Chapter 01
Managerial Accounting and the Business Environment
Multiple Choice Questions
1. Day-to-day decision making is most common to which of the following activities managers
are expected to carry on in organizations?
A. Strategy formulation.
B. Directing and motivating.
C. Planning.
D. Budgeting.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-02 The Work of Managers and Their Need for Managerial Accounting Information
2. Identifying alternatives and selecting the best among them is part of which of the following
activities which managers carry on in organizations?
A. Controlling.
B. Directing.
C. Planning.
D. Motivating.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-03 Planning
3. Budgeting is part of which of the following activities managers perform in organizations?
A. Controlling.
B. Directing.
C. Planning.
D. Motivating.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-03 Planning
4. Obtaining feedback is generally identified most directly with which of these functions of
management?
A. Planning.
B. Directing and motivating.
C. Controlling.
D. Decision making.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-05 Controlling
5. Which of the following is part of managing and improving business processes?
A. Directing
B. Lean production
C. Motivating
D. Planning
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-16 Business Process Management
6. Which is the most common risk management tactic?
A. Accept the risk.
B. Avoid the risk.
C. Reduce the risk.
D. Share the risk.
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
7. Which of the following best describes the function of managerial accounting within an
organization?
A. It has its primary emphasis on the future.
B. It is required by regulatory bodies such as the Ontario Securities Commission.
C. It focuses on the organization as a whole, rather than on the organization's segments.
D. It places more emphasis on precision of data than financial accounting does.
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-10 Emphasis on the Future
8. Upon which of the following does managerial accounting place considerable weight?
A. Generally accepted accounting principles.
B. The financial history of the entity.
C. Ensuring that all transactions are properly recorded.
D. Detailed segment reports about departments, products, and customers.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-13 Segments of an Organization
9. For internal uses, managers are more concerned with receiving information that achieves
which of the following standards?
A. Completely objective and verifiable.
B. Completely accurate and precise.
C. Relevant, flexible, and timely.
D. Relevant, completely accurate, and precise.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-11 Relevance of Data
10. Which of the following would be an example of a performance report?
A. An income statement reporting actual results for the past month.
B. An income statement showing the amounts budgeted for the past month.
C. A balance sheet showing the actual financial position at the end of the past month.
D. A production report showing budgeted and actual production for the past month.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Hard
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-05 Controlling
11. Which of the following is NOT one of the three major customer value propositions
discussed in the text?
A. Customer intimacy
B. Discount pricing
C. Operational excellence
D. Product leadership
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
12. Which of the following is NOT a topic relating to managing and improving business
processes?
A. Lean Production.
B. Corporate Governance.
C. Enterprise Systems.
D. Risk Management.
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-16 Business Process Management
Topic: 01-17 Lean Production
Topic: 01-18 Enterprise Risk Management
13. Which one of the following is NOT an example of corporate social responsibility provided
to customers?
A. Safe, high- quality products that are fairly priced.
B. Full disclosure of product related risks.
C. Opportunities for training, promotion and personal development.
D. Easy to use information systems for shopping and tracking orders.
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-21 Corporate Social Responsibility
14. Which one of the following is NOT an activity in the planning and control cycle?
A. Comparing actual to planned performance.
B. Raw materials are released to production far in advance of being needed to ensure no
interruptions in work flows due to shortages of raw materials.
C. Formulating long and short-term plans.
D. Measuring performance.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-03 Planning
Topic: 01-05 Controlling
Topic: 01-06 Decision Making
15. Which of the following is NOT an example of a business risk?
A. Products harming customers.
B. A website malfunctioning.
C. A customer value proposition.
D. An employee accessing unauthorized information.
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
16. Professional accounting body in Canada (CPA) require their members to undertake
professional development and/or continuing education. This practice is intended to directly
satisfy which of these rules of ethical conduct in line with other code of ethics?
A. Integrity.
B. Objectivity.
C. Competence.
D. Confidentiality.
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-20 Ethics
17. Samantha Galloway is a managerial accountant in the accounting department of Mustang
Industries, Inc. Samantha has just discovered evidence that some of the corporation's
marketing managers have been wrongfully inflating their expense reports in order to obtain
higher reimbursements from the firm. According to the Institute of Management Accountants'
Standards of Ethical Conduct, what should Samantha do upon discovering this evidence?
A. Notify the controller.
B. Notify the marketing managers involved.
C. Notify the president of the corporation.
D. Ignore the evidence because she is not part of the Marketing Department.
Blooms: Apply
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Hard
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-20 Ethics
18. Both financial and managerial accounting rely on the same underlying financial data but
there are major differences. Managerial Accounting:
A. emphasizes financial consequences of past activities.
B. emphasizes precision.
C. emphasizes relevance.
D. must follow GAAP.
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-10 Emphasis on the Future
Topic: 01-11 Relevance of Data
Topic: 01-12 Less Emphasis on Precision
19. After careful planning, Jammu Manufacturing Corporation has decided to switch to a justin-time inventory system as a component of the lean thinking model. At the beginning of this
switch, Jammu has 30 units of product in inventory. Jammu has 2,000 labour hours available
in the first month of this switch. These hours could produce 500 units of product. Customer
demand for this first month is 400 units. If just-in-time principles are correctly followed, how
many units should Jammu plan to produce in the first month of the switch?
A. 370
B. 400
C. 430
D. 470
Blooms: Analyze
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Hard
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
20. Which of the following facets of the lean thinking model is often called just-in-time
production?
A. Identify value in specific products/services.
B. Identify the business process that delivers value.
C. Create a pull system that responds to customer orders.
D. Organize work arrangements around the flow of the business process.
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
21. Which of the following groups should be the focal point of a company's strategy?
A. Employees
B. Board of directors
C. Shareholders
D. Target customers
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Hard
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
22. The purpose of IFRS is:
A. To encourage Strategic planning.
B. To enhance the comparability and clarity of financial information on a global basis.
C. To encourage disclosure of Non-Financial data.
D. To change how management accountants prepare reports.
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-14 Generally Accepted Accounting Principles
23. In Canada, CPA Code of Ethics is an instrument for enforcing professional conduct for its
members and comprise the following:
A. Level of competence, confidentiality, integrity, due care and objectivity
B. Level of competence, confidentiality and integrity
C. Level of competence, confidentiality and objectivity
D. Level of competence, integrity and objectivity
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-20 Ethics
24. Which of the following is the stakeholder group whose interests are to be directly and
formally protected by effective corporate social responsibility?
A. Customers
B. Creditors
C. All Stakeholders
D. Suppliers
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-21 Corporate Social Responsibility
True / False Questions
25. An important part of planning is to identify alternatives and then to select from among the
alternatives the one that best meets the organization's objectives.
TRUE
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-03 Planning
26. Lean production is a management approach that organizes resources such as people and
machines around the flow of business processes and that produces units only in response to
customer orders.
TRUE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
27. Companies should identify foreseeable risks before they occur rather than react to
unfortunate events that have already happened.
TRUE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
28. A value chain consists of the major business functions that add value to a company's
products and services.
TRUE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-16 Business Process Management
29. Managerial accounting places less emphasis on precision and more emphasis on
timeliness of data than financial accounting does.
TRUE
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-12 Less Emphasis on Precision
30. Managerial accounting is NOT governed by generally accepted accounting principles
(GAAP).
TRUE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-14 Generally Accepted Accounting Principles
Topic: 01-15 Managerial Accounting—Not Mandatory
31. In general, accounting data serve both financial accounting and managerial accounting
purposes.
TRUE
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-10 Emphasis on the Future
Topic: 01-11 Relevance of Data
Topic: 01-12 Less Emphasis on Precision
32. Product harming customers is NOT a business risk.
FALSE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
33. Managerial accounting plays a critical role in providing information to management to
facilitate implementing and monitoring strategy.
TRUE
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
34. To reduce the likelihood that employees will engage in undesirable activities that may
harm various stakeholders, many companies prepare a formal code of conduct to reflect their
values and moral system.
TRUE
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-20 Ethics
35. Emphasis on the future is given equal weight by both managerial accounting and financial
accounting.
FALSE
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-10 Emphasis on the Future
36. Managerial accounting plays a critical role in providing information to management to
facilitate strategy implementation and monitoring.
TRUE
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
37. Lean thinking differs from traditional manufacturing methods, which organize work
departmentally and encourage those departments to maximize their output even if it exceeds
customer demand and bloats inventories.
TRUE
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
38. A customer value proposition is essentially a reason for customers to choose a company's
products over its competitors' products.
TRUE
Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
39. Customer value propositions tend to fall into three broad categories--customer intimacy,
operational excellence, and product leadership.
TRUE
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
40. Companies that adopt a customer intimacy strategy are in essence saying to their target
customers, "The reason you should choose us is because we understand and respond to your
individual needs better than our competitors."
TRUE
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
41. Companies that choose an operational excellence strategy are in essence saying to their
customers, "Choose us rather than our competitors because we strive for zero defects."
FALSE
Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
42. Many organizations use extrinsic incentives to highlight important goals and to motivate
employees to achieve them.
TRUE
Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-05 Explain how intrinsic motivation; extrinsic incentives; and cognitive biases affect employee behaviour.
Topic: 01-22 Managing Employees
43. The lean approach results in fewer defects, less wasted effort, and quicker customer
response times than traditional production methods.
TRUE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
44. Managerial accounting is not mandatory.
TRUE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-15 Managerial Accounting—Not Mandatory
45. Many customers seek to purchase products and services from socially responsible
companies.
TRUE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-21 Corporate Social Responsibility
46. Lean production is often called just-in-time production.
TRUE
Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
Short Answer Questions
47. You have recently been hired by a manufacturing company. Two days ago, you met with
the top management of the company to discuss future strategies for the firm. During the
meeting, the president of the company expressed concern about the profitability of the
company and the company's ability to compete effectively in the future. You responded to the
president's concerns by mentioning some articles you had read in professional accounting
journals regarding the lean thinking model. The president responded to your comments by
saying that although the lean thinking model sounded interesting, no one in the company was
knowledgeable about it. The president then requested that you prepare a brief summary of the
lean thinking model for the next strategic planning meeting.
Required:
a. Describe the lean thinking model and how it differs from traditional manufacturing
methods
b. List some of the benefits of the lean thinking model.
a. The lean thinking model is a management approach that organizes resources around the
flow of business processes and pulls units through in response to customer orders. The model
includes the popular just-in-time production. Lean thinking differs from traditional
manufacturing methods, which organize work departmentally and encourage those
departments to maximize output even if it exceeds customer demand. Scheduling production
in response to customer orders results in minimal inventory.
b. Some of the benefits that accrue from adoption of the lean thinking model are as follows:
1) Lower inventories of raw materials, work in process, and finished goods.
2) Fewer defects
3) Less wasted efforts
5) Quicker customer response times.
Blooms: Apply
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
48. How much it costs a company to manufacture a particular product is one of the many
questions that reports typically provided by managerial accountants help to answer.
Required:
Comment on the usefulness of a unit product cost information in the preparation of a set of
financial statements?
Unlike a merchandising company, a manufacturing company must calculate the average unit
cost of each product it manufactures. As it will be demonstrated in subsequent chapters of the
book, this number is essentially the sum of the cost of all the factors of production incurred
(that is, raw materials, labour, and capital) divided by the total output. The resulting unit
product cost information is not only useful but essential in calculating the cost of units of the
product sold required for preparing an income statement and the cost of units of the product
not sold (to be reported among the assets on the balance sheet as ending inventory).
Blooms: Analyze
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Hard
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-07 The Planning and Control Cycle
Topic: 01-10 Emphasis on the Future
Topic: 01-11 Relevance of Data
49. Provide three examples of common business risks faced by companies.
Some examples of common business risks include: (1) losing market share to competitors; (2)
Web site malfunctioning; (3) employees stealing assets or accessing unauthorized
information; and (4) inaccurate budget estimates causing operational problems such as
excessive inventory levels or inventory shortages.
Blooms: Apply
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
Chapter 03
Cost Behaviour: Analysis and Use
Multiple Choice Questions
1. Expense A is a fixed cost; expense B is a variable cost. During the current year, the activity
level has increased but is still within the relevant range. In terms of cost per unit of activity,
you would expect which of the following statements to be true?
A. Expense A has remained unchanged.
B. Expense B has decreased.
C. Expense A has decreased.
D. Expense B has increased.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-03 Variable Costs
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-10 Fixed Costs
Topic: 03-15 Fixed Costs and the Relevant Range
2. Which costs will change with a decrease in activity within the relevant range?
A. Total fixed costs and total variable costs.
B. Unit fixed cost and total variable costs.
C. Unit variable cost and unit fixed cost.
D. Unit fixed cost and total fixed costs.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-03 Variable Costs
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-10 Fixed Costs
Topic: 03-15 Fixed Costs and the Relevant Range
3. Within the relevant range of activity, how will variable cost per unit behave?
A. It will increase in proportion with the level of activity.
B. It will remain constant.
C. It will vary inversely with the level of activity.
D. Its behaviour cannot be determined without additional information.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-03 Variable Costs
Topic: 03-09 The Linearity Assumption and the Relevant Range
4. What will result from an increase in the activity level within the relevant range?
A. An increase in fixed cost per unit.
B. A proportionate increase in total fixed costs.
C. An unchanged fixed cost per unit.
D. A decrease in fixed cost per unit.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-10 Fixed Costs
Topic: 03-15 Fixed Costs and the Relevant Range
5. What does the term "relevant range" mean?
A. The range within which costs may fluctuate.
B. The range within which a particular cost formula is valid.
C. The range within which production may vary.
D. The range within which the relevant costs are incurred.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-09 The Linearity Assumption and the Relevant Range
6. The linear equation Y = a + bX is often used to express cost formulas. Which of the
following representations in this equation is correct?
A. The b term represents variable cost per unit of activity.
B. The a term represents variable cost in total.
C. The X term represents total costs.
D. The Y term represents total fixed costs.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-16 Mixed Costs
7. Which of the following is an example of a discretionary fixed cost?
A. Insurance.
B. Taxes on real estate.
C. Management training.
D. Amortization of buildings and equipment.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-11 Types of Fixed Costs
Topic: 03-13 Discretionary Fixed Costs
8. Which of the following is an example of a committed fixed cost?
A. A training program for salespersons.
B. Executive travel expenses.
C. Property taxes on the factory building.
D. New product research and development.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-11 Types of Fixed Costs
Topic: 03-12 Committed Fixed Costs
9. What are discretionary fixed costs?
A. They vary directly and proportionately with the level of activity.
B. They have a long-term planning horizon, generally encompassing many years.
C. They are made up of plant, equipment, and basic organizational costs.
D. None of these options.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-13 Discretionary Fixed Costs
10. What are committed fixed costs?
A. They vary directly and proportionately with the level of activity.
B. They have a long-term planning horizon, generally encompassing several years.
C. They are made up of plant, equipment, and basic organizational costs.
D. They can be reduce in the short run with minimal damage to the long-run organizational
objectives
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-12 Committed Fixed Costs
11. In describing the cost formula equation Y = a + bX, which of the following statements is
correct?
A. The X term is the dependent variable.
B. The a term is the fixed component.
C. In the high-low method, the b term equals change in activity divided by change in costs.
D. As the X term increases, the Y term decreases.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-16 Mixed Costs
12. Which of the following best describes the contribution approach to the income statement?
A. It organizes costs on a functional basis.
B. It shows data based on the cost behavior aspect of fixed and variable.
C. It shows a contribution margin rather than an operating income figure at the bottom of the
statement.
D. It can be used only by manufacturing companies.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
13. Contribution margin is the excess of revenues over which of the following?
A. Cost of goods sold.
B. Manufacturing cost.
C. All direct costs.
D. All variable costs.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-25 The Contribution Approach
14. Which of the following is an example of a cost that is variable with respect to the number
of units produced and sold?
A. Insurance on the headquarters building.
B. Power to run production equipment.
C. Supervisory salaries.
D. Amortization of factory facilities.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-03 Variable Costs
Topic: 03-04 The Activity Base
15. What is an activity base?
A. It is the largest single category of cost in a company.
B. It is a fixed cost that cannot be avoided.
C. It is a measure of whatever causes a variable cost to be incurred
D. It is an indirect cost that is essential to the business.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-04 The Activity Base
16. The following data pertain to activity and costs for two months:
Activity level in units
Variable costs
Fixed costs
Mixed costs
Total costs
October
5,000
$10,000
30,000
20,000
$60,000
November
10,000
?
?
?
$75,000
Assuming that these activity levels are within the relevant range, what were the mixed costs
for November?
A. $20,000.
B. $25,000.
C. $35,000.
D. $40,000.
$75,000 - [($10,000/5,000) * 10,000] - $30,000 = $25,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-04 The Activity Base
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
17. The following data pertain to activity and costs for two months:
Activity level in units
Variable costs
Fixed costs
Mixed costs
Total costs
June
10,000
$20,000
15,000
10,000
$45,000
July
20,000
?
?
?
$70,000
Assuming that these activity levels are within the relevant range, what were the mixed costs
for July?
A. $10,000.
B. $15,000.
C. $35,000.
D. $40,000.
$70,000 - [($20,000/10,000) * 20,000] - 15,000 = $15,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-04 The Activity Base
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
18. At an activity level of 10,000 units, total variable costs were $35,000 while total fixed
costs were $20,800. If 16,000 units are produced and this activity is within the relevant range,
which of the following statements is correct?
A. Total costs would equal $89,280.
B. Total unit cost would equal $4.80.
C. Fixed cost per unit would equal $5.58.
D. Total costs would equal $55,800.
[(35,000/10,000)+ (20,800]/16,000)] = $4.80/unit.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-04 The Activity Base
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
19. Anaconda Mining Company shipped 9,000 tons of copper concentrate for $450,000 in
March and 11,000 tons for $549,000 in April. Use the high-low method to estimate the
shipping costs for 12,000 tons to be shipped in May.
A. $548,780.
B. $549,020.
C. $594,000.
D. $598,500.
VC/ton = (549,000 - 450,000)/(11,000 - 9,000) = $49.50/ton;
FC = 450,000 - 9,000 * 49.50 = $4,500.
Total shipping cost for 12,000 tons = FC + VC = $4,500 + (12,000 * $49.50) = $598,500.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-22 Account Analysis
20. An analysis of past maintenance costs indicates that maintenance cost is an average of
$0.20 per machine hour at an activity level of 10,000 machine hours and $0.25 per machine
hour at an activity level of 8,000 machine hours. Assuming that this activity is within the
relevant range, what is the total expected maintenance cost if the activity level is 8,700
machine hours?
A. $400.
B. $1,740.
C. $2,000.
D. $2,250.
Total Cost = $2,000 at both levels therefore all the costs are fixed.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
21. Shipping expense is $9,000 for 8,000 kilograms shipped and $11,250 for 11,000
kilograms shipped. Assuming that this activity is within the relevant range, if the company
ships 9,000 kilograms, its expected shipping expense would be closest to which of the
following?
A. $8,583.
B. $9,750.
C. $9,972.
D. $10,125.
VC = (11,250 - 9,000)/(11,000 - 8,000) = $0.75.
FC = 11,250 - 11,000 *.75 = $3,000
Total shipping expense = FC + VC = $3,000 + (9,000 * $0.75) = $9,750.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
22. Average maintenance costs are $1.50 per machine hour at an activity level of 8,000
machine hours and $1.20 per machine hour at an activity level of 13,000 machine hours.
Assuming that this activity is within the relevant range, total expected maintenance cost for a
budgeted activity level of 10,000 machine hours would be closest to which of the following?
A. $11,433.
B. $13,440.
C. $15,000.
D. $16,128.
VC = (13,000 * 1.20 - 8,000 * 1.50)/(13,000 - 8,000) = $0.72/hr. FC = 15,600 - 13,000 *.72 =
$6,240; Total Cost = FC + VC = 6,240 + 10,000 *.72 = $13,440.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
23. The controller of Joy Co has requested a quick estimate of the manufacturing supplies
needed for July when production is expected to be 470,000 units. Below are actual data from
the prior three months of operations:
March
April
May
Production in units
450,000
540,000
480,000
Manufacturing supplies
$723,060
853,560
766,560
Using these data and the high-low method, what is the best estimate of the cost of
manufacturing supplies that would be needed for July? (Assume that this activity is within the
relevant range.)
A. $752,060.
B. $755,196.
C. $805,284.
D. $1,188,756.
VC = (853,560 - 723,060)/(540,000 - 450,000) = $1.45; FC = 853,560 - 540,000 * $1.45 =
$70,560. TC July = FC + VC = 70,560 + 470,000 * $1.45 = $752,060.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
24. Which of the following concepts used in estimating cost behaviour is unique to the leastsquares regression method?
A. Independent variable.
B. Dependent variable.
C. R-squared.
D. Variable cost per unit.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-21 Scattergraph Plots
Topic: 03-22 Using the High-Low Method
Topic: 03-27 Economic Plausibility
25. Given the cost formula Y = $15,000 + $5X, what is the total cost at an activity level of
8,000 units?
A. $15,000.
B. $23,000.
C. $40,000.
D. $55,000.
Y = $15,000 + $5 * 8,000 = $55,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
26. Given the cost formula Y = $12,000 + $6X, what is the total cost at an activity level of
8,000 units?
A. $12,000.
B. $20,000.
C. $48,000.
D. $60,000.
Y = $12,000 + $6 * 8,000 = $60,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
27. Reddy Company has the following cost formulas for overhead:
Cost
Indirect Materials
Maintenance
Machine Setup
Utilities
Amortization
Cost Formula
$2,000 plus $0.40 per machine hour
$1,500 plus $0.60 per machine hour
$0.30 per machine hour
$200 plus $0.10 per machine hour
$800
Based on these cost formulas, what is the expected total overhead cost at 600 machine hours?
A. $4,500.
B. $5,200.
C. $5,620.
D. $5,340.
2,000 +.40 * 600 + 1,500 +.60 * 600 +.3 * 600 + 200 +.1 * 600 + 800 = $5,340.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-04 The Activity Base
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
28. Given the cost formula Y = $17,500 + $4X, at what level of activity will total cost be
$42,500?
A. 4,375 units.
B. 5,250 units.
C. 6,250 units.
D. 10,625 units.
(42,500 - 17,500)/4 = $6,250.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-07 True Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
29. The following data pertain to activity and utilities costs for two recent years:
Activity Level in Units
Utilities Cost
Year 2
12,000
$15,000
Year 1
8,000
$12,000
Using the high-low method, what is the variable cost per unit for utilities?
A. $1.25 per unit.
B. $1.50 per unit.
C. $1.33 per unit.
D. $0.75 per unit.
($15,000 - $12,000)/(12,000 - 8,000) = $.75 per unit.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
30. The following data pertain to activity and utilities costs for two recent years:
Activity Level in Units
Utilities Cost
Year 2
10,000
$12,000
Year 1
6,000
$9,000
Using the high-low method, what is the cost formula for utilities?
A. $1.20 per unit.
B. $1.50 per unit.
C. $3,000 plus $3.00 per unit.
D. $4,500 plus $0.75 per unit.
VC = (12,000 - 9,000)/(10,000 - 6,000) = $.75/unit.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
31. At an activity level of 6,000 units, the cost for maintenance is $7,200; at 10,000 units, the
cost for maintenance is $11,600. Using the high-low method, what is the cost formula for
maintenance?
A. $1.16 per unit.
B. $1.20 per unit.
C. $600 plus $1.10 per unit.
D. $1,200 plus $1.10 per unit.
VC = ($11,600 - $7,200)/(10,000 - 6,000) = $1.10 per unit
FC = 11,600 - 10,000 *.75 = $600.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
32. Bell Company has provided the following data for maintenance costs:
Machine Hours Incurred
Maintenance Cost Incurred
April
12,000
$24,000
May
16,000
$26,000
Using the high-low method, what is the cost formula for maintenance cost?
A. $2.00 per machine hour.
B. $1.625 per machine hour.
C. $18,000 plus $0.50 per machine hour.
D. $24,000 plus $0.50 per machine hour.
VC = (26,000 - 24,000)/(16,000 - 12,000) = $.5 per machine hour.
FC = 26,000 - 16,000 *.5 = $18,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
33. Buckeye Company has provided the following data for maintenance cost:
Machine Hours
Maintenance Cost
Prior Year
12,500
$27,000
Current Year
15,000
$31,000
Using the high-low method, what is the cost formula for maintenance cost?
A. $7,000 per year plus $0.625 per machine hour.
B. $7,000 per year plus $1.60 per machine hour.
C. $21,625 per year plus $0.625 per machine hour.
D. $27,000 per year plus $1.60 per machine hour.
VC = (31,000 - 27,000)/(15,000 - 12,500) = $1.6 per hour
FC = 31,000 - 15,000 * 1.60 = $7,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
34. Selected information about Buehler Corporation's operations at high and at low levels of
activity follow:
Number of Units Produced
Total manufacturing
overhead costs
Direct material cost per
unit
Direct labour cost per unit
Level of Activity
Low
25,000
$575,000
High
30,000
$680,000
$5
$5
$6
$6
Using the high-low method, what is the total variable cost per unit of product?
A. $11.05.
B. $21.00.
C. $32.00.
D. $35.00.
VC overhead = (680,000 - 575,000)/(30,000 - 25,000) = $21
Total cost of unit = $5 + 6 + 21 = $32.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
35. At a sales level of $300,000, James Company's gross margin is $15,000 less than its
contribution margin, its operating income is $50,000, and its total selling and administrative
expenses are $120,000. At this sales level, what is the company's contribution margin?
A. $155,000.
B. $170,000.
C. $185,000.
D. $250,000.
50,000 + 120,000 + 15,000 = $185,000.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-25 The Contribution Approach
36. Which of the following statements about contribution format income statement is
incorrect?
A. It is used as an internal planning and decision making tool
B. It facilitates cost volume profit analysis
C. It separates costs into fixed and variable first deducting variable expenses from sale to
obtain contribution margin
D. It emphasizes the function of production, administration and sales with no distinguish
between fixed and variable costs
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-25 The Contribution Approach
37. Which of the following statements about the methods for estimating a cost formula is
incorrect?
A. A scattergram plot should precede the high-low method.
B. A scattergram plot should precede the least-squares regression method.
C. The preferred method is high-low.
D. The preferred method is least-squares regression.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-21 Scattergraph Plots
Topic: 03-22 Using the High-Low Method
Topic: 03-27 Economic Plausibility
Rymore Company would like to classify the following costs according to their cost
behaviour:
Sales in Units
Cost A
Cost B
Cost C
July
1,500
$35,000
16,000
67,500
August
1,600
$36,000
16,000
72,000
38. Which of the following classifications best describes the behaviour of Cost A?
A. Mixed.
B. Variable.
C. Fixed.
D. Opportunity cost.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
39. Which of the following classifications best describes the behaviour of Cost B?
A. Mixed.
B. Variable.
C. Fixed.
D. Opportunity cost.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
40. Which of the following classifications best describes the behaviour of Cost C?
A. Mixed.
B. Variable.
C. Fixed.
D. Differential cost.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
Comparative income statements for Boggs Sporting Equipment Company for the last two
months are presented below:
Sales in Units
Sales Revenue
Less: Cost of Goods Sold
Gross Margin
Less: Operating
Expenses:
Rent
Sales Commissions
Maintenance Expenses
Clerical Expenses
Total Operating Expenses
Operating Income
July
11,000
$165,000
72,600
92,400
August
10,000
$150,000
66,000
84,000
12,000
13,200
13,500
16,000
$54,700
$37,700
12,000
12,000
13,000
15,000
$52,000
$32,000
All of the company's costs are either fixed, variable, or a mixture of the two (that is, mixed).
Assume that the relevant range includes all of the activity levels mentioned in this problem.
41. Which of the operating expenses of the company is variable?
A. Rent.
B. Sales commissions.
C. Maintenance expenses.
D. Clerical expenses.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
42. What is the total monthly fixed cost for Boggs Sporting Equipment Company?
A. $12,000.
B. $22,500.
C. $25,000.
D. $40,000.
Maintenance; VC = (13,500 - 13,000)/(11,000 - 10,000) = $0.50
FC = 13,500 - 11,000 *.5 = 8,000.
Clerical VC = (16,000 - 15,000)/(11,000 - 10,000) = $1.00
FC = $16,000 - 11,000 * $1 = $5,000
Total FC = 12,000 + 8,000 + 5,000 = $25,000.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
43. If sales are projected to be 8,000 units in September, what would be total operating
expenses?
A. $41,600.
B. $44,750.
C. $46,600.
D. $49,300.
12,000 + [8,000 * (12,000/10,000)] + [$8,000 + (8,000 * $.5)] + [$5,000 + (8,000 * $1)] =
$46,600.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
Gasson Company is a merchandising firm. Next month, the company expects to sell 800
units. The following data describe the company's revenue and cost structure:
Selling price per unit
Sales commission
Purchase price (cost) per unit
Advertising expense
Administrative expense
$40
5%
$18
$4,000 per month
$4,500 per month plus 15% of sales
Assume that all activity mentioned in this problem is within the relevant range.
44. What is the expected gross margin next month?
A. $11,200.
B. $14,400.
C. $16,400.
D. $17,600.
800 * ($40 - 18) = $17,600.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-24 Why a New Income Statement Format?
45. What is the expected total administrative expense next month?
A. $4,800.
B. $9,300.
C. $13,300.
D. $14,900.
4,500 + 800 *.15 * $40 = $9,300.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-25 The Contribution Approach
46. What is the expected contribution margin next month?
A. $11,200.
B. $14,400.
C. $16,000.
D. $17,600.
800 * [40 - (40 *.05) - 18 - (40 *.15)] = $11,200.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-25 The Contribution Approach
47. What is the expected operating income next month?
A. $2,700.
B. $5,100.
C. $7,500.
D. $11,200.
11,200 - 4,000 - 4,500 = $2,700.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-25 The Contribution Approach
In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total
overhead costs were $223,000. Of this amount, utilities were $48,000 (all variable) and
amortization was $60,000 (all fixed). The balance of the overhead costs consisted of
maintenance cost (mixed). At 100,000 machine hours, maintenance costs were $130,000.
Assume that all of the activity levels mentioned in this problem are within the relevant range.
48. What is the variable cost for maintenance per machine hour?
A. $0.75.
B. $1.30.
C. $1.35.
D. $1.44.
Mixed Maintenance cost = 223,000 - 48,000 - 60,000 = $115,000 at 80,000 hrs
VC/hr. = (130,000 - 115,000)/(100,000 - 80,000) = $.75.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
49. What is the total fixed overhead cost for O'Donnell?
A. $55,000.
B. $60,000.
C. $115,000.
D. $130,000.
60,000 + (130,000 - 100,000 *.75) = $115,000.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
50. If 110,000 machine hours of activity are projected for next period, what would be total
expected overhead cost?
A. $242,500.
B. $256,000.
C. $263,500.
D. $306,625.
(48,000/80,000) * 110,000 + 110,000 *.75 + 115,000 = $263,500.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
Maxwell Company has a total expense per unit of $2.00 per unit at the 16,000-unit level of
activity, and total expense per unit of $1.95 at the 21,000-unit level of activity.
51. What is the best estimate of the variable cost per unit for Maxwell Company?
A. $0.56.
B. $1.79.
C. $1.95.
D. $2.00.
(21,000 * 1.95 - 16,000 * 2)/(21,000 - 16,000) = $1.79.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
52. What is the best estimate of the total fixed cost per period for Maxwell Company?
A. $3,360.
B. $29,190.
C. $32,000
D. $40,950.
(21,000 * $1.95) - 21,000 * 1.79 = $3,360.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
53. What is the best estimate of the total expected costs at the 19,000 level of activity for
Maxwell Company?
A. $37,050.
B. $37,370.
C. $38,000.
D. $39,830.
3,360 + 19,000 * 1.79 = $37,370.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
Johnson Company has provided the following data for the first five months of the year:
January
February
March
April
May
Machine Hours
120
160
200
150
170
Lubrication Cost
$750
800
870
790
840
54. Using the least squares regression method, the estimated variable lubrication cost per
machine hour is closest to which of the following?
A. $0.67.
B. $1.56.
C. $1.40.
D. $1.50.
use calculator or spreadsheet.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-27 Economic Plausibility
55. Using the least squares regression method, the estimated monthly fixed component of
lubrication cost is closest to which of the following?
A. $561.
B. $565.
C. $570.
D. $585.
use calculator or spreadsheet.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-27 Economic Plausibility
Gargymal Company would like to estimate the variable and fixed components of its electrical
costs and has compiled the following data for the last five months of operations:
August
September
October
November
December
Machine Hours
1,000
900
1,500
2,000
1,300
Electrical Cost
$1,620
1,510
1,870
1,950
1,730
56. Using the high-low method, the estimated variable cost per machine hour for electricity is
closest to which of the following?
A. $0.40 per hour.
B. $0.98 per hour.
C. $1.68 per hour.
D. $2.50 per hour.
(1,950 - 1,510)/(2,000 - 900) = $.4 per hour.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-22 Using the High-Low Method
57. Using the high-low method, the estimated fixed cost per month for electricity is closest to
which of the following?
A. $870.00.
B. $1,150.00.
C. $1,290.00.
D. $1,306.50.
1,950 - 2,000 *.40 = $1,150.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-22 Using the High-Low Method
Wilson Company's activity for the first six months of the current year is as follows:
January
February
March
April
May
June
Machine Hours
2,000
3,000
2,400
1,900
1,800
2,100
Electrical Cost
$1,560
2,200
1,750
1,520
1,480
1,600
58. Using the high-low method, what is the variable cost per machine hour?
A. $0.40 per hour.
B. $0.60 per hour.
C. $0.64 per hour.
D. $0.67 per hour.
(2,200 - 1,480)/(3,000 - 1,800) = $.6 per hour.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-22 Using the High-Low Method
59. Using the high-low method, what is the fixed portion of the electrical cost each month?
A. $190.
B. $280.
C. $400.
D. $760.
2,200 - 3,000 *.60 = $400.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-22 Using the High-Low Method
Prater Company has provided the following data:
Units Sold
Sales Revenue
Less: Cost of Goods Sold
Gross Margin
Less: Operating Expenses
Operating Income
This Year
300,000
$1,300,000
910,000
390,000
272,000
$118,000
Last Year
250,000
$1,050,000
735,000
315,000
260,000
$55,000
60. What is the best estimate of the company's variable operating expense per unit?
A. $0.24 per unit.
B. $0.91 per unit.
C. $0.96 per unit.
D. $4.17 per unit.
(272,000 - 260,000)/(300,000 - 250,000) = $0.24 per unit.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-22 Using the High-Low Method
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
61. What is the best estimate of the company's total fixed operating expense per year?
A. $72,000.
B. $188,000.
C. $200,000.
D. $212,000.
272,000 - 300,000 *.24 = $200,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-22 Using the High-Low Method
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
The following data have been provided by a retailer that sells a single product:
Units Sold
Sales Revenue
Less: Cost of Goods Sold
Gross Margin
Less: Operating Expenses
Operating Income
This Year
200,000
$1,000,000
700,000
300,000
222,000
$78,000
Last Year
150,000
$1750,000
525,000
225,000
210,000
$15,000
62. What is the best estimate of the company's variable operating expenses per unit?
A. $0.24 per unit.
B. $0.71 per unit.
C. $0.90 per unit.
D. $4.17 per unit.
(222,000 - 210,000)/(200,000 - 150,000) =$.24 per unit.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-22 Using the High-Low Method
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
63. What is the best estimate of the company's total fixed operating expenses per year?
A. $0.
B. $44,000.
C. $80,000.
D. $174,000.
222,000 - 200,000 *.24 = $174,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-22 Using the High-Low Method
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
64. What is the best estimate of the company's contribution margin for this year?
A. $252,000.
B. $300,000.
C. $158,000.
D. $225,000.
1,000,000 - 700,000 - 200,000 *.24 = $252,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-22 Using the High-Low Method
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
The following information has been provided by the Evans Retail Stores, Inc., for the first
quarter of the year:
Sales
Variable Selling Expenses
Fixed Selling Expenses
Cost of Goods Sold
Fixed Administrative Expenses
Variable Administrative Expenses
$350,000
$35,000
$25,000
$160,000
$55,000
$15,000
65. What is the gross margin of Evans Retail Stores, Inc., for the first quarter?
A. $140,000.
B. $190,000.
C. $210,000.
D. $220,000.
350,000 - 160,000 = $190,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
66. What is the contribution margin of Evans Retail Stores, Inc., for the first quarter?
A. $140,000.
B. $190,000.
C. $210,000.
D. $300,000.
350,000 - 35,000 - 160,000 - 15,000 = $140,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
Porter Company has provided the following data for the second quarter of the most recent
year:
Sales
Fixed Manufacturing Overhead
Direct Labour
Fixed Selling Expenses
Variable Manufacturing Overhead
Variable Administrative Expenses
Direct Materials
Fixed Administrative Expenses
Variable Selling Expenses
$300,000
55,000
72,500
46,250
41,000
48,000
51,500
44,500
49,750
Assume that direct labour is a variable cost and that there was no beginning or ending
inventories.
67. What was the total contribution margin of Porter Company for the second quarter?
A. $37,250.
B. $87,000.
C. $176,000.
D. $211,000.
300,000 - 72,500 - 41,000 - 48,000 - 51,500 - 49,750 = $37,250.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-07 True Variable Costs
Topic: 03-16 Mixed Costs
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
68. What was the gross margin(loss) for Porter Company for the second quarter?
A. $(12,500).
B. $80,000.
C. $131,500.
D. $135,000.
300,000 - 51,500 - 72,500 - 41,000 - 55,000 = $80,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-07 True Variable Costs
Topic: 03-16 Mixed Costs
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
An income statement for Crandall's Bookstore for the first quarter of the current year is
presented below:
CRANDALL's BOOKSTORE
Income Statement for the First Quarter of the Current Year
Sales
Less: Cost of Goods Sold
- all variable
Gross Margin
Less: Operating
Expenses:
Selling
Administrative
Operating Income
$800,000
560,000
240,000
$98,000
98,000
196,000
$44,000
On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the
remaining selling expenses being fixed. The variable administrative expenses are 3% of sales,
with the remainder being fixed.
69. What is the contribution margin for Crandall's Bookstore for the first quarter?
A. $128,000.
B. $152,000.
C. $240,000.
D. $688,000.
books sold = 800,000/50 = 16,000. CM = 240,000 - 16,000 * 5.50 - 800,000 *.03 = $128,000.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-07 True Variable Costs
Topic: 03-16 Mixed Costs
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
70. Using the contribution approach, what is the operating income for the first quarter?
A. $44,000.
B. $128,000.
C. $152,000.
D. $240,000.
Operating Income is the same under both approaches.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
71. What is the cost formula for operating expenses where X represents the number of books
sold?
A. Y = $84,000 + $7.00X.
B. Y = $84,000 + $8.50X.
C. Y = $98,000 + $7.00X.
D. Y = $98,000 + $8.50X.
FC = [98,000 - ($800,000 * 0.03)] + [98,000 - (16,000 * 5.5)] = $84,000
VC operating expenses = 5.50 + 50 *.03 = $7.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-07 True Variable Costs
Topic: 03-16 Mixed Costs
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
Sorter Company has provided the following data for the third quarter of the most recent year:
Sales
Fixed Manufacturing Overhead
Direct Labour
Fixed Selling Expenses
Variable Manufacturing Overhead
Variable Administrative Expenses
Direct Materials
Fixed Administrative Expenses
Variable Selling Expenses
$500,000
55,000
72,500
46,250
41,000
48,000
51,500
44,500
49,750
Assume that direct labour is a variable cost and that there was no beginning or ending
inventories.
72. At the level of sales for the third quarter, how much in additional fixed selling expenses
could Sorter Company have afforded to spend and still would have reported $41,500
operating income?
A. $50,000.
B. $87,750.
C. $91,500.
D. $96,250.
(Sales - expenses) - $41,500 = $50,000.
Blooms: Analyze
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
73. Suppose the sales for the third quarter was the equivalent of 1,000 units and that the fixed
manufacturing and non-manufacturing costs were valid between the relevant range of 800 and
1,200 units. If Sorter Company had sold 100 additional units, it would have reported what
amount of additional operating income?
A. $9,150.
B. $23,725.
C. $50,000.
D. $100,650.
(500 - 72.5 - 41 - 48 - 51.5 - 49.75) * 100 units = $23,725.
Blooms: Analyze
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-15 Fixed Costs and the Relevant Range
Topic: 03-16 Mixed Costs
Topic: 03-25 The Contribution Approach
74. Which of the following items of Sorter Company's expenses and/or costs can be
misleading if reported on a per unit of production and/or sales basis?
A. Direct labour
B. Direct materials.
C. Variable administrative expenses.
D. Fixed manufacturing overhead.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-06 True Variable versus Step-Variable Costs
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-10 Fixed Costs
Topic: 03-15 Fixed Costs and the Relevant Range
75. Which of the following should be the first step in the analysis of cost behaviour?
A. Estimating the slope coefficient.
B. Estimating the intercept term.
C. Estimating the R-squared in the case of least-squares regression.
D. Scattergram plot.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
Topic: 03-27 Economic Plausibility
76. Which of the following assumptions is implicit in the simplified contribution approach
income statement?
A. There are two cost drivers, both units of production and units of sales.
B. The fixed expenses do vary with either units of production or units of sales.
C. Units of production and units of sales are equal.
D. Inventory levels in units do change.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
77. Which of the following is generally true for the cost of goods sold amount that a
merchandising company would report on its income statement?
A. It is a mixed cost.
B. It is a variable cost.
C. It is a fixed cost.
D. It has no effect on the contribution margin.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-07 True Variable Costs
Topic: 03-08 Step-Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-24 Why a New Income Statement Format?
True / False Questions
78. Modern technology is causing shifts away from variable costs toward more fixed costs in
many industries.
TRUE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-14 The Trend toward Fixed Costs
79. In order for a cost to be variable, it must vary with either units produced or units sold.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-03 Variable Costs
Topic: 03-14 The Trend toward Fixed Costs
80. A cost that is obtainable in large chunks and that increases or decreases only in response to
fairly wide changes in the activity level is known as a step-variable cost.
TRUE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-08 Step-Variable Costs
81. The concept of the relevant range does not apply to fixed costs.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-15 Fixed Costs and the Relevant Range
82. Indirect costs, such as manufacturing overhead, are always fixed costs.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-06 True Variable versus Step-Variable Costs
Topic: 03-12 Committed Fixed Costs
83. A cost formula may not be valid outside the relevant range of activity.
TRUE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-15 Fixed Costs and the Relevant Range
84. Discretionary fixed costs arise from annual decisions by management to spend in certain
fixed cost areas.
TRUE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-13 Discretionary Fixed Costs
85. Significant reductions in committed fixed costs can usually be made on a temporary basis
without seriously impairing the long-term goals of a firm.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-03 Variable Costs
Topic: 03-12 Committed Fixed Costs
Topic: 03-13 Discretionary Fixed Costs
86. The planning horizons for committed fixed costs and discretionary fixed costs are
generally the same.
FALSE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Topic: 03-12 Committed Fixed Costs
Topic: 03-13 Discretionary Fixed Costs
87. The high-low method is generally less accurate than the least-squares regression method
for analyzing the behaviour of mixed costs.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-12 Committed Fixed Costs
Topic: 03-27 Economic Plausibility
88. The contribution approach to constructing an income statement emphasizes the functions
of production, administration and sales.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
89. The "goodness of fit" statistic (that is, R-squared) associated with the least-squares
regression method indicates the proportion of a mixed cost that is variable.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-27 Economic Plausibility
90. Because the least-squares regression method is more accurate, a scattergram plot is
unnecessary.
FALSE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-21 Scattergraph Plots
Topic: 03-27 Economic Plausibility
91. The contribution approach to the income statement classifies costs by behaviour rather
than by function.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
92. A mixed cost is partially variable and partially fixed.
TRUE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
93. The R2 tells us the percentage of the variation in the dependent variable (e.g., cost) that is
explained by variation in the independent variable (activity).
TRUE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-26 Appendix 3A: Least-Squares Regression Calculations
94. R2 is a measure of goodness of fit.
TRUE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-26 Appendix 3A: Least-Squares Regression Calculations
95. The engineering approach can be very time consuming and is typically used in situations
where no past experience is available on activity and costs.
TRUE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-18 Estimating Cost Behaviour
Topic: 03-20 Engineering Approach
96. When analysing mixed costs with the high-low method, begin by identifying the period
with the lowest level of activity and the period with the highest level of activity.
TRUE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-22 Using the High-Low Method
Short Answer Questions
97. The following information summarizes the company's cost structure
Variable cost per unit
Fixed cost per unit
Total cost per unit
Units produced and sold
$1.30
4.50
$5.80
48,000
Assume that all of the activity levels mentioned in this problem are within the relevant range.
Required:
Prepare a schedule showing predictions for the following items at the 40,000 unit level of
activity:
a) Total variable cost.
b) Total fixed cost.
c) Variable cost per unit.
d) Fixed cost per unit.
Note: The total fixed cost is $4.50 48,000 = $216,000.
Total costs:
Variable ($1.30 x 40,000 units)
Fixed
Costs per unit:
Variable (unchanged)
Fixed ($216,000 / 40,000 units)
$52,000
216,000
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-03 Variable Costs
Topic: 03-10 Fixed Costs
Topic: 03-16 Mixed Costs
$1.30
5.40
98. Mateo Company's average cost per unit is $1.425 at the 16,000-unit level of activity and
$1.38 at the 20,000-unit level of activity. The selling price is $3.00 per unit
Assume that all of the activity levels mentioned in this problem are within the relevant range.
Required:
Predict the following items for Mateo Company:
(a) Variable cost per unit.
(b) Total fixed cost per period.
(c) Total expected costs at the 18,000-unit level of activity.
(d) Total Contribution Margin at the 18,000 unit level of production and sales.
High level of activity (20,000 units *
$1.38)
Low level of activity (16,000 units *
$1.425)
Change
a) $4,800 / 4,000 units = $1.20 per unit
variable cost
b) Total cost at the high level
Less: Variable element ($1.20 * 20,000
units)
Fixed element
c) Variable cost ($1.20 * 18,000 units)
Fixed cost
Total cost
Cost
$27,600
22,800
$4,800
$27,600
24,000
$3,600
$21,600
3,600
$25,200
d) CM = 18,000 * ($3.00 - $1.20) = $32,400
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
99. ABC Company's total overhead costs at various levels of activity are presented below:
March
April
May
June
Machine hours
60,000
50,000
70,000
80,000
Total overhead costs
$216,800
194,000
239,600
262,400
Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. At the 50,000-machine-hour level of activity, these costs are presented below:
Utilities (V)
Supervisory salaries (F)
Maintenance (M)
Total overhead costs
$54,000
62,000
78,000
$194,000
V = Variable, F = Fixed, M = Mixed
The company wants to break down the maintenance cost into its basic variable and fixed cost
elements.
Required:
a) Estimate the maintenance cost for June.
b) Use the high-low method to estimate the cost formula for maintenance cost.
c) Estimate the total overhead cost at an activity level of 55,000 machine hours, using the
separate estimates you obtained for its components.
d) Estimate the total overhead cost at an activity level of 55,000 machine hours, independent
of the separate estimates you obtained for its components.
a) Maintenance cost for June:
Total overhead cost at 80,000 machine
hours
Less:
Utilities ($54,000 / 50,000) * 80,000
Supervisory salaries (fixed)
Portion of overhead for June that
represents maintenance
$262,400
86,400
62,000
$114,000
b) High-low analysis of maintenance cost:
High point
Low point
Change observed
Maintenance cost
$114,000
78,000
$36,000
Variable rate:
Change in cost =
Change in activity
Total fixed cost:
Total maintenance cost at the low point
Less: Variable cost element (50,000 *
$1.20)
Fixed cost element
Machine hours
80,000
50,000
30,000
$36,000 = $1.20 per machine hr
30,000 MH
$78,000
60,000
$18,000
The cost formula is: Y = $18,000 + $1.20X
c) Total overhead at 55,000 machine hours:
Utilities ($54,000 /
50,000) * 55,000
Supervisory salaries
Maintenance cost:
Variable (55,000 * $1.20)
Fixed
Total overhead cost at
55,000 MH
$59,400
62,000
$66,000
18,000
84,000
$205,400
Note: The overhead cost function is: Y = ($62,000 + $18,000) + ($1.08 + $1.20)X
Y = $80,000 + $2.28X
d.) Independent estimate of the overhead cost function involves using the high-low method on
the original data as follows:
Variable rate
Fixed costs
Estimated overhead costs at 55,000 machine hours:
= ($262,400 - $194,000)/(80,000 50,000)
= $68,400/30,000
= $2.28 per machine hour
= $262,400 - ($2.28 * 80,000) =
$262,400 - $182,400
= $80,000
= $194,000 - ($2.28 * 50,000) =
$194,000 - $114,000
$80,000
Variable: 55,000 * $2.28
Fixed
Total
$125,400
80,000
$204,400
Blooms: Apply
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
100. Stuart Manufacturing produces metal picture frames. The company's income statements
for the last two years are presented below:
Units sold
Sales
Less: Cost of goods sold
Gross margin
Less: Operating expenses
Net income
Last year
50,000
$800,000
550,000
250,000
150,000
$100,000
This year
70,000
$1,120,000
710,000
410,000
190,000
$220,000
The company has no beginning or ending inventories. All activity in this problem is in the
relevant range.
Required:
a. Estimate the company's total variable cost per unit, and its total fixed costs per year.
(Remember that this is a manufacturing firm.)
b. Compute the company's contribution margin for this year.
a. Variable component of cost of goods sold:
Variable rate = Change in costs/Change in units
Variable rate = ($710,000 - $550,000)/(70,000 - 50,000)
Variable rate = $8.00 per unit
Fixed cost:
High units: $710,000 - $8.00(70,000) = $150,000
Low units: $550,000 - $8.00(50,000) = $150,000
Variable component of operating expenses:
Variable rate = Change in costs/Change in units
Variable rate = ($190,000 - $150,000)/(70,000 - 50,000)
Variable rate = $2.00 per unit
Fixed cost:
High units: $190,000 - $2.00(70,000) = $50,000
Low units: $150,000 - $2.00(50,000) = $50,000
Total variable cost per unit:
$8.00 + $2.00 = $10.00 per unit
Total fixed cost:
$150,000 + $50,000 = $200,000
b.
Sales revenue
Less: Variable expenses
Variable cost of goods
sold
Variable operating
expenses
Contribution margin
$1,120,000
$560,000
140,000
700,000
$420,000
Blooms: Apply
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-15 Fixed Costs and the Relevant Range
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
Topic: 03-25 The Contribution Approach
101. The Central Valley Company is a merchandising firm that sells a single product. The
company's revenues and expenses for the last three months are presented below:
CENTRAL VALLEY COMPANY
Comparative Income Statement for the Second Quarter
Sales in units
Sales revenue
Less: cost of goods
sold
Gross margin
Less: operating
expenses
Shipping expense
Advertising
expense
Salaries and
commissions
Insurance expense
Depreciation
expense
Total operating
expenses
Net income
April
4,500
$630,000
252,000
May
5,250
$735,000
294,000
June
6,000
$840,000
336,000
378,000
441,000
504,000
56,000
70,000
63,500
70,000
71,000
70,000
143,000
161,750
180,500
9,000
42,000
9,000
42,000
9,000
42,000
320,000
346,250
372,500
$58,000
$94,750
$131,500
Required:
a. Determine which expenses are mixed and, by use of the high-low method, separate each
mixed expense into its variable and fixed components. State the cost formula for each mixed
expense.
b. Compute the company's total contribution margin for May.
a. The cost of goods sold for this company is a variable cost and is $56 per unit. The Shipping
Expense and the Salaries and Commissions Expense are mixed. All other expenses are
constant for each of the months shown and are therefore fixed.
Shipping expense:
$71,000 - $56,000 =
6,000 - 4,5000
$15,000 = $10 per unit
1,500
$56,000 - (4,500 $10) = $11,000.
Cost formula = $11,000 per month plus $10 per unit.
Salaries and commissions:
$180,500 - 143,000 =
6,000 - 4,500
$37,500 = $25 per unit
1,500
$143,000 - (4,500 $25) = $30,500
Cost formula = $30,500 per month plus $25 per unit.
b. Contribution margin for May:
Sales in units
Sales revenue
Variable expenses:
Cost of goods sold
Shipping expense ($10 x
5,250)
Salaries & commissions
($25 x 5,250)
Contribution margin
5,250
$735,000
$294,000
52,500
131,250
477,750
$257,250
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
102. Selected data about Pitkin Company's manufacturing operations at two levels of activity
are presented below:
Number of Units
Produced
Total Manufacturing
Costs
Direct Material Cost per
Unit
Direct Labour Cost per
Unit
10,000
15,000
$157,000
$225,000
$4
$4
$6
$6
Required: Using the high-low method, estimate the cost formula for manufacturing overhead.
Assume that both direct material and direct labour are variable costs. Using your results,
estimate the total manufacturing cost at a level of 12,000 units.
Total manufacturing costs
Less:
Direct materials ($4 *
10,000 and $4 * 15,000,
respectively)
Direct labour ($6 * 10,000
and $6 * 15,000,
respectively
Manufacturing overhead
cost
High level of activity
Low level of activity
Change
Low
$157,000
High
$225,000
40,000
60,000
60,000
90,000
$57,000
$75,000
Cost
$75,000
57,000
$18,000
Activity
15,000 units
10,000
5,000 units
$18,000/5,000 units = $3.60 per unit variable cost
Total cost at the high level of activity
Less: Variable element ($3.60 * 15,000
units)
Fixed cost element
$75,000
54,000
$21,000
Therefore, the cost formula for manufacturing overhead is $21,000 per period plus $3.60 per
unit produced, or Y = $21,000 + $3.60x.
Total Manufacturing Costs at 12,000 units = 12,000 * ($4 + $6 + $3.60) + $21,000 =
$184,200
Blooms: Analyze
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
103. Unified Parcel, Inc. operates a local parcel delivery service. The company keeps detailed
records relating to operating costs of trucks, and has found that if a truck is driven 110,000
kilometres per year, the operating cost is 7.5 cents per kilometre. This cost increases to 8.75
cents per kilometre if a truck is driven 60,000 kilometres per year.
Required:
Estimate the cost formula for truck operating costs using the high-low method.
Total cost at high level of activity: 110,000 $0.75 = $8,250
Total cost at low level of activity: 60,000 $.0875 = $5,250
High
Low
Change
Variable cost
Fixed cost element
Activity
110,000
60,000
50,000
Cost
$8,250
5,250
$3,000
= Change in cost / Change in activity
= $0.06 per kilometre
= $1,650
= $8,250 - ($0.06 x 110,000)
= $1,650
The cost formula is $1,650 per year plus $0.06 per kilometre.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
104. (Appendix 3A) The Stephens Leadership Centre provides training seminars in personal
development and time management. The company is relatively new and management is
seeking information regarding the Centre's cost structure. The following information has been
gathered since the inception of the business in January of the current year:
January
February
March
April
May
June
Seminars offered
10
12
15
18
16
13
Costs incurred
$17,000
18,800
20,900
23,762
21,800
19,400
Required:
a. Using the high-low method, estimate the variable cost per seminar and the total fixed cost
per month.
b. Using the least-squares regression method and the equations for a and b, estimate the
variable cost per seminar and the total fixed cost per month.
a. High-low method:
April (high activity level)
January (low activity
level)
Change observed
Number of seminars
18
10
Costs incurred
$23,762
17,000
8
$6,762
Change in cost =
$6,762 = $845.25 per
seminar
8
Variable cost =
Change in activity
Fixed cost element
= Total cost - Variable cost element
= $23,762 - (18 * $845.25)
= $8,547.50
Cost formula for seminar costs: $8,547.50 per month plus $845.25 per seminar held
b. Least-squares regression method:
January
February
March
April
May
June
Seminars
offered
10
12
15
18
16
13
84
Costs
incurred
$17,000
18,800
20,900
23,762
21,800
19,400
$121,662
XY
X2
170,000
225,600
313,500
427,716
348,800
252,200
1,737,816
100
144
225
324
256
169
1,218
n=6
X = 84
Y = 121,662
XY = 1,737,816
X2 = 1,218
b = [n(XY) - (X)( Y)]/[n(X2) - (X)2]
= [6(1,737,816) - (84)(121,662)]/[6(1,218) - (84)2]
= $822.57 (rounded to the nearest whole cent)
a = [(Y) - b(X)]/n
= [(121,662) - 822.57(84)]/6
= $8,761 (rounded to the nearest whole dollar)
The cost formula is $8,761 per month plus $822.57 per seminar.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
Topic: 03-27 Economic Plausibility
105. The 4 4 Shop is a large retailer of equipment for pickup trucks. An income statement for
the company's Bed Liner Department for the most recent quarter is presented below:
The 4 4 Shop
Income Statement - Liner Deparment for First Quarter of Current Year
Sales
Less: Cost of goods sold
Gross margin
Less: Operating
expenses:
Selling expenses
Administrative expenses
Net income
$700,000
250,000
$450,000
$195,000
145,000
340,000
$110,000
The liners sell, on average, for $350 each. The department's variable selling expenses are $35
per liner sold. The remaining selling expenses are fixed. The administrative expenses are 25%
variable and 75% fixed. The company purchases its liners from a supplier at a cost of $125
per liner.
Required:
Prepare an income statement for the quarter, using the contribution approach.
The 4 4 Shop
Income Statement (Contribution Format) for First Quarter of Current Year
Sales
Variable expenses:
Cost of goods sold
Selling expenses ($35 *
2,000)
Administrative expenses
(0.25 * $145,000)
Contribution margin
Fixed expenses:
Selling expenses
($195,000 - $70,000)
Administrative expenses
(0.75 * $145,000)
Net income
$700,000
$250,000
70,000
36,250
356,250
343,750
125,000
108,750
233,750
$110,000
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-16 Mixed Costs
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
106. (Appendix 3A) The Accounting Department of Archer Company, a merchandising
company, has prepared the following analysis:
Cost
Cost of goods sold
Sales commissions
Advertising expense
Administrative salaries
Billing expense
Depreciation expense
Cost formula
$56 per unit
12% of sales
$300,000 per month
$160,000 per month
?
$62,000 per month
The Accounting Department feels that billing expense is a mixed cost, containing both fixed
and variable cost elements. A tabulation has been made of billing expense and sales in units
over the last several months, as follows:
January
February
March
April
May
June
Units sold (000)
9
11
14
17
15
12
Billing expense
$30,000
33,000
36,000
42,000
39,000
35,000
The Accounting Department now plans to develop a cost formula for billing expense so that a
contribution-type income statement can be prepared for management's use.
Required:
a. Using the least-squares regression method and the equations for a and b, estimate the cost
formula for billing expense.
b. Assume that the company plans to sell 30,000 units during July at a selling price of $100
per unit. Prepare a budgeted income statement for the month, using the contribution format.
a.
January
February
March
April
May
June
Units sold
(000)
9
11
14
17
15
12
78
Billing
expense
$30,000
33,000
36,000
42,000
39,000
35,000
$215,000
XY
∑X2
$270,000
363,000
504,000
714,000
585,000
420,000
$2,856,000
81
121
196
289
225
144
1,056
n=6
X = 78
Y = 215,000
XY = 2,856,000
X2 = 1,056
b = [n(XY) - (X)( Y)]/[n(X2) - (X)2]
= [6(2,856,000) - (78)(215,000)]/[6(1,056) - (78)2]
= $1,452 (rounded to the nearest dollar)
a = [(Y) - b(X)]/n
= [(215,000) - 1,452(78)]/6
= $16,957 (rounded to nearest dollar)
The cost formula is $16,957 per month plus $1,452 per thousand units.
b. ARCHER COMPANY
Budgeted Income Statement for the month of June
Sales ($100 * 30,000)
Variable expenses:
Cost of goods sold ($56 *
30,000)
Commissions (0.12 *
$3,000,000)
Billing expense ($1,452 *
30)
Contribution margin
Fixed expenses:
Advertising expense
Administrative salaries
Billing expense
Depreciation expense
Net income
$3,000,000
$1,680,000
360,000
43,560
2,083,560
916,440
$300,000
160,000
16,952
62,000
538,952
$377,488
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
Topic: 03-27 Economic Plausibility
107. (Appendix 3A) Below are cost and activity data for a particular cost over the last four
periods. Your boss has asked you to analyze this cost so that management will have a better
understanding of how this cost changes in response to changes in activity.
Period 1
Period 2
Period 3
Period 4
Activity
44
42
48
49
Cost
277
265
284
284
Required:
Using the least-squares regression method and the equations for a and b, estimate the cost
formula for this cost.
n=4
X = 183
Y = 1,110
XY = 50,866
X2 = 8,405
b = [n(XY) - (X)( Y)]/[n(X2) - (X)2]
= [4(50,866) - (183)(1,110)]/[4(8,405) - (183)2
= $2.55 (rounded to nearest cent)
a = [(Y) - b(X)]/n
= [(1,110) - 2.55(183)]/4
= $161 (rounded to nearest whole dollar)
Cost formula: Y = $161 + $2.55X.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-27 Economic Plausibility
108. Suppose a firm reports the following results using the least-squares regression method:
Y = $750 - $2.56X
Y is the daily repair and maintenance cost and X is the daily units of production in hundreds.
The daily observations were over a one-month period. The results do not make sense to the
manager of the repair and maintenance department.
Required:
What is the most plausible explanation for the apparently meaningless results?
According to the results, total daily repair and maintenance costs decrease as the daily units of
production increase. This is consistent with a situation where very little or no repair and
maintenance is conducted when the production facilities are in use. In other words, repair and
maintenance is most likely scheduled when the production facilities are idle. Also repair and
maintenance is generally not conducted daily but production is. A least-squares regression
using, for example, monthly or bi-weekly repairs and maintenance and production data is
likely to produce meaningful results. It may be necessary to evaluate total repair and
maintenance costs per month using some other independent variable such as machine hours to
see if more meaningful results can be achieved.
Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-27 Economic Plausibility
109. The cost structure of Sackville Manufacturing Company (SMC) at two levels of
production is as follows:
Units
Costs:
Direct materials
Direct labour
Factory overhead
Total costs
Average cost per unit
60,000
80,000
$120,000
90,000
216,000
$426,000
$7.10
$160,000
120,000
248,000
$528,000
$6.60
Required:
a. Classify and explain each production cost as either strictly variable or strictly fixed or
mixed
b. Determine the total production cost equation for SMC, using the units of production as the
cost driver. (Be sure to identify clearly all the separate components of the equation.)
c. Explain what causes the drop in average cost per unit from $7.10 to $6.60 when production
is increased from 60,000 to 80,000 units. Show all supporting calculations.
a. The cost of both direct materials and direct labour is strictly variable because, in each case,
the average cost per unit remains the same at both levels of production. It is $2.00 for direct
materials and $1.50 for direct labour. On the other hand, factory overhead cost is a mixed
cost, that is, it is a combination of some fixed costs and some variable costs. The average cost
per unit does not remain the same at the two levels of production. In this case, it decreases
with increased production. (See part c below for further explanation.)
b. The two-point method can be used to estimate the total cost function either by combining
the cost function of the three separate costs or using their totals.
Direct materials: Variable rate
Fixed
Direct labour: Variable rate
Fixed
Factory overhead: Variable
rate
Fixed
Combined: Variable
Fixed
Y
= ($160,000 - $120,000)/(80,000 - 60,000)
= $40,000/20,000
= $2.00
= $0 (by definition)
= ($120,000 - $90,000)/(80,000 - 60,000)
= $30,000/20,000
= $1.50
= $0 (by definition)
= ($248,000 - $216,000)/(80,000 - 60,000)
= $32,000/20,000
= $1.60
= $248,000 - ($1.60 * 80,000)
= $248,000 = $128,000
= $120,000
= $216,000 - ($1.60 * 60,000)
= $216,000 - $96,000
= $120,000
= $5.10 (that is, $2.00 + $1.50 + $1.60)
= $120,000
= $120,000 + $5.10x
Alternatively using the total cost:
Total cost: Variable rate
Fixed
Y
= ($528,000 - $426,000)/(80,000 60,000)
= $102,000/20,000
= $5.10
= $528,000 - ($5.10 * 80,000)
= $528,000 = $408,000
= $120,000
= $426,000 - ($5.10 * 60,000)
= $426,000 - $306,000
= $120,000
= $120,000 + $5.10x
c. The drop in the average cost from $7.10 to $6.60 was the result of spreading the total fixed
cost of $120,000 over 80,000 units (an average of $1.50) instead of 60,000 (an average of
$2.00). The difference is exactly $0.50.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-07 True Variable Costs
Topic: 03-09 The Linearity Assumption and the Relevant Range
Topic: 03-16 Mixed Costs
Topic: 03-22 Using the High-Low Method
110. The graph below was produced after recording the processing costs of Oki Products
observed over the last 10 months using the following data:
Month
1
2
3
4
5
6
7
8
9
10
Units Produced
7,500
11,000
15,000
5,500
9,000
8,500
2,500
7,000
11,500
6,000
Processing Costs
$44,000
52,000
59,000
38,000
47,000
52,000
28,000
41,000
52,000
41,000
Required:
a. Using the graph identify the monthly fixed costs. What additional information might you
determine from the graph?
b. The chart above indicates total processing costs of $47,000 at a level of 9,000 units for
month 5. Using this level of activity and your fixed costs determined in a, calculate the
variable cost per unit to the nearest cent. Express your results in the form of a linear equation
y = a + bx.
c. Use the high low method to determine the variable cost per unit and fixed cost per month.
Express your results in the form of a linear equation y = a + bx.
d. Comment on the differences between the results in b and c. Which result would you
consider more accurate and why?
a. From the graph it is clear from where the line meets the y-axis that the total fixed costs are
$30,000 per month. The graph also indicates that there is a strong linear relationship between
total processing costs and units produced. This is evident because the points are very close to
the straight line which indicates that total costs do in fact increase proportionately with units
produced. Given the closeness of the points to the line we can estimate a very high r-squared.
b. In month 5 Total Costs for 9,000 units = $47,000. Since $30,000 of this total is considered
fixed costs the variable cost per unit can be computed as follows:
TC - FC = TVC = $47,000 - 30,000 = $17,000 total variable cost at a level of 9,000 units. VC/
unit = $17,000/9,000 units = $1.89/unit rounded to nearest cent. Linear equation Y = $30,000
+ $1.89x
c. VC = change in cost/change in activity = ($59,000 - 28,000)/(15,000 - 2,500) = $2.48/unit.
FC = $59,000 - 15,000 * 2.48 = $21,800.
Linear Equation Y = $21,800 + $2.48x
d. The results using the graph are taken from using all 10 months of data compared to only 2
months of data using the high low method. In addition the high and low monthly points could
be outside of the companies relevant range of activity so the graphical solution represents a
more accurate result. The graph clearly indicates very close to $30,000 per month for fixed
costs and using the high low method the results are much lower than that. The most accurate
method would be the least squares regression which also uses all data points.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-01 Describe how fixed and variable costs behave and how to use them to predict costs.
Learning Objective: 03-02 Analyze mixed costs using various approaches.
Topic: 03-16 Mixed Costs
Topic: 03-21 Scattergraph Plots
Topic: 03-22 Using the High-Low Method
111. The following is Allison Corporation's contribution format income statement for
December 2013:
Sales
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Before-tax profits
$800,000
300,000
500,000
400,000
$100,000
The company had no beginning or ending inventories. The company produced and sold
10,000 units in December 2013.
Required:
Assuming no change in either the cost structure or the average selling price, prepare a
contribution format income statement for a January, 2014 assuming production and sales of
7,500 units for Allison Corporation.
Crucial step: Determining the required units to generate $400,000 total contribution margin.
The average contribution per unit when company sold 10,000 was $50, that is,
$500,000/10,000. This is also the difference between the average selling price of $80 (that is,
$800,000/10,000) and average variable expenses of $30 (that is, $300,000/10,000). By
assumption, the average contribution margin of $50/unit does not change.
Contribution Margin Income Statement:
Sales (7,500 units * $80)
Less: Variable Costs (7,500 units * $30)
Contribution margin
Less: Fixed expenses
Net Operating Income
$600,000
225,000
$375,000
400,000
$(25,000)
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 03-03 Prepare an income statement using the contribution format.
Topic: 03-24 Why a New Income Statement Format?
Topic: 03-25 The Contribution Approach
112. (Appendix 3A) Jenson Manufacturing is developing cost formula for future planning and
cost control. Utilities is one of the mixed costs associated with production. The cost analyst
has suggested that units produced be used as the activity base to determine the fixed and
variable costs and the cost formula for utility costs. The controller feels the most appropriate
cost base is direct labour hours. Below is information collected over the past 8 months:
Month
Units Produced
1
2
3
4
5
6
7
8
1,100
900
1,300
1,500
1,720
1,700
1,700
1,670
Direct Labour
Hours
500
300
400
600
1,000
900
800
1,100
Utilities Cost
$7,200
6,500
7,100
7,500
10,800
10,000
9,200
12,000
Required:
Use the least squares regression method to determine the cost formula for utilites cost
assuming units produced is the independent variable. Calculate the R-squared. Use the same
method to determine the cost formula and R-squared assuming direct labour hours is the
independent variable. Use a spreadsheet or calculator to determine the slope and intercept. Do
you recommend the company use units produced or direct labour hours as a cost base?
Explain.
Intercept
Slope
R-squared
Cost Formula
Units Produced
1174.559719
5.254833671
0.680142544
Y = 1174.56 + 5.25x
Direct Labour Hours
4074.166667
6.733333333
0.962287567
Y = 4074.17 + 6.73x
Recommend that the company use direct labour hours as a base because the relationship
between this and total cost is much better than it is for units produced. The R-squared using
units produced are only 68% compared to 96% using direct labour as a base. It seems that
direct labour hours has a close relationship to Utilities cost.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 03-04 Analyze a mixed cost using the least-squares regression method.
Topic: 03-28 Multiple Regression Analysis
Chapter 04
Cost-Volume-Profit Relationships
Multiple Choice Questions
1. Which of the following is defined as the difference between total sales in dollars and total
variable expenses?
A. Margin of safety.
B. Operating income.
C. The gross margin.
D. The contribution margin.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Topic: 04-03 Contribution Margin
2. Brasher Company manufactures and sells a single product that has a positive contribution
margin. If the selling price and variable expenses both decrease by 5% and fixed expenses do
not change, then what would be the effect on the contribution margin per unit and the
contribution margin ratio?
A)
B)
C)
D)
Contribution margin per
unit
Decrease
Decrease
No change
No change
Contribution margin
ratio
Decrease
No change
Decrease
No change
A. Option A
B. Option B
C. Option C
D. Option D
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
3. Once the break-even point is reached, which of the following statements is true?
A. The total contribution margin changes from negative to positive.
B. Operating income will increase by the unit contribution margin for each additional item
sold.
C. Variable expenses will remain constant in total.
D. The contribution margin ratio begins to decrease.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Topic: 04-03 Contribution Margin
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
4. The contribution margin ratio always increases when which of the following occurs?
A. Variable expenses as a percentage of sales increase.
B. Variable expenses as a percentage of sales decrease.
C. Break-even point increases.
D. Fixed Costs increase.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
5. If the fixed expenses of a product increase while variable expenses and the selling price
remain constant, what will happen to the total contribution margin and the break-even point?
A)
B)
C)
D)
Contribution margin
Increase
Decrease
No change
No change
Break-even point
Decrease
Increase
Increase
No change
A. Option A
B. Option B
C. Option C
D. Option D
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-14 Break-Even Computations
6. The total contribution margin decreases if sales volume remains the same and which of the
following occurs?
A. Fixed expenses increase.
B. Fixed expenses decrease.
C. Variable expense per unit increases.
D. Variable expense per unit decreases.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-09 Change in Variable Costs and Sales Volume
Topic: 04-12 Importance of the Contribution Margin
7. The break-even in units sold will decrease if there is an increase in which of the following?
A. Unit sales volume.
B. Total fixed expenses.
C. Unit variable expenses.
D. Selling price.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
Topic: 04-11 Change in Variable Cost, Fixed Cost, and Sales Volume
Topic: 04-14 Break-Even Computations
8. A company has sales of $87,500 at the break-even point and fixed costs are $35,000.
Assuming cost behaviour does not change if sales increase by $20,000 how much will
operating income will increase by?
A. $20,000.00.
B. $12,000.00.
C. $8,000.00.
D. $4,000.00.
At breakeven point CM = FC. CM ratio = 35,000/87,500 = 40%. Incremental operating
income = $20,000 *.40 = $8,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
9. A company increased the selling price for its product from $1.00 to $1.10 a unit when total
fixed expenses increased from $400,000 to $480,000 and the variable expense per unit
remained unchanged at $0.50. How would these changes affect the break-even point?
A. The break-even point in units would increase.
B. The break-even point in units would decrease.
C. The break-even point in units would remain unchanged.
D. The effect cannot be determined from the information given.
B/E = 400,000/.50 = 800,000; 480,000/.60 = 800,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-14 Break-Even Computations
10. Which of the following is defined as the ratio of fixed expenses to the unit contribution
margin?
A. Break-even point in unit sales.
B. Profit margin.
C. Contribution margin ratio.
D. Margin of safety.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-14 Break-Even Computations
11. The break-even point in unit sales increases when variable expenses do which of the
following?
A. Increase, and the selling price remains unchanged.
B. Decrease, and the selling price, remains unchanged.
C. Decrease, and the selling price increases.
D. Remain unchanged, and the selling price increases.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations
12. How is the margin of safety percentage computed?
A. Break-even sales divided by Total sales.
B. Total sales minus Break-even sales.
C. (Total sales - Break-even sales) divided by Break-even sales.
D. (Total sales - Break-even sales) divided by Total sales.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-17 The Margin of Safety
13. When interpreting a CVP graph which of the following is NOT correct?
A. When sales are below the breakeven intersection the company incurs a loss.
B. The breakeven point is where the total revenue line meets the fixed cost line.
C. The anticipated profit or loss at any given level of sales is measured by the vertical
distance between the total revenue line and the total expense line.
D. The total revenue line starts at the origin.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
14. Which of the following is defined as the amount by which a company's sales can decline
before operating losses are incurred?
A. Contribution margin.
B. Degree of operating leverage.
C. Margin of safety.
D. Contribution margin ratio.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-17 The Margin of Safety
15. How is the degree of operating leverage calculated?
A. Contribution margin divided by sales.
B. Gross margin divided by operating income.
C. Operating income divided by sales.
D. Contribution margin divided by operating income.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
16. If company A has a higher degree of operating leverage than company B, then which of
the following statements is true?
A. Company A has higher variable expenses.
B. Company A's profits are more sensitive to percentage changes in sales.
C. Company A is more profitable.
D. Company A is less risky.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
17. Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol's unit
contribution margin is higher than septine's, which is higher than tridol's. Which one of the
following events is most likely to increase the company's overall break-even point?
A. The installation of new computer-controlled equipment and subsequent lay-off of
assembly-line workers.
B. A decrease in tridol's selling price.
C. An increase in the overall market demand for septine.
D. A change in the relative market demand for the products, with the increase favouring petrol
relative to septine and tridol.
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
18. A company has provided the following data:
Sales
Sales price
Variable cost
Fixed cost
3,000 units
$70 per unit
$50 per unit
$25,000
If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by
20%, and all other factors remain the same, what will the outcome be for operating income?
A. Increase by $61,000.
B. Increase by $20,000.
C. Increase by $3,500.
D. Increase by $11,000.
($20 *.10) * 3,000 + (25,000 *.2) = $11,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
19. A company has provided the following data:
Sales
Sales price
Variable cost
Fixed cost
3,000 units
$70 per unit
$50 per unit
$25,000
If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all
other factors remain the same, what will the outcome be for operating income?
A. Decrease by $31,875.
B. Decrease by $15,000.
C. Increase by $20,625.
D. Decrease by $3,125.
Current CM = 3,000 * (70 - 50) = $60,000
New CM = (3,000 - 750) * (70 - 50 * 1.15) = $28,125
Decrease in operating income by = $31,875.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-09 Change in Variable Costs and Sales Volume
20. Last year, Twins Company reported $750,000 in sales (25,000 units) and an operating
income of $25,000. At the break-even point, the company's total contribution margin equals
$500,000. Based on this information, which of the following statements is true?
A. The company's contribution margin ratio is 40%.
B. The company's break-even point is 24,000 units.
C. The company's variable expense per unit is $9.
D. The company's variable expenses are 60% of sales.
CM ratio = (25,000 + 500,000)/750,000 =.7 so VC ratio is.3. Selling Price = 750,000/25,000
= $30. Var. Cost = $30 *.3 = $9.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations
21. Last year, Black Company reported sales of $640,000, a contribution margin of $160,000,
and an operating loss of $40,000. Based on this information, what was the break-even point?
A. $640,000.
B. $480,000.
C. $800,000.
D. $960,000.
(160,000 + 40,000)/(160,000/640,000) = $800,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations
22. The break-even point in sales for Rice Company is $360,000, and the company's
contribution margin ratio is 20%. Its income tax rate is 40%. If Rice Company desires an
after-tax operating profit of $84,000, what would total sales have to be?
A. $1,050,360.
B. $1,060,000.
C. $780,000.
D. Cannot be determined without additional information.
Exp. Op income = 84,000/(1 -.4) = $140,000
Sales = (360,000 *.20 + 140,000)/.20 = $1,060,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-14 Break-Even Computations
Topic: 04-16 After-Tax Analysis
23. The margin of safety in the Flaherty Company is $24,000. If the company's sales are
$120,000 and its variable expenses are $80,000, what must its fixed expenses be?
A. $8,000.
B. $32,000.
C. $24,000.
D. $16,000.
FC = (120,000 - 24,000) * (1 - 80/120) = $32,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
24. Young Company has a margin of safety percentage of 20%. The break-even point is
$400,000 and the variable costs are 40% of sales. Given this information, what is the
operating income?
A. $48,000.
B. $80,000.
C. $60,000.
D. $0.
FC = 400,000 * (1 -.40) = $240,000. Sales = 400,000/(1 -.20) = $500,000. Op. Income =
500,000 *.6 - 240,000 = $60,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
25. Dodero Company produces a single product that sells for $100 per unit. Fixed expenses
total $12,000 per month, and variable expenses are $60 per unit. The company's sales average
500 units per month. Which of the following statements is correct?
A. The company's break-even point is $12,000 per month.
B. The fixed expenses remain constant at $24 per unit for any activity level within the
relevant range.
C. The company's contribution margin ratio is 40%.
D. Responses A, B, and C are all correct.
CM ratio = 1 - 60/100 = 40%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-08 Change in Fixed Cost and Sales Volume
26. North Company sells a single product. The product has a selling price of $30 per unit and
variable expenses are 70% of sales. If the company's fixed expenses total $60,000 per year,
then what will be its break-even?
A. $60,000.
B. $85,714.
C. $42,000.
D. $200,000.
60,000/(1 -.70) = $200,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
27. Gerber Company is planning to sell 200,000 units for $2.00 a unit and will just break even
at this level of sales. The contribution margin ratio is 25%. What are the company's fixed
expenses?
A. $100,000.
B. $160,000.
C. $200,000.
D. $300,000.
200,000 * 2 *.25 = $100,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
28. Marling Corporation has budgeted the following data:
Expected Sales $600,000
Variable Expenses $420,000
Fixed Expenses $120,000
What is the break-even in sales dollars?
A. $400,000.
B. $420,000.
C. $540,000.
D. $660,000.
120,000/[(600,000 - 420,000)/600,000] = $400,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
29. Wallace, Inc., prepared the following budgeted data based on a sales forecast of
$6,000,000:
Direct materials
Direct labour
Factory overhead
Selling expenses
Administrative expenses
Total
Variable
$1,600,000
1,400,000
600,000
240,000
60,000
$3,900,000
Fixed
$900,000
360,000
140,000
$1,400,000
What would be the amount of sales dollars at the break-even point?
A. $2,250,000.
B. $3,500,000.
C. $4,000,000.
D. $5,300,000.
1,400,000/[(6,000,000 - 3,900,000)/6,000,000] = $4,000,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
30. Koby Co. has sales of $200,000 with variable expenses of $150,000, fixed expenses of
$60,000, and a net loss of $10,000. How much would Koby have to sell in order to achieve an
operating income of 10% of sales?
A. $375,000.
B. $451,000.
C. $431,000.
D. $400,000.
CM ratio = (200,000 - 150,000)/200,000 =.25
Sales = 60,000/(.25 -.10) = $400,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
31. Green Company's variable expenses are 75% of sales. At a sales level of $400,000, the
company's degree of operating leverage is 8. At this sales level, fixed expenses equal which of
the following?
A. $87,500.
B. $100,000.
C. $50,000.
D. $75,000.
CM ratio = 25% CM = 400,000 *.25 = $100,000. Op. Income = 100,000/8 = 12,500. FC =
$100,000 - 12,500 = $87,500.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
32. Scott Company's variable expenses are 72% of sales. The company's break-even point in
sales is $2,450,000. If sales are $60,000 below the break-even point, what operating loss
would the company report?
A. $43,200.
B. $60,000.
C. $16,800.
D. Cannot be determined from the data given.
CM ratio = 1 -.72 =.28. Op. Loss = 60,000 *.28 = $16,800.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations
33. Last year, Perry Company reported profits of $4,200. Its total variable expenses were
$66,000, or $6 per unit. The unit contribution margin was $3.00. What is the break-even point
in units for Perry Company?
A. 11,000 units.
B. 9,600 units.
C. 22,000 units.
D. 12,400 units.
Sales unit = $66,000/$6 per unit = 11,000 units. FC = 11,000 * $3 - 4,200 = $28,800.
B/E = $28,800/3 = 9,600 units.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
34. At a break-even point of 800 units sold, White Company's variable expenses are $8,000
and its fixed expenses are $4,000. What will the company's operating income be at a volume
of 801 units?
A. $15.
B. $10.
C. $5.
D. $20.
CM/unit = 4,000/800 = $5 for one additional unit.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
35. The following information pertains to Rica Company:
Sales (50,000 units)
Manufacturing costs:
Variable
Fixed
Selling and admin. Expenses:
Variable
Fixed
How much is Rica's break-even point?
A. 9,848 units.
B. 10,000 units.
C. 18,571 units.
D. 26,000 units.
CM/unit = (1,000,000 - 340,000 - 10,000)/50,000 = $13.
B/E = (70,000 + 60,000)/13 = 10,000 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
$1,000,000
340,000
70,000
10,000
60,000
36. Curtis Company anticipates selling 10,000 units next year. The company wants to earn an
operating income equal to 10% of sales. If variable expenses are $12 per unit, and fixed
expenses total $78,000 per year, what selling price must be established to achieve the desired
level of operating income?
A. $19.80 per unit.
B. $18.00 per unit.
C. $21.78 per unit.
D. $22.00 per unit.
Sales = (120,000 + 78,000)/(1 -.10) = $220,000.
Selling Price = 220,000/10,000 = $22 per unit.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-15 Target Operating Profit Analysis
37. Carver Company produces a product that sells for $30. Variable manufacturing costs are
$15 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity,
and fixed selling and administrative costs are $4 per unit. A selling commission of 10% of the
selling price is paid on each unit sold. What is the contribution margin per unit?
A. $3.
B. $15.
C. $8.
D. $12.
CM per unit = $30 - 15 - 30 *.10 = $12.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
38. At a break-even point of 400 units sold, variable expenses were $4,000 and fixed expenses
were $2,000. What will the 401st unit sold contribute to operating income?
A. $0.
B. $5.
C. $10.
D. $15.
CM/unit = $2,000/400 units = $5 for an additional unit.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
39. The following information relates to Clyde Corporation, which produced and sold 50,000
units last month.
Sales
Manufacturing costs:
Fixed
Variable
Selling and admin. Expenses:
Fixed
Variable
$850,000
210,000
140,000
300,000
45,000
There were no beginning or ending inventories. Production and sales next month are expected
to be 40,000 units. In the next month, what should the company's unit contribution margin
be?
A. $16.63.
B. $3.10.
C. $7.98.
D. $13.30.
CM per unit = (850,000 - 140,000 - 45,000)/50,000 = $13.30.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Topic: 04-03 Contribution Margin
40. The following is last month's contribution format income statement:
Sales (12,000 units)
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$1,200,000
700,000
500,000
300,000
$200,000
What is the company's margin of safety percentage, rounded to the nearest whole percent?
A. 42%.
B. 40%.
C. 17%.
D. 20%.
MOS percentage = $1,200,000 - 300,000/(500,000/1,200,000) = $480,000 then
$480,000/$1,200,000 = 40% of sales.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety
41. The following is last month's contribution format income statement:
Sales (15,000 units)
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$1,500,000
900,000
600,000
500,000
$100,000
What is the company's margin of safety in dollars?
A. $100,000.
B. $600,000.
C. $1,500,000.
D. $250,000.
1,500,000 - 500,000/(600,000/1,500,000) = $250,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety
42. The following data pertain to Wistron Company's two products:
Sales in dollars
Contribution margin ratio
Product X
$100,000
48%
Product Y
$80,000
30%
If fixed expenses for the company as a whole are $60,000 and the product mix is constant,
what would be the overall break-even point in sales dollar for the company?
A. $150,000.
B. $153,846.
C. $100,000.
D. $132,000.
CM ratio = (100,000 *.48 + 80,000 *.30)/(100,000 + 80,000) = 40%.
B/E sales dollars = 60,000/.40 = $150,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
43. The following monthly data are available for the Phelps Company:
Sales
Variable
expenses
Contribution
margin
Fixed
expenses
Product A
$150,000
91,000
Product B
$130,000
104,000
Product C
$90,000
27,000
Total
$370,000
222,000
$59,000
$26,000
$63,000
148,000
55,000
$93,000
What are the break-even sales for the month for the company?
A. $91,667.
B. $203,000.
C. $148,000.
D. $137,500.
BE sales dollars = 55,000/(148,000/370,000) = $137,500.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
44. The following data pertain to last month's operations:
Selling price
Variable production cost
Fixed production cost
Variable selling & administrative
expenses
Fixed selling & administrative expenses
What is the break-even point in dollars?
A. $18,000.
B. $6,000.
C. $11,250.
D. $7,500.
BEP in dollar = $4,500/(20 - 12 - 3) * $20/unit = $18,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
$20 per unit
$12 per unit
$3,000
$3 per unit
$1,500
45. The following data pertain to last month's operations:
Selling price
Variable production cost
Fixed production cost
Variable selling & administrative
expenses
Fixed selling & administrative expenses
$30 per unit
$15 per unit
$80,000
$3 per unit
$40,500
What is the break-even point in dollars?
A. $300,000.
B. $240,000.
C. $200,000.
D. $160,000.
BEP in dollar = (80,000 + 40,000)/(30 - 15 - 3) 30 = $300,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
46. The following is last month's contribution format income statement:
Sales (10,000 units)
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$1,200,000
800,000
400,000
240,000
$160,000
What is the company's break-even sales in units?
A. 0 units.
B. 12,000 units.
C. 6,000 units.
D. 8,000 units.
BE units = 240,000/(400,000/10,000) = 6,000 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
47. The following is last month's contribution format income statement(Do not round
intermediate computations):
Sales (20,000 units)
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
What is the company's break-even in sales dollars?
A. $1,200,000.
B. $0.
C. $1,800,000.
D. $1,600,000.
BE sales dollars = 400,000/(600,000/1,800,000) = $1,200,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
$1,800,000
1,200,000
600,000
400,000
$200,000
48. Roberts Company sells a single product at a selling price of $55 per unit. Variable costs
are $30.25 per unit, and fixed costs are $113,850. What is Roberts Company's break-even
point?
A. $207,000.
B. 3,764 units.
C. $253,000.
D. 2,070 units.
BEP = [113,850/(55 - 30.25)] * 55 = $253,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
49. A product sells for $20 per unit, and has a contribution margin ratio of 40%. Fixed
expenses total $120,000 annually. The company that makes and sells the product has an
income tax rate of 40%. How many units must be sold to yield an after-tax operating profit of
$30,000?
A. 21,250 units.
B. 18,750 units.
C. 24,375 units.
D. 14,167 units.
Op. Income = 30,000/(1 -.40) = $50,000.
Units required = (120,000 + 50,000)/(20 *.40) = 21,250 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-16 After-Tax Analysis
50. A total of 30,000 units were sold last year. The contribution margin per unit was $2, and
total fixed expenses were $20,000 for the year. This year, fixed expenses are expected to
increase to $26,000, but the contribution margin per unit will remain unchanged at $2. How
many units must be sold this year to earn the same operating income as was earned last year?
A. 23,000 units.
B. 33,000 units.
C. 30,000 units.
D. 13,000 units.
Op. Income last year = 30,000 * $2 - 20,000 = $40,000.
Units required = (26,000 + 40,000)/2 = 33,000 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-14 Break-Even Computations
Topic: 04-15 Target Operating Profit Analysis
51. A product sells for $20 per unit and has a contribution margin ratio of 40%. Fixed
expenses total $240,000 annually. How many units of the product must be sold to yield an
operating income of $60,000?
A. 37,500 units.
B. 40,000 units.
C. 65,000 units.
D. 30,000 units.
(240,000 + 60,000)/(20 *.40) = 37,500 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-15 Target Operating Profit Analysis
52. Lindsay Company reported the following results from sales of 5,000 units for the month
of June:
Sales
Variable expenses
Fixed expenses
$200,000
$120,000
$60,000
Assume that Lindsay increases the selling price of the product by 10% on July 1. How many
units would have to be sold in July in order to generate an operating income of $20,000?
A. 4,000 units.
B. 4,300 units.
C. 4,500 units.
D. 5,000 units.
new CM = (200,000/5,000 * 1.10 - 120,000/5,000 = $20/unit.
Units required = (60,000 + 20,000)/20 = 4,000 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-15 Target Operating Profit Analysis
53. Austin Manufacturing had the following operating data for the year just ended:
Selling price per unit
Variable expense per unit
Fixed expenses
$60 per unit
$22 per unit
$504,000
Management plans to improve the quality of its only product by replacing a component that
costs $3.50 with a higher-grade component that costs $5.50, and renting a packing machine
for $18,000 a year. If the desired target operating profit is $288,000, how many units must the
company sell?
A. 19,300 units.
B. 21,316 units.
C. 22,500 units.
D. 20,842 units.
(504,000 + 18,000 + 288,000)/(60 - 22 - 2) = 22,500 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-11 Change in Variable Cost, Fixed Cost, and Sales Volume
Topic: 04-15 Target Operating Profit Analysis
54. Kern Company prepared the following tentative budget for next year:
Sales
Selling price
Variable expenses
Fixed expenses
$500,000
$5 per unit
$300,000
$150,000
The sales manager argues that the unit selling price could be increased by 20%, with an
expected volume decrease of only 10%. If Kern incorporates these changes in its budget, what
should be the budgeted operating income?
A. $66,000.
B. $90,000.
C. $120,000.
D. $145,000.
New CM = $5 * 1.20 - 300,000/100,000 = $3/unit.
Budgeted operating income = 90,000 * $3 - 150,000 = $120,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-15 Target Operating Profit Analysis
55. Wilson Company prepared the following preliminary budget assuming no advertising
expenditures:
Selling price
Unit sales
Variable expenses
Fixed expenses
$10 per unit
100,000
$600,000
$300,000
Based on a market study, the company estimated that it could increase the unit selling price by
15% and increase the unit sales volume by 10%, if $100,000 were spent on advertising.
Assuming that these changes are incorporated in its budget, what should be the budgeted
operating income?
A. $175,000.
B. $190,000.
C. $205,000.
D. $365,000.
New CM = 10 * 1.15 - 600,000/100,000 = $5.50/unit.
Budgeted Operating Income = 100,000 * 1.10 * $5.50 - 300,000 - 100,000 = $205,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
56. Loren Company's single product has a selling price of $15 per unit. Last year, the
company reported total variable expenses of $180,000, fixed expenses of $90,000, and an
operating income of $30,000. A study by the sales manager discloses that a 15% increase in
the selling price would reduce unit sales by 10%. If her proposal is adopted, what would the
outcome be for operating income?
A. Increase by $45,000.
B. Increase by $37,500.
C. Increase by $7,500.
D. Increase by $28,500.
Total sales = 30,000 + 90,000 + 180,000 = $300,000. Units sold = 300,000/15 = 20,000 units.
New CM = 15 * 1.15 - 180,000/20,000 = $8.25/unit.
New Op. Income = (20,000 *.90 * $8.25) - 90,000 = $58,500.
Therefore operating income will increase by 58,500 - 30,000 = $28,500.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
57. The following monthly data are available for the Eager Company and its only product:
Unit sales price
Unit variable expenses
Total fixed expenses
Actual sales for the month of March
$75
$30
$180,000
7,000 units
What was the margin of safety for the company for March?
A. $315,000.
B. $225,000.
C. $135,000.
D. $495,000.
CM ratio = (75 - 30)/75 =.60.
Margin safety = 7,000 * $75 - 180,000/.60 = $225,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety
58. Ostler Company's operating income last year was $10,000, and its contribution margin
was $50,000. Using the operating leverage concept, if the company's sales increase next year
by 8%, by what percentage can its operating income expect to increase?
A. 20%.
B. 16%.
C. 160%.
D. 40%.
(50,000/10,000) * 8% = 40%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-01 Mobile Computations
Topic: 04-15 Target Operating Profit Analysis
Topic: 04-16 After-Tax Analysis
59. If sales increase from $80,000 per year to $120,000 per year, and if the degree of
operating leverage is 5, then by what percentage should operating income increase?
A. 167%.
B. 250%.
C. 100%.
D. 334%.
(120,000 - 80,000)/80,000 * 5 = 250%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
60. The following is last month's contribution format income statement:
Sales (8,000 units)
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$800,000
500,000
300,000
200,000
$100,000
What is the company's degree of operating leverage?
A. 0.125.
B. 8.0.
C. 3.0.
D. 0.333.
DOL = 300,000/100,000 = 3.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
61. Goodman Company has sales of 3,000 units at $80 per unit. Variable costs are 35% of the
sales price. If total fixed costs are $66,000, what is the degree of operating leverage rounded
to 2 decimal places?
A. 0.79.
B. 0.93.
C. 2.67.
D. 1.73.
CM = (80 - 80 *.35) * 3,000 units = $156,000
DOL = 156,000/(156,000 - 66,000) = 1.73.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
The following is Addison Corporation's contribution format income statement for last month:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$1,000,000
700,000
300,000
180,000
$120,000
The company has no beginning or ending inventories. A total of 20,000 units were produced
and sold last month.
62. What is the company's contribution margin ratio?
A. 250%.
B. 150%.
C. 70%.
D. 30%.
CM ratio = 300,000/1,000,000 = 30%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
63. What is the company's break-even in units?
A. 20,000 units.
B. 0 units.
C. 18,000 units.
D. 12,000 units.
CM/unit = (300,000/20,000 = $15 used in 7,980 also. B/E = 180,000/15 = $12,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
64. If sales increase by 100 units, by how much should operating income increase?
A. $400.
B. $4,800.
C. $1,500.
D. $2,500.
100 * $15 = $1,500.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
65. How many units would the company have to sell to attain target operating profits of
$150,000?
A. 22,000 units.
B. 37,500 units.
C. 25,000 units.
D. 26,667 units.
(180,000 + 150,000)/15 = 22,000 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-15 Target Operating Profit Analysis
66. What is the company's margin of safety in dollars?
A. $400,000.
B. $600,000.
C. $120,000.
D. $880,000.
1,000,000 - 180,000/.30= $400,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety
67. What is the company's degree of operating leverage?
A. 0.12.
B. 2.5.
C. 0.4.
D. 3.3.
300,000/120,000 = 2.5.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
The following is Allison Corporation's contribution format income statement for last month:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$800,000
300,000
500,000
400,000
$100,000
The company has no beginning or ending inventories. The company produced and sold
10,000 units last month.
68. What is the company's contribution margin ratio?
A. 62.5%.
B. 160%.
C. 500%.
D. 20%.
500,000/800,000 = 62.5%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
69. What is the company's break-even sales in dollars?
A. $0.
B. $640,000.
C. $700,000.
D. $400,000.
400,000/.625 = $640,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
70. If sales increase by 200 units, by how much should before-tax profits increase?
A. $16,000.
B. $5,000.
C. $2,000.
D. $10,000.
CM/unit = 500,000/10,000 = $50. Increased profit = 200 * $50 = $10,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-04 Cost-Volume-Profit Relationships in Graphic Form
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
71. How many units would the company have to sell to attain after-tax profits of $72,000,
assuming it is subject to a 40% income tax rate?
A. 9,440 units.
B. 11,600 units.
C. 10,400 units.
D. 12,000 units.
[400,000 + 72,000/(1 -.40) ]/50 = 10,400 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-16 After-Tax Analysis
72. What is the company's margin of safety percentage?
A. 25%.
B. 20%.
C. 40%.
D. 10%.
(800,000 - 640,000)/800,000 = 20%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety
73. What is the company's degree of operating leverage?
A. 0.2.
B. 8.0.
C. 1.7.
D. 5.0.
500,000/100,000 = 5.0.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
McGordon Corporation has provided the following data:
Sales
Variable expenses
Fixed expenses
$800,000
$560,000
$168,000
74. What is the contribution margin?
A. $240,000.
B. $560,000.
C. $632,000.
D. $72,000.
800,000 - 560,000 = $240,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Topic: 04-03 Contribution Margin
75. What is the break-even point in sales dollars?
A. $240,000.
B. $560,000.
C. $728,000.
D. $408,000.
168,000/(240,000/800,000) = $560,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
The following data relate to a company that produces and sells a travel guide that is updated
monthly:
Fixed costs:
Copy editing
$6,000
Art work
Typesetting
$2,000
$72,000
Variable costs:
Printing and binding
Bookstore discounts
Salespersons' commissions
Author's royalties
$3.20 per copy
$4.00 per copy
$0.50 per copy
$2.00 per copy
Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July.
76. What is the unit contribution margin per book?
A. $10.30.
B. $14.30.
C. $10.80.
D. $8.30.
20 - 3.20 - 4 -.50 - 2 = $10.30.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Topic: 04-03 Contribution Margin
77. What is the contribution margin ratio for the book?
A. 71.5%.
B. 54.0%.
C. 51.5%.
D. 51.9%.
10.30/20 = 51.5%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
78. What is the break-even point in units?
A. 8,247 books.
B. 7,767 books.
C. 7,407 books.
D. 6,504 books.
(6,000 + 2,000 + 72,000)/10.30 = 7,767 books.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
79. What is the degree of operating leverage for July?
A. The same as that for June.
B. Higher than that for June.
C. Lower than that for June.
D. Not determinable.
Assuming no change in cost behaviour as volume increases, DOL will decrease
June CM = 8,000 * 10.30 = 82,400 DOL = 82,400/(82,400 - 80,000) = 34.33.
For July = (10,000 * 10.30)/(10,000 * 10.30 - 80,000) = 4.477.
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
80. The degree of operating leverage for July is closest to which of the following?
A. 4.48.
B. 3.48.
C. 4.22.
D. 8.70.
(10,000 * 10.30)/(10,000 * 10.30 - 80,000) = 4.477.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
Dorian Company produces and sells a single product. The product sells for $60 per unit and
has a contribution margin ratio of 40%. The company's monthly fixed expenses are $28,800.
81. What is the variable expense per unit?
A. $31.20 per unit.
B. $24.00 per unit.
C. $36.00 per unit.
D. $28.80 per unit.
60 * (1 -.40) = $36.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
82. What is the break-even point in sales dollars?
A. $48,000.
B. $72,000.
C. $28,800.
D. $0.
28,800/.40 = $72,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
83. If Dorian Company desires a monthly operating income equal to 10% of sales, what will
its monthly sales have to be?
A. $90,000.
B. $45,600.
C. $120,000.
D. $96,000.
S = (FC +.10S)/.40 so S = 28,800/(.40 -.10) = $96,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-15 Target Operating Profit Analysis
84. If the selling price is reduced by 5%, variable expenses reduced by $1.00, and fixed
expenses increased to a total of $38,400, how many units would need to be sold to earn an
operating income of $21,000?
A. 1,000 units.
B. 2,700 units.
C. 1,700 units.
D. 2,950 units.
SP = 60 * (1 -.05) = $57. VC = 36 - 1 = 35. New CM = $22/unit.
Units required = (38,400 + 21,000)/22 = 2,700 units.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
Topic: 04-11 Change in Variable Cost, Fixed Cost, and Sales Volume
Arthur Company had the following data for the year just ended:
Sales
Sales price
Variable cost
Fixed costs
4,000 units
$60 per unit
$18 per unit
$42,000
85. If the company wants to increase its total contribution margin by 40% in the next year, all
other factors remaining the same, by how much will it need to increase its sales?
A. $96,000.
B. $50,400.
C. $67,200.
D. $72,000.
CM = 4,000 * (60 - 18) = $168,000. Incremental CM = 168,000 *.40 = $67,200. Increase in
sales = (67,200/42) * 60 = $96,000.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-15 Target Operating Profit Analysis
86. If the company wants its margin of safety to equal $35,000 next year, all other factors
remaining the same, how many units will it need to sell?
A. 1,000 units.
B. 833 units.
C. 1,583 units.
D. 1,833 units.
42/60 =.70. Sales units = [(42,000/.70) + 35,000]/$60 = 1,583.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-17 The Margin of Safety
87. If the company's sales volume increases by 30% next year, all other factors remaining the
same, by how much will its operating income increase?
A. $92,400.
B. $50,400.
C. $37,800.
D. $72,000.
4,000 *.30 * $42 = $50,400.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
88. If the company's fixed costs decrease by 20% next year, all other factors remaining the
same, by how much will the break-even level change compared to that of the current year,
rounded to the nearest whole unit?
A. 200-unit increase.
B. 440-unit decrease.
C. 200-unit decrease.
D. No change in the break-even point.
(42,000 *.20)/$42 = 200 unit decrease.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-14 Break-Even Computations
Paxton Corp has provided the following data concerning its operations last month:
Sales
Variable expenses
Fixed expenses
$400,000
$250,000
$100,000
Paxton Corp is a retailing organization.
89. What is the degree of operating leverage?
A. 3.
B. 8.
C. 0.33.
D. 5.
CM = 400,000 - 250,000 = $150,000 O.I. = 150,000 - 100,000 = $50,000
DOL = 150,000/50,000 = 3.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
90. What is the contribution margin ratio?
A. 12.5%.
B. 33.0%.
C. 25.0%.
D. 37.5%.
$150,000/400,000 = 37.5%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
91. What is the break-even point in sales dollars, rounded to the nearest dollar?
A. $148,148.
B. $266,667.
C. $333,333.
D. $350,000.
100,000/.375 = $266,667.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
Janet Company produces a game that sells for $17 per game. Variable expenses are $9 per
game, and fixed expenses total $172,000 annually.
92. The break-even point is closest to which of the following?
A. 19,111 units.
B. 10,118 units.
C. 21,500 units.
D. 24,000 units.
172,000/(17 - 9) = 21,500 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
93. The contribution margin ratio is closest to which of the following?
A. 47.1%.
B. 2.1%.
C. 1.9%.
D. 52.9%.
(17 - 9)/17 = 47.059%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Fletcher Company has three products with the following characteristics:
Monthly sales in
dollars
Contribution
margin ratio
Product A
$60,000
Product B
$80,000
Product C
$100,000
20%
40%
16%
Fixed Costs = $30,000 per month.
94. What is the overall contribution margin ratio for the company as a whole, rounded to the
nearest tenth of a percent?
A. 25.3%.
B. 75.0%.
C. 25.0%.
D. 28.5%.
(60,000 *.20 + 80,000 *.40 + 100,000 *.16)/(60,000 + 80,000 + 100,000) = 25%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
95. The breakeven point in sales dollars is closest to:
A. $137,500.
B. $40,000.
C. $120,000.
D. $60,000.
FC/CM ratio = $30,000/.25 = $120,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
96. If total units sold remain unchanged, but the sales mix shifts more heavily toward Product
C, what would the overall contribution margin ratio be expected to do?
A. Increase.
B. Decrease.
C. Remain unchanged.
D. The effect cannot be predicted without additional information.
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
97. If Total sales next month are $330,000 and Fletchers sales mix remains unchanged, the
total sales for product C will be closest to:
A. $100,000.
B. $110,000.
C. $82,500.
D. $137,500.
[100,000/(60,000 + 80,000 + 100,000)] * 330,000 = $137,500.
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
98. Assume sales next year total $240,000; product A $70,000, product B $90,000 and C
$80,000. Total Contribution Margin for Fletcher will be closest to:
A. $60,000.
B. $62,800.
C. $32,800.
D. $30,000.
70,000 *.20 + 90,000 *.40 + 80,000 *.16 = $62,800.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
Hurst Co. manufactures and sells a single product. Price and cost data regarding this product
are as follows:
Selling price
Variable manufacturing cost
Variable selling & administrative
expenses
Fixed manufacturing overhead
Fixed selling & administrative expenses
$40 per unit
$20 per unit
$6 per unit
$208,000 per year
$324,000 per year
99. What is the break-even point in units per year?
A. 15,200 units.
B. 26,600 units.
C. 38,000 units.
D. 40,000 units.
CM/unit = 40 - 20 - 6 = $14. CM ratio = 14/40 = 35%.
FC = 208,000 + 324,000 = $532,000. B/E = 532,000/14 = 38,000 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
100. How many units need to be sold to earn an annual operating income equal to 10% of
sales?
A. 44,000 units.
B. 53,200 units.
C. 54,500 units.
D. 47,500 units.
S = (532,000 +.10S)/CM ratio.
S = 532,000/(.35 -.10) = $2,128,000. Units to be sold = 2,128,000/40= 53,200 units.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-15 Target Operating Profit Analysis
101. In the current year, the company sold 43,000 units. Due to competition, management will
be forced to lower the selling price by 10% next year. How many units must be sold next year
to earn the same operating income as was earned in the current year?
A. 50,000 units.
B. 53,200 units.
C. 58,800 units.
D. 60,200 units.
Current year operating income = 43,000 * $14 - 532,000 = $70,000.
New CM = 40 * (1 -.10) - 20 - 6 = $10. Units required = (532,000 + 70,000)/10 = 60,200
units.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-15 Target Operating Profit Analysis
Junsin Corporation's budget for next year appears below. The budget assumes the company
will sell 30,000 units.
Sales
Less: expenses
Variable
Fixed
Operating income
$600,000
$390,000
$140,000
$530,000
$70,000
102. What is the break-even point in annual sales dollars?
A. $530,000.
B. $350,000.
C. $460,000.
D. $400,000.
CM ratio = (600,000 - 390,000)/600,000 =.35. B/E = 140,000/.35 = $400,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
103. What is the company's margin of safety as a percentage of sales, rounded to the nearest
whole percent?
A. 33%.
B. 50%.
C. 12%.
D. 67%.
(600,000 - 400,000)/600,000 = 33.33%.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety
Hooper Corporation produces and sells two models of vacuum cleaners, Standard and
Deluxe. The company records show the following monthly data relating to these two
products:
Selling price per unit
Variable production costs
Variable selling expense
per unit
Expected monthly sales in
units
Total monthly fixed cost
(common in both)
Standard
$150
$120
$16
Deluxe
$165
$126
$13
600
1,200
$15,000
104. The break-even in sales dollars for the expected sales mix is closest to which of the
following?
A. $160,772.
B. $95,178.
C. $109,091.
D. $175,644.
Total Sales = $150 * 600 + $165 * 1,200 = $288,000.
Total CM = (150 - 120 - 16) * 600 + (165 - 126 - 13) * 1,200 = $39,600.
CM ratio = 39,600/288,000. B/E = 15,000/.1375 = $109,091.
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
105. If the expected monthly sales in units were divided equally between the two models (900
Standard and 900 Deluxe), where would the break-even level of sales be as compared to the
expected sales mix?
A. The same as with the expected sales mix.
B. Higher than with the expected sales mix.
C. Lower than with the expected sales mix.
D. Cannot be determined with the available data.
Average CM ratio decreases due to more sales of the lower CM product (standard) and fewer
sales of deluxe therefore increasing breakeven point.
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
Wright Corporation's contribution format income statement for last month appears below:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$45,000
27,000
18,000
12,000
$6,000
There were no beginning or ending inventories. The company produced and sold 3,000 units
during the month.
106. If sales decrease by 500 units in the next month, by how much would fixed expenses
have to be reduced to maintain the current operating income?
A. $7,500.
B. $6,000.
C. $2,000.
D. $3,000.
500 units * 18,000/3,000 = $3,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-15 Target Operating Profit Analysis
107. The company has an opportunity to secure a special order of 800 units if it is willing to
drop the selling price on these units to $13. Costs of securing the special order would be
$1,000. The special order would not affect the company's regular sales. If the special order is
accepted, what will be the impact on the company's overall operating income?
A. Increase $3,200.
B. Increase $2,200.
C. Increase $3,800.
D. Remain the same.
VC/unit = 27,000/3,000 = $9
Incremental profit = 800 * (13 - 9) - 1,000 = $2,200 increase.
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-10 Change in Fixed Costs, Selling Price, and Sales Volume
108. Company Y is considering two production technologies, Bronze and Platinum, for
producing its new product. The cost structures of the two technologies are as follows:
Selling price per unit
Variable production costs
per unit
Total fixed production
costs
Bronze
$150
$120
Platinum
$150
$50
$300,000
$1,210,000
At what level of sales volume in units (rounded to the nearest whole unit) would Company Y
be indifferent in choosing between the Bronze and Platinum technologies?
A. 10,000 units.
B. 12,100 units.
C. 13,000 units.
D. Cannot be determined without additional information.
Let x = Indifference point: 30x - 300,000 = 100x - 1,210,000. X = 910,000/.70 = 13,000 units.
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-21 Indifference Analysis
True / False Questions
109. A shift in the sales mix from products with a low contribution margin ratio toward
products with a high contribution margin ratio will lower the break-even point in the company
as a whole.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
110. The break-even point in units can be obtained by dividing total fixed expenses by the
contribution margin ratio.
FALSE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-14 Break-Even Computations
111. In two companies making the same product and with the same total sales and total
expenses, the contribution margin ratio will tend to be lower in the company with a higher
proportion of fixed expenses in its cost structure.
FALSE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
112. For a given level of sales, a low contribution margin ratio will produce less operating
income than a high contribution margin ratio.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
113. Once the break-even point has been reached, increases in contribution margin will be
reflected dollar for dollar in increased operating income.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
Topic: 04-14 Break-Even Computations
114. The formula for the break-even point is the same as the formula to attain a given target
operating profit for the special case where the target operating profit is zero.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-14 Break-Even Computations
Topic: 04-15 Target Operating Profit Analysis
115. At the break-even point: Sales - Variable expenses = Fixed expenses.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
Topic: 04-14 Break-Even Computations
116. If fixed expenses increase by $10,000 per year, then the level of sales needed to break
even will also increase by $10,000.
FALSE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-14 Break-Even Computations
117. The total volume in sales dollars that would be required to attain a given target operating
profit is determined by dividing the sum of the fixed expenses and the target operating profit
by the contribution margin ratio.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-06 Contribution Margin Ratio
Topic: 04-15 Target Operating Profit Analysis
118. A company with sales of $80,000 and variable expenses of $40,000 should spend
$12,000 on increased advertising, if the increased advertising will increase sales by $22,000.
FALSE
CM ratio = 50% so incremental CM = 22,000 *.5 which is less than $12,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-06 Contribution Margin Ratio
Topic: 04-08 Change in Fixed Cost and Sales Volume
119. If the fixed expenses increase in a company, and all other factors remain unchanged, then
one would expect the margin of safety to decrease.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-17 The Margin of Safety
120. The margin of safety percentage is equal to the margin of safety in dollars divided by
total sales in dollars.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Topic: 04-17 The Margin of Safety
121. If two companies produce the same product and have the same total sales and same total
expenses, operating leverage will be lower in the company with a higher proportion of fixed
expenses in its cost structure.
FALSE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
122. A company with an income tax rate of 40% and an objective of an after-tax target
operating profit of $48,000 should generate a before-tax target operating profit of $120,000.
FALSE
48,000/(1-.4) = $80,000.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-03 Contribution Margin
Topic: 04-16 After-Tax Analysis
123. A company with a degree of operating leverage of 4 would expect income to increase by
200% if sales increased from $100,000 to $150,000.
TRUE
Increase in Sales is 50% so income increases 50%*4.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
124. If sales are zero, the company's operating loss equals its fixed expenses.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Topic: 04-03 Contribution Margin
125. Once the break-even point has been reached, each additional unit sold increases the
company's operating profit by the amount of the unit CM.
TRUE
Blooms: Understand
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Easy
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
Topic: 04-14 Break-Even Computations
Short Answer Questions
126. The following is Arkadia Corporation's contribution format income statement for last
month:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$1,200,000
800,000
400,000
300,000
$100,000
The company has no beginning or ending inventories and produced and sold 20,000 units
during the month.
Required:
a) What is the company's contribution margin ratio?
b) What is the company's break-even in units?
c) If sales increase by 100 units, by how much should operating income increase?
d) How many units would the company have to sell to attain target operating income of
$125,000?
e) What is the company's margin of safety in dollars?
f) What is the company's degree of operating leverage?
g) If the tax rate is 30%, how many units must be sold to attain an after tax profit of $84,000?
a) Contribution margin ratio
CM ratio = Contribution margin ratio Sales
= $400,000 $1,200,000 = 0.333
b) Break-even units
Selling price ($1,200,000/20,000 units) = $60 per unit
Variable expenses ($800,000/20,000 units) = $40 per unit
Sales = Variable expenses + Fixed expenses + Target operating income
$60 Q = $40Q + $300,000 + $0
$20 Q = $300,000
Q = $300,000 $20 = 15,000 units
c) Increase in operating income from additional sales of 100 units
Selling price
Variable expenses
Unit contribution margin
Additional sales
Increase in operating income
$60 per unit
$40 per unit
$20 per unit
* 100 units
$2,000
d) Sales to attain target operating income
Sales = Variable expenses + Fixed expenses + Target operating income
$60 Q = $40Q + $300,000 + $125,000
$20 Q = $425,000
Q = $425,000 $20 = 21,250 units
e) Margin of safety in dollars
Break-even sales = $60 per unit 15,000 units = $900,000
Margin of safety in dollars = Sales - Break-even sales
= $1,200,000 - $900,000 = $300,000
f) Degree of operating leverage
Degree of operating leverage = Contribution margin Operating income
= $400,000 $100,000 = 4.0
g) Before tax profit = 84,000/(1-.3) = $120,000. Units required = (300,000 + 120,000)/$20/
unit = 21,000 units.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
Topic: 04-16 After-Tax Analysis
Topic: 04-17 The Margin of Safety
Topic: 04-20 Operating Leverage
127. The following is Alsatia Corporation's contribution format income statement for last
month:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$1,400,000
900,000
500,000
300,000
$200,000
The company has no beginning or ending inventories and produced and sold 10,000 units
during the month.
Required:
a) What is the company's contribution margin ratio?
b) What is the company's break-even in units?
c) If sales increase by 100 units, by how much should operating income increase?
d) How many units would the company have to sell to attain target operating income of
$225,000?
e) What is the company's margin of safety in dollars?
f) What is the company's degree of operating leverage?
A) Contribution margin ratio
CM ratio = Contribution margin ratio Sales
= $500,000 $1,400,000 = 0.357
B) Break-even units
Selling price ($1,400,000/10,000 units) = $140 per unit
Variable expenses ($900,000/10,000 units) = $90 per unit
Sales = Variable expenses + Fixed expenses + Target operating income
$140 Q = $90Q + $300,000 + $0
$50 Q = $300,000
Q = $300,000 $50 = 6,000 units
C) Increase in operating income from additional sales of 100 units
Selling price
$140 per unit
Variable expenses
Unit contribution margin
Additional sales
Increase in operating income
D) Sales to attain target operating income
Sales = Variable expenses + Fixed expenses + Target operating income
$140 Q = $90Q + $300,000 + $225,000
$50 Q = $525,000
Q = $525,000 $50 = 10,500 units
E) Margin of safety in dollars
Break-even sales = $140 per unit 6,000 units = $840,000
Margin of safety in dollars = Sales - Break-even sales
= $1,400,000 - $840,000 = $560,000
F) Degree of operating leverage
Degree of operating leverage = Contribution margin Operating income
= $500,000 $200,000 = 2.5
$90 per unit
$50 per unit
* 100 units
$5,000
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-14 Break-Even Computations
Topic: 04-16 After-Tax Analysis
Topic: 04-17 The Margin of Safety
Topic: 04-20 Operating Leverage
128. Spencer Company's most recent monthly contribution format income statement is given
below:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$60,000
45,000
15,000
18,000
($3,000)
The company sells its only product for $10 per unit. There were no beginning or ending
inventories.
Required:
a) What is the company's contribution margin ratio?
b) What are total sales in dollars at the break-even point?
c) What are total variable expenses at the break-even point?
d) If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what
would be the company's expected operating income? (Prepare a new income statement.)
a) The contribution margin ratio is $15,000/$60,000 = 25%.
b) The contribution margin ratio is $15,000/$60,000 = 25%. Therefore, the break-even in
sales dollars is $18,000/25% = $72,000.
c) The variable cost ratio is $45,000/$60,000 = 75%. Therefore, the variable expenses at the
break-even point are $72,000 75% = $54,000.
d)
Sales ($60,000 * 1.1)
Less: variable expenses ($45,000 * 1.1)
Contribution margin
Less: fixed expenses ($18,000 - $2,000)
Operating income
$66,000
49,500
16,500
16,000
$500
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-06 Contribution Margin Ratio
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-12 Importance of the Contribution Margin
129. The following monthly data are available for the Challenger Company and its only
product, Product SW:
Sales (400 units)
Variable expenses
Contribution margin
Fixed expenses
Net income
Total
$110,000
44,000
$66,000
52,800
$13,200
Per Unit
$275
110
$165
Required:
a) Without resorting to calculations, what is the total contribution margin at the break-even
point?
b) Management is contemplating the use of plastic gearing rather than metal gearing in
Product SW. This change would reduce variable costs by $15. The company's marketing
manager predicts that this would reduce the overall quality of the product and thus would
result in a decline in sales to a level of 350 units per month. Should this change be made?
c) Assume that Challenger Company is currently selling 400 units of Product SW per month.
Management wants to increase sales and feels that this can be done by cutting the selling price
by $25 per unit and increasing the advertising budget by $20,000 per month. Management
believes that these actions will increase unit sales by 50%. Should these changes be made?
d) Assume that Challenger Company is currently selling 400 units of Product SW.
Management wants to automate a portion of the production process for Product SW. The new
equipment would reduce direct labour costs by $20 per unit but would result in a monthly
rental cost for the new robotic equipment of $10,000. Management believes that the new
equipment will increase the reliability of Product SW, thus resulting in an increase in monthly
sales of 12%. Should these changes be made?
a) The total contribution margin is $52,800 since it is equal to the fixed expenses at the breakeven point.
b) The $15 decrease in variable costs will cause the contribution margin per unit to increase
from $165 to $180.
Expected total contribution margin: 350
units * $180 =
Present total contribution margin: 400
units * $165 =
Decrease in total contribution margin
$63,000
$66,000
$3,000
The less costly components should not be used to manufacture Product SW. Net income will
decrease by $3,000.
c) The decrease in selling price per unit will cause the unit contribution margin to decrease
from $165 to $140.
Expected total contribution margin: 400
* 150% * $140 =
Present total contribution margin: 400 *
$165 =
Incremental contribution margin
Change in fixed costs: Less incremental
advertising expense
Reduction in operating income
$84,000
66,000
$18,000
20,000
$(2,000)
The change should not be made.
d) The use of the automated process would affect both fixed and variable costs. Fixed costs
will increase by $10,000 from $52,800 to $62,800. Variable costs will decrease by $20 from
$110 to $90, and the unit contribution margin will increase from $165 to $185.
Expected total contribution margin: 400
units * 112% * $185 =
Present total contribution margin: 400 *
$165 =
Increase in total contribution margin
Change in fixed costs: Less monthly
equipment rental
Increase in operating income
$82,880
66,000
$16,880
20,000
$6,880
The changes should be made since they increase operating income.
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-09 Change in Variable Costs and Sales Volume
Topic: 04-11 Change in Variable Cost, Fixed Cost, and Sales Volume
130. Tanner Company's most recent contribution format income statement is presented below:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$75,000
45,000
30,000
36,000
($6,000)
The company sells its only product for $15 per unit. There were no beginning or ending
inventories.
Required:
a) Compute the company's break-even point in units sold.
b) Compute the total variable expenses at the break-even point.
c) How many units would have to be sold to earn a target operating income of $9,000?
d) The sales manager is convinced that a $6,000 increase in the advertising budget would
increase total sales by $25,000. Would you advise the increased advertising outlay?
a) Contribution margin ratio = $30,000/$75,000 = 0.40
$36,000/0.40 = $90,000 break-even sales
$90,000/$15 = 6,000 units to break even
b) Variable expense ratio = $45,000/$75,000 = 0.60
$90,000 sales 60% variable expense ratio = $54,000
c) ($36,000 + $9,000)/0.40 = $112,500
$112,500/$15 = 7,500 units
d).
Increased contribution margin: $25,000 *
0.40
Less increased advertising cost
Incremental operating income
$10,000
6,000
$4,000
Yes, the advertising budget should be increased.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Topic: 04-06 Contribution Margin Ratio
Topic: 04-08 Change in Fixed Cost and Sales Volume
Topic: 04-14 Break-Even Computations
Topic: 04-15 Target Operating Profit Analysis
131. Belli-Pitt, Inc produces a single product. The results of the company's operations for a
typical month are summarized in contribution format as follows:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$540,000
360,000
180,000
120,000
$60,000
The company produced and sold 120,000 kilograms of product during the month. There were
no beginning or ending inventories.
Required:
a) Given the present situation, compute
1 The break-even sales in kilograms.
2 The break-even sales in dollars.
3 The sales in kilograms that would be required to produce operating income of $90,000.
4 The margin of safety in dollars.
b) An important part of processing is performed by a machine that is currently being leased
for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay
$0.10 royalty per kilogram processed by the machine rather than the monthly lease.
1 Should the company choose the lease or the royalty plan?
2 Under the royalty plan, compute the break-even point in kilograms.
3 Under the royalty plan, compute the break-even point in dollars.
4 Under the royalty plan, determine the sales in kilograms that would be required to produce
operating income of $90,000.
a)
Per kg.
$4.50
3.00
$1.50
Sales
Variable expenses
Contribution margin
100.0%
66.7%
33.3%
1. Sales = Variable expenses + Fixed expenses + Target operating income
$4.50Q = $3.00Q + $120,000 + $0
$1.50Q = $120,000
Q = $120,000/$1.50 = 80,000 units
2. 80,000 units $4.50 = $360,000
3. Sales = Variable expenses + Fixed expenses + Target operating income
$4.50Q = $3.00Q + $120,000 + $90,000
$1.50Q = $210,000
Q = $210,000/$1.50 = 140,000 units
4. Margin of safety = Sales - Sales at break-even
= $540,000 - $360,000
= $180,000
b)
Sales
Variable
expenses
Contribution
margin
Fixed expense
Operating
income
As Is Amount
Per Unit
Per Unit
$4.50
3.00
Proposed
Amount
$540,000
372,000
$540,000
360,000
180,000
1.50
168,000
1.40
120,000
60,000
1.00
0.50
100,000
$68,000
0.83
$0.57
$4.50
3.10
1. Since operating income increases by $8,000, the royalty is a good plan, provided sales
remains at the same level. Should the long run trend in sales or annual fluctuations of sales
change, the lease could possible prove to be better. It is important to understand the cost
structure when making this type of decision.
2. Sales = Variable expenses + Fixed expenses + Target operating income
$4.50Q = $3.10Q + $100,000 + $0
$1.40Q = $100,000
Q = $100,000/$1.40 = 71,429 units
3. 71,429 $4.50 = $321,429
4. Sales = Variable expenses + Fixed expenses + Target operating income
$4.50Q = $3.10Q + $100,000 + $90,000
$1.40Q = $190,000
Q = $190,000/$1.40 = 135,714 units
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-15 Target Operating Profit Analysis
Topic: 04-17 The Margin of Safety
Topic: 04-19 Cost Structure and Profit Stability
132. Seco Corp., a wholesale supply company, uses independent sales agents to market the
company's products. These agents currently receive a commission of 20% of sales, but are
demanding an increase to 25% of sales. Seco had already prepared its budget for next year
before learning of the sales agents' demand for an increase in commissions. That budgeted
income statement appears below:
SECO CORP.
Budgeted Income Statement
Sales
Cost of sales
Gross margin
Selling and
administrative expenses:
Commissions
All other expenses (fixed)
Operating income
$10,000,000
6,000,000
4,000,000
$2,000,000
100,000
2,100,000
$1,900,000
Seco is considering the possibility of employing its own salespersons. Three individuals
would be required, at a salary of $30,000 each, plus commissions of 5% of sales. In addition,
a sales manager would be employed at a fixed annual salary of $160,000.
Required:
a) Compute Seco's break-even point in sales dollars based upon the company's budgeted
income statement, assuming that the company continues to use independent sales agents and
that they are paid the old commission rate of 20% of sales.
b) Compute Seco's break-even point in sales dollars, assuming that the company employs its
own salespersons.
c) Compute the sales dollars required to attain the target profit of $1,900,000, assuming that
the company continues to use independent sales agents and the company agrees to their
demand for a 25% sales commission.
d) Compute the sales dollars that would be required to generate the same operating income,
whether Seco employs its own salespersons or continues to use the independent sales agents
and pays them a 25% commission.
a) Estimated break-even based on the budgeted income statement:
Sales (a)
Variable expenses:
Cost of sales
Commissions
Contribution margin (b)
$10,000,000
$6,000,000
2,000,000
8,000,000
$2,00,000
Contribution margin ratio (b)/(a) = 20%
Fixed expenses
Contribution margin ratio
Break-even
$100,000
/ 0.20
500,000
b) Estimated break-even with company employing its own salespersons:
Variable expense ratios:
Cost of sales
Commissions
Total
Contribution margin ratio (100% - 65%)
Fixed expenses:
Sales manager
3 salespersons @ $30,000 each
Administrative
Total
Fixed expenses
Contribution margin ratio
Break-even point
60%
5%
65%
35%
$160,000
90,000
100,000
$350,000
$350,000
/ 0.35
$1,000,000
c) Estimated sales volume yielding target operating income of $1,900,000:
Variable expense ratios:
Cost of sales
Commissions
Contribution margin ratio (100% - 85%)
Fixed expenses + Target operating
income
Contribution margin ratio
Sales volume to attain target operating
income
60%
25%
85%
15%
$2,000,000
/ 0.15
$13,333,333
d) Estimated sales volume to attain the same profit, whether the company employs its own
salespersons or continues to use the sales agents and pays them a commission of 25%:
Operating profit = Sales - Variable expenses - Fixed expenses
Let X = sales volume
With sales agents:
Operating profit = X - 0.85X - $100,000
With salespersons:
Operating profit = X - 0.65X - $350,000
Operating profit will be the same when:
X - 0.85X - $100,000 = X - 0.65X - $350,000
$250,000 = 0.20X
X = $250,000/0.20 = $1,250,000
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-15 Target Operating Profit Analysis
Topic: 04-21 Indifference Analysis
133. Rawlings Company prepared the following budget information for the coming year:
Sales
Variable
expenses
Contribution
margin
Fixed expense
Operating
income
Product A
$85,714
25,714
Product B
$1,000,000
800,000
Product C
$177,777
97,777
Total
$1,263,491
923,491
$60,000
$200,000
$80,000
$340,000
255,000
$85,000
The budget assumes the sale of 20,000 units of A, 100,000 units of B, and 80,000 units of C.
Required:
a) What is the company's break-even point given the sales mix above?
b) If the budgeted sales mix is maintained, what is the total contribution margin and operating
income if 300,000 units are sold?
a)
Sales
Variable
expenses
Contributio
n margin
Fixed
expense
Operating
income
Product A
$85,714
25,714
Product B
$1,000,000
800,000
Product C
$177,777
97,777
Total
$1,263,491
923,491
100%
73%
$60,000
$200,000
$80,000
$340,000
27%
255,000
$85,000
Break-even sales Budgeted:
Fixed Expenses =
CM Ratio
$255,000 = $944,444
0.27
b) Per unit contribution margins for Products A, B, and C:
Product A: $60,000/20,000 units = $3 per unit.
Product B: $200,000/100,000 units = $2 per unit.
Product C: $80,000/80,000 units = $1 per unit.
Product mix for Products A, B, and C:
Product A: 20,000/(20,000 + 100,000 + 80,000) = 10%
Product B: 100,000/(20,000 + 100,000 + 80,000) = 50%
Product C: 80,000/(20,000 + 100,000 + 80,000) = 40%
Total contribution margin at 300,000 units:
Product A: 10% * 300,000 units * $3/
unit =
Product B: 50% * 300,000 units * $2/
unit =
Product C: 40% * 300,000 * $1/unit =
Total contribution margin at 300,000
units
Fixed expenses
Operating income
$90,000
300,000
120,000
510,000
255,000
255,000
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-03 Contribution Margin
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
134. The following monthly budgeted data are available for the International Company:
Sales
Variable expenses
Contribution
margin
Product A
$500,000
300,000
$200,000
Product B
$300,000
210,000
$90,000
Product C
$900,000
720,000
$180,000
Budgeted operating income for the month is $220,000.
Required:
a) Calculate the break-even sales for the month.
b) Calculate the margin of safety.
c) Calculate the degree of operating leverage.
a) Break-even sales
Sales
Variable
expenses
Contributio
n margin
Fixed
expenses
Operating
income
Product A
$500,000
300,000
Product B
$300,000
210,000
Product C
$900,000
720,000
Total
$1,700,000
1,230,000
100%
72%
$200,000
$90,000
$180,000
$470,000
28%
250,000
$220,000
Break-even sales Budgeted:
Fixed Expenses =
$250,000 = $892,857
CM Ratio
0.28
NOTE: students may not round the CM ratio to 28% but use the exact ratio of 27.647%.
Keeping all decimal places in the calculation will equal a Break-even of $904,255 sales.
B) Margin of safety
Total sales - Break-even sales = $1,700,000 - $892,857 = $807,143
C) Operating leverage
Contribution margin =
Operating income
$470,000 - 2.14
$220,000
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-17 The Margin of Safety
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
135. The following monthly budgeted data is available for the Baxter Company:
Sales
Variable expenses
Contribution
margin
Product C
$660,000
396,000
$264,000
Product J
$380,000
266,000
$114,000
Product R
$660,000
528,000
$132,000
Budgeted operating income for the month is $260,000.
Required:
a) Calculate the break-even sales for the month.
b) Calculate the margin of safety.
c) Calculate the degree of operating leverage.
A) Break-even sales
Sales
Variable
expenses
Contributio
n margin
Fixed
expenses
Operating
income
Product C
$660,000
396,000
Product J
$380,000
266,000
Product R
$660,000
528,000
Total
$1,700,000
1,190,000
100%
70
$264,000
$114,000
$132,000
$510,000
30%
250,000
$260,000
Break-even sales Budgeted:
Fixed Expenses =
$250,000 = $833,333
CM Ratio
0.30
b) Margin of safety
Total sales - Break-even sales = $1,700,000 - $833,333 = $866,667
c) Operating leverage
Contribution margin =
Net income
$510,000 = 1.96
$260,000
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-17 The Margin of Safety
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
136. Barnes Company sells three products: A, B, and C. Budgeted sales by product and in
total for the coming month are as follows:
% of total
sales
Sales
Variable exp.
Contrbution
margin
Fixed expense
% of total
sales
Sales
Variable exp.
Contribution
margin
Fixed expense
Operating
income
Break-even sales Budgeted:
Product A
48%
$240,000
72,000
$168,000
Product B
20%
100%
30%
70%
Product C
32%
$160,000
88,000
$72,000
$100,000
80,000
$20,000
100%
80%
20%
Total
100%
100%
55%
45%
$500,000
240,000
$260,000
100%
48%
52%
223,600
$36,400
Fixed Expenses =
CM Ratio
$223,600 = $430,000
0.52
As shown by these data, operating income is budgeted at $36,400 for the month, and breakeven sales at $430,000.
Assume that actual sales for the month total $500,000 as planned. Actual sales by product are:
A $160,000
B $200,000
C $140,000
Required:
a) Prepare a contribution income statement for the month based on actual sales data. Assume
variable expenses as a percentage of sales and total fixed expenses are the same as budgeted.
Present the income statement in the format shown in the images above.
b) Compute break-even sales for the month, based on actual data.
c) Explain why the company did not meet the budgeted operating results or break-even sales
even though it met its $500,000 sales budget.
a)
% of total
sales
Sales
Variable exp.
Contribution
margin
Fixed expense
% of total
sales
Sales
Variable exp.
Contribution
margin
Fixed expense
Operating
income
Product A
32%
$160,000
48,000
$112,000
Product B
40%
100%
30%
70%
Product C
28%
$140,000
77,000
$63,000
$200,000
160,000
$40,000
100%
80%
20%
Total
100%
100%
55%
45%
$500,000
285,000
215,000
100%
57%
43%
223,600
$(8,600)
b) Break-even sales:
Fixed expenses =
CM ratio
$223,600 = $520,000
0.43
c) Despite the fact that the company met its sales budget of $500,000 for the month, the mix
of products sold changed from that budgeted. This is the reason the budgeted net income was
not met, and the reason the break-even sales were greater than budgeted. The company's sales
mix was planned at 48% for A, 20% for B, and 32% for C. The actual sales mix was 32% for
A, 40% for B, and only 28% for C. The budgeted contribution margin was 52%, while the
actual contribution margin was 43%. This also explains why the break-even point was higher
than planned. With less average contribution margin per dollar of sales, a greater level of sales
is required to provide sufficient contribution margin to cover fixed costs.
Blooms: Apply
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Medium
Learning Objective: 04-09 Compute the break-even point for a multi-product company and explain the effects of changes in the sales mix on
the contribution margin and the break-even point.
Topic: 04-23 The Definition of Sales Mix
Topic: 04-24 Sales Mix and Break-Even Analysis
137. Kilimanjaro Company (KC) makes and sells one product: dehydrated meals for
backpacking. Both the average sales price per meal and the average variable cost per meal
remain constant regardless of the number meals prepared and sold. Reported sales and aftertax operating income for Year 8 were 25,000 meals and $72,000, respectively. Fixed costs
depend on number of meals prepared and sold, as the following schedule shows:
Range of Number of Meals Prepared
and Sold
Minimum
Maximum
0
32,001
56,001
32,000
56,000
76,000
Incremental fixed
cost
$80,000
160,000
240,000
Total fixed cost
$80,000
240,000
480,000
KC expects the cost structure and average selling price per meal for Year 8 NOT to change in
Year 9. Maximum plant capacity will also remain at 76,000 meals in Year 9. The company can
sell every meal it prepares and its marginal income tax rate of 40 percent for Year 8 will also
remain unchanged in Year 9.
Required:
a) Calculate the dollar contribution margin per meal for Year 8 when 25,000 meals were
prepared and sold.
b) Calculate KC's expected break-even point for Year 9 for EACH of the THREE ranges of
meals preparation and sales. If there is no break-even point for a given range of meals
preparation and sales level state so, including a brief (but clear) explanation.
c) Calculate the number of meals KC must prepare and sell in Year 9 to maximize its after-tax
operating income.
d) Calculate KC's (i) degree of operating leverage and (ii) margin of safety percentage for
Year 8 when 25,000 meals were prepared and sold.
e) Using ONLY the degree of operating leverage number you just calculated in part (d) above,
calculate the expected dollar amount increase or decrease in before-tax operating income if
KC expects to prepare and sell 22,500 meals in Year 9. (NOTE: No credit will be given for
answers that include preparation of an income statement for the 22,500 meals.)
a)
Before-tax operating
Total contribution margin
Contribution margin per meal
= $72,000/(1 - 0.4)
= $120,000
= Before-tax operating income + fixed
expenses
= $120,000 + $80,000
= $200,000
= $200,000/25,000 meals
= $8.00
b) 0 to 32,000 meals: Break-even = 80,000/$8 = 10,000 meals
32,001 to 56,000 meals
Incremental fixed costs = $160,000
Less: operating income from first 32,000 meals (32,000 - 10,000) $8 = $176,000
Extra operating income = $16,000
Therefore, there is no break-even between 32,001 and 56,000 meals because operating
income will be greater than zero throughout the range. In other words, the operating income
from the first 32,000 meals is more than sufficient to cover the incremental fixed costs of
producing the additional 24,000 meals.
Alternatively, one can find the break-even point from 0 to 56,000 meals and specify that it
must exceed 32,000 meals: This number is 30,000 meals (that is, $240,000/$8 per meal)
which is less than 32,000 meals. It is outside the range of 32,001 and 56,000 meals and
therefore there is no break-even in that range.
56,001 to 76,000 meals
Incremental fixed costs = $240,000
Less operating income from the first 56,000 meals (56,000 $8) - $240,000 = $448,000 $240,000 = $208,000
Total contribution margin required = $32,000
Additional meals = $32,000/$8 = 4,000
Therefore break-even number of meals for the range 56,000 to 76,000 meals is 60,000 meals.
Alternatively, one can find the break-even point from 0 to 76,000 meals and specify that it
must exceed 56,000 meals: This number is 60,000 meals (that is, $480,000/$8 per meal)
which exceeds 56,000 meals. It is within the range and therefore it is the break-even point.
c) Since the contribution margin remains positive (and the same in this case), maximum
operating income will be at the end of one of the three ranges:
Operating income (32,000 meals)
Operating income (56,000 meals)
Operating income (76,000 meals)
= (32,000 * $8) - $80,000
= $256,000 - $80,000
= $176,000
= (56,000 * $8) - $240,000
= $448,000 - $240,000
= $208,000
= (76,000 * $8) - $480,000
= $608,000 - $480,000
= $128,000
Since the marginal tax rate of 40% is the same for all levels of before-tax operating income
the decision can be based on either after-tax or before-tax operating income. Maximum aftertax operating income occurs at 56,000 meals.
d) (i) Degree of operating level (DOL) for 25,000 meals = Total contribution margin/beforetax operating income = ($8 25,000)/($8 25,000 - $80,000)
= $200,000/$120,000 (same as $72,000/(1 - 0.4))
= 1.67 (or 2/3)
(ii) Margin of safety percentage = (25,000 meals - 10,000 meals)/25,000 meals
= 5,000 meals/25,000 meals
= 60%
e) Expected sales of 22,500 meals represents a 10% decrease in sales, that is, [(22,500 25,000)/25,000)]
Expected percentage decrease in before-tax operating income = DOL % decrease in sales
= 1.67 10%
= 6.7% (or 1/6)
Expected dollar amount of the decrease = 16.7% $120,000
= $20,000 (rounded if using decimals)
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-14 Break-Even Computations
Topic: 04-16 After-Tax Analysis
Topic: 04-17 The Margin of Safety
Topic: 04-20 Operating Leverage
138. The basic cost-volume-profit model assumes no change in inventories when the model is
applied to a manufacturing company.
Required:
Explain the reasoning behind this assumption.
The basic model assumes that sales for the period must cover all fixed costs before any
operating profit will emerge. This implicitly assumes that all fixed costs become expenses
during the period. For a merchandising firm this requirement can be easily satisfied since such
costs relate to only administrative and selling activities which, by definition, are period costs
or expenses.
For a manufacturing company, some of the fixed costs are incurred for production activities
(for example, plant amortization). So far in this course, such costs have been treated as
product costs and do not become part of the cost of goods sold (and released to the income
statement) until the units are sold. Of course, if everything produced is sold, all the costs
become part of the cost of goods sold. When everything produced is sold, there will be no
change in inventory and the basic cost-volume-profit model assumption is satisfied.
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-02 Prepare and interpret a cost-volume-profit graph.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Topic: 04-03 Contribution Margin
Topic: 04-05 Preparing the Cost-Volume-Profit Graph
Topic: 04-12 Importance of the Contribution Margin
139. Dr. Bertin performs a certain routine surgical procedure at her medical clinic. Her
monthly fixed operating costs are $12,000, while her after-tax operating income is $8,000
when she performs 200 such procedures in a month. Dr. Bertin's before-tax operating income
is subject to a marginal tax rate of 60%.
Required:
a) What is the margin of safety percentage for Dr. Bertin, assuming she performs 200
procedures?
b) What is the degree of operating leverage for Dr.Bertin, again assuming she performs 200
procedures?
a) Determine the break-even number of procedures
Total contribution margin for 200 procedures:
Before-tax operating income
($8,000/0.40)
Fixed operating costs
Total contribution margin
Contributon margin per procedure
Break-even number of procedures
Margin of safety percentage
$20,000
12,000
$32,000
= $32,000/200
= $160
= $12,000/$160
= 75
= (200 - 75)/200
= 62.50%
b) Degree of operating leverage = Total contribution margin/before-tax operating income
= $32,000/$20,000
= 1.60
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-06 Determine the level of sales needed to achieve a desired target profit.
Learning Objective: 04-07 Compute the margin of safety and explain its significance.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-16 After-Tax Analysis
Topic: 04-19 Cost Structure and Profit Stability
Topic: 04-20 Operating Leverage
140. P. Harrison Limited manufactures and sells highly faddish products directed toward the
preteen market. A new product has come onto the market that the company is anxious to
manufacture and sell. Enough capacity exists in the company's plant to manufacture a
maximum of 35,000 units of the new product each month. Total fixed costs (both
manufacturing and non-manufacturing) will amount to $60,000 per month. The company's
controller projects an operating loss of $15,000 if the company manufactures and sells 30,000
units of the new product per month.
The marketing department predicts that demand for the new product will exceed the
maximum 35,000 units that the company is able to manufacture in its own plant. Additional
manufacturing capacity can be rented from another company at a fixed cost of $20,000 per
month to manufacture 50,000 units of the new product monthly. The variable costs to
manufacture and sell units of the new product made in the rented facility will be higher at
$3.75, due to somewhat less efficient operations than in the company's own plant. The new
product, however, will sell for $4.50 per unit, regardless of where it is manufactured.
Required:
a) Calculate the monthly break-even sales for the new product in units if the company
operates only in its own plant, that is, it manufactures a maximum of 35,000 units. (NOTE: If
there is no break-even sales level, state so together with the supporting calculations and
reasoning.)
b) Calculate the monthly break-even sales for the new product in units if the company rents
the additional manufacturing capacity, that is, it manufactures more than 35,000 units. NOTE:
Again, if there is no break-even sales level, state so together with the supporting calculations
and reasoning.)
c) Suppose there are NO manufacturing capacity constraints for the manufacture of the new
product at either the company's own plant or the rented facility.
(i) At what level of non-zero production and sales (in units) would you expect the company to
be indifferent between the two manufacturing facilities?
(ii) Calculate the degree of operating leverage at a monthly sales level of 50,000 units at
EACH manufacturing facility.
(iii) Which one of the two manufacturing facilities will be MORE advantageous for the
manufacture of the new product, assuming the marketing department predicts very strong and
increasing demand for the new product? Explain, strictly on the basis of the degree of
operating leverage calculations in Part c (ii) above.
a) Break-even sales in own plant
Reported loss of $15,000 for 30,000 units of sale implies the following:
Contribution margin (TCM)
= Fixed costs - Loss
$ CM per unit
Break-even sales
= $60,000 - $15,000
= $45,000
= $45,000/30,000
= $1.50
= $60,000/$1.50
= 40,000 units
Decision: There is no break-even sales since the required 40,000 units exceed the maximum
capacity of 35,000 units.
b) Break-even sales for production exceeding 35,000 units (that is, operating at own plant and
rented facility)
Loss from own plant ((40,000 - 35,000) *
$1.75; 5,000 * $1.75)*
Additional fixed cost from rental facility
Total CM from rented facility
Required units from rented facility to
generate the $27,500:
$27,500/($4.50 - $3.75), that is,
$27,500/$0.75
$7,500
20,000
$27,500
36,667 units
Break-even sales = 35,000 + 36,667 = 71,667 units **
* Alternatively: 35,000 ($1.50) - $60,000; that is, $52,500 - $60,000 = -$7,500
** Alternatively, define Q as the required units that must exceed 35,000 units:
(35,000 $1.50) + (Q - 35,000) $0.75 - ($60,000 + $20,000) = $0
$52,500 + $0.75Q - $26,250 - $80,000 = $0
$0.75Q = $53,750
Q = 71,667 units
c) Assuming no manufacturing capacity constraints at either own or rented facility
(i) Indifference production and sales
Equating profits
$1.50Q - $60,000
$0.75Q
Q
= $0.75 - $20,000
= $40,000
= $40,000/0.75
= 53,333 units
($4.50 - $1.50)Q + $60,000
$3Q + $60,000
$0.75Q
Q
= $3.75Q + $20,000
= $3.75Q + $20,000
= $40,000
= $40,000/$0.75
= 53,333 units
Equating total costs
(ii) Degrees of operating leverage (DOL) at 50,000 units sales level
DOL (Own Plant)
DOL (Rented)
= (50,000 * $1.50)/((50,000 * $1.50) $60,000)
= $75,000/($75,000 - $60,000)
= $75,000/$15,000
=5
= (50,000 * $0.75)/(50,000 * $0.75) $20,000)
= $37,500/($37,500 - $20,000)
= $37,500/$17,500
= 2.14
(iii) Advantageous production facility in times of strong and increasing demand
Decision: Own plant
Why?
First, its own plant has a higher DOL, that is, operating income will increase 5 times
(compared to only 2.14 times at the rented facility) for the same percentage increase in sales.
Second, as the calculation in part (i) above shows, its own plant is more advantageous when
sales and production exceed 53,333 units
Blooms: Analyze
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Learning Objective: 04-08 Explain cost structure; compute the degree of operating leverage at a particular level of sales; and explain how
operating leverage can be used to predict changes in operating income.
Topic: 04-03 Contribution Margin
Topic: 04-11 Change in Variable Cost, Fixed Cost, and Sales Volume
Topic: 04-20 Operating Leverage
Topic: 04-21 Indifference Analysis
141. The following is Allison Corporation's contribution format income statement for
December 2014:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$800,000
300,000
500,000
400,000
$100,000
The company had no beginning or ending inventories. The company produced and sold
10,000 units in December.
Required:
Assuming no change in either the cost structure or the average selling price, prepare a
contribution format income statement for a month Allison Corporation reports no before-tax
profit or loss:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Operating income
$640,000 (note 1)
240,000 (note 2)
400,000 (see crucial step below)
400,000 (no change by definition)
$0
Crucial step: Determining the required units to generate $400,000 total contribution margin.
The average contribution per unit when company sold 10,000 was $5, that is,
$500,000/10,000. This is also the difference between the average selling price of $8 (that is,
$800,000/10,000) and average variable expenses of $3 (that is, $300,000/10,000). By
assumption, the average contribution margin of $5 does not change, further implying 8,000
units to be produced and sold to obtain the $400,000 total contribution margin (that is,
$400,000/$5)
Note 1: $8 8,000
Note 2: $3 8,000
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-03 Use the contribution margin ratio to compute changes in contribution margin and operating income resulting
from changes in sales volume.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations
142. Jeff Merchandisers (JM) has determined with 100 percent certainty the following costs
for making one unit of its only product:
Direct materials
Direct labour
$6.00
4.00
$10.00
The company is, however, not sure of the behaviour of its total indirect manufacturing costs
(that is, manufacturing overhead). The controller therefore ran a simple regression based on
20 pairs of monthly observations and obtained the following results:
Y = $6,000 + 1.50X
Y represents total monthly manufacturing overhead costs while X represents total monthly
manufacturing direct labour costs.
Required:
Assume JM incurs NO selling and administrative expenses. What is your best estimate of the
company's monthly breakeven sales in units at a guaranteed selling price of $20.00 per unit?
Selling price
Less variable expenses:
Direct materials
Direct labour
Variable overhead (1.50 *
$4.00)
Contribution margin
Break-even: $6,000/$4.00
$20.00
$6.00
4.00
6.00
16.00
$4.00
1,500 units
Blooms: Evaluate
CPA Competency: 3.5.1 Performs sensitivity analysis.
Difficulty: Hard
Learning Objective: 04-01 Explain how changes in activity affect contribution margin and operating income.
Learning Objective: 04-04 Show the effects on contribution margin of changes in variable costs; fixed costs; selling price; and volume.
Learning Objective: 04-05 Compute the break-even point in unit sales and sales dollars.
Topic: 04-03 Contribution Margin
Topic: 04-12 Importance of the Contribution Margin
Topic: 04-14 Break-Even Computations
Chapter 06
Systems Design: Process Costing
Multiple Choice Questions
1. (Appendix 6A) Which of the following statements referring to a production report is not
correct?
A. The quantity schedule deals with physical units, not whole units.
B. The total "Costs to be accounted for" must equal the total cost of the units completed and
transferred out, plus the cost of the ending work-in-process inventory.
C. The equivalent units in the ending work-in-process inventory will be different if the
weighted-average method is used than it will be if the FIFO method is used.
D. The total of the "Units to be accounted for" will equal the total of the "Units accounted
for."
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-23 A Comparison of Costing Methods
2. Assume that there is no beginning work-in-process inventory, and the ending work-inprocess inventory is 50% complete with respect to conversion costs. What would be the
number of equivalent units of production with respect to conversion costs under the weightedaverage method?
A. The same as the units completed.
B. The same as the units started during the period.
C. Less than the units completed.
D. Less than the units started during the period.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
3. (Appendix 6A) All production costs have been steadily rising in the Donner Company for
several periods, and the company maintains large work-in-process inventories. What is the
Donner Company's cost per equivalent unit, as computed using the FIFO method?
A. The same as that computed under the weighted-average method.
B. Higher than that computed under the weighted-average method.
C. Lower than that computed under the weighted-average method.
D. It could be the lower than, the same as, or higher than that computed under the weightedaverage method.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
4. (Appendix 6A) If a company uses two different unit cost figures to cost transfers from one
department to another under a process costing system, then which of the following statements
is reasonable to assume?
A. There was no beginning work-in-process inventory.
B. Processing centres are arranged in a sequential pattern.
C. The FIFO cost method is being used.
D. The weighted-average cost method is being used.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
5. For which of the following industries would it NOT be appropriate to use process costing?
A. Custom furniture building.
B. Oil refining.
C. Grain milling.
D. Newsprint production.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-04 Processing Departments
Topic: 06-05 The Flow of Materials, Labour, and Overhead Costs
6. Which of the following is true about process costing?
A. Unit costs are computed by job on the job cost sheet
B. The department production report is the key document showing the accumulation and
disposition of costs by a department.
C. Costs are accumulated by individual job, regardless of the accounting period during which
the work is done.
D. All units of product are different.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-02 Comparison of Job-Order and Process Costing
7. The equivalent units of production (weighted-average method) for a department are:
A. The number of units transferred to the next department
B. The number of units transferred to the next department (or to finished goods) plus the
equivalent units in the department's ending work in process inventory.
C. The equivalent units in the department's ending work in process inventory.
D. Equivalent units to complete beginning work in process inventory plus units started and
completed during the period plus equivalent units in ending work in process inventory
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-11 Equivalent Units of Production
8. Which of the following statements best defines an operation costing system?
A. It is identical to a process costing system except that actual manufacturing overhead costs
are traced to units of product.
B. It is the same as a process costing system except that direct materials costs are accounted
for in the same way as in job-order costing system.
C. It is the same as a job-order costing system except that direct materials costs are accounted
for in the same way as in a process costing system.
D. It is identical to a job-order costing system except that actual manufacturing overhead costs
are traced to units of product.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-04 Processing Departments
Topic: 06-16 Summary of Tropic Breeze Fans Costing
9. Lucas Company uses the weighted-average method in its process costing system. The
company adds materials at the beginning of the process in the Forming Department, which is
the first of two stages in its production process. Information concerning operations in the
Forming Department in October follows:
Work in process on
October 1
Units started during
October
Units completed and
transferred to the next
Department during
October
Materials
Units
6,000
50,000
44,000
Cost
$3,000
$25,560
What was the materials cost of work in process on October 31?
A. $3,060.
B. $5,520.
C. $6,000.
D. $6,120.
EI = 6,000 + 50,000 - 44,000 = 12,000 units * $28,560/56,000 = $6,120.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
10. David Company uses the weighted-average method in its process costing system. The first
processing department, the Welding Department, started the month with 20,000 units that
were 80% complete with respect to conversion costs. The conversion cost in this beginning
work-in-process inventory was $123,200. An additional 65,000 units were started into
production during the month. There were 19,000 units in the ending work-in-process
inventory of the Welding Department that were 10% complete with respect to conversion
costs. A total of $389,250 in conversion costs were incurred in the department during the
month.
What would be the cost per equivalent unit for conversion costs for the month? (Round off to
three decimal places.)
A. $7.547.
B. $7.700.
C. $4.634.
D. $5.988.
EU = 66,000 + 19,000 *.1 = 67,900.
Cost/EU = (123,200 + 389,250)/67,900 = $7.547.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
11. Larner Company uses the weighted-average method in its process costing system.
Operating data for the first processing department for the month of June appear below:
Beginning work in
process inventory
Started into production
during June
Ending work in process
inventory
Units
24,000
Percentage complete
40%
86,000
19,000
20%
According to the company's records, the conversion cost in beginning work-in-process
inventory was $68,064 at the beginning of June. Additional conversion costs of $585,324
were incurred in the department during the month.
What was the cost per equivalent unit for conversion costs for the month? (Round off to three
decimal places.)
A. $5.575.
B. $6.174.
C. $6.892.
D. $7.090.
($68,064 + 585,324)/(91,000 + 19,000 * 20%) = $6.174.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
12. Glo Co., a manufacturer of combs, uses the weighted-average method in its process
costing system. The company sold 125,000 units during the month of April. There is only one
processing department. The following additional information is provided:
Inventory at April 1:
Work in process
Finished goods
Inventory at April 30:
Work in process (75% complete as to
conversion costs)
Finished goods
None
37,500 units
8,000 units
30,000 units
What were the equivalent units of production for conversion costs for April?
A. 126,500 units.
B. 125,500 units.
C. 123,500 units.
D. 117,500 units.
Transferred out of WIP to FG = 125,000 + 30,000 - 37,500 = 117,500 (from FG information).
EU = 117,500 * 100% + 8,000 *.75 = 123,500 units.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-05 The Flow of Materials, Labour, and Overhead Costs
Topic: 06-12 Weighted-Average Method
13. The Morgan Company uses the weighted-average method in its process costing system.
For a particular department, the company had 54,000 equivalent units of production with
respect to conversion costs in March. There were 7,500 units in the department's beginning
work-in-process inventory, two-thirds complete with respect to conversion costs. During
March, 52,500 units were started and 50,000 were completed and transferred out of the
department. What was the ending work-in-process inventory in the department?
A. Consisted of 5,000 units.
B. Consisted of 2,500 units.
C. 65% complete with respect to conversion costs.
D. 40% complete with respect to conversion costs.
7,500 + 52,500 = 60,000 less 50,000 transferred out = EI of 10,000 units.
EI equiv. units = 54,000 - 50,000 = 4,000 EU therefore 4,000/10,000 = 40% complete.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
14. The following data were taken from the accounting records of the Hazel Corporation,
which uses the weighted-average method in its process costing system:
Beginning work in process inventory
(100% complete as to materials; 70%
complete as to conversion)
Started in process during the period
Ending work in process inventory
(100% complete as to materials; 60%
complete as to conversion)
30,000 units
90,000 units
20,000 units
What were the equivalent units of production for conversion costs?
A. 102,000 units.
B. 112,000 units.
C. 111,000 units.
D. 100,000 units.
T. out + WIP e.i. = 30,000 + 90,000 - 20,000 = 100,000 * 100% + 20,000 * 60% = 112,000
units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
15. Baker Company uses the weighted-average method in its process costing system. The
Assembly Department started the month with 8,000 units in its beginning work-in-process
inventory that were 90% complete with respect to conversion costs. An additional 95,000
units were transferred in from the prior department during the month to begin processing in
the Assembly Department. There were 11,000 units in the ending work-in-process inventory
of the Assembly Department that were 90% complete with respect to conversion costs.
What were the equivalent units of production for conversion costs in the Assembly
Department for the month?
A. 94,700 units.
B. 101,900 units.
C. 98,000 units.
D. 92,000 units.
92,000 + 11,000 *.9 = 101,900 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
16. Jawson Company uses the weighted-average method in its process costing system.
Operating data for the Painting Department for the month of April appear below:
Beginning work in
process inventory
Transferred in from the
prior department during
April
Ending work in process
inventory
Units
6,300
Percentage complete
10%
65,600
4,600
70%
What were the equivalent units of production for conversion costs in the Painting Department
for April?
A. 67,300 units.
B. 68,820 units.
C. 70,520 units.
D. 63,900 units.
(6,300 + 65,600 - 4,600) * 100% + 4,600 * 70% = 70,520 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
17. Sarver Company uses the weighted-average method in its process costing system. The
Fitting Department is the second department in its production process. The data below
summarize the department's operations in March:
Beginning work in
process inventory
Transferred in from the
prior department during
March
Ending work in process
inventory
Units
7,100
Percentage complete
70%
61,000
4,600
30%
The Fitting Department's production report indicates that the cost per equivalent unit for
conversion cost for March was $8.24.
How much conversion cost was assigned to the units transferred out of the Fitting Department
during March?
A. $482,287.20.
B. $502,640.00.
C. $523,240.00.
D. $561,144.00.
(7,100 + 61,000 - 4,600) * $8.24 = $523,240.00.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-16 Summary of Tropic Breeze Fans Costing
18. The Nichols Company uses the weighted-average method in its process costing system.
The company recorded 29,500 equivalent units of production for conversion costs for
November in a particular department. There were 6,000 units in the ending work-in-process
inventory on November 30, 75% complete with respect to conversion costs. The November 1
work-in-process inventory consisted of 8,000 units, 50% complete with respect to conversion
costs. A total of 25,000 units were completed and transferred out of the department during the
month. What was the number of units started during November in the department?
A. 24,500 units.
B. 23,000 units.
C. 27,000 units.
D. 21,000 units.
25,000 + 6,000 - 8,000 = 23,000 units started.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
19. The Assembly Department started the month with 35,000 units in its beginning work-inprocess inventory. Additional units 472,000 were transferred in from the prior department
during the month to begin processing in the Assembly Department. There were 34,000 units
in the ending work-in-process inventory of the Assembly Department. How many units were
transferred to the next processing department during the month?
A. 507,000 units.
B. 473,000 units.
C. 471,000 units.
D. 541,000 units.
35,000 + 472,000 - 34,000 = 473,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
20. Huffer Company uses the weighted-average method in its process costing system. The
following information pertains to Processing Department D for the month of May:
Beginning work in
process
Started in May
Units completed
Ending work in process
Number of units
30,000
Cost of materials
$11,000
80,000
85,000
25,000
$36,000
All materials are added at the beginning of the process. Which of the following costs is closest
to the cost per equivalent unit for materials?
A. $0.43.
B. $0.45.
C. $0.55.
D. $0.59.
($11,000 + 36,000)/(85,000 + 25,000) = $0.43.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
21. Harker Company uses the weighted-average method in its process costing system. The
first processing department, the Welding Department, started the month with 16,000 units in
its beginning work-in-process inventory that were 40% complete with respect to conversion
costs. The conversion cost in this beginning work-in-process inventory was $29,440. An
additional 59,000 units were started into production during the month, and 61,000 units were
completed in the Welding Department and transferred to the next processing department.
There were 14,000 units in the ending work-in-process inventory of the Welding Department
that were 10% complete with respect to conversion costs. A total of $246,400 in conversion
costs were incurred in the department during the month.
What would be the cost per equivalent unit for conversion costs for the month? (Round off to
three decimal places.)
A. $4.176.
B. $4.600.
C. $3.375.
D. $4.421.
Cost/EU = ($29,440 + 246,400)/(61,000 + 14,000 *.1) = $4.421.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
22. Paxton Company uses the weighted-average method in its process costing system. The
Moulding Department is the second department in its production process. The data below
summarize the department's operations in January:
Beginning work in
process inventory
Transferred in from the
prior department during
January
Completed and
transferred to the next
department during
January
Ending work in process
inventory
Units
2,700
Percentage complete
80%
57,000
50,300
9,400
20%
The accounting records indicate that the conversion cost that had been assigned to beginning
work-in-process inventory was $10,973, and a total of $268,107 in conversion costs were
incurred in the department during January.
What was the cost per equivalent unit for conversion costs for January in the Moulding
Department? (Round off to three decimal places.)
A. $5.348.
B. $4.038.
C. $5.080.
D. $4.704.
($10,973 + 268,107)/(50,300 + 9,400 *.2) = $5.348.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
23. The Richmond Company uses the weighted-average method in its process costing system.
The company has only a single processing department. The company's ending work-inprocess inventory on August 31 consisted of 18,000 units. The units in the ending work-inprocess inventory were 100% complete with respect to materials and 60% complete with
respect to labour and overhead. If the cost per equivalent unit for August was $2.75 for
materials and $4.25 for labour and overhead, what was the total cost assigned to the ending
work-in-process inventory?
A. $126,000.
B. $75,600.
C. $80,100.
D. $95,400.
18,000 * $2.75 + 18,000 *.6 * $4.25 = $95,400.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
24. (Appendix 6A) On November 1, Yankee Company had 20,000 units of work in process in
Department No. 1 that were 100% complete with respect to material costs and 20% complete
with respect to conversion costs. During November, 160,000 units were started in Department
No. 1, and 170,000 units were completed and transferred to Department No. 2. The work in
process on November 30 was 100% complete with respect to material costs and 40%
complete with respect to conversion costs. By what amount would the equivalent units of
production for conversion costs for the month of November differ if the FIFO method were
used instead of the weighted-average method?
A. 20,000 decrease.
B. 16,000 decrease.
C. 8,000 decrease.
D. 4,000 decrease.
Transferred out 170,000 units, EI = 10,000 units.
W. Avg.: EU = 170,000 + 10,000 *.4 = 174,000 EU
FIFO: 20,000 *.8 + 150,000 * 1 + 10,000 *.4 = 170,000 EU. Therefore 4,000 less using FIFO.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-12 Weighted-Average Method
Topic: 06-20 Equivalent Units—FIFO Method
25. Fabian Company uses the weighted-average method in its process costing system. The
Assembly Department started the month with 9,000 units in its beginning work-in-process
inventory that were 70% complete with respect to conversion costs. During the month, an
additional 90,000 units were transferred in from the prior department to begin processing in
the Assembly Department. During the month, 87,000 units were completed in the Assembly
Department and transferred to the next processing department. There were 12,000 units in the
ending work-in-process inventory of the Assembly Department that were 20% complete with
respect to conversion costs.
What were the equivalent units of production for conversion costs in the Assembly
Department for the month?
A. 93,000 units.
B. 83,100 units.
C. 87,000 units.
D. 89,400 units.
87,000 + 12,000 *.20 = 89,400 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
26. Narver Company uses the weighted-average method in its process costing system.
Conversion costs are added equally throughout the production process. Operating data for the
Lubricating Department for the month of October appear below:
Beginning work in
process inventory
Transferred in from the
prior department during
October
Completed and
transferred to the next
department during
October
Ending work in process
inventory
Units
6,600
Percentage complete
60%
40,100
37,100
9,600
80%
What were the equivalent units of production for conversion costs in the Lubricating
Department for October?
A. 43,100 units.
B. 37,100 units.
C. 44,780 units.
D. 47,780 units.
37,100 + 9,600 *.80 = 44,780 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
27. Black Company uses the weighted-average method in its process costing system. The
company's ending work-in-process inventory consists of 5,000 units, 80% complete with
respect to materials and 50% complete with respect to labour and overhead. If the total dollar
value of the inventory is $60,000 and the cost per equivalent unit for labour and overhead is
$8.00, what is the cost per equivalent unit for materials?
A. $5.00.
B. $10.00.
C. $8.00.
D. $4.00.
Value for Labour and Overhead in Inventory = 5,000 *.5 * $8 = $20,000
Material cost in inventory = $60,000 - $20,000 = $40,000
Material Cost/EU = $40,000/(5,000 *.8) = $10.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
28. Department 2 is the second of three sequential processes. All materials are added at the
beginning of processing in Department 2. During October, Department 2 reported the
following data:
Number of units
Units started
Completed and
transferred
Work in process, October
1
Work in process, October
31
Costs for October
Work in process,
October 1
Added during the
month
Conversion costs
percentage complete
60,000
50,000
26,000
60%
36,000
20%
Transferred In
$45,000
Materials
$25,000
Conversion Costs
$54,000
81,000
115,000
315,000
The company uses the weighted-average method in its process costing system. To the nearest
cent, what is the cost per equivalent unit on the production report for conversion costs?
A. $5.51.
B. $6.45.
C. $6.30.
D. $7.38.
(54,000 + 315,000)/(50,000 + 36,000 *.2) = $6.45.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
29. Overland, Inc., uses the weighted-average method in its process costing system. The
company's work-in-process inventory on April 30 consists of 25,000 units. The units in the
ending inventory are 100% complete with respect to materials and 75% complete with respect
to conversion costs. If the cost per equivalent unit is $3.00 for materials and $5.50 for
conversion costs, what is the total cost in the April 30 work-in-process inventory?
A. $212,500.
B. $178,125.
C. $159,375.
D. $109,375.
25,000 * $3 + 25,000 *.75 * $5.50 = $178,125.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
30. Valley Manufacturing Company's beginning work-in-process inventory consisted of
10,000 units, 100% complete with respect to materials cost and 40% complete with respect to
conversion costs. The total cost in the beginning inventory was $30,000. During the month,
50,000 units were transferred out. The equivalent unit cost was computed to be $2.00 for
materials and $3.70 for conversion costs under the weighted-average method. Given this
information, what was the total cost of the units completed and transferred out?
A. $255,000.
B. $270,000.
C. $240,000.
D. $285,000.
50,000 * ($2 + $3.70) = $285,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
31. Ogden Company uses the weighted-average method in its process costing system.
Information for the month of January concerning Department A, the first stage of the
company's production process, follows:
Work in process,
beginning
Current added during
January
Equivalent units of
production
Cost per equivalent unit
Materials
$8,000
Conversion costs
$6,000
$40,000
$32,000
100,000
95,000
$0.48
$0.40
Units completed and transferred to the
next department
Work in process, ending
90,000 units
10,000 units
Materials are added at the beginning of the process. The ending work in process is 50%
complete with respect to conversion costs. What cost would be recorded for the ending workin-process inventory?
A. $6,800.
B. $8,800.
C. $3,400.
D. $4,400.
10,000 * $0.48 + 10,000 *.5 * $0.40 = $6,800.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
32. Clover Sweet Company uses the weighted-average method in its process costing system.
Information for the month of February concerning Department A, the first stage of the
company's production process, follows:
Work in process,
beginning
Current added during
January
Equivalent units of
production
Cost per equivalent unit
Units completed and transferred to the
next department
Work in process, ending
Materials
$7,000
Conversion costs
$5,000
$45,000
$37,000
105,000
100,000
$0.58
$0.5
95,000 units
15,000 units
Materials are added at the beginning of the process. The ending work in process is 60%
complete with respect to conversion costs. What cost would be recorded for the ending workin-process inventory?
A. $13,500
B. $13,200
C. $14,300
D. $12,300
15,000 * 0.58 + 15,000 * 0.6 * 0.5 = $13,200.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
33. Trapp Company uses the weighted-average method in its process costing system. The
beginning work-in-process inventory in its Painting Department consisted of 3,000 units that
were 70% complete with respect to materials and 60% complete with respect to conversion
costs. The cost of the beginning work-in-process inventory in the department was recorded as
$10,000. During the period, 9,000 units were completed and transferred on to the next
department. The costs per equivalent unit for the period were $2.00 for material and $3.00 for
conversion costs. What was the cost of units transferred out during the month?
A. $39,600.
B. $45,000.
C. $45,400.
D. $35,400.
9,000 * ($2 + $3) = $45,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
34. Strap Company uses the weighted-average method in its process costing system. The
company has only one processing department. The ending work-in-process inventory consists
of 10,000 units, 60% complete with respect to materials. The total dollar value of this
inventory is $38,000. The costs per equivalent unit are $5.00 for materials and $4.00 for
conversion costs for the period. With respect to conversion costs, what is the ending work-inprocess inventory?
A. 10% complete.
B. 20% complete.
C. 38% complete.
D. 30% complete.
EI cost of material; 10,000 *.6 * $5 = $30,000
(38,000 - 30,000)/$4/EU = 2,000 EU for conversion costs therefore 2,000/10,000 = 20%
complete.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
35. Rariton Company uses the weighted-average method in its process costing system. The
Moulding Department is the second department in its production process. The data below
summarize the department's operations in January:
Beginning work in
process inventory
Transferred in from the
prior department during
January
Completed and
transferred to the next
department during
January
Ending work in process
inventory
Units
4,800
Percentage complete
60%
78,000
80,900
1,900
40%
The Moulding Department's production report indicates that the cost per equivalent unit for
conversion cost for January was $5.37.
How much conversion cost was assigned to the ending work-in-process inventory in the
Moulding Department for January?
A. $4,081.20.
B. $10,203.00.
C. $10,310.40.
D. $6,121.80.
1,900 *.4 * $5.37 = $4,081.20.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
36. Wire One Company uses the weighted-average method in its process costing system. The
Coating Department is the second department in its production process. The data below
summarize the department's operations in February:
Beginning work in
process inventory
Transferred in from the
prior department during
January
Completed and
transferred to the next
department during
January
Ending work in process
inventory
Units
3,800
Percentage complete
70%
52,000
53,000
2,800
30%
The Coating Department's production report indicates that the cost per equivalent unit for
conversion cost for January was $4.37.
How much conversion cost was assigned to the ending work-in-process inventory in the
Coating Department for February?
A. $3,589.20
B. $3670.80
C. $5,081.20
D. $6121.80
2,800 *.3 * $4.37 = $3670.80.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
37. (Appendix 6A) Ebis Company uses the FIFO method in its process costing system. The
first processing department, the Welding Department, started the month with 13,000 units in
its beginning work-in-process inventory; 10% of the units were complete with respect to
conversion costs. The conversion cost in this beginning work-in-process inventory was
$12,610. An additional 89,000 units were started into production during the month. There
were 22,000 units in the ending work-in-process inventory of the Welding Department; 30%
of these units were complete with respect to conversion costs. A total of $806,085 in
conversion costs were incurred in the department during the month.
What would be the cost per equivalent unit for conversion costs for the month on the
department's production report? (Round off to three decimal places.)
A. $8.026.
B. $9.700.
C. $9.057.
D. $9.450.
Transferred out = 13,000 + 89,000 - 22,000 = 80,000 units of which 13,000 are from
Beginning inventory. $806,085/(13,000 *.9 + 67,000 * 1 + 22,000 *.3) = $9.45.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
38. (Appendix 6A) Marten Company uses the FIFO method in its process costing system.
Operating data for the Casting Department for the month of September appear below:
Beginning work in
process inventory
Transferred in from the
prior department during
September
Ending work in process
inventory
Units
19,000
Percentage complete
80%
74,000
17,000
90%
According to the company's records, the conversion cost in beginning work-in-process
inventory was $83,600 at the beginning of September. Additional conversion costs of
$427,682 were incurred in the department during the month.
What would be the cost per equivalent unit for conversion costs for September on the Casting
Department's production report? (Round off to three decimal places.)
A. $5.498.
B. $5.779.
C. $5.620.
D. $5.500.
$427,682/(19,000 *.2 + 57,000 * 1 + 17,000 *.9) = $5.62.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
39. (Appendix 6A) Herston Company uses the FIFO method in its process costing system.
The beginning work-in-process inventory in a particular department consisted of 6,000 units,
two-thirds complete with respect to conversion costs. During the month, 42,000 units were
started and 40,000 units were completed and transferred out of the department. The company
had 40,000 equivalent units of production for conversion costs. Which of the following
represents the ending work-in-process inventory in the department? (Do not round
intermediate calculations.)
A. 8,000 units, 25% complete with respect to conversion costs.
B. 0 units.
C. 8,000 units, 50% complete with respect to conversion costs.
D. 4,000 units, 100% complete with respect to conversion costs.
Total EU was 40,000. From transferred out the EU = 6,000 * 1/3 + 34,000 = 36,000 EU
Therefore, 40,000 - 36,000 = 4,000 EU in EI. EI consists of 6,000 + 42,000 - 40,000 = 8,000
units 50% complete (4,000/8,000).
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
40. (Appendix 6A) Carson Company uses the FIFO method in its process costing system. The
Assembly Department started the month with 6,000 units in its beginning work-in-process
inventory; 20% of the units were complete with respect to conversion costs. An additional
74,000 units were transferred in from the prior department during the month to begin
processing in the Assembly Department. Of the 8,000 units in the ending work-in-process
inventory of the Assembly Department, 60% were complete with respect to conversion costs.
What were the equivalent units of production for conversion costs in the Assembly
Department for the month?
A. 72,000 units.
B. 75,600 units.
C. 76,000 units.
D. 76,800 units.
6,000 + 74,000 - 8,000 = 72,000 transferred out.
EU = 6,000 *.8 + 66,000 * 1 + 8,000 *.6 = 75,600 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
41. (Appendix 6A) Karmen Company uses the FIFO method in its process costing system.
Operating data for the Enamelling Department for the month of May appear below:
Beginning work in
process inventory
Transferred in from the
prior department during
May
Ending work in process
inventory
Units
2,400
Percentage complete
40%
87,000
8,600
60%
What were the equivalent units of production for conversion costs in the Enamelling
Department for May?
A. 85,000 units.
B. 85,960 units.
C. 93,200 units.
D. 80,800 units.
Trans. Out = 2,400 + 87,000 - 8,600 = 80,800 units of which 2,400 come from BI.
EU = 2,400 *.6 + 78,400 * 1 + 8,600 *.6 = 85,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
42. (Appendix 6A) Creer Company uses the FIFO method in its process costing system.
Department A had 20,000 units in process at the beginning of January, and 40% were
complete with respect to conversion costs. All materials are added at the beginning of the
process in Department A. The January 1 work-in-process inventory in Department A
contained $10,000 in materials cost and $11,600 in conversion cost. During January, materials
costs were $0.50 per equivalent unit, and conversion costs were $1.50 per equivalent unit. All
of the units in the beginning work-in-process inventory were completed and transferred out
during the month. What was the total cost attached to these units when they were transferred
to the next department?
A. $39,600.
B. $33,600.
C. $45,600.
D. $37,600.
BI = $10,000 + 11,600 = $21,600
Cost to complete these units = 20,000 *.6 * $1.50 = $18,000 for a total of $39,600.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
43. (Appendix 6A) Mukluk Company uses the FIFO method in its process costing system.
The conversion cost for the month of April is $5.00 per equivalent unit, and the materials cost
is $2.90 per equivalent unit. At the beginning of the month, 1,000 units were in process, and
100% were complete with respect to materials and 30% were complete with respect to
conversion, with a total cost at that point of $2,400. If these units are fully complete by the
end of the month, what will be their total cost?
A. $3,500.
B. $3,900.
C. $5,900.
D. $8,000.
$2,400 + 1,000 *.7 * $5 = $5,900.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-01 Costing the "Quicker-Picker-Upper"
Topic: 06-02 Comparison of Job-Order and Process Costing
Topic: 06-03 Process Cost Flows
44. (Appendix 6A) Index Company uses the FIFO method in its process costing system. The
first processing department, the Forming Department, started the month with 17,000 units in
its beginning work-in-process inventory; the units were 10% complete with respect to
conversion costs. The conversion cost in this beginning work-in-process inventory was
$9,010. An additional 76,000 units were started into production during the month, and 83,000
units were completed and transferred to the next processing department. There were 10,000
units in the ending work-in-process inventory of the Forming Department; 70% of the units
were complete with respect to conversion costs. A total of $445,915 in conversion costs were
incurred in the department during the month.
What would be the cost per equivalent unit for conversion costs for the month on the Forming
Department's production report? (Round off to three decimal places.)
A. $5.050.
B. $5.300.
C. $5.867.
D. $5.150.
$445,915/(17,000 *.9 + 66,000 * 1 + 10,000 *.7) = $5.05.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
45. (Appendix 6A) Qart Company uses the FIFO method in its process costing system.
Operating data for the Cutting Department for the month of March appear below:
Beginning work in
process inventory
Transferred in from the
prior department during
March
Completed and
transferred to the next
department during March
Ending work in process
inventory
Units
4,500
Percentage complete
20%
74,000
74,500
4,000
60%
According to the company's records, the conversion cost in beginning work-in-process
inventory was $1,656 at the beginning of March. Additional conversion costs of $129,960
were incurred in the department during the month.
What would be the cost per equivalent unit for conversion costs for March on the Cutting
Department's production report? (Round off to three decimal places.)
A. $1.710.
B. $1.677.
C. $1.756.
D. $1.840.
4,500 *.8 + 70,000 * 1 + 4,000 *.6 = 76,000 EU. Cost/EU = $129,960/76,000 = $1.71.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
46. (Appendix 6A) Roger Company uses the FIFO method in its process costing system. The
following data are taken from the accounting records of a particular department for June:
Beginning work in process inventory:
Cost
Units
Percentage completion:
Materials
Conversion
$17,500
20,000 units
100%
60%
Units completed and transferred out: 75,000 units
Cost per equivalent unit:
Material: $1.75
Conversion: $0.50
What is the cost of the 75,000 units transferred out of the department during June?
A. $151,250.
B. $145,250.
C. $131,500.
D. $168,750.
Transferred out 20,000 from BI *.4 = 8,000 EU, units started and completed 55,000.
Cost of units transferred out then = $17,500 + 8,000 * $0.50 + 55,000 * $2.25 = $145,250.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
47. (Appendix 6A) Winkle Company uses the FIFO method in its process costing system. At
the beginning of March, the work-in-process inventory in the Blending Processing Center
consisted of 5,000 units, 90% complete with respect to conversion costs. At the end of the
month, the work-in-process inventory consisted of 2,000 units that were 60% complete with
respect to conversion costs. If 10,000 units were transferred to the next processing center
during the month, what would be the equivalent units of production for conversion costs?
A. 6,700 units.
B. 11,700 units.
C. 10,300 units.
D. 13,000 units.
5,000 *.1 + 5,000 * 1 + 2,000 *.6 = 6,700 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
48. (Appendix 6A) Winder Company uses the FIFO method in its process costing system.
Department One is the first stage of the company's production process. The following
information pertains to conversion costs for April for Department One:
Units
Work in process, beginning (40%
complete)
Started in April
Completed in April and transferred to
Department Two
Work in process, ending (60% complete)
40,000
320,000
340,000
20,000
What are the equivalent units of production for conversion costs?
A. 320,000 units.
B. 336,000 units.
C. 352,000 units.
D. 360,000 units.
40,000 *.6 + 300,000 * 1 + 20,000 *.6 = 336,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
49. (Appendix 6A) Garson Company uses the FIFO method in its process costing system. The
Grinding Department started the month with 18,000 units in its beginning work-in-process
inventory; 10% of the units were complete with respect to conversion costs. During the
month, an additional 98,000 units were transferred in from the preceding department to begin
processing in the Grinding Department. During the month, 115,000 units were completed in
the Grinding Department and transferred to the next processing department. Of the 1,000 units
in the ending work-in-process inventory of the Grinding Department, 20% were complete
with respect to conversion costs. What were the equivalent units of production for conversion
costs in the Grinding Department for the month?
A. 81,000 units.
B. 115,200 units.
C. 115,000 units.
D. 113,400 units.
18,000 *.9 + 97,000 * 1 + 1,000 *.2 = 113,400 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
50. (Appendix 6A) Oxyrom Company uses the FIFO method in its process costing system.
Operating data for the Brazing Department for the month of November appear below:
Beginning work in
process inventory
Transferred in from the
prior department during
November
Completed and transferred
to the next department
during November
Ending work in process
inventory
Units
3,800
Percentage complete
20%
46,700
43,200
7,300
80%
What were the equivalent units of production for conversion costs in the Brazing Department
for November?
A. 49,040 units.
B. 50,200 units.
C. 43,200 units.
D. 48,280 units.
3,800 *.8 + 39,400 * 1 + 7,300 *.8 = $48,280 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
51. (Appendix 6A) Tarten Company uses the FIFO method in its process costing system.
Operating data for the Curing Department for the month of March appear below:
Beginning work in
process inventory
Transferred in from the
prior department during
March
Completed and
transferred to the next
department during March
Ending work in process
inventory
Units
9,000
Percentage complete
10%
57,000
65,000
1,000
70%
According to the company's records, the conversion cost in beginning work-in-process
inventory was $7,470 at the beginning of March. The cost per equivalent unit for conversion
costs for March was $8.20.
How much conversion cost would be assigned to the units completed and transferred out of
the department during March?
A. $525,530.
B. $592,040.
C. $533,090.
D. $533,000.
$7,470 + 9,000 *.9 * $8.20 + 56,000 * $8.20 = $533,090.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
A sporting goods manufacturer buys wood as a direct material for baseball bats. The Forming
Department processes the baseball bats, and the bats are then transferred to the Finishing
Department where a sealant is applied. There was no beginning work-in-process inventory in
the Forming Department in May. The Forming Department began manufacturing 10,000
Casey Slugger baseball bats during May. Costs for the Forming Department for the month of
May were as follows:
Direct materials
Conversion costs
$33,000
$17,000
A total of 8,000 bats were completed and transferred to the Finishing Department during May.
The ending work-in-process inventory was 100% complete with respect to direct materials
and 25% complete with respect to conversion costs. The company uses the weighted-average
method of process costing.
52. What was the cost of the units transferred to the Finishing Department during May?
A. $50,000.
B. $40,000.
C. $53,000.
D. $42,400.
EU's Material = 8,000 + 2,000 = 10,000 Conv. Costs = 8,000 + 2,000 *.25 = 8,500
Cost/EU material = $33,000/10,000 = $3.30 Conv. Cost/EU = $17,000/8,500 = $2. Total
$5.30
Transferred out = 8,000 * $5.30 = $42,400.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
53. What was the cost of the work-in-process inventory in the Finishing Department at the
end of May?
A. $7,600.
B. $10,000.
C. $2,500.
D. $4,000.
Cost/EU 42,400. EI = 2,000 * $3.30 + 500 * $2 = $7,600.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
Adam Company uses the weighted-average method in its process costing system. The
following information for the Assembly Department was obtained from the accounting
records for September (all materials are added at the beginning of the process):
Number of Units
Work in process
inventory, Sept. 1
Transferred in the during
the month
Work in process
inventory, Sept. 30
Transferred In
Beginning workin-process
inventory
Cost added during
the month
60,000
Labour and overhead
percentage complete
15%
105,000
40,000
Materials
20%
$30,000
Labour and
overhead
$16,000
$63,000
$320,000
54. The "Total cost to be accounted for" section of the production report for the month will
show an amount equal to which of the following?
A. $604,500.
B. $498,500.
C. $429,000.
D. $106,000.
$30,000 + $63,000 + $16,000 + $320,000 = $429,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
55. What are the equivalent units of production for material for the month?
A. 105,000 units.
B. 145,000 units.
C. 122,000 units.
D. 165,000 units.
Transferred out = 60,000 + 105,000 - 40,000 = 125,000. Since materials are all added at
beginning of process then all units 125,000 + 40,000 ( 100% complete as to material) =
165,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Madsen Company uses the weighted-average method in its process costing system. During
October, the Mixing Department transferred out 40,000 units. The October 31 work-inprocess inventory in the Mixing Department consisted of 4,000 equivalent units of material
and 5,000 equivalent units of labour and overhead. The cost per equivalent unit was $2.50 for
materials and $6.25 for labour and overhead.
56. What was the total cost of the October 31 work-in-process inventory?
A. $41,250.
B. $35,000.
C. $43,750.
D. $78,750.
4,000 * $2.50 + 5,000 * $6.25 = $41,250.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
57. The "Total cost accounted for" section of the production report for October will show an
amount equal to which of the following?
A. $110,000.
B. $391,250.
C. $350,000.
D. $428,750.
40,000 * ($2.50 + $6.25) + $41,250 (EI from 52) = $391,250.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
The activity in Nolan Company's Blending Department for the month of April is given below:
Number of Units
Work in process
inventory, April 1
Transferred in the during
the month
Work in process
inventory, April 30
8,000
Labour and overhead
percentage complete
50%
50,000
10,000
70%
All materials are added at the beginning of processing in the Blending Department.
58. (Appendix 6A) Using the FIFO method, what are the equivalent units of production for
material for the month?
A. 50,000 units.
B. 58,000 units.
C. 54,000 units.
D. 60,000 units.
T. out 48,000 units of which 8,000 are from BI. EU = 8,000 * 0 + 40,000 * 1 + 10,000 * 1 =
50,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
59. (Appendix 6A) Using the FIFO method, what are the equivalent units of production for
labour and overhead for the month?
A. 47,000 units.
B. 51,000 units.
C. 5,000 units.
D. 54,000 units.
8,000 *.5 + 40,000 * 1 + 10,000 *.7 = 51,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
60. Using the weighted-average method, what are the equivalent units of production for
material for the month?
A. 48,000 units.
B. 50,000 units.
C. 58,000 units.
D. 52,000 units.
48,000 + 10,000 = 58,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
61. Using the weighted-average method, what are the equivalent units of production for
labour and overhead for the month?
A. 50,000 units.
B. 51,000 units.
C. 47,000 units.
D. 55,000 units.
48,000 + 10,000 *.7 = 55,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Activities in the Challenger Company's Assembly Department for the month of March
follow:
Work in process
inventory, March 1
Started into
production during
March
Work in process
inventory, March
31
Number of Units
5,000
Percent Completed
Materials
Conversion
65%
30%
65,000
3,000
35%
25%
62. Using the weighted-average method, what are the equivalent units of production for
materials for March?
A. 65,000 units.
B. 67,000 units.
C. 68,050 units.
D. 70,000 units.
67,000 * 1 + 3,000 *.35 = 68,050 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
63. (Appendix 6A) Using the FIFO method, what are the equivalent units of production for
conversion for March?
A. 66,250 units.
B. 67,000 units.
C. 64,250 units.
D. 67,750 units.
5,000 *.7 + 62,000 * 1 + 3,000 *.25 = 66,250 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
The following data relate to the Blending Department of Tru-Colour Paint Company for a
recent month:
Number of Units
Beginning work in
process inventory
Units started into
production
Units completed and
transferred out
Ending work in process
inventory
9,000
Conversion costs
percentage complete
60%
45,000
46,000
8,000
25%
All materials are added prior to the beginning of work in the Blending Department.
64. (Appendix 6A) Assuming that Tru-Colour Paint Company uses the FIFO method, what
are the equivalent units of production for materials?
A. 42,600 units.
B. 45,000 units.
C. 53,000 units.
D. 46,000 units.
9,000 * 0 + 37,000 * 1 + 8,000 * 1 = 45,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
65. (Appendix 6A) Assuming that Tru-Colour Paint Company uses the FIFO method, what
are the equivalent units of production for conversion costs?
A. 42,600 units.
B. 44,400 units.
C. 46,000 units.
D. 54,000 units.
9,000 *.4 + 37,000 * 1 + 8,000 *.25 = 42,600 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
66. Assuming that Tru-Colour Paint Company uses the weighted-average method, what are
the equivalent units of production for materials?
A. 48,000 units.
B. 46,000 units.
C. 54,000 units.
D. 45,000 units.
46,000 + 8,000 = 54,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
67. Assuming that Tru-Colour Paint Company uses the weighted-average method, what are
the equivalent units of production for conversion costs?
A. 44,400 units.
B. 42,600 units.
C. 46,000 units.
D. 48,000 units.
46,000 * 1 + 8,000 *.25 = 48,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
The information below was obtained from the records of the first processing department of
Christine Corporation for the month of July. The company uses the weighted-average method
in its process costing system.
Number of Units
Work in process
inventory, July 1
Started during the month
Completed during the
month
Work in process
inventory, July 31
20,000
Labour and overhead
percentage complete
40%
70,000
80,000
?
All materials are added at the beginning of the manufacturing process.
25%
68. What are the equivalent units of production for material for the month?
A. 70,000 units.
B. 90,000 units.
C. 80,000 units.
D. 82,500 units.
80,000 + 10,000 = 90,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
69. What are the equivalent units of production for labour and overhead for the month?
A. 70,000 units.
B. 90,000 units.
C. 80,000 units.
D. 82,500 units.
80,000 * 1 + 10,000 *.25 = 82,500 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
The information below was obtained from the records of the first processing department of
Moore Company for the month of May. The company uses the weighted-average method in
its process costing system.
Number of Units
Work in process
inventory, May 1
Units started
Completed and
transferred out
Work in process
inventory, May 31
10,000
Labour and overhead
percentage complete
40%
64,000
60,000
14,000
All materials are added at the beginning of the process.
70%
70. What are the equivalent units of production for materials for the month of May?
A. 60,000 units.
B. 74,000 units.
C. 64,000 units.
D. 69,800 units.
60,000 + 14,000 = 74,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
71. What are the equivalent units of production for labour and overhead for the month of
May?
A. 60,000 units.
B. 69,800 units.
C. 65,800 units.
D. 73,800 units.
60,000 + 14,000 *.7 = 69,800 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Information about units processed and processing costs incurred during a recent month in the
Refining Department of a manufacturing company follow:
Number of Units
Beginning work in
process inventory
Units started into
production
Units completed and
transferred out
Ending work in process
inventory
11,000
Conversion costs
percentage complete
35%
120,000
114,000
17,000
30%
The beginning work-in-process inventory included $11,000 of conversion cost. During the
month, the Refining Department incurred an additional $290,000 in conversion costs.
72. Assuming that the company uses the weighted-average cost method, what are the
equivalent units of production for conversion costs for the Refining Department for the
month?
A. 119,100 units.
B. 120,000 units.
C. 114,000 units.
D. 131,000 units.
114,000 + 17,000 *.3 = 119,100 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
73. Assuming that the company uses the weighted-average cost method, what is the cost per
equivalent unit for conversion costs for the month in the refining Department, rounded to the
nearest cent?
A. $2.55.
B. $2.53.
C. $2.50.
D. $2.44.
($11,000 + 290,000)/119,100 (from question no 68) = $2.53.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
74. (Appendix 6A) Assuming that the company uses the FIFO method, what are the
equivalent units of production for conversion costs for the refining Department for the
month?
A. 119,100 units.
B. 111,950 units.
C. 115,250 units.
D. 114,000 units.
11,000 *.65 + 103,000 * 1 + 17,000 *.3 = 115,250 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
75. (Appendix 6A) Assuming that the company uses the FIFO method, what is the cost per
equivalent unit for conversion costs for the month in the refining Department, rounded to the
nearest cent?
A. $2.52.
B. $2.54.
C. $2.44.
D. $2.59.
$290,000/115,250 (from question no 70) EU = 2.52.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-07 Compute the cost per equivalent unit using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Kimbeth Manufacturing makes Dust Density Sensors (DDS), a safety device for the mining
industry. The company uses a process costing system and has only a single processing
department. The following information pertains to operations for the month of May:
Beginning work in process inventory
Started into production during May
Completed during May
Ending work in process inventory
Units
16,000
100,000
92,000
24,000
The beginning work-in-process inventory was 60% complete with respect to materials and
20% complete with respect to conversion costs. The ending work-in-process inventory was
90% complete with respect to materials and 40% complete with respect to conversion costs.
The costs were as follows:
Beginning work-inprocess inventory
Costs incurred during
May
Materials
$54,560
Conversion
$35,560
$468,000
$574,040
76. (Appendix 6A) Using the FIFO method, what are the equivalent units of production for
materials for May?
A. 82,400 units.
B. 104,000 units.
C. 107,200 units.
D. 108,000 units.
16,000 *.4 + 76,000 + 24,000 *.9 = 104,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
77. (Appendix 6A) Using the FIFO method, what are the equivalent units of production for
conversion costs for May?
A. 85,600 units.
B. 88,800 units.
C. 95,200 units.
D. 98,400 units.
16,000 *.8 + 76,000 + 24,000 *.4 = 98,400 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
78. (Appendix 6A) Using the FIFO method, the cost per equivalent unit of materials for May
is closest to which of the following?
A. $4.12.
B. $4.50.
C. $4.60.
D. $4.80.
$468,000/104,000 EU = $4.50.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-07 Compute the cost per equivalent unit using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
79. (Appendix 6A) Using the FIFO method, the cost per equivalent unit of conversion cost for
May is closest to which of the following?
A. $5.65.
B. $5.83.
C. $6.00.
D. $6.20.
$574,040/98,400 EU = $5.83.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-07 Compute the cost per equivalent unit using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
80. (Appendix 6A) Using the FIFO method, the total cost of units in the ending work-inprocess inventory is closest to which of the following?
A. $153,200.
B. $154,800.
C. $155,300.
D. $157,000.
24,000 *.9 * $4.50/EU (from 74) + 24,000 *.4 * $5.8333/EU (from 75) = $153,200.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-07 Compute the cost per equivalent unit using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
81. Using the weighted-average method, the cost per equivalent unit of materials for May is
closest to which of the following?
A. $4.12.
B. $4.50.
C. $4.60.
D. $5.03.
($54,560 + 468,000)/(92,000 + 24,000 *.9) = $4.60.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
82. Using the weighted-average method, the cost per equivalent unit of conversion cost for
May is closest to which of the following?
A. $5.65.
B. $5.83.
C. $6.00.
D. $6.41.
($35,560 + 574,040)/(92,000 + 24,000 *.4) = $6.00.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
83. Using the weighted-average method, the total cost of the units in ending work-in-process
inventory is closest to which of the following?
A. $156,960.
B. $86,400.
C. $153,960.
D. $154,800.
(24,000 *.9 * $4.60/Eu (from 77) + 24,000 *.4 * $6/EU (from 78) = $156,960.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
Reid Company uses a process costing system in which units go through several departments.
In the Cutting Department for June, units in the beginning work-in-process inventory were
80% complete with respect to conversion costs. Units in the ending work-in-process inventory
were 25% complete with respect to conversion costs. Other data for the department for June
are as follows:
Work in process
inventory on June 1
Units started into
production
Conversion costs incurred
during June
Units completed and
transferred to the next
department during June
Units
15,000
Conversion costs
$50,200
145,000
$175,700
130,000
84. (Appendix 6A) Assuming that the company uses the FIFO cost method, what is the cost
per equivalent unit for conversion costs for June, rounded to the nearest cent?
A. $1.80.
B. $1.40.
C. $1.64.
D. $1.35.
EU = 15,000 *.2 + 115,000 + 30,000 *.25 = 125,500. Cost/EU = $175,700/125,500 = $1.40.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-07 Compute the cost per equivalent unit using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
85. Assuming that the company uses the weighted-average method, what is the cost per
equivalent unit for conversion costs for June, rounded to the nearest cent?
A. $1.64.
B. $1.56.
C. $1.74.
D. $1.48.
($50,220 + 175,700)/(130,000 + 30,000 *.25) = $1.64.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Cherrington Company uses a process costing system. For May, the month just completed, the
beginning work-in-process inventory consisted of 50,000 units that were 60% complete with
respect to conversion costs. The ending inventory for the month was 20% complete with
respect to conversion costs. A summary of cost data for the month follows:
Work in process
inventory on May 1
Units started into
production
Conversion costs incurred
during May
Units completed and
transferred out during the
month
Units
50,000
Conversion costs
$30,000
180,000
$690,000
190,000
86. Assuming that Cherrington Company uses the weighted-average method, what is the cost
per equivalent unit for conversion costs for May, rounded to the nearest cent?
A. $4.19.
B. $4.00.
C. $3.64.
D. $3.83.
($30,000 + 690,000)/(190,000 + 40,000 *.2) Note: EI = 50,000 + 180,000 - 190,000 = $3.64.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
87. (Appendix 6A) Assuming that Cherrington Company uses the FIFO method, what is the
cost per equivalent unit for conversion costs for May, rounded to the nearest cent?
A. $4.31.
B. $3.49.
C. $4.29.
D. $4.11.
$690,000/(50,000 *.4 + 140,000 + 40,000 *.2) = $4.11.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-07 Compute the cost per equivalent unit using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
88. Assuming that Cherrington Company uses the weighted-average method, the conversion
costs for work in process ending inventory in May is closest to which of the following?
(Round your intermediate answers two decimal places)
A. $32,000.
B. $29,120.
C. $33,520.
D. $30,640.
40,000 *.20 * $3.64/eu = $29,120.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
89. Assuming that Cherrington Company uses the FIFO method, the conversion costs for
work in process ending inventory in May is closest to which of the following? (Round your
intermediate answers two decimal places)
A. $34,480.
B. $27,920.
C. $32,880.
D. $34,320.
40,000 *.20 * $4.11/eu = $32,880.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-07 Compute the cost per equivalent unit using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
The following information was obtained from the records of the first processing department
of Keith Manufacturing Company for the month of February. The company uses the FIFO
method in its process costing system.
Number of Units
Work in process
inventory, February 1
Started in assembly
during the month
Work in process
inventory, February 28
15,000
Labour and overhead
percentage complete
30%
60,000
20,000
20%
All materials are added at the beginning of the manufacturing process.
90. (Appendix 6A) What are the equivalent units of production for material for the month?
A. 50,000 units.
B. 60,000 units.
C. 54,500 units.
D. 75,000 units.
15,000 * 0 + 40,000 * 1 + 20,000 * 1 = 60,000 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
91. (Appendix 6A) What are the equivalent units of production for labour and overhead for
the month?
A. 54,500 units.
B. 59,000 units.
C. 95,000 units.
D. 60,000 units.
15,000 * 0.70 + 40,000 + 20,000 *.20 = 54,500 units.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Selah Manufacturing makes a quality-improvement device for the aeronautical industry. The
company uses a process costing system and has only a single processing department. The
following information pertains to operations for the month of May:
Beginning work in process inventory
Units started into production during
May
Units completed during May
Ending work in process inventory
Number of Units
16,000
100,000
92,000
24,000
The beginning work-in-process inventory was 60% complete with respect to materials and
20% complete with respect to conversion costs. The ending work-in-process inventory was
90% complete with respect to materials and 40% complete with respect to conversion costs.
The costs were as follows:
Beginning workin-process
inventory
Costs incurred
during May
Total
Materials
$54,560
Conversion
$35,560
Total
$90,120
$468,000
$574,040
$1,042,040
$522,560
$609,600
$1,132,160
92. What was the unit cost for materials included in the beginning work-in-process inventory,
rounded to the nearest cent?
A. $3.41.
B. $4.60.
C. $5.68.
D. $8.53.
$54,560/(16,000 *.6) = $5.68.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
93. What was the unit cost for conversion included in the beginning work-in-process
inventory, rounded to the nearest cent?
A. $2.22.
B. $2.78.
C. $6.00.
D. $11.11.
$35,560/(16,000 *.2) = $11.11.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
94. (Appendix 6A) Suppose there was no separate breakdown of the total cost of the
beginning work-in-process inventory of $90,120 into materials ($54,560) and conversion
($35,560). Which method of accounting would not have been possible to use?
A. Process costing, using weighted-average.
B. Process costing, using FIFO.
C. Process costing using either weighted-average or FIFO.
D. Operations costing.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
95. What total amount was debited to the Work-in-process inventory during the month of
May?
A. $522,560.
B. $609,600.
C. $1,042,040.
D. $1,132,160.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Topic: 06-05 The Flow of Materials, Labour, and Overhead Costs
Topic: 06-16 Summary of Tropic Breeze Fans Costing
96. Suppose the company used the weighted-average method. What amount would have been
credited to the Work-in-process inventory for the units completed and transferred out during
the month of May?
A. $423,200
B. $552,000
C. $975,200
D. $132,160.
Cost/EU Material = $522,560/(92,000 + 24,000 *.9) = $4.60
Cost/EU conv. Cost = $609,600/(92,000 + 24,000 *.4) = $6.00
Units completed and transferred out = 92,000 * ($4.60 + $6) = $975,200.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-10 Completing the Cost Flows
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
97. Eve Company uses the weighted-average method in its process costing system. The
following information for the Assembly Department was obtained from the accounting
records for September (all materials are added at the beginning of the process):
Number of Units
Work in process
inventory, Sept. 1
Transferred in during the
month
Work in process
inventory, Sept. 31
Beginning work in
process inventory
Cost added during the
month
Total
60,000
Labour and overhead
percentage complete
15%
105,000
40,000
20%
Materials
$30,000
Labour and overhead
$16,000
$63,000
$320,000
$93,000
$336,000
What unit cost (rounded to the nearest cent) was used in calculating the total cost of labour
and overhead included in the Work-in-process inventory on September 1?
A. 0.27
B. 0.31
C. 1.78
D. 2.73
EI from Aug 31 = 60,000 *.15 = 9,000 EU. $16,000/9,000 = $1.7777.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
True / False Questions
98. The following journal entry would be made in a process costing system when units that
have been completed with respect to the work done in Processing Department Z are
transferred from Processing Department Z to Processing Department Y:
Work in process,
department Y
Work in process,
department Z
XXX
XXX
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-10 Completing the Cost Flows
99. The following journal entry would be made in a process costing system when units that
have been completed with respect to the work done in the final processing department are
transferred to the finished goods warehouse:
Finished good
Work in process
XXX
XXX
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-10 Completing the Cost Flows
100. (Appendix 6A) The "Quantity Schedule and Equivalent Units" section of the production
report is the same for the weighted-average method and the FIFO method of process costing.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-12 Weighted-Average Method
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
101. In process costing, the same equivalent units figure is used for both materials and
conversion costs.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
102. (Appendix 6A) The cost per equivalent unit for conversion costs will always be the same
under both the FIFO and the weighted-average methods if there is no ending work-in-process
inventory.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
103. (Appendix 6A) The cost per equivalent unit for conversion costs will always be the same
under both the FIFO and the weighted-average methods if there is no beginning work-inprocess inventory.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
104. When assigning costs to partially completed units in the ending work-in-process
inventory, it is NOT necessary to consider the percentage of completion of the units under the
weighted-average method.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-16 Summary of Tropic Breeze Fans Costing
105. When computing the cost per equivalent unit, it is NOT necessary to consider the
percentage of completion of the units in beginning inventory under the weighted-average
method.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
106. (Appendix 6A) Under the FIFO process costing method, the equivalent units of
production in the production report relate to work done only during the current period.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
107. (Appendix 6A) The cost per equivalent unit under the FIFO method of process costing is
equal to the cost of beginning work-in-process inventory plus the costs added during the
period, all divided by the equivalent units of production for the period.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
108. The weighted-average method of process costing can only be used if materials are added
at the beginning of the production process.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-04 Processing Departments
Topic: 06-05 The Flow of Materials, Labour, and Overhead Costs
Topic: 06-12 Weighted-Average Method
109. A manufacturer of blank DVDs would ordinarily use process costing rather than joborder costing.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-04 Processing Departments
110. In order to use process costing, the output of a processing department must be
homogeneous.
TRUE
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-04 Processing Departments
111. In process costing, costs are accumulated in processing departments, rather than by job.
TRUE
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-04 Processing Departments
112. If all units go through all processing departments, then the processing departments are
arranged in a parallel, rather than sequential, fashion.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-04 Processing Departments
113. (Appendix 6B) Units can disappear because of evaporation, losses, or rejection. Such
missing units can be considered to be a normal part of the processing or may be deemed to be
abnormal.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-09 Compute the cost of lost units or shrinkage.
Topic: 06-25 Case 1: Normal Loss Charged to Manufacturing Overhead
Topic: 06-26 Case 2: Normal Loss Charged to Good Output
114. (Appendix 6B) There is only one method of accounting treatment for normal losses.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-09 Compute the cost of lost units or shrinkage.
Topic: 06-25 Case 1: Normal Loss Charged to Manufacturing Overhead
Topic: 06-26 Case 2: Normal Loss Charged to Good Output
115. (Appendix 6B) In the production report, a separate line is included in the units accounted
for section for normal units lost.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-09 Compute the cost of lost units or shrinkage.
Topic: 06-25 Case 1: Normal Loss Charged to Manufacturing Overhead
116. (Appendix 6B) When normal losses are charged to good output a special journal entry is
required to account for costs related to spoiled units.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-09 Compute the cost of lost units or shrinkage.
Topic: 06-26 Case 2: Normal Loss Charged to Good Output
117. (Appendix 6B) The cost per equivalent unit will be greater when normal losses are
charged to good output than when they are charged to manufacturing overhead.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-09 Compute the cost of lost units or shrinkage.
Topic: 06-25 Case 1: Normal Loss Charged to Manufacturing Overhead
Topic: 06-26 Case 2: Normal Loss Charged to Good Output
118. (Appendix 6B) Assuming normal losses are charged to good output the production report
will account for lost units but not assigned a value in equivalent units.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-09 Compute the cost of lost units or shrinkage.
Topic: 06-26 Case 2: Normal Loss Charged to Good Output
Short Answer Questions
119. Able Inc. uses the weighted-average method in its process costing system. The following
data concern the operations of the company's first processing department for a recent month:
Work in process, beginning:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
Costs in the beginning inventory:
Materials cost
Conversion cost
Units started into production during
the month
Units completed and transferred out
Costs added to production during
the month:
Materials cost
Conversion cost
Work in process, ending:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
300
60%
30%
$342
$2,394
21,000
20,700
$44,136
$546,750
600
80%
30%
Required:
Prepare a production report for the department using the weighted-average method.
Weighted Average method:
Quantity schedule and equivalent units
Quantity Schedule
Units to be accounted for:
Work in process, beginning
Started into production
Total units
300
21,000
21,300
Equivalent units
Materials
Conversion
Units accounted
for as follows:
Transferred to next
department
Work in process,
ending
Total units
20,700
20,700
20,700
600
480
180
21,300
21,180
20,880
Total Cost
Materials
Conversion
$2,736
$342
$2,394
590,886
44,136
546,750
$593,622
$44,478
21,180
$549,144
20,880
$2,100
$26,300
Costs per equivalent unit:
Cost to be
accounted for:
Work in process,
beginning
Cost added during
the month
Total cost (a)
Equivalent units
(above) (b)
Cost per EU, (a) /
(b)
Combined cost per
EU
$28,400
Cost reconciliation per equivalent unit
Cost accounted
for as follows:
Transferred out
Work in process,
ending:
Materials
Conversion
Total work in
process, ending
Total cost
Total Cost
Materials
Conversion
$587,880
20,700
20,700
$1,008
$4,734
$5,742
480
180
$593,622
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
120. Barker Inc. uses the weighted-average method in its process costing system. The
following data concern the operations of the company's first processing department for a
recent month:
Work in process, beginning:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
Costs in the beginning inventory:
Materials cost
Conversion cost
Units started into production during the
month
Units completed and transferred out
Costs added to production during the
month:
Materials cost
Conversion cost
Work in process, ending:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
800
50%
20%
$2,440
$4,928
15,000
15,600
$96,470
$476,362
200
50%
90%
Required:
Using the weighted-average method:
a) Determine the equivalent units of production for materials and conversion costs.
b) Determine the cost per equivalent unit for materials and conversion costs.
c) Determine the cost of units transferred out of the department during the month.
d) Determine the cost of ending work-in-process inventory in the department.
a) through d) The answers to all of the questions can be found by filling out a production
report as follows.
Quantity schedule and equivalent units
Quantity Schedule
Units to be accounted for:
Work in process, beginning
Started into production
Total units
800
15,000
15,800
d)
Equivalent units
Materials
Conversion
Units accounted
for as follows:
Transferred to next
department
Work in process,
ending
Total units
Costs per equivalent unit:
15,600
15,600
15,600
200
100
180
15,800
15,700
15,780
Cost to be
accounted for:
Work in process,
beginning
Cost added during
the month
Total cost (a)
Equivalent units
(above) (b)
Cost per EU, (a) /
(b)
Combined cost per
EU
Total Cost
Materials
Conversion
$7,368
$2,440
$4,928
572,832
96,470
476,362
$580,200
$98,910
15,700
$481,290
15,780
$6,300
$30,500
Total Cost
Materials
Conversion
$574,080
15,600
15,600
$630
$5,490
$6,120
100
$36,800
Cost reconciliation per equivalent unit
Cost accounted
for as follows:
Transferred out
Work in process,
ending:
Materials
Conversion
Total work in
process, ending
Total cost
$580,200
180
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
121. Harmon Company uses the weighted-average method in its process costing system. The
Curing Department of Harmon Company reported the following information for the month of
November:
Units
Work in process,
November 1
Units started
Completed and
transferred out
Work in process,
November 30
Costs for November:
Work in process,
November 1
Added during the month
10,000
Conversion percentage
complete
80%
28,000
30,000
8,000
30%
Materials
$34,500
Conversion
$48,600
$146,000
$194,400
All materials are added at the beginning of the process.
Required:
Compute the following items for the company's monthly production report using the
weighted-average method:
a) The equivalent units (EUs) of production for materials.
b) The cost per equivalent unit for conversion.
c) The total cost assigned to units transferred out of the Curing Department during November.
d) The cost assigned to work-in-process inventory as of November 30.
a)
A) Units transferred out
Add: Equivalent units in ending
inventory (8,000 * 100%)
Equivalent units for materials
B) Units transferred out
Add: Equivalent units in ending
inventory (8,000 * 30%)
Equivalent units for conversion
Total conversion costs
30,000
8,000
38,000
30,000
2,400
32,400
243,000
b) ($48,600 + $194,400)/32,400 EUs = $7.50 per EU
c) Materials cost per equivalent unit:
($34,500 + $146,000)/38,000 EUs = $4.75 per EU
Costs transferred out:
30,000 units * ($7.50 + $4.75) = $367,500
d) Materials cost 8,000 units * $4.75 per EU: $38,000
Conversion 8,000 units * 30% complete * $7.50 per EU: 18,000
Cost assigned to ending inventory: $56,000
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
122. Carver Inc. uses the weighted-average method in its process costing system. The
following data concern the operations of the company's first processing department for a
recent month:
Work in process, beginning:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
Units started into production during
the month
Work in process, ending:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
700
50%
40%
23,000
200
80%
40%
Required:
Using the weighted-average method, determine the equivalent units of production for
materials and conversion costs by compiling the "Quantity Schedule and Equivalent Units"
portion of the production report.
Quantity schedule and equivalent units
Quantity Schedule
Units to be accounted for:
Work in process, beginning
Started into production
Total units
700
23,000
23,700
Equivalent units
Materials
Conversion
Units accounted
for as follows:
Transferred to next
department
Work in process,
ending
Total units
23,500
23,500
23,500
200
160
80
23,700
23,660
23,580
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
123. (Appendix 6A) The Smith Company manufactures a product that goes through two
departments prior to completion. The following information is available on work in one of
these departments, the Forming Department, during March:
Work in process,
March 1
Started into
production
Completed and
transferred out
Work in process,
March 31
Percent Completed
Number of Units Materials
Conversion
70,000 5/7
3/7
460,000
450,000
80,000 7/8
5/8
Cost in the beginning work-in-process inventory and cost added during the month were as
follows:
Work in process, March 1
Cost added during March
Materials
$42,190
$440,810
Conversion
$38,000
$394,000
The Forming Department is the first department in the production process; after forming has
been completed, the units are transferred to the Finishing Department.
Required:
a) Assuming the company uses the weighted-average method, calculate the equivalent units
and unit cost for materials and conversion costs, rounded to the nearest tenth of a cent.
b) (Appendix 6A) Assuming the company uses the FIFO method, calculate the equivalent
units and unit cost for materials and conversion costs, rounded to the nearest tenth of a cent.
a) Equivalent units:
Weighted-average:
Units completed and
transferred out
Work in process,
March 31:
Materials: 80,000 * 7/8 =
Conversion: 80,000 * 5/8
=
Equivalent units
Materials
450,000
Conversion
450,000
70,000
50,000
520,000
500,000
Unit costs:
Materials: ($42,190 + $440,810)/520,000 = $0.929
Conversion: ($38,000 + $394,000)/500,000 = $0.864
b) Equivalent units:
FIFO:
Materials
Work in process, March 1
Materials: 70,000 * 2/7 =
Conversion: 70,000 * 4/7
=
Started and completed
during March
Work in process, March
31
Materials: 80,000 * 7/8 =
Conversion: 80,000 * 5/8
=
Equivalent units
Conversion
20,000
40,000
380,000
380,000
70,000
50,000
470,000
470,000
Unit costs:
Materials: $440,810/470,000 = $0.938
Conversion: $394,000/470,000 = $0.838
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
124. (Appendix 6A) Dita Company uses a process costing system. The following information
relates to one month's activity in the company's Curing Department:
Units
Beginning work in
process inventory
Units started
Units completed and
transferred out
Ending work in process
inventory
10,000
Conversion percentage
complete
20%
21,000
26,000
5,000
80%
The conversion cost of the beginning inventory was $6,500. During the month, $112,000 in
additional conversion cost was incurred.
Required:
a) (Appendix 6A) Assume that the company uses the FIFO method. Compute the following:
1. The equivalent units of production for conversion for the month.
2. The cost per equivalent unit for conversion for the month.
3. The total cost transferred out during the month.
4. The cost assigned to the ending work-in-process inventory.
b) Assume that the company uses the weighted-average cost method. Compute the following:
1. The equivalent units of production for conversion for the month.
2. The cost per equivalent unit for conversion for the month.
3. The total cost transferred out during the month.
4. The cost assigned to the ending work-in-process inventory.
a)
Units transferred out
Deduct: equivalent units in the
beginning inventory
Add: Equivalent units in ending
inventory
Equivalent units
26,000
2,000
24,000
4,000
28,000
2. $112,000 28,000 EUs = $4 per EU
3. Beginning inventory:
Cost in the beginning inventory
Completion of the units in the
beginning inventory:
$4 * 1,000 x 80%
Units started and completed during the
period: $4 * 16,000 units
Total cost transferred out
$6,500
32,000
64,000
$102,500
4. $4 per EU 5,000 80% = $16,000
b)
1. Units transferred out
Add: Equivalent units in ending
inventory
Equivalent units
2. Cost in the opening inventory
Cost incurred during the period
Total cost
26,000
4,000
30,000
$6,500
112,000
$118,500
2. $118,500 30,000 EUs = $3.95 per EU
3. 26,000 units $3.95 per EU = $102,700
4. $3.95 per EU 5,000 80% = $15,800
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
125. Production and cost data for the month of February for Process A of the Packer
manufacturing Company follow:
Production record:
Units in process, February 1 (100%
complete with respect to materials;
25% complete with respect to
conversion cost)
New units started in process
Units completed
Units in process, February 28 (100%
complete with respect to materials;
1/3 complete with respect to
conversion cost)
Cost record:
Work in process
inventory, February 1:
Materials
Conversion
Costs for February:
Materials issued
Conversion
Total cost to be accounted
for
2,000
8,000
7,000
3,000
$600
100
700
2,560
1,500
$4,760
The company uses the weighted-average method in its process costing system.
Required:
a) Calculate the equivalent units and unit costs for February for materials and for conversion
costs.
b) Determine the cost transferred to finished goods.
c) Determine the amount of cost that should be assigned to the ending work-in-process and
finished goods inventories.
a)
1. Equivalent units:
Materials:
Completed
Work in process, Feb 28
Equivalent units
Conversion:
Completed
Work in process, Feb 28 (3,000 x 1/3)
Equivalent units
7,000
3,000
10,000
7,000
1,000
8,000
b)
Unit costs:
Cost from work in
process, Feb 1
Cost recorded in February
Total cost
Equivalent units
Unit cost
Materials
Conversion
$600
$100
2,560
$3,160
10,000
$0.316
1,500
$1,600
8,000
$0.20
c)
Units completed and transferred 7,000 * $.516
Work in process inventory, Feb 28:
Material cost: 3,000 units * 100% *
$0.316 =
Conversion cost: 3,000 units * 1/3 *
$0.20
Total cost accounted for
$3,612
948
200
$4,760
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
126. Miller Company manufactures a product for which materials are added at the beginning
of the manufacturing process. A review of the company's inventory and cost records for the
most recently completed year revealed the following information:
Work in process ,
Jan. 1 80%
complete with
respect to
conversion costs
Units started into
production
Costs added during
the year
Materials
Conversion
Units completed
during the year
Number of Units
100,000
Materials
$100,000
Conversion
$157,500
500,000
$650,000
$997,500
450,000
The company uses the weighted-average method in its process costing system. The ending
inventory is 50% complete with respect to conversion costs.
Required:
a) Compute the equivalent units of production and the cost per equivalent units for materials
and for conversion costs.
b) Determine the cost transferred to finished goods.
c) Determine the amount of cost that should be assigned to the ending work-in-process
inventory.
a) Equivalent units:
Units completed and
transferred out
Work in process,
December 31:
Materials: 150,000 *
1.00 =
Conversion: 150,000 *
0.50 =
Equivalent units
Materials
450,000
Conversion
450,000
150,000
75,000
600,000
525,000
Materials
$100,000
Conversion
$157,500
650,000
997,500
$750,000
600,000
$1.25
$1,155,000
525,000
$2.20
Unit costs:
Costs in beginning work
in process
Costs added during the
year
Total
Equivalent units
Unit cost
b)
Costs to be accounted for:
Work in process, beginning
Cost added by department
Total cost to be accounted for
Cost accounted for as follows:
Transferred to finished goods: 450,000 *
($1.25 + $2.20) =
Work in process, ending:
Materials - 150,000 * $1.25 =
Conversion - 75,000 * $2.20 =
Total costs accounted for
$257,500
1,697,500
$1,905,000
$1,552,500
187,500
165,000
$1,905,000
c) Ending work in process:
Materials
Conversion
Total
$187,500
165,000
$352,500
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-03 Compute the cost per equivalent unit using the weighted-average method.
Learning Objective: 06-04 Assign cost units using the weighted-average method.
Learning Objective: 06-05 Prepare a cost reconciliation report accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the weighted-average method.
Topic: 06-12 Weighted-Average Method
Topic: 06-14 Cost per Equivalent Unit—Weighted-Average Method
Topic: 06-16 Summary of Tropic Breeze Fans Costing
127. The Hardy Company manufactures a product that goes through two departments prior to
completion. The following information is available on work in one of these departments, the
Moulding Department, during the month of July:
Work in process,
July 1
Started into
production
Complete
Work in process,
July 31
Percent Completed
Number of Units Materials
Conversion
50,000 3/5
2/5
440,000
430,000
60,000 5/6
2/3
The Moulding Department is the first department in the production process; after moulding
has been completed, the units are transferred to the Finishing Department.
Required:
Assuming the company uses the weighted-average method, calculate the equivalent units for
materials and conversion costs, rounded to the nearest tenth of a cent.
Units completed and
transferred out
Work in process, July 31:
Materials: 60,000 * 5/6 =
Conversion: 60,000 * 2/3
=
Equivalent units
Equivalent units, weighted average
Materials
Conversion
430,000
430,000
50,000
40,000
480,000
470,000
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Topic: 06-12 Weighted-Average Method
128. (Appendix 6A) Sharp Company has a process costing system. The following data relate
to the company's Mixing Department for a recent month:
Units
Beginning work in
process inventory
Units started into
production
Units completed and
transferred
Ending work in process
inventory
5,000
Conversion percentage
complete
60%
40,000
37,000
8,000
25%
All materials are added at the beginning of the mixing process.
Required:
a) (Appendix 6A) Compute the equivalent units of production for materials using the FIFO
method.
b) (Appendix 6A) Compute the equivalent units of production for conversion using the FIFO
method.
c) Compute the equivalent units of production for materials using the weighted-average
method.
d) Compute the equivalent units of production for conversion using the weighted-average
method.
A) & B)
Units transferred out
Deduct: equivalent units
in beginning inventory
Add: equivalent units in
ending inventory
Equivalent units of
production
Materials
37,000
5,000
Conversion
37,000
3,000
32,000
8,000
34,000
2,000
40,000
36,000
Materials
37,000
8,000
Conversion
37,000
2,000
45,000
39,000
C) & D)
Units transferred out
Add: equivalent units in
the ending inventory
Equivalent units of
production
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-02 Compute the equivalent units of production using the weighted-average method.
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-12 Weighted-Average Method
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
129. (Appendix 6A) Darver Inc. uses the FIFO method in its process costing system. The
following data concern the operations of the company's first processing department for a
recent month:
Work in process, beginning:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
Costs in the beginning inventory:
Materials cost
Conversion cost
Units started into production during
the month
Units completed and transferred out
Costs added to production during
the month:
Materials cost
Conversion cost
Work in process, ending:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
Required:
Prepare a production report for the department using the FIFO method.
Quantity schedule and equivalent units
100
80%
60%
$376
$2,376
21,000
20,400
$93,645
$825,531
700
70%
50%
Quantity Schedule
Units to be accounted for:
Work in process, beginning
Started into production
Total units
100
21,000
21,100
Equivalent units
Materials
Conversion
Units accounted
for as follows:
Transferred out:
From the
beginning
inventory
Started and
completed
Work in process,
ending
Total units
Costs per equivalent unit:
100
20
40
20,300
20,300
20,300
700
490
350
21,100
20,810
20,690
Total Cost
Cost to be
accounted for:
Work in process,
beginning
Cost added during
the month
Total cost (a)
Equivalent units
(above) (b)
Cost per EU, (a) /
(b)
Combined cost per
EU
Materials
Conversion
$93,645
$825,531
20,810
20,690
$4,500
$39,900
$2,752
919,176
$921,928
$44,400
Cost reconciliation per equivalent unit
Total Cost
Cost accounted
for as follows:
Transferred out:
From the
beginning
inventory:
Cost in the
beginning
inventory
Cost to complete
these units:
Materials
Conversion
Total cost
Units started and
completed
Total cost
transferred
Work in process,
ending:
Materials
Conversion
Total work in
process, ending
Total cost
Materials
Conversion
$2,752
$90
$1,596
$4,438
$901,320
20
40
20,300
20,300
$905,758
$2,205
$13,965
$16,170
490
350
$921,928
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
130. (Appendix 6A) Easy Inc. uses the FIFO method in its process costing system. The
following data concern the operations of the company's first processing department for a
recent month:
Work in process, beginning:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
Costs in the beginning inventory:
Materials cost
Conversion cost
Units started into production during the
month
Units completed and transferred out
Costs added to production during the
month:
Materials cost
Conversion cost
Work in process, ending:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
300
60%
80%
$594
$8,256
26,000
25,500
$79,732
$887,626
800
50%
40%
Required:
Using the FIFO method:
a) Determine the equivalent units of production for materials and conversion costs.
b) Determine the cost per equivalent unit for materials and conversion costs.
c) Determine the cost of units transferred out of the department during the month.
d) Determine the cost of ending work-in-process inventory in the department.
a) through d) can be answered by completing a production report as follows:
Quantity schedule and equivalent units
Quantity Schedule
Units to be accounted for:
Work in process, beginning
Started into production
Total units
300
26,000
26,300
d)
Equivalent units
Materials
Conversion
Units accounted
for as follows:
Transferred out:
From the
beginning
inventory
Started and
completed
Work in process,
ending
Total units
300
120
60
25,200
25,200
25,200
800
400
320
26,300
25,720
25,580
Costs per equivalent unit:
Total Cost
Cost to be
accounted for:
Work in process,
beginning
Cost added during
the month
Total cost (a)
Equivalent units
(above) (b)
Cost per EU, (a) /
(b)
Combined cost per
EU
Materials
Conversion
$79,732
$887,626
25,720
25,580
$3,100
$34,700
$8,850
967,358
$976,208
$37,800
Cost reconciliation per equivalent unit
Total Cost
Cost accounted
for as follows:
Transferred out:
From the
beginning
inventory:
Cost in the
beginning
inventory
Cost to complete
these units:
Materials
Conversion
Total cost
Units started and
completed
Total cost
transferred
Work in process,
ending:
Materials
Conversion
Total work in
process, ending
Total cost
Materials
Conversion
$8,850
$372
$2,082
$11,304
$952,560
120
60
25,200
25,200
$963,864
$1,240
$11,104
$12,344
400
320
$976,208
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
131. (Appendix 6A) Farwest Inc. uses the FIFO method in its process costing system. The
following data concern the operations of the company's first processing department for a
recent month:
Work in process, beginning:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
Units started into production during
the month
Work in process, ending:
Units in process
Stage of completion with respect to
materials
Stage of completion with respect to
conversion
800
70%
50%
22,000
300
80%
70%
Required:
Using the FIFO method, determine the equivalent units of production for materials and
conversion costs by compiling the "Quantity Schedule and Equivalent Units" portion of the
production report.
Quantity schedule and equivalent units
Quantity Schedule
Units to be accounted for:
Work in process, beginning
Started into production
Total units
800
22,000
22,800
d)
Units accounted
for as follows:
Transferred out:
From the
beginning
inventory
Started and
completed
Work in process,
ending
Total units
Equivalent units
Materials
Conversion
800
240
400
21,700
21,700
21,700
300
240
210
22,800
22,180
22,310
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
132. (Appendix 6A) Production and cost data for the month of February for Process A of the
Packer Manufacturing Company were as follows:
Production record:
Units in process, February 1 (100%
complete with respect to materials;
25% complete with respect to
conversion cost)
New units started in process
Units completed
Units in process, February 28
(100% complete with respect to
materials; 1/3 complete with respect
to conversion cost)
Cost record:
Work in process
inventory, February 1:
Materials
Conversion
Costs for February:
Materials issued
Conversion
Total cost to be accounted
for
2,000
8,000
7,000
3,000
$600
100
700
2,560
1,500
$4,760
The company uses the FIFO cost method in its process costing system.
Required:
a) Calculate the equivalent units and unit costs for February for materials and conversion
costs.
b) Determine the cost transferred to finished goods.
c) Determine the amount of cost that should be assigned to the ending work-in-process and
finished goods inventories.
a)
1. Equivalent units:
Materials:
Completion of work in process at Feb
1
Units started and completed during the
period
Units in process at Feb
Equivalent units
Conversion:
Completion of work in process at Feb
1 (2,000 * 0.75)
Units started and completed during the
period
Units in process at Feb 28 (3,000 *
1/3)
Equivalent units
5,000
3,000
8,000
1,500
5,000
1,000
7,500
b) Unit costs:
Materials: $2,560/8,000 =
Conversion: $1,500/7,500 =
Total unit cost
$0.32
0.20
$0.52
c) 2. and 3.
From beginning work in process
inventory (2,000 units):
Cost from preceding period
Materials added
Conversion: 2,000 units * 0.75 * $0.20
Completed cost of opening inventory
From new production started in current
month (5,000 units): 5,000 units *
$0.52
Total cost of completed production
Work in process
inventory. Feb 28:
Material: 3,000 units *
100% * $0.32
Conversion: 3,000 units *
1/3 * $0.20
Total cost accounted for
$700
-0300
$1,000
2,600
$3,600
960
200
1,160
$4,760
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-06 Compute the equivalent units of production using the FIFO method.
Learning Objective: 06-08 Prepare a cost reconciliation report for accounting for the costs transferred out and the costs in work in process
inventory at the end of the period using the FIFO method.
Topic: 06-20 Equivalent Units—FIFO Method
Topic: 06-21 Comparison of Equivalent Units of Production under the Weighted-Average and FIFO Methods
Topic: 06-23 A Comparison of Costing Methods
133. Job-costing systems tend to produce more accurate product cost information compared to
process costing systems. On the other hand they also tend to be more costly systems than
processing costing systems.
Required:
Comment on the two observations.
There is more tracing of costs (such as direct materials and direct labour) to individual jobs in
job-order costing systems than in processing costing systems. In process costing systems,
costs are not traced to products/jobs; instead they are traced to activities or processes or
departments before their allocation to outputs. In essence, all costs are indirect in process
costing systems and have to be allocated. Usually, the allocation bases (including overhead
allocations in job-order costing systems) are not entirely accurate. They are, in many cases,
selected arbitrarily without establishing a cause-and-effect relationship.
Of course, more tracing generally costs more money even in this age of technology. This is
the reason why job-order costing systems tend to be more expensive than process costing
systems. Hybrid systems that are part-job and part-process are become popular because they
offer the benefits of both systems, that is, greater accuracy and cost-efficiency.
Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 06-01 Record the flow of materials; labour; and overhead through a process costing system.
Topic: 06-04 Processing Departments
Chapter 07
Activity-Based Costing: A Tool to Aid Decision Making
Multiple Choice Questions
1. Costs incurred at which of the following activity levels should NOT be allocated to
products for decision-making purposes?
A. Unit-level activities.
B. Batch-level activities.
C. Product-level activities.
D. Organization-sustaining activities.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
2. Testing a prototype of a new product is an example of an activity at which of the following
levels?
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity.
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
3. Setting up equipment is an example of an activity at which of the following levels?
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity.
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
4. Which of the following activity levels is an example of the clerical activity associated with
processing purchase orders to produce an order for a standard product?
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
5. Worker recreational facilities are examples of costs that would ordinarily be considered to
be incurred at which of the following activity levels?
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
6. Arranging for a shipment of a number of different products to a customer is an example of
an activity at which of the following levels?
A. Unit-level activity.
B. Batch-level activity.
C. Customer-level activity.
D. Organization-sustaining activity.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
7. Human resource management is an example of an activity at which of the following
levels?
A. Unit-level activity.
B. Product-level activity.
C. Batch-level activity.
D. Organization-sustaining activity.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
8. Which of the following would be classified as a product-level activity?
A. Machine setup for a batch of a standard product.
B. Cafeteria facilities available to and used by all employees.
C. Human resource management.
D. Advertising a product.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
9. Why may departmental overhead rates NOT correctly assign overhead costs?
A. Because of the use of direct labour hours in allocating overhead costs to products rather
than machine time or quantity of materials.
B. Because of the high correlation between direct labour hours and the incurrence of overhead
costs.
C. Because of the over-reliance on volume as a basis for allocating overhead costs where
products differ regarding the number of units produced, lot size, or complexity of production.
D. Because of the difficulties associated with identifying cost pools for the first stage of the
allocation process.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
10. Which of the following statements about overhead allocation based on volume alone is
correct?
A. It is a key aspect of the activity-based costing model.
B. It will systematically overcost high-volume products and undercost low-volume products.
C. It will systematically overcost low-volume products and undercost high-volume products.
D. It must be used for external financial reporting.
Blooms: Understand
CPA Competency: 3.1.3 Recommends improvements to reporting systems to meet information needs.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
11. What is a duration driver?
A. A simple count of the number of times an activity occurs.
B. An activity measure that is used for the life of the company.
C. A measure of the amount of time required to perform an activity.
D. An activity measure that is used for the life of an activity-based costing system.
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
12. What is a transactiondriver?
A. An event that causes a transactionto begin.
B. A measure of the amount of time required to perform an activity.
C. An event that causes a transactionto end.
D. A simple count of the number of times an activity occurs.
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
13. Which of the following is NOT a limitation of activity-based costing?
A. Maintaining an activity-based costing system is more costly than maintaining a traditional
direct labour-based costing system.
B. Changing from a traditional direct labour-based costing system to an activity-based costing
system changes product margins and other key performance indicators used by managers.
Such changes are often resisted by managers.
C. In practice, most managers insist on fully allocating all costs to products, customers, and
other costing objects in an activity-based costing system. This results in overstated costs.
D. More accurate product costs may result in increasing the selling prices of some products.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
CPA Competency: 3.3.4 Recommends cost management improvements across the entity.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
14. (Appendix 7A) Why would an activity-based costing system that is designed for internal
decision making NOT conform to generally accepted accounting principles?
A. Some manufacturing costs (i.e., the costs of idle capacity and organization-sustaining
costs) will not be assigned to products.
B. Some non-manufacturing costs are assigned to products.
C. First-stage allocations may be based on subjective interview data.
D. All of the above.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
CPA Competency: 3.3.4 Recommends cost management improvements across the entity.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-19 Activity-Based Costing and External Reports
15. Paul Company has two products: A and B. The company uses activity-based costing. The
estimated total cost and expected activity for each of the company's three activity cost pools
are as follows:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$22,000
16,240
14,600
Expected Activity
Product A
Product B
400
380
500
100
200
250
Total
500
580
750
The activity rate under the activity-based costing system for Activity 3 is closest to which of
the following?
A. $19.47.
B. $28.87.
C. $58.40.
D. $70.45.
$14,600/750 = $19.47.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-10 Step 3: Calculate Activity Rates
16. Selena Company has two products: A and B. The company uses activity-based costing.
The estimated total cost and expected activity for each of the company's three activity cost
pools are as follows:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$17,600
12,000
26,000
Expected Activity
Product A
Product B
800
500
800
300
200
400
Total
1,100
700
1,200
The activity rate under the activity-based costing system for Activity 3 is closest to which of
the following?
A. $18.53.
B. $21.67.
C. $46.33.
D. $65.00.
$26,000/1,200 = $21.67.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-10 Step 3: Calculate Activity Rates
17. Matt Company uses activity-based costing. The company has two products: A and B. The
annual production and sales of Product A is 8,000 units and of Product B is 6,000 units. There
are three activity cost pools, with estimated total cost and expected activity as follows:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$20,000
37,000
91,200
Expected Activity
Product A
Product B
100
800
800
400
200
3,000
Total
500
1,000
3,800
The cost per unit of Product A under activity-based costing is closest to which of the
following?
A. $2.40.
B. $3.90.
C. $6.60.
D. $10.59.
[(20,000/500) * 100 + (37,000/1,000) * 800 + (91,200/3,800) * 800]/8,000 = $6.60.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
18. Matt Company uses activity-based costing. The company has two products: A and B. The
annual production and sales of Product A is 5,000 units and of Product B is 7,000 units. There
are three activity cost pools, with estimated total cost and expected activity as follows:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$24,000
36,000
81,200
Expected Activity
Product A
Product B
200
700
800
400
200
3,000
Total
600
900
3,800
The cost per unit of Product B under activity-based costing is closest to which of the
following?
A. $15.60
B. $14.92
C. $16.45
D. $13.50
[(24,000/600)*400 + (36,000/900)* 200 + (81,200/3,800)* 3,000]/7,000 = $14.92.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Bridget Company uses activity-based costing. The company has two products: A and B. The
annual production and sales of Product A is 2,000 units and of Product B is 3,000 units. There
are three activity cost pools, with estimated total cost and expected activity as follows:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$9,000
12,000
48,000
Expected Activity
Product A
Product B
400
100
400
350
400
1,200
Total
750
500
1,600
19. The cost per unit of Product A under activity-based costing is closest to which of the
following?
A. $6.00.
B. $8.63.
C. $9.60.
D. $13.80.
[(9,000/750) * 400 + (12,000/500) * 100 + 48,000/1,600 * 400]/2,000 = $9.60.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
20. The cost per unit of Product B under activity-based costing is closest to which of the
following?
A. $24.10.
B. $16.60.
C. $35.38.
D. $31.90.
[(9,000/750) * 350 + (12,000/500) * 400 + (48,000/1,600) * 1200]/3,000 = $16.60.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Dideda Company uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity-based costing
system:
Costs:
Manufacturing overhead
Selling and administrative expenses
Total
$360,000
240,000
$600,000
Distribution of Resource Consumption:
Order Size
Manufacturing
overhead
Selling and
administrative
expenses
25%
60%
Activity Cost Pools
Customer
Other
Support
65%
10%
20%
20%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the first-stage allocation of costs to the
activity cost pools.
21. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A. $150,000.
B. $234,000.
C. $255,000.
D. $360,000.
360,000 *.25 + 240,000 *.6 = $234,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
22. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A. $120,000.
B. $255,000.
C. $282,000.
D. $390,000.
360,000 *.65 + 240,000 *.2 = $282,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
23. How much cost, in total, should NOT be allocated to orders and customer support in the
second stage of the allocation process if the activity-based costing system is used for internal
decision making?
A. $0.
B. $60,000.
C. $84,000.
D. $120,000.
360,000 *.1 + 240,000 *.2 = $84,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Diehl Company uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity-based costing
system:
Costs:
Manufacturing overhead
Selling and administrative expenses
Total
$480,000
100,000
$580,000
Distribution of Resource Consumption:
Order Size
Manufacturing
overhead
Selling and
administrative
expenses
5%
60%
Activity Cost Pools
Customer
Other
Support
85%
10%
20%
20%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the first-stage allocation of costs to the
activity cost pools.
24. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A. $29,000.
B. $84,000.
C. $188,000.
D. $348,000.
480,000 *.05 + 100,000 *.6 = $84,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
25. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A. $116,000.
B. $304,500.
C. $428,000.
D. $493,000.
480,000 *.85 + 100,000 *.2 = $428,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
26. How much cost, in total, should not be allocated to orders and customer support in the
second stage of the allocation process if the activity-based costing system is used for internal
decision making?
A. $0.
B. $58,000.
C. $68,000.
D. $116,000.
480,000 *.1 + 100,000 *.2 = $68,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Dierich Company uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity-based costing
system:
Costs:
Manufacturing overhead
Selling and administrative expenses
Total
$600,000
220,000
$820,000
Distribution of Resource Consumption:
Order Size
Manufacturing
overhead
Selling and
administrative
expenses
15%
60%
Activity Cost Pools
Customer
Other
Support
75%
10%
20%
20%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the first-stage allocation of costs to the
activity cost pools.
27. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A. $123,000.
B. $222,000.
C. $307,500.
D. $492,000.
600,000 *.15 + 220,000 *.6 = $222,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
28. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A. $164,000.
B. $389,500.
C. $494,000.
D. $615,000.
600,000 *.75 + 220,000 *.2 = $494,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
29. How much cost, in total, should not be allocated to orders and customer support in the
second stage of the allocation process if the activity-based costing system is used for internal
decision making?
A. $0.
B. $82,000.
C. $104,000.
D. $164,000.
600,000 *.1 + 220,000 *.2 = $104,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Davis Company uses an activity-based costing system in which there are three activity cost
pools. The company has provided the following data concerning its costs and its activitybased costing system:
Costs:
Manufacturing overhead
Selling and administrative expenses
Total
$400,000
200,000
$600,000
Distribution of Resource Consumption:
Order Size
Manufacturing
overhead
Selling and
administrative
expenses
35%
50%
Activity Cost Pools
Customer
Other
Support
55%
10%
30%
20%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the first-stage allocation of the costs to the
activity cost pools.
30. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A. $210,000.
B. $240,000.
C. $255,000.
D. $300,000.
400,000 *.35 + 200,000 *.5 = $240,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
31. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A. $180,000.
B. $255,000.
C. $280,000.
D. $330,000.
400,000 *.55 + 200,000 *.3 = $280,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
32. How much cost, in total should not be allocated to orders and customer support in the
second stage of the allocation process if the activity-based costing system is used for internal
decision making?
A. $0.
B. $60,000.
C. $80,000.
D. $120,000.
400,000 *.1 = 200,000 *.2 = $80,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Furniture Company uses an activity-based costing system in which there are three activity
cost pools. The company has provided the following data concerning its costs and its activitybased costing system:
Costs:
Manufacturing overhead
Selling and administrative expenses
Total
$600,000
300,000
$900,000
Distribution of Resource Consumption:
Order Size
Manufacturing
overhead
Selling and
administrative
expenses
45%
40%
Activity Cost Pools
Customer
Other
Support
50%
5%
45%
15%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the first-stage allocation of the costs to the
activity cost pools.
33. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A. $210,000.
B. $240,000.
C. $390,000
D. $300,000.
600,000 *.45 + 300,000 *.4 = $390,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
34. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A. $280,000.
B. $355,000.
C. $380,000.
D. $435,000.
600,000 *.5 + 300,000 *.45 = $435,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
35. How much cost, in total should not be allocated to orders and customer support in the
second stage of the allocation process if the activity-based costing system is used for internal
decision making?
A. $0.
B. $75,000.
C. $80,000.
D. $120,000.
600,000 *.0.05 + 300,000 *.15 = $75,000.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Escau Company is a wholesale distributor that uses activity-based costing for all of its
overhead costs. The company has provided the following data concerning its annual overhead
costs and its activity-based costing system:
Overhead costs:
Wages and salaries
Other expenses
Total
$380,000
100,000
$480,000
Distribution of Resource Consumption:
Wages and
salaries
Other expenses
Filling
Orders
30%
35%
Activity Cost Pools
Customer
Other
Support
60%
10%
45%
20%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The activity measures for the activity cost pools for the year are as follows:
Activity Cost Pool
Filling orders
Customer support
Activity
3,000 orders
20 customers
36. What would be the total overhead cost per order according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Filling Orders activity cost pool?
A. $48.00.
B. $49.67.
C. $52.00.
D. $56.00.
(380,000 *.3 + 100,000 *.35)/3,000 = $49.67.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
37. What would be the total overhead cost per customer according to the activity-based
costing system, rounded to the nearest whole dollar? In other words, what would be the
overall activity rate for the Customer Support activity cost pool?
A. $10,800.
B. $12,600.
C. $13,650.
D. $14,400.
(380,000 *.6 + 100,000 *.45)/20 = $13,650.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
38. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who placed eight orders in a year?
A. $7,392.
B. $9,548.
C. $11,704.
D. $14,784.
Cost assigned = $380,000 *.3 = 114,000 and 380,000 *.6 = $228,000
($114,000/3,000) * 8 + ($228,000/20) * 1 = $11,704.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Escalona Company is a wholesale distributor that uses activity-based costing for all of its
overhead costs. The company has provided the following data concerning its annual overhead
costs and its activity-based costing system:
Overhead costs:
Wages and salaries
Other expenses
Total
$580,000
200,000
$780,000
Distribution of Resource Consumption:
Wages and
salaries
Other expenses
Filling
Orders
40%
35%
Activity Cost Pools
Customer
Other
Support
50%
10%
45%
20%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Filling orders
Customer support
Activity
1,000 orders
30 customers
39. What would be the total overhead cost per order according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Filling Orders activity cost pool?
A. $273.00.
B. $292.50.
C. $302.00.
D. $312.00
(580,000 *.4 + 200,000 *.35)/1,000 = $302.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
40. What would be the total overhead cost per customer according to the activity-based
costing system, rounded to the nearest whole dollar? In other words, what would be the
overall activity rate for the Customer Support activity cost pool?
A. $11,700.
B. $12,350.
C. $12,667.
D. $13,000.
(580,000 *.5 + 200,000 *.45)/30 = $12,667.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
41. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who placed four orders in a year? Do not round intermediate calculations.
A. $7,124.
B. $8,859.
C. $10,595.
D. $14,248.
Cost assigned = $580,000 *.4 = 232,000 and 580,000 *.5 = $290,000: ($232,000/1,000) * 4 +
($290,000/30) * 1 = $10,595.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Escoto Company is a wholesale distributor that uses activity-based costing for all of its
overhead costs. The company has provided the following data concerning its annual overhead
costs and its activity-based costing system:
Overhead costs:
Wages and salaries
Other expenses
Total
$540,000
200,000
$740,000
Distribution of Resource Consumption:
Wages and
salaries
Other expenses
Filling
Orders
10%
20%
Activity Cost Pools
Customer
Other
Support
80%
10%
60%
20%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Filling orders
Customer support
Activity
4,000 orders
40 customers
42. What would be the total overhead cost per order according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Filling Orders activity cost pool?
A. $18.50.
B. $23.50.
C. $27.75.
D. $37.00.
(540,000 *.1 + 200,000 *.2)/4,000 = $23.50.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
43. What would be the total overhead cost per customer according to the activity-based
costing system, rounded to the nearest whole dollar? In other words, what would be the
overall activity rate for the Customer Support activity cost pool?
A. $11,100.
B. $12,950.
C. $13,800.
D. $14,800.
(540,000 *.8 + 200,000 *.6)/40 = $13,800.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
44. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who placed eight orders in a year?
A. $7,474.
B. $9,191.
C. $10,908.
D. $14,948.
54,000/4 * 8 + 432,000/40 * 1 = $10,908. Note the numerator in each fraction represents the
cost assigned to each pool for wages and salaries.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Acton Company has two products: A and B. The annual production and sales of Product A is
800 units and of Product B is 500 units. The company has traditionally used direct labour
hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3
direct labour hours per unit, and Product B requires 0.2 direct labour hours per unit. The total
estimated overhead for next period is $92,023.
The company is considering switching to an activity-based costing system for the purpose of
computing unit product costs for external reports. The new activity-based costing system
would have three overhead activity cost pools-Activity 1, Activity 2, and General Factorywith estimated overhead costs and expected activity as follows:
Activity Cost
Pool
Activity 1
Activity 2
General
Factory
Total
Estimated
Overhead
Cost
$14,487
64,800
12,736
Expected Activity
Product A
Product B
500
2,500
240
600
500
100
Total
1,100
3,000
340
$92,023
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour
hours.)
45. The predetermined overhead rate under the traditional costing system is closest to which
of the following?
A. $13.17.
B. $21.60.
C. $37.46.
D. $270.66.
$92,023/(800 *.3hrs + 500 *.2hrs) = $270.66.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
46. The overhead cost per unit of Product B under the traditional costing system is closest to
which of the following?
A. $2.63.
B. $4.32.
C. $7.49.
D. $54.13.
$270.66 *.2 hrs = $54.13.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
47. The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based
costing system is closest to which of the following?
A. $13.17.
B. $24.15.
C. $28.97.
D. $83.66.
$14,487/1,100 = $13.17.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-10 Step 3: Calculate Activity Rates
48. The overhead cost per unit of Product A under the activity-based costing system is closest
to which of the following?
A. $11.24.
B. $70.79.
C. $81.20.
D. $86.97.
[(14,487/1,100) * 500 + (64,800/3,000) * 2,500 + (12,736/340) * 240]/800 units = $86.97.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Addy Company has two products: A and B. The annual production and sales of Product A is
1,700 units and of Product B is 1,100 units. The company has traditionally used direct labour
hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3
direct labour hours per unit, and Product B requires 0.6 direct labour hours per unit. The total
estimated overhead for next period is $98,785.
The company is considering switching to an activity-based costing system for the purpose of
computing unit product costs for externalreports. The new activity-based costing system
would have three factory overhead activity cost pools-Activity 1, Activity 2, and General
Factory-with estimated overhead costs and expected activity as follows:
Activity Cost
Pool
Activity 1
Activity 2
General
Factory
Total
Estimated
Overhead
Cost
$30,528
17,385
50,872
Expected Activity
Product A
Product B
1,000
1,700
510
600
200
660
Total
1,600
1,900
1,170
$98,785
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour
hours.)
49. The predetermined overhead rate under the traditional costing system is closest to which
of the following?
A. $9.15.
B. $19.08.
C. $43.48.
D. $84.43.
$98,785/(1,700 *.3hrs + 1,100 *.6) = $84.43.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
50. The overhead cost per unit of Product B under the traditional costing system is closest to
which of the following?
A. $5.49.
B. $11.45.
C. $26.09.
D. $50.66.
$84.43 *.6 hrs = $50.66.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
51. (Appendix 7A) The predetermined overhead rate (i.e., activity rate) for Activity 2 under
the activity-based costing system is closest to which of the following?
A. $9.15.
B. $10.23.
C. $51.99.
D. $86.93.
$17,385/1,900 = $9.15.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
52. The overhead cost per unit of Product B under the activity-based costing system is closest
to which of the following?
A. $26.09.
B. $35.28.
C. $38.16.
D. $50.66.
(30,528/1,600 * 600 + 17,385/1,900 * 200 + 50,872/1170 * 660)/1,100 units = $38.16.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Abel Company uses activity-based costing. The company has two products: A and B. The
annual production and sales of Product A is 200 units and of Product B is 400 units. There are
three activity cost pools, with estimated costs and expected activity as follows:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$16,660
18,450
9,731
Expected Activity
Product A
Product B
600
1,100
60
100
700
160
Total
700
1,800
220
53. The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based
costing system is closest to which of the following?
A. $10.25.
B. $16.77.
C. $24.91.
D. $26.36.
$18,450/1,800 = $10.25.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
54. The cost per unit of Product B is closest to which of the following?
A. $17.69.
B. $41.58.
C. $74.73.
D. $81.53.
[(16,660/700) * 100 + (18,450/1,800) * 700 + (9,731/220) * 160]/400 = $41.58.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
55. The cost per unit of Product A is closest to which of the following?
A. $27.91.
B. $56.38.
C. $141.04.
D. $70.52.
[(16,660/700) * 600 + (18,450/1,800) * 1100 + (9,731/220) * 60]/200 = $141.04.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Accola Company uses activity-based costing. The company has two products: A and B. The
annual production and sales of Product A is 1,100 units and of Product B is 700 units. The
direct production costs (material and labour) for Product A are $110,600 and for B is $70,000.
There are three activity cost pools for overhead, with estimated costs and expected activity as
follows:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$18,270
35,891
48,796
Expected Activity
Product A
Product B
600
1,600
440
500
300
420
56. The activity rate for Activity 3 is closest to which of the following?
A. $26.67.
B. $56.74.
C. $116.18.
D. $119.72.
$48,976/860 = $56.74.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Total
1,100
1,900
860
57. The overhead cost per unit of Product A is closest to which of the following?
A. $22.70.
B. $47.89.
C. $57.20.
D. $59.23.
[(18,270/1,100) * 600 + (35,891/1,900) * 1,600 +(48,796/860) * 440]/100 = $59.23.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
58. The total annual production cost for Product B is closest to which of the following?
A. $37,816.
B. $107,802.
C. $65,231.
D. $70,000.
[$70,000 + (18,270/1,100) * 500 + (35,891/1,900) * 300 + (48,796/860) * 420] = $107,802.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Arthur Company has two products: S and D. The company uses activity-based costing and
has prepared the following analysis, showing the estimated total overhead cost and expected
activity for each of its three activity cost pools:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$20,000
14,600
90,000
Expected Activity
Product S
Product D
100
500
300
Total
400
250
2,700
500
750
3,000
The annual production and sales of Product S is 4,547 units. The annual production and sales
of Product D is 7,913. Direct costs/unit for each product are as follows:
Direct Material
Direct Labour
Product S
$1.50
$2.00
Product D
$1.20
$2.50
59. The activity rate under the activity-based costing system for Activity 3 is closest to which
of the following?
A. $29.32.
B. $30.00.
C. $33.33.
D. $41.53.
$90,000/3,000 = $30.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
60. The overhead cost per unit of Product S under activity-based costing is closest to which of
the following? Do not round intermediate calculations.
A. $1.83.
B. $1.98.
C. $5.00.
D. $10.00.
[(20,000/500) * 100 + (14,600/750) * 500 + (90,000/3,000) * 300]/4,547 = $5.0.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
61. The total production cost per unit of Product D under activity-based costing is closest to
which of the following?
A. $16.15.
B. $12.87.
C. $16.37.
D. $16.57.
$1.20 + $2.50 + (20,000/500 * 400 + 14,600/750 * 250 + 90,000/3,000 * 2,700)/7,913 =
$16.57.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
Monson Company has two products: G and P. The company uses activity-based costing and
has prepared the following analysis, showing the estimated total overhead cost and expected
activity for each of its three activity cost pools:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$30,000
24,000
80,000
Expected Activity
Product G
Product P
200
600
400
400
900
3,600
Total
600
1,500
4,000
The annual production and sales of Product G is 10,640 units. The annual production and
sales of Product P is 26,600.
62. The activity rate under the activity-based costing system for Activity 2 is closest to which
of the following?
A. $16.00.
B. $21.97.
C. $26.67.
D. $89.33.
24,000/1,500 = $16.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
63. The overhead cost per unit of Product P under activity-based costing is closest to which of
the following?
A. $4.00.
B. $6.88.
C. $10.00.
D. $30.16.
[(30,000/600) * 400 + (24,000/1,500) * 900 + (80,000/4,000) * 3,600]/26,600 = $4.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
64. The overhead cost per unit of Product G under activity-based costing is closest to which of
the following?
A. $4.00.
B. $28.66.
C. $2.59.
D. $10.04.
[(30,000/600) * 200 + (24,000/1,500) * 600 + (80,000/4,000) * 400]/10,640 = $2.59.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Sarah Company has two products: T and V. The company uses activity-based costing and has
prepared the following analysis, showing the estimated total overhead cost and expected
activity for each of its three activity cost pools:
Activity Cost
Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$30,000
39,000
80,000
Expected Activity
Product T
Product V
200
400
400
400
900
3,600
Total
600
1,300
4,000
The annual production and sales of Product T is 10,640 units. The annual production and sales
of Product V is 26,600.
65. The activity rate under the activity-based costing system for Activity 2 is closest to which
of the following?
A. $16.00.
B. $21.97.
C. $26.67.
D. $30.00.
39,000/1,300 = $30.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
66. The overhead cost per unit of Product V under activity-based costing is closest to which of
the following?
A. $4.50.
B. $6.88.
C. $10.00.
D. $30.16.
[(30,000/600) * 400 + (39,000/1,300) * 900 + (80,000/4,000) * 3,600]/26,600 = $4.5.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
67. The overhead cost per unit of Product T under activity-based costing is closest to which of
the following?
A. $4.00.
B. $28.66.
C. $2.81
D. $10.04.
[(30,000/600) * 200 + (39,000/1,300) * 400 + (80,000/4,000) * 400]/10,640 = $2.81.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Forse Florist specializes in large floral bouquets for hotels and other commercial spaces. The
company has provided the following data concerning its annual overhead costs and its
activity-based costing system:
Overhead costs:
Wages and salaries
Other expenses
Total
$80,000
40,000
$120,000
Distribution of Resource Consumption:
Wages and salaries
Other expenses
Activity Cost Pools
Making Bouquets
Delivery
60%
30%
45%
25%
Other
10%
30%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Making bouquets
Delivery
Activity
60,000 bouquets
5,000 deliveries
68. What would be the total overhead cost per bouquet according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Making Bouquets activity cost pool?
A. $0.90.
B. $1.05.
C. $1.10.
D. $1.20.
(80,000 *.6 + 40,000 *.5)/60,000 = $1.10.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
69. What would be the total overhead cost per delivery according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Deliveries activity cost pool?
A. $6.00
B. $6.60
C. $6.80
D. $7.20
(80,000 *.3 + 40,000 *.25)/5,000 = $6.80.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Foster Florist specializes in large floral bouquets for hotels and other commercial spaces. The
company has provided the following data concerning its annual overhead costs and its
activity-based costing system:
Overhead costs:
Wages and salaries
Other expenses
Total
$70,000
50,000
$120,000
Distribution of Resource Consumption:
Wages and salaries
Other expenses
Activity Cost Pools
Making Bouquets
Delivery
70%
20%
45%
25%
Other
10%
30%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Making bouquets
Delivery
Activity
40,000 bouquets
1,000 delive
70. What would be the total overhead cost per bouquet according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Making Bouquets activity cost pool?
A. $1.35.
B. $1.73.
C. $1.79.
D. $2.10.
(70,000 *.7 + 50,000 *.45)/40,000 = $1.79.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
71. What would be the total overhead cost per delivery according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Deliveries activity cost pool?
A. $24.00.
B. $26.50.
C. $27.00.
D. $30.00.
(70,000 *.2 + 50,000 *.25)/1,000 = $26.50.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Foss Florist specializes in large floral bouquets for hotels and other commercial spaces. The
company has provided the following data concerning its annual overhead costs and its
activity-based costing system:
Overhead costs:
Wages and salaries
Other expenses
Total
$70,000
40,000
$110,000
Distribution of Resource Consumption:
Wages and
salaries
Other expenses
Making
Bouquets
55%
45%
Activity Cost Pools
Delivery
Other
Total
35%
10%
100%
25%
30%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Making bouquets
Delivery
Activity
20,000 bouquets
7,000 deliveries
72. What would be the total overhead cost per bouquet according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Making Bouquets activity cost pool?
A. $2.48.
B. $2.75.
C. $2.83.
D. $3.03.
(70,000 *.55 + 40,000 *.45)/20,000 = $2.83.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
73. What would be the total overhead cost per delivery according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall activity
rate for the Deliveries activity cost pool?
A. $3.93.
B. $4.71.
C. $4.93.
D. $5.50.
(70,000 *.35 + 40,000 *.25)/7,000 = $4.93.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Grogam Catering uses activity-based costing for its overhead costs. The company has
provided the following data concerning the activity rates in its activity-based costing system:
Wages
Supplies
Other expenses
Activity Cost Pools
Preparing Meals Arranging Functions
$1.15
$110.00
$0.35
$380.00
$0.25
$70.00
The number of meals served is the measure of activity for the Preparing Meals activity cost
pool. The number of functions catered is used as the activity measure for the Arranging
Functions activity cost pool.
Management would like to know whether the company made any money on a recent function
at which 100 meals were served. The company catered the function for a fixed price of $21.00
per meal. The cost of the raw ingredients for the meals was $8.25 per meal. This cost is in
addition to the costs of wages, supplies, and other expenses detailed above.
74. According to the activity-based costing system, what was the total cost (including the
costs of raw ingredients) of the function mentioned above, rounded to the nearest whole
dollar?
A. $910.
B. $1,060.
C. $1,560.
D. $1,760.
100 * $8.25 + 100 * (1.15 + 0.35 + 0.25) + 1 * (110 + 380 + 70) = $1,560.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
75. According to the activity-based costing system, what is the total profit margin for this
function?
A. $1,365.
B. $540.
C. $1,040.
D. $1,190.
$21/meal * 100 - 1,560 (Total Cost) = $540.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Groce Catering uses activity-based costing for its overhead costs. The company has provided
the following data concerning the activity rates in its activity-based costing system:
Wages
Supplies
Other expenses
Activity Cost Pools
Preparing Meals Arranging Functions
$0.70
$145.00
$0.45
$230.00
$0.40
$100.00
The number of meals served is the measure of activity for the Preparing Meals activity cost
pool. The number of functions catered is used as the activity measure for the Arranging
Functions activity cost pool.
Management would like to know whether the company made any money on a recent function
at which 150 meals were served. The company catered the function for a fixed price of $14.00
per meal. The cost of the raw ingredients for the meals was $8.75 per meal. This cost is in
addition to the costs of wages, supplies, and other expenses detailed above.
76. According to the activity-based costing system, what was the total cost (including the
costs of raw ingredients) of the function mentioned above, rounded to the nearest whole
dollar?
A. $1,370.
B. $1,520.
C. $2,020.
D. $2,220.
150 * $8.75 + 150 * (0.70 + 0.45 + 0.40) + 1 * (145 + 230 + 100) = $2,020.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
77. According to the activity-based costing system, what is the total profit margin for this
function?
A. ($70).
B. ($20).
C. $80.
D. $230.
150 * $14 - 2,020 (total cost) = $80.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Grodt Catering uses activity-based costing for its overhead costs. The company has provided
the following data concerning the activity rates in its activity-based costing system:
Wages
Supplies
Other expenses
Activity Cost Pools
Preparing Meals Arranging Functions
$0.85
$110.00
$0.50
$310.00
$0.30
$120.00
The number of meals served is the measure of activity for the Preparing Meals activity cost
pool. The number of functions catered is used as the activity measure for the Arranging
Functions activity cost pool.
Management would like to know whether the company made any money on a recent function
at which 60 meals were served. The company catered the function for a fixed price of $19.00
per meal. The cost of the raw ingredients for the meals was $8.60 per meal. This cost is in
addition to the costs of wages, supplies, and other expenses detailed above.
78. According to the activity-based costing system, what was the total cost (including the
costs of raw ingredients) of the function mentioned above, rounded to the nearest whole
dollar?
A. $505.
B. $655.
C. $1,155.
D. $1,355.
60 * $8.60 + 60 * (0.85 + 0.50 + 0.30) + 1 * (110 + 310 + 120) = $1,155.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
79. According to the activity-based costing system, what is the total profit margin for this
function?
A. ($165).
B. ($115).
C. ($15).
D. $135.
60 * $19 - 1,155 = ($15).
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Addison Company has two products: A and B. Annual production and sales are 800 units of
Product A and 700 units of Product B. The company has traditionally used direct labour-hours
as the basis for applying all manufacturing overhead to products. Product A requires 0.2 direct
labour hours per unit and Product B requires 0.6 direct labour hours per unit. The total
estimated overhead for next period is $71,286.
The company is considering switching to an activity-based costing system for the purpose of
computing unit product costs for externalreports. The new activity-based costing system
would have three factory overhead activity cost pools-Activity 1, Activity 2, and General
Factory-with estimated overhead costs and expected activity as follows:
Activity Cost
Pool
Activity 1
Activity 2
General
Factory
Total
Estimated
Overhead
Cost
$20,272
29,380
21,634
Expected Activity
Product A
Product B
300
800
160
500
500
420
Total
800
1,300
580
$71,286
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour
hours.)
80. (Appendix 7A) The predetermined overhead rate under the traditional costing system is
closest to:
A. $89.11
B. $101.84
C. $47.52
D. $122.91
$71,286/(800*.2 + 700*.6) = $122.91.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
81. (Appendix 7A) The overhead cost per unit of Product B under the traditional costing
system is closest to:
A. $22.38
B. $13.56
C. $73.74
D. $15.20
$122.91 *.6hrs = $73.74.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
82. (Appendix 7A) The predetermined overhead rate (i.e., activity rate) for Activity 2 under
the activity-based costing system is closest to:
A. $22.60
B. $54.84
C. $58.76
D. $36.73
$29,380/1,300 = $22.60.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
83. (Appendix 7A) The overhead cost per unit of Product B under the activity-based costing
system is closest to: (Do not round intermediate calculations)
A. $73.74
B. $56.62
C. $22.38
D. $47.52
[(20,272/800) * 500 + (29,380/1,300) * 500 + (21,634/580) * 420]/700 = $56.62.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
Koszyk Manufacturing Corporation has a traditional costing system in which it applies
manufacturing overhead to its products using a predetermined overhead rate based on direct
labour-hours (DLHs). The company has two products, P85G and C43S, about which it has
provided the following data:
Direct materials per unit
Direct labour per unit
Direct labour hours per unit
Annual production
P85G
$36.50
$20.80
0.80
35,000
C43S
$63.10
$31.20
1.20
10,000
The company's estimated total manufacturing overhead for the year is $2,264,000 and the
company's estimated total direct labour-hours for the year is 40,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for externalreports. Data for this proposed activity-based costing system appear
below:
Activities and Activity Measures
Supporting direct labour (DLHs)
Setting up machines (setups)
Parts administration (part types)
Total
DLHs
Setups
Part types
Estimated Overhead Cost
$1,160,000
288,000
816,000
$2,264,000
Expected Activity
P85G
C43S
28,000
12,000
1,480
920
1,880
840
Total
40,000
2,400
2,720
84. (Appendix 7A) The total cost of a unit of product P85G under the company's traditional
costing system is closest to:
A. $146.97
B. $102.58
C. $101.69
D. $80.50
OH rate = $2,264,000/40,000 = $56.60/DLH. OH cost = 56.60 *.8hrs = $45.28. Add to this
DM of $36.50 and DL of $20.80 = $102.58.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Hard
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
85. (Appendix 7A) The total cost of a unit of product C43S under the activity-based costing
system is closest to:
A. $165.34
B. $233.26
C. $162.22
D. $105.34
OH/unit = [(1,160,000/40,000) * 12,000 + (288,000/2,400) * 920 + (816,000/2,720) * 840]/
10,000 = $71.04. Add 63.10 DM + 31.20 DL = $165.34.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
Binegar Manufacturing Corporation has a traditional costing system in which it applies
manufacturing overhead to its products using a predetermined overhead rate based on direct
labour-hours (DLHs). The company has two products, R58G and R09O, about which it has
provided the following data:
R58G
$15.90
$1.30
0.10
30,000
Direct materials per unit
Direct labour per unit
Direct labour hours per unit
Annual production
R09O
$52.40
$27.30
2.10
10,000
The company's estimated total manufacturing overhead for the year is $1,617,600 and the
company's estimated total direct labour-hours for the year is 24,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for externalreports. Data for this proposed activity-based costing system appear
below:
Activities and Activity Measures
Assembling products (DLHs)
Preparing batches (batches)
Product support (product variations)
Total
DLHs
Batches
Production
variations
R58G
3,000
528
1,056
Estimated Overhead Cost
$696,000
252,000
669,600
$1,617,600
Expected Activity
R09O
21,000
1,152
1,176
Total
24,000
1,680
2,232
86. (Appendix 7A) The manufacturing overhead that would be applied to a unit of product
R58G under the company's traditional costing system is closest to:
A. $6.74
B. $16.10
C. $22.84
D. $2.90
$1,617,600/24,000hrs *.10hrs/unit = $6.74.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
87. (Appendix 7A) The manufacturing overhead that would be applied to a unit of product
R09O under the activity-based costing system is closest to:
A. $113.46
B. $255.00
C. $141.54
D. $17.28
[(696,000/24,000) * 21,000 + (252,000/1,680) * 1,152 + (669,600/2,232) * 1,176]/10,000 =
$113.46.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
Kebort Manufacturing Corporation has a traditional costing system in which it applies
manufacturing overhead to its products using a predetermined overhead rate based on direct
labour-hours (DLHs). The company has two products, U86Y and M91F, about which it has
provided the following data:
Direct materials per unit
Direct labour per unit
Direct labour hours per unit
Annual production
U86Y
$19.80
$18.20
0.70
40,000
M91F
$45.80
$49.40
1.90
10,000
The company's estimated total manufacturing overhead for the year is $2,541,760 and the
company's estimated total direct labour-hours for the year is 47,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for externalreports. Data for this proposed activity-based costing system appear
below:
Activities and Activity Measures
Direct labour support (DLHs)
Setting up machines (setups)
Parts administration (part types)
Total
DLHs
Setups
Part types
Estimated Overhead Cost
$1,175,000
407,960
958,800
$2,541,760
Expected Activity
U86Y
M91F
28,000
19,000
2,256
658
1,034
2,162
Total
47,000
2,914
3,196
88. (Appendix 7A) The unit product cost of product U86Y under the company's traditional
costing system is closest to:
A. $71.15
B. $55.50
C. $75.86
D. $38.00
$2,541,760/47,000 *.7 + 19.80 + 18.20 = $75.86.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
89. (Appendix 7A) The unit product cost of product M91F under the activity-based costing
system is closest to:
A. $95.20
B. $121.57
C. $216.77
D. $197.95
(1,175,000/47,000 * 19,000 + 407,960/2,914 * 658 + 958,800/3,196 * 2162)/10,000 + $19.80
+ $18.20 = $216.77.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
90. Which of the following types of costs present the greatest difficulty in efforts to trace them
to products and services?
A. Unit-level costs
B. Batch-level costs
C. Product/service-level costs
D. Organization-sustaining costs
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-03 Non-manufacturing Costs and Activity-Based Costing
Topic: 07-04 Manufacturing Costs Excluded under Activity-Based Costing
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
91. Which of the following is a distinctive feature of an ABC system in comparison to a
departmental overhead application system?
A. It is a two-stage allocation system.
B. It uses transactionaldrivers.
C. It must include at least one non unit-level driver.
D. It uses duration drivers.
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
True / False Questions
92. Most organizations that use ABC have two costing systems-the official costing system,
which is used to prepare external financial reports, and the ABC system, which is used for
internal decision making and for managing activities.
TRUE
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-01 Measuring the Cost of Product Complexity
93. When combining activities in an activity-based costing system, activities should be
grouped together at the same level. For example, batch-level activities should not be
combined with unit-level activities.
TRUE
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
94. Unit-level activities arise as a result of the total volume of production and are performed
each time a unit is produced.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
95. Unit-level production activities are performed each time a unit is made.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
96. Organization-sustaining activities are carried out regardless of how many units are made,
how many batches are run, or how many different products are made.
TRUE
Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
97. Activity-based costing uses a number of activity cost pools, each of which is allocated to
products on the basis of direct labour hours.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
98. The first-stage allocation in activity-based costing is the process by which overhead costs
are assigned to products before they are assigned to customers.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
99. Activity rates in activity-based costing are computed by dividing costs from the first-stage
allocations by the activity measure for each activity cost pool.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
100. In the second-stage allocation in activity-based costing, activity rates are used to apply
costs to products, customers, and other cost objects.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
101. In traditional costing systems, all manufacturing costs are assigned to products-even
manufacturing costs that are not caused by the products.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-04 Manufacturing Costs Excluded under Activity-Based Costing
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
102. When there are batch-level or product-level costs, in comparison to a traditional cost
system, an activity-based costing system ordinarily will shift costs from high-volume to lowvolume products.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
103. An activity-based costing system is generally easier to set up and run than a traditional
cost system.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-01 Measuring the Cost of Product Complexity
Topic: 07-02 The Treatment of Costs Under the Activity—Based Costing Model
Topic: 07-11 Second-Stage Allocation Overhead Costs
104. Activity-based costing is a costing method that is designed to provide managers with cost
information for strategic and other decisions that potentially affect only variable costs.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-03 Non-manufacturing Costs and Activity-Based Costing
Topic: 07-04 Manufacturing Costs Excluded under Activity-Based Costing
105. In activity-based costing, as in traditional costing systems, non-manufacturing costs are
not assigned to products.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-03 Non-manufacturing Costs and Activity-Based Costing
Topic: 07-04 Manufacturing Costs Excluded under Activity-Based Costing
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
106. In activity-based costing, a plant-wide overhead rate is used to apply overhead to
products.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
107. Changing a cost accounting system is likely to meet with little resistance in an
organization since it is a technical matter of little interest to individuals outside of the
accounting department.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-03 Non-manufacturing Costs and Activity-Based Costing
Topic: 07-04 Manufacturing Costs Excluded under Activity-Based Costing
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
108. Managing and sustaining product diversity requires many more overhead resources, such
as production schedulers and product design engineers, than managing and sustaining a single
product. The costs of these resources can be accurately allocated to products on the basis of
direct labour hours.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-06 Activity Rates Based on Capacity, Not Budget
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
109. Transaction drivers usually take more effort to record than duration drivers.
FALSE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
110. In general, duration drivers are more accurate measures of the consumption of resources
than transaction drivers.
TRUE
Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Short Answer Questions
111. Ingersol Draperies makes custom draperies for homes and businesses. The company uses
an activity-based costing system for its overhead costs. The company has provided the
following data concerning its annual overhead costs and its activity cost pools:
Overhead Costs:
Production overhead
Office expense
Total
$120,000
120,000
$240,000
Distribution of Resource Consumption:
Making
Drapes
35%
Production
overhead
Office expenses
Activity Cost Pools
Job Support
Other
5%
Total
45%
20%
100%
65%
30%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Making drapes
Job support
Other
Annual Activity
2,000 metres
160 jobs
Not applicable
Required:
a) Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the
table below:
Making
Drapes
Production
overhead
Office
expense
Total
Job Support
Other
Total
b) Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes and Job
Support activity cost pools by filling in the table below:
Making Drapes
Job Support
Production overhead
Office expense
Total
c) Compute the total overhead assigned to a job that involves making 71 metres of drapes.
a) First-stage allocation
Production
overhead
Office expenses
Total
Activity
Making
Drapes
$42,000
Job Support
Other
Total
$54,000
$24,000
$120,000
6,000
$48,000
2,000 metres
78,000
$132,000
160 jobs
36,000
$60,000
120,000
$240,000
b) Activity rates (costs divided by activity)
Making Drapes
$21.00
3.00
$24.00
Production overhead
Office expense
Total
Job Support
$337.50
487.50
$825.00
c) Overhead cost of the job.
Activity
Production overhead
Office expense
Total
Making Drapes
71
$1,491.00
213.00
$1,704.00
Job Support
1
$337.50
487.50
$825.00
Total
$1,828.50
700.50
$2,529.00
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-08 Step 1: Identify and Define Activities, Activity Cost Pools, and Activity Measures
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
112. Hasty Hardwood Floors installs oak and other hardwood floors in homes and businesses.
The company uses an activity-based costing system for its overhead costs. The company has
provided the following data concerning its annual overhead costs and its activity-based
costing system:
Overhead Costs:
Production overhead
Office expense
Total
$190,000
140,000
$330,000
Distribution of Resource Consumption:
Production
overhead
Office expenses
Installing
Floors
40%
10%
Activity Cost Pools
Job Support
Other
Total
40%
20%
100%
60%
30%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Installing floors
Job support
Other
Annual Activity
200 squares
160 jobs
Not applicable
A "square" is a measure of area that is roughly equivalent to 1,000 square metres.
Required:
a) Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the
table below:
Installing
Floors
Job Support
Other
Total
Production
overhead
Office
expense
Total
b) Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors and Job
Support activity cost pools by filling in the table below:
Installing Floors
Job Support
Production overhead
Office expense
Total
c) Compute the overhead cost, according to the activity-based costing system, of a job that
involves installing 3.4 squares.
a) First-stage allocation
Production
overhead
Office expenses
Total
Activity
Installing
Floors
$76,000
Job Support
Other
Total
$76,000
$38,000
$190,000
14,000
$90,000
200 squares
84,000
$160,000
160 jobs
42,000
$80,000
140,000
$330,000
b) Activity rates (costs divided by activity)
Installing Floors
$380
70
$450
Production overhead
Office expense
Total
Job Support
$475
525
$1,000
c) Overhead cost of the job.
Activity
Production
overhead
Office expense
Total
Installing Floors
3.4
$1,292
Job Support
1
$475
Total
$1,767
238
$1,530
525
$1,000
763
$2,530
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
113. Goel Company, a wholesale distributor, uses activity-based costing for its overhead costs.
The company has provided the following data concerning its annual overhead costs and its
activity-based costing system:
Overhead Costs:
Wages and salaries
Non-wage expenses
Total
$460,000
120,000
$580,000
Distribution of Resource Consumption:
Wages and
salaries
Non-wage
expenses
Filling
Orders
15%
10%
Activity Cost Pools
Product
Other
Support
75%
10%
70%
20%
Total
100%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Filling orders
Product support
Other
Annual Activity
4,000 orders
30 products
Not applicable
Required:
Compute the activity rates (i.e., cost per unit of activity) for the Filling Orders and Product
Support activity cost pools by filling in the table below:
Filling Orders
Product Support
Wages and salaries
Non-wage expenses
Total
First-stage allocation
Wages and
salaries
Non-wage
expenses
Total
Activity
Filling
Orders
$69,000
Product
Support
$345,000
Other
Total
$46,000
$460,000
12,000
84,000
24,000
120,000
$81,000
4,000 orders
$429,000
30 products
$70,000
$580,000
Activity rates (costs divided by activity):
Wages and salaries
Non-wage expenses
Total
Filling Orders
$17.25
3.00
$20.25
Product Support
$11,500
2,800
$14,300
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
114. Fife & Jones PLC, a consulting firm, uses an activity-based costing in which there are
three activity cost pools. The company has provided the following data concerning its costs
and its activity-based costing system:
Costs:
Wages and salaries
Travel expenses
Other expenses
Total
$540,000
100,000
140,000
$780,000
Distribution of Resource Consumption:
Wages and
salaries
Travel expenses
Other expenses
Working on
Engagements
50%
60%
35%
Activity Cost Pools
Business
Other
Development
20%
30%
30%
25%
10%
40%
Total
100%
100%
100%
Required:
a) How much cost, in total, would be allocated to the Working On Engagements activity cost
pool?
b) How much cost, in total, would be allocated to the Business Development activity cost
pool?
c) How much cost, in total, would be allocated to the Other activity cost pool?
All three parts can be answered using a first-stage allocation of costs.
Wages and
salaries
Travel expenses
Other expenses
Total
Working on
Engagements
$270,000
Business
Development
$108,000
Other
Total
$162,000
$540,000
60,000
49,000
$379,000
30,000
35,000
$173,000
10,000
56,000
$228,000
100,000
140,000
$780,000
a) $379,000
b) $173,000
c) $228,000
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
115. Huish Awnings makes custom awnings for homes and businesses. The company uses an
activity-based costing system for its overhead costs. The company has provided the following
data concerning its annual overhead costs and its activity cost pools:
Overhead Costs:
Production overhead
Office expense
Total
$150,000
100,000
$250,000
Distribution of resource consumption:
Production
overhead
Office expenses
Making
Awnings
45%
8%
Activity Cost Pools
Job Support
Other
Total
40%
15%
100%
65%
27%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Making awnings
Job support
Other
Annual Activity
5,000 metres
200 jobs
Not applicable
Required:
a) Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the
table below:
Making
Awnings
Job Support
Other
Total
Production
overhead
Office
expense
Total
b) Compute the activity rates (i.e., cost per unit of activity) for the Making Awnings and Job
Support activity cost pools by filling in the table below:
Making Awnings
Job Support
Production overhead
Office expense
Total
c) Prepare a report in good form of a job that involves making 80 yards of awnings and has
direct materials and direct labour cost of $3,000. The sales revenue from this job is $4,000.
a) First-stage allocation
Production
overhead
Office expenses
Total
Activity
Making
Awnings
$67,500
Job Support
Other
Total
$60,000
$22,500
$150,000
8,000
$75,500
5,000 metres
65,000
$125,000
200 jobs
27,000
$49,500
100,000
$250,000
b) Activity rates (costs divided by activity)
Making Awnings
$13.50
1.60
$15.10
Production overhead
Office expense
Total
Job Support
$300.00
325.00
$625.00
c) Overhead cost of the job.
Activity
Production
overhead
Office expense
Total
Making Awnings
80
$1,080.00
Job Support
1
$300.00
Total
$1,380.00
128.00
$1,208.00
325.00
$625.00
453.00
$1,833.00
Overhead assigned can also be calculated using the total rate for each activity:
Revenue:
Sales
Cost:
Direct Material and
Labour
Making Awnings
Job Support
Product (JOB) Margin
$4,000
$3,000
1,208
625
4,833
$(833)
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
116. Phoenix Company makes custom covers for air conditioning units for homes and
businesses. The company uses an activity-based costing system for its overhead costs. The
company has provided the following data concerning its annual overhead costs and its activity
cost pools:
Overhead Costs:
Production overhead
Office expenses
Total
$100,000
50,000
$150,000
Distribution of Resource Consumption:
Production
overhead
Office expenses
Making
Covers
40%
12%
Activity Cost Pools
Job Support
Other
Total
42%
18%
100%
60%
28%
100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Making covers
Job support
Other
Annual Activity
2,500 yards
200 jobs
Not applicable
Required:
a) Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the
table below:
Making
Covers
Job Support
Other
Total
Production
overhead
Office
expense
Total
b) Compute the activity rates (i.e., cost per unit of activity) for the Making Covers and Job
Support activity cost pools by filling in the table below:
Making Covers
Job Support
Production overhead
Office expense
Total
c) Prepare a report in good form of a job that involves making 50 yards of covers and has
direct materials and direct labour cost of $1,500. The sales revenue from this job is $2,500.
a) First-stage allocation
Production
overhead
Office expenses
Total
Activity
Making
Covers
$40,000
Job Support
Other
Total
$42,000
$18,000
$100,000
6,000
$46,000
2,500 metres
30,000
$72,000
200 jobs
14,000
$32,000
50,000
$150,000
b) Activity rates (costs divided by activity)
Making Covers
$16.00
2.40
$18.40
Production overhead
Office expense
Total
Job Support
$210.00
150.00
$360.00
c) Overhead cost of the job.
Activity
Production
overhead
Office expense
Total
Making Covers
50
$800.00
Job Support
1
$210.00
Total
$1,010.00
120.00
$920.00
150.00
$360.00
270.00
$1,280.00
Overhead assigned can also be calculated using the total rate for each activity:
Revenue:
Sales
Cost:
Direct Material and
Labour
Making Covers
Job Support
Product (JOB) Margin
$2,500
$1,500
920
360
2,780
$(280)
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
117. Jackson Painting paints the interiors and exteriors of homes and commercial buildings.
The company uses an activity-based costing system for its overhead costs. The company has
provided the following data concerning its activity-based costing system.
Activity Cost Pool
Painting overhead
Job support
Other
Activity Measure
Square metres
Jobs
None
Annual Activity
10,000 square metres
320 jobs
Not applicable
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
The company has already finished the first stage of the allocation process in which costs were
allocated to the activity cost centres. The results are listed below:
Painting
overhead
Office
expense
Total
Painting
$54,000
Job Support
$42,000
Other
$24,000
Total
$120,000
16,000
96,000
48,000
160,000
$70,000
$138,000
$72,000
$280,000
Required:
a) Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job Support
activity cost pools by filling in the table below. Round off all calculations to the nearest whole
cent.
Painting
Production overhead
Office expense
Total
Job Support
b) Prepare a report in good form of a job that involves painting 63 square metres and has
direct materials and direct labour cost of $2,070. The sales revenue from this job is $3,500.
a) Activity rates (costs divided by activity)
Painting
$5.40
1.60
$7.00
Production overhead
Office expense
Total
Job Support
$131.25
300.00
$431.25
b) Overhead cost of the job.
Activity
Production
overhead
Office expense
Total
Revenue:
Sales
Cost:
Direct Material and
Labour
Paining
Job Support
Product (JOB) Margin
Painting
63
$340.20
Job Support
1
$131.25
Total
$471.45
100.80
$441.00
300.00
$431.25
400.80
$872.25
$3,500
$2,070
441
431.25
2,942.25
$557.75
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Topic: 07-09 Step 2: Assign Overhead Costs to Activity Cost Pools
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-14 Step 5: Prepare Management Reports
118. Cabanos Company manufactures two products, Product C and Product D. The company
estimated it would incur $160,790 in manufacturing overhead costs during the current period.
Overhead currently is applied to the products on the basis of direct labour hours. Data
concerning the current period's operations appear below:
Estimated volume
Direct labour hours per
unit
Direct materials cost per
unit
Direct labour cost per
unit
Product C
3,400 units
1.40 hours
Product D
4,800 units
1.90 hours
$7.40
$12.70
$14.00
$19.00
Required:
a) Compute the predetermined overhead rate under the current method, and determine the unit
product cost of each product for the current year.
b) The company is considering using an activity-based costing system to compute unit
product costs for external financial reports instead of its traditional system based on direct
labour hours. The activity-based costing system would use three activity cost pools. Data
relating to these activities for the current period are given below:
Activity Cost
Pool
Machine
setups
Purchase
orders
General
Factory
Total
Estimated
Overhead
Cost
$12,190
Expected Activity
Product C
Product D
Total
80
150
230
79,200
730
920
1,650
69,400
4,760
9,120
13,880
$160,790
Determine the unit product cost of each product for the current period using the activity-based
costing approach.
a) The expected total direct labour hours during the period are computed as follows:
Product C: 3,400 units x 1.4 hrs
Product D: 4,800 units x 1.9 hrs
Total direct labour hours
4,760 hours
9,120 hours
13,880 hours
Using these hours as a base, the predetermined overhead using direct labour hours would be:
Predetermined overhead rate = $160,790/13,880 DLHs = $11.58/DLH
Using this overhead rate, the unit product costs are:
Direct Materials
Direct Labour
Manufacturing Overhead
Total Unit Product Cost
Product C
$7.40
$14.00
$16.22
$37.62
Product D
$12.70
$19.00
$22.01
$53.71
b) The overhead rates for each activity centre are as follows:
Machine setups
Purchase orders
General Factory
Estimated
Overhead Cost
$12,190
79,200
69,400
Expected Activity
Overhead Rate
230
1,650
13,880
$53.00
48.00
5.00
The overhead cost charged to each product is:
Machine
setups
Purchase
orders
General
Factory
Total overhead
cost
Product C
Activity
Amount
80
$4,240
Product D
Activity
Amount
150
$7,950
730
35,040
920
44,160
4,760
23,800
9,120
45,600
$63,080
$97,710
Overhead cost per unit:
Product C: $63,080/3,400 units = $18.55 per unit.
Product D: $97,710/4,800 units = $20.36 per unit.
Using activity-based costing, the unit product cost of each product would be:
Direct Materials
Direct Labour
Manufacturing Overhead
Total Unit Product Cost
Product C
$7.40
14.00
18.55
$39.95
Product D
$12.70
19.00
20.36
$52.06
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
119. Lionel Corporation manufactures two products, Product B and Product H. Product H is
of fairly recent origin, having been developed as an attempt to enter a market closely related
to that of Product B. Product H is the more complex of the two products, requiring two hours
of direct labour time per unit to manufacture, compared to one hour of direct labour time for
Product B. Product H is produced on an automated production line.
Overhead is currently assigned to the products on the basis of direct labour hours. The
company estimated it would incur $450,000 in manufacturing overhead costs and produce
7,500 units of Product H and 30,000 units of Product B during the current year. Unit costs for
materials and direct labour are:
Product B
$12
$10
Direct materials
Direct labour
Product H
$25
$20
Required:
a) Compute the predetermined overhead rate under the current method of allocation, and
determine the unit product cost of each product for the current year.
b) The company's overhead costs can be attributed to four major activities. These activities
and the amount of overhead cost attributable to each for the current year are given below:
Activity Cost
Pool
Machine
setups
required
Purchase
orders issued
Machine hours
required
Maintenance
requests
issued
Total
Estimated
Overhead
Cost
$180,000
Expected Activity
Product B
Product H
Total
600
1,200
1,800
38,382
500
100
600
92,650
6,800
10,200
17,000
138,968
693
907
1,600
$450,000
Using the data above and an activity-based costing approach, determine the unit product cost
of each product for the current year.
a) The company expects to work 45,000 direct labour hours during the current year, computed
as follows:
Product B: 30,000 units x 1 hr
Product H: 7,500 units x 2 hrs
Total direct labour hours
30,000 hours
15,000 hours
45,000 hours
Using these hours as a base, the predetermined overhead using direct labour hours would be:
Predetermined overhead rate = $450,000/45,000 DLHs = $10.00/DLH
Using this overhead rate, the unit product cost of each product would be:
Product B
$12
$10
Direct Materials
Direct Labour
Manufacturing Overhead:
Product B-one hour
Product H-two hours
Total
Product H
$25
$20
$10
$32
$20
$65
b) The overhead rates are computed as follows:
Activity Cost Pool
Machine setups
Purchase orders
Machine hours
Maintenance
requests
Total
Estimated
Overhead Cost
$180,000
38,382
92,650
138,968
$450,000
Total Expected
Activity
1,800
600
17,000
1,600
Rate
$100.000/setup
63.970/order
5.450/hour
86.855/request
The overhead cost attributable to each product is:
Machine
setups,
$100.00/setup
Purchase
orders,
$63.97/setup
Machine
hours, $5.45/
hour
Maintenance
request, at
$86.855/
request
Product B
Activity
Amount
600
$60,000
Product H
Activity
Amount
1,200
$120,000
500
31,985
100
6,397
6,800
37,060
10,200
55,590
693
60,191
907
78,777
$189,236
$260,764
Overhead cost per unit:
Product B: $189,236/30,000 units = $6.3079/unit.
Product H: $260,764/7,500 units = $34.7685/unit.
Using activity-based costing, the unit product cost of each product would be:
Direct Materials
Direct Labour
Manufacturing Overhead
Total Unit Product Cost
Product B
$12.0000
10.0000
6.3079
$28.3079
Product H
$25.0000
20.0000
34.7685
$79.7685
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
120. Flyer Corporation manufactures two products, Product A and Product B. Product B is of
fairly recent origin, having been developed as an attempt to enter a market closely related to
that of Product A. Product B is the more complex of the two products, requiring three hours of
direct labour time per unit to manufacture, compared to one and one-half hours of direct
labour time for Product A. Product B is produced on an automated production line.
Overhead is currently assigned to the products on the basis of direct labour hours. The
company estimated it would incur $396,000 in manufacturing overhead costs and produce
5,500 units of Product B and 22,000 units of Product A during the current year. Unit costs for
materials and direct labour are:
Product A
$9
$7
Direct materials
Direct labour
Product B
$20
$15
Required:
a) Compute the predetermined overhead rate under the current method of allocation, and
determine the unit product cost of each product for the current year.
b) The company's overhead costs can be attributed to four major activities. These activities
and the amount of overhead cost attributable to each for the current year are given below:
Activity Cost
Pool
Machine
setups
required
Purchase
orders issued
Machine hours
required
Maintenance
requests
issued
Total
Estimated
Overhead
Cost
$170,000
Expected Activity
Product A
Product B
Total
700
1,000
1,700
37,000
300
200
500
91,000
4,000
9,00
13,000
98,000
400
600
1,000
$396,000
Using the data above and an activity-based costing approach, determine the unit product cost
of each product for the current year.
a) The company expects to work 49,500 direct labour hours during the current year, computed
as follows:
Product A: 22,000 units x 1.5 hrs
Product B: 5,500 units x 3.0 hrs
Total direct labour hours
33,000 hours
16,500 hours
49,500 hours
Using these hours as a base, the predetermined overhead using direct labour hours would be:
Predetermined overhead rate = $396,000/49,500 DLHs = $8.00/DLH
Using this overhead rate, the unit product cost of each product would be:
Product A
$9
7
Direct Materials
Direct Labour
Manufacturing Overhead:
Product B-1.5 hour
Product H-three hours
Total
Product B
$20
15
12
$28
24
$59
b) The overhead rates are computed as follows:
Activity Cost Pool
Machine setups
Purchase orders
Machine hours
Maintenance
requests
Total
Estimated
Overhead Cost
$170,000
37,000
91,000
98,000
$396,000
Total Expected
Activity
1,700
500
13,000
1,000
Rate
$100/setup
74/order
7/hour
98/request
The overhead cost attributable to each product is:
Machine
setups,
$100.00/setup
Purchase
orders,
$74.00/order
Machine
hours, $7.00/
hour
Maintenance
request, at
$98.00/request
Product B
Activity
Amount
700
$70,000
Product H
Activity
Amount
1,000
$100,000
300
22,200
200
14,800
4,000
28,000
9,000
63,000
400
39,200
600
58,800
$159,400
$236,600
Overhead cost per unit:
Product A: $159,400/22,000 units = $7.2455/unit.
Product B: $236,600/5,500 units = $43.0182/unit.
Using activity-based costing, the unit product cost of each product would be:
Direct Materials
Direct Labour
Manufacturing Overhead
Total Unit Product Cost
Product A
$9.0000
7.0000
7.2455
$23.2455
Product B
$20.0000
15.0000
43.0182
$78.0182
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
121. EMD Corporation manufactures two products, Product S and Product W. Product W is of
fairly recent origin, having been developed as an attempt to enter a market closely related to
that of Product S. Product W is the more complex of the two products, requiring one hour of
direct labour time per unit to manufacture, compared to a half-hour of direct labour time for
Product S. Product W is produced on an automated production line.
Overhead is currently assigned to the products on the basis of direct labour hours. The
company estimated it would incur $500,000 in manufacturing overhead costs and produce
10,000 units of Product W and 60,000 units of Product S during the current year. Unit cost for
materials and direct labour are:
Product S
$10
$8
Direct materials
Direct labour
Product W
$24
$12
Required:
a) Compute the predetermined overhead rate under the current method of allocation, and
determine the unit product cost of each product for the current year.
b) The company's overhead costs can be attributed to four major activities. These activities
and the amount of overhead cost attributable to each for the current year are given below:
Activity Cost
Pool
Machine
setups
required
Purchase
orders issued
Machine hours
required
Maintenance
requests
issued
Total
Estimated
Overhead
Cost
$200,00
Expected Activity
Product S
Product W
Total
800
1,200
2,000
43,500
500
100
600
104,000
3,000
10,000
13,000
152,500
860
1,140
2,000
$500,000
Using the data above and an activity-based costing approach, determine the unit product cost
of each product for the current year.
a) The company expects to work 40,000 direct labour hours during the current year, computed
as follows:
Product S: 60,000 units x 0.5 hr
Product W: 10,000 units x 1.0 hrs
Total direct labour hours
30,000 hours
10,000 hours
40,000 hours
Using these hours as a base, the predetermined overhead using direct labour hours would be:
Predetermined overhead rate = $500,000/40,000 DLHs = $12.50/DLH
Using this overhead rate, the unit product cost of each product would be:
Product S
$10.00
8.00
Direct Materials
Direct Labour
Manufacturing Overhead:
Product B-half hour
Product H-one hour
Total
Product W
$24.00
12.00
6.25
$24.25
12.50
$48.50
b) The overhead rates are computed as follows:
Activity Cost Pool
Machine setups
Purchase orders
Machine hours
Maintenance
requests
Total
Estimated
Overhead Cost
$200,000
43,500
104,000
152,500
$500,000
Total Expected
Activity
2,000
600
13,000
2,000
Rate
$100.00/setup
72.50/order
8.00/hour
76.25/request
The overhead cost attributable to each product is:
Machine
setups,
$100.00/setup
Purchase
orders,
$72.50/order
Machine
hours, $8.00/
hour
Maintenance
request, at
$76.25/require
Product S
Activity
Amount
800
$80,000
Product W
Activity
Amount
1,200
$120,000
500
36,250
100
7,250
3,000
24,000
10,000
80,000
860
65,575
1,140
86,925
$205,825
$294,175
Overhead cost per unit:
Product S: $205,825/60,000 units = $3.4304/unit.
Product W: $294,175/10,000 units = $29.4175/unit.
Using activity-based costing, the unit product cost of each product would be:
Direct Materials
Direct Labour
Manufacturing Overhead
Total Unit Product Cost
Product S
$10.0000
8.0000
3.4304
$21.4304
Product W
$24.0000
12.0000
29.4175
$65.4175
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
122. Daba Company manufactures two products, Product F and Product G. During the current
year, the company expects to produce and sell 1,400 units of Product F and 1,800 units of
Product G. The company uses activity-based costing to compute unit product costs for
external reports. Data relating to the company's three activity cost pools are given below for
the current year:
Activity Cost
Pool
Machine
setups
Purchase
orders
General
factory
Estimated
Overhead
Cost
$10,800
Expected Activity
Product F
Product G
Total
80
100
180
77,520
510
1,010
1,520
75,920
2,240
3,600
5,840
Required:
Using the activity-based costing approach, determine the overhead cost per unit for each
product.
The overhead rates for each activity centre are as follows:
Activity Centre
Machine setups
Purchase orders
General factory
Estimated
Overhead Cost
$10,800
77,520
75,920
The overhead cost charged to each product is:
Total Expected
Activity
180
1,520
5,840
Overhead Rate
$60.00
51.00
13.00
Machine setups
Purchase orders
General factory
Total overhead
cost
Product F
Activity
Amount
80
$4,800
510
26,010
2,240
29,120
$59,930
Product G
Activity
Amount
100
$6,000
1,010
51,510
3,600
46,800
$104,310
Overhead cost per unit:
Product F: $59,930/1,400 units = $42.81 per unit.
Product G: $104,310/1,800 units = $57.95 per unit.
Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-19 Activity-Based Costing and External Reports
123. Eaker Company uses activity-based costing to compute product costs for external
reports. The company has three activity cost pools and applies overhead using predetermined
overhead rates for each activity cost pool. Estimated costs and activities for the current year
are presented below for the three activity centres:
Activity Centre
Batch setups
Material handling
General factory
Estimated Overhead
Costs
$20,400
52,800
78,000
Expected Activity
1,200
2,400
2,600
Actual costs and activities for the current year were as follows:
Activity Centre
Batch setups
Material handling
General factory
Actual Overhead Costs
$20,740
52,360
77,590
Expected Activity
1,230
2,470
2,680
Required:
a) How much total overhead was applied to products during the year?
b) By how much was overhead overapplied or underapplied? (Be sure to clearly label your
Answer as to whether the overhead was overapplied or underapplied for each activity centre
as well as for the total.)
a) The overhead rates for each activity centre are as follows:
Activity Centre
Machine setups
Purchase orders
Estimated
Overhead Cost
$20,400
52,800
Total Expected
Activity
1,200
2,400
Predetermined
Overhead Rate
$17.00
22.00
General factory
78,000
2,600
30.00
The amount of overhead applied to production is determined as follows:
Activity Centre
Machine setups
Machine handling
General factory
Total overhead
applied
Predetermined
Overhead Rate
$17.00
22.00
30.00
Actual Activity
1,230
2,470
2,680
Applied
Overhead
$20,910
54,340
80,400
$155,650
b) The amount of underapplied (overapplied) for each centre and all activity centres is as
follows:
Activity Centre
Machine setups
Machine handling
General factory
Total overhead
applied
Actual Overhead
Applied
Overhead
$20,740
52,360
77,590
$150,690
$20,910
54,340
80,400
$155,650
Underapplied
(Overapplied)
Overhead
($170)
($1,980)
($2,810)
($4,960)
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-19 Activity-Based Costing and External Reports
124. Kya, Inc. manufactures two models of high-pressure steam valves, the XR7 model and
the ZD5 model. Budgeted manufacturing overhead cost and operating data regarding
production and sales of 2,000 units of the XR7 model and 8,000 units of the ZD5 model for
2005 follow:
Activity
Cost Pool
Machine
setups
Vendor
negotiation
Assembly
Budgeted Cost
Overhead Driver
Costs
$800,000 Number of
setups
200,000 Number of
parts
400,000 Direct
labour
hours
$1,400,000
Budgeted Level for Cost Driver
XR7
ZD5
Total
150
100
250
800
200
1,000
4,000
36,000
40,000
Required:
a) Identify and briefly explain each of the three cost drivers as either unit-level or batch-level
or product-level or organization-sustaining level.
b) Calculate the budgeted manufacturing overhead cost for each unit of the two models, using
only one unit-level cost driver.
c) Calculate the budgeted manufacturing overhead cost for each unit of the two models, using
the activity-based-costing (ABC) method.
d) Assume Kya, Inc. will use only the unit-level driver. Compared to the ABC method, by
how much (in terms of total allocated/applied manufacturing overhead cost), if any, will the
total output of each model be either under-costed or over-costed?
e) Is the result obtained in part (d) above consistent with your expectations? Explain.
a) Number of setup is a batch-level activity in the sense that machine has to be setup for each
batch independent of the number units in a batch. Number of parts is a product-level activity
because the vendor negotiation costs increase with the number of different vendors to be
sourced. Direct labour is a traditional unit-level activity that is performed on each unit of
output.
b) Predetermined rate = $1,400,000/40,000 DLHs
= $35/DLH
Applied overhead @ $35
per DLH: (4,000 x $35);
(36,000 x $35)
Number of units
Cost per unit
XR7 Model
$140,000
ZD5 Model
$1,260,000
2,000
$70.00
8,000
$157.50
c) Rates:
setups ($800,000/250) = $3,200 per machine setup
Vendor negotiations ($200,000/1,000) = $200 per part
Assembly ($400,000/40,000) = $10 per DLH
Applied overhead @ $35
per DLH: (4,000 x $35);
(36,000 x $35)
Number of units
Cost per unit
XR7 Model
$140,000
ZD5 Model
$1,260,000
2,000
$70.00
8,000
$157.50
d)
ABC Allocations
Unit-level allocations
Amount of under-costing
Amount of over-costing
XR7 Model
$680,000
140,000
$540,000
ZD5 Model
$720,000
1,260,000
$540,000
e) The result in part (d) above is consistent with expectations. In comparison with ABC, use
of only unit-level cost drivers such as direct labour hours generally tends to over-cost the high
volume product (in this case, ZD5 Model) while it under-costs the low-volume product (in
this case XR7 Model). This is the result obtained in part (d) above.
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
125. Activity-based-costing (ABC) charges products for the cost of capacity used, NOT for
idle capacity.
Required:
a) The use of which activity level, budgeted (same as expected) or maximum capacity, is
consistent with ABC? Explain.
b) How might the use of ABC based on maximum capacity activity level enhance a firm's
ability to compete on price? Explain.
a) Use of maximum capacity activity level is consistent with the ABC method. It will ensure a
reasonably stable (if not constant) activity rate regardless of the expected level of activity.
Since, by definition, expected level of activity cannot exceed the maximum capacity, the
resulting activity rate is also likely to be lower. A lower activity rate when applied to a lessthan-capacity expected or actual activity level will ensure that cost of idle capacity is not
charged to products.
b) Since the cost of idle capacity will not be charged to products, products are unlikely to be
overcosted. The fact that ABC generally achieves more accurate product costs (because it uses
multiple unit-level and non unit-level cost drivers) also avoids undercosting or overcosting.
Accurate product cost information is a good starting point for competitive pricing. This is
especially important in diverse multiple product firms where product emphasis decisions are
routinely made.
Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-14 Step 5: Prepare Management Reports
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
126. (Appendix 7A) Werger Manufacturing Corporation has a traditional costing system in
which it applies manufacturing overhead to its products using a predetermined overhead rate
based on direct labour-hours (DLHs). The company has two products, W82R and L48S, about
which it has provided the following data:
W82R
$11.50
$2.00
0.20
45,000
Direct materials per unit
Direct labour per unit
Direct labour hours per unit
Annual production
L48S
$62.90
$13.00
1.30
10,000
The company's estimated total manufacturing overhead for the year is $1,521,960 and the
company's estimated total direct labour-hours for the year is 22,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system appear
below:
Activities and Activity Measures
Supporting direct labour (DLHs)
Setting up machines (setups)
Parts administration (part types)
Total
Estimated Overhead Cost
$352,000
201,960
968,000
$1,521,960
Activities
Supporting direct
labour
Setting up
machines
Part
administration
W82R
9,000
L48S
13,000
Total
22,000
814
374
1,188
924
1,012
1,936
Required:
a. Determine the unit product cost of each of the company's two products under the traditional
costing system.
b. Determine the unit product cost of each of the company's two products under activity-based
costing system.
a. Traditional Unit Product Costs
Predetermined overhead rate = $1,521,960 22,000 DLHs = $69.18 per DLH
Direct materials
Direct labour
Manufacturing overhead
(0.2 DLHs x $69.18 per
DLH; 1.3 DLHs x $69.18
per DLH)
Unit product cost
W82R
$11.50
2.00
13.84
L48S
$62.90
13.00
89.93
$27.34
$165.83
b. ABC Unit Product Costs
Estimated
Overhead Cost
$352,000
Total Expected
Activity
22,000 DLHs
Activity Rate
$201,960
1,188 setups
$170 per setup
$968,000
1,936 part types
$500 per part type
Activity Rate
$16 per DLH
Activity
9,000 DLHs
ABC Cost
$144,000
$170 per setup
814 setups
138,380
$500 per part type
924 part types
462,000
$744,380
Supporting direct
labour
Setting up
machines
Part administration
$16 per DLH
Overhead cost for W82R
Supporting direct
labour
Setting up
machines
Part administration
Total
Overhead cost for L48S
Supporting direct
labour
Setting up
machines
Part administration
Total
Activity Rate
$16 per DLH
Activity
13,000 DLHs
ABC Cost
$208,000
$170 per setup
374 setups
63,580
$500 per part type
1,012 part types
506,000
$777,580
Direct materials
Direct labour
Manufacturing overhead
($744,400 / 45,000 units;
$777,600 / 10,000 units)
Unit product cost
W82R
$11.50
2.00
16.54
L48S
$62.90
13.00
77.76
$30.04
$153.66
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
127. (Appendix 7A) Torri Manufacturing Corporation has a traditional costing system in
which it applies manufacturing overhead to its products using a predetermined overhead rate
based on direct labour-hours (DLHs). The company has two products, B40W and C63J, about
which it has provided the following data:
B40W
$34.90
$20.80
0.80
35,000
Direct materials per unit
Direct labour per unit
Direct labour hours per unit
Annual production
C63J
$63.70
$62.40
2.40
15,000
The company's estimated total manufacturing overhead for the year is $2,656,000 and the
company's estimated total direct labour-hours for the year is 64,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system appear
below:
Activities and Activity Measures
Assembling products (DLHs)
Preparing batches (batches)
Milling (MHs)
Total
Estimated Overhead Cost
$1,216,000
480,000
960,000
$2,656,000
Activities
Assembling
products
Preparing batches
Milling
B40W
28,000
C63J
36,000
Total
64,000
2,304
1,088
2,496
2,112
4,800
3,200
Required:
a. Determine the unit product cost of each of the company's two products under the traditional
costing system.
b. Determine the unit product cost of each of the company's two products under activity-based
costing system.
a. Traditional Unit Product Costs
Predetermined overhead rate = $2,656,000 64,000 DLHs = $41.50 per DLH
Direct materials
Direct labour
Manufacturing overhead
(0.8 DLHs x $4150 per
DLH; 2.4 DLHs x $41.50
per DLH)
Unit product cost
B40W
$34.90
20.80
33.20
C63J
$63.70
62.40
99.60
$88.90
$225.70
b. ABC Unit Product Costs
Assembling
products
Preparing batches
Milling
Estimated
Overhead Cost
$1,216,000
Total Expected
Activity
64,000 DLHs
Activity Rate
$480,000
$960,000
4,800 batches
3,200 MHs
$100 per setup
$300 per MH
Activity Rate
$19 per DLH
Activity
28,000 DLHs
ABC Cost
$532,000
$100 per setup
$300 per MH
2,304 batches
1,088 MHs
230,400
326,400
$1,088,800
$19 per DLH
Overhead cost for B40W
Assembling
products
Preparing batches
Milling
Total
Overhead cost for C63J
Assembling
products
Preparing batches
Milling
Total
Direct materials
Direct labour
Manufacturing overhead
($1,088,800 / 35,000
units; $1,567,200 / 15,000
units)
Unit product cost
Activity Rate
$19 per DLH
Activity
36,000 DLHs
ABC Cost
$684,000
$100 per setup
$300 per MH
2,496 batches
2,112 MHs
249,600
633,600
$1,567,200
B40W
$34.90
20.80
31.11
C63J
$63.70
62.40
104.48
$86.81
$230.58
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
128. (Appendix 7A) Welk Manufacturing Corporation has a traditional costing system in
which it applies manufacturing overhead to its products using a predetermined overhead rate
based on direct labour-hours (DLHs). The company has two products, H16Z and P25P, about
which it has provided the following data:
H16Z
$10.20
$8.40
0.40
30,000
Direct materials per unit
Direct labour per unit
Direct labour hours per unit
Annual production
P25P
$50.50
$25.20
1.20
10,000
The company's estimated total manufacturing overhead for the year is $1,464,480 and the
company's estimated total direct labour-hours for the year is 24,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system appear
below:
Activities and Activity Measures
Supporting direct labour (DLHs)
Setting up machines (setups)
Parts administration (part types)
Total
Estimated Overhead Cost
$552,000
132,480
780,000
$1,464,480
Activities
Supporting direct
labour
Setting up
machines
Part
administration
H16Z
12,000
P25P
12,000
Total
24,000
864
240
1,104
600
960
1,560
Required:
a. Determine the manufacturing overhead cost per unit of each of the company's two products
under the traditional costing system.
b. Determine the manufacturing overhead cost per unit of each of the company's two products
under activity-based costing system.
a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,464,480 24,000 DLHs = $61.02 per DLH
Direct labour-hours
Predetermined overhead
rate per DLH
Manufacturing overhead
cost per unit
H16Z
0.40
$61.02
P25P
1.20
$61.02
$24.41
$73.22
b. ABC Manufacturing Overhead Costs
Estimated
Overhead Cost
$552,000
Total Expected
Activity
24,000 DLHs
Activity Rate
$132,480
1,104 setups
$120 per setup
$780,000
1,560 part types
$500 per part type
Activity Rate
$23 per DLH
Activity
12,000 DLHs
ABC Cost
$276,000
$120 per setup
864 setups
103,680
$500 per part type
600 part types
300,000
$679,680
30,000
Supporting direct
labour
Setting up
machines
Part administration
$23 per DLH
Overhead cost for H16Z
Supporting direct
labour
Setting up
machines
Part administration
Total
Annual production
Manufacturing
overhead cost per
unit
$22.66
Overhead cost for P25P
Supporting direct
labour
Setting up
machines
Part administration
Total
Annual production
Manufacturing
overhead cost per
unit
Activity Rate
$23 per DLH
Activity
12,000 DLHs
ABC Cost
$276,000
$120 per setup
240 setups
28,800
$500 per part type
960 part types
480,000
$784,800
10,000
$78,48
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
129. (Appendix 7A) Bullie Manufacturing Corporation has a traditional costing system in
which it applies manufacturing overhead to its products using a predetermined overhead rate
based on direct labour-hours (DLHs). The company has two products, D31X and U75X, about
which it has provided the following data:
D31X
$29.20
$1.10
0.10
35,000
Direct materials per unit
Direct labour per unit
Direct labour hours per unit
Annual production
U75X
$47.40
$23.10
2.10
15,000
The company's estimated total manufacturing overhead for the year is $1,147,650 and the
company's estimated total direct labour-hours for the year is 35,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system appear
below:
Activities and Activity Measures
Assembling products (DLHs)
Preparing batches (batches)
Axial milling (MHs)
Total
Estimated Overhead Cost
$140,000
241,150
766,500
$1,147,650
Activities
Assembling
products
Preparing batches
Axial milling
D31X
3,500
U75X
31,500
Total
35,000
560
1,540
1,295
1,015
1,855
2,555
Required:
a. Determine the manufacturing overhead cost per unit of each of the company's two products
under the traditional costing system.
b. Determine the manufacturing overhead cost per unit of each of the company's two products
under activity-based costing system.
a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,147,650 35,000 DLHs = $32.79 per DLH
Direct labour-hours
Predetermined overhead
rate per DLH
Manufacturing overhead
cost per unit
D31X
0.10
$32.79
U75X
2.10
$32.79
$3.28
$68.86
b. ABC Manufacturing Overhead Costs
Assembling
products
Preparing batches
Milling
Estimated
Overhead Cost
$140,000
Total Expected
Activity
35,000 DLHs
Activity Rate
$241,150
$766,500
1,855 batches
2,555 MHs
$130 per batch
$300 per MH
Activity Rate
$4 per DLH
Activity
3,500 DLHs
ABC Cost
$14,000
$130 per batch
$300 per MH
560 batches
1,540 MHs
72,800
462,000
$548,800
35,000
$15.68
$4 per DLH
Overhead cost for D31X
Assembling
products
Preparing batches
Axial milling
Total
Annual production
Manufacturing
overhead cost per
unit
Overhead cost for U75X
Assembling
products
Preparing batches
Axial milling
Total
Annual production
Manufacturing
overhead cost per
unit
Activity Rate
$4 per DLH
Activity
31,500 DLHs
ABC Cost
$126,000
$130 per batch
$300 per MH
1,295 batches
1,015 MHs
168,350
304,500
$598,850
15,000
$39.92
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Medium
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-17 The Differences between Activity-Based Costs and Traditional Product Costs
Topic: 07-19 Activity-Based Costing and External Reports
130. Mike Kyekyeku is a sole proprietorship that provides consulting and tax preparation
services to its clients. Mike charges a fee of $100 per hour for each service and can devote a
maximum of 4,000 hours annually to his clients. He reported the following revenues and
expenses for 2014:
Revenue
Expenses (All overhead
costs):
Secretarial support
Supplies
Computer costs, etc.
Net income (loss)
$400,000
$84,000
72,000
48,000
204,000
$196,000
Being an accountant, Mike kept good records of the following data for 2014:
(i). Revenue:
Tax preparation
Consulting
Total
$130,000
270,000
$400,000
(ii).
Overhead
Cost
Secretarial
support
Supplies
Computer
costs, etc.
Cost Driver
Number of
clients
TrAnsweraction
s with clients
Computer hours
ACTIVITY LEVEL
Tax
Consulting
Total
72
48
120
200
300
500
1,000
600
1,600
Required:
a. Should Mike emphasize one service more than the other if Mike were to allocate all the
overhead costs using direct-labours as the only overhead cost driver (1,300 for Tax and 2,700
for Consulting)? Support your decision with the relevant calculations and/or analysis.
b. Identify each of the three cost drivers as either unit-level, batch-level, product-level,
customer-level, or organization-sustaining.
c. How might Mike's product/service emphasis decision in Partaabove be altered if he were
to allocate all the overhead costs using activity-based costing and the three cost drivers, that
is, number of clients, number of transactions with clients, and computer hours? Show all your
supporting calculations and/or analysis, including any necessary explanation.
a.
Decision: No
Analysisand/orcalculations:
Preliminary analysis:
The overhead allocation rate = $51 per DLH, i.e. $204,000/(1,300 + 2,700)
Revenue
Expenses:
Allocations at $51 per
DLH ($51 x 1,300; $51 x
2,700)*
Profit
Number of DLHs
Profit per DLH:
($63,700/1,300;
$132,300/2,700)
Tax
$130,000
Consulting
$270,000
66,300
137,700
$63,700
1,300
$49**
$132,300
2,700
$49**
The two services generate the same profit for each hour of Mike's scarce time. Note: Since the
$100 billing rate per DLH is the same, the decision can be based only on allocated cost per
DLH ($51) which is the same for both services
* Alternatively, allocate in proportion to Tax and Consulting at 32.5% and 67.5%,
respectively.
** Same as the $100 billing rate less the $51 allocation rate.
b. Number of clients: Customer-level
Number of transactions with clients: Unit-level
Computer hours: Unit-level
c. Preliminary analysis (ABC)
Revenue
Expenses:
Allocations
Secretarial support (60%,
40%)*
Supplies (40%, 60%)**
Computer costs, etc.
(62.5%, 37.5%)***
Profit
Profit per DLH:
($20,800/1,300;
$175,200/2,700)
Tax
$130,000
Consulting
$270,000
50,400
33,600
28,800
30,000
43,200
18,000
$109,200
$20,800
$16.00
$94,800
$175,200
$64.89
Decision:
Consulting should receive greater emphasis since every hour of Mike's scarce time generates
a profit of $64.89 compared to $16.00 for Tax. (Note: The decision can be based only on the
total allocated cost per DLH (that is, $109,200/1,300 = $84.00 for Tax; $94,800/2,700 =
$35.11 for Consulting) since the billing rate per DLH of $100 is the same for both services.
Alternatively, base decision on total allocated cost for each service together with an
explanation that consulting has less allocated cost and also fewer number of direct labour
hours.
* same as using activity rate of $700 per client (i.e., $84,000/120)
** same as using activity rate of $144 per transactions (i.e., $72,000/500)
*** same as using activity rate of $30 per computer hour (i.e., $48,000/1,600)
Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
CPA Competency: 3.3.3 Recommends changes identified by applying process improvement methodologies.
Difficulty: Hard
Learning Objective: 07-01 Explain the activity-based costing model and how it differs a traditional costing system.
Learning Objective: 07-02 Assign costs to cost pools using a first-stage allocation; and compute activity rates.
Learning Objective: 07-03 Assign costs to a cost object using a second-stage allocation.
Learning Objective: 07-04 Manufacturing Costs Excluded under Activity-Based Costing.
Learning Objective: 07-05 Compare product costs computed using traditional and activity-based costing methods.
Learning Objective: 07-06 Activity Rates Based on Capacity; Not Budget.
Topic: 07-05 Overhead Cost Pools, Allocation Bases, and Activity-Based Costing
Topic: 07-10 Step 3: Calculate Activity Rates
Topic: 07-12 Step 4: Assign Overhead Costs to Cost Objects Using the Activity Rates and Activity Measures
Topic: 07-16 Product Margins Computed Using the Traditional Costing System
Topic: 07-19 Activity-Based Costing and External Reports
Chapter 08
Variable Costing: A Tool for Management
Multiple Choice Questions
1. Which of the following costs/expenses is included in product costs under both absorption
costing and variable costing?
A. Supervisory salaries.
B. Office equipment depreciation.
C. Variable manufacturing costs.
D. Variable selling expenses.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
2. An allocated portion of fixed manufacturing overhead is included in product costs under
which of the following?
Absorption Costing
A) No
B) No
C) Yes
D) Yes
Variable Costing
No
Yes
No
Yes
A. Option A
B. Option B
C. Option C
D. Option D
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-06 Unit Cost Computations
3. Which of the following is normally included in product cost under the variable costing
method?
A. Direct materials cost, direct labour cost, but NOT manufacturing overhead cost.
B. Direct materials cost, direct labour cost, and variable manufacturing overhead cost.
C. Prime cost but NOT conversion cost.
D. Prime cost and all conversion cost.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-04 Variable Costing
4. The total fixed manufacturing overhead costs of Cay Company are $100,000, and the total
variable selling costs are $80,000. Under variable costing, how should these costs be
classified?
Period Costs
A) $0
B) 80,000
C) 100,000
D) 180,000
Product Costs
$180,000
100,000
80,000
0
A. Option A
B. Option B
C. Option C
D. Option D
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
5. Which of the following are considered to be product costs under variable costing?
I. Variable manufacturing overhead.
II. Fixed manufacturing overhead.
III. Selling and administrative expenses.
A. I only.
B. I and II only.
C. I and III only.
D. I, II, and III.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
6. What factor is the cause of the difference between operating income computed using
absorption costing and operating income computed using variable costing?
A. Absorption costing considers all manufacturing costs in the determination of operating
income, whereas variable costing considers only prime costs.
B. Absorption costing allocates fixed manufacturing costs between cost of goods sold and
inventories, and variable costing considers all fixed manufacturing costs as period costs.
C. Absorption costing includes all variable manufacturing costs in product costs, but variable
costing considers variable manufacturing costs to be period costs.
D. Absorption costing includes all fixed manufacturing costs in product costs, but variable
costing expenses all fixed manufacturing costs.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-07 Income Comparison of Absorption and Variable Costing
7. Under variable costing, which of the following costs are treated as period costs?
A. Only fixed manufacturing costs.
B. Both variable and fixed manufacturing costs.
C. All fixed costs.
D. Only fixed selling and administrative costs.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
8. Which of the following statements is true for a firm that uses variable costing?
A. The unit product cost changes as a result of changes in the number of units manufactured.
B. Both variable selling costs and variable production costs are included in the unit product
cost.
C. Operating income moves in the same direction as sales.
D. Operating income is greatest in periods when production is highest.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
9. Which of the following are considered to be product costs under absorption costing?
I. Variable manufacturing overhead.
II. Fixed manufacturing overhead.
III. Selling and administrative expenses.
A. I, II, and III.
B. I and II only.
C. I and III only.
D. I only.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
10. The term "gross margin" for a manufacturing company refers to the excess of sales over
which of the following?
A. Cost of goods sold, excluding fixed manufacturing overhead.
B. All variable costs, including variable selling and administrative expenses.
C. Cost of goods sold, including fixed manufacturing overhead.
D. Variable costs, excluding variable selling and administrative expenses.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-07 Income Comparison of Absorption and Variable Costing
11. Operating income determined using absorption costing can be reconciled to operating
income determined using variable costing by computing the difference between which of the
following?
A. Fixed manufacturing overhead costs deferred in or released from inventories.
B. Discretionary costs included in the beginning and ending inventories.
C. Gross margin (absorption costing method) and contribution margin (variable costing
method).
D. Sales as recorded under the variable costing method and sales as recorded under the
absorption costing method.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
12. Operating income reported under absorption costing will generally exceed operating
income reported under variable costing for a given period in which of the following cases?
A. If production equals sales for that period.
B. If production exceeds sales for that period.
C. If sales exceed production for that period.
D. If the variable manufacturing overhead exceeds the fixed manufacturing overhead.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
13. Which of the following statements is true about the difference in operating income
between variable costing and absorption costing if the number of units in work-in-process and
finished goods inventories increase?
A. There will be no difference in net income.
B. Operating income computed using variable costing will be higher.
C. The difference in operating income cannot be determined from the information given.
D. Operating income computed using variable costing will be lower.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
14. What is the costing method that can be used most easily with break-even analysis and
other cost-volume-profit techniques?
A. Variable costing.
B. Absorption costing.
C. Process costing.
D. Job-order costing.
Blooms: Understand
CPA Competency: 3.1.3 Recommends improvements to reporting systems to meet information needs.
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-04 Explain the advantages and disadvantages of both variable and absorption costing.
Topic: 08-14 Cost-Volume-Profit Analysis and Absorption Costing
Topic: 08-15 Decision Making
15. For the most recent year, Atlantic Company's operating income computed using the
absorption costing method was $7,400, and its operating income computed using the variable
costing method was $10,100. The company's unit product cost was $17 under variable costing
and $22 under absorption costing. Atlantic produces the same number of units each year.
What must have been the beginning inventory if the ending inventory consisted of 1,460
units?
A. 920 units.
B. 1,460 units.
C. 2,000 units.
D. 12,700 units.
(10,100 + 7,300 - 7,400)/$5/unit = 2,000 units.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
16. During the most recent year, Evans Company had operating income of $90,000 using
absorption costing and $84,000 using variable costing. The fixed manufacturing overhead
application rate was $6 per unit. There were no beginning inventories. If 22,000 units were
produced last year, what were the sales in units for last year?
A. 15,000 units.
B. 21,000 units.
C. 23,000 units.
D. 28,000 units.
Fixed OH deferred = $90,000 - 84,000 so units in EI = $6,000/$6 = 1,000 units.
Sales = 22,000 - 1,000 = 21,000 units.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
17. During the year just ended, Roberts Company's operating income under absorption costing
was $3,000 lower than its operating income under variable costing. The company sold 9,000
units during the year, and its variable costs were $9 per unit, of which $3 was variable selling
expense. If production cost is $11 per unit under absorption costing every year, how many
units did the company produce during the year?
A. 8,000 units.
B. 8,400 units.
C. 9,600 units.
D. 10,000 units.
Fixed OH cost/unit = $11 - 6 = $5. Units in cost released = $3,000/$5 = 600 units decrease in
inventories. Production = 9,000 - 600 = 8,400 units.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
18. Last year, Silver Company's total variable production costs were $7,500, and its total fixed
manufacturing overhead costs were $4,500. The company produced 3,000 units during the
year and sold 2,400 units. There were no units in the beginning inventory. Which of the
following statements is true?
A. Under variable costing, the average cost of the units in the ending inventory will be $4
each.
B. The operating income under absorption costing for the year will be $900 lower than the
operating income under variable costing.
C. The ending inventory under variable costing will be $900 lower than the ending inventory
under absorption costing.
D. Under absorption costing, the average cost of the units in ending inventory will be $2.50
each.
(3,000 - 2,400 units) * $4,500/3,000 = $900 for the fixed OH component in EI under
absorption costing.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
19. During the last year, Hansen Company had operating income under absorption costing
that was $5,500 lower than its operating income under variable costing. The company sold
9,000 units during the year, and its variable costs were $10 per unit, of which $6 was variable
selling expense. If fixed production cost is $5 per unit under absorption costing every year,
how many units did the company produce during the year?
A. 7,625 units.
B. 7,900 units.
C. 8,450 units.
D. 10,100 units.
$5,500/$5 = 1,100 units released.
Production = 9,000 - 1,100 change in inventory = 7,900 units.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
20. Indiana Corporation produces a single product that it sells for $9 per unit. During the first
year of operations, 100,000 units were produced and 90,000 units were sold. Manufacturing
costs and selling and administrative expenses for the year were as follows:
Raw materials
Direct labour
Factory overhead
Selling and administrative
Fixed Costs
--$100,000
70,000
Variable Costs
$1.75 per unit produced
1.25 per unit produced
0.50 per unit produced
0.60 per unit sold
What was Indiana Corporation's operating income for the year using variable costing?
A. $181,000.
B. $271,000.
C. $281,000.
D. $371,000.
90,000 units * (9 - 1.75 - 1.25 -.50 -.60) - 100,000 - 70,000 = $271,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
21. Last year, fixed manufacturing overhead costs were $30,000, variable production costs
were $48,000, fixed selling and administration costs were $20,000, and variable selling
administrative expenses were $9,600. There was no beginning inventory. During the year,
3,000 units were produced and 2,400 units were sold at a price of $40 per unit. Under variable
costing, what would be the operating income (loss)?
A. $6,000.
B. $4,000.
C. ($2,000).
D. ($4,400).
VCGS = $48,000/3,000 * 2,400 = $38,400.
Op. income = 2,400 * $40 - 38,400 - 9,600 - 30,000 - 20,000 = ($2,000).
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
22. West Co.'s manufacturing costs are as follows:
Direct materials and direct labour
Other variable manufacturing costs
Depreciation of factory building and manufacturing equipment
Other fixed manufacturing overhead
$700,000
100,000
80,000
18,000
What amount should be considered product costs for external reporting purposes if the
company uses absorption costing?
A. $700,000.
B. $800,000.
C. $880,000.
D. $898,000.
700,000 + 100,000 + 80,000 + 18,000 = $898,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
23. At the end of last year, Lee Company had 30,000 units in its ending inventory. Every year,
Lee Company's variable production costs are $10 per unit, and its fixed manufacturing
overhead costs are $5 per unit. The company's operating income for the year was $12,000
higher under variable costing than under absorption costing. Given these facts, what must
have been the number of units of product in inventory at the beginning of the year?
A. 27,600 units.
B. 28,800 units.
C. 32,400 units.
D. 42,000 units.
30,000 units + $12,000/$5 per unit = $32,400.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
24. During the last year, Moore Company's total variable production costs were $10,000, and
its total fixed manufacturing overhead costs were $6,800. The company produced 5,000 units
during the year and sold 4,600 units. There were no units in the beginning inventory. Which
of the following statements is true?
A. The operating income under absorption costing for the year will be $800 higher than
operating income under variable costing.
B. The operating income under absorption costing for the year will be $544 higher than
operating income under variable costing.
C. The operating income under absorption costing for the year will be $544 lower than
operating income under variable costing.
D. The operating income under absorption costing for the year will be $800 lower than
operating income under variable costing.
400 units * $6,800/5,000 = $544 higher than under variable costing.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
25. Last year, Ben Company's operating income under absorption costing was $4,400 lower
than its operating income under variable costing. The company sold 8,000 units during the
year, and its variable costs were $8 per unit, of which $3 was variable selling expense. Fixed
manufacturing overhead was $1 per unit in beginning inventory under absorption costing.
Ending inventory was zero. How many units did the company produce during the year?
A. 3,600 units.
B. 7,120 units.
C. 7,450 units.
D. 12,400 units.
8,000 - 4,400/1 = 3,600 units.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
26. Last year, Stephen Company had 20,000 units in its ending inventory. During the year,
Stephen Company's variable production costs were $12 per unit. The fixed manufacturing
overhead cost was $8 per unit in the beginning inventory. The company's operating income
for the year was $9,600 higher under variable costing than it was under absorption costing.
Given these facts, what must have been the number of units of product in the beginning
inventory last year?
A. 18,800 units.
B. 19,200 units.
C. 19,520 units.
D. 21,200 units.
Since operating income was higher under variable costing than under absorption costing the
cost released in beginning inventory was more than what was deferred so BI > EI by
$9,600/$8/unit = 1,200 units. BI = 20,000 + 1,200 = 21,200 units.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Aaker Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$99
0
6,300
6,000
300
$12
$42
$6
$6
$170,100
$24,000
27. What is the unit product cost for the month under variable costing?
A. $60.
B. $66.
C. $87.
D. $93.
12 + 42 + 6 = $60.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
28. What is the unit product cost for the month under absorption costing?
A. $60.
B. $66.
C. $87.
D. $93.
60 + 170,100/6,300 = $87.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
29. What is the total contribution margin for the month under the variable costing approach?
A. $27,900.
B. $72,000.
C. $198,000.
D. $234,000.
6,000 * (99 - 12 - 42 - 6 - 6) = $198,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
30. What is the total gross margin for the month under the absorption costing approach?
A. $12,000.
B. $72,000.
C. $98,100.
D. $198,000.
6,000 * (99 - 87) = $72,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
31. What is the total period cost for the month under the variable costing approach?
A. $60,000.
B. $170,000.
C. $194,100.
D. $230,100.
170,100 + 24,000 + 6,000 * 6 = $230,100.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
32. What is the total period cost for the month under the absorption costing approach?
A. $24,000.
B. $60,000.
C. $170,100.
D. $230,100.
24,000 + 6,000 * 6 = $60,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
33. What is the operating income (loss) for the month under variable costing?
A. ($14,100).
B. $3,900.
C. $8,100.
D. $12,000.
198,000 - 170,100 - 24,000 = $3,900.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
34. What is the operating income (loss) for the month under absorption costing?
A. ($14,100).
B. $3,900.
C. $8,100.
D. $12,000.
72,000 - 60,000() = $12,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production
costs were as follows:
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
$100,000
75,000
50,000
75,000
Total sales were $440,000, total variable selling and administrative expenses were $110,000,
and total fixed selling and administrative expenses were $45,000. There was no beginning
inventory. Assume that direct labour is a variable cost.
35. Under absorption costing, what was the unit product cost?
A. $9.00.
B. $12.00.
C. $13.40.
D. $14.00.
(100,000 + 75,000 + 50,000 + 75,000)/25,000 = $12.00.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
36. Under absorption costing, what was the gross margin?
A. $21,000.
B. $66,000.
C. $176,000.
D. $242,000.
$440,000 - 22,000 * $12 = $176,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
37. What was the contribution margin per unit?
A. $6.00.
B. $8.00.
C. $11.00.
D. $15.00.
Product VC/unit = (100,000 + 75,000 + 50,000)/25,000 = $9.
CM = (440,000 - 22,000 * 9 - 110,000)/22,000 = $6.00.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
38. Under variable costing, what was the total amount of fixed manufacturing cost in the
ending inventory?
A. $0.
B. $9,000.
C. $14,400.
D. $27,000.
There are no fixed costs in the inventory under variable costing.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
39. Under absorption costing, what was the total amount of fixed manufacturing cost in the
ending inventory?
A. $0.
B. $9,000.
C. $14,400.
D. $27,000.
3,000 * (75,000/25,000) = $9,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
40. What was the operating income under variable costing?
A. $2,000.
B. $9,000.
C. $12,000.
D. $21,000.
22,000 * 6 - 75,000 - 45,000 = $12,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
41. What was the operating income under absorption costing?
A. $2,000.
B. $9,000.
C. $12,000.
D. $21,000.
176,000 - 110,000 - 45,000 = $21,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Farron Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$92
0
8,700
8,300
400
$13
$55
$1
$5
$130,500
$8,300
42. What was the unit product cost for the month under variable costing?
A. $69.
B. $74.
C. $84.
D. $89.
13 + 55 + 1 = $69.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
43. What was the unit product cost for the month under absorption costing?
A. $69.
B. $74.
C. $84.
D. $89.
69 + (130,500/8,700) = $84.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
44. What was the operating income (loss) for the month under variable costing?
A. ($17,000).
B. $6,000.
C. $10,600.
D. $16,600.
8,300 * (92 - 74) - 130,500 - 8,300 = $10,600.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
45. What was the operating income (loss) for the month under absorption costing?
A. ($17,000).
B. $6,000.
C. $10,600.
D. $16,600.
8,300 * (92 - 84) - 8,300 * 5 - 8,300 = $16,600.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
46. What was the amount of fixed overhead cost in ending inventory under absorption
costing?
A. $33,600.
B. $27,000.
C. $6,000.
D. $0
400 * $15 = $6,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-03 Absorption Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Jarvix Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$111
0
8,800
8,900
$34
$37
$3
$9
$61,600
$169,100
The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.
47. What was the unit product cost for the month under variable costing?
A. $74.
B. $81.
C. $83.
D. $90.
34 + 37 + 3 = $74.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
48. What was the unit product cost for the month under absorption costing?
A. $74.
B. $81.
C. $83.
D. $90.
$74 + (61,600/8,800) = $81.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
49. What was the operating income for the month under variable costing?
A. $2,100.
B. $17,800.
C. $18,500.
D. $25,900.
8,900 * (111 - 74 - 9) - 61,600 - 169,100 = $18,500.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
50. What was the total period cost for the month under variable costing?
A. $0.
B. $61,600.
C. $230,700.
D. $310,800.
61,600 + 169,100 + 8,900 * 9 = $310,800.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
51. What was the amount of fixed manufacturing overhead deferred under absorption
costing?
A. $0.
B. $2,100.
C. $2,800.
D. $61,600.
Units in EI = 400 + 8,800 - 8,900 = 300 units.
Cost deferred = 300 * 61,600/8,800 = $2,100.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-03 Absorption Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
52. What was the amount of fixed overhead released for the month under absorption costing?
A. $0.
B. $2,100.
C. $2,800.
D. $61,600.
400 units * $7/unit = $2,800.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-03 Absorption Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
53. What was the operating income for the month under absorption costing?
A. $2,100.
B. $17,800.
C. $18,500.
D. $25,900.
$18,500 + 2,100 - 2,800 (= $17,800).
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-03 Absorption Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Hatfield Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$123
0
6,400
300
$45
$30
$1
$8
$140,800
$91,500
54. What was the unit product cost for the month under variable costing?
A. $76.
B. $84.
C. $98.
D. $106.
45 + 30 + 1 = $76.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
55. What was the total contribution margin for the month under the variable costing
approach?
A. $97,100.
B. $152,500.
C. $237,900.
D. $286,700.
(6,400 - 300) * (123 - 76 - 8) = $237,900.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
56. What was the total period cost for the month under the variable costing approach?
A. $140,300.
B. $140,800.
C. $232,300.
D. $281,100.
140,800 + 91,500 + 6,100 * 8 = $281,100.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
57. What was the operating income (loss) for the month under variable costing?
A. ($17,200).
B. $5,600.
C. $6,600.
D. $12,200.
$237,900 - 140,800 - 91,500 = $5,600.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Iancu Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$149
0
4,200
3,900
300
$27
$46
$5
$9
$155,400
$70,200
58. What was the unit product cost for the month under variable costing?
A. $78.
B. $87.
C. $115.
D. $124.
24 + 46 + 5 = $78.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
59. What was the operating income (loss) for the month under variable costing?
A. ($7,200).
B. $11,100.
C. $16,200.
D. $27,300.
(4,200 - 300) * (149 - 78 - 9) - 155,400 - 70,200 = $16,200.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
O'Briens Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$165
0
4,300
3,800
500
$31
$43
$5
$8
$165,400
$80,200
60. What was the unit product cost for the month under variable costing?
A. $79.
B. $87.
C. $115.
D. $124.
31 + 43 + 5 = $79.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
61. What was the operating income (loss) for the month under variable costing?
A. ($7,200).
B. $41,100.
C. $50,800.
D. $47,300.
(4,300 - 500) * (165 - 79 - 8) - 165,400 - 80,200 = $50,800.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
The Pacific Company manufactures a single product. The following data relate to the year
just completed:
Variable costs per unit:
Production
Selling and administrative
Fixed costs in total:
Production
Selling and administrative
$43
$15
$145,000
$95,000
During the year, 5,000 units were produced and 4,800 units were sold. There were no
beginning inventories.
62. Under variable costing, what was the unit product cost?
A. $43.
B. $58.
C. $72.
D. $91.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
63. Which of the following would best describe the relationship between the carrying value of
the finished goods inventory at the end of the year under variable costing as opposed to under
absorption costing?
A. $8,800 less than under absorption costing.
B. The same as absorption costing.
C. $5,800 less than under absorption costing.
D. $5,800 more than under absorption costing
145,000/5,000 * (5,000 - 4800) = $5,800 less.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
64. Under absorption costing, what was the cost of goods sold for the year?
A. $206,400.
B. $278,400.
C. $345,600.
D. $360,000.
4,800 * (43 + 145,500/5,000) = $345,600.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Crystal Company's variable costing income statement for the month of May appears below:
Crystal Company
Income Statement
For the month ended May 31
Sales ($10 per unit)
Less: Variable costs
Variable cost of goods
sold:
Beginning inventory
Add: Variable cost of
goods manufactured
Goods available for sale
Less: Ending inventory
Variable cost of goods
sold
Variable selling expense
Total variable costs
Contribution margin
Fixed costs:
Fixed manufacturing
overhead
Fixed selling and
administrative
Total fixed costs
Operating income
$900,000
$125,000
400,000
$525,000
75,000
$450,000
90,000
$540,000
360,000
$240,000
90,000
$330,000
$30,000
The company produces 80,000 units each month. Variable production costs per unit and total
fixed costs have remained constant over the past several months.
65. What was the dollar value of the company's inventory on May 31 under the absorption
costing method?
A. $60,000.
B. $75,000.
C. $90,000.
D. $120,000.
FC/unit = $240,000/80,000 = $3. VC = $400,000/80,000 = $5/unit.
Units in ending inventory = $75,000/$5 = 15,000. EI = 15,000 * (3 + 5) = $120,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
66. Under absorption costing, what was the reported operating income (loss) for the month
ending May 31?
A. ($30,000).
B. $0.
C. $30,000.
D. $60,000.
$30,000 + 15,000 * 3 - 25,000 * 3 = $0.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
The following data were provided by Green Enterprises for the most recent period:
Units in beginning inventory
Units produced
Units sold
Variable costs per unit:
Manufacturing
Selling and administrative
Fixed costs in total
Manufacturing
Selling and administrative
0
8,000
6,000
$15
$5
$24,000
$16,000
67. What was the unit product cost under variable costing?
A. $15.
B. $18.
C. $20.
D. $22.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
68. What was the unit product cost under absorption costing?
A. $15.
B. $18.
C. $20.
D. $25.
$15 + (24,000/8,000) = $18.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
69. For the period noted, which of the following statements best describes the relationship
between the operating income under absorption costing and under variable costing?
A. Absorption costing operating income would be higher than the operating income under
variable costing.
B. Absorption costing operating income would be lower than the operating income under
variable costing.
C. Absorption costing operating income would be the same as the operating income under
variable costing.
D. The relationship between absorption costing operating income and variable costing
operating income cannot be determined without additional information.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
The following data pertain to one month's operations of Whitney, Inc.:
Units in beginning inventory
Units produced
Units sold
Variable costs per unit:
Manufacturing
Selling and administrative
Fixed costs in total
Manufacturing
Selling and administrative
0
9,000
8,000
$10
$6
$18,000
$27,000
70. What was the carrying value on the balance sheet of the ending finished goods inventory
under variable costing?
A. $10,000.
B. $12,000.
C. $16,000.
D. $19,000.
(9,000 - 8,000) * 10 = $10,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
71. What was the carrying value on the balance sheet of the ending finished goods inventory
under absorption costing?
A. $10,000.
B. $12,000.
C. $16,000.
D. $21,000.
$10,000 + 1,000 * (18,000/9,000) = $12,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
72. For the month noted, what was the relationship between the operating income under
variable costing as opposed to under absorption costing?
A. Higher than operating income under absorption costing.
B. Lower than operating income under absorption costing.
C. The same as operating income under absorption costing.
D. The relationship between variable costing and absorption costing operating income cannot
be determined with the data provided.
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Bateman Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$117
0
4,700
4,400
300
$36
$38
$4
$11
$89,300
$26,400
73. What was the unit product cost for the month under variable costing?
A. $78.
B. $89.
C. $97.
D. $107.
36 + 38 + 4 = $78.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
74. What was the unit product cost for the month under absorption costing?
A. $78.
B. $89.
C. $97.
D. $108.
36 + 38 + 4 + (89,300/4,700) = $97.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Peaceman Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$117
0
4,700
4,400
300
$36
$38
$4
$11
$89,300
$26,400
75. What was the total contribution margin for the month?
A. $39,600.
B. $88,000.
C. $123,200.
D. $171,600.
4,400 * (117 - 36 - 38 - 4 - 11) = $123,200.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
76. What was the total gross margin for the month?
A. $39,600.
B. $88,000.
C. $123,200.
D. $171,600.
4,400 * [117 (89,300/4,700) - 36 - 38 - 4] = $88,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
During the past year, Carr Company manufactured 25,000 units and sold 20,000 units.
Production costs for the year were as follows:
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
$180,000
120,000
210,000
250,000
Total sales were $850,000, total variable selling expenses were $110,000, and total fixed
selling and administrative expenses were $170,000. There were no units in beginning
inventory. Assume that direct labour is a variable cost. Do not round intermediate
calculations.
77. What was the contribution margin per unit?
A. $12.10.
B. $16.60.
C. $17.70.
D. $22.10.
VC/unit = (210,000 + 120,000 + 180,000)/25,000 = $20.40.
CM = [850,000 (20,000 * 20.40) - 110,000]/20,000 = $16.60.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
78. Under absorption costing, what was the value of the ending inventory for the year?
A. $152,000.
B. $179,500.
C. $213,500.
D. $222,000.
50,000 * (20.40 + 250,000/25,000) = $152,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
79. What was the operating income for the year under variable costing as opposed to
absorption costing?
A. $28,000 lower than under absorption costing.
B. $28,000 higher than under absorption costing.
C. $50,000 lower than under absorption costing.
D. $50,000 higher than under absorption costing.
Lower by 5,000 * (250,000/25,000) = lower by $50,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Last year, Harris Company manufactured 17,000 units and sold 13,000 units. Production
costs for the year were as follows:
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
$153,000
110,500
204,000
255,000
Sales were $780,000 for the year, variable selling and administrative expenses were $88,400,
and fixed selling and administrative expenses were $170,000. There was no beginning
inventory. Assume that direct labour is a variable cost.
80. What was the contribution margin per unit? Do not round intermediate calculations.
A. $17.50.
B. $25.70.
C. $27.50.
D. $32.50.
VC product cost = (153,000 + 110,500 + 204,000)/17,000 = $27.50.
CM/unit = [780,000 (13,000 * 27.50) - 88,400]/13,000 = $25.70.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
81. Under absorption costing, what was the carrying value on the balance sheet of the ending
inventory for the year? Do not round intermediate calculations.
A. $0.
B. $170,000.
C. $190,800.
D. $230,800.
(17,000 - 13,000) * (27.50 + 255,000/17,000) = $170,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
82. Under variable costing, what was the company's operating income for the year, as
compared with under absorption costing?
A. $60,000 higher than under absorption costing.
B. $108,000 higher than under absorption costing.
C. $108,000 lower than under absorption costing.
D. $60,000 lower than under absorption costing.
4,000 * 255,000/17,000 = $60,000 lower.
Blooms: Evaluate
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Fahey Company manufactures a single product that it sells for $25 per unit. The company has
the following cost structure:
Variable costs per unit:
Manufacturing
Selling and administrative
Fixed costs in total
Manufacturing
Selling and administrative
$9
$3
$72,000
$54,000
There were no units in beginning inventory. During the year, 18,000 units were produced and
15,000 units were sold.
83. Under absorption costing, what was the unit product cost?
A. $9.
B. $12.
C. $13.
D. $16.
9 + (72,000/18,000) = $13.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
84. What was the company's operating income for the year under variable costing?
A. $57,000.
B. $60,000.
C. $69,000.
D. $81,000.
15,000 * (25 - 9 - 3) - 72,000 - 54,000 = $69,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
O'Leary Company manufactures a single product that it sells for $29 per unit. The company
has the following cost structure:
Variable costs per unit:
Manufacturing
Selling and administrative
Fixed costs in total
Manufacturing
Selling and administrative
$11
$4
$80,000
$58,000
There were no units in beginning inventory. During the year, 16,000 units were produced and
14,000 units were sold.
85. Under absorption costing, what was the unit product cost?
A. $9.
B. $12.
C. $13.
D. $16.
11 + (80,000/16,000) = $16.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
86. What was the company's operating income for the year under variable costing?
A. $58,000.
B. $60,000.
C. $69,000.
D. $81,000.
14,000 * (29 - 11- 4) - 80,000 - 58,000 = $58,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Erie Company manufactures a single product. Assume the following data for the year just
completed:
Variable costs per unit:
Manufacturing
Selling and administrative
Fixed costs in total
Manufacturing
Selling and administrative
$5
$8
$60,000
$82,500
There were no units in inventory at the beginning of the year. During the year, 30,000 units
were produced and 25,000 units were sold. Each unit sells for $35.
87. Under absorption costing, what was the unit product cost? Do not round intermediate
calculations.
A. $8.00.
B. $10.75.
C. $13.00
D. $17.75.
8 + (82,500/30,000) = $10.75.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
88. What was the company's operating income under variable costing?
A. $407,500.
B. $417,500.
C. $421,250.
D. $431,250.
25,000 * (35 - 8 - 5) - 60,000 - 82,500 = $407,500.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Chown Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$110
0
8,000
7,800
200
$22
$31
$3
$4
$248,000
$140,400
89. What was the total contribution margin for the month under the variable costing
approach?
A. $142,000.
B. $179,400.
C. $390,000.
D. $421,200.
7,800 * (110 - 22 - 31 - 3 - 4) = $390,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
90. What was the total gross margin for the month under the absorption costing approach?
A. $7,800.
B. $179,400.
C. $196,800.
D. $390,000.
7,800 * (110 - 22 - 31 - 3 - 248,000/8,000) = $179,400.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Delvin Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$120
0
1,800
1,500
300
$42
$42
$2
$9
$7,200
$28,500
91. What was the total period cost for the month under the variable costing approach?
A. $7,200.
B. $35,700.
C. $42,000.
D. $49,200.
1,500 * 9 + 7,200 + 28,500 = $49,200.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
92. What was the total period cost for the month under the absorption costing approach?
A. $7,200.
B. $28,500.
C. $42,000.
D. $49,200.
1,500 * 9 + 28,500 = $42,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Gabbert Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$90
0
3,600
3,400
200
$23
$11
$2
$8
$93,600
$61,200
93. What was the total contribution margin for the month under the variable costing
approach?
A. $62,800.
B. $95,200.
C. $156,400.
D. $183,600.
3,400 * (90 - 23 - 11 - 2 - 8) = $156,400.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
94. What was the total gross margin for the month under the absorption costing approach?
A. $90,000.
B. $95,200.
C. $125,800.
D. $156,400.
3,400 * (90 - 23 - 11 - 2 - 93,600/3,600) = $95,200.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
95. What was the total period cost for the month under the variable costing approach?
A. $88,400.
B. $93,600.
C. $154,800.
D. $182,000.
93,600 + 61,200 + 3,400 * 8 = $182,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
96. What was the total period cost for the month under the absorption costing approach?
A. $61,200.
B. $88,400.
C. $93,600.
D. $182,000
61,200 + 3,400 * 8 = $88,400.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
New Look Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$95
0
3,800
3,600
200
$22
$11
$2
$9
$102,600
$63,200
97. What was the total contribution margin for the month under the variable costing
approach?
A. $62,800.
B. $95,200.
C. $156,400.
D. $183,600.
3,600 * (95 - 22 - 11 - 2 - 9) = $183,600.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
98. What was the total gross margin for the month under the absorption costing approach?
A. $90,000.
B. $95,200.
C. $118,800.
D. $156,400.
3,600 * (95- 22 - 11 - 2 - 102,600/3,800) = $118,800.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
99. What was the total period cost for the month under the variable costing approach?
A. $88,400.
B. $93,600.
C. $154,800.
D. $200,000.
102,600 + 63,200 + 3,800 * 9 = $200,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
100. What was the total period cost for the month under the absorption costing approach?
A. $61,200.
B. $88,400.
C. $95,600.
D. $182,000
63,200 + 3,600 * 9 = $95,600.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Gordon Company produces a single product that sells for $10 per unit. Last year, there were
no beginning inventories, 100,000 units were produced, and 80,000 units were sold. The
company has the following cost structure:
Raw materials
Direct labour
Factory overhead
Selling and administrative
Fixed Costs
--$120,000
70,000
Variable Costs
$2.00 per unit produced
1.25 per unit produced
0.75 per unit produced
1.00 per unit sold
101. What was the operating income under variable costing?
A. $114,000.
B. $210,000.
C. $234,000.
D. $330,000.
80,000 * (10 - 2 - 1.25 -.75 - 1) - 120,000 - 70,000 = $210,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
102. Under absorption costing, what was the carrying value on the balance sheet of the ending
finished goods inventory? Do not round intermediate calculations.
A. $80,000.
B. $104,000.
C. $110,000.
D. $200,000.
(100,000 - 80,000) * (2 + 1.25 +.75 + 120,000/100,000) = $104,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Elliot Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$112
0
4,900
4,500
400
$19
$45
$6
$9
$117,600
$22,500
103. What was the operating income (loss) for the month under variable costing?
A. ($19,600).
B. $8,400.
C. $9,600.
D. $18,000.
4,500 * (112 - 19 - 45 - 6 - 9) - 117,600 - 22,500 = $8,400.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
104. What was the operating income (loss) for the month under absorption costing?
A. ($19,600).
B. $8,400.
C. $9,600.
D. $18,000.
8,400 + 400 * 117,600/4,900 = $18,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Khanam Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$97
500
8,400
400
$20
$37
$1
$11
$67,200
$161,500
The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.
105. What was the operating income for the month under variable costing?
A. $3,200.
B. $8,500.
C. $9,300.
D. $15,100.
Units sold = 500 + 8,400 - 400 = 8,500.
Op. Inc. = 8,500 * (97 - 20 - 37 - 1 - 11) - 67,200 - 161,500 = $9,300.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
106. What is the operating income for the month under absorption costing?
A. $3,200.
B. $8,500.
C. $9,300.
D. $15,100.
8,500 * (97 - 20 - 37 - 1 - 67,200/8,400) - 8,500 * 11 - 161,500 = $8,500.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
107. What is the amount of fixed overhead deferred under absorption costing?
A. $0
B. $3,200
C. $4,000
D. $67,200
400 * 67,200/8,400 = $3,200.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
108. What is the amount of fixed overhead released under absorption costing?
A. $0
B. $3,200
C. $4,000
D. $67,200
500 * 67,200/8,400 = $4,000.
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
DeAnne Company's variable costing income statement for August appears below:
DeAnne Company
Income Statement
For the month ended August 31
Sales ($15 per unit)
Less: Variable costs
Variable cost of goods
sold:
Beginning inventory
Add: Variable cost of
goods manufactured
Goods available for
sale
Less: Ending inventory
Variable cost of goods
sold
Variable selling
expense
Total variable costs
Contribution margin
Fixed costs:
Fixed manufacturing
overhead
Fixed selling and
administrative
Total fixed costs
Operating income
$600,000
$72,000
315,000
$387,000
27,000
$360,000
80,000
$440,000
160,000
$105,000
35,000
$140,000
$20,000
The company produces 35,000 units each month. Variable production costs per unit and total
fixed costs have remained constant over the past several months.
109. Under the absorption costing method, what was the dollar value of the company's
inventory on August 31?
A. $27,000.
B. $36,000.
C. $42,000.
D. $47,000.
Units sold = 600,000/15 = 40,000. VC production = 360,000/40,000 = $9/unit.
FOH = 105,000/35,000 = $3/unit. EI = $27,000/9 = 3,000 units * (9 + 3) = $36,000.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
110. Under absorption costing, what operating income (loss) did the company report for the
month ending August 31?
A. ($5,000).
B. $5,000.
C. $20,000.
D. $25,000.
BI = 72,000/9 = 8,000 units.
Op. Inc. = $20,000 + 3,000 * 3 - 8,000 * 3 = $5,000.
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
True / False Questions
111. In the preparation of financial statements using variable costing, fixed manufacturing
overhead is treated as a period cost.
TRUE
Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
112. Variable costing is sometimes referred to as direct costing or marginal costing.
TRUE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-04 Variable Costing
113. Under variable costing, the unit product cost contains some fixed manufacturing
overhead cost.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-04 Variable Costing
Topic: 08-06 Unit Cost Computations
114. Under variable costing, it may be possible to report a positive operating income even if
the company sells less than the break-even volume of sales.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
115. Under variable costing, the impact of both fixed manufacturing and non-manufacturing
cost is emphasized because the total amount of such cost for the period appears in the income
statement.
TRUE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
116. Absorption costing treats fixed manufacturing overhead as a period cost, rather than as a
product cost.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-06 Unit Cost Computations
117. The unit product cost under absorption costing contains no element of fixed
manufacturing overhead cost.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
118. Absorption costing treats all manufacturing costs as product costs.
TRUE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Topic: 08-03 Absorption Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
119. When the number of units in work-in-process and finished goods inventories increase,
absorption costing operating income will typically be greater than variable costing operating
income.
TRUE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
120. When sales exceeds production for a period, absorption costing operating income will
generally be greater than variable costing operating income.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
121. Absorption costing operating income is closer to the operating cash flow of a period than
is variable costing operating income.
FALSE
Blooms: Understand
CPA Competency: 3.1.3 Recommends improvements to reporting systems to meet information needs.
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-04 Explain the advantages and disadvantages of both variable and absorption costing.
Topic: 08-17 Advantages of Variable Costing and the Contribution Approach
122. Although variable costing is NOT permitted for income tax purposes in Canada, it is
widely accepted for external financial reports.
FALSE
Blooms: Remember
CPA Competency: 3.1.3 Recommends improvements to reporting systems to meet information needs.
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-04 Explain the advantages and disadvantages of both variable and absorption costing.
Topic: 08-16 External Reporting, Income Taxes, and Management Performance Evaluation
123. Sales volume is the only driver of operating income under absorption costing.
FALSE
Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
124. When lean production methods are introduced, the difference in operating income
calculated using the absorption and variable costing methods is reduced.
TRUE
Blooms: Understand
CPA Competency: 3.1.3 Recommends improvements to reporting systems to meet information needs.
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Learning Objective: 08-04 Explain the advantages and disadvantages of both variable and absorption costing.
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Topic: 08-17 Advantages of Variable Costing and the Contribution Approach
125. Since variable costing emphasizes costs by behaviour, it works well with cost-volumeprofit analysis.
TRUE
Blooms: Understand
CPA Competency: 3.1.3 Recommends improvements to reporting systems to meet information needs.
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 08-04 Explain the advantages and disadvantages of both variable and absorption costing.
Topic: 08-14 Cost-Volume-Profit Analysis and Absorption Costing
Short Answer Questions
126. Lee Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$95
100
6,200
5,900
400
$42
$28
$1
$5
$62,000
$35,400
The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.
Required:
a) What is the unit product cost for the month under variable costing?
b) What is the unit product cost for the month under absorption costing?
c) Prepare an income statement for the month using the contribution format and the variable
costing method.
d) Prepare an income statement for the month using the absorption costing method.
e) Reconcile the variable costing and absorption costing operating incomes for the month.
a) and b) Unit product costs
Variable costing:
Direct materials
Direct labour
Variable manufacturing overhead
Unit product cost
Absorption costing:
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
Unit product cost
c) and d) Income statements
$42
28
1
$71
$42
28
1
10
$81
Variable costing income
statement
Sales
Less variable expenses:
Variable cost of goods
sold:
Beginning inventory
Add variable
manufacturing costs
Goods available for sale
Less ending inventory
Variable costs of goods
sold
Variable selling and
administrative
Contribution margin
Less fixed expense:
Fixed manufacturing
overhead
Fixed selling and
administrative
Operating income
Absorption costing income statement
$560,500
$7,100
440,200
447,300
28,400
418,900
29,500
448,400
112,100
62,000
35,400
97,400
$14,700
Sales
Cost of goods sold:
Beginning inventory
Add cost of good
manufactured
Goods available for sale
Less ending inventory
Gross margin
Less selling and
administrative expense:
Variable selling and
administrative
Fixed selling and
administrative
Operating income
$560,500
$8,100
502,200
510,300
32,400
29,500
35,400
64,900
$17,700
e) Reconciliation
Variable costing operating income
Add fixed manufacturing overhead costs
Costs deferred in inventory under
absorption costing
Deduct fixed manufacturing overhead
costs released
From inventory under absorption
Absorption costing operating income
$14,700
3,000
0
$17,000
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
127. Mahugh Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$122
0
8,300
8,200
100
$27
$46
$4
$7
$199,200
$106,600
Required:
a) What is the unit product cost for the month under variable costing?
b) What is the unit product cost for the month under absorption costing?
c) Prepare an income statement for the month using the contribution format and the variable
costing method.
d) Prepare an income statement for the month using the absorption costing method.
e) Reconcile the variable costing and absorption costing operating incomes for the month.
a) and b) Unit product costs
Variable costing:
Direct materials
Direct labour
Variable manufacturing overhead
Unit product cost
Absorption costing:
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
Unit product cost
c) and d) Income statements
$27
46
4
$77
$27
46
4
24
$101
Variable costing income
statement
Sales
Less variable expenses:
Variable cost of goods
sold:
Beginning inventory
Add variable
manufacturing costs
Goods available for sale
Less ending inventory
Variable costs of goods
sold
Variable selling and
administrative
Contribution margin
Less fixed expense:
Fixed manufacturing
overhead
Fixed selling and
administrative
Operating income
Absorption costing income statement
$1,000,400
$0
639,100
639,100
7,700
631,400
57,400
688,800
311,600
199,200
106,600
305,800
$5,800
Sales
Cost of goods sold:
Beginning inventory
Add cost of good
manufactured
Goods available for sale
Less ending inventory
Gross margin
Less selling and
administrative expense:
Variable selling and
administrative
Fixed selling and
administrative
Operating income
$1,000,400
$0
838,300
838,300
10,100
828,200
172,000
57,400
106,600
164,000
$8,200
e) Reconciliation
Variable costing operating income
Add fixed manufacturing overhead costs
Costs deferred in inventory under
absorption costing
Deduct fixed manufacturing overhead
costs released
From inventory under absorption
Absorption costing operating income
$5,800
2,400
0
$8,200
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
128. The EG Company produces and sells one product: a microwave oven. The following data
refer to the year just completed:
Beginning inventory
Units produced
Units sold
Sales price per unit
Selling and administrative expenses:
Variable per unit
Fixed (total)
Manufacturing costs:
Direct materials cost per unit
Direct labour cost per unit
Variable overhead cost per unit
Fixed overhead (total)
$0
25,000
20,000
$400
$15
$275,000
$200
$50
$30
$300,000
Assume that direct labour is a variable cost.
Required:
a) Compute the cost of a single unit of product under both the absorption costing and variable
costing approaches.
b) Prepare an income statement for the year using absorption costing.
c) Prepare an income statement for the year using variable costing.
d) Reconcile the absorption costing and variable costing operating income figures in b) and c)
above.
a)
Cost per unit under absorption
costing:
Direct materials
Direct labour
Variable overhead
Fixed overhead ($300,000/25,000)
Total cost per unit
Cost per unit under variable costing:
Direct materials
Direct labour
Variable overhead
Total cost per unit
$200
50
30
12
$292
$200
50
30
$280
b) Absorption costing income statement:
Sales
Cost of goods sold:
Beginning inventory
Add cost of good
manufactured (25,000 @
$292)
Goods available for sale
Less ending inventory
(25,000 units @ $292)
Gross margin
Less selling and
administrative expense:
[($15 x 20,000) +
$275,000]
Operating income
c) Variable costing income statement:
$8,000,000
$0
7,300,000
7,300,000
1,460,000
5,480,000
2,160,000
575,000
$1,585,000
Sales
Cost of goods sold:
Beginning inventory
Cost of goods
manufactured (25,000 @
$280)
Cost of goods available
Less ending inventory
(5,000 @ $280)
Variable cost of goods
sold
Variable selling and
administrative (20,000 x
$15)
Less fixed expense:
Manufacturing overhead
Selling and
administrative
Operating income
$8,000,000
$0
7,000,000
7,000,000
1,400,000
5,600,000
300,000
5,900,000
300,000
275,000
575,000
$1,525,000
d)
Operating income under variable
costing
Add fixed manufacturing overhead
costs
Deferred in inventory under absorption
costing (5,000 x $12)
Operating income under absorption
costing
$1,525,000
60,000
$1,585,000
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
129. The Dean Company produces and sells a single product: a laser printer. The following
data refer to the year just completed:
Beginning inventory
Units produced
Units sold
Sales price per unit
Selling and administrative expenses:
Variable per unit
Fixed (total)
Manufacturing costs:
Direct materials cost per unit
Direct labour cost per unit
Variable overhead cost per unit
Fixed overhead (total)
$0
20,000
19,000
$350
$10
$225,000
$190
$40
$25
$250,000
Assume that direct labour is a variable cost.
Required:
a) Compute the cost of a single unit of product under both the absorption costing and variable
costing approaches.
b) Prepare an income statement for the year using absorption costing.
c) Prepare an income statement for the year using variable costing.
d) Reconcile the absorption costing and variable costing operating income figures in b) and c)
above.
a)
Cost per unit under absorption
costing:
Direct materials
Direct labour
Variable overhead
Fixed overhead ($250,000 / 20,000)
Total cost per unit
Cost per unit under variable costing:
Direct materials
Direct labour
Variable overhead
Total cost per unit
$190.00
40.00
25.00
12.50
$267.50
$190.00
40.00
25.00
$255.00
b) Absorption costing income statement:
Sales
Cost of goods sold:
Beginning inventory
Add cost of good
manufactured (20,000 @
$267.50)
Goods available for sale
Less ending inventory
(1,000 units @ $267.50)
Gross profit
Less selling and
administrative expense:
[($10 x 19,000) +
$225,000]
Operating income
c) Variable costing income statement:
$6,650,000
$0
5,350,000
5,350,000
267,500
5,082,500
1,567,500
415,000
$1,152,200
Sales
Cost of goods sold:
Beginning inventory
Cost of goods
manufactured (20,000 @
$255)
Cost of goods available
Less ending inventory
(1,000 @ $255)
Variable cost of goods
sold
Variable selling and
administrative (19,000 x
$10)
Contribution margin
Less fixed expense:
Manufacturing overhead
Selling and
administrative
Operating income
$6,650,000
$0
5,100,000
5,100,000
255,000
4,845,000
190,000
5,035,000
1,615,000
250,000
225,000
475,000
$1,140,000
(d).
Operating income under variable
costing
Add fixed manufacturing overhead
cost deferred in inventory under
absorption costing (1,000 x $12.50)
Operating income under absorption
costing
$1,140,000
12,500
$1,152,500
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
130. Harper Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$111
400
8,800
8,900
$34
$37
$3
$9
$61,600
$169,100
The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.
Required:
a. Compute the total Contribution Margin.
b. Compute the Operating Income under Variable Costing.
c. Prepare a reconciliation from your Variable Costing Operating Income to compute
Operating Income under absorption costing.
a. 8,900 units * (111 - 34 - 37 - 3 - 9) = $249,200
b. CM - Fixed Expenses = 249,200 - 61,600 - 169,100 = $18,500
c. EI = 400 + 8,800 - 8,900 = 300 units. F. OH cost = 61,600/8,800 = $7/unit
Variable costing operating income
Add: Fixed manufacturing overhead
deferred in inventory under absorption
costing (300 units @ $7)
Deduct: Fixed manufacturing overhead
released from beginning
Operating income, absorption costing
$18,500
2,100
(2,800)
$17,800
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
131. Operating data for Fowler Company and its absorption costing income statements for the
last two years are presented below:
Units in beginning
inventory
Units produced
Units sold
Sales
Cost of goods sold:
Beginning inventory
Add cost of goods
manufactured
Goods available for
sale
Less ending inventory
Cost of goods sold
Gross margin
Selling and
administrative expense
Operating income
Year 1
0
Year 2
3,000
18,000
15,000
18,000
20,000
$0
180,000
$30,000
180,000
180,000
210,000
30,000
150,000
90,000
80,000
10,000
200,000
120,000
90,000
$10,000
$30,000
Variable manufacturing costs are $6 per unit. Fixed manufacturing overhead totals $72,000 in
each year. This overhead is applied at the rate of $4 per unit. Variable selling and
administrative expenses were $2 per unit sold.
Required:
a) What was the unit product cost in each year under variable costing?
b) Prepare new income statements for each year using variable costing.
c) Reconcile the absorption costing and variable costing operating income for each year.
a) The manufacturing cost of $6 per unit is the unit product cost under variable costing in both
years.
Sales
Less variable expenses:
Variable cost of goods
sold
Beginning inventory
Add variable
manufacturing costs @
$6
Goods available for sale
Less ending inventory @
$6
Variable cost of goods
sold
Variable selling and
administrative @ $2
Total variable expense
Contribution margin
Less fixed expense:
Fixed manufacturing
overhead*
Fixed selling and
administrative
Total
Operating income
* Year 1: $8,000 - $2 15 15,000 = $50,000
Year 1
$240,000
Year 2
$320,000
0
18,000
108,000
108,000
108,000
126,000
18,000
90,000
6,000
120,000
30,000
40,000
120,000
160,000
120,000
160,000
72,000
72,000
50,000
50,000
122,000
$(2,000)
122,000
$38,000
c)
Variable costing operating
income
Add fixed factory
overhead deferred in
inventory under
absorption costing (3,000
units x $4 per unit)
Less fixed factory
overhead released from
inventory under
absorption costing (2,000
units x $4 per unit)
Absorption costing
operating income
Year 1
$(2,000)
Year 2
$38,000
12,000
(8,000)
$10,000
$30,000
Blooms: Evaluate
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
132. Pabbatti Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$112
500
2,800
2,900
400
$37
$19
$7
$5
$109,200
$5,800
The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.
Required:
a) What is the unit product cost for the month under variable costing?
b) Prepare an income statement for the month using the contribution format and the variable
costing method.
c) Without preparing an income statement, determine the absorption costing operating income
for the month. (Hint: Use the reconciliation method.)
a) Variable costing unit product cost
Direct materials
Direct labour
Variable manufacturing overhead
Unit product cost
$37
19
7
$63
b) income statement:
Sales
Less variable expenses:
Variable cost of goods
sold
Beginning inventory
Add variable
manufacturing costs
Goods available for sale
Less ending inventory
Variable cost of goods
sold
Variable selling and
administrative @ $2
Variable selling and
administrative
Contribution margin
Less fixed expense:
Fixed manufacturing
overhead
Fixed selling and
administrative
Operating income
$324,800
$31,500
176,400
207,900
25,200
182,700
14,500
197,200
127,600
109,200
5,800
c) Computation of absorption costing operating income:
115,000
$12,600
Fixed manufacturing overhead per
unit
Change in inventories (units)
Variable costing operating income
Add fixed manufacturing overhead
costs deferred in inventory under
absorption costing
Deduct fixed manufacturing overhead
costs released from inventory under
absorption costing
Absorption costing operating income
$39.00
(100)
$12,600
0
(3,900)
$8,700
Blooms: Evaluate
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
133. Qabar Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$110
0
4,600
4,200
400
$46
$28
$5
$10
$55,200
$25,200
Required:
a) What is the unit product cost for the month under variable costing?
b) Prepare an income statement for the month using the contribution format and the variable
costing method.
c) Without preparing an income statement, determine the absorption costing operating income
for the month. (Hint: Use the reconciliation method.)
a) Variable costing unit product cost
Direct materials
Direct labour
Variable manufacturing overhead
Unit product cost
$46
28
5
$79
b) Variable costing income statement:
Sales
Less variable expenses:
Variable cost of goods
sold
Beginning inventory
Add variable
manufacturing costs
Goods available for sale
Less ending inventory
Variable cost of goods
sold
Variable selling and
administrative
Contribution margin
Less fixed expense:
Fixed manufacturing
overhead
Fixed selling and
administrative
Operating income
$462,000
$0
363,400
363,400
31,600
331,800
42,000
373,800
88,200
55,200
25,200
c) Computation of absorption costing operating income:
80,400
$7,800
Fixed manufacturing overhead per
unit
Change in inventories (units)
Variable costing operating income
Add fixed manufacturing overhead
costs deferred in inventory under
absorption costing
Deduct fixed manufacturing overhead
costs released from inventory under
absorption costing
Absorption costing operating income
$12.00
400
$7,800
4,800
0
$12,600
Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
134. UHF Antennas, Inc., produces and sells a unique television antenna. The company has
just opened a new plant to manufacture the antenna, and the following cost and revenue data
have been reported for the first month of the new plant's operation:
Selling price
Beginning inventory
Units produced
Units sold
Selling price per unit
Selling and administrative expenses:
Variable per unit
Fixed (total)
Manufacturing costs:
Direct material cost per unit
Direct labour cost per unit
Variable overhead cost per unit
Fixed overhead cost (Total)
$108
0
35,000
30,000
$50
$2
$360,000
$9
$8
$3
$350,000
Management is anxious to see how profitable the new antenna will be and has asked that an
income statement be prepared for the month. Assume that direct labour is a variable cost.
Required:
a) Assuming that the company uses absorption costing, compute the unit product cost and
prepare an income statement.
b) Assuming that the company uses variable costing, compute the unit product cost and
prepare an income statement.
c) Explain the reason for any difference in the ending inventories under the two costing
methods and the impact of this difference on reported operating income.
a) Unit product cost under absorption costing
Direct materials cost per unit
Direct labour cost per unit
Variable overhead cost per unit
Fixed overhead cost per unit:
$350,000/35,000 units
Total cost per unit under absorption
costing
$9
8
3
10
$30
Income statement: under absorption costing:
Sales ($50 x 30,000)
Cost of goods sold:
Beginning inventory
Cost of goods
manufactured
Cost of goods available
Ending inventory (5,000
x $30)
Gross margin
Selling and
administrative expense:
[360,000 + ($2 x
30,000)]
Operating income
Cost of goods
manufactured: $30 x
35,000 = $1,050,000
b) Unit product cost under variable costing
$1,500,000
$0
1,050,000
1,050,000
150,000
900,000
600,000
420,000
$180,000
Direct materials cost per unit
Direct labour cost per unit
Variable overhead cost per unit
Total cost per unit under variable
costing
$9
8
3
$20
Income statement: under variable costing:
Sales ($50 x 30,000)
Cost of goods sold:
Beginning inventory
Cost of goods
manufactured ($20 x
35,000 units)
Cost of goods available
Ending inventory (5,000
x $20)
Variable cost of goods
sold
Variable selling and
administrative expenses:
($2 x 30,000)
Contribution margin
Fixed expenses:
Fixed overhead
Fixed selling and
administrative
Operating income
$1,500,000
$0
700,000
700,000
100,000
600,000
60,000
660,000
$350,000
360,000
710,000
$130,000
c)
Variable costing operating income
Add fixed factory overhead cost
deferred in inventory under absorption
costing (5,000 units x $10)
Absorption costing operating income
$130,000
50,000
$180,000
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
135. Data concerning Sonderegger Company's operations last year appear below:
Selling price
Units in beginning inventory
Units produced
Units sold
Selling price per unit
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$110
0
70,000
60,000
$12.00
$2.00
$1.00
$1.00
$1.50
$140,000
$150,000
Required:
a) Prepare an income statement for the year using absorption costing.
b) Prepare an income statement for the year using variable costing.
c) Prepare a report reconciling the difference in operating income between absorption and
variable costing for the year.
a)
Sales
Cost of goods sold:
Beginning inventory
Add Cost of goods
manufactured @ $6*
Goods available for sale
Less ending inventory @
$6*
Gross margin
Selling and
administrative expense**
Operating income
$720,000
$0
420,000
420,000
60,000
360,000
360,000
240,000
$120,000
* $4 = @200 + $1.00 + $1.00 + $140,000/70,000
**60,000 units $1.50 per unit variable plus $150,000 fixed
b)
Sales
Less variable expenses:
Variable cost of goods
sold
Beginning inventory
Add variable
manufacturing costs @ $4
Goods available for sale
Less ending inventory @
$4
Variable cost of goods
sold
Variable selling and
administrative @ $1.50
Contribution margin
Less fixed expense:
Fixed manufacturing
overhead
Fixed selling and
administrative
Operating income
$722,000
$0
280,000
280,000
40,000
240,000
90,000
330,000
390,000
140,000
150,000
290,000
$100,000
c)
Variable costing operating income
Add fixed factory overhead cost
deferred in inventory under absorption
costing (10,000 units × $2)
Absorption costing operating income
$100,000
20,000
$120,000
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
136. Nelson Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$84
500
1,900
2,100
300
$25
$10
$7
$10
$38,000
$21,000
The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.
Required:
a) Prepare an income statement for the month using the contribution format and the variable
costing method.
b) Prepare an income statement for the month using the absorption costing method.
a) Variable costing income statement:
Sales
Cost of goods sold:
Beginning inventory
Add variable
manufacturing costs
Goods available for sale
Less ending inventory
Variable cost of goods
sold
Variable selling and
administrative
Contribution margin
Less fixed expense:
Fixed manufacturing
overhead
Fixed selling and
administrative
Operating income
$176,400
$21,000
79,800
100,800
12,600
88,200
21,000
109,200
67,200
38,000
21,000
59,000
$8,200
b) Absorption costing income statement:
Sales
Cost of goods sold:
Beginning inventory
Add cost of goods
Goods available for sale
Less ending inventory
Gross profit
Less selling and
administrative expense:
Variable selling and
administrative
Fixed selling and
administrative
Operating income
$176,400
$31,000
117,800
148,800
18,600
130,200
46,200
21,000
21,000
42,000
$4,200
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
137. Oakes Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$108
0
1,100
900
200
$28
$30
$7
$11
$14,300
$1,800
Required:
a) Prepare an income statement for the month using the contribution format and the variable
costing method.
b) Prepare an income statement for the month using the absorption costing method.
a) Variable costing income statement:
Sales
Cost of goods sold:
Beginning inventory
Add variable
manufacturing costs
Goods available for sale
Less ending inventory
Variable cost of goods
sold
Variable selling and
administrative
Contribution margin
Less fixed expense:
Fixed manufacturing
overhead
Fixed selling and
administrative
Operating income
$97,200
$0
71,500
71,500
13,000
58,500
9,900
68,400
28,800
14,300
1,800
16,100
$12,700
b) Absorption costing income statement:
Sales
Cost of goods sold:
Beginning inventory
Add cost of goods
Goods available for sale
Less ending inventory
Gross margin
Less selling and
administrative expense:
Variable selling and
administrative
Fixed selling and
administrative
Operating income
$97,200
$0
85,800
85,800
15,600
70,200
27,000
9,900
1,800
11,700
$15,300
Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Topic: 08-03 Absorption Costing
Topic: 08-04 Variable Costing
Topic: 08-05 Selling and Administrative Expenses
Topic: 08-06 Unit Cost Computations
138. The Miller Company had the following results for its first two years of operation:
Sales
Cost of goods sold
Gross margin
Selling and administrative
expense
Operating income
Year 1
$1,200,000
800,000
400,000
300,000
Year 2
$1,200,000
800,000
400,000
300,000
$100,000
$100,000
In Year 1, the company produced and sold 40,000 units of its only product; in Year 2, the
company again sold 40,000 units, but increased production to 50,000 units. The company's
variable production cost is $5 per unit, and its fixed manufacturing overhead cost is $600,000
a year. Fixed manufacturing overhead costs are applied to the product on the basis of each
year's unit production (i.e., a new fixed overhead rate is computed each year). Variable selling
and administrative expenses are $2 per unit sold.
Required:
a) Compute the unit product cost for each year under absorption costing and under variable
costing.
b) Prepare an income statement for each year, using the contribution format with variable
costing.
c) Reconcile the variable costing and absorption costing income figures for each year.
d) Explain why the operating income for Year 2 under absorption costing was higher than the
operating income for Year 1, although the same number of units were sold in each year.
a) Cost per unit under absorption costing:
Variable production cost
per unit
Fixed manufacturing
overhead cost:
($600,000/40,000)
($600,000/50,000)
Unit product cost
Year 1
$5
Year 2
$5
$15
$20
$12
$17
Cost per unit under variable costing:
Variable production cost
per unit
Year 1
$5
b) Income statements for each year under variable costing:
Year 2
$5
Sales
Cost of goods sold ($5 x
40,000)
Variable selling and
administrative expense
($2 x 40,000)
Contribution margin
Fixed expense:
Fixed manufacturing
overhead
Fixed selling and
administrative expense
Operating income
Year 1
$1,200,000
200,000
Year 2
$1,200,000
200,000
80,000
80,000
920,000
920,000
600,000
600,000
150,000
150,000
$100,000
$100,000
c) Reconciliation of absorption costing and variable costing net incomes
Net income under variable
costing
Fixed manufacturing
overhead deferred in
(released from)
inventory:
Year 1
Year 2 (10,000 units x $12
per unit)
Net income under
absorption costing
Year 1
$100,000
Year 2
$100,000
0
120,000
$100,000
$220,000
d. The increase in production in Year 2, in the face of level sales, caused a buildup of
inventory and a deferral of a portion of the overhead costs of Year 2 to the next year. This
deferral of cost relieved Year 2 of $120,000 of fixed manufacturing overhead. Income for Year
2 was $120,000 higher than income of Year 1, even though the same number of units was sold
each year. By increasing production and building up inventory, the company was able to
increase profits without increasing sales. This is a major criticism of the absorption costing
approach.
Blooms: Evaluate
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
139. The Hadfield Company manufactures and sells a unique electronic part. The company's
plant is highly automated with low variable and high fixed manufacturing costs. Operating
results on an absorption costing basis for the first three years of activity were as follows:
Sales
Cost of goods
sold:
Beginning
inventory
Cost of goods
manufactured
Goods available
for sale
Less ending
inventory
Cost of goods sold
Gross margin
Less selling and
administrative
expense
Operating income
(loss)
Year 1
$704,000
Year 2
$528,000
Year 3
$704,000
0
0
220,000-
520,000
550,000
496,000
520,000
550,000
716,000
0
220,000
186,000
520,000
184,000
180,000
330,000
198,000
160,000
530,000
174,000
180,000
$4,000
$38,000
$(6,000)
Additional information about the company is as follows:
-Variable manufacturing costs (direct labour, direct materials, and variable manufacturing
overhead) total $3 per unit, and fixed manufacturing overhead costs total $400,000.
-Fixed manufacturing costs are applied to units of product on the basis of the number of units
produced each year (i.e., a new fixed overhead rate is computed each year).
-The company uses a FIFO inventory flow assumption.
-Variable selling and administrative expenses are $2 per unit sold. Fixed selling and
administrative expenses total $100,000.
-Production and sales information for the three years is as follows:
Production in units
Sales in units
Year 1
40,000
40,000
Year 2
50,000
30,000
Year 3
32,000
40,000
Required:
a) Compute operating income for each year under the variable costing approach.
b) Prepare a reconciliation from your Operating Income (loss) under variable costing to
Absorption Costing operating income for year 3.
c) Referring to the absorption costing income statements above, explain why operating
income was higher in Year 2 than in Year 1 under absorption costing, in light of the fact that
fewer units were sold in Year 2 than in Year 1.
d) Referring again to the absorption costing income statements, explain why the company
suffered an operating loss in Year 3 but reported a positive operating income in Year 1,
although the same number of units was sold in each year.
e) If the company had used just-in-time (JIT) during Year 2 and Year 3 and produced only
what could be sold, what would have been the company's operating income (loss) for each
year under absorption costing.
a)
Sales
Less variable
expenses:
Variable cost of
goods sold
Beginning inventory
Add manufacturing
costs
Goods available for
sale
Less ending
inventory
Variable cost of
goods sold
Variable selling
expense
Total variable
expense
Contribution margin
Less fixed expense:
Fixed
manufacturing
overhead
Fixed selling and
administrative
Total fixed expense
Operating income
Year 1
$704,000
Year 2
$528,000
Year 3
$704,000
0
120,000
0
150,000
60,000
96,000
120,000
150,000
156,000
0
60,000
36,000
120,000
90,000
120,000
80,000
60,000
80,000
200,000
150,000
200,000
504,000
378,000
504,000
400,000
400,000
400,000
100,000
100,000
100,000
500,000
$4,000
500,000
$(122,000)
500,000
$4,000
b) Reconciliation Year 3
Variable costing operating income
Add: Fixed overhead deferred in EI ;
12,000 units @ $12.50
$4,000
150,000
Deduct: Fixed overhead released from
BI ; 20,000 units @ $8
Absorption costing operating income
(160,000)
$(6,000)
c) Production increased sharply in Year 2 even though unit sales declined. The increase in
production resulted in a lower unit product cost in Year 2 than in Year 1. Furthermore, because
production exceeded sales, fixed manufacturing overhead costs were deferred in inventories.
These effects more than offset the loss of revenue due to lower sales. The company's income
thus rose even though sales were down.
d) Production decreased sharply in Year 3. This resulted in an increase in the unit product
cost. In addition, inventories decreased and as a result fixed manufacturing overhead deferred
in inventories in Year 2 were released to the income statement in Year 3.
e) If JIT had been in use, the operating income under absorption costing would have been the
same as under variable costing in all three years. With production geared to sales, there would
have been no ending inventory, and therefore, there would have been no fixed overhead costs
deferred in inventory to other years.
Blooms: Evaluate
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
140. X Company reported operating income for Year 2 of $1,200,000 under variable costing
and $1,600,000 under absorption costing. The total variable manufacturing cost of the
company's ending finished goods inventory was $120,000. The cost of the company's
beginning-of-year finished goods inventory under absorption costing was $50,000 higher than
the cost of the beginning-of-year finished goods inventory under variable costing.
Required:
a) Calculate the cost of ending finished goods inventory under absorption costing.
b) Compare the cost of your ending finished inventory under absorption costing in part (a)
with that given under variable costing. Does the difference make sense? Why or why not?
a) The best approach is to use the reconciliation method.
Operating income under variable costing
DEDUCT fixed manufacturing overhead
released from beginning inventory under
absorption costing
ADD fixed manufacturing overhead
deferred in ending inventory under
absorption costing
Operating income under absorption
costing
$1,200,000
50,000
$1,150,000
X
$1,600,000
Therefore, fixed manufacturing overhead deferred in ending inventory under absorption
costing is $450,000 (that is, $1,600,000 minus $1,150,000).
Cost of ending finished goods inventory under absorption costing is $570,000 (that is,
$120,000 plus $450,000)
b) The cost of the ending finished inventory under absorption costing is higher. This makes
sense for two reasons. First, the cost of inventory under absorption costing includes one more
element of manufacturing costs (fixed manufacturing overhead) than the cost of inventory
under variable costing. Second, operating income under absorption costing is higher by
exactly the amount of fixed manufacturing overhead deferred in the ending finished goods
inventory.
Blooms: Evaluate
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
141. The following information pertains to Malcolm Corporation for a period:
Selling price per unit
Standard fixed manufacturing costs per
unit
Variable selling and administrative
cost per unit
Fixed selling and administrative costs
Beginning inventories:
Units
Standard fixed manufacturing cost
Standard variable manufacturing cost
Units produced
Units sold
$41
$20
$4
$16,000
?
$40,000
$20,000
10,000 units
9,600 units
a) Assume the unit standard costs data for the beginning and ending inventories remained
constant during the period. What was the total standard cost of the ending inventory under
absorption costing?
b) Ignoring the effects of income taxes, what is your best estimate of the difference in retained
earnings at the end of the period under absorption costing and variable costing?
a)
Units in beginning inventory
Units in ending inventory
Cost of ending inventory under
absorption costing:
Fixed manufacturing cost ($20 × 2,400)
Variable manufacturing cost ($10* ×
2,400)
Total ($30 × 2,400)
*$20,000/2,000 units = $10/unit
= $40,000/$20
= 2,000
= 2,000 + 10,000 - 9,600
= 2,400
$48,000
24,000
$72,000
b) Difference in retained earnings will be equal to difference in ending inventory values, that
is, the additional fixed manufacturing overhead in the absorption costing ending inventory of
$48,000 (that is, 2,400 $20):
Ending inventory under absorption
costing ($30 × 2,400)
Ending inventory under variable
costing ($10 × 2,400)
Difference
$72,000
24,000
$48,000
Blooms: Evaluate
CPA Competency: 3.1.3 Recommends improvements to reporting systems to meet information needs.
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Learning Objective: 08-04 Explain the advantages and disadvantages of both variable and absorption costing.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Topic: 08-15 Decision Making
142. It is generally true that if production and sales are NOT equal there are income statement
differences in terms of operating incomes under absorption costing and variable costing.
Required:
a) Which elements, if any, of the balance sheet are also likely to be different under absorption
and variable costing? Explain.
a). The amounts reported for inventories and retained earnings will different. Differences in
inventories and operating income amounts tend to receive more attention in the absorption
versus variable costing controversy. The differences in inventories are gross amounts which in
a world of no-taxes would also be reflected in balances of retained earnings. If there are taxes,
gross amounts will be split between income taxes payable or future income taxes and the
retained earnings.
Blooms: Evaluate
CPA Competency: 3.1.3 Recommends improvements to reporting systems to meet information needs.
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Learning Objective: 08-04 Explain the advantages and disadvantages of both variable and absorption costing.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Topic: 08-16 External Reporting, Income Taxes, and Management Performance Evaluation
143. Y Company reported operating income for Year 2 of $1,600,000 under variable costing
and $1,200,000 under absorption costing. The total variable manufacturing cost of the
company's beginning finished goods inventory was $120,000. The cost of the company's endof-year finished goods inventory under standard absorption costing was $50,000 higher than
the cost of the beginning-of-year finished goods inventory under variable costing.
Required:
a) Calculate the cost of ending finished goods inventory under absorption costing.
b) Compare the operating incomes under absorption costing and variable costing. What do the
numbers suggest in terms of relationship, if any, between units sold and units produced in
Year 2? Explain.
a) The best approach is to use the reconciliation method.
Operating income under absorption
costing
ADD fixed manufacturing overhead
released from beginning inventory under
absorption costing
DEDUCT fixed manufacturing overhead
deferred in ending inventory under
absorption costing
Operating income under variable costing
$1,200,000
X
$Y
50,000
$1,600,000
Y is $1,650,000 (that is, $1,600,000 plus $50,000), implying fixed manufacturing overhead
released from beginning inventory under absorption costing was $450,000 (that is, $1,650,000
minus $1,200,000).
Cost of beginning finished goods inventory under absorption costing was $570,000 (that is,
$120,000 plus $450,000)
b) The fact that operating income under variable costing ($1,600,000) was greater than
operating income under absorption costing ($1,200,000) would suggest that units sold
exceeded units produced. That is, inventory level was reduced making it necessary to release
the fixed manufacturing overhead that had been deferred in those units. The difference in
operating income of $400,000 is exactly equal to the difference in fixed manufacturing
overhead released from beginning inventory ($450,000) and fixed overhead deferred in
ending inventory ($50,000). Note that this explanation assumes that the fixed manufacturing
overhead application rate used for absorption costing in Year 2 did not change from Year 1.
Blooms: Evaluate
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 08-01 Identify how variable costing differs from absorption costing; and compute unit product costs under each method.
Learning Objective: 08-02 Prepare income statements using both variable and absorption costing.
Learning Objective: 08-03 Reconcile variable costing and absorption costing operating incomes; and explain why the two amounts differ.
Topic: 08-06 Unit Cost Computations
Topic: 08-09 Effect of Changes in Production on Operating Income
Topic: 08-10 Variable Costing
Topic: 08-11 Absorption Costing
Chapter 09
Budgeting
Multiple Choice Questions
1. What is the budget or schedule that provides necessary input data for the direct labour
budget?
A. Raw materials purchases budget.
B. Production budget.
C. Schedule of cash collections.
D. Cash budget.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
Topic: 09-21 The Direct Labour Budget
2. The cash budget must be prepared before you can complete which of the following?
A. Production budget.
B. Budgeted balance sheet.
C. Raw materials purchases budget.
D. Schedule of cash disbursements.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-14 The Cash Budget
Topic: 09-25 The Cash Budget
Topic: 09-27 The Budgeted Balance Sheet
3. Which of the following is NOT a benefit of budgeting?
A. It uncovers potential bottlenecks before they occur.
B. It coordinates the activities of the entire organization by integrating the plans and
objectives of the various parts.
C. It ensures that records comply with generally accepted accounting principles.
D. It provides benchmarks for evaluating subsequent performance.
Blooms: Understand
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and accounting forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-05 Advantages of Budgeting
4. Which of the following best describes the direct materials purchase budget?
A. It is the beginning point in the budget process.
B. It must provide for the desired ending inventory as well as for production.
C. It is accompanied by a schedule of cash collections.
D. It is completed after the cash budget.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-20 The Direct Materials Purchases Budget
5. The master budget process usually begins with which of the following?
A. Production budget.
B. Operating budget.
C. Sales budget.
D. Cash budget.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-15 Sales Forecasting—A Critical Step
Topic: 09-17 The Sales Budget
6. Which of the following variances in a comprehensive performance report using the flexible
budget concept is the most appropriate for measuring efficiency of operations?
A. Sales volume variance.
B. Contribution margin variance.
C. Flexible budget variance.
D. Total static budget variance.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-30 Using the Flexible Budgeting Concept in Performance Evaluation
7. There are various budgets within the master budget. One of these budgets is the production
budget. Which of the following best describes the production budget?
A. It details the required direct labour hours.
B. It details the required raw materials purchases.
C. It is calculated based on the sales budget and the desired ending inventory.
D. It summarizes the costs of producing units for the budget period.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-18 The Production Budget
8. Which of the following best describes a typical participative budget?
A. It is NOT subject to review by higher levels of management since to do so would
contradict the participative aspect of the budgeting processing.
B. It is NOT subject to review by higher levels of management except in specific cases where
the input of higher management is required.
C. It is subject to review by higher levels of management in order to prevent the budgets from
becoming too loose.
D. It is NOT critical to the success of a budgeting program.
Blooms: Understand
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-08 The Participative Budget Approach
9. What is a continuous (or perpetual) budget?
A. It is prepared for a range of activity so that the budget can be adjusted for changes in
activity.
B. It is a plan that is updated monthly or quarterly, dropping one period and adding another.
C. It is a strategic plan that does not change.
D. It is used in companies that experience no change in sales.
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-07 Choosing a Budget Period
10. Which of the following best describes a method of budgeting in which the cost of each
program must be justified every year?
A. Operational budgeting.
B. Zero-based budgeting.
C. Continuous budgeting.
D. Responsibility accounting.
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-10 Zero-Base Budgeting
11. Fairmont Inc. uses an accounting system that charges costs to the manager who has been
delegated the authority to make decisions concerning the costs. For example, if the sales
manager accepts a rush order that will result in higher than normal manufacturing costs, these
additional costs are charged to the sales manager because the authority to accept or decline the
rush order was given to the sales manager. What best describes this type of an accounting
system?
A. Responsibility accounting.
B. Contribution accounting.
C. Absorption accounting.
D. Operational budgeting.
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-06 Responsibility Accounting
12. Parlee Company's sales are 30% in cash and 70% on credit. Sixty percent of the credit
sales are collected in the month of sale, 25% in the month following sale, and 12% in the
second month following sale. The remainder is uncollectible. The following are budgeted
sales data:
Total Sales
January
$60,000
February
$70,000
March
$50,000
April
$30,000
What would be the budgeted total cash receipts in April?
A. $27,230.
B. $36,230.
C. $38,900.
D. $47,900.
30,000 *.3 + 30,000 *.7 *.6 + 70,000 *.7 *.12 + 50,000 *.7 *.25 = $36,230.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
13. Budgeted sales in Allen Company over the next four months are given below:
Budgeted
Sales
September
$100,000
October
$160,000
November
$180,000
December
$120,000
Twenty-five percent of the company's sales are for cash, and 75% are on account. Collections
for sales on account follow a stable pattern as follows: 50% of a month's sales are collected in
the month of sale, 30% are collected in the month following sale, and 15% are collected in the
second month following sale. The remainder is uncollectible. Given these data, what should
be cash collections for December?
A. $133,500.
B. $120,000.
C. $138,000.
D. $153,000.
Dec. cash sales 120,000 *.25 + Dec. credit sales 120,000 *.75 *.50 + Nov. credit sales
180,000 *.75 *.30 + Oct. 160,000 *.75 *.15. = $133,500.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
14. The PDQ Company makes collections on credit sales according to the following schedule:
25% in month of sale
70% in month following sale
4% in second month following sale
1% uncollectible
The following sales have been budgeted:
Month
April
May
June
Sales
$100,000
120,000
110,000
What would be the cash collections in June?
A. $110,000.
B. $111,500.
C. $113,400.
D. $115,500.
100,000 *.04 + 120,000 *.70 + 110,000 *.25 = $115,500.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
15. Orion Corporation is preparing a cash budget for the six months beginning January 1.
Shown below are the company's expected collection pattern and the budgeted sales for the
period:
Expected collection pattern:
65% collected in the month of sale
20% collected in the month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible
Budgeted Sales:
January
February
March
April
May
June
$160,000
185,000
190,000
170,000
200,000
180,000
What would be the estimated total cash collections during April from sales and accounts
receivables?
A. $155,900.
B. $167,000.
C. $171,666.
D. $173,400.
160,000 *.04 + 185,000 *.10 + 190,000 *.20 + 170,000 *.65 = $173,400.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
16. Pardee Company plans to sell 12,000 units during the month of August. If the company
has 2,500 units on hand at the start of the month, and plans to have 2,000 units on hand at the
end of the month, how many units must be produced during the month?
A. 11,500 units.
B. 12,000 units.
C. 12,500 units.
D. 14,000 units.
12,000 + 2,000 - 2,500 = 11,500 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-18 The Production Budget
17. Modesto Company produces and sells Product AlphaB. To guard against stockouts, the
company requires that 20% of the next month's sales be on hand at the end of each month.
Budgeted sales of Product AlphaB over the next four months are:
Budgeted
Sales in Units
June
30,000
July
40,000
August
60,000
September
50,000
What would be the budgeted production for August?
A. 50,000 units.
B. 58,000 units.
C. 62,000 units.
D. 70,000 units.
60,000 + 50,000 *.20 - 60,000 *.20 = 58,000 units.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-18 The Production Budget
18. Friden Company has budgeted sales and production over the next quarter as follows:
Sales in Units
Production in
Units
April
100,000
104,000
May
120,000
128,000
June
?
156,000
On April 1, the company has 20,000 units of product on hand. A minimum of 20% of the next
month's sales needs (in units) must be on hand at the end of each month. July sales are
expected to be 140,000 units. What would be the budgeted sales for June (in units)?
A. 128,000 units.
B. 160,000 units.
C. 184,000 units.
D. 188,000 units.
May EI = 128,000 + 120,000 *.20 - 120,000 = $32,000 = June BI. June sales = 156,000 +
32,000 - 140,000 *.20. = 160,000 units.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
19. Walsh Company expects sales of Product W to be 60,000 units in April, 75,000 units in
May, and 70,000 units in June. The company desires that the inventory on hand at the end of
each month be equal to 40% of the next month's expected unit sales. Due to excessive
production during March, there were 25,000 units of Product W in the ending inventory on
March 31. Given this information, what should be Walsh Company's production of Product W
for the month of April?
A. 60,000 units.
B. 65,000 units.
C. 66,000 units.
D. 75,000 units.
60,000 + 75,000 *.40 - 25,000 = 65,000 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
20. Superior Industries' sales budget shows quarterly sales for the next year as follows:
Quarter
First
Second
Third
Fourth
Sales (Units)
10,000
8,000
12,000
14,000
Company policy is to have a finished goods inventory at the end of each quarter equal to 20%
of the next quarter's sales. What should be the budgeted production for the second quarter?
A. 7,200 units.
B. 8,000 units.
C. 8,400 units.
D. 8,800 units.
8,000 + 12,000 *.20 - 8,000 *.20 = 8,800 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
21. The Tobler Company has budgeted production for next year as follows:
Quarter
Production in
Units
First
10,000
Second
12,000
Third
16,000
Fourth
14,000
Four kilograms of raw materials are required for each unit produced. At the start of the year,
raw materials on hand total 4,000 kilograms. The raw materials inventory at the end of each
quarter should equal 10% of the next quarter's production needs. What would be the budgeted
purchases of raw materials in the third quarter?
A. 50,400 kilograms.
B. 56,800 kilograms.
C. 62,400 kilograms.
D. 63,200 kilograms.
16,000 * 4 + 14,000 * 4 *.10 - 16,000 * 4 *.10 = 63,200 units.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-18 The Production Budget
Topic: 09-20 The Direct Materials Purchases Budget
22. Marple Company's budgeted production in units and budgeted raw materials purchases
over the next three months are given below:
Budgeted
Production (in
Units)
Budgeted Raw
Materials:
Purchases (in
Kilograms)
January
60,000
February
?
March
100,000
129,000
165,000
188,000
Two kilograms of raw materials are required to produce one unit of product. The company
wants raw materials on hand at the end of each month equal to 30% of the following month's
production needs. The company is expected to have 36,000 kilograms of raw materials on
hand on January 1. What should be the budgeted production for February?
A. 75,000 units.
B. 82,500 units.
C. 105,000 units.
D. 150,000 units.
Desired EI = 129,000 + 36,000 - 60,000 * 2 = 45,000 kg. Production in Feb. = 45,000/.30/2 =
75,000 units.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-18 The Production Budget
Topic: 09-20 The Direct Materials Purchases Budget
23. The Waverly Company has budgeted sales for next year as follows:
Quarter
Sales in Units
First
12,000
Second
14,000
Third
18,000
Fourth
16,000
The ending inventory of finished goods for each quarter should equal 25% of the next
quarter's budgeted sales in units. The finished goods inventory at the start of the year is 3,000
units. What should be the scheduled production for the third quarter?
A. 13,500 units.
B. 17,500 units.
C. 18,500 units.
D. 22,000 units.
18,000 + 16,000 *.25 - 18,000 *.25 = 17,500 units.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
24. The Willsey Merchandise Company has budgeted $40,000 in sales for the month of
December. The company's cost of goods sold is 30% of sales. If the company has budgeted to
purchase $18,000 in merchandise during December, what is the budgeted change in inventory
levels over the month of December?
A. $6,000 increase.
B. $10,000 decrease.
C. $15,000 increase.
D. $22,000 decrease.
Change in inventory = Bud. Purchase - CGS = 18,000 - 40,000 *.30 = $6,000 increase.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
25. ABC Company has a cash balance of $9,000 on April 1. The company must maintain a
minimum cash balance of $6,000. During April, expected cash receipts are $45,000. Expected
cash disbursements during the month total $52,000. What amount will the company need to
borrow during April?
A. $2,000.
B. $4,000.
C. $6,000.
D. $8,000.
Unadjusted cash = 9,000 + 45,000 - 52,000 = 2000. Borrowing = 6,000 - 2,000.= $4,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-14 The Cash Budget
Topic: 09-25 The Cash Budget
26. Avril Company makes collections on sales according to the following schedule:
30% in the month of sale
60% in the month following sale
8% in the second month following sale
The following sales are expected:
January
February
March
Expected Sales
$100,000
120,000
110,000
What should be the budgeted cash collections in March?
A. $105,000.
B. $110,000.
C. $110,800.
D. $113,000.
100,000 *.08 + 120,000 *.60 + 110,000 *.30 = $113,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-14 The Cash Budget
Topic: 09-25 The Cash Budget
27. The Stacy Company makes and sells a single product: Product R. Budgeted sales for April
are $300,000. Gross margin is budgeted at 30% of sales dollars. If the net income for April is
budgeted at $40,000, what are the budgeted selling and administrative expenses?
A. $50,000.
B. $78,000.
C. $102,000.
D. $133,333.
300,000 *.30 - 40,000 = $50,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-24 The Selling and Administrative Expense Budget
Topic: 09-26 The Budgeted Income Statement
KAB Inc., a small retail store, had the following results for May. The budgets for June and
July are also given.
Sales
Cost of sales
Gross margin
Operating
expenses
Operating income
May (actual)
$42,000
21,000
21,000
20,000
June (budget)
$40,000
20,000
20,000
20,000
July (budget)
$45,000
22,500
22,500
20,000
$1,000
$0
$2,500
Sales are collected 80% in the month of the sale and the balance in the month following the
sale. (There are no bad debts.) The goods that are sold are purchased in the month prior to
sale. Suppliers of the goods are paid in the month following the purchase. The operating
expenses are paid in the month of the sale.
28. What should be the amount of cash collected during the month of June?
A. $32,000.
B. $40,000.
C. $40,400.
D. $41,000.
42,000 *.20 + 40,000 *.80 = $40,400.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
29. What should be the cash disbursements during the month of June for goods purchased for
resale and for operating expenses?
A. $40,000.
B. $41,000.
C. $42,500.
D. $43,500.
Purchases in May are paid for in June. May purchases = June budgeted CGS. Cash
disbursements = 20,000 + 20,000 = $40,000.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
Justin's Plant Store, a retailer, started operations on January 1. On that date, the only assets
were $16,000 in cash and $3,500 in merchandise inventory. For purposes of budget
preparation, assume that the company's cost of goods sold is 60% of sales. Expected sales for
the first four months appear below:
January
February
March
April
Expected Sales
$10,000
24,000
16,000
25,000
The company desires that the merchandise inventory on hand at the end of each month be
equal to 50% of the next month's merchandise sales (stated at cost). All purchases of
merchandise inventory must be paid in the month of purchase. Sixty percent of all sales
should be for cash; the balance will be on credit. Seventy-five percent of the credit sales
should be collected in the month following the month of sale, with the balance collected in the
following month. Variable operating expenses should be 10% of sales, and fixed expenses (all
depreciation) should be $3,000 per month. Cash payments for the variable operating expenses
are made during the month the expenses are incurred.
30. In a budgeted income statement for the month of February, what would be the net
income?
A. $0.
B. $1,800.
C. $4,200.
D. $9,000.
24,000 * (1 -.60) - 24,000 *.10 - 3,000 = $4,200.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-26 The Budgeted Income Statement
31. In a budgeted balance sheet, what would be the merchandise inventory on February 28?
A. $3,200.
B. $4,800.
C. $7,500.
D. $9,600.
16,000 *.60 *.50 = $4,800.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
Topic: 09-27 The Budgeted Balance Sheet
32. What would be the accounts receivable balance that would appear in the March 31
budgeted balance sheet?
A. $8,800.
B. $12,400.
C. $15,000.
D. $16,000.
24,000 *.40 *.25 + 16,000 *.40 = $8,800.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-27 The Budgeted Balance Sheet
33. In a budget of cash receipts for March, what would be the total cash receipts?
A. $8,200.
B. $16,000.
C. $17,800.
D. $20,200.
16,000 *.60 + 24,000 *.40 *.75 + 10,000 *.40 *.25 = $17,800.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-25 The Cash Budget
34. In a budget of cash disbursements for March, what would be the total cash
disbursements?
A. $11,200.
B. $13,900.
C. $16,900.
D. $22,300.
CGS + EI - BI + Op. Expenses = 16,000 *.60 + 25,000 *.60 *.50 - 4,800 + 16,000 *.10 =
$13,900.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
Topic: 09-25 The Cash Budget
Information on the actual sales and inventory purchases of the Law Company for the first
quarter follow:
January
February
March
Inventory Sales
$120,000
100,000
130,000
Purchases
$60,000
78,000
90,000
Collections from Law Company's customers are normally 60% in the month of sale, 30% in
the month following sale, and 8% in the second month following sale. The balance is
uncollectible. Law Company takes full advantage of the 3% discount allowed on purchases
paid for by the end of the following month.
The company expects sales in April of $150,000 and inventory purchases of $100,000.
Operating expenses for the month of April are expected to be $38,000, of which $15,000 is
salaries and $8,000 is depreciation. The remaining operating expenses are variable with
respect to the amount of sales in dollars. Those operating expenses requiring a cash outlay are
paid for during the month incurred. Law Company's cash balance on March 1 was $43,000,
and on April 1 was $35,000.
35. What would be the expected cash collections from customers during April?
A. $117,600.
B. $137,000.
C. $139,000.
D. $150,000.
150,000 *.60 + 130,000 *.30 + 100,000 *.08 = $137,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-25 The Cash Budget
36. What would be the expected cash disbursements during April for inventory purchases?
A. $87,300.
B. $90,000.
C. $97,000.
D. $100,000.
90,000 * (1 -.03) = $87,300.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
37. What would be the expected cash disbursements during April for operating expenses?
A. $15,000.
B. $23,000.
C. $30,000.
D. $38,000.
38,000 - 8,000 = $30,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-24 The Selling and Administrative Expense Budget
38. What would be the expected cash balance on April 30?
A. $19,700.
B. $28,700.
C. $54,700.
D. $62,700.
35,000 + 137,000 - 87,300 - 30,000 = $54,700.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
Topic: 09-24 The Selling and Administrative Expense Budget
Topic: 09-25 The Cash Budget
The LaPann Company has obtained the following sales forecast data:
Cash Sales
Credit Sales
July
$80,000
240,000
August
$70,000
220,000
September
$50,000
180,000
October
$60,000
200,000
The regular pattern of collection of credit sales is 20% in the month of sale, 70% in the month
following the month of sale, and the remainder in the second month following the month of
sale. There are no bad debts.
39. What is the budgeted accounts receivable balance on September 30?
A. $126,000.
B. $148,000.
C. $166,000.
D. $190,000.
180,000 *.80 + 220,000 *.10 = $166,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-27 The Budgeted Balance Sheet
40. What are the budgeted cash receipts for October?
A. $188,000.
B. $226,000.
C. $248,000.
D. $278,000.
60,000 + 200,000 *.20 + 180,000 *.70 + 220,000 *.10 = $248,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-25 The Cash Budget
The LaGrange Company had the following budgeted sales for the first half of the current
year:
January
February
March
April
May
June
Cash Sales
$70,000
50,000
40,000
35,000
45,000
40,000
Credit Sales
$340,000
190,000
135,000
120,000
160,000
140,000
The company is in the process of preparing a cash budget and must determine the expected
cash collections by month. To this end, the following information has been assembled:
Collections on sales:
60% in month of sale
30% in month following sale
10% in second month following sale
The accounts receivable balance on January 1 of the current year was $70,000, of which
$50,000 represents uncollected December sales and $20,000 represents uncollected November
sales.
41. What would be the total cash collected by LaGrange Company during January?
A. $261,500.
B. $331,500.
C. $344,000.
D. $274,000.
70,000 + 20,000 + 50,000/.40 *.30 + 340,000 *.60 = $331,500.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-25 The Cash Budget
42. What is the budgeted accounts receivable balance on June 1 of the current year?
A. $56,000.
B. $64,000.
C. $76,000.
D. $132,000.
120,000 *.10 + 160,000 *.40 = $76,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
Topic: 09-27 The Budgeted Balance Sheet
Pardise Company plans the following beginning and ending inventory levels (in units) for
July:
Raw material
July 1
40,000
July 31
50,000
Work in process
Finished goods
10,000
80,000
10,000
50,000
Two units of raw material are needed to produce each unit of finished product.
43. If Pardise Company plans to sell 480,000 units during July, what would be the number of
units it would have to manufacture during July?
A. 440,000 units.
B. 450,000 units.
C. 480,000 units.
D. 510,000 units.
480,000 + 50,000 - 80,000 = 450,000 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
44. If 500,000 finished units were to be manufactured during July, what would be the units of
raw material needed to be purchased?
A. 900,000 units.
B. 1,000,000 units.
C. 1,010,000 units.
D. 1,020,000 units.
500,000 * 2 + 50,000 - 40,000 = $1,010,000 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
Topic: 09-20 The Direct Materials Purchases Budget
Barley Enterprises has budgeted unit sales for the next four months as follows:
October
November
December
January
4,800 units
5,800 units
6,400 units
5,200 units
The ending inventory for each month should be equal to 15% of the next month's sales in
units. The inventory on September 30 was below this level and contained only 600 units.
45. What are the total units to be produced in October?
A. 4,530 units.
B. 5,070 units.
C. 5,670 units.
D. 5,890 units.
4,800 + 5,800 *.15 - 600 = 5,070 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
46. What is the desired ending inventory for December?
A. 690 units.
B. 780 units.
C. 870 units.
D. 960 units.
5,200 *.15 = 780 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
Roberts Enterprises has budgeted sales in units for the next five months as follows:
June
July
August
September
October
4,500 units
7,100 units
5,300 units
6,700 units
3,700 units
Past experience has shown that the ending inventory for each month must be equal to 10% of
the next month's sales in units. The inventory on May 31 contained 410 units. The company
needs to prepare a production budget for the second quarter of the year.
47. What is the opening inventory in units for September?
A. 370 units.
B. 530 units.
C. 670 units.
D. 6,700 units.
6,700 *.10 = 670 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
48. What is the total number of units to be produced in July?
A. 6,920 units.
B. 7,100 units.
C. 7,280 units.
D. 7,630 units.
7,100 + 5,300 *.10 - 7,100 *.10 = 6,920 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
49. What is the desired ending inventory for August?
A. 370 units.
B. 530 units.
C. 670 units.
D. 710 units.
6,700 *.10 = 670 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
Noel Enterprises has budgeted sales in units for the next five months as follows:
January
February
March
April
May
6,800 units
5,400 units
7,200 units
4,600 units
3,800 units
Past experience has shown that the ending inventory for each month must be equal to 10% of
the next month's sales in units. The inventory on December 31 contained 400 units. The
company needs to prepare a production budget for the second quarter of the year.
50. What is the opening inventory in units for April?
A. 380 units.
B. 460 units.
C. 720 units.
D. 680 units.
4,600 *.10 = 460 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
51. What is the total number of units to be produced in February?
A. 5,220 units.
B. 5,400 units.
C. 5,580 units.
D. 6,120 units.
5,400 + 7,200 *.10 + 5,400 *.10 = 5,580 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
52. What is the desired ending inventory for March?
A. 380 units.
B. 460 units.
C. 540 units.
D. 720 units.
4,600 *.10 = 460 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
The LFM Company makes and sells a single product: Product T. Each unit of Product T
requires 1.3 hours of labour at a labour rate of $9.10 per hour. LFM Company needs to
prepare a Direct Labour Budget for the second quarter of next year.
53. What would be the budgeted direct labour cost per unit of Product T?
A. $7.00.
B. $9.10.
C. $10.40.
D. $11.83.
1.3 hrs * $9.10/hr.= $11.83 per unit.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-21 The Direct Labour Budget
54. The company has budgeted to produce 25,000 units of Product T in June. The finished
goods inventories on June 1 and June 30 were budgeted at 500 and 700 units, respectively.
What would be the budgeted direct labour costs incurred in June?
A. $227,500.
B. $293,384.
C. $295,750.
D. $304,031.
25,000 * 1.3 * 9.10 = $295,750.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-21 The Direct Labour Budget
The International Company makes and sells only one product, Product SW. The company is
in the process of preparing its Selling and Administrative Expense Budget for the last half of
the year. The following budget data are available:
Sales commissions
Shipping
Advertising
Executive salaries
Depreciation on office
equipment
Other
Variable cost per unit
sold
$0.70
1.10
0.20
Monthly fixed cost
0.25
19,000
$14,000
34,000
11,000
All expenses other than depreciation are paid in cash in the month they are incurred.
55. If the company has budgeted to sell 25,000 units of Product SW in July, what will be the
total budgeted selling and administrative expenses for July?
A. $56,250.
B. $78,000.
C. $123,250.
D. $134,250.
Total VC = $2.25. Total FC = $78,000. 25,000 * 2.25 + 78,000 = $134,250.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-24 The Selling and Administrative Expense Budget
56. If the company has budgeted to sell 20,000 units of Product SW in October, what will be
the total budgeted variable selling and administrative expenses for October?
A. $40,000.
B. $45,000.
C. $56,250.
D. $78,000.
20,000 * 2.25 = $45,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-24 The Selling and Administrative Expense Budget
57. If the budgeted cash disbursements for selling and administrative expenses for November
total $123,250, then how much was the total selling and administrative budget for
November?
A. $123,250.
B. $134,250.
C. $168,250.
D. $187,250.
123,250 + 11,000 = $134,250.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-24 The Selling and Administrative Expense Budget
Topic: 09-25 The Cash Budget
58. If the company has budgeted to sell 24,000 units of Product SW in September, what would
be the total budgeted fixed selling and administrative expenses for September?
A. $48,000.
B. $54,000.
C. $67,000.
D. $78,000.
Total FC = $78,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-24 The Selling and Administrative Expense Budget
Topic: 09-25 The Cash Budget
The Culver Company is preparing its Manufacturing Overhead Budget for the third quarter of
the year. Budgeted variable factory overhead is $3.00 per unit produced; budgeted fixed
factory overhead is $75,000 per month, with $16,000 of this amount being factory
depreciation.
59. If the budgeted production for July is 6,000 units, what is the total budgeted factory
overhead for July?
A. $18,000.
B. $75,000.
C. $93,000.
D. $109,000.
6,000 * 3 + 75,000 = $93,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-22 The Manufacturing Overhead Budget
60. If the budgeted production for August is 5,000 units, what is the total budgeted factory
overhead per unit?
A. $15.
B. $18.
C. $20.
D. $22.
3 + 75,000/5,000 = $18 per unit.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-22 The Manufacturing Overhead Budget
61. If all cash expenses are paid for in the month incurred what is the budgeted cash
disbursements for manufacturing overhead if 5,500 units are produced?
A. $16,500.
B. $75,500.
C. $91,500.
D. $99,000.
5,500 * 3 + 75,000 - 16,000 = $75,500.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-22 The Manufacturing Overhead Budget
Topic: 09-25 The Cash Budget
The Bandeiras Company, a merchandising firm, has budgeted its activity for December
according to the following information:
I. Sales at $550,000, all for cash.
II. Merchandise inventory on November 30 was $300,000.
III. Budgeted depreciation for December is $35,000.
IV. The cash balance at December 1 was $25,000.
V. Selling and administrative expenses are budgeted at $60,000 for December and are paid in
cash.
VI. The planned merchandise inventory on December 31 is $270,000.
VII. The invoice cost for merchandise purchases represents 75% of the sales price. All
purchases are paid for in cash.
62. What are the budgeted cash receipts for December?
A. $137,500.
B. $412,500.
C. $550,000.
D. $585,000.
all sales $550,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
63. What are the budgeted cash disbursements for December?
A. $382,500.
B. $442,500.
C. $472,500.
D. $477,500.
550,000 *.75 + 270,000 - 300,000 + 60,000 = $442,500.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
Topic: 09-24 The Selling and Administrative Expense Budget
Topic: 09-25 The Cash Budget
64. What is the budgeted net income for December?
A. $42,500.
B. $77,500.
C. $107,500.
D. $137,500.
550,000 * (1 -.75) - 35,000 - 60,000 = $42,500.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-24 The Selling and Administrative Expense Budget
Topic: 09-26 The Budgeted Income Statement
A cash budget by quarters for the Carney Company is given below (note that some data are
missing). Missing data amounts have been keyed with either question marks or lowercase
letters (a, b, c, etc.); these lowercase letters will be referred to in the questions that follow. (It
may be necessary to calculate a value for items where a question mark appears.) A zero
amount is designated by a dash (-). The company requires a minimum cash balance of at least
$10,000 to start a quarter. All data are in thousands of dollars.
Carney Corporation
Cash Budget
Cash balance,
beginning
Add:
collections
from
customers
Total cash
available
Less:
disbursement
s
Purchase of
inventory
Operating
expenses
Dividends
Total
disbursements
Excess
(deficiency) of
cash available
over
disbursements
Financing:
Borrowings
Repayments
(including
interest)
Total
financing
Cash balance,
ending
Quarters
1
$16
2
$e
3
$13
4
$10
$a
$70
$67
$80
$?
$?
$80
$90
$31
$c
$40
$35
$10
$14
$19
$-
$$76
$6
$?
$$f
$5
$55
$7
$17
$(2)
$35
$b
$-
$$d
$12
$-
$$(16)
$?
$?
$12
$(16)
$10
$?
$10
$19
65. What are the collections from customers during the first quarter (item a), in thousands of
dollars?
A. $43.
B. $67.
C. $60.
D. $73.
76 + 7 - 16 = $67.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-25 The Cash Budget
66. What is the borrowing required during the first quarter to meet the minimum cash balance
(item b), in thousands of dollars?
A. $0.
B. $3.
C. $7.
D. $10.
10 - 7 = $3.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-25 The Cash Budget
67. What is the cash disbursed for purchases during the second quarter (item c), in thousands
of dollars?
A. $9.
B. $13.
C. $21.
D. $55.
10(e) + 70 - 17 - 6 - 14 - 22 = $21.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-25 The Cash Budget
68. What is the repayment (including interest) of financing during the second quarter (item d),
in thousands of dollars?
A. $0.
B. $4.
C. $7.
D. $17.
17 - 13 = $4.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-25 The Cash Budget
69. What is the cash balance at the beginning of the second quarter (item e), in thousands of
dollars?
A. $0.
B. $7.
C. $10.
D. $14.
the same as ending first quarter.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-25 The Cash Budget
70. What are the total disbursements during the third quarter (item f), in thousands of dollars?
A. $59.
B. $78.
C. $82.
D. $84.
80 + 2 = $82.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-25 The Cash Budget
71. What are the total collections from customers for the year, in thousands of dollars?
A. $260.
B. $277.
C. $290.
D. $284.
67 + 70 + 67 + 80 = $284.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-25 The Cash Budget
Pollitt Potato Packers has a flexible budget for manufacturing overhead that is based on direct
labour hours. The following overhead costs appear on the flexible budget at the 200,000-hour
level of activity:
Variable overhead costs (total):
Packing supplies
Indirect labour
Fixed overhead costs (total):
Utilities
Insurance
Rent
$120,000
$180,000
$100,000
$40,000
$20,000
72. At an activity level of 180,000 direct labour hours, what amount would the flexible budget
estimate for indirect labour cost?
A. $108,000.
B. $144,000.
C. $162,000.
D. $180,000.
180,000 * (180,000/200,000) = $162,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
73. What amount would the flexible budget estimate for total variable overhead cost per direct
labour hour?
A. $0.60.
B. $0.90.
C. $1.50.
D. $1.80.
(120,000 + 180,000)/200,000 = $1.50 per unit.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
74. At an activity level of 180,000 direct labour hours, what amount would the flexible budget
estimate for total budgeted fixed costs?
A. $100,000.
B. $144,000.
C. $150,000.
D. $160,000.
100,000 + 40,000 + 20,000 = $160,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
75. At an activity level of 160,000 direct labour hours, what amount would the flexible budget
estimate for the utilities?
A. $80,000.
B. $100,000.
C. $120,000.
D. $160,000.
Utilities is fixed.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
Capelli Hospital bases its budgets on patient-visits. The hospital's static budget for August
appears below:
Budgeted number of patient-visits
Budgeted variable overhead costs:
Supplies (@$5.00 per patient-visit)
Laundry (@$7.30 per patient-visit)
Total variable overhead cost
Budgeted fixed overhead costs:
Wages and salaries
Occupancy costs
Total fixed overhead cost
Total budgeted overhead cost
8,300
$41,500
60,590
102,090
60,590
73,040
133,630
$235,720
76. What should be the total variable overhead cost at an activity level of 9,300 patient-visits
per month?
A. $114,390.
B. $149,730.
C. $102,090.
D. $133,630.
9,300 * (5 + 7.30) = $114,390.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
77. What should be the total fixed overhead cost at an activity level of 9,600 patient-visits per
month?
A. $133,630.
B. $154,560.
C. $235,720.
D. $272,640.
Total Fixed overhead cost.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
78. What should be the total overhead cost at an activity level of 9,400 patient-visits per
month?
A. $235,720
B. $249,250
C. $266,960
D. $250,640
9,400 * (5 + 7.30) + 133,630 = $249,250.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
Mandalay Hotel bases its budgets on guest-days. The hotel's static budget for August appears
below:
Budgeted number of guest-days
Budgeted variable overhead costs:
Supplies (@$9.60 per guest-day)
Laundry (@$9.40 per guest-day)
Total variable overhead cost
Budgeted fixed overhead costs:
Wages and salaries
Occupancy costs
Total fixed overhead cost
Total budgeted overhead cost
4,300
$41,280
40,420
81,700
57,190
52,030
109,220
$190,920
79. What is the expected total variable overhead cost at an activity level of 5,000 guest-days
per month?
A. $127,000
B. $109,220
C. $95,000
D. $81,700
5,000 * (9.60 + 9.40) = $95,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
80. What is the expected total fixed overhead cost at an activity level of 5,500 guest-days per
month?
A. $139,700
B. $190,920
C. $244,200
D. $109,220
Will be same as given for 4,300 guests.
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
81. The total overhead cost at an activity level of 5,200 guest-days per month should be:
A. $208,020
B. $230,880
C. $209,940
D. $190,920
5,200 * (9.60 + 9.40) + 109,220 = $208,020.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
Isadore Hospital bases its budgets on patient-visits. The hospital's static budget for July
appears below:
Budgeted number of patient-visits
Budgeted variable overhead costs:
Supplies (@$4.60 per guest-day)
Laundry (@$7.20 per guest-day)
Total variable overhead cost
Budgeted fixed overhead costs:
Salaries
Occupancy costs
Total fixed overhead cost
Total budgeted overhead cost
Actual results for the month were:
7,700
$35,420
55,440
90,860
46,200
67,760
113,960
$204,820
Actual number of patient-visits
Supplies
Laundry
Salaries
Occupancy costs
7,800
$38,250
$61,240
$46,190
$65,650
82. What is the variance for supplies costs in the flexible budget performance report for the
month?
A. $2,370 U
B. $2,370 F
C. $2,830 F
D. $2,830 U
7,800 * 4.60 - 38,250 = $2,370 U.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
83. What is the variance for laundry costs in the flexible budget performance report for the
month?
A. $5,080 F
B. $5,080 U
C. $5,800 U
D. $5,800 F
7,800 * 7.20 - 61,240 = $5,080 U.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
84. What is the variance for occupancy costs in the flexible budget performance report for the
month?
A. $2,110 U
B. $2,990 U
C. $2,990 F
D. $2,110 F
67,760 - 65,650 = $2,110 F.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
85. The following costs appear in Malgorzata Company's flexible budget at an activity level
of 15,000 machine-hours:
Indirect materials: $7,800
Factory rent: $18,000
What would be the flexible budget amounts at an activity level of 12,000 machine hours if
indirect material is a variable cost and factory rent a fixed cost?
Indirect materials
A) $7,800
B) 7,800
C) 6,240
D) 6,240
Factory rent
$14,400
18,000
14,400
18,000
A. Option A
B. Option B
C. Option C
D. Option D
Indirect materials = 12,000 * 7,800/15,000= $6,240 Factory rent $18,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
86. Mongelli Family Inn is a bed and breakfast establishment in a converted 100-year-old
mansion. The Inn's guests appreciate its gourmet breakfasts and individually decorated rooms.
The Inn's overhead budget for the most recent month appears below:
Activity level
Variable overhead costs:
Supplies
Laundry
Fixed overhead costs:
Utilities
Salaries and wages
Depreciation
Total overhead cost
90 guests
$234
315
220
4,290
2,680
$7,739
The Inn's variable overhead costs are driven by the number of guests.
Assuming that the activity levels of 90 guests and 99 guests are within the same relevant
range and rounding to the nearest dollar, what would be the total budgeted overhead cost for a
month if the activity level is 99 guests?
A. $7,794.
B. $61,541.
C. $8,513.
D. $7,739.
(234 + 315)/90 = $6.10. Total = 99 * 6.10 + 220 + 4,290 + 2,680 = $7,794.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
The following is a summarized master budget that Winnipeg Company prepared for January:
Sales
Sales revenue
Less variable costs:
Manufacturing
Selling and administrative
Contribution
Less fixed costs:
Manufacturing
Selling and administrative
Operating income
9,000 units
$450,000
$270,000
18,000
72,000
27,000
288,000
$162,000
99,000
$63,000
Actual results for January were as follows:
Units produced and sold
Selling price per unit
Variable costs per unit:
Manufacturing
Selling and administrative
Total fixed costs
8,500 units
$55.00
$32.00
$1.50
$99,000
87. What was the flexible budget operating income (loss) for Winnipeg Company for
January?
A. $83,750.
B. $54,000.
C. $63,000.
D. $59,500.
Bud. Selling price = 450,000/9,000 = $50/unit. Flex Bud Operating Income = 8,500 * 50 8,500 * (270,000/9,000 + 18,000/9,000) - 99,000.= $54,000 Required for further questions.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
88. What total sales volume variance did Winnipeg Company report for January?
A. $3,500 U.
B. $9,000 U.
C. $25,000 U.
D. $27,500 U.
54,000 - 63,000 = $9,000U.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
89. What was the total flexible budget variance for January?
A. $20,750 F.
B. $9,000 U.
C. $29,750 F.
D. $12,750 U.
Actual Operating Income = 8,500 * (55 - 32 - 1.50) - 99,000 = $83,750.
Variance = 83,750 - 54,000 = $29,750 F
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
90. What were the total flexible budget expenses for January?
A. $383,750.
B. $371,000.
C. $387,000.
D. $365,500.
8,500 * (30 + 2) + 99,000 = $371,000.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
91. What was the total static budget variance for January?
A. $20,750 F.
B. $9,000 U.
C. $29,750 F.
D. $12,750 U.
83,750 - 63,000 = $20,750 F.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
Alaska Company expressed the total expenses (Y) component of its master budget for
February with the cost formula Y = $100,000 + $40 * X, where X represents the expected
number of units of its only product to be manufactured and sold. The budgeted average selling
price per unit was $65 for budgeted sales volume 5,000 units. Reported actual results for
February were as follows:
Sales
Sales revenue
Less variable costs
Contribution margin
Less fixed expenses
Operating income
5,400 units
$324,000
194,400
$129,600
102,000
$27,600
92. What was the master budget operating income for February?
A. $23,000.
B. $25,000.
C. $35,000.
D. $33,000.
5,000 * (65 - 40) - 100,000 = $25,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
93. What was the flexible operating income for February?
A. $23,000.
B. $25,000.
C. $35,000.
D. $33,000.
5,400 * (65 - 40) - 100,000 = $35,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
94. What was the total static budget variance for February?
A. $7,400 U.
B. $2,600 F.
C. $10,000 F.
D. $1,000 U.
Variance = 27,600 - 25,000 = $2,600 F.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
95. What was the sales volume variance for February?
A. $10,000 F.
B. $26,000 F.
C. $7,400 U.
D. $2,600 F.
Variance = 35,000 - 25,000 = $10,000 F.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
96. What was the flexible budget variance for February?
A. $10,000 F.
B. $26,000 F.
C. $7,400 U.
D. $2,600 F.
Variance = 27,600 - 35,000 = $,7400 U.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
Windsor Limited makes and sells a single product. The company employs a flexible
budgeting system that covers a relevant range from 20,000 units to 25,000 units and a just in
time inventory system. Budget data for April, based on 22,000 units, are as follows:
Prime costs
Manufacturing overhead
Selling and administrative expenses
Selling price
$30 per unit
$132,000 plus $3 per unit
$30,000 plus $2 per unit
$60 per unit
97. What is the company's master budget operating income (loss) for April?
A. $388,000.
B. $463,000.
C. $550,000.
D. $625,000.
22,000 * (60 - 30 - 3 - 2) - 132,000 - 30,000 = $388,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
98. Suppose the company produces and sells 25,000 units instead of the original 22,000 units
at an average selling price of $55. What is the company's flexible budget operating income
(loss) for April, given the actual sales volume of 25,000 units?
A. $388,000.
B. $463,000.
C. $550,000.
D. $625,000.
25,000 * (60 - 30 - 3 - 2) - 132,000 - 30,000 = $463,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
99. Suppose the company produces and sells 25,000 units instead of the original 22,000 units
at an average selling price of $55. What will be the company's sales volume variance for
April?
A. $3,000 F.
B. $75,000 F.
C. $75,000 U.
D. $180,000 F.
463,000 - 388,000 = $75,000 F.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
Children Toys Limited makes and sells a single product. The company employs a flexible
budgeting system that covers a relevant range from 25,000 units to 30,000 units and a just in
time inventory system. Budget data for April, based on 27,000 units, are as follows:
Prime costs
Manufacturing overhead
Selling and administrative expenses
Selling price
$35 per unit
$137,000 plus $4 per unit
$35,000 plus $3 per unit
$75 per unit
100. What is the company's master budget operating income (loss) for April?
A. $463,000.
B. $550,000.
C. $719,000.
D. $625,000.
27,000 * (75 - 35 - 4 - 3) - 137,000 - 35,000 = $719,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
101. Suppose the company produces and sells 29,000 units instead of the original 27,000 units
at an average selling price of $70. What is the company's flexible budget operating income
(loss) for April, given the actual sales volume of 29,000 units?
A. $388,000.
B. $463,000.
C. $550,000.
D. $640,000.
29,000 * (70 - 35 - 4 - 3) - 137,000 - 35,000 = $640,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
102. Suppose the company produces and sells 29,000 units instead of the original 27,000 units
at an average selling price of $70. What will be the company's sales volume variance for
April?
A. $3,000 F.
B. $75,000 F.
C. $75,000 U.
D. $79,000U.
640,000 - 719,000 = $79,000 U.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
The Shoe Company, a merchandising firm, has budgeted its activity for April according to the
following information:
I. Sales at $650,000, all for cash.
II. Merchandise inventory on March 31st was $300,000.
III. Budgeted depreciation for April is $35,000.
IV. The cash balance at April 1 was $25,000.
V. Selling and administrative expenses are budgeted at $60,000 for April and are paid in cash.
VI. The planned merchandise inventory on April 30 is $270,000.
VII. The invoice cost for merchandise purchases represents 75% of the sales price. All
purchases are paid for in cash.
103. What are the budgeted cash receipts for April?
A. $137,500.
B. $412,500.
C. $650,000.
D. $585,000.
all sales $650,000.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
104. What are the budgeted cash disbursements for April?
A. $382,500.
B. $517,500.
C. $472,500.
D. $477,500.
650,000 *.75 + 270,000 - 300,000 + 60,000 = $517,500.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
Topic: 09-24 The Selling and Administrative Expense Budget
Topic: 09-25 The Cash Budget
105. What is the budgeted net income for April?
A. $42,500.
B. $67,500.
C. $107,500.
D. $137,500.
650,000 * (1 -.75) - 35,000 - 60,000 = $67,500.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-24 The Selling and Administrative Expense Budget
Topic: 09-26 The Budgeted Income Statement
James Enterprises has budgeted unit sales for the next four months as follows:
November
December
January
4,800 units
5,800 units
6,400 units
February
5,200 units
The ending inventory for each month should be equal to 15% of the next month's sales in
units. The inventory on October 31 was below this level and contained only 600 units.
106. What are the total units to be produced in October?
A. 4,530 units.
B. 5,070 units.
C. 5,670 units.
D. 5,890 units.
4,800 + 5,800 *.15 - 600 = 5,070 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
107. What is the desired ending inventory for December?
A. 690 units.
B. 780 units.
C. 870 units.
D. 960 units.
5,200 *.15 = 780 units.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
O'Connors Inc., a small retail store, had the following results for May. The budgets for June
and July are also given.
Sales
Cost of sales
Gross margin
Operating
expenses
Operating income
May (actual)
$42,000
21,000
21,000
20,000
June (budget)
$40,000
20,000
20,000
20,000
July (budget)
$45,000
22,500
22,500
20,000
$1,000
$0
$2,500
Sales are collected 70% in the month of the sale and the balance in the month following the
sale. (There are no bad debts.) The goods that are sold are purchased in the month prior to
sale. Suppliers of the goods are paid in the month following the purchase. The operating
expenses are paid in the month of the sale.
108. What should be the amount of cash collected during the month of June?
A. $32,000.
B. $40,000.
C. $40,600.
D. $41,000.
42,000 *.30 + 40,000 *.70 = $40,600.
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-14 The Cash Budget
Topic: 09-17 The Sales Budget
109. What should be the cash disbursements during the month of June for goods purchased
for resale and for operating expenses?
A. $40,000.
B. $41,000.
C. $42,500.
D. $43,500.
Purchases in May are paid for in June. May purchases = June budgeted CGS. Cash
disbursements = 20,000 + 20,000 = $40,000.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
True / False Questions
110. The usual starting point in budgeting is to make a forecast of cash receipts and cash
disbursements.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-13 The Sales Budget
Topic: 09-17 The Sales Budget
111. Budgets are used for planning rather than for control of operations.
FALSE
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-04 Budgets' Dual Role: Planning and Control
112. A continuous or perpetual budget is one that covers a 12-month period, but is constantly
adding a new month onto the end of the 12-month period as the current month is completed.
TRUE
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-07 Choosing a Budget Period
113. Control involves developing objectives and preparing the various budgets to achieve
those objectives.
FALSE
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-04 Budgets' Dual Role: Planning and Control
114. One of the distinct advantages of a budget is that it can help to uncover potential
bottlenecks before they occur.
TRUE
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-05 Advantages of Budgeting
115. The participative budget can be a very effective control device in an organization.
TRUE
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-08 The Participative Budget Approach
116. Sales forecasts are drawn up after the cash budget has been completed because it is only
at that time that the funds available for marketing are known.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-15 Sales Forecasting—A Critical Step
Topic: 09-16 Preparing the Master Budget
Topic: 09-17 The Sales Budget
117. A production budget is to a manufacturing firm as a merchandise purchases budget is to a
merchandising firm.
TRUE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-18 The Production Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
118. The direct materials to be purchased for a period can be obtained by subtracting the
desired ending inventory of direct materials from the total direct materials needed for the
period.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-20 The Direct Materials Purchases Budget
119. In companies that have "no lay-off" policies, the total direct labour cost for a budget
period is computed by taking the total direct labour hours needed to make the budgeted output
of completed units and multiplying them by the direct labour wage rate.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-21 The Direct Labour Budget
120. In the merchandise purchases budget, the required purchases (in units) for a period can
be determined by subtracting the beginning merchandise inventory (in units) from the
budgeted sales (in units).
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-19 Inventory Purchases—Merchandising Firm
121. The beginning cash balance is not included on the cash budget since the cash budget
deals exclusively with cash flows rather than with balance sheet amounts.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-25 The Cash Budget
122. When using the participative budget approach, it is generally best for top management to
accept all budget estimates without question in order to minimize adverse behavioural
responses from employees.
FALSE
Blooms: Understand
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-08 The Participative Budget Approach
123. The effect of responsibility accounting is to personalize the accounting system.
TRUE
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-06 Responsibility Accounting
124. Zero-based budgeting requires managers to justify all costs of programs as if these
programs were being proposed for the first time.
TRUE
Blooms: Remember
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Topic: 09-10 Zero-Base Budgeting
125. A flexible budget is "flexible" in the sense that a budget can be prepared for any level of
activity, but once a budget is set the budget figures are not changed if actual activity later
proves to be different than budgeted activity.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
126. In a performance report, actual costs should be compared to budgeted costs at the
original budgeted activity level.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-0
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
127. When choosing an activity measure for a flexible budget, it is best to choose an activity
that is measured in dollars.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
128. A static budget is geared toward a single level of activity.
TRUE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Easy
Learning Objective: 09-0
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
129. The static budget is a good tool for assessing whether variable costs are under control or
not.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-0
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
130. A comprehensive flexible budget prepared for performance evaluation should incorporate
both fixed and variable costs, but not revenues.
FALSE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-0
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
131. The two components of the static budget variance are the flexible budget variance and
the sales volume variance.
TRUE
Blooms: Understand
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-0
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
Short Answer Questions
132. Clay Company has projected sales and production in units for the second quarter of the
coming year as follows:
Sales
Production
April
50,000
60,000
May
40,000
50,000
June
60,000
50,000
Cash-related production costs are budgeted at $5 per unit produced. Of these production costs,
40% are paid in the month in which they are incurred and the balance in the following month.
Selling and administrative expenses will amount to $100,000 per month. The accounts
payable balance on March 31 totals $190,000, which will be paid in April.
All units are sold on account for $14 each. Cash collections from sales are budgeted at 60% in
the month of sale, 30% in the month following the month of sale, and the remaining 10% in
the second month following the month of sale. Accounts receivable on April 1 totalled
$500,000 ($90,000 from February's sales and the remainder from March).
Required:
a) Prepare a schedule for each month showing budgeted cash disbursements for Clay
Company.
b) Prepare a schedule for each month showing budgeted cash receipts for Clay Company.
Production units
Cash required per
unit
Production costs
Cash
disbursements:
Production this
month (40%)
Production prior
month (60%)
Selling and
administrative
Total disbursements
April
60,000
$5
May
50,000
$5
June
50,000
$5
$300,000
April
$250,000
May
$250,000
June
$120,000
$100,000
$100,000
190,000
180,000
150,000
100,000
100,000
100,000
$410,000
$380,000
$350,000
Payments relating to the prior month (March) in April represent the balance of accounts
payable at March 31.
b)
Sales units
Sales price
Total sales
Cash receipts:
February sales
March sales
April sales
May sales
June sales
Total receipts
April
50,000
X $14
$700,000
April
$90,000
307,500
420,000
May
40,000
X $14
$560,000
May
$817,500
$648,500
$102,500
210,000
336,000
June
60,000
X $14
$840,000
June
$70,000
168,000
504,000
$742,000
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
Topic: 09-20 The Direct Materials Purchases Budget
133. Tilson Company has projected sales and production in units for the second quarter of the
coming year as follows:
Sales
Production
April
55,000
65,000
May
45,000
55,000
June
65,000
55,000
Cash-related production costs are budgeted at $7 per unit produced. Of these production costs,
40% are paid in the month in which they are incurred and the balance in the following month.
Selling and administrative expenses will amount to $110,000 per month. The accounts
payable balance on March 31 totals $193,000, which will be paid in April.
All units are sold on account for $16 each. Cash collections from sales are budgeted at 60% in
the month of sale, 30% in the month following the month of sale, and the remaining 10% in
the second month following the month of sale. Accounts receivable on April 1 totalled
$520,000 ($100,000 from February's sales and the remainder from March).
Required:
a) Prepare a schedule for each month showing budgeted cash disbursements for Tilson
Company.
b) Prepare a schedule for each month showing budgeted cash receipts for Tilson Company.
Production units
Cash required per
unit
Production costs
Cash
disbursements:
Production this
month (40%)
Production prior
month (60%)
Selling and
administrative
Total disbursements
April
65,000
$7
May
55,000
$7
June
55,000
$7
$455,000
April
$385,000
May
$385,000
June
$182,000
$154,000
$154,000
193,000
273,000
231,000
110,000
110,000
110,000
$485,000
$537,000
$495,000
Payments relating to the prior month (March) in April represent the balance of accounts
payable at March 31.
Sales units
Sales price
Total sales
Cash receipts:
February sales
March sales
April sales
May sales
June sales
Total receipts
April
55,000
X $16
$880,000
April
$100,000
315,000
528,000
432,000
$943,000
May
45,000
X $16
$720,000
May
June
65,000
X $16
$1,040,000
June
$105,000
264,000
216,000
$88,000
$801,000
624,000
$928,000
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
Topic: 09-20 The Direct Materials Purchases Budget
134. On March 31, Streuling Enterprises, a merchandising firm, had an inventory of 38,000
units, and it had accounts receivable totaling $85,000. Sales, in units, have been budgeted as
follows for the next four months:
April
May
June
July
60,000
75,000
90,000
81,000
Streuling's board of directors has established a policy to commence in April that the inventory
at the end of each month should contain 40% of the units required for the following month's
budgeted sales.
The selling price is $2 per unit. One-third of sales are paid for by customers in the month of
the sale; the balance is collected in the following month.
Required:
a) Prepare a merchandise purchases budget showing how many units should be purchased for
each of the months April, May, and June.
b) Prepare a schedule of expected cash collections for each of the months April, May, and
June.
Budgeted
sales, in units
Desired ending
inventory
(40%)
Total needs
Less beginning
inventory
Required
purchases
April
60,000
May
75,000
June
90,000
30,000
36,000
32,400
90,000
38,000
111,000
30,000
122,400
36,000
52,000
81,000
86,400
July
81,000
Budgeted sales, at
$2 per unit
March 31
Accounts
Receivable
April sales
May sales
June
Total cash
collections
April
$120,000
May
$150,000
June
$180,000
$85,000
40,000
$125,000
$80,000
50,000
$130,000
$100,000
60,000
$160,000
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
135. TabComp Inc. is a retail distributor for MZB-33 computer hardware and related software.
TabComp prepares annual sales forecasts, of which the first six months of the coming year are
presented below:
January
February
March
April
May
June
Hardware
units
130
120
110
90
100
125
Hardware
dollars
$390,000
360,000
330,000
270,000
300,000
375,000
Software
Total sales
$160,000
140,000
150,000
130,000
125,000
225,000
$550,000
500,000
480,000
400,000
425,000
600,000
Cash sales account for 25% of TabComp's total sales, 30% of the total sales are paid by bank
credit card, and the remaining 45% are on open account (TabComp's own charge accounts).
The cash and bank credit card sale payments are received in the month of the sale. Bank credit
card sales are subject to a 4% discount, which is deducted immediately. The cash receipts for
sales on open account are 70% in the month following the sale and 28% in the second month
following the sale; the remaining are uncollectible.
TabComp's month-end inventory requirements for computer hardware units are 30% of the
next month's sales. The units must be ordered two months in advance due to long lead times
quoted by the manufacturer.
Required:
a) Calculate the cash that TabComp can expect to collect during April. Show all of your
calculations.
b) Determine the number of computer hardware units that should be ordered in January. Show
all of your calculations.
a) The cash that TabComp can expect to collect during April is calculated below:
April cash receipts:
April cash sales ($400,000 * 0.25)
April credit card sales ($400,000 * 0.30
* 0.96)
Collections on open account:
March ($480,000 * 0.45 * 0.70)
February ($500,000 * 0.45 * 0.28)
January (uncollectible)
Total collections
$100,000
115,200
151,200
63,000
0
$429,400
b) The number of units that TabComp should order in January is calculated as follows:
March sales
Add desired ending inventory (90 units *
0.30)
Total needs
Less beginning inventory (110 units *
0.30)
Required purchases
110 units
27 units
137 units
33 units
104 units
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
136. The Doley Company has planned the following sales for the next three months:
Budgeted Sales
January
$40,000
February
$50,000
March
$70,000
Sales are made 20% for cash and 80% on account. From experience, the company has learned
that a month's sales on account are collected according to the following pattern:
Month of sale
First month following sale
Second month following sale
Uncollectible
60%
30%
8%
2%
The company requires a minimum cash balance of $5,000 to start a month. The beginning
cash balance in March is budgeted to be $6,000.
Required:
a) Compute the budgeted cash receipts for March.
b) The following additional information has been provided for March:
Inventory purchases (all paid in March)
Operating expenses (all paid in March)
Depreciation expense for March
Dividends paid in March
$28,000
40,000
5,000
4,000
Prepare a cash budget in good form for the month of March, using this information and the
budgeted cash receipts you computed for part a) above. The company can borrow in any
dollar amount and will not pay interest until April.
a.
Cash sales, March: $70,000 * 20%
Collections on account:
Jan. sales: $40,000 * 80% * 8%
Feb. sales: $50,000 * 80% * 30%
Mar. sales: $70,000 * 80% * 60%
Total cash receipts
$14,000
2,560
12,000
33,600
$62,160
b.
Cash balance, beginning
Add cash receipts from sales
Total cash available
$6,000
62,160
$68,160
Less disbursements:
Inventory purchases
Operating expenses
Dividends
Total disbursements
Cash excess (deficiency)
Financing - borrowing
Cash balance, ending
28,000
40,000
4,000
72,000
(3,840)
8,840
$5,000
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-25 The Cash Budget
137. Montero Corporation, a merchandising company, has provided the following budget
data:
Purchases
$42,000
48,000
36,000
54,000
60,000
January
February
March
April
May
Sales
$72,000
66,000
60,000
78,000
66,000
Collections from customers are normally 70% in the month of sale, 20% in the month
following the sale, and 9% in the second month following the sale. The balance is expected to
be uncollectible. Montero pays for purchases in the month following the purchase. Cash
disbursements for expenses other than merchandise purchases are expected to be $14,400 for
May. Montero's cash balance on May 1 was $22,000.
Required:
a) Compute the expected cash collections during May.
b) Compute the expected cash balance on May 31.
a.
March
April
May
Total
Expected Sales
$60,000
$78,000
$66,000
Collections
X 9%
X 20%
X 70%
= $5,400
= $15,600
= $46,200
$67,200
b.
Balance, May 1
Expected collections
Expected disbursements
April purchases to be paid in May
Cash disbursements for expenses
Total disbursements
Expected ending balance
$22,000
67,200
$54,000
14,400
68,400
(1,200)
$20,800
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-19 Inventory Purchases—Merchandising Firm
Topic: 09-25 The Cash Budget
138. A sales budget is given below for one of the products manufactured by the Key Co.:
January
February
March
April
May
June
21,000 units
36,000 units
61,000 units
41,000 units
31,000 units
25,000 units
The inventory of finished goods at the end of each month should equal 20% of the next
month's sales. However, on December 31, the finished goods inventory totalled only 4,000
units.
Each unit of product requires three specialized electrical switches. Since the production of
these specialized switches by Key's suppliers is sometimes irregular, the company has a policy
of maintaining an ending inventory at the end of each month equal to 30% of the next month's
production needs. This requirement had been met on January 1 of the current year.
Required:
Prepare a budget showing the quantity of switches to be purchased each month for January,
February, and March, and in total for the quarter.
Budgeted
sales (units)
Add: Desired
ending
inventory
Total needs
Deduct:
Beginning
inventory
Units to be
produced
Units to be
produced
Switches per
unit
Production
needs
Add: Desired
ending
inventory
Total needs
Deduct:
Beginning
inventory
Required
purchases
January
21,000
February
36,000
March
61,000
April
41,000
7,200
12,200
8,200
6,200
28,200
4,000
48,200
7,200
69,200
12,200
47,200
8,200
24,200
41,000
57,000
39,000
January
24,200
February
41,000
March
57,000
Quarter
122,200
X3
X3
X3
X3
72,600
123,000
171,000
366,600
36,900
51,300
35,100
35,100
109,500
21,780
174,300
36,900
206,100
51,300
401,700
21,780
87,720
137,400
154,800
379,920
Beginning inventory, January 1: 72,600 0.3 = 21,780.
Ending inventory, March 31: (39,000 3) 0.3 = 35,100.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
Topic: 09-20 The Direct Materials Purchases Budget
139. A sales budget is given below for one of the products manufactured by the OMI Co.:
January
February
March
April
May
June
25,000 units
40,000 units
65,000 units
45,000 units
35,000 units
30,000 units
The inventory of finished goods at the end of each month must equal 20% of the next month's
sales. However, on December 31, the finished goods inventory totalled only 4,000 units.
Each unit of product requires three kilograms of specialized material. Since the production of
this specialized material by OMI's suppliers is sometimes irregular, the company has a policy
of maintaining an ending inventory at the end of each month equal to 30% of the next month's
production needs. This requirement had been met on January 1 of the current year.
Required:
Prepare a budget showing the quantity of material to be purchased each month for January,
February, and March, and in total for the quarter.
Production Schedule required for purchase schedule:
Budgeted
sales (units)
Add: Desired
ending
inventory
Total needs
Deduct:
Beginning
inventory
Units to be
produced
Units to be
produced
Switches per
unit
Production
needs
Add: Desired
ending
inventory
Total needs
Deduct:
Beginning
inventory
Required
purchases
January
25,000
February
40,000
March
65,000
April
45,000
8,000
13,000
9,000
7,000
33,000
4,000
53,000
8,000
74,000
13,000
52,000
9,000
29,000
45,000
61,000
43,000
January
29,000
February
45,000
March
61,000
Quarter
135,000
X3
X3
X3
X3
87,000
135,000
183,000
405,000
40,500
54,900
38,700
38,700
127,500
26,100
189,900
40,500
221,700
54,900
443,700
26,100
101,400
149,400
166,800
417,600
Beginning inventory, January 1: 87,000 0.3 = 26,100.
Ending inventory, March 31: (43,000 3) 0.3 = 38,700.
Blooms: Analyze
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-02 Prepare the supporting components of a master budget and the budgeted financial statements.
Topic: 09-17 The Sales Budget
Topic: 09-18 The Production Budget
Topic: 09-20 The Direct Materials Purchases Budget
140. Budgeting aids planning and controlling the level of both fixed costs and variable costs.
Required:
Explain the differences, if any, between the planning and controlling of fixed costs and
variable costs.
The major difference between the two types of costs occurs in the control phase. Since total
variable costs are expected to change in direct proportion to changes in the level of activity,
the budgeted amounts can be revised to reflect changing levels of activity, assuming the cost
per unit level of activity remains constant. In theory, once the level of fixed costs has been
determined in the budgeting process, it cannot be changed in the short run in responses to
changes in levels of activity. This is because the budgeted costs reflect cost of supplying
capacity. Thus, the most appropriate time to control the level of fixed costs is when they are
being planned, that is, during the budgeting process. In essence planning and controlling the
level of fixed costs occur at the same time. However, control of truly variable costs can be
effective after completing the budgeting process, that is, after-the-fact.
Blooms: Evaluate
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-01 Explain why organizations budget; and describe the processes they use to create budgets.
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-04 Budgets' Dual Role: Planning and Control
Topic: 09-29 How a Flexible Budget Works
141. The following overhead data are for a department in a large company.
Activity Level (in units)
Variable costs:
Indirect materials
Power
Fixed costs:
Supervision
Rent
Activity Costs Incurred
250
Static Budget
220
$8,745
$2,065
$7,634
$1,738
$1,560
$7,210
$1,600
$7,300
Required:
Prepare a report that would be useful in assessing how well costs were controlled in this
department.
Variable
costs:
Indirect
materials
Power
Total variable
cost
Fixed costs:
Supervision
Rent
Total fixed
cost
Total cost
Cost formula
per unit
Actual costs
incurred
Budget based
on actual
activity
Variance
$34.70
$8,745
$8,675
$70 U
7.90
$42.60
2,065
10,810
1,975
10,650
90 U
160 U
1,560
7,210
8,770
1,600
7,300
8,900
40 F
90 F
130 F
19,580
9,550
$30 U
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
142. The following overhead data are for a department in a large company.
Activity Level (in units)
Variable costs:
Supplies
Electricity
Fixed costs:
Supervision
Depreciation
Activity Costs Incurred
480
Static Budget
480
$16,734
$1,026
$16,944
$1,056
$8,570
$5,780
$8,600
$5,800
Required:
Prepare a report that would be useful in assessing how well costs were controlled in this
department.
Variable
costs:
Supplies
Electricity
Total variable
cost
Fixed costs:
Supervision
Depreciation
Total fixed
cost
Total cost
Cost formula
per unit
Actual costs
incurred
Budget based
on actual
activity
Variance
$35.30
2.20
$37.50
$16,734
1,026
17,760
$16,944
1,056
18,000
$210 F
30 F
240 F
8,570
5,780
14,350
8,600
5,800
14,400
30 F
20 F
50 F
$32,110
$32,400
$290 F
Blooms: Apply
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
143. Fougere Realtors, Inc., specializes in home re-sales. It earns revenue from selling fees.
Fougere Realtors' major costs are commissions for salespersons, listing agents, and listing
companies. Its business has improved steadily over the last ten years. As usual, Chris Fougere,
the managing partner of Fougere Realtors, Inc., received a report summarizing the
performance for the most recent year.
Fougere Realtors, Inc.
Performance Report
For the year ended December 31, 2007
Number of home
re-sales
Variable expenses
Sales commissions
Automobile
Advertising
General overhead
Total
Fixed expenses
General overhead
Total expenses
Budget
180
Actual
202
Variance
22 F
$1,102,950
36,000
171,000
656,100
$1,966,050
$1,205,183
39,560
192,690
716,970
$2,154,403
$102,233 U
3,560 U
21,690 U
60,870 U
$188,353 U
60,000
$2,026,050
62,300
$2,216,703
2,300 U
$190,653 U
Required:
a) Explain the major weakness of the performance report.
b) Explain clearly why all the variances for the variable expenses are unfavourable (U).
c) As a first step in helping Chris Fougere to evaluate cost/expense control in the organization,
complete the following for the year ended December 31, 2007, assuming the only cost driver
is the number of home re-sales. (Note: Indicate any variance as either favourable (F) or
unfavourable (U).)
Number of home
re-sales
Variable expenses
Sales commissions
Automobile
Advertising
General overhead
Total
Fixed expenses
General overhead
Budget
202
Actual
202
Variance
0
$_____
$_____
$_____
$_____
$_____
$1,205,183
39,560
192,690
716,970
$2,154,403
$_____
$_____
$_____
$_____
$_____
$_____
62,300
$_____
a) The major weakness of the performance report is the fact that it compares costs at two
different activity levels (home re-sales), that is, actual home re-sales of 202 versus budgeted
home re-sales of 180. The major flaw is with respect to the variable expenses.
b) All the variable expense variances are unfavourable because the correct comparison of
actual variable expenses should be against budgeted variable expenses for the higher level of
home re-sales, not against budgeted variable expenses for the lower level of home re-sales. In
essence, the original budgeted variable expenses are understated. One would expect the actual
variable expenses to be higher, given the higher level of actual home re-sales. By definition,
variable expenses are expected to change in direct proportion to changes in activity levels
(number of home re-sales).
c) Preliminary calculations per home re-sale:
Sales commissions ($1,102,950/180): $6,127.50
Automobile ($36,000/180): $200
Advertising ($171,000/180): $950
General overhead ($656,100/180): $3,645
Number of home
re-sales
Variable expenses
Sales commissions
Automobile
Advertising
General overhead
Total
Fixed expenses
General overhead
Total expenses
Budget
202
Actual
202
Variance
0
$1,237,755
40,400
191,900
736,290
$2,206,345
$1,205,183
39,560
192,690
716,970
$2,154,403
$32,572 F
840 F
790 U
19,320 F
$51,942 F
60,000
$2,266,345
62,300
$2,216,703
2,300 U
$49,624 F
Blooms: Evaluate
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
144. Toyworld manufactures and sells a line of toys. The toys are primarily distributed
through department stores. As president of Toyworld, you wanted to analyze Toyworld's
profitability. Your capable assistant provided you with the following data:
Selling price, per unit
Variable manufacturing
cost, per unit
Variable marketing and
administrative expenses,
total
Fixed manufacturing cost,
total
Fixed marketing and
administrative expenses,
total
Sales volume, in units
* 5% of sales revenue
Static/Master Actual
$20.00
11.00
Budget
$21.00
12.00
9,000*
11,550
34,500
36,000
40,000
44,000
9,000
10,000
Required:
a) Your assistant has requested you to complete the "Flexible Budget" and "Static/Master
Budget" columns of the analysis, reproduced below (She had to attend to an out-of-town
emergency):
Units sold
Revenues (sales)
Variable
expenses:
Manufacturing
Marketing and
administrative
Contribution
margin
Fixed expenses:
Manufacturing
Marketing and
administrative
Operating income
(loss)
Actual Results
Flexible Budget
10,000
$210,000
$_____
$_____
Static/Master
Budget
$_____
$_____
$120,000
11,550
$_____
$_____
$_____
$_____
$131,550
$78,450
$_____
$_____
$_____
$_____
$36,000
44,000
$_____
$_____
$_____
$_____
$80,000
($1,550)
$_____
$_____
$_____
$_____
b) Calculate the following variances: flexible budget variance, sales volume variance, and
total static budget variance.
a)
Units sold
Revenues (sales)
Variable
expenses:
Manufacturing
Marketing and
administrative
Contribution
margin
Fixed expenses:
Manufacturing
Marketing and
administrative
Operating income
(loss)
Actual Results
Flexible Budget
10,000
$210,000
10,000
$200,000
Static/Master
Budget
9,000
$180,000
$120,000
11,550
$110,000
10,000
$99,000
9,000
$131,550
$78,450
$120,000
$80,000
$108,000
$72,000
$36,000
44,000
$34,500
40,000
$34,500
40,000
$80,000
($1,550)
$74,500
$5,500
$74,500
($2,500)
b) Calculation of Variances
Flexible budget variane = $5,500 - (-$1,550) = $7,050 unfavourable
This is the difference between actual operating loss of $1,550 and flexible budget operating
income of $5,500.
Sales volume variane = $5,500 - (-$2,500) = $8,000 favourable
This is the same as the difference between the flexible budget operating income of $5,500 and
the static budget operating loss of $2,500. It can also be calculated as the increase in unit sales
volume (1,000 units) times the budgeted unit contribution margin of $8 ($72,000/9,000).
Total static budget variance = $2,500 - $1,550 = $950 favourable
This is the difference between the higher static budget operating loss of $2,500 and the lower
actual operating loss of $1,550. This is also the sum of the favourable sales volume variance
of $8,000 and the unfavourable flexible budget variance of $7,050.
Blooms: Evaluate
CPA Competency: 3.2.2 Prepares, analyzes, or evaluates operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-03 Prepare a flexible budget; and explain the need for the flexible budget approach.
Learning Objective: 09-04 Prepare a performance report using the flexible budget approach.
Topic: 09-29 How a Flexible Budget Works
145. In a not-for-profit entity a budget can be prepared either on an expenditure basis or on a
program basis. Discuss.
An expenditure based budget simply lists the total expected costs of items such as rent,
insurance, salaries and depreciation without detailing how these various expenses relate to
particular programs. Rather than simply budget total expected costs a program basis details
out the revenues and expenses related to each program that is expected to run. This facilitates
performance evaluation and allows the entity to compare budgeted expenses with actual
relating to each program and allows managers to make decisions with respect to similar
programs in the future. Budgeting by program also facilitates the stewardship objective by
providing information in a format permitting determination of whether funds designated by
donors for specific purposes are being spent as intended.
Blooms: Understand
CPA Competency: 3.2.1 Develops or evaluates information inputs for operational plans, budgets, and forecasts.
Difficulty: Medium
Learning Objective: 09-05 Describe variations in the master budget process when applying it to not-for-profit situations.
Topic: 09-31 Budgeting for Not-for-Profit Entities
Chapter 10
Standard Costs and Overhead Analysis
Multiple Choice Questions
1. Which of the following refers to standards that allow for no machine breakdowns or other
work interruptions and that require peak efficiency at all times?
A. Normal standards.
B. Practical standards.
C. Ideal standards.
D. Budgeted standards.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-05 Ideal versus Practical Standards
2. To measure controllable production inefficiencies, which of the following is the best basis
for a company to use in establishing the standard hours allowed for the output of one unit of
product?
A. Average historical performance for the last several years.
B. Engineering estimates based on ideal performance.
C. Engineering estimates based on attainable performance.
D. The hours per unit that would be required for the present workforce to satisfy expected
demand over the long run.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-07 Setting Direct Labour Standards
3. Which of the following statements concerning practical standards is NOT correct?
A. Practical standards can be used for product costing and cash budgeting.
B. Practical standards can be attained by the average worker.
C. When practical standards are used; there is no reason to adjust standards if an old machine
is replaced by a newer, faster machine.
D. Under practical standards, large variances are less likely than under ideal standards.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-05 Ideal versus Practical Standards
4. If a company follows a practice of isolating variances at the earliest point in time, what
would be the appropriate time to isolate and recognize a direct material price variance?
A. When material is issued.
B. When material is purchased.
C. When material is used in production.
D. When production is completed.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
5. What does an unfavourable labour efficiency variance indicate?
A. The actual labour rate was higher than the standard labour rate.
B. The labour rate variance must also be unfavourable.
C. Actual labour hours worked exceeded standard labour hours for the production level
achieved.
D. Overtime labour was used during the period.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
6. What does a favourable labour rate variance indicate?
A. Actual hours exceed standard hours.
B. Standard hours exceed actual hours.
C. The actual rate exceeds the standard rate.
D. The standard rate exceeds the actual rate.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
7. (Appendix 10B) What does a credit balance in a direct labour efficiency variance account
indicate?
A. The average wage rate paid to direct labour employees was less than the standard rate.
B. The standard hours allowed for the units produced were greater than actual direct labour
hours used.
C. The actual total direct labour costs incurred were less than standard direct labour costs
allowed for the units produced.
D. The number of units produced was less than the number of units budgeted for the period.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
Topic: 10-46 Direct Labour Variances
8. If the actual labour hours worked exceed the standard labour hours allowed, what type of
variance will occur?
A. Favourable labour efficiency variance.
B. Favourable labour rate variance.
C. Unfavourable labour efficiency variance.
D. Unfavourable labour rate variance.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
9. Which of the following is the most probable reason a company would experience an
unfavourable labour rate variance and a favourable labour efficiency variance?
A. The mix of workers assigned to the particular job was heavily weighted towards the use of
higher paid, experienced individuals.
B. The mix of workers assigned to the particular job was heavily weighted towards the use of
new, relatively low-paid, unskilled workers.
C. Because of the production schedule, workers from other production areas were assigned to
assist this particular process.
D. Defective materials caused more labour to be used in order to produce a standard unit.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
10. Which department is usually held responsible for an unfavourable materials quantity
variance?
A. Marketing.
B. Purchasing.
C. Engineering.
D. Production.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-14 Responsibility for the Variance
11. A favourable materials price variance coupled with an unfavourable materials quantity
variance would MOST likely result from which of the following?
A. Problems with processing machines.
B. Purchase of low quality materials.
C. Problems with labour efficiency.
D. Changes in the product mix.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
Topic: 10-14 Responsibility for the Variance
Topic: 10-15 Materials Quantity Variance—A Closer Look
12. Tower Company planned to produce 3,000 units of its single product, Titactium, during
November. The standards for one unit of Titactium specify six kilograms of materials at $0.30
per kilogram. Actual production in November was 3,100 units of Titactium. There was a
favourable materials price variance of $380 and an unfavourable materials quantity variance
of $120. Based on these variances, what could one assume?
A. That more materials were purchased than were used.
B. That more materials were used than were purchased.
C. That the actual cost per kilogram for materials was less than the standard cost per
kilogram.
D. That the actual usage of materials was less than the standard allowed.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
Topic: 10-14 Responsibility for the Variance
Topic: 10-15 Materials Quantity Variance—A Closer Look
13. A labour efficiency variance resulting from the use of poor quality materials should be
charged to which/whom?
A. The production manager.
B. The purchasing agent.
C. Manufacturing overhead.
D. The engineering department.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-13 Isolation of Variances
Topic: 10-14 Responsibility for the Variance
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
14. (Appendix 10B) Drake Company purchased materials on account. The entry to record the
purchase of materials having a standard cost of $1.50 per kilogram from a supplier at $1.60
per kilogram would include which of the following?
A. A credit to Raw Materials Inventory.
B. A debit to Work in Process.
C. A credit to Materials Price Variance.
D. A debit to Materials Price Variance.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-45 Direct Materials Variances
15. (Appendix 10B) Which of the following entries would correctly record the charging of
direct labour costs to Work in Process given an unfavourable labour efficiency variance and a
favourable labour rate variance?
A. A debit to Work in Process, and credits to Labour Efficiency Variance, Labour Rate
Variance, and Wages Payable.
B. A debit to Work in Process and an equal credit to Wages Payable.
C. Debits to Work in Process and Labour Efficiency Variance, and credits to Labour Rate
Variance and Wages Payable.
D. Debits to Work in Process and Labour Rate Variance, and credits to Labour Efficiency
Variance and Wages Payable.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
Topic: 10-46 Direct Labour Variances
16. Under a standard cost system, who is usually held responsible for the materials price
variances?
A. The production manager.
B. The sales manager.
C. The purchasing manager.
D. The engineering manager.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-14 Responsibility for the Variance
17. What do the terms "standard quantity allowed" or "standard hours allowed" mean?
A. The actual output in units multiplied by the standard output allowed.
B. The actual input in units multiplied by the standard output allowed.
C. The actual output in units multiplied by the standard input allowed.
D. The standard output in units multiplied by the standard input allowed.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-09 Are Standards the Same as Budgets?
Topic: 10-10 A General Model for Variance Analysis
18. Dahl Company, a clothing manufacturer, uses a standard costing system. Each unit of a
finished product contains 2 metres of cloth. However, there is unavoidable waste of 20%,
calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is $3
per metre. What is the standard direct material cost for cloth per unit of finished product?
A. $4.80.
B. $6.00.
C. $7.00.
D. $7.50.
2m/(1 -.20) * $3 = $7.50.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-06 Setting Direct Materials Standards
19. Cox Company's direct material costs for the month of January were as follows;
Actual quantity purchased
Actual unit purchase price
Materials price varianceUnfavourable (based on purchases)
Standard quantity allowed
For actual production
Actual quantity used
$18,000 kilograms
$3.60 per kilogram
$3,600
16,000 kilograms
15,000 kilograms
What was the favourable direct materials quantity variance for January?
A. $3,360.
B. $3,375.
C. $3,400.
D. $3,800.
Std. Price = (18,000 * 3.60 - 3,600)/18,000 = $3.40/kg.
Material quantity variance = $3.40 * (15,000 - 16,000) =$3,400.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
Topic: 10-15 Materials Quantity Variance—A Closer Look
20. The Porter Company has a standard cost system. In July, the company purchased and used
22,500 kilograms of direct material at an actual cost of $53,000, the materials quantity
variance was $1,875 unfavourable, and the standard quantity of materials allowed for July
production was 21,750 kilograms. What was the materials price variance for July?
A. $2,725 favourable.
B. $2,725 unfavourable.
C. $3,250 favourable.
D. $3,250 unfavourable.
Std. Price = 1,875/(22,500 - 21,750) = $2.50/kg.
Variance = 22,500 * 2.50 - 53,000 = $3,250 favourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
Topic: 10-15 Materials Quantity Variance—A Closer Look
21. Information on Fleming Company's direct material costs follows:
Actual amount of direct materials purchased and used
Actual direct material costs
Standard price of direct materials
Direct materials quantity variance-favourable
20,000 kilograms
$40,000
$2.10 per kilogram
$3,000
What was the company's direct material price variance?
A. $1,000 favourable.
B. $1,000 unfavourable.
C. $2,000 favourable.
D. $2,000 unfavourable.
20,000 * 2.10 - 40,000 = $2,000 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
Topic: 10-15 Materials Quantity Variance—A Closer Look
22. Last month, 75,000 kilograms of direct materials were purchased, and 71,000 kilograms
were used. If the actual purchase price per kilogram was $0.50 more than the standard
purchase price per kilogram, what was the materials price variance?
A. $2,000 favourable.
B. $35,500 unfavourable.
C. $37,500 favourable.
D. $37,500 unfavourable.
75,000 * $0.50 = $37,500 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
23. During March, Younger Company's direct material costs for product T were as follows:
Actual unit purchase price
Standard quantity allowed for actual Production
Quantity purchased and used for actual Production
Standard unit price
$6.50 per metre
2,100 metres
2,300 metres
$6.25 per metre
What was Younger's material quantity variance for March?
A. $1,250 unfavourable.
B. $1,250 favourable.
C. $1,300 unfavourable.
D. $1,300 favourable.
(2,100 - 2,300) * 6.25 = $1,250 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
24. The following materials standards have been established for a particular product:
Standard quantity per unit of output
Standard price
1.7 metres
$19.80 per metre
The following data pertain to operations concerning the product for the last month:
Actual materials purchased
Actual cost of materials purchased
Actual materials used in production
Actual output
5,800 metres
$113,680
5,100 metres
3,200 units
What was the materials quantity variance for the month?
A. $6,664 favourable.
B. $6,732 favourable.
C. $13,720 unfavourable.
D. $13,860 unfavourable.
(3,200 * 1.7 - 5,100) * 19.80 = $6,732 favourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
25. The following materials standards have been established for a particular product:
Standard quantity per unit of output
Standard price
8.3 grams
$19.15 per gram
The following data pertain to operations concerning the product for the last month:
Actual materials purchased
Actual cost of materials purchased
Actual materials used in production
Actual output
7,500 grams
$141,375
7,100 grams
700 units
What was the materials price variance for the month?
A. $2,250 favourable.
B. $7,540 unfavourable.
C. $7,660 unfavourable.
D. $24,317 unfavourable.
7,500 * 19.15 - 141,375 = $2,250 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
26. Information on Kennedy Company's direct material costs follows:
Standard price per kilogram of raw materials
Actual quantity of raw materials purchased
Standard quantity allowed for actual production
Materials purchase price variance-favourable
$3.60
1,600 kilograms
1,450 kilograms
$240
What was the actual purchase price per unit, rounded to the nearest cent?
A. $3.06.
B. $3.11.
C. $3.45.
D. $3.75.
(1,600 * 3.60 - 240)/1,600 = $3.45.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
27. The Fletcher Company uses standard costing. The following data are available for
October:
Actual quantity of direct materials used
Standard price of direct materials
Materials quantity variance
23,500 kilograms
$2 per kilogram
$1,000 favourable
What was the standard quantity of material allowed for October production?
A. 23,000 kilograms.
B. 24,000 kilograms.
C. 24,500 kilograms.
D. 25,000 kilograms.
(23,500 * 2 + 1,000)/2 = 24,000 kilograms.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
Topic: 10-15 Materials Quantity Variance—A Closer Look
28. Yola Company manufactures a product with standards for direct labour of 4 direct labourhours per unit at a cost of $12.00 per direct labour-hour. During June, 1,000 units were
produced using 4,100 hours at $12.20 per hour. What was the direct labour efficiency
variance?
A. $1,200 favourable.
B. $1,200 unfavourable.
C. $2,020 favourable.
D. $2,020 unfavourable.
(4,100 - 1,000 * 4) * 12 = $1,200 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
29. The following labour standards have been established for a particular product:
Standard labour hours per unit of output
Standard labour rate
8.3 hours
$12.10 per hour
The following data pertain to operations concerning the product for the last month:
Actual hours worked
Actual total labour cost
Actual output
6,100 hours
$71,370
900 units
What was the labour efficiency variance for the month?
A. $16,029 favourable.
B. $16,577 favourable.
C. $19,017 favourable.
D. $19,017 unfavourable.
(900 * 8.3 - 6,100) * 12.10 = $16,577 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
30. The following labour standards have been established for a particular product:
Standard labour hours per unit of output
Standard labour rate
1.7 hours
$14.05 per hour
The following data pertain to operations concerning the product for the last month:
Actual hours worked
Actual total labour cost
Actual output
3,700 hours
$50,690
2,300 units
What was the labour rate variance for the month?
A. $1,295 favourable.
B. $1,295 unfavourable.
C. $2,950 favourable.
D. $2950 unfavourable.
3,700 * 14.05 - 50,690 = $1,295 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
31. Lab Corp. uses a standard cost system. Direct labour information for Product CER for the
month of October follows:
Standard direct labour rate
Actual direct labour rate paid
Standard hours allowed for actual production
Labour efficiency variance-unfavourable
$6.00 per hour
$6.10 per hour
1,500 hours
$600
What were the actual hours worked?
A. 1,400 hours.
B. 1,402 hours.
C. 1,598 hours.
D. 1,600 hours.
(1,500 * 6 + 600)/6 = 1,600 hours.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
32. The standards for direct labour for a product are 2.5 hours at $8 per hour. Last month,
9,000 units of the product were made, and the labour efficiency variance was $8,000
favourable. What was the actual number of hours worked during the past period?
A. 20,500 hours.
B. 21,500 hours.
C. 22,500 hours.
D. 23,500 hours.
(9,000 * 2.5 * 8 - 8,000)/8 = 21,500 hours.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
33. In a certain standard costing system, the following results occurred last period: labour rate
variance, $1,000 unfavourable; labour efficiency variance, $2,800 favourable; and the actual
labour rate was $0.20 more per hour than the standard labour rate. What number of actual
direct labour hours was used last period?
A. 4,800 hours.
B. 5,000 hours.
C. 5,400 hours.
D. 9,000 hours.
$1,000/.20 = 5,000 hours.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
34. The Reedy Company uses a standard costing system. The following data are available for
November:
Actual direct labour hours worked
Standard direct labour rate
Labour rate variance
5,800
$9 per hour
$1,160 favourable
What was the actual direct labour rate for November?
A. $8.80.
B. $8.90.
C. $9.00
D. $9.20.
(5,800 * 9 - 1,160)/5,800 = $8.80.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
35. For the month of April, Thorp Co.'s records disclosed the following data relating to direct
labour:
Actual cost
Rate variance
Efficiency variance
$10,000
$1,000 favourable
$1,500 unfavourable
For the month of April, actual direct labour hours amounted to 2,000. In April, what was
Thorp's standard direct labour rate per hour?
A. $4.50.
B. $4.75.
C. $5.00.
D. $5.50.
(10,000 + 1,000)/2,000 = $5.50.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
36. Borden Enterprises uses standard costing. For the month of April, the company reported
the following data:
Standard direct labour rate
Standard hours allowed for actual production
Actual direct labour rate
Labour efficiency variance
$10 per hour
8,000
$9.50 per hour
$4,800 favourable
What was the labour rate variance for April?
A. $2,850 favourable.
B. $2,850 unfavourable.
C. $3,760 favourable.
D. $3,760 unfavourable.
(8,000 * 10 - 4,800)/10 * (10 - 9.50) = $3,760 favourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
37. The following standards for variable manufacturing overhead have been established for a
company that makes only one product:
Standard hours per unit of output
Standard variable overhead rate
7.8 hours
$12.55 per hour
The following data pertain to operations for the last month:
Actual hours
Actual total variable overhead cost
Actual output
2,900 hours
$36,975
200 units
What was the variable overhead efficiency variance for the month?
A. $0.
B. $16,817 unfavourable.
C. $580 unfavourable.
D. $17,397 unfavourable.
(200 * 7.8 - 2,900) * 12.55 = $16,817 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
38. The following standards for variable manufacturing overhead have been established for a
company that makes only one product:
Standard hours per unit of output
Standard variable overhead rate
5.6 hours
$12.00 per hour
The following data pertain to operations for the last month:
Actual hours
Actual total variable overhead cost
Actual output
2,600 hours
$31,330
400 units
What was the variable overhead spending variance for the month?
A. $130 favourable.
B. $130 unfavourable.
C. $4,338 unfavourable.
D. $4,450 unfavourable.
2,600 * 12 - 31,330 = $130 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Bryan Company employs a standard cost system in which direct materials inventory is
carried at standard cost. Bryan has established the following standards for the prime costs of
one unit of product:
Direct Materials
Direct Labour
Standard
Quantity
6 kilograms
1.3 hours
Standard Price
Standard Cost
$3.50/kilogram
$11.00/hour
$21.00
_$14.30
_$35.30
During March, Bryan purchased 165,000 kilograms of direct materials at a total cost of
$585,750. The total factory wages for March were $400,000, 90 percent of which were for
direct labour. Bryan manufactured 25,000 units of product during March, using 151,000
kilograms of direct materials and 32,000 direct labour hours.
39. What was the price variance for the direct materials acquired by the company during
March?
A. $7,550 favourable.
B. $7,550 unfavourable.
C. $8,250 favourable.
D. $8,250 unfavourable.
165,000 * 3.50 - 585,750 = $8,250 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
40. What was the direct materials quantity variance for March?
A. $3,500 favourable.
B. $3,500 unfavourable.
C. $52,500 favourable.
D. $52,500 unfavourable.
(25,000 * 6 - 165,000) * 3.50 = $52,500 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
41. What was the direct labour rate variance for March?
A. $8,000 favourable.
B. $8,000 unfavourable.
C. $48,000 favourable.
D. $48,000 unfavourable.
32,000 * 11 - 400,000 *.90 = $8,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
42. What was the direct labour efficiency variance for March?
A. $5,500 favourable.
B. $5,500 unfavourable.
C. $5,625 favourable.
D. $5,625 unfavourable.
(25,000 * 1.3 - 32,000) * 11 = $5,500 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
The Litton Company has established standards as follows:
Direct Material
Direct Labour
Variable Manufacturing Overhead
3 kgs. @ $4/kg. = $12 per unit
2 hrs. @ $8/hr. = $16 per unit
2 hrs. @ $5/hr. = $10 per unit
Actual production figures for the past year are given below. The company records the
materials price variance when materials are purchased.
Units Produced
Direct Material Used
Direct Material Purcahsed (3,000 kgs.)
Direct Labour Cost (1,100 hrs.)
Variable Manufacturing Overhead Cost Incurred
600
2,000 kgs.
$11,400
$9,240
$5,720
The company applies variable manufacturing overhead to products on the basis of direct
labour hours.
43. What was the materials price variance?
A. $400 favourable.
B. $400 unfavourable.
C. $600 favourable.
D. $600 unfavourable.
3,000 * 4 - 11,400 = $600 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-09 Are Standards the Same as Budgets?
Topic: 10-12 Materials Price Variance—A Closer Look
44. What was the materials quantity variance?
A. $760 favourable.
B. $760 unfavourable.
C. $800 unfavourable.
D. $4,000 unfavourable.
(600 * 3 - 2,000) * 4 = $800 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
45. What was the labour rate variance?
A. $480 favourable.
B. $480 unfavourable.
C. $440 favourable.
D. $440 unfavourable.
1,100 * 8 - 9,240 = $440 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
46. What was the labour efficiency variance?
A. $800 favourable.
B. $800 unfavourable.
C. $840 favourable.
D. $840 unfavourable.
(600 * 2 - 1,100) * 8 = $800 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
47. What was the variable overhead spending variance?
A. $220 favourable.
B. $220 unfavourable.
C. $240 favourable.
D. $240 unfavourable.
1,100 * 5 - 5,720 = $220 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
48. What was the variable overhead efficiency variance?
A. $500 favourable.
B. $500 unfavourable.
C. $520 favourable.
D. $520 unfavourable.
(600 * 2 - 1,100) * 5 = $500 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
The Albright Company uses standard costing and has established the following standards for
its single product:
Direct Materials
Direct Labour
Variable Manufacturing Overhead
2 litres at $3 per litre
0.5 hours at $8 per hour
0.5 hours at $2 per hour
During November, the company made 4,000 units and incurred the following costs:
Direct Materials Purchased
Direct Materials Used
Direct Labour Used
Actual Variable Manufacturing Overhead
8,100 litres at $3.10 per litre
7,600 litres
2,200 hours at $8.25 per hour
$4,175
The company applies variable manufacturing overhead to products on the basis of direct
labour hours.
49. What was the materials price variance for November?
A. $810 favourable.
B. $810 unfavourable.
C. $2,310 favourable.
D. $2,310 unfavourable.
8,100 * (3 - 3.10) = $810 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
50. What was the materials quantity variance for November?
A. $300 unfavourable.
B. $1,200 favourable.
C. $1,200 unfavourable.
D. $1,500 favourable.
(4,000 * 2 - 7,600) * 3 = $1,200 FAVOURABLE.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
51. What was the labour rate variance for November?
A. $550 unfavourable.
B. $1,050 unfavourable.
C. $2,150 favourable.
D. $2,150 unfavourable.
2,200 * (8 - 8.25) = $550 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
52. What was the labour efficiency variance for November?
A. $550 unfavourable.
B. $1,050 unfavourable.
C. $1,600 favourable.
D. $1,600 unfavourable.
(4,000 *.5 - 2,200) * 8 = $1,600 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
53. What was the total variable overhead variance for November?
A. $175 unfavourable.
B. $225 favourable.
C. $225 unfavourable.
D. $400 unfavourable.
4,000 *.5 * 2 - 4,175 = $175 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Cole Laboratories makes and sells a lawn fertilizer called Fastgro. The company has
developed standard costs for one bag of Fastgro as follows:
Direct Materials
Direct Labour
Variable Manufacturing
Overhead
Standard Quantity
20 kilograms
0.1 hours
0.1 hours
Standard Cost per Bag
$8.00
1.10
.40
The company had no beginning inventories of any kind on January 1. Variable manufacturing
overhead is applied to production on the basis of direct labour hours. The results of the
company's operations during January are as follows:
Production of Fastgro:
Direct Materials Purchased
Direct Labour Used
Variable Manufacturing Overhead
Incurred
Inventory of Direct Materials on January
31
4,000 bags
85,000 kilograms at a cost of $32,300
390 hours at a cost of $4,875
$1,475
3,000 kilograms
54. What was the materials price variance for January?
A. $1,300 unfavourable.
B. $1,640 favourable.
C. $1,640 unfavourable.
D. $1,700 favourable.
85,000 * (8/20) - 32,300 = $1,700 favourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
55. What was the materials quantity variance for January?
A. $300 favourable.
B. $300 unfavourable.
C. $750 favourable.
D. $800 unfavourable.
(4,000 * 20 - (85,000 - 3,000)) * 8/20 = $800 unfavourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
56. What was the labour rate variance for January?
A. $475 favourable.
B. $475 unfavourable.
C. $585 favourable.
D. $585 unfavourable.
DL rate = 1.10/.1 = $11/hr. Variance = 390 * 11 - 4,875 = 585 Unfavourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
57. What was the labour efficiency variance for January? Do not round intermediate
calculations.
A. $110 favourable.
B. $130 unfavourable.
C. $350 unfavourable.
D. $475 favourable.
(4,000 *.1 - 390) * 11 = $110 favourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
58. What was the total variance for variable overhead for January?
A. $40 favourable.
B. $85 favourable.
C. $100 unfavourable.
D. $125 favourable.
4,000 *.4 - 1,475 = $125 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
(Appendix 10B) The Dexon Company makes and sells a single product, called a Mip, and
employs a standard costing system. The following standards have been established for one
unit of Mip:
Direct Materials
Direct Labour
Standard Quantity or Standard Cost per Mip
Hours
6 board metre
$9.00
0.8 hours
$9.60
There were no inventories of any kind on August 1. During August, the following events
occurred:
Purchased 15,000 board metres at the total cost of $24,000.
Used 12,000 board metres to produce 2,100 Mips.
Used 1,700 hours of direct labour time at a total cost of $20,060.
59. (Appendix 10B) To record the purchase of direct materials, the general ledger would
include what entry to the Materials Price Variance account?
A. $1,500 credit.
B. $1,500 debit.
C. $6,000 credit.
D. $6,000 debit.
Std. Price/m = 9/6 = $1.50.
15,000 * 1.50 - 24,000 = $1,500 debit.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
Topic: 10-45 Direct Materials Variances
60. (Appendix 10B) To record the use of direct materials in production, the general ledger
would include what entry to the Materials Quantity Variance account?
A. $900 debit.
B. $900 credit.
C. $3,600 debit.
D. $3,600 credit.
(2,100 * 6 - 12,000) * 1.50 = $900 credit.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-15 Materials Quantity Variance—A Closer Look
Topic: 10-45 Direct Materials Variances
61. (Appendix 10B) To record the incurrence of direct labour cost and its use in production,
the general ledger would include what entry to the Labour Rate Variance account?
A. $240 credit.
B. $240 debit.
C. $340 debit.
D. $340 credit.
Std. Rate = 9.60/.8 = $12/hr.; 1,700 * 12 - 20,060 = $340 credit.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-46 Direct Labour Variances
62. (Appendix 10B) To record the incurrence of direct labour costs and its use in production,
the general ledger would include what entry to the Labour Efficiency Variance account?
A. $240 debit.
B. $480 credit.
C. $1,200 debit.
D. $1,200 credit.
(2,100 *.8 - 1,700) * 12 = $240 debit.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
Topic: 10-46 Direct Labour Variances
The Alpha Company produces toys for national distribution. Standards for a particular toy
are:
Materials: 12 grams per unit at 56per gram.
Labour: 2 hours per unit at $2.75 per hour.
During the month of December, the company produced 1,000 units. Information for the month
follows:
Materials: 14,000 grams were purchased and used at a total cost of $7,140.
Labour: 2,500 hours worked at a total cost of $8,000.
63. What was the materials price variance?
A. $420 favourable.
B. $420 unfavourable.
C. $700 favourable.
D. $700 unfavourable.
14,000 *.56 - 7,140 = $700 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
64. What was the materials quantity variance?
A. $1,120 favourable.
B. $1,120 unfavourable.
C. $1,820 favourable.
D. $1,820 unfavourable.
(1,000 * 12 - 14,000) *.56 = $1,120 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
65. What was the labour rate variance?
A. $1,125 favourable.
B. $1,125 unfavourable.
C. $2,500 favourable.
D. $2,500 unfavourable.
2,500 * 2.75 - 8,000 = $1,125 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
66. What was the labour efficiency variance?
A. $1,375 favourable.
B. $1,375 unfavourable.
C. $1,600 favourable.
D. $1,600 unfavourable.
(1,000 * 2 - 2,500) * 2.75 = $1,375 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
The following materials standards have been established for a particular product:
Standard quantity per unit of output
Standard price
4.4 kilograms
$13.20 per kilogram
The following data pertain to operations concerning the product for the last month:
Actual materials purchased
Actual cost of materials purchased
Actual materials used in production
Actual output
4,800 kilograms
$62,880
4,300 kilograms
70 units
67. What was the materials price variance for the month?
A. $430 favourable.
B. $430 unfavourable.
C. $480 favourable.
D. $480 unfavourable.
4,800 * 13.20 - 62,880 = $480 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
68. What was the materials quantity variance for the month?
A. $6,550 unfavourable.
B. $6,600 unfavourable.
C. $15,982 unfavourable.
D. $16,104 unfavourable.
(700 * 4.4 - 4,300) * 13.20 = $16,104 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
The following materials standards have been established for a particular product:
Standard quantity per unit of output
Standard price
1.9 grams
$18.00 per gram
The following data pertain to operations concerning the product for the last month:
Actual materials purchased
Actual cost of materials purchased
Actual materials used in production
Actual output
5,800 grams
$108,460
5,200 grams
2,700 units
69. What was the materials price variance for the month?
A. $3,640 favourable.
B. $3,640 unfavourable.
C. $4,060 favourable.
D. $4,060 unfavourable.
5,800 * 18 - 108,460 = $4,060 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
70. What was the materials quantity variance for the month?
A. $1,260 unfavourable.
B. $1,309 unfavourable.
C. $10,880 unfavourable.
D. $11,220 unfavourable.
(2,700 * 1.9 - 5,200) * 18 = $1,260 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
The following materials standards have been established for a particular product:
Standard quantity per unit of output
Standard price
6.8 metres
$17.10 per metre
The following data pertain to operations concerning the product for the last month:
Actual materials purchased
Actual cost of materials purchased
Actual materials used in production
Actual output
9,000 metres
$156,600
8,500 metres
1,200 units
71. What was the materials price variance for the month?
A. $2,550 favourable.
B. $2,550 unfavourable.
C. $2,700 favourable.
D. $2,700 unfavourable.
9,000 * 17.10 - 156,600 = $2,700 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
72. What was the materials quantity variance for the month?
A. $5,814 unfavourable.
B. $5,916 unfavourable.
C. $8,550 unfavourable.
D. $8,700 unfavourable.
(1,200 * 6.8 - 8,500) * 17.10 = $5,814 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
The following labour standards have been established for a particular product:
Standard labour hours per unit of output
Standard labour rate
7.5 hours
$15.25 per hour
The following data pertain to operations concerning the product for the last month:
Actual hours worked
Actual total labour cost
Actual output
9,600 hours
$144,480
1,200 units
73. What was the labour rate variance for the month?
A. $240 favourable.
B. $240 unfavourable.
C. $1,920 favourable.
D. $1,920 unfavourable.
9,600 * 15.25 - 144,480 = $1,920 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
74. What was the labour efficiency variance for the month?
A. $7,230 favourable.
B. $7,230 unfavourable.
C. $9,030 unfavourable.
D. $9,150 unfavourable.
(1,200 * 7.5 - 9,600) * 15.25 = $9,150 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
The Clark Company makes a single product and uses standard costing. Some data concerning
this product for the month of May follow:
Labour rate variance
Labour efficiency variance
Variable overhead efficiency variance
Number of units produced
Standard labour rate per direct labour hour
Standard variable overhead rate per direct labour hour
Actual labour hours used
Actual variable manufacturing overhead costs
$7,000 favourable
$12,000 favourable
$4,000 favourable
10,000
$12
$4
14,000
$58,290
75. What was the variable overhead spending variance for May?
A. $1,710 favourable.
B. $1,710 unfavourable.
C. $2,290 favourable.
D. $2,290 unfavourable.
14,000 * 4 - 58,290 = $2,290 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
76. What was the actual direct labour rate for May in dollars per hour?
A. $11.50.
B. $11.75.
C. $12.00.
D. $12.50.
(14,000 * 12 - 7,000)/14,000 = $11.50.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
77. What was the total standard cost for direct labour for May?
A. $120,000.
B. $161,000.
C. $168,000.
D. $180,000.
14,000 * 12 + 12,000 = $180,000.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
78. What was the total standard cost for variable overhead for May?
A. $40,000.
B. $50,000.
C. $56,000.
D. $60,000.
14,000 * 4 + 4,000 = $60,000.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
79. What are the standard hours allowed to make one unit of finished product?
A. 1.0 hours.
B. 1.2 hours.
C. 1.5 hours.
D. 2.0 hours.
60,000/4/10,000 = 1.5 hours.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
The following standards for variable manufacturing overhead have been established for a
company that makes only one product:
Standard hours per unit of output
Standard variable overhead rate
1.6 hours
$11.55 per hour
The following data pertain to operations for the last month:
Actual hours
Actual total variable overhead cost
Actual output
4,900 hours
$58,310
3,000 units
80. What was the variable overhead spending variance for the month?
A. $1,715 favourable.
B. $1,715 unfavourable.
C. $2,870 favourable.
D. $2,870 unfavourable.
4,900 * 11.55 - 58,310 = $1,715 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
81. What was the variable overhead efficiency variance for the month?
A. $1,155 unfavourable.
B. $1,190 favourable.
C. $1,190 unfavourable.
D. $1,680 favourable.
(3,000 * 1.6 - 4,900) * 11.55 = $1,155 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
The Upton Company employs a standard costing system in which variable overhead is
assigned to production on the basis of direct labour hours. Data for the month of February
include the following:
Variable manufacturing overhead cost incurred
Total variable overhead variance
Standard hours allowed for actual production
Actual direct labour hours worked
$48,700
$300 favourable
7,000
6,840
82. What is the standard variable overhead rate per direct labour hour?
A. $6.91.
B. $6.95.
C. $7.00.
D. $7.12.
(48,700 + 300)/7,000hrs. = $7.00.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
83. What was the variable overhead spending variance?
A. $740 favourable.
B. $740 unfavourable.
C. $820 favourable.
D. $820 unfavourable.
6,840 * 7- 48,700 = $820 unfavourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
84. What was the variable overhead efficiency variance?
A. $430 unfavourable.
B. $740 favourable.
C. $950 unfavourable.
D. $1,120 favourable.
(7,000 - 6,840) * 7 = $1,120 favourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
(Appendix 10A) Saskatoon Company uses two raw materials, A and B, in the manufacture of
its only product: Zizbo. The materials are very close substitutes. The standard proportions for
the manufacture of a unit of Zizbo are 2 units of A and 3 units of B. The unit standard prices
of A and B are $10 and $8, respectively. During the month of August, the company used 450
units of A and 750 units of B to produce 230 units of Zizbo.
85. What were the direct materials quantity variances for raw materials A and B,
respectively?
A. $100 favourable and $480 unfavourable.
B. $200 unfavourable and $240 unfavourable.
C. $300 favourable and $240 unfavourable.
D. $480 unfavourable and $100 favourable.
Material A: (230 * 2 - 450) * 10 = $100 favourable and Material B: (230 * 3 - 750) * 8 = $480
unfavourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
86. (Appendix 10A) For raw material A, what were the mix and yield variances,
respectively?
A. $60 favourable and $440 unfavourable.
B. $200 unfavourable and $300 favourable.
C. $300 favourable and $200 unfavourable.
D. $300 unfavourable and $200 favourable.
Mix = (450 - (2/5 * (450 + 750)) * 10 = $300 favourable.
Yield = (2/5 * 1,200 - 230 * 2) * 10 = $200 unfavourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-08 Compute the mix and yield variances for materials; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
Topic: 10-43 Appendix 10A: Further Analysis of Materials Variances
87. (Appendix 10A) For raw material B, what were the mix and yield variances,
respectively?
A. $60 favourable and $440 favourable.
B. $240 favourable and $200 favourable.
C. $240 unfavourable and $240 favourable.
D. $240 unfavourable and $240 unfavourable.
Mix = (750 - (3/5 * (450 + 750)) * 8 = 240 unfavourable.
Yield = (3/5 * 1,200 - 230 * 3) * 8 = 240 unfavourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-08 Compute the mix and yield variances for materials; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
Topic: 10-43 Appendix 10A: Further Analysis of Materials Variances
88. Which one of the following variances is MOST controllable by a production supervisor?
A. Materials price variance.
B. Materials quantity variance.
C. Fixed overhead volume variance.
D. Variable overhead spending variance.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-14 Responsibility for the Variance
Topic: 10-21 Interpreting the Spending Variance
Topic: 10-22 Interpreting the Efficiency Variance
Topic: 10-32 Volume Variance
89. Which of the following variances would be useful in calling attention to possible problems
in the control of spending on overhead items?
Option
A
B
C
D
Variable overhead spending
variance
No
No
Yes
Yes
Fixed overhead budget variance
No
Yes
No
Yes
A. Option A
B. Option B
C. Option C
D. Option D
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Learning Objective: 10-07 Prepare a performance report for manufacturing overhead; decide which variances to investigate; and perform
an analysis of capacity utilization.
Topic: 10-21 Interpreting the Spending Variance
Topic: 10-26 Flexible Budgets and Overhead Rates
Topic: 10-31 Budget Variance
Topic: 10-37 Variance Investigation Decisions
90. Which of the following variances would be useful in calling attention to possible problems
in the control of spending on overhead items?
Option
A
B
C
D
Variable overhead spending
variance
No
No
Yes
Yes
Fixed overhead volume
variance
No
Yes
No
Yes
A. Option A
B. Option B
C. Option C
D. Option D
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Learning Objective: 10-07 Prepare a performance report for manufacturing overhead; decide which variances to investigate; and perform
an analysis of capacity utilization.
Topic: 10-21 Interpreting the Spending Variance
Topic: 10-26 Flexible Budgets and Overhead Rates
Topic: 10-31 Budget Variance
Topic: 10-37 Variance Investigation Decisions
91. Which of the following is directly associated with a higher denominator level of activity?
A. Higher unit product cost.
B. Lower unit product cost.
C. Frequent occurrence of a volume variance.
D. More profitable operations.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-27 Denominator Activity
92. A decrease in denominator level of activity will lead to which of the following?
A. A decrease in the fixed portion of the predetermined overhead rate.
B. An increase in the fixed portion of the predetermined overhead rate.
C. A decrease in the variable portion of the predetermined overhead rate.
D. An increase in the variable portion of the predetermined overhead rate.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-27 Denominator Activity
93. The economic impact of the inability to reach a target denominator level of activity would
best be measured by which of the following?
A. The amount of the volume variance.
B. The contribution margin lost by failing to meet the target denominator level of activity.
C. The amount of the fixed overhead budget variance.
D. The amount of the variable overhead efficiency variance.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Learning Objective: 10-07 Prepare a performance report for manufacturing overhead; decide which variances to investigate; and perform
an analysis of capacity utilization.
Topic: 10-27 Denominator Activity
Topic: 10-32 Volume Variance
Topic: 10-33 Graphic Analysis of Fixed Overhead Variances
Topic: 10-38 Capacity Analysis
94. Which of the following statements is NOT correct?
A. If the denominator level of activity and the standard hours allowed for the output of the
period are the same, then there is no volume variance.
B. If the denominator level of activity is greater than the standard hours allowed for the output
of the period, then the volume variance is unfavourable.
C. If the denominator level of activity is greater than the standard hours allowed for the output
of the period, then the volume variance is favourable.
D. The volume variance is the most appropriate measure of the utilization of plant facilities.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-32 Volume Variance
95. The fixed overhead volume variance is due to which of the following?
A. Inefficient or efficient use of whatever the denominator activity is.
B. Inefficient or efficient use of overhead resources.
C. A difference between the denominator activity and the standard hours allowed for the
actual output of the period.
D. A shift in the amount of hours required to produce the actual output.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-32 Volume Variance
Topic: 10-33 Graphic Analysis of Fixed Overhead Variances
96. Which of the following variances is caused by a difference between the denominator
activity in the predetermined overhead rate and the standard hours allowed for the actual
production of the period?
A. Variable overhead spending variance.
B. Variable overhead efficiency variance.
C. Fixed overhead budget variance.
D. Fixed overhead volume variance.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-32 Volume Variance
Topic: 10-33 Graphic Analysis of Fixed Overhead Variances
Topic: 10-34 Cautions in Fixed Overhead Analysis
97. Overhead cost is applied to units based on direct labour hours. For April, total overhead
cost was budgeted at $80,000 based on a denominator activity level of 20,000 direct labour
hours for the month. The standard cost card indicates that each unit of finished product
requires 2 direct labour hours. The following data are available for April's activity:
Number of Units Produced
Direct Labour Hours Worked
Actual Total Overhead Cost Incurred
$9,500
$19,500
$79,500
What was the amount of total overhead cost applied to production for the month of April?
A. $76,000.
B. $78,000.
C. $79,500.
D. $80,000.
9,500 * 2 * 80,000/20,000 = $76,000.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-26 Flexible Budgets and Overhead Rates
Topic: 10-27 Denominator Activity
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-35 Overhead Variances and Under- or Overapplied Overhead Cost
98. Hart Company's labour standards call for 500 direct labour hours to produce 250 units of
product. During October, the company worked 625 direct labour hours and produced 300
units. What were the standard hours allowed for October?
A. 250 hours.
B. 500 hours.
C. 600 hours.
D. 625 hours.
300 * (500/250) = 600 hours.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
99. At Jacobson Company, indirect labour is a variable cost that varies with direct labour
hours. Last month's performance report showed that total actual indirect labour cost was
$5,780 for the month and that the associated spending variance was $245 favourable. If
24,100 direct labour hours were actually worked last month, what must be the flexible budget
cost formula for indirect labour (per direct labour hour)?
A. $0.20.
B. $0.25.
C. $0.30.
D. $0.35.
(5,780 + 245)/24,100 = $0.25.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-21 Interpreting the Spending Variance
Topic: 10-35 Overhead Variances and Under- or Overapplied Overhead Cost
100. At Overland Company, maintenance cost is exclusively a variable cost that varies
directly with machine hours. The performance report for July showed that total actual
maintenance costs were $9,800 and that the associated spending variance was $200
unfavourable. If 8,000 machine hours were actually worked during July, what was the
budgeted maintenance cost per machine hour?
A. $1.200.
B. $1.225.
C. $1.250.
D. $1.275.
(9,800 - 200)/8,000 = $1.200.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-21 Interpreting the Spending Variance
Topic: 10-35 Overhead Variances and Under- or Overapplied Overhead Cost
101. Tyro Company has a standard cost system that applies manufacturing overhead to units
of product on the basis of direct labour hours (DLHs). The following information is available:
Actual Total Overhead Costs
Actual Fixed Overhead Costs
Budgeted Fixed Overhead Costs
Actual Hours Worked
Standard Hours Allowed for the Output
Variable Overhead Rate
$15,000
$7,200
$7,000
3,500 DLHs
3,800 DLHs
$2.50 per DLH
Based on these data, what was the variable overhead spending variance?
A. $750 unfavourable.
B. $950 favourable.
C. $1,500 unfavourable.
D. $1,700 favourable.
3,500 * 2.50 - (15,000 - 7,200) = $950 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
102. Web Company uses a standard cost system that applies manufacturing overhead to units
of product on the basis of machine hours. During February, the company used a denominator
activity of 80,000 machine hours in computing its predetermined overhead rate. However,
only 75,000 standard machine hours were allowed for the month's actual production. If the
fixed overhead volume variance for February was $6,400 unfavourable, what was the total
budgeted fixed overhead cost for the month?
A. $96,000.
B. $98,600.
C. $100,000.
D. $102,400.
[6,400/(80,000 - 75,000)] * 80,000 = $102,400.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-26 Flexible Budgets and Overhead Rates
Topic: 10-27 Denominator Activity
Topic: 10-31 Budget Variance
Topic: 10-32 Volume Variance
103. The Adlake Company makes and sells a single product and uses a standard cost system.
During October, the company budgeted $300,000 in manufacturing overhead cost at a
denominator activity of 20,000 machine hours. At standard, each unit of finished product
requires 5 machine hours. The following cost and activity were recorded during October:
Total Actual Manufacturing Overhead Cost Incurred
Units of Product Completed
Actual Machine Hours Worked
$294,000
3,800
19,422
What was the amount of overhead cost that the company applied to work in process for
October?
A. $279,300.
B. $285,000.
C. $291,330.
D. $294,000.
3,800 * 5 * 300,000/20,000 = $285,000.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-26 Flexible Budgets and Overhead Rates
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
104. The predetermined overhead rate (variable and fixed) is $7.50 per machine hour, and the
denominator activity level is 135,000 machine hours. If the variable portion of the
predetermined overhead rate is $3.00 per machine hour, what is the budgeted fixed factory
overhead for the year?
A. $30,000.
B. $607,500.
C. $405,000.
D. $1,012,500.
135,000 *(7.50 - 3) = $607,500.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-26 Flexible Budgets and Overhead Rates
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
105. Mauve Company uses a standard cost system that applies manufacturing overhead to
units of product on the basis of direct labour hours (DLHs). The following data pertain to last
month:
Actual Hours Worked
Budgeted Fixed Overhead Costs
Actual Fixed Overhead Costs
Standard Hours Allowed
Predetermined Overhead Rate
2,400 DLHs
$10,000
$10,400
2,500 DLHs
$5 per DLH
What was the fixed overhead budget variance?
A. $300 favourable.
B. $300 unfavourable.
C. $400 unfavourable.
D. $500 favourable.
10,400 - 10,000 = $400 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-31 Budget Variance
106. Jaune Company uses a standard cost system that applies manufacturing overhead to units
of product on the basis of direct labour hours (DLHs). The following data pertain to last
month's operations:
Budgeted Fixed Overhead Costs
Actual Fixed Overhead Costs
Standard Hours Allowed for Output
Predetermined Overhead Rate ($2 variable + $3 fixed)
$5,000
$5,000
2,400 DLHs
$5 per DLH
What was the fixed overhead budget variance?
A. $500 favourable.
B. $500 unfavourable.
C. $1,700 unfavourable.
D. $2,200 unfavourable.
5,000 - 5,500 = $500 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-31 Budget Variance
107. Henley Company uses a standard cost system that applies manufacturing overhead to
units of product on the basis of direct labour hours. For the month of January, the fixed
manufacturing overhead volume variance was $2,220 favourable. The company uses a fixed
manufacturing overhead rate of $1.85 per direct labour hour. What were the standard direct
labour hours allowed for the month's output in January?
A. They exceeded the denominator hours by 1,000.
B. They fell short of the denominator hours by 1,000.
C. They exceeded the denominator hours by 1,200.
D. They fell short of the denominator hours by 1,200.
2,200/1.85 = 1,200.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-32 Volume Variance
108. Patridge Company uses a standard cost system in which it applies manufacturing
overhead to units of product on the basis of direct labour hours. The information below is
taken from the company's flexible budget for manufacturing overhead:
Percent of Capacity
Direct Labour Hours
Variable Overhead
Fixed Overhead
Total Overhead
70%
21,000
$42,000
$108,000
$150,000
80%
24,000
$48,000
$108,000
$156,000
90%
27,000
$54,000
$108,000
$162,000
During the year, the company operated at exactly 80% of capacity, but it applied
manufacturing overhead to products based on the 90% level. What was the company's fixed
overhead volume variance for the year?
A. $6,000 favourable.
B. $6,000 unfavourable.
C. $12,000 favourable.
D. $12,000 unfavourable.
24,000 * 108,000/27,000 - 108,000 = $12,000 unfavourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-32 Volume Variance
109. Union Company uses a standard cost accounting system. The following overhead costs
and production data are available for August:
Standard Fixed Overhead Rate
Standard Variable Overhead Rate
Denominator Activity
Actual Hours
Standard Hours Allowed for Output
Overapplied Overhead
$1.00 per hour
$4.00 per hour
40,000 hours
39,500 hours
39,000 hours
$2,000
What was the total amount of overhead applied to work in process in August?
A. $195,000.
B. $197,000.
C. $197,500.
D. $199,500.
39,000 * (1 + 4) = $195,000.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-26 Flexible Budgets and Overhead Rates
Topic: 10-27 Denominator Activity
Topic: 10-30 Overhead Application in a Standard Costing System
The Murray Company makes and sells a single product. The company recorded the following
activity and cost data for May:
Number of Units Completed
Standard Direct Labour Hours Allowed per Unit of
Product
Budgeted Direct Labour Hours (denominator activity)
Actual Fixed Overhead Costs Incurred
Volume Variance
45,000 units
1.5 DLHS
72,000 DLHS
$66,000
$4,4275 unfavourable
The fixed portion of the predetermined overhead rate is $0.95 per direct labour hour.
110. What was the amount of fixed overhead contained in the company's overhead flexible
budget for May?
A. $64,125.
B. $67,500.
C. $68,400.
D. $70,275.
45,000 * 1.5 *.95 + 4,275 = $68,400.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
Topic: 10-34 Cautions in Fixed Overhead Analysis
Topic: 10-35 Overhead Variances and Under- or Overapplied Overhead Cost
111. What was the amount of fixed manufacturing overhead cost applied to work in process
during May?
A. $42,750.
B. $61,725.
C. $62,700.
D. $64,125.
45,000 * 1.5 *.95 = $64,125.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
Topic: 10-34 Cautions in Fixed Overhead Analysis
Topic: 10-35 Overhead Variances and Under- or Overapplied Overhead Cost
112. What was the fixed overhead budget variance for May?
A. $2,400 favourable.
B. $2,400 unfavourable.
C. $6,000 favourable.
D. $6,000 unfavourable.
68,400 - 66,000 = $2,400 favourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
Topic: 10-34 Cautions in Fixed Overhead Analysis
Topic: 10-35 Overhead Variances and Under- or Overapplied Overhead Cost
A manufacturing company has a standard costing system based on machine hours (MHs) as
the measure of activity. Data from the company's flexible budget for manufacturing overhead
are given below:
Denominator Level of Activity
Overhead Costs at the Denominator Activity Level:
Variable Overhead Cost
Fixed Overhead Cost
6,100 MHs
$35,075
$77,775
The following data pertain to operations for the most recent period:
Actual Hours
Standard Hours Allowed for the Actual Output
Actual Total Variable Overhead Cost
Actual Total Fixed Overhead Cost
6,300 MHs
5,994 MHs
$36,540
$76,875
113. What was the total predetermined overhead rate, rounded to the nearest cent?
A. $17.91.
B. $18.00.
C. $18.50.
D. $18.59.
(35,075 + 77,775)/6,100 = $18.50.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-28 Computing the Overhead Rate
114. How much overhead was applied to products during the period, rounded to the nearest
dollar?
A. $110,889.
B. $112,850.
C. $113,415.
D. $116,550.
5,994 * 18.50 = $110,889.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
115. What was the variable overhead spending variance for the period, rounded to the nearest
dollar?
A. $315 favourable.
B. $315 unfavourable.
C. $2,075 favourable.
D. $2,075 unfavourable.
[6,300 * (35,075/6,100)] - 36,540 = $315 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-28 Computing the Overhead Rate
116. What was the variable overhead efficiency variance for the period, rounded to the nearest
dollar?
A. $0.
B. $2,075 unfavourable.
C. $2.075 favourable.
D. $1,760 unfavourable.
(5,994 - 6,300) * 35,075/6,100 = $1,760 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-28 Computing the Overhead Rate
117. What was the fixed overhead budget variance for the period, rounded to the nearest
dollar?
A. $452 favourable.
B. $452 unfavourable.
C. $900 unfavourable.
D. $900 favourable.
77,775 - 76,875 = $900 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-31 Budget Variance
118. What was the fixed overhead volume variance for the period, rounded to the nearest
dollar?
A. $1,352 unfavourable.
B. $1,359 unfavourable.
C. $2,550 favourable.
D. $3,902 unfavourable.
5,994 * 77,775/6,100 - 77,775 = $1,351.50 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-32 Volume Variance
The Dillon Company makes and sells a single product and uses a flexible budget for
overhead to plan and control overhead costs. Overhead costs are applied on the basis of direct
labour hours. The standard cost card shows that 5 direct labour hours are required per unit.
The Dillon Company had the following budgeted and actual data for March:
Units Produced
Direct Labour Hours
Variable Overhead Costs
Fixed Overhead Costs
Actual
33,900
161,800
$140,500
$80,000
Budgeted
30,800
154,000
$123,200
$77,000
119. What was the variable overhead spending variance for March?
A. $4,900 unfavourable.
B. $11,060 unfavourable.
C. $14,700 unfavourable.
D. $17,300 unfavourable.
161,800 * 123,200/154,000 - 140,500 = $11,060 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
120. What was the variable overhead efficiency variance for March?
A. $6,160 favourable.
B. $6,160 unfavourable.
C. $6,240 favourable.
D. $6,240 unfavourable.
(33,900 * 5 - 161,800) * 123,200/154,000 = $6,160 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
121. What was the fixed overhead budget variance for March?
A. $900 favourable.
B. $3,000 unfavourable.
C. $3,900 favourable.
D. $7,750 favourable.
77,000 - 80,000 = $3,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
Topic: 10-31 Budget Variance
122. What was the fixed overhead volume variance for March?
A. $1,550 favourable.
B. $3,900 unfavourable.
C. $7,750 favourable.
D. $7,750 unfavourable.
33,900 * 5 * 77,000/154,000 - 77,000 = 7,750 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
Topic: 10-32 Volume Variance
The Ferris Company applies manufacturing overhead costs to products on the basis of direct
labour hours. The standard cost card shows that 3 direct labour hours are required per unit of
product. For August, the company budgeted to work 90,000 direct labour hours and to incur
the following total manufacturing overhead costs:
Total Variable Overhead Costs
Total Fixed Overhead Costs
$99,000
$118,000
During August, the company completed 28,000 units of product, worked 86,000 direct labour
hours, and incurred the following total manufacturing overhead costs:
Total Variable Overhead Costs
Total Fixed Overhead Costs
$98,900
$115,300
The denominator activity used for the predetermined overhead rate was 90,000 direct labour
hours.
123. For August, what was the variable overhead spending variance?
A. $4,300 favourable.
B. $4,300 unfavourable.
C. $6,500 favourable.
D. $6,500 unfavourable.
86,000 * 99,000/90,000 - 98,900 = $4,300 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-28 Computing the Overhead Rate
124. For August, what was the variable overhead efficiency variance?
A. $0.
B. $1,800 favourable.
C. $2,200 favourable.
D. $2,200 unfavourable.
(28,000 * 3 - 86,000) * 99,000/90,000 = $2,200 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-28 Computing the Overhead Rate
125. For August, what was the fixed overhead budget variance?
A. $4,420 favourable.
B. $4,420 unfavourable.
C. $3,500 favourable.
D. $3,500 unfavourable.
118,800 - 115,300 = $3,500 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-31 Budget Variance
126. For August, what was the fixed overhead volume variance?
A. $4,300 unfavourable.
B. $4,980 favourable.
C. $4,980 unfavourable.
D. $7,920 unfavourable.
28,000 * 3 * 118,800/90,000 - 118,800 = $7,920 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
King Company estimated that it would operate its manufacturing facilities at 800,000 direct
labour hours for the year, which served as the denominator activity in the predetermined
overhead rate. The total budgeted manufacturing overhead for the year was $2,000,000, of
which $1,600,000 was variable and $400,000 was fixed. The standard variable overhead rate
was $2 per direct labour hour. The standard direct labour time was 3 direct labour hours per
unit. The actual results for the year are presented below:
Actual Finished Units
Actual Direct Labour Hours
Actual Variable Overhead
Actual Fixed Overhead
250,000
764,000
$1,610,000
$392,000
127. What was the variable overhead spending variance for the year?
A. $2,000 favourable.
B. $10,000 unfavourable.
C. $82,000 unfavourable.
D. $110,000 unfavourable.
764,000 * 2 - 1,610,000 = $82,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
128. What was the variable overhead efficiency variance for the year?
A. $28,000 favourable.
B. $28,000 unfavourable.
C. $192,000 favourable.
D. $192,000 unfavourable.
(250,000 * 3 - 764,000) * 2 = $28,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
129. What was the fixed overhead budget variance for the year?
A. $8,000 favourable.
B. $10,000 unfavourable.
C. $17,000 unfavourable.
D. $74,000 favourable.
400,000 - 392,000 = $8,000 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-31 Budget Variance
130. What was the fixed overhead volume variance for the year?
A. $7,000 unfavourable.
B. $18,000 favourable.
C. $25,000 unfavourable.
D. $41,667 unfavourable.
[250,000 * 3 * (400,000/800,000)] - 400,000 = $25,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
A manufacturing company that has only one product has established the following standards
for its variable manufacturing overhead. The company uses machine hours as its measure of
activity.
Standard Hours per Unit of Output
Standard Variable Overhead Rate
8.1 machine hours
$14.30 per machine hour
The following data pertain to operations for the last month:
Actual Hours
Actual Total Variable Overhead Cost
Actual Output
1,700 machine hours
$24,905
200 units
131. What was the variable overhead spending variance for the month?
A. $595 favourable.
B. $595 unfavourable.
C. $1,739 favourable.
D. $1,739 unfavourable.
1,700 * 14.30 - 24,905 = $595 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
132. What was the variable overhead efficiency variance for the month?
A. $567 favourable.
B. $1,144 unfavourable.
C. $1,172 favourable.
D. $1,172 unfavourable.
(200 * 8.1 - 1,700) * 14.30 = $1,144 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
A manufacturing company that has only one product has established the following standards
for its variable manufacturing overhead. The company uses direct labour hours (DLHs) as its
measure of activity.
Standard Hours per Unit of Output
Standard Variable Overhead Rate
7.2 DLHs
$14.20 per DLH
The following data pertain to operations for the last month:
Actual Direct Labour Hours
Actual Total Variable Overhead Cost
Actual Output
5,100 DLHs
$72,165
600 units
133. What was the variable overhead spending variance for the month?
A. $255 favourable.
B. $255 unfavourable.
C. $10,821 favourable.
D. $10,821 unfavourable.
5,100 * 14.20 - 72,165 = $255 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
134. What was the variable overhead efficiency variance for the month?
A. $216 unfavourable.
B. $11,037 favourable.
C. $11,037 unfavourable.
D. $11,076 unfavourable.
(600 * 7.2 - 5,100) * 14.20 = $11,076 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Raff Co. has a standard cost system in which manufacturing overhead is applied to units of
product on the basis of direct labour hours (DLHs). The following standards are based on
100,000 direct labour hours:
Variable Overhead
Fixed Overhead
2 DLHs @ $3 per DLH = $6 per unit
2 DLHs @ $4 per DLH = $8 per unit
The following information pertains operations during March:
Units Actually Produced
Actual Direct Labour Hours Worked
Actual Manufacturing Overhead
Incurred:
Variable Overhead
Fixed Overhead
38,000
80,000
$250,000
$384,000
135. For March, what was the variable overhead spending variance?
A. $6,000 favourable.
B. $10,000 unfavourable.
C. $12,000 unfavourable.
D. $22,000 favourable.
80,000 * 3 - 250,000 = $10,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
136. For March, what was the fixed overhead volume variance?
A. $80,000 favourable.
B. $80,000 unfavourable.
C. $96,000 favourable.
D. $96,000 unfavourable.
(38,000 * 2 * 4) - (100,000 * 4) = $96,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-32 Volume Variance
A furniture manufacturer has a standard costing system based on machine hours (MHs) as the
measure of activity. Data from the company's flexible budget for manufacturing overhead are
given below:
Denominator Level of Activity
Overhead Costs at the Denominator Activity Level:
Variable Overhead Cost
Fixed Overhead Cost
3,300 MHs
$31,845
$40,425
The following data pertain to operations for the most recent period:
Actual Hours
Standard Hours Allowed for the Actual Output
Actual Total Variable Overhead Cost
Actual Total Fixed Overhead Cost
3,400 MHs
3,078 MHs
$32,980
$38,975
137. What was the total predetermined overhead rate, rounded to the nearest cent?
A. $21.16.
B. $21.26.
C. $21.80.
D. $21.90.
(31,845 + 40,425)/3,300 = $21.90.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
138. How much overhead was applied to products during the period, rounded to the nearest
dollar?
A. $67,408.
B. $71,955.
C. $72,270.
D. $74,460.
3,078 * 21.90 = $67,408.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
139. What was the fixed overhead budget variance for the period, rounded to the nearest
dollar?
A. $1,270 favourable.
B. $1,450 favourable.
C. $2,675 unfavourable.
D. $3,691 favourable.
40,425 - 38,975 = $1,450 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-31 Budget Variance
140. What was the fixed overhead volume variance for the period, rounded to the nearest
dollar?
A. $1,225 favourable.
B. $2,720 unfavourable.
C. $2,811 unfavourable.
D. $3,945 unfavourable.
3,078 * 40,425/3,300 - 40,425 = $2,719.50 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
A manufacturer of playground equipment has a standard costing system based on machine
hours (MHs) as the measure of activity. Data from the company's flexible budget for
manufacturing overhead are given below:
Denominator Level of Activity
Fixed Overhead Cost
3,000 MHs
$40,650
The following data pertain to operations for the most recent period:
Actual Hours
Standard Hours Allowed for the Actual Output
Actual Total Fixed Overhead Cost
3,400 MHs
3,172 MHs
$41,600
141. What was the predetermined fixed overhead rate, rounded to the nearest cent?
A. $11.94.
B. $12.24.
C. $13.55.
D. $13.87.
40,650/3,000 = $13.55.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-28 Computing the Overhead Rate
142. How much fixed overhead was applied to products during the period, rounded to the
nearest dollar?
A. $40,650.
B. $41,600.
C. $42,981.
D. $46,070.
3,172 * 13.55 = $42,980.60.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
143. What was the fixed overhead budget variance for the period, rounded to the nearest
dollar?
A. $950 unfavourable.
B. $1,381 unfavourable.
C. $2,790 favourable.
D. $4,470 unfavourable.
40,650 - 41,600 = $950 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-31 Budget Variance
144. What was the fixed overhead volume variance for the period, rounded to the nearest
dollar?
A. $2,256 favourable.
B. $2,331 favourable.
C. $3,089 unfavourable.
D. $5,420 favourable.
42,980.60 - 40,650 = $2,330.60 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
The Claus Company makes and sells a single product and uses standard costing. During
January, the company actually used 8,700 direct labour hours (DLHs) and produced 3,000
units of product. The standard cost card for one unit of product includes the following:
Variable Factory Overhead: 3.0 DLHs @ $4.00 per DLH.
Fixed Factory Overhead: 3.0 DLHs. @ $3.50 per DLH.
For January, the company incurred $22,000 of actual fixed overhead costs and recorded an
$875 favourable volume variance.
145. What was the budgeted fixed factory overhead cost for January?
A. $30,625.
B. $31,500.
C. $32,375.
D. $33,250.
3,000 * 3 * 3.50 875 = $30,625.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
146. What was the denominator level of activity in direct labour hours (DLHs) used by Claus
in setting the predetermined overhead rate for January?
A. 8,750 DLHs.
B. 9,250 DLHs.
C. 9,500 DLHs.
D. 10,500 DLHs.
30,625/3.50 = 8,750 DLHs.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
A manufacturer of industrial equipment has a standard costing system based on machine
hours (MHs) as the measure of activity. Data from the company's flexible budget for
manufacturing overhead are given below:
Denominator Level of Activity
Overhead Costs at the Denominator Activity Level:
Variable Overhead Cost
Fixed Overhead Cost
39,00 MHs
$33,345
$61,425
The following data pertain to operations for the most recent period:
Actual Hours
Standard Hours Allowed for the Actual Output
Actual Total Variable Overhead Cost
Actual Total Fixed Overhead Cost
3,900 MHs
3,952 MHs
$32,565
$60,675
147. What was the total predetermined overhead rate, rounded to the nearest cent?
A. $23.59.
B. $23.91.
C. $23.98.
D. $24.30.
(33,345 + 61,425)/3,900 = $24.30.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-28 Computing the Overhead Rate
148. How much overhead was applied to products during the period, rounded to the nearest
dollar?
A. $93,240.
B. $94,483.
C. $94,770.
D. $96,034.
3,952 * 24.30 = $96,033.60.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
A manufacturer of industrial equipment has a standard costing system based on direct labour
hours (DLHs) as the measure of activity. Data from the company's flexible budget for
manufacturing overhead are given below:
Denominator Level of Activity
Overhead Costs at the Denominator Activity Level:
Variable Overhead Cost
Fixed Overhead Cost
8,000 DLHs
$56,400
$100,800
The following data pertain to operations for the most recent period:
Actual Hours
Standard Hours Allowed for the Actual Output
Actual Total Variable Overhead Cost
Actual Total Fixed Overhead Cost
7,800 DLHs
7,735 DLHs
$54,210
$100,200
149. What was the total predetermined overhead rate, rounded to the nearest cent?
A. $19.30.
B. $19.65.
C. $19.80.
D. $20.15.
(56,400 + 100,800)/8,000 = $19.65.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-28 Computing the Overhead Rate
150. How much overhead was applied to products during the period, rounded to the nearest
dollar?
A. $151,993.
B. $153,270.
C. $154,410.
D. $157,200.
7,735 * 19.65 = $151,992.75.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Dori Castings is a job order shop that uses a standard cost system to account for its
production costs. Manufacturing overhead costs are applied to production on the basis of
direct labour hours.
151. Dori's choice of a production volume as a denominator for calculating its predetermined
overhead rate will have NO effect on which of the following?
A. The fixed portion of this rate, which is used for applying costs to production.
B. The variable portion of this rate, which is used for applying costs to production.
C. The fixed overhead budget variance.
D. The fixed overhead volume variance.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-31 Budget Variance
Topic: 10-32 Volume Variance
152. A volume variance will exist for Dori in a month under which of the following
conditions?
A. When the production volume differs from sales volume.
B. When the actual direct labour hours differ from standard hours allowed.
C. When there is a budget variance in fixed overhead costs.
D. When the fixed overhead applied to units of product on the basis of standard hours allowed
differs from the budgeted fixed overhead.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
153. What amount of fixed overhead would Dori apply to finished production?
A. The actual direct labour hours multiplied by the standard fixed overhead rate per direct
labour hour.
B. The standard hours allowed for the actual units of finished output multiplied by the
standard fixed overhead rate per direct labour hour.
C. The standard units of output for the actual direct labour hours worked multiplied by the
standard fixed overhead rate per unit of output.
D. The actual fixed overhead cost per direct labour hour multiplied by the standard hours
allowed for standard output.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-30 Overhead Application in a Standard Costing System
Jessep Corporation has a standard cost system in which manufacturing overhead is applied to
units of product on the basis of direct labour hours. The company has provided the following
data concerning its fixed manufacturing overhead costs in March:
Denominator Hours
Actual Hours Worked
Standard Hours Allowed for the Output
Flexible Budget Fixed Overhead Cost
Actual Fixed Overhead Costs
15,000 hours
14,000 hours
12,000 hours
$45,000
$48,00
154. What was the fixed overhead budget variance?
A. $1,000 unfavourable.
B. $2,000 favourable.
C. $2,000 unfavourable.
D. $3,000 unfavourable.
45,000 - 48,000 = $3,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-31 Budget Variance
155. What was the fixed overhead volume variance?
A. $3,000 favourable.
B. $3,000 unfavourable.
C. $9,000 unfavourable.
D. $6,000 unfavourable.
12,000 * (45,000/15,000) - 45,000 = $9,000 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
An outdoor barbecue grill manufacturer has a standard costing system based on direct labour
hours (DLHs) as the measure of activity. Data from the company's flexible budget for
manufacturing overhead are given below:
Denominator Level of Activity
Fixed Overhead Cost
3,300 DLHs
$26,895
The following data pertain to operations for the most recent period:
Actual Hours
Standard Hours Allowed for the Actual Output
Actual Total Fixed Overhead Cost
3,400 DLHs
3,420 DLHs
$28,295
156. What was the fixed overhead budget variance for the period, rounded to the nearest
dollar?
A. $166 unfavourable.
B. $422 favourable.
C. $585 favourable.
D. $1,400 unfavourable.
26,895 - 28,295 = $1,400 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-31 Budget Variance
157. What was the fixed overhead volume variance for the period, rounded to the nearest
dollar?
A. $163 favourable.
B. $815 favourable.
C. $978 favourable.
D. $993 favourable.
3,420 * (26,895/3,300) - 26,895 = $978 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
An outdoor barbecue grill manufacturer has a standard costing system based on machine
hours (MHs) as the measure of activity. Data from the company's flexible budget for
manufacturing overhead are given below:
Denominator Level of Activity
Fixed Overhead Cost
4,600 MHs
$50,140
The following data pertain to operations for the most recent period:
Actual Hours
Standard Hours Allowed for the Actual Output
Actual Total Fixed Overhead Cost
5,000 MHs
4,743 MHs
$48,960
158. What was the fixed overhead budget variance for the period, rounded to the nearest
dollar?
A. $1,450 favourable.
B. $2,503 favourable.
C. $3,009 unfavourable.
D. $5,810 unfavourable.
50,140 - 48,690 = $1,450 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-31 Budget Variance
159. What was the fixed overhead volume variance for the period, rounded to the nearest
dollar?
A. $1,468 favourable.
B. $1,559 favourable.
C. $2,801 unfavourable.
D. $4,360 favourable.
4,743 * (50,140/4,600) - 50,140 = $1,558.70 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
The Tate Company uses a standard costing system in which manufacturing overhead is
applied to units of product on the basis of direct labour hours (DLHs). The company recorded
the following costs and activity for September:
Cost:
Actual Fixed Overhead Costs Incurred
Volume Variance
Fixed Portion of the Predetermined Overhead Rate
Activity:
Number of Units Completed
Standard Direct Labour Hours Allowed per Unit of Product
Denominator Activity
$61,400
$2,850 unfavourable
$0.95 per DLH
22,800
2.5 DLHs
60,000 DLHs
160. What was the amount of fixed manufacturing overhead cost applied to work in process
during September?
A. $54,150.
B. $57,000.
C. $59,850.
D. $61,400.
22,800 * 2.5 *.95 = $54,150.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-30 Overhead Application in a Standard Costing System
161. What was the amount of fixed overhead cost contained in the company's flexible budget
for manufacturing overhead for September?
A. $57,000.
B. $58,550.
C. $60,000.
D. $61,400.
54,150 + 2,850 = $57,000.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
(Appendix 10C) Kyekyeku Company retails two models of a product: Model X and Model Y.
It considers both products to be close substitutes. The following data relate to the company's
operations for last year:
Sales in Units:
Budget
Actual
Contribution Margins per Unit:
Budget
Actual
Market Volume in Units:
Budget
Actual
Model X
Model Y
Total
1,000
1,008
1,000
1,092
2,000
2,100
$30
$25
$40
$38
40,000
52,500
162. (Appendix 10C) What were the sales volume variances for Model X and Model Y,
respectively, for last year?
A. $200 favourable and $3,496 favourable.
B. $240 favourable and $3,680 favourable.
C. $1,250 favourable and $1,900 favourable.
D. $1,500 favourable and $2,000 favourable.
Model X variance = (1,008 - 1,000) * 30 = $240 favourable. And Model Y: Variance = (1,092
- 1,000) * 40 = $3,680 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
163. (Appendix 10C) What were the sales mix variances for Model X and Model Y,
respectively, for last year?
A. $1,050 unfavourable and $1,596 unfavourable.
B. $1,260 favourable and $1,680 unfavourable.
C. $1,260 unfavourable and $1,680 favourable.
D. $1,500 favourable and $2,000 favourable.
Model X Variance = (1,008 - 2,100 * 1/2) * 30 = $1,260 unfavourable. And Model Y Variance
= (1,092 - 2,100 * 1/2) * 40 = $1,680 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
164. (Appendix 10C) What were the sales quantity variances for Model X and Model Y,
respectively, for last year?
A. $200 favourable and $3,496 favourable.
B. $240 favourable and $3,680 favourable.
C. $1,250 favourable and $1,900 favourable.
D. $1,500 favourable and $2,000 favourable.
Model X Variance = (2,100 * 1/2 - 1,000) * 30 = $1,500 favourable. And Model Y Variance =
(2,100 * 1/2 - 1,000) * 40 = $2,000 favourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
165. (Appendix 10C) What was the market share variance for last year?
A. $16,537.50 unfavourable.
B. $18,375.00 favourable.
C. $18,375.00 unfavourable.
D. $21,875.00 favourable.
avg. CM = (1,000 * 30 + 1,000 * 40)/2,000 = 35.
Variance = (2,100 - 52,500 * 2,000/40,000) * 35 = $18,375 unfavourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
166. (Appendix 10C) What was the market volume variance for last year?
A. $18,375.00 favourable.
B. $19,687.50 favourable.
C. $21,875.00 favourable.
D. $21,875.00 unfavourable.
(52,500 - 40,000) * 2,000/40,000 * 35 = $21,875 favourable.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
(Appendix 10B) The Baby Clothing Company makes and sells a single product, called a New
bodysuit and employs a standard costing system. The following standards have been
established for one unit of New bodysuit:
Direct Materials
Direct Labour
Standard Quantity or
Hours
5 board metre
0.7 hours
Standard Cost per
New bodysuit
$8.00
$8.40
There were no inventories of any kind on August 1. During August, the following events
occurred:
Purchased 14,000 board metres at the total cost of $22,000.
Used 10,300 board metres to produce 2,100 New bodysuits.
Used 1,400 hours of direct labour time at a total cost of $18,060.
167. (Appendix 10B) To record the purchase of direct materials, the general ledger would
include what entry to the Materials Price Variance account?
A. $1,500 credit.
B. $400 debit.
C. $500 credit.
D. $600 debit.
Std. Price/m = 8/5 = $1.60.
14,000 * 1.60 - 22,000 = $400 debit.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
Topic: 10-45 Direct Materials Variances
168. (Appendix 10B) To record the use of direct materials in production, the general ledger
would include what entry to the Materials Quantity Variance account?
A. $900 debit.
B. $320 credit.
C. $360 debit.
D. $360 credit.
(2,100 * 5 - 10,300) * 1.60 = $320 credit.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-15 Materials Quantity Variance—A Closer Look
Topic: 10-45 Direct Materials Variances
169. (Appendix 10B) To record the incurrence of direct labour cost and its use in production,
the general ledger would include what entry to the Labour Rate Variance account?
A. $240 credit.
B. $240 debit.
C. $340 debit.
D. $340 credit.
Std. Rate = 8.40/.7 = $12/hr.; 1,700 * 12 - 20,060 = $340 credit.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-46 Direct Labour Variances
170. (Appendix 10B) To record the incurrence of direct labour costs and its use in production,
the general ledger would include what entry to the Labour Efficiency Variance account?
A. $840 debit.
B. $480 credit.
C. $1,200 debit.
D. $1,200 credit.
(2,100 *.7- 1,400) * 12 = $840 debit.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
Topic: 10-46 Direct Labour Variances
The Baby Clothing Company makes a single product and uses standard costing. Some data
concerning this product for the month of May follow:
Labour rate variance
Labour efficiency variance
Variable overhead efficiency variance
Number of units produced
Standard labour rate per direct labour hour
Standard variable overhead rate per direct labour hour
Actual labour hours used
Actual variable manufacturing overhead costs
$7,500 favourable
$12,000 favourable
$5,000 favourable
10,000
$12
$5
15,000
$78,290
171. What was the variable overhead spending variance for May?
A. $1,710 favourable.
B. $1,710 unfavourable.
C. $2,290 favourable.
D. $3,290 unfavourable.
15,000 * 5- 78,290 = $3,290 unfavourable.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
172. What was the actual direct labour rate for May in dollars per hour?
A. $11.50.
B. $11.75.
C. $12.00.
D. $12.50.
(15,000 * 12 - 7,500)/15,000 = $11.50.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
173. What was the total standard cost for direct labour for May?
A. $120,000.
B. $161,000.
C. $168,000.
D. $192,000.
15,000 * 12 + 12,000 = $192,000.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
174. What was the total standard cost for variable overhead for May?
A. $40,000.
B. $50,000.
C. $56,000.
D. $80,000.
15,000 * 5 + 4,000 = $80,000.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
175. What are the standard hours allowed to make one unit of finished product?
A. 1.0 hours.
B. 1.2 hours.
C. 1.6 hours.
D. 2.0 hours.
80,000/5/10,000 = 1.56 hours.
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-18 Labour Efficiency Variance—A Closer Look
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
A manufacturer of industrial equipment has a standard costing system based on direct labour
hours (DLHs) as the measure of activity. Data from the company's flexible budget for
manufacturing overhead are given below:
Denominator Level of Activity
Overhead Costs at the Denominator Activity Level:
Variable Overhead Cost
9,000 DLHs
$90,700
Fixed Overhead Cost
$102,800
The following data pertain to operations for the most recent period:
Actual Hours
Standard Hours Allowed for the Actual Output
Actual Total Variable Overhead Cost
Actual Total Fixed Overhead Cost
7,800 DLHs
7,765 DLHs
$54,210
$100,200
176. What was the total predetermined overhead rate, rounded to the nearest cent?
A. $19.30.
B. $19.65.
C. $21.5.
D. $20.15.
(90,700 + 102,800)/9,000 = $21.5.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-28 Computing the Overhead Rate
177. How much overhead was applied to products during the period, rounded to the nearest
dollar?
A. $166,948
B. $153,270.
C. $154,410.
D. $157,200.
7,765 * 21.5= $166,947.5.
Blooms: Remember
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
178. Under which product costing system for a manufacturing company would there be no
fixed manufacturing overhead volume variance?
A. Standard absorption costing.
B. Standard variable costing.
C. Job order costing.
D. Process costing.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-04 Who Uses Standard Costs?
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
179. Which of the following is NOT true for variable manufacturing overhead costs in a
standard costing system?
A. No volume variance is ever reported.
B. The flexible variable overhead allowance for the standard hours allowed for the output is
the same as the applied total variable overhead.
C. The slope of the budgeted variable overhead line is the same as the slope of the applied
variable overhead line.
D. Any underapplied or overapplied overhead is equal to the variable overhead spending
variance.
Blooms: Evaluate
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-04 Who Uses Standard Costs?
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-30 Overhead Application in a Standard Costing System
Topic: 10-32 Volume Variance
180. (Appendix 10C) Which of the following is (are) NOT used in calculating sales mix
variances for two products that are close substitutes?
A. The budgeted sales mix percentages.
B. The actual sales mix percentages.
C. The actual total units of the two products sold.
D. The market volume in units.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
181. (Appendix 10C) The sales quantity variance is calculated by holding constant which of
the following?
A. The budgeted sales mix percentages.
B. The actual sales mix percentages.
C. The budgeted contribution margin per unit.
D. Both the budgeted sales mix percentages and the budgeted contribution margin per unit.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
182. (Appendix 10C) What is the sum of the sales mix variance and the sales quantity
variance?
A. The flexible budget variance.
B. The sales volume variance.
C. The master budget variance.
D. The market share variance.
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
True / False Questions
183. Standard costs should generally be based on the actual costs of prior periods.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-04 Who Uses Standard Costs?
Topic: 10-05 Ideal versus Practical Standards
184. The standard direct labour rate should NOT include fringe benefits.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-07 Setting Direct Labour Standards
185. From a standpoint of cost control, the most effective time to recognize material price
variances is when the materials are placed into production.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-13 Isolation of Variances
186. The material quantity variance is computed based on the quantity of all materials
purchased during the period.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-15 Materials Quantity Variance—A Closer Look
187. Purchase of poor quality materials will generally result in a favourable materials price
variance and an unfavourable labour rate variance.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Topic: 10-14 Responsibility for the Variance
188. At the end of the variance analysis cycle, management should be able to identify possible
causes for both favourable and unfavourable variances.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-07 Prepare a performance report for manufacturing overhead; decide which variances to investigate; and perform
an analysis of capacity utilization.
Topic: 10-14 Responsibility for the Variance
Topic: 10-21 Interpreting the Spending Variance
Topic: 10-22 Interpreting the Efficiency Variance
Topic: 10-37 Variance Investigation Decisions
189. (Appendix 10B) A favourable labour efficiency variance would result in a credit balance
in the labour efficiency variance account.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-46 Direct Labour Variances
190. The production manager is usually held responsible for the labour efficiency variance.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Topic: 10-17 Labour Rate Variance—A Closer Look
191. (Appendix 10A) A mix variance for direct materials can be derived as the difference
between the quantity variance and the yield variance.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-08 Compute the mix and yield variances for materials; and explain their significance.
Topic: 10-43 Appendix 10A: Further Analysis of Materials Variances
192. Standard costs can be used in conjunction with job-order costing but NOT with process
costing.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-04 Who Uses Standard Costs?
193. The overhead spending variance contains price but not quantity elements.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-21 Interpreting the Spending Variance
Topic: 10-22 Interpreting the Efficiency Variance
194. The variable overhead efficiency variance reflects how efficiently variable overhead
resources were used.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-21 Interpreting the Spending Variance
Topic: 10-22 Interpreting the Efficiency Variance
195. A reason for keeping a constant denominator activity level is to maintain stability in the
amount of overhead cost that is applied to each unit of product manufactured over the period.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Easy
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
196. The fixed portion of the predetermined overhead rate is used for product costing
purposes and has no significance in terms of cost control.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
Topic: 10-34 Cautions in Fixed Overhead Analysis
197. In a standard costing system, under- or overapplied fixed overhead is equal to the sum of
the fixed overhead budget variance and the fixed overhead volume variance.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-31 Budget Variance
Topic: 10-32 Volume Variance
Topic: 10-35 Overhead Variances and Under- or Overapplied Overhead Cost
198. If the standard hours allowed for the actual output of the period is greater than the
denominator level of activity (in hours), then the overhead budget variance will be
unfavourable.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-26 Flexible Budgets and Overhead Rates
Topic: 10-27 Denominator Activity
Topic: 10-31 Budget Variance
199. The fixed overhead budget variance is NOT controllable by managers because fixed
costs are NOT controllable.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-31 Budget Variance
200. One cause of an unfavourable overhead volume variance would be increase in cost for
fixed overhead items.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-32 Volume Variance
Topic: 10-33 Graphic Analysis of Fixed Overhead Variances
Topic: 10-34 Cautions in Fixed Overhead Analysis
201. If the denominator activity (in hours) used to compute the predetermined overhead rate is
equal to the actual activity (in hours) for the period, then there is no volume variance.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-32 Volume Variance
Topic: 10-33 Graphic Analysis of Fixed Overhead Variances
Topic: 10-34 Cautions in Fixed Overhead Analysis
202. Because managers want stable unit cost figures, the accountant creates an artificial
stability so far as fixed costs are concerned by applying fixed costs to products as if the fixed
costs were really variable.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-05 Explain the significance of the denominator activity figure in determining the standard cost of a unit of product.
Learning Objective: 10-06 Compute and interpret the fixed overhead budget and volume variances.
Topic: 10-27 Denominator Activity
Topic: 10-28 Computing the Overhead Rate
Topic: 10-30 Overhead Application in a Standard Costing System
203. Waste or excessive usage of overhead items will show up as part of the variable overhead
efficiency variance.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-22 Interpreting the Efficiency Variance
204. Capacity analysis is most affected by the presence of variable costs, NOT fixed costs.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Learning Objective: 10-07 Prepare a performance report for manufacturing overhead; decide which variances to investigate; and perform
an analysis of capacity utilization.
Topic: 10-05 Ideal versus Practical Standards
Topic: 10-38 Capacity Analysis
205. (Appendix 10A) Direct labour efficiency variance can be analyzed further into mix and
yield variances if more than one class of direct labour that are good substitutes is used in
operations.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-08 Compute the mix and yield variances for materials; and explain their significance.
Topic: 10-43 Appendix 10A: Further Analysis of Materials Variances
206. (Appendix 10C) A favourable sales volume variance for a single-product firm necessarily
implies a favourable market share variance.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
207. (Appendix 10C) A favourable sales volume variance for a substitute product in a
multiple-product firm does NOT necessarily imply a favourable sales mix variance for that
substitute product.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
208. (Appendix 10C) If two products are poor substitutes, the calculation of a separate market
volume variance and a separate market share variance for each product is NOT useful.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
209. (Appendix 10C) If two products are close substitutes, the sales volume variance for each
product can be split into a sales quantity variance and a sales mix variance.
TRUE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Medium
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
210. (Appendix 10C) If two products are good substitutes, the sales quantity variance for each
product can be analyzed further into a market volume variance and a market share variance.
FALSE
Blooms: Understand
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-01 Explain how direct materials standards and direct labour standards are set.
Topic: 10-50 Sales Variance Analysis
Short Answer Questions
211. (Appendix 10B) Albert Manufacturing Company manufactures a single product. The
standard cost of one unit of this product is:
Direct Materials: 6 metres at $1.50
Direct Labour: 1 hour at $6.75
Variable Overhead: 1 hour at $4.50
Total Standard Variable Cost per Unit
$9.00
$6.75
$4.50
$20.25
During the month of October, 6,000 units were produced. Selected cost data relating to the
month's production follow:
Materials Purcahsed: 60,000 metres at $1.43
Material Used in Production: 38,000 metres
Direct Labour: _?_ hours at $ _?_ per hr
Variable Overhead Cost Incurred
Variable Overhead Efficiency Variance
$85,800
$41,925
$30,713
$2,250 unfavourable
There was no beginning inventory of raw materials. The variable overhead rate is based on
direct labour-hours.
Required:
a) (Appendix 10B) For direct materials, compute the price and quantity variances for the
month, and prepare journal entries to record activity for the month.
b) (Appendix 10B) For direct labour, compute the rate and efficiency variances for the month,
and prepare a journal entry to record labour activity for the month.
c) For variable overhead, compute the spending variance for the month, and prove the
efficiency variance given above.
a) Materials Price Variance:
Actual Quantity of Inputs, at Actual Price:
60,000 metres @ $1.43 per metre
Actual Quantity of Inputs, at Standard Price:
60,000 metres @ $1.50 per metre
Materials Price Variance
Materials Quantity Variance:
Actual Quantity of Inputs, at Standard Price:
38,000 metres @ $1.150 per metre
Standard Quantity of Inputs, at Standard Price:
6,000 units @ 6 metres per unit x $1.50 per metre
Materials Quantity Variance
$85,800
$90,000
$4,200 favourable
$57,000
$54,000
$3,000 unfavourable
Journal entries:
Raw Materials (60,000 metres @ $1.50)
Materials Price Variance (60,000 metres @ $.07
favourable)
Accounts Payable (60,000 metres @ $1.43)
Work in Process (36,000 metres @ $1.50)
Materials Quantity Variance (2,000 metres unfavourable @
$1.50)
Raw Materials (38,000 metre @ $1.50)
90,000
4,200
85,800
54,000
3,000
57,000
b) The actual hours worked during the period can be computed through the variable overhead
efficiency variance, as follows:
SR(AH - SH) = Variable Overhead Efficiency Variance
$4.50(AH - (6,000 units @ 1 hr. per unit) = $2,250 unfavourable
$4.50AH - $27,000 = $2,250 unfavourable
$4.50AH = $29,250
AH = 6,500 hours
Labour Rate Variance:
Actual Hours of Input, at the Actual Rate:
6,500 hours @ $6.45 per hour
Actual Hours of Input, at the Standard Rate:
6,500 hours @ $6.75 per hour
Labour Rate Variance
Labour Efficiency Variance:
Actual Hours of Input, at the Standard Rate:
6,500 hours @ $6.75 per hour
Standard Hours of Input, at the Standard Rate:
6,000 @ 1 hour per unit @ $6.75 per hour
Labour Efficiency Variance
$49,056
$43,875
$1,950 favourable
$43,875
$40,500
$3,375 unfavourable
Journal entry:
Work in Process (6,000 hrs. @ $6.75)
Labour Efficiency Variance (500 hrs. unfavourable @ $6.75)
Labour Rate Variance (6,500 hrs. @ $0.30 F)
Wages Payable (6,500 hrs. @ $6.45)
40,500
3,375
1,950
41,925
c) Variable Overhead Spending Variance:
Actual Hours of Input, at the Actual Rate:
Actual Hours of Input, at the Standard Rate:
6,500 hours @ $4.50 per hour
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance:
Actual Hours of Input, at the Standard Rate:
6,500 hours @ $4.50 per hour
Standard Hours of Input, at the Standard Rate:
6,000 hours @ $4.50 per hour
Variable Overhead Efficiency Variance
$30,713
$29,250
$1,463 unfavourable
$29,250
$27,000
$2,250 unfavourable
Blooms: Analyze
CPA Competency: 3.2.3 Computes, analyzes, or assesses implications of variances.
Difficulty: Hard
Learning Objective: 10-02 Compute the direct materials price and quantity variances; and explain their significance.
Learning Objective: 10-03 Compute the direct labour rate and efficiency variances; and explain their significance.
Learning Objective: 10-04 Compute the variable manufacturing overhead spending and efficiency variances; and explain their significance.
Learning Objective: 10-09 Prepare journal entries to record standard costs and variances.
Topic: 10-12 Materials Price Variance—A Closer Look
Topic: 10-15 Materials Quantity Variance—A Closer Look
Topic: 10-17 Labour Rate Variance—A Closer Look
Topic: 10-18 Labour Efficiency Variance—A Closer Look
Topic: 10-20 Variable Manufacturing Overhead Variances—A Closer Look
Topic: 10-45 Direct Materials Variances
Topic: 10-46 Direct Labour Variances
212. (Appendix 10B) Vernon Mills, Inc. is a large producer of men's and women's clothing.
The company uses standard costs for all of its products. The standard costs and actual costs
per unit of product for a recent period are given below for one of the company's product lines:
Standard: 4.0 metres at $5.40 per metre
Actual: 4.4 metres at $5.05 per metre
Direct Labour:
Standard: 1.6 hours at $6.75 per hour
Actual: 1.4 hours at $7.30 per hour
Variable Overhead:
Standard: 1.6 hours at $2.70 per hour
Actual: 1.4 hours at $3.25 per hour
Total Cost per Unit
Standard Cost
$21.60
Actual Cost
$22.22
$10.80
$10.22
$4.32
______
$36.72
_$4.55
$36.99
During this period, the company produced 4,800 units of this product. A comparison of
standard and actual costs for the period on a total cost basis is given below:
Actual Costs: 4,800 units at $36.99
Standard Costs: 4,800 units at $36.72
Difference in Cost-Unfavourable
$177,552
$176,256
$1,296
There was no inventory of materials on hand at the beginning of the period. During the
period, 21,120 metres of materials were purchased, all of which were used in production.
Required:
a) (Appendix 10B) For direct materials, compute the price and quantity variances for the
period and prepare journal entries to record all activity relating to direct materials for the
period.
b) (Appendix 10B) For direct labour, compute the rate and efficiency variances and prepare a
journal entry to record the incurrence of direct labour cost for the period.
c) For variable overhead, compute the spending and efficiency variances.
a) Materials Price Variance:
Actual Quantity of Inputs, at Actual Price:
4,800 units, 4.4 metres per unit, $5.05 per metre
Actual Quantity of Inputs, at Standard Price:
4,800 units, 4.4 metres per unit, $5.40 per metre
Materials Price Variance
Materials Quantity Variance:
Actual Quantity of Inputs, at Standard Price:
4,800 units, 4.4 metres per unit, $5.40 per metre
Standard Quantity of Inputs, at Standard
price:
4,800 units, 4.0 metres per unit, $5.40 per metre
Materials Quantity Variance
Journal entries:
Raw Materials (21,120 metres @ $5.40)
Materials Price Variance (21,120 metres @ $0.35 F)
Accounts payable (21,120 metres @ $5.05)
$106,656
$114,048
$7,392 favourable
$114,048
$103,680
$10,368 unfavourable
114,048
7,392
106,656
Work in Process (19,200 metres @ $5.40)
Materials Quantity Variance (1,920 metres unfavourable @ $5.40)
Raw Materials (21,120 metres @ $5.40)
103,680
10,368
114,048
(b) Labour Rate Variance:
Actual Hours of Input, at the Actual Rate:
4,800 units, 1.4 hours, $7.30 per hour
Actual Hours of Input, at the Standard Rate:
4,800 units, 1.4 hours, $6.75 per hour
Labour Rate Variance
Labour Efficiency Variance:
Actual Hours of Input, at the Standard Rate:
4,800 units, 1.4 hours, $6.75 per hour =
Standard Hours of Input, at the Standard Rate:
4,800 units, 1.6 hours, $6.75 per hour =
Labour Efficiency Variance
$49,056
$45,360
$3,696 unfavourable
$45,360
$51,840
$6,480 favourable
Journal entry:
Work in Process (7,680 hrs. @ $6.75)
Labour Rate Variance (6,720 hrs. @ $0.55 unfavourable)
Labour Efficiency Variance (960 hrs. favourable @ $6.75)
Wages Payable (6,720 hrs. @ $7.30)
(c) Variable Overhead Spending Variance:
51,840
3,696
$6,480
49,056
Actual Hours of Input, at the Actual Rate:
4,800 units, 1.4 hours, $3.25 per hour
Actual Hours of Input, at the Standard Rate:
4,800 units, 1.4 hours, $2.70 per hour
Variable Overhead Spending Variance
$18,144
$3,696 unfavourable
Variable Overhead Efficiency Variance:
Actual Hours o