
not include
a.
b.
c.
d.
the corporate income tax rates in host countries of foreign subsidiaries.
foreign monetary exchange risks.
environmental policies of the host countries of foreign subsidiaries.
actions of competitors of foreign subsidiaries.
ANSWER:
32.
a
Allocating service department costs to revenue-producing departments is an alternative to
a.
b.
c.
d.
31.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
c
MEDIUM
Corporate taxes and tariffs are particular transfer-pricing concerns of
a.
b.
c.
d.
investment centers.
multinational corporations.
division managers.
domestic corporations involved in importing foreign goods.
ANSWER:
b
EASY
Chapter 18
33.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
When managers attempt to cause actual results to conform to planned results, this is
known as
a.
b.
c.
d.
efficiency.
effectiveness.
conformity.
goal congruence.
ANSWER:
34.
b
EASY
Which of the following would not be considered a critical success factor?
a.
b.
c.
d.
quality
cost control
customer service
all of the above are critical success factors
ANSWER:
35.
18–9
d
EASY
The costs of service departments can be assigned to other divisions through the use of
a.
b.
c.
d.
cost centers.
transfer prices.
goal congruence.
operational auditing techniques.
ANSWER:
d
MEDIUM
18–10
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Use the following information for questions 36–40.
Office Products Inc. manufactures and sells various high-tech office automation products. Two
divisions of Office Products Inc. are the Computer Chip Division and the Computer Division.
The Computer Chip Division manufactures one product, a “super chip,” that can be used by both
the Computer Division and other external customers. The following information is available on
this month’s operations in the Computer Chip Division:
Selling price per chip
Variable costs per chip
Fixed production costs
Fixed SG&A costs
Monthly capacity
External sales
Internal sales
$50
$20
$60,000
$90,000
10,000 chips
6,000 chips
0 chips
Presently the Computer Division purchases no chips from the Computer Chips Division, but
instead pays $45 to an external supplier for the 4,000 chips it needs each month.
36.
Assume that next month’s costs and levels of operations in the Computer and Computer
Chip Divisions are similar to this month. What is the minimum of the transfer price
range for a possible transfer of the super chip from one division to the other?
a.
b.
c.
d.
$50
$45
$20
$35
ANSWER:
37.
c
MEDIUM
Assume that next month’s costs and levels of operations in the Computer and Computer
Chip Divisions are similar to this month. What is the maximum of the transfer price
range for a possible transfer of the chip from one division to the other?
a.
b.
c.
d.
$50
$45
$35
$30
ANSWER:
b
MEDIUM
Chapter 18
38.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Two possible transfer prices (for 4,000 units) are under consideration by the two
divisions: $35 and $40. Corporate profits would be ___________ if $35 is selected as the
transfer price rather than $40.
a.
b.
c.
d.
$20,000 larger
$40,000 larger
$20,000 smaller
the same
ANSWER:
39.
d
MEDIUM
If a transfer between the two divisions is arranged next period at a price (on 4,000 units of
super chips) of $40, total profits in the Computer Chip division will
a.
b.
c.
d.
rise by $20,000 compared to the prior period.
drop by $40,000 compared to the prior period.
drop by $20,000 compared to the prior period.
rise by $80,000 compared to the prior period.
ANSWER:
40.
18–11
d
MEDIUM
Assume, for this question only, that the Computer Chip Division is selling all that it can
produce to external buyers for $50 per unit. How would overall corporate profits be
affected if it sells 4,000 units to the Computer Division at $45? (Assume that the
Computer Division can purchase the super chip from an outside supplier for $45.)
a.
b.
c.
d.
no effect
$20,000 increase
$20,000 decrease
$90,000 increase
ANSWER:
c
MEDIUM
18–12
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Use the following information for questions 41–43.
The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at
an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact
type of carburetor that the Motor Division requires. The Carburetor Division is presently
operating at its capacity of 15,000 units per month and sells all of its output to a foreign car
manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
Variable production costs
Variable selling costs
All fixed costs
$70
10
10
Assume that the Carburetor Division would not incur any variable selling costs on units that are
transferred internally.
41.
What is the maximum of the transfer price range for a transfer between the two divisions?
a.
b.
c.
d.
$106
$100
$90
$70
ANSWER:
42.
MEDIUM
What is the minimum of the transfer price range for a transfer between the two divisions?
a.
b.
c.
d.
$96
$90
$70
$106
ANSWER:
43.
b
a
MEDIUM
If the two divisions agree to transact with one another, corporate profits will
a.
b.
c.
d.
drop by $30,000 per month.
rise by $20,000 per month.
rise by $50,000 per month.
rise or fall by an amount that depends on the level of the transfer price.
ANSWER:
c
MEDIUM
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
18–13
Use the following information for questions 44–47.
Bigole Corp. produces various products used in the construction industry. The Plumbing
Division produces and sells 100,000 copper fittings each month. Relevant information for last
month follows:
Total sales (all external)
Expenses (all on a unit base):
Variable manufacturing
Fixed manufacturing
Variable selling
Fixed selling
Variable G&A
Fixed G&A
Total
$250,000
$0.50
.25
.30
.40
.15
.50
$2.10
Top-level managers are trying to determine how a transfer price can be set on a transfer of 10,000
of the copper fittings from the Plumbing Division to the Bathroom Products Division.
44.
A transfer price based on variable cost will be set at ___________ per unit.
a.
b.
c.
d.
$0.50
$0.80
$0.95
$0.75
ANSWER:
45.
MEDIUM
A transfer price based on full production cost would be set at ___________ per unit.
a.
b.
c.
d.
$0.75
$2.10
$1.45
$1.60
ANSWER:
46.
c
a
MEDIUM
A transfer price based on market price would be set at ___________ per unit.
a.
b.
c.
d.
$2.10
$2.50
$1.60
$2.25
ANSWER:
b
MEDIUM
18–14
47.
Chapter 18
If the Plumbing Division is operated as an autonomous investment center and its capacity
is 100,000 fittings per month, the per-unit transfer price is not likely to be below
a.
b.
c.
d.
$0.75.
$1.60.
$2.10.
$2.50.
ANSWER:
48.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
d
MEDIUM
A company has two divisions, A and B, each operated as a profit center. A charges B $35
per unit for each unit transferred to B. Other data follow:
A’s variable cost per unit
A’s fixed costs
A’s annual sales to B
A’s annual sales to outsiders
$30
$10,000
5,000 units
50,000 units
A is planning to raise its transfer price to $50 per unit. Division B can purchase units at
$40 each from outsiders, but doing so would idle A’s facilities now committed to
producing units for B. Division A cannot increase its sales to outsiders. From the
perspective of the company as a whole, from whom should Division B acquire the units,
assuming B’s market is unaffected?
a.
b.
c.
d.
outside vendors
Division A, but only at the variable cost per unit
Division A, but only until fixed costs are covered, then should purchase from
outside vendors
Division A, in spite of the increased transfer price
ANSWER:
49.
d
MEDIUM
A service department includes which of the following?
a.
b.
c.
d.
Payroll
yes
yes
no
no
ANSWER:
Production
no
yes
yes
no
a
EASY
Chapter 18
50.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Indirect costs should be allocated for all of the following reasons except to
a.
b.
c.
d.
motivate managers.
determine the full cost of a product.
motivate general administration.
compare alternatives for decision making.
ANSWER:
51.
MEDIUM
purchasing
warehousing
distributing
manufacturing
ANSWER:
d
EASY
All of the following objectives are reasons to allocate service department costs to
compute full cost except to
a.
b.
c.
d.
provide information on cost recovery.
abide by regulations that may require full costing in some instances.
provide information on controllable costs.
reflect production’s “fair share” of costs.
ANSWER:
53.
c
A service department provides specific functional tasks for other internal units. Which of
the following activities would not be engaged in by a service department?
a.
b.
c.
d.
52.
18–15
c
MEDIUM
All of the following objectives are reasons that service department allocations can
motivate managers except to
a.
b.
c.
d.
instill a consideration of support costs in production managers.
encourage production managers to help service departments control costs.
encourage the usage of certain services.
determine divisional profitability.
ANSWER:
d
MEDIUM
18–16
54.
Chapter 18
Which of the following is a reason for allocating service department costs and thereby
motivating management?
a.
b.
c.
d.
provides for cost recovery
provides relevant information in determining corporatewide profits generated by
alternative actions
meets regulations in some pricing instances
reflects usage of services on a fair and equitable basis
ANSWER:
55.
Internal units
no
yes
no
yes
ANSWER:
MEDIUM
b
External units
no
no
yes
yes
EASY
After service department costs have been allocated, what is the final step in determining
full product cost?
a.
b.
c.
d.
determine direct material cost
determine overhead application rates for revenue-producing areas
determine direct labor cost
determine total service department costs
ANSWER:
57.
d
Service departments provide functional tasks for which of the following?
a.
b.
c.
d.
56.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
b
EASY
Which of the following is not an objective for computing full cost?
a.
b.
c.
d.
to reflect production’s “fair share” of costs
to instill a consideration of support costs
to reflect usage of services on a fair and equitable basis
to provide for cost recovery
ANSWER:
c
MEDIUM
Chapter 18
58.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
A rational and systematic allocation base for service department costs should reflect the
cost accountant’s consideration of all of the following except
a.
b.
c.
d.
the ability of revenue-producing departments to bear the allocated costs.
the benefits received by the revenue-producing department from the service
department.
a causal relationship between factors in the revenue-producing department and
costs incurred in the service department.
all of the above are considerations.
ANSWER:
59.
MEDIUM
step method
indirect method
direct method
algebraic method
ANSWER:
b
EASY
Which service department cost allocation method assigns costs directly to revenueproducing areas with no other intermediate cost pools or allocations?
a.
b.
c.
d.
step method
indirect method
algebraic method
direct method
ANSWER:
61.
d
Which of the following is not a method for allocating service department costs?
a.
b.
c.
d.
60.
18–17
d
EASY
The overhead allocation method that allocates service department costs without
consideration of services rendered to other service departments is the
a.
b.
c.
d.
step method.
direct method.
reciprocal method.
none of the above.
ANSWER:
b
EASY
18–18
62.
Chapter 18
Which service department cost allocation method assigns indirect costs to cost objects
after considering some of the interrelationships of the cost objects?
a.
b.
c.
d.
step method
indirect method
algebraic method
direct method
ANSWER:
63.
EASY
algebraic method
indirect method
step method
direct method
ANSWER:
c
EASY
Which service department cost allocation method assigns indirect costs to cost objects
after considering interrelationships of the cost objects?
a.
b.
c.
d.
Algebraic method
no
no
yes
yes
ANSWER:
65.
a
Which service department cost allocation method utilizes a “benefits-provided” ranking?
a.
b.
c.
d.
64.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
c
Step method
no
yes
yes
no
EASY
Which of the following methods of assigning indirect service department costs recognizes
on a partial basis the reciprocal relationships among the departments?
a.
b.
c.
d.
step method
direct method
indirect method
algebraic method
ANSWER:
a
EASY
Chapter 18
66.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
The most accurate method for allocating service department costs is the
a.
b.
c.
d.
step method.
direct method.
algebraic method.
none of the above.
ANSWER:
67.
EASY
Benefits received
yes
yes
no
no
ANSWER:
b
Fairness
yes
yes
yes
no
Causal relationships
no
yes
yes
no
MEDIUM
To identify costs that relate to a specific product, an allocation base should be chosen that
a.
b.
c.
d.
does not have a cause-and-effect relationship.
has a cause-and-effect relationship.
considers variable costs but not fixed costs.
considers direct material and direct labor but not manufacturing overhead.
ANSWER:
69.
c
The criteria that are most often used to decide on allocation bases are?
a.
b.
c.
d.
68.
18–19
b
EASY
The fixed costs of service departments should be allocated to production departments
based on
a.
b.
c.
d.
actual short-run utilization based on predetermined rates.
actual short-run units based on actual rates.
the service department’s expected costs based on expected long-run use of
capacity.
the service department’s actual costs based on actual utilization of services.
ANSWER:
d
MEDIUM
18–20
70.
Chapter 18
Which service department cost allocation method provides for reciprocal allocation of
service costs among the service department as well as to the revenue producing
departments?
a.
b.
c.
d.
algebraic method
indirect method
step method
direct method
ANSWER:
71.
b.
c.
d.
EASY
considers all interrelationships of the departments and reflects these relationships
in equations.
does not consider interrelationships of the departments nor reflect these
relationships in equations.
is also referred to as the “benefits-provided” ranking method.
is not a service department cost allocation method.
ANSWER:
a
EASY
Which service department cost allocation method considers all interrelationships of the
departments and reflects these relationships in equations?
a.
b.
c.
d.
step method
indirect method
algebraic method
direct method
ANSWER:
73.
a
The algebraic method
a.
72.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
c
EASY
An automotive company has three divisions. One division manufactures new
replacements parts for automobiles, another rebuilds engines, and the third does repair
and overhaul work on a line of trucks. All three divisions use the services of a central
payroll department. The best method of allocating the cost of the payroll department to
the various operating divisions is
a.
b.
c.
d.
total labor hours incurred in the divisions.
value of production in the divisions.
direct labor costs incurred in the divisions.
machine hours used in the divisions.
ANSWER:
a
MEDIUM
Chapter 18
74.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
18–21
The allocation of general overhead control costs to operating departments can be least
justified in determining
a.
b.
c.
d.
income of a product or functional unit.
costs for making management’s decisions.
costs of products sold.
costs for government’s “cost-plus” contracts.
ANSWER:
b
MEDIUM
Use the following information for questions 75–84.
Gates Co. has three production departments A, B, and C. Gates also has two service
departments, Administration and Personnel. Administration costs are allocated based on value of
assets employed, and Personnel costs are allocated based on number of employees. Assume that
Administration provides more service to the other departments than does the Personnel
Department.
Dept.
Admin.
Personnel
A
B
C
75.
Employees
25
10
15
5
10
Asset Value
$450,000
600,000
300,000
150,000
800,000
Using the direct method, what amount of Administration costs is allocated to A (round to
the nearest dollar)?
a.
b.
c.
d.
$216,000
$150,000
$288,000
$54,000
ANSWER:
76.
Direct Costs
$900,000
350,000
700,000
200,000
250,000
a
MEDIUM
Using the direct method, what amount of Personnel costs is allocated to B (round to the
nearest dollar)?
a.
b.
c.
d.
$50,000
$43,750
$26,923
$58,333
ANSWER:
d
MEDIUM
18–22
77.
Chapter 18
Using the direct method, what amount of Administration costs is allocated to C (round to
the nearest dollar)?
a.
b.
c.
d.
$576,000
$54,000
$108,000
$150,000
ANSWER:
78.
MEDIUM
$72,973
$291,892
$145,946
$389,189
ANSWER:
b
MEDIUM
Using the step method, what amount of Administration costs is allocated to A (round to
the nearest dollar)?
a.
b.
c.
d.
$72,973
$291,892
$145,946
$389,189
ANSWER:
80.
a
Using the step method, what amount of Administration costs is allocated to Personnel
(round to the nearest dollar)?
a.
b.
c.
d.
79.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
c
MEDIUM
Using the step method, what amount of Administration costs is allocated to B (round to
the nearest dollar)?
a.
b.
c.
d.
$72,973
$291,892
$145,946
$389,189
ANSWER:
a
MEDIUM
Chapter 18
81.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Using the step method, what amount of Administration costs is allocated to C (round to
the nearest dollar)?
a.
b.
c.
d.
$389,189
$145,946
$291,892
$72,973
ANSWER:
82.
MEDIUM
$213,964
$106,982
$430,000
$0
ANSWER:
c
MEDIUM
Assume that Administration costs have been allocated and the balance in Personnel is
$860,000. What amount is allocated to B (round to the nearest dollar)?
a.
b.
c.
d.
$213,964
$430,000
$106,982
$143,333
ANSWER:
84.
a
Assume that Administration costs have been allocated and the balance in Personnel is
$860,000. What amount is allocated to A (round to the nearest dollar)?
a.
b.
c.
d.
83.
18–23
d
MEDIUM
Assume that Administration costs have been allocated and the balance in Personnel is
$860,000. What amount is allocated to C (round to the nearest dollar)?
a.
b.
c.
d.
$213,964
$430,000
$286,667
$143,333
ANSWER:
c
MEDIUM
18–24
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Use the following information for questions 85–90.
Brooks Co. has two service departments: Data Processing and Administration/Personnel. The
company also has three divisions: X, Y, and Z. Data Processing costs are allocated based on
hours of use and Administration/Personnel costs are allocated based on number of employees.
Direct costs
$400,000
850,000
450,000
300,000
550,000
Admin/Per.
Data Pro.
X
Y
Z
Employees
10
5
30
15
25
Hours of use
3,300
1,100
1,800
2,200
4,500
Assume that Data Processing provides more service than Administration/Personnel.
85.
Using the direct method, what amount of Data Processing costs is allocated to X (round
to the nearest dollar)?
a.
b.
c.
d.
$180,000
$129,661
$0
$84,706
ANSWER:
86.
MEDIUM
Using the direct method, what amount of Data Processing costs is allocated to Y (round
to the nearest dollar)?
a.
b.
c.
d.
$158,475
$0
$220,000
$103,529
ANSWER:
87.
a
c
MEDIUM
Using the direct method, what amount of Data Processing costs is allocated to Z (round to
the nearest dollar)?
a.
b.
c.
d.
$211,765
$0
$152,542
$450,000
ANSWER:
d
MEDIUM
Chapter 18
88.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Assume that Data Processing costs have been allocated and the balance in Administration
is $600,000. Using the step method, what amount is allocated to X?
a.
b.
c.
d.
$257,143
$112,500
$200,000
$187,500
ANSWER:
89.
a
MEDIUM
Assume that Data Processing costs have been allocated and the balance in Administration
is $600,000. Using the step method, what amount is allocated to Y?
a.
b.
c.
d.
$225,000
$128,571
$187,500
$200,000
ANSWER:
90.
18–25
b
MEDIUM
Assume that Data Processing costs have been allocated and the balance in Administration
is $600,000. Using the step method, what amount is allocated to Z?
a.
b.
c.
d.
$200,000
$112,500
$214,286
$225,000
ANSWER:
c
MEDIUM
18–26
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Use the following information for questions 91 and 92.
Blake Company has two service departments: Data Processing and Personnel. Data Processing
provides more service than does Personnel. Blake also has two production departments: A and
B. Data Processing costs are allocated on the basis of assets used while Personnel costs are
allocated based on the number of employees.
Direct costs
$1,000,000
300,000
500,000
330,000
Data Pro.
Pers.
A
B
91.
Assets used
$700,000
230,000
125,000
220,000
Using the direct method, what amount of Data Processing costs is allocated to A (round
to the nearest dollar)?
a.
b.
c.
d.
$362,319
$637,681
$253,623
$446,377
ANSWER:
92.
Employees
15
8
12
20
a
MEDIUM
Using the direct method, what amount of Personnel costs is allocated to B (round to the
nearest dollar)?
a.
b.
c.
d.
$123,750
$206,250
$112,500
$187,500
ANSWER:
d
MEDIUM
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
18–27
Use the following information for questions 93–96.
Hartwell Company distributes its service department overhead costs directly to producing
departments without allocation to the other service departments. Information for January is
presented here.
Overhead costs incurred
Service provided to:
Maintenance Dept.
Utilities Dept.
Producing Dept. A
Producing Dept. B
93.
Utilities
$9,000
10%
20%
40%
40%
30%
60%
The amount of Utilities Department costs distributed to Dept. B for January should be
(rounded to the nearest dollar)
a.
b.
c.
d.
$3,600.
$4,500.
$5,400.
$6,000.
ANSWER:
94.
Maintenance
$18,700
d
MEDIUM
Assume instead Hartwell Company distributes the service department’s overhead costs
based on the step method. Maintenance provides more service than does Utilities. Which
of the following is true?
a.
b.
c.
d.
Allocate maintenance expense to Departments A and B.
Allocate maintenance expense to Departments A and B and the Utilities
Department.
Allocate utilities expense to the Maintenance Department and Departments A
and B.
None of the above.
ANSWER:
b
MEDIUM
18–28
95.
Chapter 18
Using the step method, how much of Hartwell’s Utilities Department cost is allocated
between Departments A and B?
a.
b.
c.
d.
$9,900
$10,800
$12,740
$27,700
ANSWER:
96.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
c
MEDIUM
Assume that Hartwell Company distributes service department overhead costs based on
the algebraic method. What would be the formula to determine the total maintenance
costs?
a.
b.
c.
d.
M = $18,700 + .10U
M = $9,000 + .20U
M = $18,700 + .30U + .40A + .40B
M = $27,700 + .40A + .40B
ANSWER:
a
MEDIUM
SHORT ANSWER/PROBLEMS
1.
Describe the lowest internal transfer price that an autonomous division manager of an
investment center would consider accepting for a product that his/her division produces.
ANSWER: The lowest price that an investment center manager should ever consider
is the one that would leave his/her performance evaluation measures unaffected.
Typically, this would be the price that maintains divisional profits at the level that existed
prior to acceptance of the internal transfer. This price should be no lower than the total of
the selling segment’s incremental costs associated with the services/goods plus the
opportunity cost of the facilities used.
MEDIUM
Chapter 18
2.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
18–29
What are the advantages and disadvantages of market value as a transfer price?
ANSWER: Market value has the advantage of being an external measure of value. It is
subject to manipulation by neither the internal buying nor selling segment. In addition, it
captures the relevant opportunity costs because it is a measure of the price that the
internal selling unit could receive for its production from another buyer and a measure of
the cost that would be incurred by the internal buying segment to purchase from an
alternative seller. The disadvantages of market price include the possibility that there
may not be a comparable product in the marketplace. If demand for the product has
declined, establishing a transfer price becomes more difficult. Additionally, if the firm
has experienced a reduction in expenses related to the product, market price may not be
reliable or appropriate as a transfer price.
MEDIUM
3.
Why is “standard cost” a better measure for a transfer price than “actual cost”?
ANSWER: When a transfer is based on actual cost, the producing division has no
incentive to be efficient in its production. With a standard costing system, any
differences between standard and actual costs will be the responsibility of the producing
division. Hence, the producing division has incentive to be efficient.
MEDIUM
4.
Can the performance evaluation measures (for autonomous subunit managers) create goal
congruence problems in transfer pricing situations? Explain.
ANSWER: Yes, at times, performance-based incentives can conflict with overall
organizational goals. The situation is the worst when upper level managers look at the
performance of subunit managers in a comparative fashion. In this case, before
transacting with another internal segment, each manager needs to determine how the
transaction would affect his/her performance evaluation measure relative to the
performance evaluation measure of the other transacting party.
MEDIUM
18–30
5.
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Why don’t upper-level managers simply dictate transfer prices to divisional managers,
and thereby avoid all the hassles and expense of the negotiations between them
(divisional managers)?
ANSWER: Once upper-level managers impose their wills on lower-level managers,
the autonomy of the lower-level managers is reduced. This situation is significant
because managers should only be evaluated on the controllable aspects of operations. If
upper management sets transfer prices, various divisional income measures (ROI, RI,
etc.) are no longer fair bases on which to evaluate lower-level managers. Thus,
intervention reduces both the authority to act and the subsequent responsibility of lower
managers.
MEDIUM
Use the following information for questions 6–9.
Electric Division of Engineered Products Co. has developed a wind generator that requires a
special “S” ball bearing. The Ball Bearing Division of Engineered Products Co. has the
capability to produce such a ball bearing.
Unfortunately, the Ball Bearing Division is operating at capacity and will need to reduce
production of another existing product, the “T” bearing, by 1,000 units per month to provide the
600 “S” bearings needed each month by the Electric Division. The “T” bearing currently sells
for $50 per unit. Variable costs incurred to produce the “T” bearing are $30 per unit; variable
costs to produce the new “S” bearing would be $60 per unit.
Electric Division has found an external supplier that would furnish the needed “S” bearings at
$100 per unit. Assume that both Electric Division and Ball Bearing Division are independent,
autonomous investment centers.
6.
What is the maximum price per unit that Electric Division would be willing to pay the
Ball Bearing Division for the “S” bearing?
ANSWER: Electric Division would be willing to pay no more than $100 per unit, the
price offered by the external supplier.
MEDIUM
Chapter 18
7.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
18–31
What is the minimum price that Ball Bearing Division would consider to produce the “S”
bearing?
ANSWER: The minimum price that Ball Bearing Division would accept is the one
that would leave its profits at the same level as if it only produced “T” bearings. To
produce the “S” bearing, Ball Bearing Division must give up production and sale of 1,000
“T” bearings. These 1,000 bearings generate $20,000 of contribution margin: [1,000 ×
($50 – $30) ]. The sales price would have to be high enough to recoup both the variable
costs of the “S” bearings and the contribution margin that is forfeited on the 1,000 units
of “T” bearings: $60 + ($20,000/600) = $93.33
MEDIUM
8.
How would your answer to question 104 be different if Ball Bearing Division did not
need to forfeit any of its existing sales to produce the “S” bearing?
ANSWER:
“S” bearing.
The minimum price would be $60, the incremental costs to produce the
MEDIUM
9.
What factors besides price would Electric Division want to consider in deciding where it
will purchase the bearing?
ANSWER: In particular, Electric Division would want to consider the quality of both
suppliers. The factors to be considered would include: ability to meet delivery deadlines,
quality of the product produced, ability to change as environmental conditions change,
willingness to work on future cost reductions/quality improvements, business reputation,
stability of the labor force, and possibility of future price increases.
MEDIUM
18–32
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Use the following information for questions 10–14.
Wire Division of XS Steel Corporation produces “bales” of steel wire that are used in various
commercial applications. The bales sell for an average of $20 each and Wire Division has the
capacity to produce 10,000 bales per month. Consumer Products Division of XS Steel uses
approximately 2,000 bales of steel wire each month in its production of various appliances. The
operating information for Wire Division at its present level of operations (8,000 bales per month)
follows:
Sales (all external)
Variable costs per bale:
Production
Selling
G&A
Fixed costs per bale (based on a 10,000 unit capacity):
Production
Selling
G&A
$160,000
$5
2
3
$2
3
4
Consumer Products Division currently pays $15 per bale for wire obtained from its external
supplier.
10.
If 2,000 bales are transferred in one month to Consumer Products Division at $10 per
bale, what would be the profit/loss of Wire Products Division?
ANSWER: The $10 per unit would equal the Division’s variable costs ($5 + 2 + 3 =
$10), so the contribution margin per unit is zero. Thus, only the 8,000 units of external
sales would generate a contribution margin of $80,000 (8,000 × $10) to cover fixed costs
of $90,000 (10,000 × $9). So the Division would show a $10,000 loss.
MEDIUM
Chapter 18
11.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
18–33
For the Wire Products Division to operate at break-even level, what would it need to
charge for the production and transfer of 2,000 bales to the Consumer Products Division?
Assume all variable costs indicated will be incurred by the Wire Division.
ANSWER:
Total fixed costs to Wire are:
Production
$2 × 10,000 =
Selling
$3 × 10,000 =
G&A
$4 × 10,000 =
Total
$20,000
30,000
40,000
$90,000
Less: Contrib.Margin on Regular Business
[$20 – (5 + 2 + 3)] × 8,000
(80,000 )
Unrecovered Fixed Costs
$10,000
which must be covered by CM of inside sales =
Trans.Price × Vol. = SP – [(5 + 2 + 3) × 2,000]
SP = $15
MEDIUM
12.
If Wire Products Division transferred 2,000 wire bales to the Consumer Products
Division at 200 percent of full absorption cost, what would be the transfer price?
ANSWER:
Full absorption cost: Variable Production Cost =
Fixed Production Cost =
Total full absorption cost
Doubled
Transfer price
$ 5
2
$ 7
× 2
$14
MEDIUM
13.
If Consumer Products Division agrees to pay Wire Products Division $16 for 2,000 bales
this month, what would be Consumer’s change in total profits?
ANSWER:
Proposed transfer price per unit
Consumer’s current market purchase price per unit
Increase in cost per unit of wire to Consumer’s
Times units purchased
Decrease in profit due to increased costs
MEDIUM
$
16
15
$
1
× 2,000
$ 2,000
18–34
14.
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Assuming, for this question only, that Wire Products Division would not incur any
variable G&A costs on internal sales, what is the minimum price that it would consider
accepting for sales of bales to Consumer Products Division?
ANSWER: Wire Division must cover its out of pocket costs or the relevant variable
costs; the fixed costs are irrelevant since they will be incurred regardless of this extra
inside business. Thus, the total cost to be covered is $7 (production, $5; selling, $2).
MEDIUM
Use the following information for questions 15–19.
Carpet Division of Building Products Inc. manufactures a single grade of residential grade
carpeting. The division has the capacity to produce 500,000 square yards of carpet each year. Its
current costs and revenues are shown here:
Sales (400,000 square yards)
Variable costs per square yard:
Production
SG&A
Fixed costs per square yard (based on 500,000 yard capacity)
Production
SG&A
$2,000,000
$2.00
1.00
$0.50
1.00
The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by
the Carpet Division) each year at a cost of $6.50 per square yard from an outside vendor.
15.
If the autonomous Housing and Carpet Divisions enter negotiations on the internal
transfer of 40,000 square yards of carpeting, what is the maximum price that will be
considered?
ANSWER: The maximum price or ceiling is the current purchase price of the buying
division or $6.50 per yard.
MEDIUM
16.
If the autonomous Housing and Carpet Divisions enter negotiations on the internal
transfer of 40,000 square yards of carpeting, what is the Carpet Division’s minimum
price?
ANSWER: The minimum price acceptable to Carpet is its incremental cost of $3
($2 + $1) per square yard.
MEDIUM
Chapter 18
17.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
18–35
If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards
of carpet at a price of $4.50 per square yard, how will the profits of the Housing Division
be affected?
ANSWER:
Current external purchase price
Proposed transfer price
Reduction in purchase price per yard
Times yards acquired
Increase in profits
$6.50
4.50
$2.00
×40,000
$80,000
MEDIUM
18.
If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards
of carpet at a price of $4.00 per square yard, how will overall corporate profits be
affected?
ANSWER:
Current outside purchase price per square yard
Carpet’s variable cost per square yard
Savings per square yard to Housing Division
& corporate
Times number square yards bought
Savings to corporate and increase in profits
$6.50
3.00
$3.50
× 40,000
$140,000
MEDIUM
19.
Assume, for this question only, that Carpet Division is producing and selling 500,000
square yards of carpet to external buyers at a price of $5 per square yard. What would be
the effect on overall corporate profits if Carpet Division reduces external sales of carpet
by 40,000 square yards and transfers the 40,000 square yards of carpet to the Housing
Division?
ANSWER: Since Carpet is operating at full capacity, it would lose the contribution
margin on the 40,000 square yards. However, the Housing Division would not have to
buy externally. Thus,
Lost CM
($2 × 40,000 yd) =
Gained CM ($3.50 × 40,000 yd) =
Net increase in corporate profits
MEDIUM
$(80,000 )
140,000
$ 60,000
18–36
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Use the following information for questions 20 and 21.
XY Corporation is comprised of two divisions: X and Y. X currently produces and sells a gear
assembly used by the automotive industry in electric window assemblies. X is currently selling
all of the units it can produce (25,000 per year) to external customers for $25 per unit. At this
level of activity, X’s per unit costs are:
Variable:
Production
SG&A
Fixed:
Production
SG&A
$7
2
6
5
Y Division wants to purchase 5,000 gear assemblies per year from X Division. Y Division
currently purchases these units from an outside vendor at $22 each.
20.
What is the minimum price per unit that X Division could accept from Y Division for
5,000 units of the gear assembly and be no worse off than currently?
ANSWER: X Division is operating and selling outside at full capacity so minimum
price is equal to the variable cost to make and sell plus the lost contribution margin from
outside sales:
VC: Production
SGA
Contribution margin
Selling price
MEDIUM
$7
2
$ 9
16
$25
Chapter 18
21.
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
What will be the effect on overall corporate profits if the two divisions agree to an
internal transfer of 5,000 units?
ANSWER:
Corporate profits will decrease by forcing the transfer.
CM per units earned by X is from external sales $25 – [$7 + $2]
Times units to be sold
Decrease in CM to X and XY Corp.
Net savings to buy internally
rather than externally [$22 – $9]
Times units to be purchased
Savings by buying internally
Net effect on XY Corp. profits
MEDIUM
$16
× 5,000
$ 80,000
$13
× 5,000
$ 65,000
$(15,000)
18–37
18–38
Chapter 18
Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Use the following information for questions 22 and 23.
Third Savings and Loan of Dallas has three departments that generate revenue: loans, checking
accounts, and savings accounts. Third S & L has two service departments:
Administration/Personnel and Maintenance. The service departments provide service in the
order of their listing. The following information is available for direct costs. Administration/
Personnel costs are best allocated based on number of employees while Maintenance costs are
best allocated based on square footage occupied.
Department
Admin./Pers.
Maintenance
Loans
Checking
Savings
22.
Direct costs
$530,000
450,000
900,000
600,000
240,500
Employees
10
8
15
6
5
Footage
30,000
16,500
45,000
10,000
42,000
Using the direct method, compute the amount allocated to each department from
Administration/Personnel.
ANSWER:
Loans
15/26 × $530,000 = $305,769
Checking 6/26 × 530,000 = 122,308
Savings
5/26 × 530,000 = 101,923
MEDIUM
23.
Using the step method, compute the amount allocated to each department from
Maintenance.
ANSWER:
To allocate Admin./Pers. to Maintenance
8/34 × $530,000 = $124,706(rounded)
Then, Maintenance balance is $450,000 + $124,706 = $574,706
Then, allocate Maintenance :
Loans
45/97 × $574,706 = $266,616
Checking 10/97 × 574,706 =
59,248
Savings 42/97 × 574,706 = 248,842
MEDIUM
CHAPTER 19
MEASURING AND REWARDING ORGANIZATIONAL PERFORMANCE
MULTIPLE CHOICE
1.
Variance analysis would be appropriate to measure performance in
a.
b.
c.
d.
profit centers.
investment centers.
cost centers.
all of the above.
ANSWER:
2.
investment center
revenue center
profit center
cost center
ANSWER:
a
EASY
Net cash flow could be used to measure performance in
a.
b.
c.
d.
cost centers and investment centers.
revenue centers and profit centers.
revenue centers and investment centers.
profit and investment centers.
ANSWER:
4.
EASY
Which of the following responsibility centers may be evaluated on the basis of residual
income?
a.
b.
c.
d.
3.
d
d
EASY
Using a single performance evaluation criterion for an investment center
a.
b.
c.
d.
is most effective because a manager can concentrate on a single goal.
can result in manipulation of the performance measure.
allows multinational investment centers' performances to be equitably compared.
is only appropriate if the criterion is non-monetary.
ANSWER:
b
EASY
19-1
19-2
5.
Chapter 19
A company has set a target rate of return of 16% for its investment center. An investment
center manager in this company would
a.
b.
c.
d.
acquire assets that would increase divisional income by more than 16%.
sell all assets that do not generate divisional income of more than 16%.
acquire assets that would increase sales by more than 16%.
acquire any technologically advanced assets that would cause costs to be reduced
by 16% or more.
ANSWER:
6.
c.
d.
EASY
and the sub-unit should be evaluated on the basis of the same costs and revenues.
should only be evaluated on the basis of variable costs and revenues of the subunit.
should be evaluated on all costs and revenues that are controllable by the manager
should be evaluated on all costs and revenues that can be directly traced to the
sub-unit.
ANSWER:
c
EASY
The Statement of Cash Flows may be superior to the cash budget as a performance
evaluation measure because
a.
b.
c.
d.
cash flows are shown on the accrual basis on the cash budget.
the cash budget does not include capital investments.
cash flows are arranged by activity.
of all the above reasons.
ANSWER:
8.
a
In evaluating the performance of a profit center manager, the manager
a.
b.
7.
Measuring and Rewarding Organizational Performance
c
MEDIUM
The Statement of Cash Flows indicates the cash inflows and outflows from
a.
b.
c.
d.
investing, financing, and borrowing activities.
operating, investing, and sending activities.
merchandising, financing, and investing activities.
operating, investing, and financing activities.
ANSWER:
d
EASY
Chapter 19
9.
Measuring and Rewarding Organizational Performance
Division A's investment in a new project will raise the overall organization's return on
investment if
a.
b.
c.
d.
the return on investment on the new project exceeds the target return of the overall
organization.
the return on investment on the new project exceeds the return on investment of
Division A.
the return on investment on the new project exceeds the overall organization's
return on investment.
Division A's return on investment exceeds the return on investment of the overall
organization.
ANSWER:
10.
c
EASY
If sales and expenses both rise by $100,000
a.
b.
c.
d.
residual income will increase.
return on investment will increase.
return on investment will be unchanged.
asset turnover will decrease
ANSWER:
11.
19-3
c
EASY
ABC Corp. is composed of three operating divisions. Overall, the ABC Corp. has a
return on investment of 20%. A Division has a return on investment of 25%. If ABC
Corp. evaluates its managers on the basis of return on investment, how would the A
Division manager and the ABC Corp. president react to a new investment that has an
estimated return on investment of 23%?
a.
b.
c.
d.
A Division manager
accept
accept
reject
reject
ANSWER:
c
EASY
ABC Corp. president
accept
reject
accept
reject
19-4
12.
Chapter 19
A company's return on investment is affected by a change in
a.
b.
c.
d.
Profit Margin
Asset Turnover on Sales
Yes
Yes
Yes
No
No
No
No
Yes
ANSWER:
13.
EASY
only asset turnover.
only earnings as a percent of sales.
both asset turnover and earnings as a percent of sales.
asset turnover and earnings as a percent of sales, correcting for the effects of
differing depreciation methods.
ANSWER:
c
EASY
Return on investment (ROI) is a term most often used to express income earned on assets
invested in a business unit. A company's return on investment would increase if sales
a.
b.
c.
d.
increased by the same dollar amount as expenses and total assets increased.
remained the same and expenses were reduced by the same dollar amount that
total assets increased.
decreased by the same dollar amount that expenses increased.
and expenses increased by the same percentage that total assets increased.
ANSWER:
15.
a
The return on investment (ROI) ratio measures
a.
b.
c.
d.
14.
Measuring and Rewarding Organizational Performance
b
MEDIUM
A sub-unit of an organization is evaluated on the basis of its ROI. If this sub-unit’s sales
and expenses both increase by $30,000, how will the following measures be affected?
a.
b.
c.
d.
ROI
increase
indeterminate
no change
no change
ANSWER:
c
Assert turnover
increase
increase
increase
decrease
MEDIUM
Profit margin
increase
decrease
decrease
no change
Chapter 19
16.
Measuring and Rewarding Organizational Performance
Which of the following would be an appropriate alternative to the use of ROI in
evaluating the performance of an investment center?
a.
b.
c.
d.
Residual
income
yes
no
yes
yes
ANSWER:
17.
c
Cost and revenue
variance analysis
yes
no
no
yes
EASY
contribution margin.
inventory turnover.
assets invested.
average assets employed.
ANSWER:
c
EASY
Presently, the Alligator Division of Animal Crackers Co. has a profit margin of 30%. If
total sales rise by $100,000, both the numerator and the denominator of the profit margin
will increase. The net result will be
a.
b.
c.
e.
an increase in the profit margin ratio to above 30%.
a decrease in the profit margin ratio to below 30%.
no change in the profit margin ratio.
a change in the profit margin ratio that cannot be determined from this
information.
ANSWER:
19.
Net cash
flow
yes
yes
no
no
Return on investment is computed by dividing income by
a.
b.
c.
d.
18.
19-5
c
MEDIUM
Profit margin indicates the portion of sales that
a.
b.
c.
d.
covers fixed expenses.
is not used to cover expenses.
equals contribution margin.
equals product contribution margin.
ANSWER:
b
EASY
19-6
20.
Chapter 19
Profit margin equals
a.
b.
c.
d.
income divided by sales.
incomes divided by average inventory.
income divided by average assets.
income divided by average stockholder’s equity.
ANSWER:
21.
b
EASY
In the Du Pont model, profit margin is a ratio of
a.
b.
c.
d.
income to sales.
income to assets.
sales to income.
sales to assets.
ANSWER:
a
EASY
The Du Pont model measures ROI as it is affected by
a.
b.
c.
d.
contribution margin and asset turnover.
profit margin and asset turnover.
asset turnover.
profit margin.
ANSWER:
24.
EASY
residual income.
return on investment.
throughput.
profit.
ANSWER:
23.
a
The Du Pont model measures
a.
b.
c.
d.
22.
Measuring and Rewarding Organizational Performance
b
EASY
Residual income is used as a performance measure in
a.
b.
c.
d.
profit centers.
cost centers.
investment centers.
revenue centers.
ANSWER:
c
EASY
Chapter 19
25.
Measuring and Rewarding Organizational Performance
If a new project generates a positive residual income, the
a.
b.
c.
d.
project's return on investment is less than the target rate.
project's return on investment is greater than the target rate.
project's return on investment is equal to the target rate.
relationship between the project's return on investment and the target rate cannot
necessarily be determined.
ANSWER:
26.
EASY
project generates a negative return on investment.
project's return on investment is zero.
project's return on investment is 5% less than the company's target rate.
company's target rate is 15%
ANSWER:
c
MEDIUM
Residual income is the
a.
b.
c.
d.
contribution margin of an investment center, less the imputed interest on the
invested capital used by the center.
contribution margin of an investment center, plus the imputed interest on the
invested capital used by the center.
income of an investment center, less the imputed interest on the invested capital
used by the center.
income of an investment center, plus the imputed interest on the invested capital
used by the center.
ANSWER:
28.
b
A prospective project under consideration by P Division of C Co. has an estimated
residual income of a negative $20,000. If the project requires an investment of $400,000,
the
a.
b.
c.
d.
27.
19-7
c
EASY
Residual income is an example of a ____________ performance measurement.
a.
b.
c.
d.
long-term
short-term
qualitative
profit center
ANSWER:
b
EASY
19-8
29.
Chapter 19
If a division generates a positive residual income then the division’s
a.
b.
c.
d.
asset turnover was very high.
profitability was greater than that of other divisions in the company.
performance was above expectations.
actual return on investment exceeds the division’s target return.
ANSWER:
30.
EASY
income times the asset turnover rate.
income times the inventory turnover rate.
income minus (asset base times target rate of return).
sales minus (asset base times target rate of return).
ANSWER:
c
EASY
Residual income is used as a performance measure in which of the following types of
centers?
a.
b.
c.
d.
Revenue
yes
yes
no
no
ANSWER:
32.
d
Residual income is determined as
a.
b.
c.
d.
31.
Measuring and Rewarding Organizational Performance
d
Investment
no
yes
yes
yes
Profit
yes
yes
yes
no
EASY
An increase in a corporation's target rate would result in a(n)
a.
b.
c.
d.
increase in residual income.
decrease in return on investment.
decrease in residual income.
decrease in both residual income and return on investment.
ANSWER:
c
EASY
Chapter 19
33.
Measuring and Rewarding Organizational Performance
All other things being equal, an increase in sales price would increase
a.
b.
c.
d.
asset turnover.
profit margin.
residual income.
all of the above.
ANSWER:
34.
decrease and asset turnover will decrease.
increase and asset turnover will decrease.
decrease and asset turnover will increase.
increase and asset turnover will increase.
ANSWER:
c
MEDIUM
Asset turnover equals
a.
b.
c.
d.
income divided by average assets.
sales divided by assets.
sales divided by average assets.
assets divided by sales.
ANSWER:
36.
EASY
If sales and expenses both rise by $100,000, profit margin will
a.
b.
c.
d.
35.
d
c
EASY
The information below relates to costs, revenues, and assets anticipated for 1999 in B
Division of BVD Corp:
Sales
Variable costs
Average assets employed
Fixed costs
$ 4,000,000
75% of sales
$12,000,000
0
How would each of the following measures be affected if sales rise by $5,000 in X
Division?
a.
b.
c.
d.
ROI
increase
increase
increase
no change
ANSWER:
c
Asset turnover
increase
no change
increase
no change
EASY
Profit margin
increase
increase
no change
increase
19-9
19-10
37.
Chapter 19
A division of Lucky Co. reported a return on investment of 20% for a recent period. If
the division's asset turnover was 5, its profit margin must have been
a.
b.
c.
d.
100%
4%
25%
2%
ANSWER:
38.
b
EASY
Which measure is limited by the fact that it uses accounting income?
a.
b.
c.
d.
ROI
RI
EVA
All of the above
ANSWER:
39.
Measuring and Rewarding Organizational Performance
d
EASY
Z Division of XYZ Corp. has the following information for 1998:
Assets available for use $1,800,000
Target rate of return
10%
Residual income
$ 270,000
What was Z Division's return on investment for 1998?
a.
b.
c.
d.
15%
10%
25%
20%
ANSWER:
c
MEDIUM
Chapter 19
Measuring and Rewarding Organizational Performance
19-11
Use the following information for questions 40-43:
Apple Division of the American Fruit Co had the following statistics for 1998:
Assets available for use
$1,000,000 Book Value
$1,500,000 Market Value
Residual income
100,000
Return on investment
15%
40.
What was Apple Division's segment income for 1998?
a.
b.
c.
d.
$150,000
$100,000
$250,000
$ 50,000
ANSWER:
41.
10%
15%
25%
5%
ANSWER:
d
MEDIUM
If the manager of Apple Division is evaluated based on return on investment, how much
would she be willing to pay for an investment that promises to increase net segment
income by $50,000?
a.
b.
c.
d.
$ 50,000
$ 333,333
$1,000,000
$ 500,000
ANSWER:
43.
MEDIUM
What was the target rate of return in the American Fruit Company for 1998?
a.
b.
c.
d.
42.
a
b
MEDIUM
If expenses increased by $20,000 in Apple Division,
a.
b.
c.
d.
return on investment would decrease.
residual income would increase.
the target rate of return would decrease.
asset turnover would decrease.
ANSWER:
a
EASY
19-12
Chapter 19
Measuring and Rewarding Organizational Performance
Use the following information for questions 44 through 46:
T Division of the Alphabet Co. has the following statistics for its 1998 operations:
Assets available for use
$2,000,000
T Division's return on investment
25%
T Division's residual income
200,000
Return on investment (entire Alphabet Co)
20%
44.
Compute EVA assuming the cost of capital is 10% and the tax rate is 40%.
a.
b.
c.
d.
$ 90,000
$ 150,000
$0
$ (60,000)
ANSWER
45.
MEDIUM
What is the target rate of return in the Alphabet Co.?
a.
b.
c.
d.
25%
20%
15%
10%
ANSWER:
46.
d
c
MEDIUM
If Alphabet Co. evaluates its managers on the basis of return on investment, the manager
of T Division would invest in a project costing $100,000 only if it increased net segment
income by at least
a.
b.
c.
d.
$10,000.
$15,000.
$20,000.
$25,000.
ANSWER:
d
MEDIUM
Chapter 19
Measuring and Rewarding Organizational Performance
19-13
47. A Corp. has a target return of 15%. If a prospective investment has an estimated return
on investment of 20%, and a residual income of $10,000, what is the estimated cost of the
investment?
a.
b.
c.
d.
$200,000
$ 66,667
$ 50,000
The answer can't be determined from this information.
ANSWER:
48.
15%
12%
25%
27%
ANSWER:
d
MEDIUM
In the X Division of S Co., 1998 segment income exceeded 1998 residual income by
$15,000. Also for 1998, return on investment exceeded the target rate of return by 10%.
What was the level of investment in the X Division for 1998?
a.
b.
c.
d.
$ 15,000
$100,000
$150,000
An answer can't be determined from this information.
ANSWER:
50.
MEDIUM
The Bullwhip Division of Leather Products Co. is considering an investment in a new
project. The project has an estimated cost of $1,000,000. If Leather Products Co. has a
target rate of return of 12%, how large does the return on investment on this project need
to be to generate $150,000 of residual income?
a.
b.
c.
d.
49.
a
c
DIFFICULT
BAD Co. has established a target rate of return of 16% for all divisions. In 1998,
Division D generated sales of $10,000,000 and expenses of $7,500,000. Total assets at
the beginning of the year were $5,000,000 and total assets at the end of the year were
$7,000,000. For 1998, what was Division D’s return on investment ?
a.
b.
c.
d.
20.83 %
35.71 %
41.67 %
50.00 %
ANSWER:
c
MEDIUM
19-14
51.
Chapter 19
BAD Co. has established a target rate of return of 16% for all divisions. In 1998,
Division D generated sales of $10,000,000 and expenses of $7,500,000. Total assets at
the beginning of the year were $5,000,000 and total assets at the end of the year were
$7,000,000. For 1998, what was Division D’s residual income?
a.
b.
c.
d.
$ 960,000
$1,380,000
$1.540,000
$1,700,000
ANSWER:
52.
Measuring and Rewarding Organizational Performance
c
MEDIUM
Bagel Division of Pita Company reported the following results for 1999:
Sales
Expenses
Total assets (1/1/99)
Total assets (12/31/99)
$8,000,000
6,250,000
5,000,000
5,400,000
What was the profit margin of Bagel Division in 1999?
a.
b.
c.
d.
68%
35%
32%
22%
ANSWER:
53.
d
MEDIUM
Bagel Division of Pita Company reported the following results for 1999:
Sales
Expenses
Total assets (1/1/99)
Total assets (12/31/99)
$8,000,000
6,250,000
5,000,000
5,400,000
What was the asset turnover ratio of Bagel Division in 1999?
a.
b.
c.
d.
1.538
2.97
0.650
1.20
ANSWER:
a
MEDIUM
Chapter 19
54.
Measuring and Rewarding Organizational Performance
Pasta Division of We Make Italian, is evaluated based on residual income generated. For
1998, the Division generated a residual income of $2,000,000 and net income of
$5,000,000. The target rate of return for all divisions of We Make Italian is 20%. For
1998, what was the return on investment for Pasta Division?
a.
b.
c.
d.
40%
13%
20%
33%
ANSWER:
55.
c.
d.
MEDIUM
are usually the most well-received by managers.
often reflect long-term organizational goals better than financial performance
measures.
can only be developed in the production area of an organization.
is limited by the number of critical success factors defined by the organization.
ANSWER:
b
EASY
Relative to qualitative performance measures, quantitative performance measures are less
a.
b.
c.
d.
subject to manipulation.
dependent on accounting information.
effective in the pursuit of organizational goals.
subjective.
ANSWER:
57.
d
Qualitative non-financial performance measures
a.
b.
56.
19-15
d
EASY
Improved effectiveness and efficiency of a product is considered a ______ performance
measurement?
a.
b.
c.
d.
non-financial
financial
quantitative
qualitative
ANSWER:
d
EASY
19-16
58.
Chapter 19
Non-financial performance measures (NFPMs) are better than financial measures in that
NFPMs
a.
b.
c.
d.
provide a better indication of customer satisfaction.
may better predict the direction of future cash flows.
directly measure how well an organization does those things that create
shareholder value.
all of the above
ANSWER:
59.
b.
c.
d.
EASY
qualitative characteristics that point out sub-optimization activities and throughput
bottlenecks.
both short-term and long-term measures related to critical success factors.
long-term supplier satisfaction levels.
short-term financial viability.
ANSWER:
b
EASY
Which of the following would be considered a non-financial performance measurement?
a.
b.
c.
d.
increase in market share
variances from standards
number of customer complaints
cost of engineering changes
ANSWER:
61.
d
In selecting non-financial performance measures managers should choose measures that
reflect
a.
60.
Measuring and Rewarding Organizational Performance
c
EASY
Which type of financial measure better predicts the direction of future cash flows?
a.
b.
c.
d.
Non-financial Measures
yes
yes
no
no
ANSWER:
d
EASY
Financial Measures
yes
no
no
yes
Chapter 19
62.
Measuring and Rewarding Organizational Performance
Which of the following would be classified as a non-financial critical success factor?
a.
b.
c.
d.
Quality
no
yes
yes
yes
ANSWER:
63.
Manufacturing
Effectiveness
yes
no
yes
yes
EASY
profitability
costs
market
sales
ANSWER:
d
EASY
Which of the following is necessary for any valid performance measurement?
a.
b.
c.
d.
It must be part of the financial accounting system in use.
It must be quantifiable.
Goal congruence must be promoted by its use.
It must be financial in nature.
ANSWER:
65.
c
Manufacturing
Efficiency
no
no
yes
no
Which of the following is not one of the four areas of performance measurements
mentioned in the text?
a.
b.
c.
d.
64.
Technical
Excellence
no
no
yes
yes
c
EASY
Process quality yield is used in the measurement of
a.
b.
c.
d.
throughput.
cash flows.
asset turnover.
profit margin.
ANSWER:
a
EASY
19-17
19-18
66.
Chapter 19
An increase in productive processing time will increase
a.
b.
c.
d.
throughput.
process yield.
return on investment.
productive capacity.
ANSWER:
67.
b
EASY
Productive capacity is a measure used in computing
a.
b.
c.
d.
residual income.
net cash flow.
return on investment.
throughput.
ANSWER:
d
EASY
Process quality yield reflects the proportion of
a.
b.
c.
d.
good units to bad units.
time required to produce a good unit.
total units manufactured that are good.
total time spent to time available.
ANSWER:
70.
EASY
Processing time/Total time
Good units/Total time
Good units/Processing time
Total units/Total time
ANSWER:
69.
a
Which of the following is the throughput measure?
a.
b.
c.
d.
68.
Measuring and Rewarding Organizational Performance
c
EASY
When inventory sits idle in a department, this would not affect the department's
a.
b.
c.
d.
processing time.
throughput.
process quality yield.
dollar days.
ANSWER:
c
EASY
Chapter 19
71.
Measuring and Rewarding Organizational Performance
Process quality yield reflects the proportion of
a.
b.
c.
d.
time it takes to make a good unit.
good units to defective units.
total time spent to total time available.
total units produced that are good units.
ANSWER:
72.
EASY
total unit sales.
throughput.
process quality yield.
process productivity.
ANSWER:
d
EASY
Process productivity is calculated as
a.
b.
c.
d.
total units divided by non-value-added processing time.
total units divided by value-added processing time.
value-added processing time divided by total units.
value-added processing divided by total time.
ANSWER:
74.
d
Holding total production in units constant, as the proportion of defective units to total
units declines, all of the following measures will be affected, except
a.
b.
c.
d.
73.
19-19
b
EASY
Which of the following would not be an appropriate cost driver to measure internal
failure?
a.
b.
c.
d.
design error
product failure
machine reliability
operator error
ANSWER:
b
EASY
19-20
75.
Chapter 19
When assessing performance, one way to compensate for differences among divisions of
a multinational organization would be for the parent company to
a.
b.
c.
d.
use different target rates of return to compute residual incomes.
modify the return on investment calculation so that foreign currency fluctuations
are removed from all financial statement figures.
classify all domestic divisions as investment centers and all foreign divisions as
profit centers.
use financial performance measures for units whose records are kept in the
domestic currency and non-financial measures for units whose records are kept in
a foreign currency.
ANSWER:
76.
a
MEDIUM
If performance measures are perfect proxies for organizational goals,
a.
b.
c.
d.
sub-optimization will be enhanced.
sub-unit managers will strive to achieve organizational goals.
sub-units can all be decentralized.
residual income will rise.
ANSWER:
77.
Measuring and Rewarding Organizational Performance
b
EASY
The following information is made available for June, what is the throughput per hour?
Good units manufactured
Value-added hours of manufacturing time
Total units manufactured
Total hours of manufacturing time
a.
b.
c.
d.
1.3 units (rounded)
2.0 units
1.8 units
.8 units
ANSWER:
a
EASY
40,000
20,000
50,000
30,000
Chapter 19
78.
Measuring and Rewarding Organizational Performance
The following information is made available for June, what is the process quality yield?
Good units manufactured
Value-added hours of manufacturing time
Total units manufactured
Total hours of manufacturing time
a.
b.
c.
d.
40,000
20,000
50,000
30,000
50%
75%
80%
125%
ANSWER:
79.
19-21
c
EASY
One of the products manufactured by I Can Fly TOO, Company is a plastic disk. The
information below relates to the Disk Production Department:
Good units produced
Units started in production
Processing time (budgeted hours)
Processing time (total hours)
Value-added processing time
200,000
250,000
425
400
300
What is the process quality yield in the Disk Production Department?
a.
b.
c.
d.
75%
44%
80%
125%
ANSWER:
c
EASY
19-22
80.
Chapter 19
Measuring and Rewarding Organizational Performance
One of the products manufactured by I Can Fly TOO, Company is a plastic disk. The
information below relates to the Disk Production Department:
Good units produced
Units started in production
Processing time (budgeted hours)
Processing time (total hours)
Value-added processing time
200,000
250,000
425
400
300
What is the throughput per hour in the Disk Production Department?
a.
b.
c.
d.
470 units
500 units
625 units
667 units
ANSWER:
81.
b
MEDIUM
One of the products manufactured by I Can Fly TOO, Company is a plastic disk. The
information below relates to the Disk Production Department:
Good units produced
Units started in production
Processing time (budgeted hours)
Processing time (total hours)
Value-added processing time
200,000
250,000
425
400
300
What is the process productivity in the Disk Production Department?
a.
b.
c.
d.
588
625
667
833
ANSWER:
82.
d
MEDIUM
Which of the following is not a balanced scorecard category?
a.
b.
c.
d.
financial measures
environmental measures
business process measures
personnel measures
ANSWER:
b
EASY
Chapter 19
83.
Measuring and Rewarding Organizational Performance
A primary purpose of a balanced scorecard is to give
a.
b.
c.
d.
managers a way to judge past performance.
stockholders a way to judge current performance.
managers a way to forecast future performance.
stockholders a way to tie strategy to profitability.
ANSWER:
84.
MEDIUM
organizational strategy and values.
the cost management system.
current organizational profitability.
activity-based management concepts.
ANSWER:
a
EASY
Customer measures on the balanced scorecard should be
a.
b.
c.
d.
Internal
yes
no
no
yes
ANSWER:
86.
c
In a balanced scorecard, measurements should be directly linked to
a.
b.
c.
d.
85.
19-23
External
no
yes
yes
yes
d
Monetary
no
yes
no
yes
Non-monetary
yes
no
yes
yes
MEDIUM
A balanced scorecard
a.
b.
c.
d.
records the variances between budgeted and actual revenues and expenses.
can be used at multiple organizational levels by redefining the categories and
measurements.
is most concerned with organizational financial solvency and business processes.
all of the above.
ANSWER:
b
MEDIUM
19-24
87.
Chapter 19
On a balanced scorecard, which of the following would be most appropriate to measure
customer service?
a.
b.
c.
d.
Rapid time-to-market of new products
Corporate financial profits
On-time delivery
Decrease in reworked products
ANSWER:
88.
EASY
Rapid time-to-market of new products
Corporate financial profits
Low employee turnover
Decrease in reworked products
ANSWER:
d
EASY
On a balanced scorecard, which of the following would be most appropriate to measure
innovation:
a.
b.
c.
d.
Rapid time-to-market of new products
Corporate financial profits
On-time delivery
Manufacturing cycle efficiency
ANSWER:
90.
c
On a balanced scorecard, which of the following would be most appropriate to measure
production process integrity?
a.
b.
c.
d.
89.
Measuring and Rewarding Organizational Performance
a
EASY
On a balanced scorecard, which of the following would be most appropriate to measure
financial performance?
a.
b.
c.
d.
Market share
Customer retention
Percentage of sales from new products
Investment in intellectual capital
ANSWER:
a
EASY
Chapter 19
91.
Measuring and Rewarding Organizational Performance
A primary characteristic of a performance management system is
a.
b.
c.
d.
consistency at all levels in the organization.
adaptability to differing situations in the organization.
efficiency of application to all individuals in the organization.
flexibility to delay rewards although performance objectives have been met.
ANSWER:
92.
d
EASY
Managers should be paid
a.
b.
c.
d.
on a periodic basis.
based on results achieved.
using ESOPs.
on a piece rate basis.
ANSWER:
b
EASY
Financial incentives are
a.
b.
c.
d.
different from monetary rewards
the same thing as a salary element
provided to all employee groups.
available to top management whose performance exceeds targeted objectives
ANSWER:
95.
MEDIUM
organizational goals
location of firm
competition
number of subsidiaries
ANSWER:
94.
b
Which of the following would not normally affect the compensation strategy of a firm?
a.
b.
c.
d.
93.
19-25
d
EASY
Which of the following steps in the performance reward plan model comes before the
others listed?
a.
b.
c.
d.
set performance rewards
identify performance measures
determine reward
identify critical success factors
ANSWER:
d
EASY
19-26
96.
Chapter 19
Objectives for a pay plan
a.
b.
c.
d.
are not needed in a performance-based plan.
must be stated for a performance-based plan to work.
are essential for a periodic compensation plan to be successful.
are unnecessary for a merit pay plan.
ANSWER:
97.
b.
c.
d.
EASY
a contingent amount of pay that is earned by managers whose subunits meet a
target rate of return.
always for a limited period of time and must be re-earned each period.
any pay earned when the company is profitable.
a pay increment received when a specific performance level is achieved.
ANSWER:
d
EASY
Contingent pay
a.
b.
c.
d.
is always paid in stock options.
is the sole source of pay an employee receives from his/her employer.
is received in addition to the basic wage and is dependent upon performance
exceeding some performance objective.
can only apply to individual performance.
ANSWER:
99.
b
Merit pay is
a.
98.
Measuring and Rewarding Organizational Performance
c
EASY
Piece rate pay
a.
b.
c.
d.
is a suitable pay plan for low-IQ workers.
involves a salary plus pay for each unit produced or carried out.
encourages quality output.
does not encourage workers to look at the company's well being.
ANSWER:
d
EASY
Chapter 19
100.
Measuring and Rewarding Organizational Performance
Which of the following pay plans encourages the improvement of the overall company's
well-being?
a.
b.
c.
d.
monthly salary
cafeteria plan
profit sharing
pensions
ANSWER:
101.
EASY
profit sharing
pensions
piece rate
merit pay
ANSWER:
a
EASY
Which performance plan best promotes quality of the product or service?
a.
b.
c.
d.
piece rate
health insurance
pensions
profit sharing
ANSWER:
103.
c
Which performance plan is most tied to company objectives?
a.
b.
c.
d.
102.
19-27
d
EASY
Employee stock ownership in the employees' firm
a.
b.
c.
d.
will encourage short term earnings growth patterns.
will encourage employees to take a longer term perspective regarding their
performance in the company.
is not suitable for hourly or salaried employees.
is common for management in American firms.
ANSWER:
b
MEDIUM
19-28
104.
Chapter 19
A pay plan that gives an employee cash or stock equal to the difference between some
specified stock price and the quoted market price at some future time period is
a.
b.
c.
d.
stock appreciation rights .
an ESOP.
profit sharing.
merit pay .
ANSWER:
105.
EASY
contingent pay
profit sharing
cafeteria plans
stock appreciation rights
ANSWER:
d
MEDIUM
The traditional compensation package provides
a.
b.
c.
d.
fixed monthly or weekly salaries.
the same salary structure for all groups of employees.
no incentive for non-top management to improve performance.
no need to include incentive compensation.
ANSWER:
107.
a
Which of the following types of employee compensation are tax-exempt?
a.
b.
c.
d.
106.
Measuring and Rewarding Organizational Performance
c
EASY
Compensation packages for executives of American firms
a.
b.
c.
d.
are beginning to emphasize the long-term commitment executives should have in
the firm.
are considered comparable to packages earned by European and Asian executives.
are shifting towards lower percentages of annual incentives.
are shifting away from long-term awards.
ANSWER:
a
EASY
Chapter 19
108.
Measuring and Rewarding Organizational Performance
Perks include all of the following except
a.
b.
c.
d.
free child care.
free parking.
recreational memberships.
hourly wages.
ANSWER:
109.
profit sharing.
an employee stock option plan.
contingent pay.
monthly salary.
ANSWER:
EASY
company lunch rooms.
flexible fringe benefit programs.
ESOPs.
pensions.
ANSWER:
b
EASY
Which performance plan is most motivating?
a.
b.
c.
d.
health insurance
piece rate
hourly wages
pensions
ANSWER:
112.
d
Cafeteria plans are
a.
b.
c.
d.
111.
EASY
A pay plan that does not encourage the overall company good is
a.
b.
c.
d.
110.
d
d
MEDIUM
A person who specializes in taking over other firms is called a(n)
a.
b.
c.
d.
shirker(s).
raider(s).
expatriate(s).
none of the above.
ANSWER:
b
EASY
19-29
19-30
113.
Chapter 19
The average compensation for chief executives was lowest in
a.
b.
c.
d.
the United States.
Canada.
Japan.
France.
ANSWER:
114.
c
MEDIUM
The average compensation level for manufacturing employees was shown in the text as
being highest in
a.
b.
c.
d.
Japan.
Britain.
the United States.
Germany.
ANSWER:
115.
Measuring and Rewarding Organizational Performance
d
MEDIUM
Expatriate employees
a.
b.
c.
d.
should be paid a base comparable to what he/she was earning domestically.
will be paid more than corresponding managers in their home country.
will always pay taxes in the country in which they are based.
should receive retirement benefits based on local currencies.
ANSWER:
a
MEDIUM
Chapter 19
Measuring and Rewarding Organizational Performance
19-31
SHORT ANSWER/PROBLEMS
1.
Discuss economic value added.
a.
b.
c.
d.
e.
What is it intended to do?
How is it measured?
How is the measurement different than that of RI?
Why is EVA a better performance measure of RI?
What is the major problem with using EVA as a long-term performance measure?
ANSWER:
a.
b.
c.
d.
e.
More directly align the interests of common shareholders and managers.
EVA = A/Tax profit – (market value of invested capital x cost of capital %).
EVA uses after-tax profit, cost of capital and market value of assets invested. RI
uses segment income, target rate of return and book value of assets invested.
Because it recognizes that there may be a significant difference between book
value and market value of assets. The market value of a company is reflected in
stock prices which are another measure of performance evaluation.
EVA includes the increased investment immediately even though significant
income may not occur until sometime in the future. Most investments will show
decreased short-term performance (EVA) and may cause a company to refuse
projects that are profitable in the long-term (similar to shortcomings of the
payback method).
MEDIUM
2.
What items affect comparability of different divisions within the same company on the
basis of EVA, ROI and RI?
ANSWER:
a.
b.
c.
Each measure is based on accounting income which can be manipulated in the
short-term by accounting methods used, which can differ between investment
centers.
The measurement of the asset base is affected by the choice of what to include,
and may include items that relate to decisions made by prior managers.
All measures focus primarily on how well the segments do in isolation with
results compared to prior years for the same segment, rather than relative
company-wide objectives.
MEDIUM
19-32
3.
Chapter 19
Measuring and Rewarding Organizational Performance
Why is it likely that a subordinate manager would be more attentive to certain
performance measures than overall corporate objectives to guide his decision making?
ANSWER:
Managers are evaluated based on how their actual results compare to specific measures of
performance. These performance measures are intended to be surrogates for the overall
corporate goals as they apply to specific managers. Thus performance measures are
selected by the extent to which
they are good proxies for corporate goals (that is the
extent to which they operationally define, and are consistent with, corporate goals) and
are intended to be major focal points for managers.
MEDIUM
4.
What are some of the major problems associated with accrual-based accounting
performance measures?
ANSWER:
There are two major problems with accrual-based accounting numbers. The first problem
is that they can be easily manipulated by managers. For example, the timing of end of
period transactions can be accelerated or delayed to affect performance measures.
Secondly, accounting measures cannot capture all corporate goals. Accounting measures
are particularly inappropriate to measure qualitative changes in the workforce, qualitative
changes in products, and achievement of social and non-monetary objectives.
Additionally, accounting measures reflect only a short-term perspective of operations
rather than a long-range goal orientation.
MEDIUM
5.
What distinct advantage does a return on investment measure have over a residual income
measure? Explain.
ANSWER:
The advantage of ROI measure over RI is that ROI facilitates a comparison of
organizational sub-units of differing sizes. Because ROI is a performance measure that
automatically scales for size, large and small sub-units can be compared to each other
(subject to all the factors that should be considered when two units in different industries,
different geographical areas, etc. are compared).
MEDIUM
Chapter 19
6.
Measuring and Rewarding Organizational Performance
19-33
How can return on investment result in sub-optimization when it is used as a performance
measure?
ANSWER:
Because performance measures are used to reward performance, managers use them as
decision criteria when they evaluate alternative courses of action. For example, if ROI is
the performance criterion, a division manager will only invest in new projects that will
result in an increase in his/her division's ROI. This is sub-optimal if the overall
organization would be better off by the division manager's investment in available
projects with lower ROIs.
MEDIUM
7.
Define residual income. Evaluate residual income as a measure of performance.
ANSWER:
Residual income is the remainder of net profit once a target cost of capital has been taken
into consideration. Residual income is determined by deducting from net income a
prescribed or imputed interest charge on assets. This method allows an organization to
use different rates of interest for various organizational assets. A main advantage of
using RI is that it overcomes some limitations of ROI (sub-optimization).
MEDIUM
8.
What are some common problems encountered in determining ROI?
ANSWER:
Net income and investment involved can both be calculated several ways. Multiple
calculations are often presented to show the different factors that effect ROI, changes in
sales, expenses, and capital investments.
MEDIUM
19-34
9.
Chapter 19
Measuring and Rewarding Organizational Performance
Discuss management uses of flexible budgets.
ANSWER:
Flexible budgets are important to managers in performing a variety of functions.
Formulating budgets commits certain activities agreed to during the planning process to
specific monetary amounts. The flexible budget provides the means to estimate costs at
various levels of activity. The control function is undertaken to assure that actual
operations meet planned operations. Through this function, deviations are determined
and variances can be ascertained. Managers also use flexible budgets in performance
evaluation. Evaluation is more meaningful with valid and accurate data to make the
process of evaluation beneficial to all involved.
MEDIUM
Use the following information for questions 10 and 11:
Deep Sea Division is one of the operating units of Global Treasure Hunters Inc.. Some of this
division's 1998 operating results follow:
Sales
Profit margin
Target return
Residual income
10.
$3,000,000
10%
15%
$ 60,000
What was the segment income of Deep Sea Division for 1998?
ANSWER:
Segment income = Profit Margin * Sales = .10 * $3,000,000 = $300,000
EASY
11.
What was the return on investment in the Deep Sea Division for 1998?
ANSWER:
ROI = Segment Income/Assets
Segment Income = $3,000,000 * .10 = $300,000
Assets = ($300,000 - $60,000)/.15 = $1,600,000
ROI = $300,000/$1,600,000 = 18.75%
MEDIUM
Chapter 19
Measuring and Rewarding Organizational Performance
19-35
Use the following information for questions 12 and 13:
Northern Division of Utah Chemical Co. produced the following operating results in 1998:
Sales
Segment income
Assets
$10,000,000
1,500,000
6,000,000
Northern Division is considering a $1,000,000 investment in a new project. Northern estimates
that its return on investment (for all of its operations) would be at 22% with the new investment.
12.
How much net segment income is the new project expected to produce?
ANSWER:
the total of the new segment income = .22($6,000,000+$1,000,000) =
.22($7,000,000) = $1,540,000
the portion of the total segment income that is produced by the new project =
$1,540,000 - $1,500,000 = $40,000
MEDIUM
13.
If the manager of Northern Division is evaluated on return on investment alone, will she
invest in the new project? Explain.
ANSWER:
The manager would not invest in the new project because the new project would lower
the Division's ROI from the current 25% ($1,500,000/$6,000,000) to 22%. The new
project only generates an ROI of 4% ($40,000/$1,000,000)
MEDIUM
19-36
14.
Chapter 19
Measuring and Rewarding Organizational Performance
The manager of the Dallas Division of Walking Tours of America is preparing the budget
for 1999. At this point, she has determined that average total assets for 1999 will equal
$4,000,000. She is evaluated on the amount of residual income generated by her division.
Assume variable costs in Dallas Division are expected to equal 60% of total sales and
fixed costs are expected to equal $400,000 in 1999.
a.
b.
Compute the sales level that would generate a 20% return on investment.
Assuming the rate of return is 15%, determine the level of sales that would
generate $200,000 of residual income.
ANSWER:
a.
The required net income = 20% x $4,000,000 = $800,000.
sales = net income + fixed costs + variable costs
sales = $800,000 +| $400,000 + (.60 x sales)
sales x 40% = $1,200,000
sales = $3,000,000
b.
sales = fixed costs + variable costs + required return + residual income
sales = $400,000 + (.60 x sales) + (.15 x sales) + $200,000
sales = $2,400,000
MEDIUM
Chapter 19
15.
Measuring and Rewarding Organizational Performance
19-37
The following information is given for Blue and Red Divisions of Color Company.
Sales
Var. cost of goods sold
Fixed manufacturing costs
Variable selling
Fixed admin. (50% allocated)
Fixed selling (20% allocated)
Assets at cost
Accumulated depreciation
a.
b.
Blue
$600,000
200,000
50,000
30,000
20,000
50,000
800,000
200,000
Red
$300,000
150,000
40,000
5,000
4,000
30,000
600,000
100,000
If Color uses income to evaluate division managers, compute net income that
should be used for that purpose given the limited data above.
If Color uses ROI to evaluate division managers and uses historical cost as the
investment base, compute the ROI for Blue and Red.
ANSWER:
a.
Sales
CGS
Gross Margin
Variable selling
Fixed admin
Fixed selling
Controllable income
b.
Blue
$600,000
(250,000)
$350,000
(30,000)
(10,000)
(40,000)
$ 270,000
Blue
$270,000  $800,000
= 33.75%
MEDIUM
Red
$ 300,000
( 190,000)
$ 110,000
(5,000)
(2,000)
(24,000)
$ 79,000
Red
$79,000  $600,000
= 13.17%
19-38
16.
Chapter 19
Measuring and Rewarding Organizational Performance
Information for two divisions of M & M Company is given below:
Net income
Capital investment
a.
b.
Peanut Plain
$ 60,000
$100,000
$400,000
$500,000
If M & M charges each division 12% for capital employed, compute residual
income for Peanut and Plain.
Compute the ROI for each division.
ANSWER:
a.
Net income
Interest charge
Residual income
b.
ROI
MEDIUM
Peanut
$60,000
(48,000)
$12,000
Plain
$100,000
(60,000)
$ 40,000
$60,000  $400,000 $100,000  $500,000
= 15%
= 20%
Chapter 19
17.
Measuring and Rewarding Organizational Performance
19-39
Creative Business Solutions (CBS), a division of Doug Jorgenson CPA, buys and installs
modular office components. For the most recent year, the division had the following
performance targets:
Asset turnover
Profit margin
Target rate of return on investments for RI
Cost of capital
Income tax rate
2.5
6%
13%
10%
40%
Actual information concerning the company’s performance for last year follows:
Total assets at beginning of year
Total assets at end of year
Total invested capital (annual average)
Sales
Variable operating costs
Direct fixed costs
Allocated fixed costs
$3,600,000
5,300,000
8,000,000
9,000,000
3,650,000
4,770,000
675,000
Required:
a.
b.
c.
d.
e.
f.
For CBS, compute the segment margin and the average assets for the year.
Based on segment margin and average assets, compute the profit margin, asset
turnover and ROI.
Evaluate the ROI performance of CBS.
Using your answers from part b., compute the residual income of CBS.
Compute the EVA of CBS. Why are the EVA and RI levels different?
Based on the data given in the problem, discuss why ROI, EVA and RI may be
inappropriate measures of performance for CBS.
19-40
Chapter 19
Measuring and Rewarding Organizational Performance
17. (cont’d.)
ANSWER:
a.
Sales
Variable costs
Direct fixed costs
Segment margin
$ 9,000,000
(3,650,000)
(4,770,000)
$ 580,000
Average assets = ($3,600,000 + $5,300,000) / 2 = $4,450,000
b.
Profit margin = $580,000 / $9,000,000 = 6.44%
Asset turnover = $9,000,000 / $4,450,000 = 2.02
ROI = $580,000 / $4,450,000 = 13%
c.
The target ROI for the division was 2.5 x 6 = 15%. The division generated an
ROI of only 13%. Thus the division did not achieve its target rate of return. The
poor performance resulted from the divisions failure to achieve its targeted asset
turnover.
d.
RI = $580,000 – (13% x $4,450,000)
= $580,000 - $578,500 = $1500
e.
After-tax profits = pretax income – taxes
= $580,000 – ($580,000 x 40%) = $348,000
EVA = $348,000 – ($8,000,000 x 10%) = $(452,000)
EVA and RI differ for three reasons. First, RI is based on pre-tax rather than
after-tax income. Second, RI is based on the book value of investment, whereas
EVA is based on the market value of investment. Third, the target rates of return
differ between the methods.
f.
ROI, RI and EVA are measures of short-term performance. These measures may
be particularly inappropriate for divisions that have long-term missions (such as
high growth). In this case, the relatively large growth and assets of CBS from the
beginning of the period to the end of the period may indicate this division is
oriented to growth. If so, the ROI, RI and EVA measures will provide an
incentive contrary to the growth mission.
DIFFICULT
Chapter 19
18.
Measuring and Rewarding Organizational Performance
19-41
The IHM Company produces small plastic dolls in its Nevada manufacturing plant. The
company is currently evaluating ways to improve productivity. The accountant of the
firm’s parent organization suggested that management implement a new compensation
plan based on throughput performance measure as an incentive to increase productivity.
To demonstrate how such a measure might work, the accountant gathered the following
data from the firm for June 1998:
Total units attempted
Good units manufactured
Processing time (total hours)
Value-added processing time
a.
b.
c.
d.
e.
6,000,000
4,800,000
800
600
How many defective units were produced in June?
Compute manufacturing cycle efficiency for June.
Compute the process productivity in June.
Compute the process quality yield in June.
Compute the hourly throughput for June.
ANSWER:
a.
b.
c.
d.
e.
Defective units = 6,000,000 - 4,800,000 = 1,200,000
MCE = 600  800 = 75%
Process productivity = 6,000,000  600 = 10,000 units per hour
Process quality yield = 4,800,000  6,000,000 = 80%
Throughput = 10,000 x .75 x .8 = 6,000 dolls per hour
MEDIUM
19.
Identify the steps to follow in establishing the performance reward system for a company.
ANSWER:
The steps are in the following order:
1. set strategic goals
2. identify the critical success factors
3. set the compensation strategy
4. identify performance measures
5. set performance rewards
6. measure/monitor performance
7. determine rewards
MEDIUM
19-42
20.
Chapter 19
Measuring and Rewarding Organizational Performance
Discuss pay-for-performance plans.
ANSWER: Employees should be encouraged by compensation plans to perform and be
loyal to the organization. Performance measures should be related to a company's
operational targets. These performance measures do not have to be evenly weighted.
Management can assign higher weights to more important performance measures as they
are related to the corporate goals.
MEDIUM
21.
Discuss the rethinking taking place regarding the time frame used in American business
performance systems.
ANSWER:
Historically, American time frames for performance has been short term, often only one
year. Presumably management tries to do what is best for the firm and its owners. Thus,
shareholder wealth maximization should be the primary focus of management. Short
term profit maximization doesn't necessarily result in long-run shareholder wealth
maximization.
To encourage this different attitude, employees and management are being asked to take a
longer run perspective. This is enhanced with employee stock ownership in their firm.
MEDIUM
22.
Are individual performance plans suitable for the Japanese worker? Why?
ANSWER:
The Japanese worker tends to be more group oriented. These workers view
themselves a team working together for some common goal. Thus, individual
performance plans would not work well in Japan.
MEDIUM
Chapter 19
23.
Measuring and Rewarding Organizational Performance
19-43
What is a golden parachute and why is it used?
ANSWER:
A golden parachute is a benefit package awarded to managers if their firm is taken over
and they are terminated. This normally follows a hostile takeover of their firm.
Proponents of parachutes say that they allow managers to devote their limited time to
serving the interests of their company's stockholders in an unbiased manner. Others say
parachutes lead to entrenched managers and reward managers who may have mismanaged
their firm which created the conditions that resulted in the hostile takeover.
MEDIUM
24.
Deferred compensation techniques are currently used in the American work place. What
are they and how do they benefit the employer and the employee?
ANSWER:
Deferred compensation is pay that was earned on current performance but is paid later to
the employee. The compensation may include profit sharing plans, pensions, and stockbased plans like ESOPs. The payment by the employer can be deducted currently for tax
purposes but the employee doesn't recognize it as income until it is received. In stock
option plans, earnings in the plan are not taxable to the employee until the plan is
distributed. Size of the plans are affected by the firm's stock value and encourage
employees to take a more positive attitude about the company's future.
MEDIUM
25.
Comment on differences regarding employee performance that exists between for-profit
and not-for-profit organizations.
ANSWER:
In a for profit entity, stockholders and their representatives, the board of directors,
maintain oversight of the company and its officers. These individuals are directly
concerned about the effectiveness and efficiency of operations because they are the
residual claimants who are paid (in the form of dividends and stock value increases) only
after all other involved parties receive their compensation.
In NFP organizations, no overriding interest group comparable to stockholders keeps herd
on the performance of managers in the entity. Performance rewards are less effective in
these operations. Pay and performance rewards in NFPs have often not been regarded as
adequate by NFP employees. Attempts are being made in this sector to incorporate some
performance factors in its compensation system.
MEDIUM
19-44
26.
Chapter 19
Measuring and Rewarding Organizational Performance
Explain why the average worker in a plant or office may feel dissatisfied with the salary
structure in American operations today.
ANSWER:
Exhibit 22-8 in the text indicates that CEOs in the U.S. average compensation far exceed
comparable CEOs in other industrial countries. No other country's CEOs approach U.S.
CEO compensation. Even U.S. managers are relatively low ranked compared to other
countries. Employees' compensation in U.S. manufacturing plants are one of the lowest
in the industrialized world. Thus, American workers feel they are being short-changed or
the CEOs are being overpaid.
MEDIUM