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Practice Final Exam for AC 225 Managerial Accounting
Answers will be released on FRIDAY.
NOTE: These questions will give you practice on answering questions in the format of the final exam,
which has 60 to 70 multiple choice questions. You should not depend on reviewing these specific
questions alone to review all of the topics on the Final Exam Review also posted in D2L.
Chapter 1
1. Managerial Accounting and Financial Accounting differ in the following way:
A. Financial Accounting emphasizes forecasts of future performance.
B. Financial Accounting summarizes information for the company as a whole.
C. Financial Accounting is private information for company managers
D. Financial Accounting emphasizes timeliness over precision.
Discussion: Managerial accounting emphasizes providing information about segments and
products within a company, rather than the company as a whole. Financial accounting creates
financial statements that must present all components under common control.
2. Common users of managerial accounting reports include the following:
A. Operations manager and loan officer
B. Chief financial officer and public shareholder
C. Public shareholder and loan officer
D. Chief financial officer and operations manager
Discussion: Managerial accounting is used by company insiders. Loan officers work for a bank.
Shareholders are the external owners of a business.
3. The management function of controlling is carried out through the use of
A. A performance report that compares budgeted to actual results.
B. A reconciliation of the beginning and ending retained earnings balances.
C. A schedule of cash collections and cash payments
D. A forecast of next period’s production.
Discussion: The control function is evaluating the results of company actions. Only A involves
both measuring results and comparison to determine whether the results are favorable or
unfavorable.
4. Management accounting is used by
A. Human resource employees who need to plan hiring
B. Marketing employees who make decisions on profit achievable through an advertising campaign
C. Accounting employees who make budget recommendations.
D. All of the above.
5. The CMA certification requires
A. A rigorous professional exam only
B. Experience in Financial management only.
C. A rigorous professional exam and experience in financial management only.
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D. An accounting degree and a rigorous professional exam and experience in financial
management.
Discussion: Individuals with any college major can become Certified Management Accountants.
6. Guidelines for ethical behavior for management accountants require
A. Management accountants maintain professional competence.
B. Management accountants disclose confidential information to competitors.
C. Management accountants eliminate all potential limitations before communicating
recommendations.
D. Management accountants ignore conflicts of interest.
Discussion: Competence is one ethical value in the Institute of Management Accountants ethical
standards. Management accountants maintain confidentiality unless disclosure is required by law. Full
disclosure of limitations is required, but no one can eliminate all limitations on recommendations.
Management accountants disclose conflicts of interest.
7. Institute of Management Accountants supports ethical practices by
A. Staffing an ethics hotline for its members
B. Representing its members in legal cases
C. Investigating corporate ethical lapses
D. Requiring members to report unethical conduct to their supervisors.
Discussion: The Institute of Management Accountants has an ethical hotline to provide an objective
consultation to members.
Chapter 2
1. The wages of factory maintenance personnel would usually be considered to be a
A. Direct labor cost
B. Manufacturing overhead cost
C. Administrative cost
D. Selling cost
Discussion: Maintenance is an indirect labor cost, which is a part of manufacturing overhead.
2. Conversion costs include
A. Manufacturing overhead costs
B. Direct material costs
C. Sales commission costs
D. Advertising costs
Discussion: Conversion costs include the product costs of direct labor and manufacturing overhead.
3. Which of the following costs is an example of a period rather than a product cost?
A. Depreciation on production equipment
B. Salaries of salespersons
C. Wages of production machine operators
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D. Insurance on production equipment
Discussion: A, C, and D are product costs; salaries within selling & administrative costs are period costs.
4. Last month 10,000 units of a product were manufactured, and the total cost per unit was $60. At this
level of production the variable cost is $30 per unit and the fixed cost is $30 per unit. If 10,500 units are
manufactured the next month, and the costs remain within the same relevant range,
A. Total variable cost will remain unchanged.
B. Fixed costs will increase in total
C. Variable cost per unit will increase
D. Total cost per unit will decrease
Discussion: Numerically the unchanging fixed cost is $30 * 10,000 = $300,000. The cost for 10,500 units
= 10,500 units * $30 variable cost + fixed cost of $300,000 = $315,000 + $300,000 = $615,000. The total
cost per unit is $615,000 / 10,500 units = $58.57. Alternatively, when production increases, fixed costs
PER UNIT decrease because the same fixed cost is spread over more units, so total cost per unit will
decrease.
5. The following costs were incurred in September:
Direct materials
$39,000
Direct labor
23,000
Manufacturing overhead
17,000
Selling expenses
14,000
Administrative expenses
27,000
Prime costs during the month totaled
A. $79,000
B. $120,000
C. $62,000
D. $40,000
Discussion: Prime costs ae direct labor and direct material costs.
6. ABC Corporation sells its product for $195.70 per unit. In 2015 the company had total sales in units
of 6,000. The total costs were the following:
Variable cost of sales
$457,800
Fixed cost of sales
100,000
Variable selling & administrative costs
108,500
Fixed selling & administrative costs
512,400
What is the best estimate of the total contribution margin?
A. $4,600
B. $507,800
C. $607,900
D. $616,400
Discussion: Total Contribution Margin = Total Sales – Total Variable Costs; Total Sales = 195.70 * 6000 =
1174200. Total Variable Costs = 457,800 + 108,500 = 566,300. Contribution Margin = 1171200-566300
= 607,900
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7. Supply costs at ABC Corporation's chain of gyms are listed below:
Management believes that supply cost is a mixed cost that depends on client-visits. Using the high-low
method to estimate the variable and fixed components of this cost, those estimates would be closest
to:
A. $2.44 per client-visit; $28,623 per month
B. $1.33 per client-visit; $12,768 per month
C. $0.79 per client-visit; $19,321 per month
D. $0.75 per client-visit; $19,826 per month
Discussion:
Client Visit
Supply Cost
High: June
12,088 visits
$28,892
Low: August
11,193 visits
$28,221
Difference
895 visits
$671
Variable cost per client visit = 671/895 = $.75per client visit
Fixed Cost for supplies per month = 28,892-12,088 *.75 = 19826
8. Buckeye Company has provided the following data for maintenance cost:
2014
2015
Machine hours
12,500
15,000
Maintenance cost
$27,000
$31,000
The best estimate of the cost formula for maintenance would be:
A. $21,625 per year plus $0.625 per machine hour
B. $7,000 per year plus $0.625 per machine hour
C. $7,000 per year plus $1.60 per machine hour
D. $27,000 per year plus $1.60 per machine hour
Discussion: Difference in Machine hours = 2,500; Difference in Maintenance: $4,000;
Maintenance cost per machine hour = $4,000 / 2,500 = 1.60 per machine hour; Fixed Cost of
maintenance = 27000 – 1.60*12,500=7,000
Use the following information for questions 9 and 10.
Chaffee Corporation staffs a helpline to answer questions from customers. The costs of operating the
helpline are variable with respect to the number of calls in a month. At a volume of 33,000 calls in a
month, the costs of operating the helpline total $742,500.
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9. To the nearest whole dollar, what should be the total cost of operating the helpline costs at a volume
of 34,800 calls in a month? (Assume that this call volume is within the relevant range.)
A. $742,500
B. $783,000
C. $704,095
D. $762,750
Discussion: From the initial data, the cost per call is $742,500/33,000 = $22.48; Therefore the cost at
34,800 calls would be $22.48*34,800=78472
10. To the nearest whole cent, what should be the average cost of operating the helpline per call at a
volume of 36,100 calls in a month? (Assume that this call volume is within the relevant range.)
A. $21.54
B. $20.57
C. $21.34
D. $22.50
Discussion: See above.
Chapter 3
1. In computing its predetermined overhead rate, Marple Company inadvertently left its indirect labor
costs out of the computation. This oversight will cause:
A. Manufacturing Overhead to be overapplied.
B. The Cost of Goods Manufactured to be understated.
C. The debits to the Manufacturing Overhead account to be understated.
D. The ending balance in Work in Process to be overstated.
Discussion: If indirect labor is omitted from the predetermined overhead rate, then the
predetermined overhead rate is too low. (C) is correct because Cost of Goods Manufactured is
increased by the amount of overhead applied. So if overhead applied is too low, then Cost of
Goods Manufactured would be too low. (A) would be true if the predetermined overhead rate
were too high. (D) could be true if predetermined overhead rate were too high. (C) refers to the
increases in Manufacturing Overhead when overhead is incurred. It decreases as it is applied to
jobs based on the predetermined overhead rate, so it is the credits to Manufacturing Overhead
that could be effected by this error.
2. In a job-order costing system, the use of direct materials that have been previously purchased is
recorded as a debit to:
A. Raw Materials inventory.
B. Finished Goods inventory.
C. Work in Process inventory.
D. Manufacturing Overhead.
Discussion: A debit increases an asset account. When direct materials are used Raw Materials
inventory decreases and Work in Process increases.
3. In a job-order costing system, indirect materials that have been previously purchased and that are
used in production are recorded as a debit to:
A. Work in Process inventory.
B. Manufacturing Overhead.
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C. Finished Goods inventory.
D. Raw Materials inventory.
Discussion: Indirect materials increase manufacturing overhead and decrease Raw Materials Inventory.
4.Overapplied manufacturing overhead occurs when:
A. applied overhead exceeds actual overhead.
B. applied overhead exceeds estimated overhead.
C. actual overhead exceeds estimated overhead.
D. budgeted overhead exceeds actual overhead
Discussion: While estimated overhead or budgeted overhead is used to calculate the predetermined
manufacturing overhead rate, overhead is then applied based on the actual direct labor hours (or
machine hours etc.). So if the overhead applied is more than the actual overhead incurred, then
overhead is overapplied.
5. Wert Corporation uses a predetermined overhead rate based on direct labor cost to apply
manufacturing overhead to jobs. Last year, the company's estimated manufacturing overhead was
$1,200,000 and its estimated level of activity was 50,000 direct labor-hours. The company's direct labor
wage rate is $12 per hour. Actual manufacturing overhead amounted to $1,240,000, with actual direct
labor cost of $650,000. For the year, manufacturing overhead was:
A. overapplied by $60,000
B. underapplied by $60,000
C. overapplied by $40,000
D. underapplied by $44,000
Discussion: The predetermined manufacturing overhead rate is $1,200,000 in overhead over direct
labor cost of 50,000 direct labor hours * $12 per hour: 1,200,000 / (12*50,000)=1200000/600,000=2.
So the manufacturing overhead applied would have been 650,000*2=$1,300,000. However the actual
overhead is $1,240,000. $1,300,000- $1,240,000=$60,000 overapplied
6. Hayne Corporation bases its predetermined overhead rate on the estimated machine-hours for the
upcoming year. Data for the most recently completed year appear below:
The predetermined overhead rate for the recently completed year was closest to:
A. $7.89
B. $30.95
C. $24.52
D. $32.41
Discussion: predetermined overhead rate = estimated total overhead / estimated machine
hours = $465,880 / 19,000 = 24.52
7. The following data have been recorded for recently completed Job 674 on its job cost sheet. Direct
materials cost was $2,039. A total of 32 direct labor-hours and 175 machine-hours were worked on the
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job. The direct labor wage rate is $14 per labor-hour. The company applies manufacturing overhead on
the basis of machine-hours. The predetermined overhead rate is $15 per machine-hour. The total cost
for the job on its job cost sheet would be:
A. $2,967
B. $2,487
C. $2,068
D. $5,112
Discussion: Total Job Cost = 2,039 + 32*14+15*175=2039+448+2625=5,112
8. Hults Corporation has provided data concerning the company's Manufacturing Overhead account for
the month of November. Prior to the closing of the overapplied or underapplied balance to Cost of
Goods Sold, the total of the debits to the Manufacturing Overhead account was $75,000 and the total of
the credits to the account was $57,000. Which of the following statements is true?
A. Manufacturing overhead transferred from Finished Goods to Cost of Goods Sold during the
month was $75,000.
B. Actual manufacturing overhead incurred during the month was $57,000.
C. Manufacturing overhead applied to Work in Process for the month was $75,000.
D. Manufacturing overhead for the month was underapplied by $18,000.
Discussion: The $75,000 is the actual amount of manufacturing incurred; $57,000 is the amount
of overhead applied. The difference between these two is the amount of overhead that is
UNDERapplied, since actual overhead is less than overhead applied by $75,000$57,000=$18,000
9. Wedd Corporation had $35,000 of raw materials on hand on May 1. During the month, the company
purchased an additional $68,000 of raw materials. During May, $92,000 of raw materials were
requisitioned from the storeroom for use in production. These raw materials included both direct and
indirect materials. The indirect materials totaled $5,000. The debits to the Work in Process account as a
consequence of the raw materials transactions in May total:
A. $92,000
B. $0
C. $68,000
D. $87,000
Discussion: The decrease to Raw Materials Inventory is $92,000. This is made up of both direct
materials and indirect materials. Since indirect materials are $5,000, then direct materials,
which would be a debit to Work in Process, is 92,000-5,000=87,000.
10. Lietz Corporation has provided the following data concerning manufacturing overhead for January:
The company's Cost of Goods Sold was $369,000 prior to closing out its Manufacturing Overhead
account. The company closes out its Manufacturing Overhead account to Cost of Goods Sold. Which of
the following statements is true?
A. Manufacturing overhead was underapplied by $23,000; Cost of Goods Sold after closing out the
Manufacturing Overhead account is $392,000
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B. Manufacturing overhead was underapplied by $23,000; Cost of Goods Sold after closing out the
Manufacturing Overhead account is $346,000
C. Manufacturing overhead was overapplied by $23,000; Cost of Goods Sold after closing out the
Manufacturing Overhead account is $346,000
D. Manufacturing overhead was overapplied by $23,000; Cost of Goods Sold after closing out the
Manufacturing Overhead account is $392,000
Discussion: If Manufacturing overhead is underapplied, then Cost of Goods Sold is too low and
will increase; If Manufacturing overhead is overapplied, then Cost of Goods Sold is too high and
will decrease. This is a case in which manufacturing overhead is overapplied.
Chapter 5
1. The break-even point in unit sales is found by dividing total fixed expenses by:
A. the contribution margin ratio.
B. the variable expenses per unit.
C. the sales price per unit.
D. the contribution margin per unit.
Discussion: breakeven point in units = fixed expenses/ contribution margin per unit. If one is
computing breakeven point in dollars of sales = fixed expenses / contribution margin RATIO.
2. The break-even point in unit sales increases when variable expenses:
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.
Discussion: Since breakeven in sales = fixed expenses / contribution margin ratio breakeven in
sales increases when the contribution margin gets smaller. Contribution margin gets smaller
when variable expenses increase and the selling price is the same or smaller. Selections B, C,
and D increase the contribution margin ratio.
3. The amount by which a company's sales can decline before losses are incurred is called the:
A. contribution margin.
B. degree of operating leverage.
C. margin of safety.
D. contribution margin ratio.
Discussion: Definition.
4. The degree of operating leverage can be calculated as:
A. contribution margin divided by sales.
B. gross margin divided by net operating income.
C. net operating income divided by sales.
D. contribution margin divided by net operating income.
Discussion: Definition
5. Mancuso Corporation has provided its contribution format income statement for January. The
company produces and sells a single product.
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If the company sells 3,100 units, its total contribution margin should be closest to:
A. $27,045
B. $181,000
C. $162,400
D. $173,600
Discussion: Contribution Margin per unit = 162,400/2900 = 56. So if there are 3100 units sold,
then contribution margin = 3100 * 56=173,600
6. Rothe Company manufactures and sells a single product that it sells for $90 per unit and has a
contribution margin ratio of 35%. The company's fixed expenses are $46,800. If Rothe desires a monthly
target net operating income equal to 15% of sales, the amount of sales in units will have to be
(rounded):
A. 1,486 units
B. 3,467 units
C. 1,040 units
D. 2,600 units
Discussion: The equations set up from this problem are the following:
Net Operating income = contribution margin – fixed expenses
Net Operating Income = 35%*90*sales in units – 46800.
Net Operating Income = 15% * 90* sales in units
So setting these equal and solving
35%*90*sales in units -46800=15%*90*sales in units
31.5 sales in units – 46800=13.5*sales in units
18 sales in units = 46800
Sales in units = 2600
7.Darth Company sells three products. Sales and contribution margin ratios for the three products
follow:
Given these data, the contribution margin ratio for the company as a whole would be:
A. 25%
B. 75%
C. 33.3%
D. it is impossible to determine from the data given.
Discussion: Contribution margin for company as a whole = Total Contribution Margin / Total
Sales
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Total Contribution Margin = .45 * 20000 + .4 * 40000 + .15 * 100000 =
9000+16000+15000=40000
Total Sales = 20000+40000+100000=160000
Overall contribution margin ratio = 40000/160000=25%
8. Pool Company's variable expenses are 36% of sales. Pool is contemplating an advertising campaign
that will cost $20,000. If sales increase by $80,000, the company's net operating income should increase
by:
A. $28,800
B. $64,000
C. $8,800
D. $31,200
Discussion: Incremental income= incremental contribution margin-incremental fixed expenses
Incremental contribution margin = (1-.36) * 80000=.64*80000= 51200
Incremental fixed cost = 20,000
Incremental income = 51200-20000=31200
9. Olis Corporation sells a product for $130 per unit. The product's current sales are 28,900 units and its
break-even sales are 25,721 units. What is the margin of safety in dollars?
A. $413,270
B. $3,343,730
C. $2,504,667
D. $3,757,000
Discussion: Margin of Safety (in dollars) = sales above breakeven = (28,900-25,721)*$130=$413,270
10. Balbuena Corporation produces and sells two products. Data concerning those products for the most
recent month appear below:
The fixed expenses of the entire company were $15,630. If the sales mix were to shift toward Product
K87W with total sales dollars remaining constant, the overall break-even point for the entire company:
A. would not change.
B. would increase.
C. would decrease.
D. could increase or decrease
Discussion:Which product is more profitable? Product K87W has a contribution margin ratio of (170007650)/17000= 55%; Product I57P has a contribution margin ration of (19000-9270)/19000=49%. So if
the company has a sales mix shift toward K87W it is toward the higher profit margin product and the
company will have a lower breakeven point.
Chapter 6
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1. Routsong Company had the following sales and production data for the past four years:
Selling price per unit, variable cost per unit, and total fixed cost are the same in each year. Which of the
following statements is not correct?
A. Under variable costing, net operating income for Year 1 and Year 2 would be the same.
B. Because of the changes in production levels, under variable costing the unit product cost
will change each year.
C. The total net operating income for all four years combined would be the same under variable
and absorption costing.
D. Under absorption costing, net operating income in Year 4 would be less than the net
operating income in Year 2.
Discussion: (A) is true because there will be the same contribution margin due to the same
amount of sales and variable costing includes the fixed costs incurred during the year, which is
assumed to be the same in this question. (B) is false because variable costs per unit don’t
change with the amount of production. (C) is true because over the four year period the number
of units sold is equal to the number of units produced, so there is no deferred manufacturing
overhead costs in ending inventory to differentiate variable and absorption costing income
values. (D) is true because even though there are fewer sales in year 2 than in year 4, in year 2
there is much more production and 1/3 of the fixed manufacturing overhead would be deferred.
This deferred overhead would be recognized in part in Year 3 and in part in Year 4, making Year 4
income lower.
2. Fixed manufacturing overhead is included in product costs under:
A. Both Absorption costing and Variable costing
B Only Absorption costing
C. Only Variable costing
D. Neither Absorption costing nor variable costing
Discussion: Only Absorption costing includes fixed manufacturing overhead as a product cost.,
meaning that it is part of the value of inventory. In variable costing, fixed manufacturing costs
are deducted as a period cost in the period in which it is incurred.
3. Net operating income reported under absorption costing will exceed net operating income reported
under variable costing for a given period if:
A. production equals sales for that period.
B. production exceeds sales for that period.
C. sales exceed production for that period.
D. the variable manufacturing overhead exceeds the fixed manufacturing overhead.
Discussion: When production is higher than sales, there is an increase in inventory and some of
the fixed manufacturing is in the value of that inventory. Thus a variable costing income will
have more expenses than absorption costing will have.
4. In an income statement segmented by product line, a fixed expense that cannot be allocated among
product lines on a cause-and-effect basis should be:
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A. classified as a traceable fixed expense and not allocated.
B. allocated to the product lines on the basis of sales dollars.
C. allocated to the product lines on the basis of segment margin.
D. classified as a common fixed expense and not allocated.
Discussion: Fixed Expenses are classified as either traceable to a segment or common to the
company as a whole. Traceable fixed expenses are deducted from segment revenues and
variable expenses to calculate segment margin. Common fixed expenses are not allocated, but
deducted from company income as a whole.
5. All other things equal, if a division's traceable fixed expenses decrease:
A. the division's segment margin will increase.
B. the overall company net operating income will decrease.
C. the division's contribution margin will increase.
D. the division's sales volume will increase.
Discussion: Traceable fixed expenses are deducted from segment Revenues less Variable
expenses. When fixed expenses are smaller, then there is more leftover in segment margin. It
does not affect sales. It is deducted after contribution margin is calculated. It affects only the
segment, and there are other factors that may affect the overall company.
6. Olds Inc., which produces a single product, has provided the following data for its most recent month
of operations:
There were no beginning or ending inventories. The absorption costing unit product cost was:
A. $97
B. $130
C. $99
D. $207
Discussion: The absorption cost includes both the variable product costs of $99 from the direct
materials, direct labor, and variable manufacturing overhead as well as the allocation of fixed
manufacturing overhead of 31000/1000 = $31 per unit for a total of $130.
7. Cockriel Inc., which produces a single product, has provided the following data for its most recent
month of operations:
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There were no beginning or ending inventories. The variable costing unit product cost was:
A. $42
B. $43
C. $37
D. $48
Discussion: Variable costing of the product includes only the Direct materials, direct labor and
variable manufacturing overhead costs of $14 + $22 + $1 = $37. Selling and administrative
expenses are not product costs. Fixed costs are not considered product costs in Variable Costing.
8. Craft Company produces a single product. Last year, the company had a net operating income of
$80,000 using absorption costing and $74,500 using variable costing. The fixed manufacturing overhead
cost was $5 per unit. There were no beginning inventories. If 21,500 units were produced last year, then
sales last year were:
A. 16,000 units
B. 20,400 units
C. 22,600 units
D. 27,000 units
Discussion: The difference in the income between absorption and variable costing = $80,000$74,500 = $5,500. This $5,500 is the deferred fixed manufacturing overhead that is deducted in
variable costing, but not in fixed costing. If fixed manufacturing overhead is $5 per unit, then the
$5,500 represents $5,500/$5 = 1,100 units in ending inventory. If 21,500 were produced and
1,100 are in ending inventory and there was no beginning inventory, then sales are 21,500+01100=20,400 units.
9. Moore Company produces a single product. During last year, Moore's variable production costs
totaled $10,000 and its fixed manufacturing overhead costs totaled $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 net operating income under absorption costing for the year will be $800 higher than net
operating income under variable costing.
B. The net operating income under absorption costing for the year will be $544 higher than net
operating income under variable costing.
C. The net operating income under absorption costing for the year will be $544 lower than net
operating income under variable costing.
D. The net operating income under absorption costing for the year will be $800 lower than net
operating income under variable costing.
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Discussion: The difference in income is the amount of deferred fixed manufacturing overhead.
The ending inventory of 5,000-4,600=400 units were allocated fixed overhead of 6800/5000 =
1.36 for a total of 400 * 1.36=544. This amount is still part of ending inventory and is not
deducted in an absorption costing income statement. So net operating income under absorption
is lower under variable costing than under absorption costing when production is greater than
sales.
10. Sugiki Corporation has two divisions: the Alpha Division and the Delta Division. The Alpha Division
has sales of $820,000, variable expenses of $369,000, and traceable fixed expenses of $347,300. The
Delta Division has sales of $460,000, variable expenses of $294,400, and traceable fixed expenses of
$134,100. The total amount of common fixed expenses not traceable to the individual divisions is
$97,300. What is the company's net operating income?
A. $135,200
B. $37,900
C. $616,600
D. $519,300
Discussion: Net Operating income is calculated as the sum of all of the segment margins less
common fixed expenses. The segment margin for Alpha = 820000-369000-347300=103700. The
segment margin for Delta = 460000-294400-134100=31,500. Net Operating income = 103700 +
31,500-97,300=37,900.
Chapter 7
1. Which of the following activities would be classified as a batch-level activity?
A. Setting up equipment.
B. Designing a new product.
C. Training employees.
D. Milling a part required for the final product.
Discussion: A batch level activity occurs for each time the company produces an order or a
group of a particular kind of product, such as equipment set up.
2. 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 labor-based costing system.
B. Changing from a traditional direct labor-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.
Discussion: (D) is an advantage and not a limitation of activity-based costing. If the company
has been underpricing a product and thus losing money on each sale of the product, activitybased costing may identify that product so that it can become profitable for the company.
3. Designing a new product is an example of (an):
A. Unit-level activity
B. Batch-level activity
C. Product-level activity
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D. Organization-sustaining activity.
Discussion: Designing a new product is a product-level activity because it occurs once for
each type of product.
4. Property taxes are an example of a cost that would be considered to be:
A. Unit-level.
B. Batch-level.
C. Product-level.
D. Organization-sustaining.
Discussion: Property taxes are typically assessed at the level of the organization and occurs on
an ongoing basis as a period cost. This describes an organization-sustaining cost.
5. McKenrick Corporation 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:
How much cost, in total, would be allocated in the first-stage allocation to the Setting Up activity
cost pool?
A. $229,000
B. $155,000
C. $310,000
D. $248,000
Discussion: The way to use this information from an activity costing system is that the Setting
Up Cost Pool would be 25% * 280,000 + 45% * 220,000 + 50% * 120,000 =
70,000+99,000+60,000=229,000
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6. Spendlove Corporation has provided the following data from its activity-based costing system:
Assembly
Processing orders
Inspection
$19.56 per machine hour
$26.12 per order
$68.80 per inspection hour
The company makes 430 units of product S78N a year, requiring a total of 1,120 machine-hours,
40 orders, and 30 inspection-hours per year. The product's direct materials cost is $49.81 per
unit and its direct labor cost is $12.34 per unit. According to the activity-based costing system,
the total costs for this product line is
A. $26,725
B. $75,951
C. $23,736
D. $50,460
Discussion: In activity based costing, the activities are measured for each product and costing
uses those measures:
Cost
Amount used for the Total
product line
Assembly
19.56 per machine
1120 machine hours
21907.20
hour
Processing orders
26.12 per order
40 orders
1044.8
Inspection
68.80 per inspection
30 inspection hours
783.6
hour
Direct Materials
49.81 per unit
430 units
21418.3
Direct Labor
12.34 per unit
430 units
5306.2
Total costs
$50,460.1
7. Gaucher Corporation has provided the following data from its activity-based costing accounting
system:
The activity rate for the "designing products" activity cost pool is closest to:
A. $78 per product design hour
B. $582,016 per product design hour
C. $128 per product design hour
D. $89 per product design hour
Discussion: Finding the rate to use in activity based costing begins with information on measuring the
amount of cost created by the amount of activity. Here $582,016 in cost occurs over 4,547 product
design hours. So the cost per product design hour is $582016/4547 = $128
Chapter 8
17
A. Which of the following represents the normal sequence in which the indicated budgets are
prepared?
A. Direct Materials, Cash, Sales
B. Production, Cash, Income Statement
C. Sales, Balance Sheet, Direct Labor
D. Production, Manufacturing Overhead, Sales
B. Self-imposed budgets typically are:
A. not subject to review by higher levels of management since to do so would contradict the
participative aspect of the budgeting processing.
B. not subject to review by higher levels of management except in specific cases where the
input of higher management is required.
C. subject to review by higher levels of management in order to prevent the budgets from
becoming too loose.
D. not critical to the success of a budgeting program.
C. A continuous (or perpetual) budget:
A. is prepared for a range of activity so that the budget can be adjusted for changes in activity.
B. is a plan that is updated monthly or quarterly, dropping one period and adding another.
C. is a strategic plan that does not change.
D. is used in companies that experience no change in sales.
DISCUSSION: A continuous budget is adjusted on an ongoing basis based on the results in the
most recent period.
D. Budgeted production in units are determined by:
A. adding budgeted sales in units to the desired ending inventory in units and deducting the
beginning inventory in units from this total.
B. adding budgeted sales in units to the beginning inventory in units and deducting the desired
ending inventory in units from this total.
C. adding budgeted sales in units to the desired ending inventory in units.
D. deducting the beginning inventory in units from budgeted sales in units.
DISCUSSION: Budgeted production must meet the forecasted sales in the period of production
as well as preparing for the next period’s expected sales. This sum is then adjusted for the
amount of inventory expected to already be on hand.
18
E. Shown below is the sales forecast for Cooper Inc. for the first four months of the coming year.
On average, 50% of credit sales are paid for in the month of the sale, 30% in the month following
sale, and the remainder are paid two months after the month of the sale. Assuming there are no
bad debts, the expected cash inflow in March is:
A. $138,000
B. $122,000
C. $119,000
D. $108,000
Discussion: March cash sales + 50% of March credit sales + 30% of February credit sales
+ 20% * January credit sales= 18,000+50%*90,000+30% * 120,000+20%*100,000 =
18,000 + 45,000 + 36,000 + 20,000 = 119,000
F. Prestwich Company has budgeted production for next year as follows:
Two pounds of material A are required for each unit produced. The company has a policy of
maintaining a stock of material A on hand at the end of each quarter equal to 25% of the
next quarter's production needs for material A. A total of 30,000 pounds of material A are
on hand to start the year. Budgeted purchases of material A for the second quarter would
be:
A. 82,500 pounds
B. 165,000 pounds
C. 200,000 pounds
D. 205,000 pounds
Discussion: In quarter 2, the materials needed are for production of 80,000 units + for 25%
of the third quarter 90,000 production = 80,000 * 2 pounds + .25 * 90,000 * 2 pounds =
160,000+45,000 =205,000 pounds. The amount on hand at the beginning of the second
quarter is 25% of the second quarter sales = .25 * 80,000 * 2 = 40,000. So purchases are
205,000- 40,000 = 165,000. Note that the amount at the beginning of the year is a distractor
and not used in the solution of this problem.
G. Hagos Corporation is working on its direct labor budget for the next two months. Each unit
of output requires 0.84 direct labor-hours. The direct labor rate is $9.40 per direct laborhour. The production budget calls for producing 2,100 units in June and 1,900 units in July. If
the direct labor work force is fully adjusted to the total direct labor-hours needed each
month, what would be the total combined direct labor cost for the two months?
19
A. $15,792.00
B. $15,002.40
C. $16,581.60
D. $31,584.00
Discussion: The Direct Labor cost for June and July is for 2100 + 1900 units = 4000 units.
The labor for these units is .84 DLH per unit * 4000 = 3360 DLH. The amount employees
are paid for 3360 hours is 3360 * 9.40 = 31,584
H. Lunderville Inc. bases its selling and administrative expense budget on budgeted unit sales. The sales
budget shows 3,200 units are planned to be sold in December. The variable selling and
administrative expense is $3.10 per unit. The budgeted fixed selling and administrative expense is
$60,800 per month, which includes depreciation of $6,720 per month. The remainder of the fixed
selling and administrative expense represents current cash flows. The cash disbursements for selling
and administrative expenses on the December selling and administrative expense budget should
be:
A. $70,720
B. $54,080
C. $64,000
D. $9,920
Discussion: The cash disbursements for selling & administrative expenses are the variable
selling & administrative expenses plus the cash-based fixed expenses. This is (3,200 *3.10)+
(60,800-6720)=9920+54080=64000
I.
Mosbey Inc. is working on its cash budget for June. The budgeted beginning cash balance is $16,000.
Budgeted cash receipts total $188,000 and budgeted cash disbursements total $187,000. The
desired ending cash balance is $40,000. The excess (deficiency) of cash available over disbursements
for June will be:
A. $15,000
B. $1,000
C. $17,000
D. $204,000
Discussion: The ending balance of cash is $16,000 beginning balance + $188,000
receipts - $187,000 in disbursements = $17,000
10. Shuck Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The direct labor
budget indicates that 8,100 direct labor-hours will be required in May. The variable overhead rate is
$1.40 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $100,440 per
month, which includes depreciation of $8,910. All other fixed manufacturing overhead costs represent
current cash flows. The May cash disbursements for manufacturing overhead on the manufacturing
overhead budget should be:
A. $102,870
B. $11,340
C. $91,530
D. $111,780
Discussion: On the overhead budget all overhead counts including the non-cash overhead of
depreciation. Variable overhead of 8100 * 1.40 + 100,440=11,340+100,440=111,780
20
Chapter 9
1. The purpose of a flexible budget is to:
A. remove items from performance reports that are not controllable by managers.
B. permit managers to reduce the number of unfavorable variances that are reported.
C. update the static planning budget to reflect the actual level of activity of the period.
D. reduce the amount of conflict between departments when the master budget is prepared.
Discussion: Definition
2. Salyers 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
The Inn's variable overhead costs are driven by the number of guests.
What would be the total budgeted overhead cost for a month if the activity level is 53 guests?
A. $7,159.20
B. $6,680.60
C. $7,184.80
D. $26,154.40
Discussion: Variable overhead per unit * actual guests + Fixed overhead = Total overhead;
(148.2+216.6)/57*53+(170+4310+2340) = 7159.2
3. Wadhams Snow Removal's cost formula for its vehicle operating cost is $1,900 per month plus $430
per snow-day. For the month of December, the company planned for activity of 16 snow-days, but the
actual level of activity was 21 snow-days. The actual vehicle operating cost for the month was $11,470.
The vehicle operating cost in the planning budget for December would be closest to:
A. $10,930
B. $11,470
C. $8,739
D. $8,780
Discussion: The planning budget uses the expected snow days of 16. So the amount planned
would be 1900 + 430 * 16 = 1900 + 6880=8780.
4. Orscheln Snow Removal's cost formula for its vehicle operating cost is $2,800 per month plus $381
per snow-day. For the month of February, the company planned for activity of 17 snow-days, but the
21
actual level of activity was 14 snow-days. The actual vehicle operating cost for the month was $7,920.
The activity variance for vehicle operating cost in February would be closest to:
A. $1,357 F
B. $1,357 U
C. $1,143 F
D. $1,143 U
Discussion: Activity variance is the difference due solely to the change from 17 planned snow
days to 14 actual snow days. The planning budget cost is 2800+381*17=9277. The flexible
budget cost is 2800 + 381 * 14 = 8134. This is a favorable variance because costs are LESS. The
amount is 9277-8134=1,143
5. Farver Air uses two measures of activity, flights and passengers, in the cost formulas in its budgets
and performance reports. The cost formula for plane operating costs is $44,420 per month plus $2,008
per flight plus $1 per passenger. The company expected its activity in May to be 80 flights and 281
passengers, but the actual activity was 81 flights and 277 passengers. The actual cost for plane operating
costs in May was $199,650. The spending variance for plane operating costs in May would be closest to:
A. $5,691 F
B. $7,695 U
C. $7,695 F
D. $5,691 U
Discussion: The spending variance is the difference between the flexible budget and actual costs. The
flexible budget cost is 44420+2008*81 flights + 1*277 passengers = 207345. The actual costs were
199650. The variance is favorable because actual costs were less than the flexible budget. The amount
is 207345-199650=7695
6. Lantto Air uses two measures of activity, flights and passengers, in the cost formulas in its budgets
and performance reports. The cost formula for plane operating costs is $34,810 per month plus $2,850
per flight plus $12 per passenger. The company expected its activity in June to be 70 flights and 292
passengers, but the actual activity was 69 flights and 291 passengers. The actual cost for plane operating
costs in June was $236,550. The plane operating costs in the flexible budget for June would be closest
to:
A. $237,814
B. $234,952
C. $236,550
D. $234,417
Discussion: The flexible budget uses the parameters of the planning budget at the actual activity levels:
34810+2850*69+12*291=34810+196650+3492=234952
Use the following information for questions 7 to 10.
MacPhail Corporation manufactures and sells a single product. The company uses units as the measure
of activity in its budgets and performance reports. During April, the company budgeted for 5,600 units,
but its actual level of activity was 5,650 units. The company has provided the following data concerning
the formulas used in its budgeting and its actual results for April:
Data used in budgeting:
22
Actual results for April:
7. The revenue variance for April would be closest to:
A. $1,645 F
B. $1,645 U
C. $3,840 U
D. $3,840 F
Discussion: Flexible Budget revenue = 43.90*5650 = 248035 vs. actual revenue of 244195. The
difference is 3840 UNFAVORABLE because actual results are less than the flexible budget amount.
8. The spending variance for direct materials in April would be closest to:
A. $3,215 U
B. $2,260 U
C. $2,260 F
D. $3,215 F
Discussion: The flexible budget cost for direct materials is 19.10*5650 = 107915 and actual results are
110,175. The difference is 2260 Unfavorable because actual costs are more than flexible budget
expected costs.
9. The spending variance for manufacturing overhead in April would be closest to:
A. $875 F
B. $970 U
C. $970 F
D. $875 U
Discussion: The spending variance for manufacturing overhead is based on the difference between the
actual results of $47,565 and the flexible budget results of $48,535 (37800+1.9*5650). The difference is
970 and is favorable because actual costs are less.
23
10. The overall revenue and spending variance (i.e., the variance for net operating income in the
revenue and spending variance column on the flexible budget performance report) for April would be
closest to:
A. $4,880 U
B. $4,090 F
C. $4,090 U
D. $4,880 F
Discussion: The Flexible Budget NOI= (43.90-28.10)*5650-61700=27570; The actual NOI = 24419536105-110175-47565-27660=22690; The difference between the flexible budget and the actual results is
4,880. This is unfavorable because the actual income is less than the flexible budget income.
Chapter 10
1. If the labor efficiency variance is unfavorable, then
A. actual hours exceeded standard hours allowed for the actual output.
B. standard hours allowed for the actual output exceeded actual hours.
C. the standard rate exceeded the actual rate.
D. the actual rate exceeded the standard rate.
Discussion: Labor efficiency variance is the difference between the standard number of hours
used in production and the actual number of hours used in production times the standard wage
rate per hour. So (C) and (D) are wrong. Unfavorable means it reduces income and that
happens when the actual hours are more.
2. Variable manufacturing overhead is applied to products on the basis of standard direct labor-hours. If
the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be:
A. favorable.
B. unfavorable.
C. either favorable or unfavorable.
D. zero.
Discussion: The variable overhead efficiency variance is the difference between the standard number
of direct labor hours and the actual number of direct labor hours times the standard variable overhead
rate per hour. So the difference in direct labor hours is a factor in both the labor efficiency variance and
the overhead efficiency variance
3. Last month 75,000 pounds of direct material were purchased and 71,000 pounds were used. If the
actual purchase price per pound was $0.50 more than the standard purchase price per pound, then the
materials price variance was:
A. $2,000 F
B. $37,500 F
C. $37,500 U
D. $35,500 U
Discussion: The material price variance = the difference in price between standard price per pound and
actual price per pound times the amount purchased. .50 * 75000 = 37500. This is unfavorable because
actual purchase price is more.
4. The following materials standards have been established for a particular product:
24
The following data pertain to operations concerning the product for the last month:
What is the materials quantity variance for the month?
A. $19,460 F
B. $9,730 U
C. $10,115 U
D. $20,230 F
Discussion: The materials quantity variance is the difference between the standard quantity * standard
price and the actual quantity times standard price. 7.3 pounds per unit*$14.45 per pound*1000 units –
5900*$14.45 = 20230 FAVORABLE because the standard quantity (7300) is more than the actual
quantity (5900)
5. The following labor standards have been established for a particular product:
The following data pertain to operations concerning the product for the last month:
What is the labor efficiency variance for the month?
A. $13,805 U
B. $13,530 U
C. $15,305 U
D. $15,305 F
Discussion: The labor efficiency variance is the standard quantity * standard price – actual quantity *
standard price = 4.0 hours * 1,500 units *$12.30 per hour – 7100 hours * $12.30 per hour = 1325. It is
unfavorable because actual quantity is 7100 and the standard quantity is 6000.
6. The following labor standards have been established for a particular product:
25
The following data pertain to operations concerning the product for the last month:
What is the labor rate variance for the month?
A. $1,325 U
B. $1,780 F
C. $430 F
D. $430 U
Discussion: Labor rate variance = Actual quantity * standard price – actual quantity * actual price = 5300
* 17.55 – 94340 = 1325. It is unfavorable because AQ*SP = $93,015, which is LESS than the actual cost
of $94,340.
Use the following information for questions 7 to 10
Arrow Industries uses a standard cost system in which direct materials inventory is carried at standard
cost. Arrow has established the following standards for the prime costs of one unit of product.
During May, Arrow purchased 160,000 pounds of direct material at a total cost of $304,000. The total
direct labor wages for May were $37,800. Arrow manufactured 19,000 units of product during May
using 142,500 pounds of direct material and 5,000 direct labor-hours.
7. The direct materials price variance for May is:
A. $16,000 favorable
B. $16,000 unfavorable
C. $14,250 favorable
D. $14,250 unfavorable
Discussion: Direct materials price variance = Actual quantity * standard price – actual quantity * actual
price = 1.80 * 160,000 – 304000 = 16,000. This is unfavorable because at the standard price the cost of
materials would have been $288,000, which is less than the actual cost at $304,000. Note that the price
variance uses the amount PURCHASED and not the amount USED.
8. The direct materials quantity variance for May is:
A. $14,400 unfavorable
B. $1,100 favorable
26
C. $17,100 unfavorable
D. $17,100 favorable
Discussion: The direct materials quantity variance is standard price * standard quantity – standard price
* actual quantity = 1.80 * 8 * 19000 – 1.8 * 142,500 = 273600-256500 = 17,100. It is favorable because
the cost at the standard quantity is more than at the actual quantity. Note that the quantity variance
uses the amount USED and not the amount PURCHASED.
8. The direct labor rate variance for May is:
A. $2,200 favorable
B. $1,900 unfavorable
C. $2,000 unfavorable
D. $2,090 favorable
Discussion: Direct labor rate variance = standard price * actual quantity – actual price * actual quantity
= 8 * 5000 – 37800 = 40,000 – 37,800=2200. This is favorable because the expected cost at the standard
rate is more than the actual cost.
10. The direct labor efficiency variance for May is:
A. $2,200 favorable
B. $2,000 favorable
C. $2,000 unfavorable
D. $1,800 unfavorable
Discussion: The direct labor efficiency = standard price * standard quantity – standard price * actual
quantity = 8 * .25 * 19,000 – 8 * 5000 = 38,000 – 40,000 = 2000. This is unfavorable because the
expected cost at the standard quantity is less than the actual cost at the actual quantity.
Chapter 11
1. Turnover is computed by dividing average operating assets into:
A. invested capital.
B. total assets.
C. net operating income.
D. sales.
Discussion: Definition
2. Which of the following will not result in an increase in the residual income, assuming other factors
remain constant?
A. An increase in sales.
B. An increase in the minimum required rate of return.
C. A decrease in expenses.
D. A decrease in operating assets.
Discussion: Residual income = Net operating income – (Average Operating Assets * Minimum Required
Rate of Return. An increase in minimum required rate of return increases the amount deducted from
net operating income to get residual income, so it makes residual income smaller. (A) and (C) increase
net operating income. (D) makes the amount deducted smaller.
3. Which of the following is true?
27
I. A profit center has control over both cost and revenue.
II. An investment center has control over invested funds, but not over costs and revenue.
III. A cost center has no control over sales.
A. Only I
B. Only II
C. Only I and III
D. Only I and II
Discussion: Definitions
4. Average operating assets are $110,000 and net operating income is $23,100. The company invests
$25,000 in new assets for a project that will increase net operating income by $4,750. What is the return
on investment (ROI) of the new project?
A. 21%
B. 19%
C. 18.5%
D. 20%
Discussion: Return on investment = net operating income / average operating assets=23100/110000=
21%
5. Average operating assets are $110,000, net operating income is $23,100, and sales are $300,000.
What is the profit margin?
A. 7.70%
B. 21.00%
C. 36.67%
D. 92.30%
Discussion: Profit Margin = Net operating income / sales = 23100/300000=7.7%
7. A company's current net operating income is $16,800 and its average operating assets are
$80,000. The company's required rate of return is 18%. A new project being considered would
require an investment of $15,000 and would generate annual net operating income of $3,000.
What is the residual income of the new project?
A. 20.8%
B. 20%
C. ($150)
D. $300
Discussion: Residual income = net operating income- (average operating assets * minimum
required rate of return)=3,000-(15,000*.18)=3000-2,700=300
8. Galanis Corporation keeps careful track of the time required to fill orders. Data concerning a
particular order appear below:
28
The throughput time was:
A. 38.8 hours
B. 33.4 hours
C. 14.1 hours
D. 5.4 hours
Discussion: Throughput time includes process time, inspection time, move time and queue
time: 1.4 +.4+3.6+8.7=14.1
9. Niemiec Corporation keeps careful track of the time required to fill orders. The times recorded
for a particular order appear below:
The manufacturing cycle efficiency (MCE) was closest to:
A. 0.20
B. 0.06
C. 0.12
D. 0.96
Discussion: MCE = process time / throughput time = 1.5/((2.6+8.5+1.5+.2)=1.5/12.8=11.7%
9. Which are the groups of performance measures on a balanced scorecard?
A. financial measures, customer measures, internal business process measures, and external business
process measures.
B. Unit, Batch, Product, and sustaining measures
C. Operating and non-operating measures
D. Product measures, Selling measures, and Administrative measures
Discussion: The balanced scorecard creates measures across the units of a company and not just
financial measures.
10. Which of the following would be a measure in the category of Learning and Growth for a balanced
scorecard?
A. The percentage of customers that report they would recommend our company to others
B. The percentage of employees that received certifications in their area of expertise
C. The percentage of production that passed quality controls
D. The sales growth over the previous year
Discussion: Learning and Growth pertains to measures about employees and their
competencies.
Chapter 12
1. The opportunity cost of making a component part in a factory with no excess capacity is the:
A. variable manufacturing cost of the component.
29
B. fixed manufacturing cost of the component.
C. total manufacturing cost of the component.
D. net benefit foregone from the best alternative use of the capacity required.
Discussion: For example, if the factory outsources making the headlights for its vehicles, then it will
have the floor space to set up another assembly line to meet demand. So the net operating income of
the second assembly line would be an opportunity cost in the Make or Buy decision.
2. Freestone Company is considering renting Machine Y to replace Machine X. It is expected that Y will
waste less direct materials than does X. If Y is rented, X will be sold on the open market. For this
decision, which of the following factors is (are) relevant?
A. Cost of direct materials used only
B. Resale value of Machine X only
C. Both cost of direct materials and resale value of Machine X
D. Neither Cost of direct materials used nor resale value of Machine X
Discussion: Relevant costs differ between the two alternatives.
3. When there is a production constraint, a company should emphasize the products with:
A. the highest unit contribution margins.
B. the highest contribution margin ratios.
C. the highest contribution margin per unit of the constrained resource.
D. the highest contribution margins and contribution margin ratios.
Discussion: The highest contribution margin alone isn’t enough. Since there is a constrained resource,
the company must use that constrained resource most profitably and obtain the most profit per unit of
the constrained resource.
4. Cung Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 as
is, but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental
effect on the company's overall profit of reworking and selling the material rather than selling it as is as
scrap?
A. -$69,100
B. -$700
C. $29,400
D. -$39,000
Discussion: Sell or Process Further Decision. The company will LOSE $700 if it processes further.
The revenue at split off: $30,100.
The net revenue if processed further: $30,800-1400=$29,400
5. A study has been conducted to determine if Product A should be dropped. Sales of the product total
$200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product
total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even
if the product is dropped. These data indicate that if Product A is dropped, the company's overall net
operating income would:
A. decrease by $20,000 per year
B. increase by $20,000 per year
C. decrease by $10,000 per year
D. increase by $30,000 per year
Discussion: Drop or Add Decision.
30
The contribution to net operating income is Revenue – Avoidable Expenses= 200,000-140,000-(9000040000)=10,000. Product A makes a $10,000 contribution to the company, so the company’s income
would decrease by $10,000 per year if the product were discontinued.
6. Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso's plant
manager is considering making the headlights now being purchased from an outside supplier for $11
each. The Peluso plant has idle equipment that could be used to manufacture the headlights. The design
engineer estimates that each headlight requires $4 of direct materials, $3 of direct labor, and $6.00 of
manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be
unaffected by this decision. A decision by Peluso Company to manufacture the headlights should result
in a net gain (loss) for each headlight of:
A. $(2.00)
B. $1.60
C. $0.40
D. $2.80
DISCUSSION: Make or Buy Decision. The company should select the “Make” because the cost is less for
the firm. There is 40%*6=2.40 of manufacturing overhead that is irrelevant because it is present
whether the company Makes or Buys.
Make
Cost to Supplier
Direct Material
Direct Labor
Manufacturing Overhead -- Avoidable
TOTAL
4
3
60%*6=3.60
10.60
Buy
11
Difference
11
.40
7. A customer has requested that Inga Corporation fill a special order for 2,000 units of product K81 for
$25.00 a unit. While the product would be modified slightly for the special order, product K81's
normal unit product cost is $19.90:
Direct labor is a variable cost. The special order would have no effect on the company's total fixed
manufacturing overhead costs. The customer would like modifications made to product K81 that
would increase the variable costs by $1.20 per unit and that would require an investment of $10,000
in special molds that would have no salvage value.
This special order would have no effect on the company's other sales. The company has
ample spare capacity for producing the special order. If the special order is accepted, the
company's overall net operating income would increase (decrease) by:
A. $13,000
B. $(9,700)
31
C. $10,200
D. $(2,200)
Discussion: The increase to net operating income will be the contribution margin from the
special order less the additional investment. Revenue = 25*2000=50000; Variable expenses
= (5.60+4+2.70+ 1.20)*2000 = 13.50 * 2000 = 27,000; Contribution margin = 50,000 – 27,000
= 23,000. Contribution margin less additional investment = 23,000 – 10,000 = 13,000
8. An automated turning machine is the current constraint at Naik Corporation. Three products use this
constrained resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable. In other
words, rank the products in the order in which they should be emphasized.
A. OP, KU, YY
B. YY, OP, KU
C. KU, YY, OP
D. YY, KU, OP
Discussion:
KU has a contribution margin of $104.89-$82.11=$22.78; CM per minute=22.78/1.7=13.4 per minute
OP has a contribution margin of $528.09-$429.78= 98.31; CM per minute = 98.31/8.7=11.3
YY has a contribution margin of $558.03-420.08=137.95; CM per minute = 137.95/8.9=15.5
RANK YY, then KU, then OP
9.
Wright Company produces products I, J, and K from a single raw material input. Budgeted data for
the next month follows:
If the cost of the raw material input is $78,000, which of the products should be processed beyond
the split-off point?
A. Project J only
B. Project I and Project J only
C. Project J and Project K only
D. Project I and Project K only
Project I
32
Sell at split off for $10
Sell after $2 of processing costs for $15: $15-2=$13 This is more profit
Project J
Sell at split off for $12
Sell after $4 of processing costs for $15: $15-4=$11 This is less profit
Project K
Sell at split off for $15
Sell after $4 of processing costs for $20: $20-$4=$16 This is more profit
10. Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets costs $51 to buy from
farmers and $14 to crush in the company's plant. Two intermediate products, beet fiber and beet juice,
emerge from the crushing process. The beet fiber can be sold as is for $20 or processed further for $18
to make the end product industrial fiber that is sold for $45. The beet juice can be sold as is for $41 or
processed further for $21 to make the end product refined sugar that is sold for $62. How much profit
(loss) does the company make by processing one batch of sugar beets into the end products industrial
fiber and refined sugar?
A. $(104)
B. $(4)
C. $7
D. $3
Beet Fiber
A) Sell for $20 as is, or
B) Sell for $45 after costs of $18 = 45-18=$27
Beet Juice
A) Sell for $41,or
B) Sell for 62 after costs of $21= 62-21=$41
Sugar Beets cost $51 for raw materials + $14 for crushing: $65
If the company produces industrial fiber and refined sugar, the company gets 27 + 41 = 68
The profit is 68-65 = 3