Dr Azer Önel
Cost Analysis Review Problems-VII Final
2008
MERCHANDISING ACTIVITIES & INVENTORY VALUATION
(Note: There may be typographical errors. Check results for all problems!)
1. During a period of steadily falling prices, which method of assigning costs to inventory
offers the best tax advantage?
a. FIFO.**
b. LIFO.
c. Average cost.
d. Specific identification.
2. Beginning inventory of TL 40,000 plus purchases of TL 30,000 equals which of the
following?
a. Cost of goods available for sale of TL 10,000.
b. Cost of goods sold of TL 10,000.
c. Net income of TL 70,000.
d. Cost of goods available for sale of TL 70,000.**
3. Net sales for the business totals TL 70,000, and goods available for sale totals TL 50,000.
Gross profit for the business runs 40% of net sales. Calculate the CGS.
a. TL 30,000.
b. TL 32,000.
c. TL 42,000.**
d. TL 28,000.
If gross profit is 40% of net sales, the cost of goods sold is 60% (=100% - 40%) of net sales.
Net sales of TL 70,000 * 0.60 = TL 42,000, the CGS.
LONG TERM (PLANT) ASSETS & DEPRECIATION / LIABILITIES
1. What is the annual straight-line depreciation for an asset that cost TL 34,600, has an
estimated service life of 8 years, and an estimated salvage value of TL 1,400?
a. TL 4,150.
b. TL 1,450.
c. TL 4,325.**
d. TL 4,500.
2. An asset cost TL 50,000, has an estimated salvage value of TL 1,500, and an estimated
useful life of 8 years. What is the double-declining-balance depreciation rate?
a. 20.0%.
b. 25.0%.**
c. 16.0%.
d. 32.5%.
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3. A bond represents a long-term, interest-bearing, note payable.
a. True**
b. False
4. The two basic sources of financing are debt and equity.
a. True**
b. False
5. The providers of borrowed capital for the business are called creditors.
a. True**
b. False
FINANCIAL ANALYSIS
1. Consider the following:
Year 3
Year 2
Year 1
Total assets
TL 90,000
TL 98,000
TL 48,000
Total liabilities TL 30,000
TL 40,000
TL 5,000
Total OE
TL 60,000
TL 58,000
TL 53,000
Net sales
TL 96,000
TL 80,000
TL 40,000
Operat. income TL 32,000
TL 25,000
TL 10,000
Net income
TL 30,000
TL 21,000
TL 8,000
What was the return on investment (ROI or ROA) for Year 2?
a. 29.2%.
b. 28.8%.**
c. 26.6%.
d. 22.3%.
Return on investment = Net income/Average total assets.
Return on investment is 34.2% (= TL 25,000/((TL 48,000 + TL 98,000)/2).
The ROI is a measure of profitability.
2. Use the above data. What was the return on equity (ROE) for Year 2?
a. 50.8%.
b. 54.1%.
c. 14.4%.
d. 37.8%.**
Return on equity = Net income/Average total equity.
Return on equity is 37.8. (= TL 21,000/((TL 53,000 + TL 58,000)/2).
Return on equity (ROE) is a measure of profitability.
3. Use the above data .What was the return on equity (ROE) for Year 3?
a. 50.8%.**
b. 54.2%.
c. 54.05%.
d. 57.7%.
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4. Consider the following:
Year 3
Year 2
Year 1
Ending cash balances
TL 12,000 TL 8,000
TL 10,000
Beg merchandise inventories TL 18,000 TL 16,800
TL 15,000
Total purchases during period TL 38,000 TL 42,000
TL 44,000
The company uses a periodic inventory system. What was the inventory turnover rate for year
2?
a. 2.43.
b. 2.34.**
c. 2.27.
d. 1.11.
Inventory turnover rate = CGS/Average inventory.
The CGS for year 2: TL 40,800 (= TL 16,800 + TL 42,000 - TL 18,000).
The average inventory: TL 17,400 (= (TL 16,800 + TL 18,000)/2).
The inventory turnover rate for year 2: 2.34 (= TL 40,800/TL 17,400).
5. Consider the following partial income statements of four companies:
Company A Company B Company C Company D
Net Sales
TL 100,000 TL 350,000 TL 500,000 TL 260,000
CGS
60,000
180,000
390,000
180,000
Gross profit TL 40,000
TL 170,000 TL 110,000 TL 80,000
Which company has the greatest gross profit rate?
a. Company A.
b. Company B.**
c. Company C .
d. Company D .
Gross profit rate: Gross profit/Sales=TL 170,000/TL 350,000=0.4860
COST CONCEPTS
1. A value chain is which of the following?
a. A linked set of activities and resources necessary to create and deliver the product or
service to the customer.**
b. A linkage of materials to work in process to finished goods to cost of goods sold.
c. A linkage between financial accounting and management accounting.
d. A process of adding value to materials as they are converted into finished goods.
2. Which of the following is a conversion cost?
a. Direct materials.
b. Direct labor.
c. Manufacturing overhead.
d. Both (b) and (c).**
3. Which of the following is a period cost?
a. Direct materials.
b. Sales commissions.**
c. Direct labor.
d. Factory rent.
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4. Which of the following statements is true about product costs or period costs?
a. Product costs are categorized as DM, DL, or MOH.
b. Period costs are generally categorized as selling or administrative expenses.
c. Product costs are reported as current asset inventories in the balance sheet.
d. All the above are true.**
5. In the manufacture of wood rocking horses in a toy manufacturing plant that specializes in
the production of wood toys, which of the following is most likely to be classified as indirect
materials?
a. Plywood used for the rockers, saddle, and head.
b. Glue to secure the saddle to the rockers.
c. Cleaning compounds to remove excess glue from the rocking horse.
d. Both (b) and (c).**
6. Consider the following:
BWIP
TL 20,000
Total manufacturing costs
TL 250,000
EWIP
TL 10,000
Cost of finished goods manufactured
TL 260,000
Beginning finished goods inventory
TL 40,000
Sales
TL 500,000
Gross profit on sales
TL 220,000
What is the per-unit cost of the 50,000 units produced?
a. TL 5.60.
b. TL 5.20.**
c. TL 5.40.
d. TL 4.40.
Cost of finished goods manufactured/Units produced = Cost per unit.
The cost per unit is TL 5.20 (= TL 260,000/50,000).
7. Consider the following:
BWIP
TL 20,000
DM used
TL 50,000
DL used
TL 80,000
MOH
TL 120,000
EWIP
TL 10,000
Cost of finished goods manufactured
TL 260,000
Calculate the total manufacturing costs.
a. TL 270,000.
b. TL 260,000.
c. TL 280,000.
d. TL 250,000.**
Total manufacturing costs is the total of the product costs of DM, DL, and MOH.
The total manufacturing cost: TL 250,000 (= TL 50,000 + TL 80,000 + TL 120,000).
8. Consider the following:
BWIP
Total manufacturing costs
EWIP
DM used
TL 20,000
TL 850,000
TL 10,000
TL 260,000
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DL
TL 190,000
What was the amount of MOH?
a. TL 860,000.
b. TL 400,000.**
c. TL 450,000.
d. TL 390,000.
Total manufacturing costs =DM used + DL + MOH.
MOH: TL 400,000 (= TL 850,000 - TL 260,000 - TL 190,000).
CVP ANALYSIS
1. Consider the following:
Units
Total Cost of A
Total Cost of B
Total Cost of C
1,000
TL 10,000
TL 10,000
TL 10,000
2,000
10,000
20,000
14,000
3,000
10,000
30,000
18,000
4,000
10,000
40,000
22,000
Which of the following is true about the each of the costs?
a. Cost A is a FC.
b. Cost B is a VC.
c. Cost C is a VC.
d. Only (a) and (b) are true.**
2. The contribution margin ratio is 45% and the unit sales price is TL 80. What is the
CM/unit?
a. TL 44.
b. TL 8.
c. TL 52.
d. TL 36.**
The CM/unit is TL 36 (= TL 80*0.45).
3. The contribution margin ratio is 52 percent. After the break-even point is reached, an
additional TL 35,000 of sales liras will result in which of the following?
a. 48 % in net income.
b. 52 % increase in operating profit.**
c. 52 % increase in variable costs.
d. 48 % increase in operating profit.
Once the break-even point is reached, every additional sales lira provides a 52-kuruş increase
in operating profit, not net income.
4. Target operating income is TL 450,000 and FC are TL 60,000. The sales price per unit is
TL 15, with a CM of 40%. What sales unit volume is required to achieve the target operating
income?
a. 100,000 units.
b. 85,000 units.**
c. 30,000 units.
d. 34,000 units.
Sales Volume in Units = (FC + Target Operating Income)/CM/unit.
CM/unit: TL 6 (= TL 15 × 0.40).
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PRODUCT COSTING
1. Which of the following business is least likely to use job order costing?
a. Automobile manufacturer.
b. House door manufacturer.
c. Automotive repair shop.
d. Oil refiner.**
2. Which of the following is true about Activity-Based Costing (ABC)?
a. It is used primarily where a single product is manufactured.
b. It uses many activity bases or cost drivers.**
c. It is an overhead allocation method that uses a single overhead rate.
d. It is of little use in pricing products.
3. Consider the following:
Units
Beginning units
10,000
Units started
Ending units
Stage of completion
100% complete as to materials
87.5% complete as to conversion
100,000
8,000
100% complete as to materials
50% complete as to conversion
What were the equivalent units of conversion for the period?
a. 112,750.
b. 112,000.
c. 110,750.
d. 97,250.**
The number of units started and completed: 92,000 (100,000 – 8,000).
The EU of conversion: 97,250 = (10,000 * (100.0 – 87.50)) + 92,000 + (8,000* 0.50)).
4. Consider the following schedule of equivalent units and total costs for materials and
conversion:
Equivalent Units
Materials
Conversion
Finish beginning work in process, 500 units
0
150
Started and complete, 1,000 new units
1,000
1,000
Start (but not complete), 600 new units
600
100
Costs
TL 28,000
TL 9,150
What is the total cost of the units started and completed?
a. TL 17,500.
b. TL 24,820.**
c. TL 34,748.
d. TL 23,219.
The cost per EU of material: TL 17.50 (= TL 28,000/(1,000 + 600)).
The cost per EU of conversion: TL 7.32 (= TL 9,150/(150 + 1,000 + 100)).
The cost of the units started and completed: TL 24,820 (= 1,000 × (TL 17.50 + TL 7.32)).
5. Use the above data.What is the total lira value of the ending work in process inventory?
a. TL 2,482.
b. TL 9,928.
c. TL 11,232.**
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d. TL 7,000.
The cost per equivalent unit of material: TL 17.50 (= TL 28,000/(1,000 + 600)).
The cost per equivalent unit of conversion: TL 7.32 (= TL 9,150/(150 + 1,000 + 100)).
The cost of the EWIP: Materials TL 10,500 (= 600 * TL 17.50); Conversion TL 732 (=100 *
TL 7.32).
The total cost of EWIP: TL 11,232 (= TL 10,500 + TL 732).
INCREMENTAL ANALYSIS
1. A company makes three models of fancy jeans. The material cost is the same for each
model. The difference in the models is primarily due to the amount of labor expended on
detailing the models.
Product
Unit Sales Price
Unit VC
DL Hours
Model A
TL 40
TL 15 1 hour
Model B
60
24
2 hours
Model C
80
44
3 hours
There is a labor constraint of 1,000 hours per month. There is no apparent demand of one
model over another, and they are not complementary products. Which of the following is
true?
a. Model C should be manufactured, exclusively.
b. Manufacturing should be divided evenly between models A and C.
c. Model A should be manufactured, exclusively.**
d. Model C will generate total contribution margin of TL 44,000.
Model A, CM/hour: TL 25 (=TL 25/1).
Model B, CM/hour: TL 18 (=TL 36/2).
Model C, CM/hour is: TL 12 (=TL 36/3).
Model A will provide the largest total contribution margin in 1,000 labor-hours.
2.Costs to manufacture 30,000 units of a component of a product are:
DM
TL 12,000
DL
36,000
Variable overhead
14,000
Fixed overhead
10,000
Total cost of 30,000 units
TL 72,000
Av. manufacturing cost/unit TL 2.40
Each unit can be purchased for TL 1.50 per unit, which will increase variable overhead costs
by TL 1,000 and reduce fixed overhead costs by TL 2,000. Which of the following is true?
a. The company should continue to manufacture the part.
b. All of the costs are irrelevant costs.
c. Only the variable overhead costs are relevant.
d. The company should buy the part.**
Total costs to buy the product: TL 68,000 (=(30,000 * TL 1.50) + TL 15,000 + TL 8,000),
which is TL 4,000 less than manufacturing the part. The company should buy the part.
Both variable and fixed overhead costs will change as a result of the decision to purchase and
are, therefore, relevant costs.
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