ACC 350 Week 11 Final Exam – New

ACC 350 Week 11 Final Exam Quiz – Strayer

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Chapter 5

Activity-Based Costing and Activity-Based Management

1)

A top-selling product might actually result in losses for the company.

2)

Companies that undercost products will most likely lose market share.

3)

If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run.

4)

As product diversity and indirect costs increase, it is usually best to switch away from an activity based cost system to a broad averaging system.

5)

If a company undercosts one of its products, then it will overcost at least one of its other products.

6)

Direct costs plus indirect costs equal total costs.

7)

When refining a costing system, a company should classify as many costs as possible as indirect costs.

8)

In a homogeneous cost pool, all costs have a similar cause-and-effect relationship with the cost-allocation base.

9)

Indirect labor and distribution costs would most likely be in the same activity-cost pool.

10)

Activity-based costing helps identify various activities that explain why costs are incurred.

11)

Direct tracing of costs improves cost accuracy.

12)

A cost-allocation base is a necessary element when using a strategy that will refine a costing system.

13)

An activity-based costing system is necessary for costing services that are similar.

14)

Traditional systems are likely to undercost complex products with lower production volume.

15)

For activity-based cost systems, activity costs are assigned to products in the proportion of the demand they place on activity resources.

16)

Unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities.

17)

Output unit-level costs cannot be determined unless you know how many units are in a given batch.

18)

Using multiple unit-level cost drivers generally constitutes an effective activity-based cost system.

19)

Misleading cost numbers are larger when unit-level assignments and the alternative activity-cost-driver assignments are proportionately similar to each other.

20)

Availability of reliable data and measures should be considered when choosing a cost-allocation base.

21)

When designing a costing system, it is easiest to calculate total costs first, and then per-unit costs.

22)

ABC systems attempt to trace more costs as direct costs.

23)

ABC systems create homogeneous cost pools linked to different activities.

24)

ABC systems seek a cost allocation base that has a cause-and-effect relationship with costs in the cost pool.

25)

For service organizations, activity-based cost systems may be used to clarify appropriate cost assignments.

26)

ABC reveals opportunities for improving the way work is done.

27)

Activity-based management refers to the use of information derived from ABC analysis to analyze and improve operations.

28)

Information derived from an ABC analysis might be used to eliminate nonvalue-added activities.

29)

ABC costing systems are primarily for use in manufacturing and marketing and not for design engineering.

30)

Department-costing systems are a further refinement of ABC systems.

31)

ABC systems are useful in manufacturing, but not in the merchandising or service industries.

32)

Costing systems with multiple cost pools are considered ABC systems.

33)

Regarding department wide systems, the benefits of an ABC system must be balanced against its costs and limitations.

34)

ABC systems always provide decision-making benefits that exceed implementation costs.

35)

The primary costs of an ABC system are the measurements necessary to implement the system.

36)

Simply because activity-based costing systems employ more activity-cost drivers, they provide more accurate product costs than traditional systems.

37)

If products are alike, then for costing purposes:
A)

a simple costing system will yield accurate cost numbers
B)

an activity-based costing system should be used
C)

multiple indirect-cost rates should be used
D)

varying demands will be placed on resources

38)

Undercosting a particular product may result in:
A)

loss of market share
B)

lower profits
C)

operating inefficiencies
D)

understating total product costs

39)

Overcosting of a product is MOST likely to result from:
A)

misallocating direct labor costs
B)

overpricing the product
C)

undercosting another product
D)

understating total product costs

40)

A company produces three products; if one product is overcosted then:
A)

one product is undercosted
B)

one or two products are undercosted
C)

two products are undercosted
D)

no products are undercosted

41)

Misleading cost numbers are MOST likely the result of misallocating:
A)

direct material costs
B)

direct manufacturing labor costs
C)

indirect costs
D)

All of these answers are correct.

42)

An accelerated need for refined cost systems is due to:
A)

global monopolies
B)

rising prices
C)

intense competition
D)

a shift toward increased direct costs

43)

The use of a single indirect-cost rate is more likely to:
A)

undercost high-volume simple products
B)

undercost low-volume complex products
C)

undercost lower-priced products
D)

Both B and C are correct.

44)

Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called:
A)

overcosting
B)

undercosting
C)

peanut-butter costing
D)

department costing

45)

Refining a cost system includes:
A)

classifying as many costs as indirect costs as is feasible
B)

creating as many cost pools as possible
C)

identifying the activities involved in a process
D)

seeking a lesser level of detail

46)

Greater indirect costs are associated with:
A)

specialized engineering drawings
B)

quality specifications and testing
C)

inventoried materials and material control systems
D)

All of these answers are correct.

47)

Design of an ABC system requires:
A)

that the job bid process be redesigned
B)

that a cause-and-effect relationship exists between resource costs and individual activities
C)

an adjustment to product mix
D)

Both B and C are correct.

48)

ABC systems create:
A)

one large cost pool
B)

homogenous activity-related cost pools
C)

activity-cost pools with a broad focus
D)

activity-cost pools containing many direct costs

49)

Logical cost allocation bases include:
A)

cubic feet of packages moved to measure distribution activity
B)

machine hours to measure setup activity
C)

direct manufacturing labor hours to measure designing activity
D)

All of these answers are correct.

50)

ABC systems:
A)

highlight the different levels of activities
B)

limit cost drivers to units of output
C)

allocate costs based on the overall level of activity
D)

generally undercost complex products

51)

A single indirect-cost rate may distort product costs because:
A)

there is an assumption that all support activities affect all products
B)

it recognizes specific activities that are required to produce a product
C)

costs are not consistently recorded
D)

it fails to measure the correct amount of total costs

52)

Traditional cost systems distort product costs because:
A)

they do not know how to identify the appropriate units
B)

competitive pricing is ignored
C)

they emphasize financial accounting requirements
D)

they apply average support costs to each unit of product

53)

Which of the following statements about activity-based costing is NOT true?
A)

Activity-based costing is useful for allocating marketing and distribution costs.
B)

Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
C)

Activity-based costing seeks to distinguish batch-level, product-sustaining, and facility-sustaining costs, especially when they are not proportionate to one another.
D)

Activity-based costing differs from traditional costing systems in that products are not cross-subsidized.

54)

Activity-based costing (ABC) can eliminate cost distortions because ABC:
A)

develops cost drivers that have a cause-and-effect relationship with the activities performed
B)

establishes multiple cost pools
C)

eliminates product variations
D)

recognizes interactions between different departments in assigning support costs

55)

Product lines that produce different variations (models, styles, or colors) often require specialized manufacturing activities that translate into:
A)

fewer indirect costs for each product line
B)

decisions to drop product variations
C)

a greater number of direct manufacturing labor cost allocation rates
D)

greater overhead costs for each product line

Answer the following questions using the information below:

Merriman Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers
Account inquiry hours $400,000 10,000 hours
Account billing lines $280,000 4,000,000 lines
Account verification accounts $150,000 40,000 accounts
Correspondence letters $ 50,000 4,000 letters
Total costs $880,000

The above activities are used by Departments A and B as follows:

Department A Department B
Account inquiry hours 2,000 hours 4,000 hours
Account billing lines 400,000 lines 200,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,000 letters 1,600 letters

56)

How much of the account inquiry cost will be assigned to Department A?
A)

$80,000
B)

$400,000
C)

$160,000
D)

None of these answers are correct.

57)

How much of the account billing cost will be assigned to Department B?
A)

$28,000
B)

$280,000
C)

$14,000
D)

None of these answers are correct.

58)

How much of account verification costs will be assigned to Department A?
A)

$30,000
B)

$37,500
C)

$150,000
D)

$10,000

59)

How much of correspondence costs will be assigned to Department B?
A)

$1,600
B)

$12,500
C)

$50,000
D)

$20,000

60)

How much of the total costs will be assigned to Department A?
A)

$158,000
B)

$80,000
C)

$224,000
D)

$880,000

61)

How much of the total costs will be assigned to Department B?
A)

$158,000
B)

$80,000
C)

$224,000
D)

$880,000

62)

Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted indirect cost allocation rate for this activity?
A)

$0.50
B)

$1.00
C)

$1.50
D)

$2.00

63)

Activity-based costing is most likely to yield benefits for companies with all of the following characteristics EXCEPT:
A)

numerous products that consume different amounts of resources
B)

operations that remain fairly consistent
C)

a highly competitive environment, where cost control is critical
D)

accessible accounting and information systems expertise to maintain the system

64)

Each of the following statements is true EXCEPT:
A)

traditional product costing systems seek to assign all manufacturing costs to products
B)

ABC product costing systems seek to assign all manufacturing costs to products
C)

traditional product costing systems are more refined than an ABC system
D)

cost distortions occur when a mismatch (incorrect association) occurs between the way indirect costs are incurred and the basis for their assignment to individual products

Answer the following questions using the information below:

Happy Valley Land and Snow Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers
Labor hours $160,000 8,000 hours
Gas $18,000 6,000 gallons
Invoices $20,000 2,500 invoices
Total costs $198,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department
Labor hours 2,500 hours 1,200 hours 4,300 hours
Gas 1,500 gallons 800 gallons 3,700 gallons
Invoices 1,600 invoices 400 invoices 500 invoices

65)

How much of the labor cost will be assigned to the Lawn Department?
A)

$50,000
B)

$12,800
C)

$20,000
D)

None of these answers are correct.

66)

How much of the gas cost will be assigned to the Plowing Department?
A)

$25,000
B)

$11,100
C)

$15,000
D)

None of these answers are correct.

67)

How much of invoice cost will be assigned to the Bush Department?
A)

$3,200
B)

$4,000
C)

$12,800
D)

$20,000

68)

How much of the gas cost will be assigned to the Lawn Department?
A)

$2,400
B)

$10,000
C)

$4,500
D)

$11,100

69)

How much of the total cost will be assigned to the Plowing Department?
A)

$198,000
B)

$101,100
C)

$67,300
D)

$86,000

70)

How much of the total costs will be assigned to the Lawn Department?
A)

$50,000
B)

$29,600
C)

$100,000
D)

$67,300

71)

The MOST likely example of an output unit-level cost is:
A)

general administrative costs
B)

paying suppliers for orders received
C)

engineering costs
D)

machine depreciation

72)

The MOST likely example of a batch-level cost is:
A)

utility costs
B)

machine repairs
C)

product-designing costs
D)

setup costs

73)

Design costs are an example of:
A)

unit-level costs
B)

batch-level costs
C)

product-sustaining costs
D)

facility-sustaining costs

74)

________ costs support the organization as a whole.
A)

Unit-level
B)

Batch-level
C)

Product-sustaining
D)

Facility-sustaining

75)

It is usually difficult to find good cause-and-effect relationships between ________ and a cost allocation base.
A)

unit-level costs
B)

batch-level costs
C)

product-sustaining costs
D)

facility-sustaining costs

76)

To set realistic selling prices:
A)

all costs should be allocated to products
B)

costs should only be allocated when there is a strong cause-and-effect relationship
C)

only unit-level costs and batch-level costs should be allocated
D)

only unit-level costs should be allocated

77)

Different products consume different proportions of manufacturing overhead costs because of differences in all of the following EXCEPT:
A)

selling prices
B)

customers’ customization specifications
C)

setup times
D)

product design

78)

Unit-level cost drivers are most appropriate as an overhead assignment base when:
A)

several complex products are manufactured
B)

only one product is manufactured
C)

direct labor costs are low
D)

factories produce a varied mix of products

79)

With traditional costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers.
A)

overcosted
B)

fairly costed
C)

undercosted
D)

ignored

Answer the following questions using the information below:

Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8.

80)

According to an ABC system, CP8 is ________ under the traditional system.
A)

undercosted
B)

overcosted
C)

fairly costed
D)

accurately costed

81)

According to an ABC system, S5 uses a disproportionately:
A)

smaller amount of unit-level costs
B)

larger amount of unit-level costs
C)

smaller amount of batch-level costs
D)

larger amount of batch-level costs

82)

Put the following ABC implementation steps in order:
A Compute the allocation rates.
B Compute the total cost of the products.
C Identify the products that are the cost objects.
D Select the cost allocation bases.
A)

DACB
B)

DBCA
C)

BADC
D)

CDAB

83)

ABC systems identify ________ costs used by products.
A)

all
B)

short-term fixed
C)

short-term variable
D)

long-term fixed

84)

The focus of ABC systems is on:
A)

long-term decisions
B)

short-term decisions
C)

make-or-buy decisions
D)

special-pricing decisions

85)

When designing a costing system, it is easiest to:
A)

calculate total costs first and then per-unit cost
B)

calculate per-unit costs first and then total costs
C)

calculate long-term costs first and then short-term costs
D)

calculate short-term costs first and then long-term costs

86)

ABC assumes all costs are ________ because over the long run management can adjust the amount of resources employed.
A)

fixed
B)

variable
C)

committed
D)

nondiscretionary

87)

A manufacturing firm produces multiple families of products requiring various combinations of different types of parts. Of the following, the MOST appropriate cost driver for assigning materials handling costs to the various products is:
A)

direct labor hours
B)

number of units produced
C)

number of parts used
D)

number of suppliers involved

Answer the following questions using the information below:

Barnes Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 22 8 375
Deluxe 28 12 225

Overhead costs $20,000 $40,000

88)

Assume a traditional costing system applies the $60,000 of overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model?
A)

$24,800
B)

$35,200
C)

$37,500
D)

$22,500

89)

Assume a traditional costing system applies the $60,000 of overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the deluxe model?
A)

$24,800
B)

$35,200
C)

$37,500
D)

$22,500

90)

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model?
A)

$24,800
B)

$35,200
C)

$37,500
D)

$22,500

91)

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the deluxe model?
A)

$24,800
B)

$35,200
C)

$37,500
D)

$22,500

Answer the following questions using the information below:

Speedy Racer Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 15 10 750
Deluxe 35 15 500

Overhead costs $30,000 $50,000

92)

Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours. What is the total amount of overhead cost assigned to the standard model?
A)

$32,000
B)

$48,000
C)

$50,000

D)

$30,000

93)

Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours. What is the total amount of overhead cost assigned to the deluxe model?
A)

$32,000
B)

$48,000
C)

$50,000
D)

$30,000

94)

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the standard model?
A)

$51,000
B)

$30,000
C)

$29,000
D)

$48,000

95)

Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the deluxe model?
A)

$51,000
B)

$50,000
C)

$48,000
D)

$25,000

Answer the following questions using the information below:

Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:

T-SHIRTS SWEATSHIRTS
Production and sales volume 60,000 units 35,000 units
Selling price $16.00 $29.00
Direct material $ 2.00 $ 5.00
Direct labor $ 4.50 $ 7.20
Manufacturing overhead $ 2.00 $ 3.00
Gross profit $ 7.50 $13.80
Selling and administrative $ 4.00 $ 7.00
Operating profit $ 3.50 $ 6.80

Tiger Pride’s managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information:

Activity Activity cost Activity-cost driver
Supervision $100,920 Direct labor hours (DLH)
Inspection $124,000 Inspections

Activities demanded
T-SHIRTS SWEATSHIRTS
0.75 DLH/unit 1.2 DLH/unit
45,000 DLHs 42,000 DLHs
60,000 inspections 17,500 inspections

96)

Under the revised ABC system, the activity-cost driver rate for the supervision activity is:
A)

$2.58
B)

$2.40
C)

$2.24
D)

$1.16

97)

Under the revised ABC system, supervision costs allocated to Sweatshirts will be:
A)

$48,720
B)

$100,800
C)

$100,920
D)

None of these answers are correct.

98)

Under the revised ABC system, total overhead costs allocated to Sweatshirts will be:
A)

$ 48,720
B)

$ 76,720
C)

$224,920
D)

None of these answers are correct.

99)

Under the revised ABC system, overhead costs per unit for the Sweatshirts will be:
A)

$1.39 per unit
B)

$1.60 per unit
C)

$2.19 per unit
D)

$2.47 per unit

100)

Using an ABC system, next year’s estimates show manufacturing overhead costs will total $228,300 for 52,000 T-shirts. If all other T-shirt costs and sales prices remain the same, the profitability that can be expected is:
A)

$5.41 per t-shirt
B)

$4.39 per t-shirt
C)

$1.11 per t-shirt
D)

($0.81) per t-shirt

Answer the following questions using the information below:

Mayan Potters manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period:

Cost Pool Overhead Costs Activity-cost driver
Materials handling $ 45,000 90,000 orders
Machine maintenance $300,000 15,000 maintenance hours
Setups $270,000 45,000 setups
Inspections $105,000 21,000 inspections
Total support costs $720,000

Production Estimates
Production units:
Regular = 8,000,000 units
Jumbo = 16,000,000 units
Machine-hours = 200,000 mh
Labor-hours = 400,000 dlh

Mayan Potters uses an ABC system and assigns overhead costs based on the overhead activity information provided above.

101)

The activity-cost driver for the materials handling activity is:
A)

orders
B)

maintenance hours
C)

production units
D)

setups

102)

The materials handling activity-cost driver rate is:
A)

$2.00
B)

$20.00
C)

$0.50
D)

$5.00

103)

The inspections activity-cost driver rate is:
A)

$0.50
B)

$2.00
C)

$20.00
D)

$5.00

104)

During October, Mayan produced 700,000 regular ceramic paperweights and Mayan’s production manager counted 2,000 orders; 1,000 maintenance-hours; 2,000 setups; and 2,000 inspections for the regular product line. For October, Mayan’s controller assigned ________ indirect costs to the regular product line.
A)

$43,000
B)

$25,000
C)

$34,000
D)

None of these answers are correct.

Answer the following questions using the information below:

Nichols, Inc., manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager believes it is time to refine the method of cost allocation and has the accounting department identify the primary production activities and their cost drivers:

Activities Cost driver Allocation Rate
Material handling Number of parts $2 per part
Assembly Labor hours $20 per hour
Inspection Time at inspection station $3 per minute

The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $200 per labor hour.

105)

What are the indirect manufacturing costs per remote control assuming the traditional method is used and a batch of 500 remote controls are produced? The batch requires 1,000 parts, 10 direct manufacturing labor hours, and 15 minutes of inspection time.
A)

$2,000.00 per remote control
B)

$0.25 per remote control
C)

$2.00 per remote control
D)

$4.00 per remote control

106)

What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 50 remote controls are produced? The batch requires 100 parts, 6 direct manufacturing labor hours, and 2.5 minutes of inspection time.
A)

$4.00 per remote control
B)

$6.55 per remote control
C)

$24.00 per remote control
D)

$327.50 per remote control

107)

What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 500 parts, 10 direct manufacturing labor hours, and 5 minutes of inspection time.
A)

$12.15 per remote control
B)

$1215 per remote control
C)

$24.30 per remote control
D)

$48.60 per remote control

Answer the following questions using the information below:

Gregory Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:

Cost Pool Overhead Costs Cost driver Activity level
Supervision of direct labor $320,000 Direct labor-hours 800,000
Machine maintenance $120,000 Machine-hours 960,000
Facility rent $200,000 Square feet of area 100,000
Total overhead costs $640,000

The accounting records show the Mossman Job consumed the following resources:

Cost driver Actual level
Direct labor-hours 200
Machine-hours 1,600
Square feet of area 50

108)

If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Gregory Enterprises?
A)

$0.50 per direct labor-hour
B)

$0.80 per direct labor-hour
C)

$0.40 per direct labor-hour
D)

$1.20 per direct labor-hour

109)

Using direct labor-hours as the only overhead cost driver, what is the amount of overhead costs allocated to the Mossman Job?
A)

$160
B)

$120
C)

$240
D)

$125

110)

If Gregory Enterprises uses the three activity cost pools to allocate overhead costs, what are the activity-cost driver rates for supervision of direct labor, machine maintenance, and facility rent, respectively?
A)

$0.60 per dlh, $0.025 per mh, $0.80 per sq ft
B)

$1.25 per dlh, $0.25 per mh, $0.50 per sq ft
C)

$0.40 per dlh, $0.05 per mh, $0.20 per sq ft
D)

$0.40 per dlh, $0.125 per mh, $2 per sq ft

111)

Using the three cost pools to allocate overhead costs, what is the total amount of overhead costs to be allocated to the Mossman Job?
A)

$200
B)

$380
C)

$675
D)

$170

112)

Which method of allocation probably best estimates actual overhead costs used? Why?
A)

Single direct labor-hours cost driver because it is best to allocate total costs uniformly to individual jobs.
B)

Single direct labor-hours cost driver because it is easiest to analyze and interpret.
C)

Three activity-cost drivers because they best reflect the relative consumption of resources.
D)

Three activity-cost drivers because product costs can be significantly cross-subsidized.

Answer the following questions using the information below:

Ernsting Printers has contracts to complete weekly supplements required by forty-six customers. For the year 20X5, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 12 million pages.

For 20X5 Ernsting Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level
Design changes $ 60,000 300 design changes
Setups 320,000 5,000 setups
Inspections 40,000 8,000 inspections
Total manufacturing overhead costs $420,000

During 20X5, two customers, Wealth Managers and Health Systems, are expected to use the following printing services:

Activity Wealth Managers Health Systems
Pages 60,000 76,000
Design changes 10 0
Setups 20 10
Inspections 30 38

113)

What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 12 million pages of production capacity?
A)

$0.05 per page
B)

$0.035 per page
C)

$0.35 per page
D)

$0.025 per page

114)

Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Wealth Managers during 20X5?
A)

$2,500
B)

$1,750
C)

$2,100
D)

$3,000

115)

Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?
A)

$200 per change, $64 per setup, $5 per inspection
B)

$180 per change, $160 per setup, $3.20 per inspection
C)

$84 per change, $269 per setup, $21 per inspection
D)

$143 per change, $76 per setup, $10 per inspection

116)

Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Wealth Managers during 20X5?
A)

$6,850
B)

$3,250
C)

$3,430
D)

$5,096

117)

When costs are assigned using the single cost driver, number of pages printed, then:
A)

Ernsting Printers will want to retain this highly profitable customer
B)

Wealth Managers will likely seek to do business with competitors
C)

Wealth Managers is unfairly over billed for its use of printing resources
D)

Wealth Managers is grossly under billed for the job, while other jobs will be unfairly over billed

Answer the following questions using the information below:

Wallace Printing has contracts to complete weekly supplements required by forty-six customers. For the year 20X5, manufacturing overhead cost estimates total $420,000 for an annual production capacity of 12 million pages.

For 20X5 Wallace Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level
Design changes $ 60,000 200 design changes
Setups 320,000 4,000 setups
Inspections 40,000 16,000 inspections
Total manufacturing overhead costs $420,000

During 20X5, two customers, Wealth Managers and Health Systems, are expected to use the following printing services:

Activity Wealth Managers Health Systems
Pages 60,000 76,000
Design changes 10 2
Setups 20 10
Inspections 30 38

118)

If manufacturing overhead costs are considered one large cost pool and are assigned based on 12 million pages of production capacity, what is the cost driver rate?
A)

$0.25 per page
B)

$0.05 per page
C)

$0.025 per page
D)

$0.035 per page

119)

Using the cost driver rate determined in the previous question, what is the manufacturing overhead cost estimate for Health Systems during 20X5?
A)

Manufacturing overhead costs applied to Health Systems total $2,100.
B)

Manufacturing overhead costs applied to Health Systems total $1,900.
C)

Manufacturing overhead costs applied to Health Systems total $2,660.
D)

Manufacturing overhead costs applied to Health Systems total $3,800.

120)

Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools?
A)

$300 per change, $80 per setup, $2.50 per inspection
B)

$250 per change, $200 per setup, $3.75 per inspection
C)

$210 per change, $105 per setup, $26.25 per inspection
D)

$333 per change, $125 per setup, $4.00 per inspection

121)

Using the activity-cost driver rates determined in the previous question, what is the manufacturing overhead cost estimate for Health Systems during 20X5?
A)

$3,113.75
B)

$1,495.00
C)

$2,068.00
D)

$3,412.50

122)

When costs are assigned using the single cost driver, number of pages printed, then Health Systems:
A)

is fairly billed because resources are allocated uniformly to all jobs
B)

is grossly under billed for the job, while other jobs will be unfairly over billed
C)

will likely seek to do business with competitors
D)

will contribute too little to profits, and Wallace Printing will not want to accept additional work from the company

123)

Activity-based-costing information:
A)

should be used when services place similar demands on resources
B)

usually results in peanut-butter costing
C)

will yield inaccurate cost numbers when products are similar
D)

may assist in improving product design and efficiency

124)

Activity-based management (ABM) includes decisions about all EXCEPT:
A)

pricing and product mix
B)

smoothing costs
C)

reducing costs
D)

improving processes

125)

ABC systems:
A)

reveal activities that can be eliminated
B)

help control nonfinancial items such as number of setup hours
C)

help identify new designs to reduce costs
D)

All of these answers are correct.

126)

Companies use ABC system information to:
A)

analyze costs
B)

prepare budgets
C)

evaluate performance
D)

All of these answers are correct.

127)

It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that:
A)

product costs will reflect their relative consumption of resources
B)

nonvalue-added costs can be eliminated
C)

there is less likelihood of cross subsidizing of product costs
D)

All of these answers are correct.

128)

A well-designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis:
A)

can be used to eliminate nonvalue-added activities
B)

is easy to analyze and interpret
C)

takes the choices and judgment challenges away from the managers
D)

emphasizes how managers can achieve higher sales

129)

A PRIMARY reason for assigning selling and distribution costs to products for analytical purposes is:
A)

to justify a varied product mix
B)

that controllers are required to assign all costs when valuing inventories
C)

that different processes, products, and customers require different quantities of selling and distribution activities
D)

that all indirect costs must be assigned

130)

For service organizations that bill customers at a predetermined average rate, activity-based cost systems can help to:
A)

clarify appropriate cost assignments for various service activities
B)

identify the profitability of various service activities
C)

Both A and B are correct.
D)

None of these answers are correct.

131)

Products make diverse demands on resources because of differences in all of the following EXCEPT:
A)

volume
B)

selling price
C)

batch size
D)

complexity

132)

The UNIQUE feature of an ABC system is the emphasis on:
A)

costing individual jobs
B)

department indirect-cost rates
C)

multiple-cost pools
D)

individual activities

133)

One department indirect-cost rate is sufficient when:
A)

activities relate to more than one level of the cost hierarchy
B)

product costs are significantly cross-subsidized
C)

the same allocation base is appropriate for all departmental activities
D)

it is a service department

Answer the following questions using the information below:

King Corporation has two departments, Small and Large. Central costs could be allocated to the two departments in various ways.

Small Department Large Department
Square footage 6,000 18,000
Number of employees 1,120 480
Sales $400,000 $2,000,000

134)

If advertising expense of $300,000 is allocated on the basis of sales, the amount allocated to the Small Department would be:
A)

$50,000
B)

$75,000
C)

$210,000
D)

$250,000

135)

If total advertising expense of $300,000 is allocated on the basis of sales, the amount allocated to the Large Department would be:
A)

$225,000
B)

$90,000
C)

$250,000
D)

$50,000

136)

If total payroll processing costs of $96,000 are allocated on the basis of number of employees, the amount allocated to the Small Department would be:
A)

$67,200
B)

$24,000
C)

$16,000
D)

$28,000

137)

If total payroll processing costs of $60,000 are allocated on the basis of number of employees, the amount allocated to the Large Department would be:
A)

$42,000
B)

$18,000
C)

$45,000
D)

$50,000

138)

If total rent expense of $120,000 is allocated on the basis of square footage, the amount allocated to the Small Department would be:
A)

$20,000
B)

$30,000
C)

$84,000
D)

$90,000

139)

If total rent expense of $288,000 is allocated on the basis of square footage, the amount allocated to the Large Department would be:
A)

$86,400
B)

$240,000
C)

$72,000
D)

$216,000

Answer the following questions using the information below:

Trustme Vehical Rental Corporation has two departments, Car Rental and Truck Rental. Central costs may be allocated to the two departments in various ways.

Car Rental Truck Rental
Number of Vehicles in fleet 700 300
Number of employees 150 50
Sales $1,500,000 $750,000

140)

If administrative expense of $125,000 is allocated on the basis of number of employees, the amount allocated to the Truck Rental Department would be:
A)

$75,000
B)

$125,000
C)

$93,750
D)

$31,250

141)

If administrative expense of $125,000 is allocated on the basis of number of employees, the amount allocated to the Car Rental Department would be:
A)

$75,000
B)

$125,000
C)

$93,750
D)

$31,250

142)

If advertising expense of $150,000 is allocated on the basis of sales, the amount allocated to the Car Rental Department would be:
A)

$100,000
B)

$125,000
C)

$50,000
D)

$75,000

143)

If advertising expense of $225,000 is allocated on the basis of sales, the amount allocated to the Truck Rental Department would be:
A)

$112,500
B)

$125,000
C)

$75,000
D)

$175,000

144)

If the facility lease expense of $350,000 is allocated on the basis of vehicles in the fleet, the amount allocated to the Truck Rental Department would be:
A)

$245,000
B)

$105,000
C)

$200,000
D)

$150,000

145)

If the facility lease expense of $350,000 is allocated on the basis of vehicles in the fleet, the amount allocated to the Car Rental Department would be:
A)

$245,000
B)

$105,000
C)

$200,000
D)

$150,000

146)

Using activity-cost rates rather than department indirect-cost rates to allocate costs results in different product costs when:
A)

a single activity accounts for a sizable portion of department costs
B)

there are several homogeneous cost pools
C)

different activities have the same cost-allocation base
D)

different products use different resources in the same proportion

147)

A key reason for using an ABC system rather than a department-costing system is because ABC assigns indirect costs:
A)

using broader averages
B)

more simply than a department-costing system
C)

in a less costly manner
D)

to reflect differences required by different processes as well as customers

148)

It ONLY makes sense to implement an ABC system when:
A)

ABC provides information to make better decisions
B)

its benefits exceed implementation costs
C)

ABC traces more costs as direct costs
D)

there is a strong cause-and-effect relationship between costs in the cost pools and their cost-allocation bases

149)

Which of the following is a sign that an ABC system may be useful?
A)

There are small amounts of indirect costs.
B)

Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity.
C)

Products a company is less suited to produce and sell show small profits.
D)

Operations staff agrees with accountants about the costs of manufacturing and marketing products and services.

150)

Smaller cost distortions occur when the traditional systems’ single indirect-cost rate and the activity-cost-driver rates:
A)

use the same total costs for computations
B)

are similar in proportion to each other
C)

are more different than alike
D)

use the same cost driver units

151)

Activity-based costing systems provide better product costs when they:
A)

employ more activity-cost drivers
B)

employ fewer activity-cost drivers
C)

identify and cost more indirect cost differences among products
D)

always yield more accurate product costs than traditional systems

152)

Factories producing a more varied and complex mix of products have higher costs than factories producing only a narrow range of products because:
A)

more variations and complexities require more activities
B)

they require more engineers
C)

they require more direct laborers
D)

they buy more robotics

153)

Which of the following is NOT a sign that a “smoothing out” costing system exists?
A)

Operations managers don’t use the data originated by the cost system.
B)

Products that a company is well suited to make and sell show large profits.
C)

New product variations have been added, but the cost system has not been upgraded.
D)

The company loses bids they believe were priced competitively.

Answer the following questions using the information below:

Cannady produces six products. Under their traditional cost system using one cost driver, SR6 costs $168.00 per unit. An analysis of the activities and their costs revealed that three cost drivers would be used under the new ABC system. The new cost of SR6 was determined to be $178.00 per unit.

154)

The total amount of indirect costs assigned to product SR6 using the traditional method is ________ the total amount assigned using ABC.
A)

more than
B)

less than
C)

identical to
D)

None of these answers are correct.

155)

Given this change in the cost:
A)

SR6 will now command a higher sales price
B)

SR6 has benefited from the new system
C)

SR6 is definitely more accurately costed
D)

the costing results for SR6 under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system

Answer the following questions using the information below:

Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards. Under their traditional cost system using one cost driver (direct manufacturing labor hours), the cost of a set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system. These cost drivers would be equipment usage, storage area for the material, and type of woods used. The new cost of a set of chess pieces was determined to be $298.00 per set.

156)

The total amount of indirect cost assigned to produce chess pieces using the traditional method is ________ the total amount assigned using ABC.
A)

more than
B)

less than
C)

identical to
D)

None of these answers are correct.

157)

Given this change in the cost structure:
A)

The costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system.
B)

Chess pieces have benefited from the new system.
C)

Chess pieces are definitely more accurately costed.
D)

Chess will now have a lower sales price.

158)

The goal of a properly constructed ABC system is to:
A)

have the most accurate cost system
B)

identify more indirect costs
C)

develop the best cost system for an economically reasonable cost
D)

have separate allocation rates for each department

159)

Cocoa Pet Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 3 30 650
Deluxe 7 50 150

Overhead costs $20,000 $60,000

Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?

Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?
e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

160)

Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 20X5, Come-On-In compiled the following data for the two products:

Deluxe Standard
Sales units $50,000 $400,000

Sales price per unit $650.00 $475.00
Direct material and labor costs per unit $180.00 $130.00
Manufacturing support costs per unit $ 80.00 $120.00

Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 20X5:

Activity Cost Driver Cost Total Deluxe Standard
Setups of setups $ 500,000 500 400 100
Machine-related of machine hours $44,000,000 600,000 300,000 300,000
Packing of shipments $ 5,000,000 250,000 50,000 200,000

Required:
a. Using the current system, what is the estimated
1. total cost of manufacturing one unit for each type of door?
2. profit per unit for each type of door?

b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this?

c. Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe doors (300,000 hours) are the same as for the standard doors (300,000 hours)?

d. Using the activity-based costing data presented above,
1. compute the cost-driver rate for each overhead activity.
2. compute the revised manufacturing overhead cost per unit for each type of entry door.
3. compute the revised total cost to manufacture one unit of each type of entry door.

e. Is the deluxe door as profitable as the original data estimated? Why or why not?

f. What considerations need to be examined when determining a sales mix strategy?

161)

Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply:

BRASS CHROME WHITE
Projected sales in units 30,000 50,000 40,000

PER UNIT data:
Selling price $40 $20 $30

Direct materials $ 8 $ 4 $ 8
Direct labor $15 $ 3 $ 9
Overhead cost based on direct labor hours
(traditional system) $12 $ 3 $ 9

Hours per 1000-unit batch:
Direct labor hours 40 10 30
Machine hours 25 25 10
Setup hours 1.0 0.5 1.0
Inspection hours 30 20 20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels
Direct labor hours 2,900 hours
Machine hours 2,400 hours
Setups $465,500 95 setup hours
Inspections $405,000 2,700 inspection hours
$870,500

Required:
a. Using the traditional system, determine the operating profit per unit for the brass style of faucet.

b. Determine the activity-cost-driver rate for setup costs and inspection costs.

c. Using the ABC system, for the brass style of faucet:
1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit.

d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

162)

Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply:

BRASS CHROME WHITE
Projected sales in units 30,000 50,000 40,000

PER UNIT data:
Selling price $40 $20 $30

Direct materials $ 8 $ 4 $ 8
Direct labor $15 $ 3 $ 9
Overhead cost based on direct labor hours
(traditional system) $12 $ 3 $ 9

Hours per 1000-unit batch:
Direct labor hours 40 10 30
Machine hours 25 25 10
Setup hours 1.0 0.5 1.0
Inspection hours 30 20 20

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels
Direct labor hours 2,900 hours
Machine hours 2,400 hours
Setups $465,500 95 setup hours
Inspections $405,000 2,700 inspection hours
$870,500

Required:
a. Using the traditional system, determine the operating profit per unit for each style of faucet.

b. Determine the activity-cost-driver rate for setup costs and inspection costs.

c. Using the ABC system, for each style of faucet
1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit.

d. Explain the differences between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

163)

Aunt Ethel’s Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon, Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie molds owned by the company. Based on budgetary projections, the information listed below is available:

Macaroon Sugar Buttercream
Projected sales in units 500,000 800,000 600,000

PER UNIT data:
Selling price $0.80 $0.75 $0.60

Direct materials $0.20 $0.15 $0.14
Direct labor $0.04 $0.02 $0.02

Hours per 1000-unit batch:
Direct labor hours 2 1 1
Oven hours 1 1 1
Packaging hours 0.5 0.5 0.5

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels
Direct labor 2,400 hours
Oven $210,000 1,900 oven hours
Packaging $150,000 950 packaging hours
$360,000

Required:
a. Determine the activity-cost-driver rate for packaging costs.

b. Using the ABC system, for the sugar cookie:
1. compute the estimated overhead costs per thousand cookies.
2. compute the estimated operating profit per thousand cookies.

c. Using a traditional system (with direct labor hours as the overhead allocation base), for the sugar cookie:.
1. compute the estimated overhead costs per thousand cookies.
2. compute the estimated operating profit per thousand cookies.

d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

164)

At Deutschland Electronics, product lines are charged for call center support costs based on sales revenue. Last year’s summary of call center operations revealed the following:

Surveillance Products Specialty Products
Number of calls for information 1,000 4,000
Average call length for information 3 minutes 8 minutes
Number of calls for warranties 300 1,200
Average call length for warranties 7 minutes 15 minutes
Sales revenue $8,000,000 $5,000,000

Deutschland Electronics currently allocates call center support costs using a rate of 0.5% of sales revenue.

Required:
a. Compute the amount of call center support costs allocated to each product line under the current system.

b. Assume Deutschland decides to use the average call length for information to assign last year’s support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?

c. Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last year’s support costs of $65,000. Compute the amount of call center support costs assigned to each product line under this revised ABC system.

d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information?

e. Discuss the barriers for implementing ABC for this call center.

165)

For each of the following activities identify an appropriate activity-cost driver.

a. machine maintenance
b. machine setup
c. quality control
d. material ordering
e. production scheduling
f. warehouse expense
g. engineering design

166)

The Marionettes Company is noted for an exceptionally impressive line of Mardi Gras masks. Marionettes has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 20X5:

Activity Cost Cost driver
Marketing $30,000 $500,000 of sales
Customer service 10,000 5,000 customer
Order execution 5,000 100 orders
Warehousing 5,000 50 product lines

Required:
a. Determine the activity-cost-driver rate for each of the four selling and distribution activities.

b. Under what circumstances is it appropriate to use each of the activity-cost drivers?

c. Describe at least one possible negative behavioral consequence for each of the four activity-cost drivers.

167)

Explain how a top-selling product may actually result in losses for the company.

168)

What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products?

169)

How are cost drivers selected in activity-based costing systems?

170)

Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems.

171)

Explain how traditional cost systems, using a single unit-level cost rate, may distort product costs.

172)

What are the four parts of the cost hierarchy. Briefly explain each part, and contrast this cost hierarchy to the fixed-variable dichotomy?

173)

Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?

174)

How can the need for a more refined costing system be identified?

175)

What is activity-based management and how can it be used to improve the profitability of a company?

Chapter 6

Master Budget and Responsibility Accounting

1)

Few businesses plan to fail, but many of those that don’t succeed have failed to plan.

2)

The master budget reflects the impact of operating decisions, but not financing decisions.

3)

Budgeted financial statements are also referred to as pro forma statements.

4)

Budgeting includes only the financial aspects of the plan and not any nonfinancial aspects such as the number of physical units manufactured.

5)

Budgeting helps management anticipate and adjust for trouble spots in advance.
Answer:

6)

Budgets can play both planning and control roles for management.

7)

Long-run planning and short-run planning are best performed independently of each other.

8)

Operating decisions deal with how to best use the limited resources of an organization.

9)

Investing decisions deal with how to obtain the funds to acquire resources.

10)

Budgeted financial statements are called pro forma statements.
11)

After a budget is agreed upon and finalized by the management team, the amounts should not be changed for any reason.

12)

Even in the face of changing conditions, attaining the original budget is critical.

13)

Lower-level managers will not actively participate in the budget process if they perceive upper management does not believe in the process.

14)

A four-quarter rolling budget encourages management to be thinking about the next 12 months.

15)

A rolling budget is the same as a continuous budget.

16)

Research has shown that challenging budgets (rather than budgets that can be easily attained) are energizing and improve performance.

17)

The revenue budget and the budgeted income statement are used to prepare the budgeted balance sheet and the budgeted statement of cash flows.

18)

It is best to compare this year’s performance with last year’s actual performance rather than this year’s budget.

19)

When administered wisely, budgets promote communication and coordination among the various subunits of the organization.

20)

Preparation of the budgeted income statement is the final step in preparing the operating budget.

21)

The sales forecast should primarily be based on statistical analysis with secondary input from sales managers and sales representatives.

22)

The usual starting point in budgeting is to forecast net income.

23)

The revenues budget should be based on the production budget.

24)

The operating budget is that part of the master budget that includes the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of cash flows.

25)

Since fixed manufacturing overhead is fixed, it is not normally included in the operating budget.

26)

The manufacturing labor budget depends on wage rates, production methods, and hiring plans.

27)

The manufacturing labor budget depends on wage rates, production methods, and hiring plans.

28)

If inventoriable costs in the operating budget are going to be in accordance with Generally Accepted Accounting Principles (GAAP), they include only variable manufacturing costs.

29)

Activity-based budgeting provides better decision-making information than budgeting based solely on output-based cost drivers (units produced, units sold, or revenues).

30)

Activity-based costing analysis takes a long-run perspective and treats all activity costs as variable costs.
31)

Activity-based budgeting (ABB) focuses on the budgeting cost of activities necessary to produce and sell products and services.

32)

Activity-based budgeting would permit the use of multiple drivers and multiple cost pools in the budgeting process.

33)

Activity-based budgeting and kaizen budgeting are really equivalent in meaning.

34)

If budgeted amounts change, the kaizen approach can be used to examine changes in the budgeted results.

35)

Computer-based financial planning models are mathematical statements of the interrelationships among operating activities, financial activities, and other factors that affect the budget.

36)

Most computer-based financial planning models have difficulty incorporating sensitivity (what-if) analysis.

37)

Sensitivity analysis is a “what-if” technique that examines how a result will change if the original prediction or assumptions change.

38)

If we increase the selling price of our product, we should probably expect a decline in the number of these products sold.

39)

If we increase the selling price of our product, we can always expect an increase in total revenue.

40)

Sensitivity analysis incorporates continuous improvement into budgeted amounts.
41)

Companies implementing kaizen budgeting believe that employees who actually do the job have the best knowledge of how the job can be done better.

42)

The Japanese use kaizen to mean financing alternatives.

43)

Kaizen budgeting does not make sense for profit centers.

44)

Kaizen budgeting encourages small incremental changes, rather than major improvements.

45)

Kaizen budgeting allows for budgeting of small incremental increases in costs each budgeting period to allow for the effects of normal inflation.

46)

A responsibility center is a part, segment, or subunit of an organization, whose manager is accountable for a specified set of activities.

47)

Each manager, regardless of level, is in charge of a responsibility center.

48)

In a profit center, a manager is responsible for investments, revenues, and costs.

49)

A packaging department is MOST likely a profit center.

50)

Variances between actual and budgeted amounts inform management about performance relative to the budget.

51)

An organization structure is an arrangement of lines of responsibility within the entity.
52)

A responsibility center can be structured to promote better alignment of individual and company goals.

53)

Management will most likely behave the same way if a department is structured as a revenue center or if the same department is structured as a profit center.

54)

Responsibility accounting focuses on control, not on information and knowledge.

55)

The fundamental purpose of responsibility accounting is to fix blame when budgets are not achieved.

56)

Human factors are crucial parts of budgeting.

57)

Budgetary slack provides management with a hedge against unexpected adverse circumstances.

58)

Most costs can be easily controlled because they are under the sole influence of one manager.

59)

Performance reports of responsibility centers may include uncontrollable items to influence behavior that is in alignment with corporate strategy.

60)

When the operating budget is used as a control device, managers are more likely to be motivated to budget higher sales than actually anticipated.

61)

Budgeting slack is most likely to occur when a firm uses the budget only as a planning device and not for control.

62)

If a cost is considered controllable, it indicates that all aspects of the cost are under the control of the manager of the responsibility center to which that cost is assigned.

63)

To create greater commitment to the budget, top-management should create the budget and then share it with lower-level managers.

64)

Budgeting for a multinational company is made more complex due to the possibility of exchange rate fluctuations.

65)

The possibility of exchange rate fluctuations does not influence the budgeting procedures in a multinational corporation.

66)

Because of the possibility of exchange rate fluctuations, managers of multinational corporations should ignore subjective factors in their performance evaluations.

67)

A key use of sensitivity analysis is for cash-flow budgeting.

68)

The self-liquidating cycle is the movement from cash to inventories to receivables and back to cash.

69)

A budget:
A)

is the quantitative expression of a proposed plan of action by management
B)

is an aid to coordinate what needs to be done
C)

generally includes both financial and nonfinancial aspects of the plan
D)

serves as a blueprint for the company to follow in an upcoming period
E)

All of the above are correct.

70)

Examples of nonfinancial budgets include all of the following EXCEPT:
A)

units manufactured
B)

cash collections from customers
C)

units sold
D)

number of new products introduced

71)

Budgeting is used to help companies:
A)

plan to better satisfy customers
B)

anticipate potential problems
C)

focus on opportunities
D)

All of these answers are correct.

72)

A master budget:
A)

includes only financial aspects of a plan and excludes nonfinancial aspects
B)

is an aid to coordinating what needs to be done to implement a plan
C)

includes broad expectations and visionary results
D)

should not be altered after it has been agreed upon

73)

Operating decisions PRIMARILY deal with:
A)

the use of scarce resources
B)

how to obtain funds to acquire resources
C)

acquiring equipment and buildings
D)

satisfying stockholders

74)

Financing decisions PRIMARILY deal with:
A)

the use of scarce resources
B)

how to obtain funds to acquire resources
C)

acquiring equipment and buildings
D)

preparing financial statements for stockholders

75)

Budgeting provides all of the following EXCEPT:
A)

a means to communicate the organization’s short-term goals to its members
B)

support for the management functions of planning and coordination
C)

a means to anticipate problems
D)

an ethical framework for decision making

76)

If initial budgets prove unacceptable, planners achieve the MOST benefit from:
A)

planning again in light of feedback and current conditions
B)

deciding not to budget this year
C)

accepting an unbalanced budget
D)

using last year’s budget

77)

Operating budgets and financial budgets:
A)

combined form the master budget
B)

are prepared before the master budget
C)

are prepared after the master budget
D)

have nothing to do with the master budget

78)

A good budgeting system forces managers to examine the business as they plan, so they can:
A)

detect inaccurate historical records
B)

set specific expectations against which actual results can be compared
C)

complete the budgeting task on time
D)

get promoted for doing a good job

79)

A budget can do all of the following EXCEPT:
A)

promote coordination among subunits
B)

determine actual profitability
C)

motivate managers
D)

motivate employees

80)

A budget should/can do all of the following EXCEPT:
A)

be prepared by managers from different functional areas working independently of each other
B)

be adjusted if new opportunities become available during the year
C)

help management allocate limited resources
D)

become the performance standard against which firms can compare the actual results

81)

A limitation of comparing a company’s performance against actual results of last year is that:
A)

it includes adjustments for future conditions
B)

feedback is no longer a possibility
C)

past results can contain inefficiencies of the past year
D)

the budgeting time period is set at one year

82)

Challenging budgets tend to:
A)

decrease line-management participation in attaining corporate goals
B)

increase failure
C)

increase anxiety without motivation
D)

motivate improved performance

83)

Actual results should NOT be compared against past performance because:
A)

past results may contain mistakes and substandard performance
B)

past results will never happen again
C)

past performance is an indicator of future performance
D)

future conditions will be similar to past conditions

84)

A company’s actual performance should be compared against budgeted amounts for the same accounting period so that:
A)

adjustments for future conditions can be included
B)

no feedback is possible
C)

inefficiencies of the past year can be included
D)

85)

It is advantageous to coordinate budgets with:
A)

suppliers
B)

customers
C)

the marketing and production departments
D)

All of these answers are correct.

86)

A budget can help implement:
A)

strategic planning
B)

long-run planning
C)

short-run planning
D)

All of these answers are correct.

87)

To gain the benefits of budgeting ________ must understand and support the budget.
A)

management at all levels
B)

customers
C)

suppliers
D)

All of these answers are correct.

88)

Participation of line managers in the budgeting process helps to create:
A)

greater commitment
B)

greater anxiety
C)

more fraud
D)

better past performance

89)

Line managers who feel that top management does not believe in the budget are MOST likely to:
A)

pick up the slack and participate in the budgeting process
B)

be motivated by the budget
C)

spend little time on the budgeting process
D)

convert the budget to a shorter more reasonable time period

90)

The time coverage of a budget should be:
A)

one year
B)

guided by the purpose of the budget
C)

cover design through manufacture and sale of the product
D)

shorter rather than longer

91)

Rolling budgets help management to:
A)

better review the past calendar year
B)

deal with a 5-year time frame
C)

focus on the upcoming budget period
D)

rigidly administer the budget

92)

Budgets should:
A)

be flexible
B)

be administered rigidly
C)

only be developed for short periods of time
D)

include only variable costs

93)

Operating budgets include all of the following EXCEPT:
A)

the revenues budget
B)

the budgeted income statement
C)

the administrative costs budget
D)

the budgeted balance sheet

94)

Operating budgets include the:
A)

budgeted balance sheet
B)

budgeted income statement
C)

capital expenditures budget
D)

budgeted statement of cash flows

95)

The operating budget process generally concludes with the preparation of the:
A)

production budget
B)

distribution budget
C)

research and development budget
D)

budgeted income statement

96)

Which budget is NOT necessary to prepare the budgeted balance sheet?
A)

cash budget
B)

budgeted statement of cash flows
C)

budgeted income statement
D)

revenues budget
97)

Financial budgets include the:
A)

capital expenditures budget
B)

production budget
C)

marketing costs budget
D)

administrative costs budget

98)

________ includes a budgeted statement of cash flows and a budgeted balance sheet.
A)

An annual report
B)

The financial budget
C)

The operating budget
D)

The capital expenditures budget

99)

The order to follow when preparing the operating budget is:
A)

revenues budget, production budget, and direct manufacturing labor costs budget
B)

costs of goods sold budget, production budget, and cash budget
C)

revenues budget, manufacturing overhead costs budget, and production budget
D)

cash expenditures budget, revenues budget, and production budget.

100)

In which order are the following developed? First to last:
A = Production budget
B = Direct materials costs budget
C = Budgeted income statement
D = Revenues budget
A)

ABDC
B)

DABC
C)

DCAB
D)

CABD

101)

The budgeting process is MOST strongly influenced by:
A)

the capital budget
B)

the budgeted statement of cash flows
C)

the sales forecast
D)

the production budget

102)

________ is the usual starting point for budgeting.
A)

The revenues budget
B)

Net income
C)

The production budget
D)

The cash budget

103)

The sales forecast should be PRIMARILY based on:
A)

statistical analysis.
B)

input from sales managers and sales representatives
C)

production capacity
D)

input from the board of directors

104)

The sales forecast is influenced by:
A)

advertising and sales promotions
B)

competition
C)

general economic conditions
D)

All of these answers are correct.

105)

A sales forecast is:
A)

often the outcome of elaborate information gathering and discussions among sales managers
B)

developed primarily to prepare next year’s marketing campaign
C)

solely based on sales of the previous year
D)

a summary of product costs that influence pricing decisions

106)

The revenues budget identifies:
A)

expected cash flows for each product
B)

actual sales from last year for each product
C)

the expected level of sales for the company
D)

the variance of sales from actual for each product

107)

The number of units in the sales budget and the production budget may differ because of a change in:
A)

finished goods inventory levels
B)

overhead charges
C)

direct material inventory levels
D)

sales returns and allowances

108)

Production is primarily based on:
A)

projected inventory levels
B)

the revenues budget
C)

the administrative costs budget
D)

the capital expenditures budget

109)

Budgeted production depends on:
A)

the direct materials usage budget and direct material purchases budget
B)

the direct manufacturing labor budget
C)

budgeted sales and expected changes in inventory levels
D)

the manufacturing overhead costs budget

110)

The direct materials usage budget is based on:
A)

the units to be produced during a period
B)

budgeted sales dollars
C)

the predetermined factory overhead rate
D)

the amount of labor-hours worked

111)

Direct material purchases equal:
A)

production needs
B)

production needs plus target ending inventories
C)

production needs plus beginning inventories
D)

production needs plus target ending inventories less beginning inventories

112)

Individual budgeted amounts included in the manufacturing overhead costs budget are based on input from:
A)

operating personnel
B)

costs incurred in prior years
C)

cost changes expected in the future
D)

All of these answers are correct.

113)

The manufacturing overhead costs budget includes budgeted amounts for:
A)

direct materials
B)

direct manufacturing labor
C)

indirect manufacturing labor
D)

All of these answers are correct.

114)

Budgeted manufacturing overhead costs include all types of factory expenses EXCEPT:
A)

fixed items such as depreciation of manufacturing machinery
B)

variable items such as plant supplies
C)

indirect labor such as the salary of the plant supervisor
D)

direct labor and direct materials

115)

The cost of goods sold budget requires all of the following budgets EXCEPT:
A)

direct material cost budget
B)

manufacturing overhead cost budget
C)

distribution cost budget
D)

direct manufacturing labor cost budget

116)

Schultz Company expects to manufacture and sell 30,000 baskets in 20X4 for $6 each. There are 3,000 baskets in beginning finished goods inventory with target ending inventory of 4,000 baskets. The company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 20X4 budgeted income statement?
A)

$174,000
B)

$180,000
C)

$186,000
D)

$204,000

117)

DeArmond Corporation has budgeted sales of 18,000 units, target ending finished goods inventory of 3,000 units, and beginning finished goods inventory of 900 units. How many units should be produced next year?
A)

21,900 units
B)

20,100 units
C)

15,900 units
D)

18,000 units

118)

For next year, Galliart, Inc., has budgeted sales of 60,000 units, target ending finished goods inventory of 3,000 units, and beginning finished goods inventory of 1,800 units. All other inventories are zero. How many units should be produced next year?
A)

58,800 units
B)

60,000 units
C)

61,200 units
D)

64,800 units

119)

Wilgers Company has budgeted sales volume of 30,000 units and budgeted production of 27,000 units, while 5,000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory?
A)

5,000 units
B)

8,000 units
C)

3,000 units
D)

2,000 units

Answer the following questions using the information below:

Marguerite, Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 20X4:

Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

120)

On the 20X5 budgeted income statement, what amount will be reported for sales?
A)

$246,000
B)

$240,000
C)

$312,000
D)

$318,000

121)

How many pool cues need to be produced in 20X5?
A)

22,500 cues
B)

22,000 cues
C)

20,500 cues
D)

19,500 cues

122)

On the 20X5 budgeted income statement, what amount will be reported for cost of goods sold?
A)

$139,400
B)

$136,000
C)

$132,600
D)

$153,000

123)

What are the 20X5 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?
A)

$0; $96,000; $19,200
B)

$39,000; $78,000; $15,600
C)

$80,000; $40,000; $16,000
D)

$41,000; $82,000; $16,400

Answer the following questions using the information below:

Daniel, Inc., expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 20X4:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

124)

On the 20X5 budgeted income statement, what amount will be reported for sales?
A)

$122,000
B)

$118,000
C)

$140,000
D)

$120,000

125)

How many ceramic vases need to be produced in 20X5?
A)

5,900 vases
B)

6,100 vases
C)

7,000 vases
D)

6,000 vases

126)

On the 20X5 budgeted income statement, what amount will be reported for cost of goods sold?
A)

$91,500
B)

$105,000
C)

$90,000
D)

$88,500

127)

What are the 20X5 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?
A)

$12,200; $61,000; $18,300
B)

$12,000; $60,000; $18,000
C)

$2,000; $10,000; $3,000
D)

$2,000; $0; $18,000

Answer the following questions using the information below:

The following information pertains to the January operating budget for Casey Corporation, a retailer:

Budgeted sales are $200,000 for January
Collections of sales are 50% in the month of sale and 50% the next month
Cost of goods sold averages 70% of sales
Merchandise purchases total $150,000 in January
Marketing costs are $3,000 each month
Distribution costs are $5,000 each month
Administrative costs are $10,000 each month

128)

For January, budgeted gross margin is:
A)

$100,000
B)

$140,000
C)

$60,000
D)

$50,000

129)

For January, the amount budgeted for the nonmanufacturing costs budget is:
A)

$78,000
B)

$10,000
C)

$168,000
D)

$18,000

130)

For January, budgeted net income is:
A)

$42,000
B)

$60,000
C)

$50,000
D)

$52,000

131)

How many uniforms need to be produced in 20X5?
A)

26,000 uniforms
B)

34,000 uniforms
C)

30,000 uniforms
D)

29,000 uniforms

132)

What is the amount budgeted for direct material purchases in 20X5?
A)

$520,000
B)

$600,000
C)

$580,000
D)

$760,000

Answer the following questions using the information below:

Konrade, Inc., expects to sell 30,000 athletic uniforms for $80 each in 20X5. Direct materials costs are $20, direct manufacturing labor is $8, and manufacturing overhead is $6 for each uniform. The following inventory levels apply to 20X4:

Beginning inventory Ending inventory
Direct materials 12,000 units 9,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 6,000 units 5,000 units

133)

What is the amount budgeted for cost of goods manufactured in 20X5?
A)

$1,020,000
B)

$986,000
C)

$1,156,000
D)

$1,190,000

134)

What is the amount budgeted for cost of goods sold in 20X5?
A)

$1,156,000
B)

$986,000
C)

$1,020,000
D)

$2,400,000

Answer the following questions using the information below:

Furniture, Inc., estimates the following number of mattress sales for the first four months of 20X5:

Month Sales
January 5,000
February 7,000
March 6,500
April 8,000

Finished goods inventory at the end of December is 1,500 units. Target ending finished goods inventory is 30% of the next month’s sales.

135)

How many mattresses need to be produced in January 20X5?
A)

4,400 mattresses
B)

5,600 mattresses
C)

6,500 mattresses
D)

7,100 mattresses

136)

How many mattresses need to be produced in the first quarter (January, February, March) of 20X5?
A)

18,500 mattresses
B)

19,400 mattresses
C)

20,900 mattresses
D)

22,400 mattresses

Answer the following questions using the information below:

Wallace Company provides the following data for next year:

Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 144,000

The gross profit rate is 40% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 30% of next month’s sales, stated at cost.

137)

Purchases budgeted for January total:
A)

$130,800
B)

$72,000
C)

$69,840
D)

$74,160

138)

Purchases budgeted for February total:
A)

$69,120
B)

$60,480
C)

$115,200
D)

$64,800

139)

Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 10,000 units of product Bigger and to have an inventory of 2,000 units of Bigger on hand at the end of the period. Currently, Shamokin has 800 units of Bigger on hand. Bigger requires two labor operations, molding and polishing. Each unit of Bigger requires one hour of molding and two hours of polishing. The direct labor rate for molding is $20 per molding hour and the direct labor rate for polishing is $25 per polishing hour. The expected cost of direct labor for Bigger is:
A)

$224,000
B)

$560,000
C)

$616,000
D)

$784,000

140)

Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 10,000 units of product Bigger and to have an inventory of 2,000 units of Bigger on hand at the end of the period. Currently, Shamokin has 800 units of Bigger on hand. Bigger requires two labor operations, molding and polishing. Each unit of Bigger requires one hour of molding and two hours of polishing. The direct labor rate for molding is $20 per molding hour and the direct labor rate for polishing is $25 per polishing hour. The expected number of hours of direct labor for Bigger is:
A)

8,800 hours of molding; 17,600 hours of polishing
B)

11,200 hours of molding; 22,400 hours of polishing
C)

17,600 hours of molding; 8,800 hours of polishing
D)

22,400 hours of molding; 11,200 hours of polishing

141)

St. Claire Manufacturing expects to produce and sell 6,000 units of Big, its only product, for $20 each. Direct material cost is $2 per unit, direct labor cost is $8 per unit, and variable manufacturing overhead is $3 per unit. Fixed manufacturing overhead is $24,000 in total. Variable selling and administrative expenses are $1 per unit, and fixed selling and administrative costs are $3,000 in total. According to generally accepted accounting principles, inventoriable cost per unit of Big would be:
A)

$13.00 per unit
B)

$14.00 per unit
C)

$17.00 per unit
D)

$18.50 per unit

142)

Financial planning models:
A)

are not used in the budgeting process
B)

are not useful for sensitivity analysis
C)

are mathematical representations of the relationships affecting the budget process
D)

are used for nonfinancial aspects of budgeting

143)

Financial planning software packages assist management with:
A)

assigning responsibility to various levels of management
B)

identifying the target customer
C)

sensitivity analysis in their planning and budgeting activities
D)

achieving greater commitment from lower management

144)

________ uses a “what-if” technique that examines how results will change if the originally predicted data changes.
A)

A sales forecast
B)

A sensitivity analysis
C)

A pro forma financial statement
D)

The statement of cash flows

145)

When performing a sensitivity analysis, if the selling price per unit is increased, then the:
A)

per unit fixed administrative costs will increase
B)

per unit direct materials purchase price will increase
C)

total volume of sales will increase
D)

total costs for sales commissions and other nonmanufacturing variable costs will increase

146)

Sensitivity analysis is useful for examining all of the following EXCEPT:
A)

changes in employee satisfaction
B)

changes in direct material cost
C)

changes in sales price
D)

changes in direct labor cost

Answer the following questions using the information below:

Ossmann Enterprises reports year-end information from 20X4 as follows:

Sales (80,000 units) $480,000
Cost of goods sold 320,000

Gross margin 160,000
Operating expenses 130,000

Operating income $ 30,000

Ossmann is developing the 20X5 budget. In 20X5 the company would like to increase selling prices by 8%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.

147)

What is budgeted sales for 20X5?
A)

$518,400
B)

$533,333
C)

$466,560
D)

$432,000

148)

What is budgeted cost of goods sold for 20X5?
A)

$311,040
B)

$288,000
C)

$345,600
D)

$320,000

149)

Should Ossmann increase the selling price in 20X5?
A)

Yes, because operating income is increased for 20X5.
B)

Yes, because sales revenue is increased for 20X5.
C)

No, because sales volume decreases for 20X5.
D)

No, because gross margin decreases for 20X5.

Answer the following questions using the information below:

Katie Enterprises reports the year-end information from 20X4 as follows:

Sales (70,000 units) $560,000
Cost of goods sold 210,000

Gross margin 350,000
Operating expenses 200,000

Operating income $ 150,000

Katie is developing the 20X5 budget. In 20X5 the company would like to increase selling prices by 4%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.

150)

What is budgeted sales for 20X5?
A)

$582,400
B)

$524,160
C)

$504,000
D)

$560,000

151)

What is budgeted cost of goods sold for 20X5?
A)

$189,000
B)

$196,560
C)

$218,400
D)

$210,000

152)

Should Katie increase the selling price in 20X5?
A)

Yes, because sales revenue is increased for 20X5.
B)

Yes, because operating income is increased for 20X5.
C)

No, because sales volume decreases for 20X5.
D)

No, because gross margin decreases for 20X5.

153)

The Japanese use the term kaizen when referring to:
A)

scarce resources
B)

pro forma financial statements
C)

continuous improvement
D)

the sales forecast

154)

Kaizen refers to incorporating cost reductions:
A)

in each successive budgeting period
B)

in each successive sales forecast
C)

in all customer service centers
D)

All of these answers are correct.

155)

All of the following are encouraged with kaizen budgeting EXCEPT:
A)

better interactions with suppliers
B)

large discontinuous improvements
C)

cost reductions during manufacturing
D)

systematic monthly cost reductions

156)

Kaizen budgeting involves:
A)

large cost reductions
B)

management directed improvements
C)

continual small cost reductions
D)

continual small revenue increases

157)

Kaizen budgeting is driven by:
A)

management
B)

employees
C)

stockholders
D)

creditors

Answer the following questions using the information below:

Dan and Donna Enterprises are using the kaizen approach to budgeting for 20X5. The budgeted income statement for January 20X5 is as follows:

Sales (84,000 units) $500,000
Less: Cost of goods sold 300,000

Gross margin 200,000
Operating expenses (includes $50,000 of fixed costs) 150,000

Operating income $ 50,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.

158)

What is budgeted cost of goods sold for March 20X5?
A)

$294,030
B)

$294,000
C)

$300,000
D)

$297,000

159)

What is budgeted gross margin for March 20X5?
A)

$196,020
B)

$198,000
C)

$204,020
D)

$205,970

160)

The use of activity-based budgeting is growing because of:
A)

the increased use of activity-based costing
B)

the increased use of kaizen costing
C)

increases in work-in-process inventory
D)

increases in direct materials inventory

161)

Activity-based budgeting would separately estimate:
A)

the cost of overhead for a department
B)

a plant-wide cost-driver rate
C)

the cost of a setup activity
D)

All of these answers are correct.

162)

Activity-based-costing analysis makes no distinction between:
A)

direct-materials inventory and work-in-process inventory
B)

short-run variable costs and short-run fixed costs
C)

parts of the supply chain
D)

components of the value chain

163)

Activity-based budgeting makes it easier to:
A)

determine a rolling budget
B)

prepare pro forma financial statements
C)

determine how to reduce costs
D)

execute a financial budget

164)

Activity-based budgeting does NOT require:
A)

knowledge of the organization’s activities
B)

specialized expertise in financial management and control
C)

knowledge about how activities affect costs
D)

the ability to see how the organization’s different activities fit together

165)

Activity-based budgeting:
A)

uses one cost driver such as direct labor-hours
B)

uses only output-based cost drivers such as units sold
C)

focuses on activities necessary to produce and sell products and services
D)

classifies costs by functional area within the value chain

166)

Activity-based budgeting includes all the following steps EXCEPT:
A)

determining demands for activities from sales and production targets
B)

computing the cost of performing activities
C)

determining a separate cost-driver rate for each department
D)

describing the budget as costs of activities rather than costs of functions

167)

Responsibility accounting:
A)

is a system that measures the plans, budgets, actions, and actual results of a responsibility center
B)

is an arrangement of lines of responsibility within the organization
C)

explicitly incorporates continuous improvement anticipated during the budget period
D)

examines how a result will change if the original plan is not achieved

168)

Responsibility centers include all of the following EXCEPT:
A)

cost
B)

revenue
C)

customers
D)

investment

169)

Variances between actual and budgeted amounts can be used to:
A)

alert managers to potential problems and available opportunities
B)

inform managers about how well the company has implemented its strategies
C)

signal that company strategies are ineffective
D)

All of these answers are correct.

170)

A maintenance manager is MOST likely responsible for a(n):
A)

revenue center
B)

investment center
C)

cost center
D)

profit center

171)

The regional sales office manager of a national firm is MOST likely responsible for a(n):
A)

revenue center
B)

investment center
C)

cost center
D)

profit center

172)

A regional manager of a restaurant chain in charge of finding additional locations for expansion is MOST likely responsible for a(n):
A)

revenue center
B)

investment center
C)

cost center
D)

profit center

173)

The manager of a hobby store that is part of a chain of stores is MOST likely responsible for a(n):
A)

revenue center
B)

investment center
C)

cost center
D)

profit center

174)

A manager of a revenue center is responsible for all of the following EXCEPT:
A)

service quality and units sold
B)

the acquisition cost of the product or service sold
C)

price, product mix, and promotional activities
D)

investments of excess cash

175)

A manager of a profit center is responsible for all of the following EXCEPT:
A)

sales revenue
B)

the cost of merchandise purchased for resale
C)

expanding into new geographic areas
D)

selling and marketing costs

176)

A controllable cost is any cost that can be ________ by a responsibility center manager for a period of time.
A)

controlled
B)

influenced
C)

segregated
D)

excluded

177)

A responsibility accounting system could:
A)

exclude all uncontrollable costs
B)

exclude controllable costs
C)

segregate uncontrollable costs from controllable costs
D)

Both A and C are correct.

178)

Which statement about controllability is NOT true:
A)

few costs are clearly under the sole influence of one manager
B)

holds managers responsible for uncontrollable costs
C)

with a long enough time span, all costs will come under somebody’s control
D)

describes the degree of influence that managers have over a particular item

179)

Controllability may be difficult to pinpoint because of all the following EXCEPT:
A)

some costs depend on market conditions
B)

current managers may have inherited inefficiencies of a previous manager
C)

the current use of stretch or challenge targets
D)

few costs are under the sole influence of one manager

180)

Responsibility accounting:
A)

emphasizes controllability
B)

focuses on whom should be asked about the information
C)

attempts to assign blame for problems to a specific manager
D)

All of these answers are correct.

181)

A PRIMARY consideration in assigning a cost to a responsibility center is:
A)

whether the cost is fixed or variable
B)

whether the cost is direct or indirect
C)

who can best explain the change in that cost
D)

where in the organizational structure the cost was incurred

182)

Building in budgetary slack includes:
A)

overestimating budgeted revenues
B)

underestimating budgeted costs
C)

making budgeted targets more easily achievable
D)

All of these answers are correct.

183)

To reduce budgetary slack management may:
A)

incorporate stretch or challenge targets
B)

use external benchmark performance measures
C)

award bonuses for achieving budgeted amounts
D)

reduce projected cost targets by 10% across all areas

184)

A stretch budget is a budget that:
A)

crosses more than one responsibility center
B)

represents a challenging, but achievable level of performance
C)

is impossible to implement in a cost center
D)

is designed to include the effects of exchange rate fluctuations

185)

Multinational budgeting is more complex than budgeting in a domestic environment due to the possibility of:
A)

exchange rate fluctuations
B)

sophisticated techniques used by multinationals such as forward, future, and options contracts
C)

different political, legal, and economic environments faced by multinationals
D)

All of these answers are correct.

186)

Multinational budgeting is useful for everything EXCEPT:
A)

comparing actual to budget in volatile conditions
B)

helping managers learn and adapt to changing conditions
C)

determining the impact of currency fluctuations
D)

determining how well managers adapt to uncertain environments

187)

To prepare the cash budget, all of the following budgets are required EXCEPT:
A)

capital expenditures budget
B)

cost of goods sold budget
C)

budgeted balance sheet
D)

revenue budget

188)

Financial analysts use the projected cash flow statement to do all of the following EXCEPT:
A)

plan for when excess cash is generated
B)

plan for short-term cash investments
C)

project cash shortages and plan a strategy to deal with the shortages
D)

project depreciation expense

189)

The cash flow statement does NOT include:
A)

cash inflows from the collection of receivables
B)

cash outflows paid toward raw material purchases
C)

all sales revenues
D)

interest paid and received

190)

The cash budget is a schedule of expected cash receipts and disbursements that:
A)

requires an aging of accounts receivable and accounts payable
B)

is a self-liquidating cycle
C)

is prepared immediately after the sales forecast
D)

predicts the effect on the cash position at given levels of operations

Answer the following questions using the information below:

The following information pertains to Tiffany Company:

Month Sales Purchases
January $30,000 $16,000
February $40,000 $20,000
March $50,000 $28,000

∙ Cash is collected from customers in the following manner:
Month of sale 30%
Month following the sale 70%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.
∙ Labor costs are 20% of sales. Other operating costs are $15,000 per month (including $4,000 of depreciation). Both of these are paid in the month incurred.
∙ The cash balance on March 1 is $4,000. A minimum cash balance of $3,000 is required at the end of the month. Money can be borrowed in multiples of $1,000.

191)

How much cash will be collected from customers in March?
A)

$47,000
B)

$43,000
C)

$50,000
D)

None of these answers are correct.

192)

How much cash will be paid to suppliers in March?
A)

$23,200
B)

$28,000
C)

$44,000
D)

None of these answers are correct.

193)

How much cash will be disbursed in total in March?
A)

$21,000
B)

$25,000
C)

$44,200
D)

$48,200

194)

What is the ending cash balance for March?
A)

($25,000)
B)

$3,000
C)

$3,200
D)

$3,800

Answer the following questions using the information below:

Fiscal Company has the following sales budget for the last six months of 20X5:

July $100,000 October $ 90,000
August 80,000 November 100,000
September 110,000 December 94,000

Historically, the cash collection of sales has been as follows:
65% of sales collected in the month of sale,
25% of sales collected in the month following the sale,
8% of sales collected in the second month following the sale, and
2% of sales are uncollectible.

195)

Cash collections for September are:
A)

$71,500
B)

$86,700
C)

$99,500
D)

$102,000

196)

What is the ending balance of accounts receivable for September, assuming uncollectible balances are written off during the second month following the sale?
A)

$99,500
B)

$48,500
C)

$44,900
D)

$46,500

197)

Cash collections for October are:
A)

$58,500
B)

$92,400
C)

$99,500
D)

$88,200

Answer the following questions using the information below:

Bear Company has the following information:

Month Budgeted Purchases
January $26,800
February 29,000
March 30,520
April 29,480
May 27,680

Purchases are paid for in the following manner:
10% of the purchase amount in the month of purchase
50% of the purchase amount in the month after purchase
40% of the purchase amount in the month after purchase

198)

What is the expected balance in Accounts Payable as of March 31?
A)

$39,068
B)

$18,312
C)

$2,900
D)

$30,520

199)

What is the expected balance in Accounts Payable as of April 30?
A)

$26,532
B)

$38,740
C)

$12,208
D)

$17,688

200)

What is the expected Accounts Payable balance as of May 31?
A)

$11,792
B)

$24,912
C)

$36,704
D)

$2,948

Answer the following questions using the information below:

The following information pertains to the January operating budget for Casey Corporation.

∙ Budgeted sales for January $100,000 and February $200,000.
∙ Collections for sales are 60% in the month of sale and 40% the next month.
∙ Gross margin is 30% of sales.
∙ Administrative costs are $10,000 each month
∙ Beginning accounts receivable is $20,000.
∙ Beginning inventory is $14,000.
∙ Beginning accounts payable is $60,000. (All from inventory purchases.)
∙ Purchases are paid in full the following month.
∙ Desired ending inventory is 20% of next month’s cost of goods sold (COGS).

201)

For January, budgeted cash collections are:
A)

$20,000
B)

$60,000
C)

$80,000
D)

None of these answers are correct.

202)

At the end of January, budgeted accounts receivable is:
A)

$20,000
B)

$40,000
C)

$60,000
D)

None of these answers are correct.

203)

For January, budgeted cost of goods sold is:
A)

$20,000
B)

$30,000
C)

$40,000
D)

None of these answers are correct.

204)

For January, budgeted net income is:
A)

$20,000
B)

$30,000
C)

$40,000
D)

None of these answers are correct.

205)

For January, budgeted cash payments for purchases are:
A)

$14,000
B)

$70,000
C)

$60,000
D)

None of these answers are correct.

206)

At the end of January, budgeted ending inventory is:
A)

$20,000
B)

$28,000
C)

$40,000
D)

None of these answers are correct.

207)

Listed below are elements of the master budget. Determine whether each budget is an operating budget or a financial budget. Place an O for operating budget or F for a financial budget.

1. Capital expenditures budget
2. Cost of goods sold budget
3. Revenues budget
4. Budgeted statement of cash flows
5. Distribution costs budget
6. Marketing costs budget
7. Cash budget
8. Direct materials cost budget
9. Budgeted balance sheet
10. Budgeted income statement

208)

Spirit Company sells three products with the following seasonal sales pattern:

Products
Quarter A B C
1 40% 30% 10%
2 30% 20% 40%
3 20% 20% 40%
4 10% 30% 10%

The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows:

Product Units Selling Price
A 50,000 $ 4
B 125,000 10
C 62,500 6

Required:

Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.

209)

Lubriderm Corporation has the following budgeted sales for the next six-month period:

Month Unit Sales
June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month.

Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds.

Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.

210)

Gerdie Company has the following information:

Month Budgeted Sales
March $50,000
April 53,000
May 51,000
June 54,500
July 52,500

In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month’s cost of sales.

Required:
Prepare a purchases budget for April through June.

211)

Favata Company has the following information:

Month Budgeted Sales
June $60,000
July 51,000
August 40,000
September 70,000
October 72,000

In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month’s cost of sales.

Required:
Prepare a purchases budget for July through September.

212)

Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.30 per foot of framing, $6.00 per square foot of glass, and $2.25 per square foot of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired.

Required:

a. Determine the quantity of framing, glass, and backing that is to be purchased during August.
b. Determine the total costs of direct materials for August purchases.

213)

Michelle Enterprises reports the year-end information from 20X5 as follows:

Sales (100,000 units) $250,000
Less: Cost of goods sold 150,000
Gross profit 100,000
Operating expenses (includes $10,000 of Depreciation) 60,000
Net income $ 40,000

Michelle is developing the 20X6 budget. In 20X6 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable.

Required:

Prepare a budgeted income statement for 20X6.

214)

Brad Corporation is using the kaizen approach to budgeting for 20X5. The budgeted income statement for January 20X5 is as follows:

Sales (240,000 units) $720,000
Less: Cost of goods sold 480,000

Gross margin 240,000
Operating expenses (includes $64,000 of fixed costs) 192,000

Net income $ 48,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.

Required:

Prepare a kaizen-based budgeted income statement for March of 20X5.

215)

Allscott Company is developing its budgets for 20X5 and, for the first time, will use the kaizen approach. The initial 20X5 income statement, based on static data from 20X4, is as follows:

Sales (140,000 units) $420,000
Less: Cost of goods sold 280,000

Gross margin 140,000
Operating expenses (includes $28,000 of depreciation) 112,000

Net income $28,000

Selling prices for 20X5 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%.

Required:

Prepare a kaizen-based budgeted income statement for 20X5.

216)

Russell Company has the following projected account balances for June 30, 20X5:

Accounts payable $40,000 Sales $800,000
Accounts receivable 100,000 Capital stock 400,000
Depreciation, factory 24,000 Retained earnings ?
Inventories (5/31 & 6/30) 180,000 Cash 56,000
Direct materials used 200,000 Equipment, net 240,000
Office salaries 80,000 Buildings, net 400,000
Insurance, factory 4,000 Utilities, factory 16,000
Plant wages 140,000 Selling expenses 60,000
Bonds payable 160,000 Maintenance, factory 28,000

Required:
a. Prepare a budgeted income statement for June 20X5.
b. Prepare a budgeted balance sheet as of June 30, 20X5.

217)

Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 20,000 units of Big and 10,000 units of Bigger. Shamokin plans on having an ending inventory of 4,000 units of Big and 2,000 units of Bigger. Currently, Shamokin has 1,000 units of Big in its inventory and 800 units of Bigger. Each product requires two labor operations: molding and polishing. Product Big requires one hour of molding time and one hour of polishing time. Product Bigger requires one hour of molding time and two hours of polishing time. The direct labor rate for molders is $20 per molding hour, and the direct labor rate for polishers is $25 per polishing hour.

Required:

Prepare a direct labor budget in hours and dollars for each product.

218)

Duffy Corporation has prepared the following sales budget:

Month Cash Sales Credit Sales
May $16,000 $68,000
June 20,000 80,000
July 18,000 74,000
August 24,000 92,000
September 22,000 76,000

Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible.

Required:

Prepare a schedule of cash collections for July through September.

219)

The following information pertains to Amigo Corporation:

Month Sales Purchases
July $30,000 $10,000
August 34,000 12,000
September 38,000 14,000
October 42,000 16,000
November 48,000 18,000
December 60,000 20,000

∙ Cash is collected from customers in the following manner:
Month of sale (2% cash discount) 30%
Month following sale 50%
Two months following sale 15%
Amount uncollectible 5%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.

Required:

a. Prepare a summary of cash collections for the 4th quarter.
b. Prepare a summary of cash disbursements for the 4th quarter.

220)

Describe the benefits to an organization of preparing an operating budget.

221)

Bob and Dale have just purchased a small honey manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company’s main problem was the lack of any financial planning. The company made a good product and market potential was great.

Required:

Explain why a company needs a good budgeting plan. Specifically address the need for a master budget.

222)

Describe operating and financial budgets and give at least two examples of each discussed in the textbook.

223)

Discuss the importance of the sales forecast and items that influence its accuracy.

224)

Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use sensitivity analysis in practice.

225)

Describe the concept of kaizen budgeting.

226)

Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally control all revenue and costs? Why or why not?

227)

Describe some of the drawbacks of using the operating budget as a control device.

228)

What is budget slack? What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager?

229)

How is budgeting for a multinational corporation different than budgeting for a corporation that is strictly domestic?

Chapter 7

Flexible Budgets, Direct-Cost Variances, and Management Control

1)

The master budget is one type of flexible budget.

2)

A flexible budget is calculated at the start of the budget period.

3)

Information regarding the causes of variances is provided when the master budget is compared with actual results.

4)

A variance is the difference between the actual cost for the current and previous year.

5)

A favorable variance results when budgeted revenues exceed actual revenues.

6)

Management by exception is the practice of concentrating on areas not operating as anticipated (such as a cost overrun) and placing less attention on areas operating as anticipated.

7)

The essence of variance analysis is to capture a departure from what was expected.

8)

A favorable variance should be ignored by management.

9)

An unfavorable variance may be due to poor planning rather than due to inefficiency.

10)

The only difference between the static budget and flexible budget is that the static budget is prepared using planned output.

11)

The static-budget variance can be subdivided into the flexible-budget variance and the sales-volume variance.

12)

The flexible-budget variance may be the result of inaccurate forecasting of units sold.

13)

Decreasing demand for a product may create a favorable sales-volume variance.

14)

An unfavorable variance is conclusive evidence of poor performance.

15)

A company would not need to use a flexible budget if it had perfect foresight about actual output units.

16)

The flexible-budget variance pertaining to revenues is often called a selling-price variance.

17)

Cost control is the focus of the sales-volume variance.

18)

The term efficiency variance is the direct-cost portion of the flexible-budget variance.

19)

Managers generally have more control over efficiency variances than price variances.

20)

To prepare budgets based on actual data from past periods is preferred since past inefficiencies are excluded.
21)

All budgets are based on standard costs.

22)

A standard is attainable through efficient operations but allows for normal disruptions such as machine breakdowns and defective production.

23)

One advantage of using standard times to develop a budget is they are simple to compile, are based solely on the past actual history, and do not require expected future changes to be taken into account.

24)

The presumed cause of a material price variance will determine how a company responds.

25)

The price variance is the difference between the actual price and the budgeted price of the input, multiplied by the actual quantity of input.

26)

For any actual level of output, the efficiency variance is the difference between actual quantity of input used and the budgeted quantity of input allowed to produce actual output, multiplied by the actual price.

27)

The use of high-quality raw materials is likely to result in a favorable efficiency variance and an unfavorable price variance.

28)

The direct manufacturing labor price variance is likely to be favorable if higher-skilled workers are put on a job.

29)

Although computed separately, price variances and efficiency variances should not be analyzed separately from each other.

30)

A favorable variance can be automatically interpreted as “good news.”
31)

Variances often affect each other.

32)

If variance analysis is used for performance evaluation, managers are encouraged to meet targets using creativity and resourcefulness.

33)

When using variance for performance evaluation, managers often focus on effectiveness and efficiency as two of the common attributes used in comparing expected results with actual results.

34)

For critical items such as product defects, a small variance may prompt investigation.

35)

A particular variance generally signals one particular problem.

36)

If budgets contain slack, cost variances will tend to be favorable.

37)

Continuous improvement budgeted costs target price reductions and efficiency improvements.

38)

Improvement opportunities are easier to identify when products have been on the market for a considerable period of time.

39)

It is best to rely totally on financial performance measures rather than using a combination of financial and nonfinancial performance measures.

40)

From the perspective of control, the direct materials price variance should be isolated at the time the direct materials are requisitioned for use.

41)

The goal of variance analysis is for managers to understand why variances arise, to learn, and to improve future performance.

42)

Employees logging in to production floor terminals and other modern technologies greatly facilitate the use of a standard costing system.

43)

Performance variance analysis can be used in activity-based costing systems.

44)

Price variances can be calculated for batch-level costs as well as for output unit-level costs.

45)

Benchmarking is the continuous process of measuring products, services, and activities against the best possible levels of performance, either inside or outside the organization.

46)

When benchmarking, the best levels of performance are typically found in companies that are totally different.

47)

One problem with benchmarking is ensuring that numbers are comparable.

48)

When benchmarking it is best when management accountants simply analyze the costs and allow management to provide the insight as to why the revenues and costs differ between companies.

49)

The master budget is:
A)

a flexible budget
B)

a static budget
C)

developed at the end of the period
D)

based on the actual level of output

50)

A flexible budget:
A)

is another name for management by exception
B)

is developed at the end of the period
C)

is based on the budgeted level of output
D)

provides favorable operating results

51)

Management by exception is the practice of concentrating on:
A)

the master budget
B)

areas not operating as anticipated
C)

favorable variances
D)

unfavorable variances

52)

A variance is:
A)

the gap between an actual result and a benchmark amount
B)

the required number of inputs for one standard output
C)

the difference between an actual result and a budgeted amount
D)

the difference between a budgeted amount and a standard amount

53)

An unfavorable variance indicates that:
A)

actual costs are less than budgeted costs
B)

actual revenues exceed budgeted revenues
C)

the actual amount decreased operating income relative to the budgeted amount
D)

All of these answers are correct.

54)

A favorable variance indicates that:
A)

budgeted costs are less than actual costs
B)

actual revenues exceed budgeted revenues
C)

the actual amount decreased operating income relative to the budgeted amount
D)

All of these answers are correct.

Answer the following questions using the information below:

Abernathy Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit.

Actual Budgeted
Units sold 92,000 units 90,000 units
Variable costs $450,800 $432,000
Fixed costs $ 95,000 $100,000

55)

What is the static-budget variance of revenues?
A)

$20,000 favorable
B)

$20,000 unfavorable
C)

$2,000 favorable
D)

$2,000 unfavorable

56)

What is the static-budget variance of variable costs?
A)

$1,200 favorable
B)

$18,800 unfavorable
C)

$20,000 favorable
D)

$1,200 unfavorable

57)

What is the static-budget variance of operating income?
A)

$3,800 favorable
B)

$3,800 unfavorable
C)

$6,200 favorable
D)

$6,200 unfavorable

Answer the following questions using the information below:

Bates Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit.

Actual Budgeted
Units sold 495,000 units 500,000 units
Variable costs $1,250,000 $1,500,000
Fixed costs $ 925,000 $ 900,000

58)

What is the static-budget variance of revenues?
A)

$50,000 favorable
B)

$50,000 unfavorable
C)

$5,000 favorable
D)

$5,000 unfavorable

59)

What is the static-budget variance of variable costs?
A)

$200,000 favorable
B)

$50,000 unfavorable
C)

$250,000 favorable
D)

$250,000 unfavorable

60)

What is the static-budget variance of operating income?
A)

$175,000 favorable
B)

$195,000 unfavorable
C)

$225,000 favorable
D)

$325,000 unfavorable

Answer the following questions using the information below:

Racine Filter Corporation used the following data to evaluate their current operating system. The company sells items for $14.50 each and had used a budgeted selling price of $15 per unit.

Actual Budgeted
Units sold 206,000 units 200,000 units
Variable costs $965,000 $950,000
Fixed costs $ 53,000 $ 50,000

61)

What is the static-budget variance of revenues?
A)

$90,000 favorable
B)

$13,000 favorable
C)

$13,000 unfavorable
D)

$6,000 favorable

62)

What is the static-budget variance of variable costs?
A)

$13,000 favorable
B)

$13,000 unfavorable
C)

$15,000 favorable
D)

$15,000 unfavorable

63)

What is the static-budget variance of operating income?
A)

$31,000 unfavorable
B)

$26,000 favorable
C)

$28,000 favorable
D)

$28,000 unfavorable

64)

Regier Company had planned for operating income of $10 million in the master budget but actually achieved operating income of only $7 million.
A)

The static-budget variance for operating income is $3 million favorable.
B)

The static-budget variance for operating income is $3 million unfavorable.
C)

The flexible-budget variance for operating income is $3 million favorable.
D)

The flexible-budget variance for operating income is $3 million unfavorable.

65)

The flexible budget contains:
A)

budgeted amounts for actual output
B)

budgeted amounts for planned output
C)

actual costs for actual output
D)

actual costs for planned output

66)

The following items are the same for the flexible budget and the master budget EXCEPT the same:
A)

variable cost per unit
B)

total fixed costs
C)

units sold
D)

sales price per unit

67)

The sales-volume variance is due to:
A)

using a different selling price from that budgeted
B)

inaccurate forecasting of units sold
C)

poor production performance
D)

Both A and B are correct.

68)

An unfavorable sales-volume variance could result from:
A)

decreased demand for the product
B)

competitors taking market share
C)

customer dissatisfaction with the product
D)

All of these answers are correct.

69)

If a sales-volume variance was caused by poor-quality products, then the ________ would be in the best position to explain the variance.
A)

production manager
B)

sales manager
C)

purchasing manager
D)

management accountant

70)

The variance that is BEST for measuring operating performance is the:
A)

static-budget variance
B)

flexible-budget variance
C)

sales-volume variance
D)

selling-price variance

71)

An unfavorable flexible-budget variance for variable costs may be the result of:
A)

using more input quantities than were budgeted
B)

paying higher prices for inputs than were budgeted
C)

selling output at a higher selling price than budgeted
D)

Both A and B are correct.

72)

An unfavorable variance:
A)

may suggest investigation is needed
B)

is conclusive evidence of poor performance
C)

demands that standards be recomputed
D)

indicates continuous improvement is needed

73)

All of the following are needed to prepare a flexible budget EXCEPT determining the:
A)

budgeted variable cost per output unit
B)

budgeted fixed costs
C)

actual selling price per unit
D)

actual quantity of output units

74)

The variance that LEAST affects cost control is the:
A)

flexible-budget variance
B)

direct-material-price variance
C)

sales-volume variance
D)

direct manufacturing labor efficiency variance

75)

A flexible-budget variance is $800 favorable for unit-related costs. This indicates that costs were:
A)

$800 more than the master budget
B)

$800 less than for the planned level of activity
C)

$800 more than standard for the achieved level of activity
D)

$800 less than standard for the achieved level of activity

Answer the following questions using the information below:

JJ White planned to use $82 of material per unit but actually used $80 of material per unit, and planned to make 1,200 units but actually made 1,000 units.

76)

The flexible-budget amount is:
A)

$80,000
B)

$82,000
C)

$96,000
D)

$98,400

77)

The flexible-budget variance is:
A)

$2,000 favorable
B)

$14,000 unfavorable
C)

$16,400 unfavorable
D)

$2,400 favorable

78)

The sales-volume variance is:
A)

$2,000 favorable
B)

$14,000 unfavorable
C)

$16,400 unfavorable
D)

$2,400 favorable

79)

Aebi Corporation currently produces cardboard boxes in an automated process. Expected production per month is 20,000 units, direct-material costs are $0.60 per unit, and manufacturing overhead costs are $9,000 per month. Manufacturing overhead is allocated based on units of production. What is the flexible budget for 10,000 and 20,000 units, respectively?
A)

$10,500; $16,500
B)

$10,500; $21,000
C)

$15,000; $21,000
D)

None of these answers are correct.

Answer the following questions using the information below:

McKenna Incorporated planned to use $24 of material per unit but actually used $25 of material per unit, and planned to make 1,000 units but actually made 1,200 units.

80)

The flexible-budget amount is:
A)

$24,000
B)

$25,000
C)

$28,800
D)

$30,000

81)

The flexible-budget variance is:
A)

$4,800 favorable
B)

$1,200 unfavorable
C)

$5,000 unfavorable
D)

$6,000 favorable

82)

The sales-volume variance is:
A)

$4,800 favorable
B)

$1,200 unfavorable
C)

$5,000 unfavorable
D)

$6,000 favorable

Answer the following questions using the information below:

Seldon Incorporated planned to use $37.50 of material per unit but actually used $36.75 of material per unit, and planned to make 900 units but actually made 800 units.

83)

The flexible-budget amount is:
A)

$30,000
B)

$33,750
C)

$29,400
D)

$600

84)

The flexible-budget variance is:
A)

$3,750 favorable
B)

$3,750 unfavorable
C)

$600 unfavorable
D)

$600 favorable

85)

The sales-volume variance is:
A)

$3,750 favorable
B)

$3,750 unfavorable
C)

$600 unfavorable
D)

$600 favorable

86)

Hemberger Corporation currently produces baseball caps in an automated process. Expected production per month is 20,000 units, direct material costs are $1.50 per unit, and manufacturing overhead costs are $23,000 per month. Manufacturing overhead is allocated based on units of production. What is the flexible budget for 10,000 and 20,000 units, respectively?
A)

$26,500; $41,500
B)

$26,500; $53,000
C)

$38,000; $53,000
D)

None of these answers are correct.

Answer the following questions using the information below:

The actual information pertains to the month of August. As part of the budgeting process, Alloway’s Fencing Company developed the following static budget for August. Alloway is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static
Results Budget Budget
Sales volume (in units) 20,000 25,000

Sales revenues $1,000,000 $ $1,250,000
Variable costs 512,000 $ ________ 600,000

Contribution margin 488,000 $ 650,000

Fixed costs 458,000 $ ________ 450,000
Operating profit $ 30,000 $ $ 200,000

87)

The flexible budget will report ________ for variable costs.
A)

$512,000
B)

$600,000
C)

$480,000
D)

$640,000

88)

The flexible budget will report ________ for the fixed costs.
A)

$458,000
B)

$450,000
C)

$360,000
D)

$572,500

89)

The flexible-budget variance for variable costs is:
A)

$32,000 unfavorable
B)

$120,000 unfavorable
C)

$32,000 favorable
D)

$120,000 favorable

90)

The PRIMARY reason for low operating profits was:
A)

the variable-cost variance
B)

increased fixed costs
C)

a poor management accounting system
D)

lower sales volume than planned

Answer the following questions using the information below:

The actual information pertains to the third quarter. As part of the budgeting process, the Duck Decoy Department of Wooden Figurines Incorporated had developed the following static budget for the third quarter. Duck Decoy is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static
Results Budget Budget
Sales volume (in units) 13,000 12,000

Sales revenues $257,500 $ $250,000
Variable costs 154,000 $ ________ 175,000

Contribution margin 103,500 $ 75,000

Fixed costs 50,500 $ ________ 49,500
Operating profit $ 53,000 $ $ 25,500

91)

The flexible budget will report ________ for variable costs.
A)

$154,000
B)

$189,583
C)

$175,000
D)

$13,583

92)

The flexible budget will report ________ for the fixed costs.
A)

$50,500
B)

$49,500 Favorable
C)

$49,500
D)

$1,000 Unfavorable

93)

The flexible-budget variance for variable costs is:
A)

$21,000 favorable
B)

$13,583 unfavorable
C)

$35,583 unfavorable
D)

$35,583 favorable

94)

The PRIMARY reason for high actual operating profits was:
A)

the variable-cost variance
B)

increased fixed costs
C)

higher sales volume than planned
D)

lower sales volume than planned

Answer the following questions using the information below:

Peters’ Company manufactures tires. Some of the company’s data was misplaced. Use the following information to replace the lost data:

Actual Results Flexible Budget Variances Flexible Budget Sales-Volume Variances Static Budget
Units sold 225,000 225,000 206,250
Revenues $84,160 $2,000 F (A) $2,800 U (B)
Variable costs (C) $400 U $31,720 $4,680 F $36,400
Fixed costs $16,560 $1,720 F $18,280 0 $18,280
Operating income $35,480 (D) $32,160 (E) $30,280

95)

What amounts are reported for revenues in the flexible-budget (A) and the static-budget (B), respectively?
A)

$82,160; $79,360
B)

$82,160; $84,960
C)

$84,960; $88,960
D)

$84,960; $83,360

96)

What are the actual variable costs (C)?
A)

$36,400
B)

$32,120
C)

$31,320
D)

$27,040

97)

What is the total flexible-budget variance (D)?
A)

$120 unfavorable
B)

$0
C)

$680 favorable
D)

$3,320 favorable

98)

What is the total sales-volume variance (E)?
A)

$7,480 unfavorable
B)

$2,800 unfavorable
C)

$1,880 favorable
D)

$7,480 favorable

99)

What is the total static-budget variance?
A)

$5,200 favorable
B)

$3,320 favorable
C)

$1,880 unfavorable
D)

$1,880 favorable

100)

The flexible-budget variance for direct cost inputs can be further subdivided into a:
A)

static-budget variance and a sales-volume variance
B)

sales-volume variance and an efficiency variance
C)

price variance and an efficiency variance
D)

static-budget variance and a price variance

101)

Budgeted input quantity information may be obtained from:
A)

actual input quantities used last period
B)

standards developed by your company
C)

data from other companies that have similar processes
D)

All of these answers are correct.

102)

When actual input data from past periods is used to develop a budget:
A)

past inefficiencies are excluded
B)

expected future changes are incorporated
C)

information is available at a low cost
D)

audited financial information must be used

103)

When standards are used to develop a budget:
A)

past inefficiencies are excluded
B)

benchmarking must also be used
C)

information is available at a low cost
D)

flexible-budget amounts are difficult to determine

104)

The term budget indicates:
A)

that standards have been used to develop the budget
B)

that actual input data from past periods have been used to develop the budget
C)

that engineering studies have been used to develop the budget
D)

planned amounts for a future accounting period

105)

A standard input:
A)

is a carefully determined price, cost, or quantity
B)

is usually expressed on a per unit basis
C)

may be developed using engineering studies
D)

All of these answers are correct.

106)

Ideal standards:
A)

assume peak operating conditions
B)

allow for normal machine breakdowns
C)

greatly improve employee motivation and performance
D)

All of these answers are correct..

107)

A favorable price variance for direct materials indicates that:
A)

a lower price than planned was paid for materials
B)

a higher price than planned was paid for materials
C)

less material was used during production than planned for actual output
D)

more material was used during production than planned for actual output

108)

A favorable efficiency variance for direct manufacturing labor indicates that:
A)

a lower wage rate than planned was paid for direct labor
B)

a higher wage rate than planned was paid for direct labor
C)

less direct manufacturing labor-hours were used during production than planned for actual output
D)

more direct manufacturing labor-hours were used during production than planned for actual output

109)

An unfavorable price variance for direct materials might indicate:
A)

that the purchasing manager purchased in smaller quantities due to a change to just-in-time inventory methods
B)

congestion due to scheduling problems
C)

that the purchasing manager skillfully negotiated a better purchase price
D)

that the market had an unexpected oversupply of those materials

110)

A favorable efficiency variance for direct materials might indicate:
A)

that lower-quality materials were purchased
B)

an overskilled workforce
C)

poor design of products or processes
D)

a lower-priced supplier was used

111)

A favorable price variance for direct manufacturing labor might indicate that:
A)

employees were paid more than planned
B)

budgeted price standards are too tight
C)

underskilled employees are being hired
D)

an efficient labor force

112)

An unfavorable efficiency variance for direct manufacturing labor might indicate that:
A)

work was efficiently scheduled
B)

machines were not properly maintained
C)

budgeted time standards are too lax
D)

more higher-skilled workers were scheduled than planned

Answer the following questions using the information below:

Robb Industries, Inc. (RII), developed standard costs for direct material and direct labor. In 2004, RII estimated the following standard costs for one of their major products, the 10-gallon plastic container.

Budgeted quantity Budgeted price
Direct materials 0.10 pounds $30 per pound
Direct labor 0.05 hours $15 per hour

During June, RII produced and sold 5,000 containers using 490 pounds of direct materials at an average cost per pound of $32 and 250 direct manufacturing labor-hours at an average wage of $15.25 per hour.

113)

June’s direct material flexible-budget variance is:
A)

$980 unfavorable
B)

$300 favorable
C)

$680 unfavorable
D)

None of these answers are correct.

114)

June’s direct material price variance is:
A)

$980 unfavorable
B)

$300 favorable
C)

$680 favorable
D)

None of these answers are correct.

115)

June’s direct material efficiency variance is:
A)

$980 unfavorable
B)

$300 favorable
C)

$680 favorable
D)

None of these answers are correct.

116)

June’s direct manufacturing labor price variance is:
A)

$62.50 unfavorable
B)

$62.50 favorable
C)

$3,811.75 unfavorable
D)

None of these answers are correct.

117)

June’s direct manufacturing labor efficiency variance is:
A)

$62.50 unfavorable
B)

$62.50 favorable
C)

$3,811.75 unfavorable
D)

None of these answers are correct.

Answer the following questions using the information below:

Sawyer Industries, Inc. (SII), developed standard costs for direct material and direct labor. In 2004, SII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.

Budgeted quantity Budgeted price
Direct materials 0.20 pounds $25 per pound
Direct labor 0.10 hours $15 per hour

During July, SII produced and sold 10,000 containers using 2,200 pounds of direct materials at an average cost per pound of $24 and 1,050 direct manufacturing labor hours at an average wage of $14.75 per hour.

118)

July’s direct material flexible-budget variance is:
A)

$2,800 unfavorable
B)

$2,200 favorable
C)

$5,000 unfavorable
D)

None of these answers are correct.

119)

July’s direct material price variance is:
A)

$2,800 favorable
B)

$2,200 favorable
C)

$5,000 unfavorable
D)

None of these answers are correct.

120)

July’s direct material efficiency variance is:
A)

$2,800 unfavorable
B)

$2,200 favorable
C)

$5,000 unfavorable
D)

None of these answers are correct.

121)

July’s direct manufacturing labor flexible-budget variance is:
A)

$750.00 unfavorable
B)

$262.50 favorable
C)

$487.50 unfavorable
D)

None of these answers are correct.

122)

July’s direct manufacturing labor price variance is:
A)

$750.00 unfavorable
B)

$262.50 favorable
C)

$487.50 favorable
D)

None of these answers are correct.

123)

July’s direct manufacturing labor efficiency variance is:
A)

$750.00 unfavorable
B)

$262.50 favorable
C)

$487.50 favorable
D)

None of these answers are correct.

Answer the following questions using the information below:

Apple Valley Orchards, Inc. (AVO), developed standard costs for direct material and direct labor. In 2008, AVO estimated the following standard costs for one of their most well loved products, the AVO classic Grandma’s large apple pie which had a brown sugar coating on the top of the crust as well as including cranberry and mince ingredients in addition to the apples.

Budgeted quantity Budgeted price
Direct materials 1.5 pounds $7.25 per pound
Direct labor 0.25 hours $14.00 per hour

During September, AVO produced and sold 1,200 pies using 1,875 pounds of direct materials at an average cost per pound of $7.00 and 280 direct labor hours at an average wage of $14.25 per hour.

124)

September’s direct material flexible-budget variance is:
A)

$100.00 unfavorable
B)

$100.00 favorable
C)

$75.00 unfavorable
D)

None of these answers are correct.

125)

September’s direct material price variance is:
A)

$468.75 favorable
B)

$468.75 unfavorable
C)

$75.00 unfavorable
D)

None of these answers are correct.

126)

September’s direct material efficiency variance is:
A)

$468.75 favorable
B)

$468.75 unfavorable
C)

$543.75 favorable
D)

$543.75 unfavorable

127)

September’s direct labor flexible-budget variance is:
A)

$210.00 favorable
B)

$210.00 unfavorable
C)

$280.00 favorable
D)

$280.00 unfavorable.

128)

September’s direct labor price variance is:
A)

$210.00 unfavorable
B)

$210.00 favorable
C)

$70.00 unfavorable
D)

$70.00 favorable

129)

September’s direct labor efficiency variance is:
A)

$280.00 favorable
B)

$280.00 unfavorable
C)

$210.00 favorable
D)

$210.00 unfavorable

Answer the following questions using the information below:

These questions refer to flexible-budget variance formulas with the following descriptions for the variables: A = Actual; B = Budgeted; P = Price; Q = Quantity.

130)

The best label for the formula (AQ – BQ) BP is the:
A)

efficiency variance
B)

price variance
C)

total flexible-budget variance
D)

spending variance

131)

The best label for the formula (AP – BP) AQ is the:
A)

efficiency variance
B)

price variance
C)

total flexible-budget variance
D)

spending variance

132)

The best label for the formula [(AP)(AQ) – (BP)(AQ)] is the:
A)

efficiency variance
B)

price variance
C)

total flexible-budget variance
D)

spending variance

133)

The best label for the formula [(AP)(AQ) – (BP)(BQ)] is the:
A)

efficiency variance.
B)

price variance
C)

total flexible-budget variance
D)

spending variance

Answer the following questions using the information below:

Ruben’s Camera Shop has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances
Budget Price Efficiency
Material A $20,000 $1,000F $3,000U
Material B 30,000 500U 1,500F
Direct manufacturing labor 40,000 500U 2,500F

134)

The MOST likely explanation of the above variances for Material A is that:
A)

a lower price than expected was paid for Material A
B)

higher-quality raw materials were used than were planned
C)

the company used a higher-priced supplier
D)

Material A used during September was $2,000 less than expected

135)

The actual amount spent for Material B was:
A)

$28,000
B)

$29,000
C)

$30,000
D)

$31,000

136)

The actual amount spent for direct manufacturing labor was:
A)

$40,000
B)

$43,000
C)

$42,000
D)

$38,000

137)

The MOST likely explanation of the above direct manufacturing labor variances is that:
A)

the average wage rate paid to employees was less than expected
B)

employees did not work as efficiently as expected to accomplish the job
C)

the company may have assigned more experienced employees this month than originally planned
D)

management may have a problem with budget slack and might be using lax standards for both labor-wage rates and expected efficiency

Answer the following questions using the information below:

Hector’s Camera Shop has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances
Budget Price Efficiency
Material A $20,000 $1,000U $1,200F
Material B 30,000 500F 800U
Material C 40,000 1,400U 1,000F

138)

The actual amount spent for Material A was:
A)

$18,800
B)

$20,200
C)

$19,800
D)

$21,000

139)

The actual amount spent for Material B was:
A)

$29,700
B)

$30,800
C)

$30,500
D)

$30,300

140)

The explanation that lower-quality materials were purchased is MOST likely for:
A)

Material A
B)

Material B
C)

Material C
D)

both Material A and C

141)

A purchasing manager’s performance is BEST evaluated using the:
A)

direct materials price variance
B)

direct materials flexible-budget variance
C)

direct manufacturing labor flexible-budget variance
D)

affect the manager’s action has on total costs for the entire company

142)

One of the primary reasons for using cost variances is:
A)

they diagnose the cause of a problem and what should be done to correct it
B)

for superiors to communicate expectations to lower-level employees
C)

to administer appropriate disciplinary action
D)

for financial control of operating activities and understanding why variances arise

143)

A favorable cost variance of significant magnitude:
A)

is the result of good planning
B)

if investigated, may lead to improved production methods
C)

indicates management does not need to be concerned about lax standards
D)

does not need to be investigated

144)

The variances that should be investigated by management include:
A)

only unfavorable variances
B)

only favorable variances
C)

all variances, both favorable and unfavorable
D)

both favorable and unfavorable variances considered significant in amount for the company

145)

Typically, managers have the LEAST control over:
A)

the direct material price variance
B)

the direct material efficiency variance
C)

machine maintenance
D)

the scheduling of production

146)

If manufacturing machines are breaking down more than expected, this will contribute to a(n):
A)

favorable direct manufacturing labor price variance
B)

unfavorable direct manufacturing labor price variance
C)

favorable direct manufacturing labor efficiency variance
D)

unfavorable direct manufacturing labor efficiency variance

147)

A single variance:
A)

signals the cause of a problem
B)

should be evaluated in isolation from other variances
C)

may be the result of many different problems
D)

should be used for performance evaluation

148)

Variance analysis should be used:
A)

to understand why variances arise
B)

as the sole source of information for performance evaluation
C)

to punish employees that do not meet standards
D)

to encourage employees to focus on meeting standards

149)

Variances should be investigated:
A)

when they are kept below a certain amount
B)

when there is a small variance for critical items such as product defects
C)

even though the cost of investigation exceeds the benefit
D)

when there is an in-control occurrence

150)

When continuous improvement budgeted costing is implemented, cost reductions can result from:
A)

price reductions
B)

reducing materials waste
C)

producing products faster and more efficiently
D)

All of these answers are correct.

151)

Nonfinancial performance measures:
A)

are usually used in combination with financial measures for control purposes
B)

are used to evaluate overall cost efficiency
C)

allow managers to make informed tradeoffs
D)

are often the sole basis of a manager’s performance evaluations

152)

Unfavorable direct material price variances are:
A)

always credits
B)

always debits
C)

credited to the Materials Control account
D)

credited to the Accounts Payable Control account

153)

Favorable direct manufacturing labor efficiency variances are:
A)

always credits
B)

always debits
C)

debited to the Work-in-Process Control account
D)

debited to the Wages Payable Control account

154)

From the perspective of control, the direct materials efficiency variance should be isolated at the time of:
A)

purchase
B)

use
C)

completion of the entire product
D)

sale of the product

155)

Standard costing systems are a useful tool when using:
A)

just-in-time systems
B)

total quality management
C)

computer-integrated manufacturing systems
D)

All of these answers are correct.

156)

Performance variance analysis can be calculated for:
A)

output unit-level costs
B)

batch-level costs
C)

product-sustaining costs
D)

All of these answers are correct.

157)

A favorable efficiency variance for material-handling labor-hours per batch could result from:
A)

inefficient production-floor layouts compared to those expected when preparing the budget
B)

materials-handling labor waiting to pick up materials
C)

well-trained and experienced material-handling employees
D)

lower wages than planned for material-handling labor

158)

The process by which a company’s products or services are measured relative to the best possible levels of performance is known as:
A)

efficiency
B)

benchmarking
C)

a standard costing system
D)

variance analysis

159)

When benchmarking:
A)

the best levels of performance are usually found in companies that are within different industries
B)

finding appropriate benchmarks is a minor issue
C)

comparisons can highlight areas for better future cost management
D)

Both A and C are correct.

160)

Ensuring benchmark numbers are comparable can be difficult because differences can exist across companies with:
A)

overall company strategy
B)

depreciation methods
C)

inventory methods
D)

All of these answers are correct.

161)

When benchmarking, management accountants are MOST valuable when they:
A)

present differences in the benchmarking data to management
B)

highlight differences in the benchmarking data to management
C)

provide insight into why costs or revenues differ across companies
D)

provide complex mathematical analysis

162)

The president of the company, Gregory Peters, has come to you for help. Use the following data to prepare a flexible budget for possible sales/production levels of 10,000, 11,000, and 12,000 units. Show the contribution margin at each activity level.

Sales price $24 per unit
Variable costs:
Manufacturing $12 per unit
Administrative $ 3 per unit
Selling $ 1 per unit
Fixed costs:
Manufacturing $60,000
Administrative $20,000

163)

Strauss Table Company manufactures tables for schools. The 20X5 operating budget is based on sales of 20,000 units at $100 per table. Operating income is anticipated to be $120,000. Budgeted variable costs are $64 per unit, while fixed costs total $600,000.

Actual income for 20X5 was a surprising $354,000 on actual sales of 21,000 units at $104 each. Actual variable costs were $60 per unit and fixed costs totaled $570,000.

Required:
Prepare a variance analysis report with both flexible-budget and sales-volume variances.

164)

Nicholas Company manufacturers TVs. Some of the company’s data was misplaced. Use the following information to replace the lost data:

Analysis Actual
Results Flexible Variances Flexible Budget Sales-
Volume Variances Static Budget
Units Sold 112,500 112,500 103,125
Revenues $42,080 $1,000 F (A) $1,400 U (B)
Variable Costs (C) $200 U $15,860 $2,340 F $18,200
Fixed Costs $8,280 $860 F $9,140 $9,140
Operating Income $17,740 (D) $16,080 (E) $15,140

Required:
a. What are the respective flexible-budget revenues (A)?
b. What are the static-budget revenues (B)?
c. What are the actual variable costs (C)?
d. What is the total flexible-budget variance (D)?
e. What is the total sales-volume variance (E)?
f. What is the total static-budget variance?

165)

Madzinga’s Draperies manufactures curtains. A certain window requires the following:

Direct materials standard 10 square yards at $5 per yard
Direct manufacturing labor standard 5 hours at $10

During the second quarter, the company made 1,500 curtains and used 14,000 square yards of fabric costing $68,600. Direct labor totaled 7,600 hours for $79,800.

Required:
a. Compute the direct materials price and efficiency variances for the quarter.
b. Compute the direct manufacturing labor price and efficiency variances for the quarter.

166)

Wilson’s Winter Woolens manufactures jackets and other wool clothing. A certain designed ski parka requires the following:

Direct materials standard 2 square yards at $13.50 per yard
Direct manufacturing labor standard 1.5 hours at $20.00 per hour

During the third quarter, the company made 1,500 parkas and used 3,150 square yards of fabric costing $39,375. Direct labor totaled 2,100 hours for $45,150.

Required:
a. Compute the direct materials price and efficiency variances for the quarter.
b. Compute the direct manufacturing labor price and efficiency variances for the quarter.

167)

The following data for the Alma Company pertain to the production of 1,000 urns during August.

Direct Materials (all materials purchased were used):

Standard cost: $6.00 per pound of urn.
Total actual cost: $5,600.
Standard cost allowed for units produced was $6,000.
Materials efficiency variance was $120 unfavorable.

Direct Manufacturing Labor:

Standard cost is 2 urns per hour at $24.00 per hour.
Actual cost per hour was $24.50.
Labor efficiency variance was $336 favorable.

Required:

a. What is standard direct material amount per urn?
b. What is the direct material price variance?
c. What is the total actual cost of direct manufacturing labor?
d. What is the labor price variance for direct manufacturing labor?

168)

The following data for the Lewgrow Garden Supplies Company pertains to the production of 2,500 garden spades during March. The spade consists of a wooden handle and a metal forged tool that comes in contact with the ground.

Direct Materials (all materials purchased were used):

Standard cost: $1.00 per handle and $3.50 per metal tool.
Total actual cost: $11,350.
Materials flexible-budget efficiency variance was $650 unfavorable.

Direct Manufacturing Labor:

Standard cost is 5 garden spades per hour at $20.00 per hour.
Actual cost per hour was $21.00.
Labor efficiency variance was $400 favorable.

Required:

a. What is the standard direct material amount per garden spade?
b. What is the standard cost allowed for all units produced?
c. What is the total direct materials flexible-budget variance?
d. What is the direct material flexible-budget price variance?
e. What is the total actual cost of direct manufacturing labor?
f. What is the labor price variance for direct manufacturing labor?

169)

The following data for the telephone company pertain to the production of 450 rolls of telephone wire during June. Selected items are omitted because the costing records were lost in a windstorm.

Direct Materials (All materials purchased were used.)

Standard cost per roll: a pounds at $4.00 per pound.
Total actual cost: b pounds costing $9,600.
Standard cost allowed for units produced was $9,000.
Materials price variance: c .
Materials efficiency variance was $80 unfavorable.

Direct Manufacturing Labor

Standard cost is 3 hours per roll at $8.00 per hour.
Actual cost per hour was $8.25.
Total actual cost: d .
Labor price variance: e .
Labor efficiency variance was $400 unfavorable.

Required:
Compute the missing elements in the report represented by the lettered items.

170)

Littrell Company produces chairs and has determined the following direct cost categories and budgeted amounts:

Standard Inputs Standard Cost
Category for 1 output per input
Direct Materials 1.00 $7.50
Direct Labor 0.30 9.00
Direct Marketing 0.50 3.00

Actual performance for the company is shown below:

Actual output: (in units) 4,000
Direct Materials:
Materials costs $30,225
Input purchased and used 3,900
Actual price per input $7.75
Direct Manufacturing Labor:
Labor costs $11,470
Labor-hours of input 1,240
Actual price per hour $9.25
Direct Marketing Labor:
Labor costs $5,880
Labor-hours of input 2,100
Actual price per hour $2.80

Required:
a. What is the combined total of the flexible-budget variances?
b. What is the price variance of the direct materials?
c. What is the price variance of the direct manufacturing labor and the direct marketing labor, respectively?
d. What is the efficiency variance for direct materials?
e. What are the efficiency variances for direct manufacturing labor and direct marketing labor, respectively?

171)

Coffey Company maintains a very large direct materials inventory because of critical demands placed upon it for rush orders from large hospitals. Item A contains hard-to-get material Y. Currently, the standard cost of material Y is $2.00 per gram. During February, 22,000 grams were purchased for $2.10 per gram, while only 20,000 grams were used in production. There was no beginning inventory of material Y.

Required:

a. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the materials purchasing manager.
b. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the production manager.
c. Discuss the issues involved in determining the price variance at the point of purchase versus the point of consumption.

172)

During February the Lungren Manufacturing Company’s costing system reported several variances that the production manager was surprised to see. Most of the company’s monthly variances are under $125, even though they may be either favorable or unfavorable. The following information is for the manufacture of garden gates, its only product:

1. Direct materials price variance, $800 unfavorable.
2. Direct materials efficiency variance, $1,800 favorable.
3. Direct manufacturing labor price variance, $4,000 favorable.
4. Direct manufacturing labor efficiency variance, $600 unfavorable.

Required:

a. Provide the manager with some ideas as to what may have caused the price variances.
b. What may have caused the efficiency variances?

173)

Mayberry Company had the following journal entries recorded for the end of June. Unfortunately, the company’s only accountant quit on July 10 and the president is at a loss as to the company’s performance for the month of June.

Materials Control 150,000
Direct Materials Price Variance 5,000
Accounts Payable Control 145,000

Work-in-Process Control 60,000
Direct Materials Efficiency Variance 4,000
Materials Control 64,000

Work-in-Process Control 425,000
Direct Manufacturing Labor Price Variance 7,500
Direct Manufacturing Labor Efficiency Variance 9,000
Wages Payable Control 423,500

Required:

a. What kind of performance did the company have for June? Explain each variance.
b. Why is Direct Materials given in two entries?

174)

Waddell Productions makes separate journal entries for all cost accounting-related activities. It uses a standard cost system for all manufacturing items. For the month of June, the following activities have taken place:

Direct Manufacturing Materials Purchased $300,000
Direct Manufacturing Materials Used 250,000
Direct Materials Price Variance 10,000 unfavorable
(at time of purchase)
Direct Materials Efficiency Variance 15,000 favorable
Direct Manufacturing Labor Price Variance 6,000 favorable
Direct Manufacturing Labor Efficiency Variance 4,000 favorable
Direct Manufacturing Labor Payable 170,000

Required:

Record the necessary journal entries to close the accounts for the month.

175)

Tyson’s Hardware uses a flexible budget to develop planning information for its warehouse operations. For 20X5, the company anticipated that it would have 96,000 sales units for 664 customer shipments. Average storage bin usage for various inventories was estimated to be 200 per day. The costs and cost drivers were determined to be as follows:

Item Fixed Variable Cost driver
Product handling $10,000 $1.25 per 100 units
Storage 3.00 per storage bin
Utilities 1,000 1.50 per 100 units
Shipping clerks 1,000 1.00 per shipment
Supplies 0.50 per shipment

During the year, the warehouse processed 90,000 units for 600 customer shipments. The workers used 225 storage bins on average each day to sort, store, and process goods for shipment. The actual costs for 20X5 were:

Item Actual costs
Product handling $10,900
Storage 465
Utilities 2,020
Shipping clerks 1,400
Supplies 340

Required:
a. Prepare a static budget for 20X5 with static-budget variances.
b. Prepare a flexible budget for 20X5 with flexible-budget variances.

176)

Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance.

177)

The textbook discusses three levels of variances, Level 0, Level 1, Level 2, and Level 3. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels.

178)

Give at least three good reasons why a favorable price variance for direct materials might be reported.

179)

Give at least three good reasons why an unfavorable efficiency variance for direct manufacturing labor might be reported.

180)

Describe the purpose of variance analysis.

181)

Explain how variance analysis is used in conjunction with activity-based costing.

182)

What is benchmarking, and how is it useful to a company?

Chapter 8

Flexible Budgets, Overhead Cost Variances, and Management Control

1)

Overhead costs are a major part of costs for most companiesmore than 50% of all costs for some companies.

2)

At the start of the budget period, management will have made most decisions regarding the level of variable costs to be incurred.

3)

One way to manage both variable and fixed overhead costs is to eliminate nonvalue-adding activities.

4)

The planning of fixed overhead costs does not differ from the planning of variable overhead costs.

5)

In a standard costing system, the variable-overhead rate per unit is generally expressed as a standard cost per output unit.

6)

For calculating the cost of products and services, a standard costing system does not have to track actual costs.

7)

Standard costing is a cost system that allocates overhead costs on the basis of overhead cost rates based on actual overhead costs times the standard quantities of the allocation bases allowed for the actual outputs produced.

8)

The budget period for variable-overhead costs is typically less than 3 months.

9)

A favorable variable overhead spending variance can be the result of paying lower prices than budgeted for variable overhead items such as energy.

10)

The variable overhead efficiency variance is computed in a different way than the efficiency variance for direct-cost items.

11)

The variable overhead flexible-budget variance measures the difference between standard variable overhead costs and flexible-budget variable overhead costs.

12)

The variable overhead efficiency variance measures the efficiency with which the cost-allocation base is used.

13)

The variable overhead efficiency variance can be interpreted the same way as the efficiency variance for direct-cost items.

14)

An unfavorable variable overhead efficiency variance indicates that variable overhead costs were wasted and inefficiently used.

15)

Causes of a favorable variable overhead efficiency variance might include using lower-skilled workers than expected.

16)

If the production planners set the budgeted machine hours standards too tight, one could anticipate there would be an unfavorable variable overhead efficiency variance.

17)

If the production planners set the budgeted machine hours standards too tight, one could anticipate there would be an unfavorable fixed overhead efficiency variance.

18)

For fixed overhead costs, the flexible-budget amount is always the same as the static-budget amount.

19)

The fixed overhead flexible-budget variance is the difference between actual fixed overhead costs and the fixed overhead costs in the flexible budget.

20)

There is never an efficiency variance for fixed costs.

21)

All unfavorable overhead variances decrease operating income compared to the budget.

22)

A favorable fixed overhead flexible-budget variance indicates that actual fixed costs exceeded the lump-sum amount budgeted.

23)

Fixed costs for the period are by definition a lump sum of costs that remain unchanged and therefore the fixed overhead spending variance is always zero.

24)

Caution is appropriate before interpreting the production-volume variance as a measure of the economic cost of unused capacity.

25)

The production-volume variance arises whenever the actual level of the denominator differs from the level used to calculate the budgeted fixed overhead rate.

26)

The lump sum budgeted for fixed overhead will always be the same amount for the static budget and the flexible budget.

27)

A favorable production-volume variance arises when manufacturing capacity planned for is not used.

28)

The fixed overhead flexible budget variance is the difference between actual fixed overhead costs and fixed overhead costs in the flexible budget.

29)

An unfavorable production-volume variance always infers that management made a bad planning decision regarding the plant capacity.

30)

Favorable overhead variances are always recorded with credits in a standard cost system.

31)

Under activity-based costing, the flexible-budget amount equals the static-budget amount for fixed overhead costs.

32)

Managers should use unitized fixed manufacturing overhead costs for planning and control.

33)

For purposes of allocating fixed overhead costs to products, managers may view the fixed overhead costs as if they had a variable-cost behavior pattern.

34)

Both financial and nonfinancial performance measures are key inputs when evaluating the performance of managers.

35)

In the journal entry that records overhead variances, the manufacturing overhead allocated accounts are closed.

36)

Variance analysis of fixed nonmanufacturing costs, such as distribution costs, can also be useful when planning for capacity.

37)

At the end of the fiscal year, the fixed overhead spending variance is always written off to cost of goods sold.

38)

Variance analysis of fixed overhead costs is also useful when a company uses activity-based costing.
39)

An unfavorable fixed setup overhead spending variance could be due to higher lease costs of new setup equipment.

40)

A favorable variable setup overhead efficiency variance could be due to actual setup-hours exceeding the setup-hours planned for the units produced.

41)

Overhead costs have been increasing due to all of the following EXCEPT:
A)

increased automation
B)

more complexity in distribution processes
C)

tracing more costs as direct costs with the help of technology
D)

product proliferation

42)

Effective planning of variable overhead costs means that a company performs those variable overhead costs that primarily add value for:
A)

the current shareholders
B)

the customer using the products or services
C)

plant employees
D)

major suppliers of component parts

43)

Variable overhead costs include:
A)

plant-leasing costs
B)

the plant manager’s salary
C)

depreciation on plant equipment
D)

machine maintenance

44)

Fixed overhead costs include:
A)

the cost of sales commissions
B)

property taxes paid on plant facilities
C)

energy costs
D)

indirect materials

45)

Effective planning of fixed overhead costs includes all of the following EXCEPT:
A)

planning day-to-day operational decisions
B)

eliminating nonvalue-added costs
C)

planning to be efficient
D)

choosing the appropriate level of capacity

46)

Effective planning of variable overhead includes all of the following EXCEPT:
A)

choosing the appropriate level of capacity
B)

eliminating nonvalue-adding costs
C)

redesigning products to use fewer resources
D)

redesigning the plant layout for more efficient processing

47)

Choosing the appropriate level of capacity:
A)

is a key strategic decision
B)

may lead to loss of sales if overestimated
C)

may lead to idle capacity if underestimated
D)

All of these answers are correct.

48)

The MAJOR challenge when planning fixed overhead is:
A)

calculating total costs
B)

calculating the cost-allocation rate
C)

choosing the appropriate level of capacity
D)

choosing the appropriate planning period

49)

In a standard costing system, a cost-allocation base would MOST likely be:
A)

actual machine-hours
B)

normal machine-hours
C)

standard machine-hours
D)

Any of these answers is correct.

50)

For calculating the costs of products and services, a standard costing system:
A)

only requires a simple recording system
B)

uses standard costs to determine the cost of products
C)

does not have to keep track of actual costs
D)

All of these answers are correct.

51)

The variable overhead flexible-budget variance measures the difference between:
A)

actual variable overhead costs and the static budget for variable overhead costs
B)

actual variable overhead costs and the flexible budget for variable overhead costs
C)

the static budget for variable overhead costs and the flexible budget for variable overhead costs
D)

None of these answers is correct.

52)

A $5,000 unfavorable flexible-budget variance indicates that:
A)

the flexible-budget amount exceeded actual variable manufacturing overhead by $5,000
B)

the actual variable manufacturing overhead exceeded the flexible-budget amount by $5,000
C)

the flexible-budget amount exceeded standard variable manufacturing overhead by $5,000
D)

the standard variable manufacturing overhead exceeded the flexible-budget amount by $5,000

53)

Which of the following is NOT a step in developing budgeted variable overhead rates?
A)

identifying the variable overhead costs associated with each cost-allocation base
B)

estimating the budgeted denominator level based on expected utilization of available capacity
C)

selecting the cost-allocation bases to use
D)

choosing the period to be used for the budget

54)

In flexible budgets, costs that remain the same regardless of the output levels within the relevant range are:
A)

allocated costs
B)

budgeted costs
C)

fixed costs
D)

variable costs
Answer the following questions using the information below:

Shimon Corporation manufactures industrial-sized water coolers and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information pertains to the company’s manufacturing overhead data:

Budgeted output units 15,000 units
Budgeted machine-hours 5,000 hours
Budgeted variable manufacturing overhead costs for 15,000 units $161,250

Actual output units produced 22,000 units
Actual machine-hours used 7,200 hours
Actual variable manufacturing overhead costs $242,000

55)

What is the budgeted variable overhead cost rate per output unit?
A)

$10.75
B)

$11.00
C)

$32.25
D)

$48.40

56)

What is the flexible-budget amount for variable manufacturing overhead?
A)

$165,000
B)

$236,500
C)

$242,000
D)

None of these answers is correct.

57)

What is the flexible-budget variance for variable manufacturing overhead?
A)

$5,500 favorable
B)

$5,500 unfavorable
C)

$4,300 favorable
D)

None of these answers is correct.

58)

Variable manufacturing overhead costs were ________ for actual output.
A)

higher than expected
B)

the same as expected
C)

lower than expected
D)

indeterminable

Answer the following questions using the information below:

White Corporation manufactures football jerseys and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information pertains to the company’s manufacturing overhead data:

Budgeted output units 20,000 units
Budgeted machine-hours 30,000 hours
Budgeted variable manufacturing overhead costs for 20,000 units $360,000

Actual output units produced 18,000 units
Actual machine-hours used 28,000 hours
Actual variable manufacturing overhead costs $342,000

59)

What is the budgeted variable overhead cost rate per output unit?
A)

$12.00
B)

$12.21
C)

$18.00
D)

$19.00

60)

What is the flexible-budget amount for variable manufacturing overhead?
A)

$324,000
B)

$342,000
C)

$380,000
D)

None of these answers is correct.

61)

What is the flexible-budget variance for variable manufacturing overhead?
A)

$18,000 favorable
B)

$18,000 unfavorable
C)

zero
D)

None of these answers is correct.

62)

Variable-manufacturing overhead costs were ________ for actual output.
A)

higher than expected
B)

the same as expected
C)

lower than expected
D)

indeterminable

Answer the following questions using the information below:

Fearless Frank’s Fertalizer Farm produces fertalizer and distributes the product by using his tanker trucks. Frank’s uses budgeted fleet hours to allocate variable manufacturing overhead. The following information pertains to the company’s manufacturing overhead data:

Budgeted output units 300 truckloads
Budgeted fleet hours 225 hours
Budgeted pounds of fertalizer 12,000,000 pounds
Budgeted variable manufacturing overhead costs for 300 loads $37,500

Actual output units produced and delivered 315 truckloads
Actual fleet hours 218 hours
Actual pounds of fertalizer produced and delivered 12,600,000 pounds
Actual variable manufacturing overhead costs $38,250

63)

What is the budgeted variable overhead cost rate per output unit?
A)

$120.00
B)

$125.00
C)

$166.67
D)

$175.00

64)

What is the flexible-budget amount for variable manufacturing overhead?
A)

$40,000
B)

$39,375
C)

$37,500
D)

$38,250

65)

What is the flexible-budget variance for variable manufacturing overhead?
A)

$1,125 favorable
B)

$1,125 unfavorable
C)

zero
D)

None of these answers are correct.

66)

Variable-manufacturing overhead costs were ________ for actual output.
A)

higher than expected
B)

the same as expected
C)

lower than expected
D)

indeterminable

67)

The variable overhead flexible-budget variance can be further subdivided into the:
A)

price variance and the efficiency variance
B)

static-budget variance and sales-volume variance
C)

spending variance and the efficiency variance
D)

sales-volume variance and the spending variance

68)

An unfavorable variable overhead spending variance indicates that:
A)

variable overhead items were not used efficiently
B)

the price of variable overhead items was more than budgeted
C)

the variable overhead cost-allocation base was not used efficiently
D)

the denominator level was not accurately determined

69)

When machine-hours are used as an overhead cost-allocation base, the MOST likely cause of a favorable variable overhead spending variance is:
A)

excessive machine breakdowns
B)

the production scheduler efficiently scheduled jobs
C)

a decline in the cost of energy
D)

strengthened demand for the product

70)

When machine-hours are used as an overhead cost-allocation base and the unexpected purchase of a new machine results in fewer expenditures for machine maintenance, the MOST likely result would be to report a(n):
A)

favorable variable overhead spending variance
B)

unfavorable variable overhead efficiency variance
C)

favorable fixed overhead flexible-budget variance
D)

unfavorable production-volume variance

71)

For variable manufacturing overhead, there is no:
A)

spending variance
B)

efficiency variance
C)

flexible-budget variance
D)

production-volume variance

Answer the following questions using the information below:

Kellar Corporation manufactured 1,500 chairs during June. The following variable overhead data pertain to June:

Budgeted variable overhead cost per unit $ 12.00
Actual variable manufacturing overhead cost $16,800
Flexible-budget amount for variable manufacturing overhead $18,000
Variable manufacturing overhead efficiency variance $360 unfavorable

72)

What is the variable overhead flexible-budget variance?
A)

$1,200 favorable
B)

$360 unfavorable
C)

$1,560 favorable
D)

$1,200 unfavorable

73)

What is the variable overhead spending variance?
A)

$840 unfavorable
B)

$1,200 favorable
C)

$1,200 unfavorable
D)

$1,560 favorable

Answer the following questions using the information below:

Patel Corporation manufactured 1,000 coolers during October. The following variable overhead data pertain to October:

Budgeted variable overhead cost per unit $ 9.00
Actual variable manufacturing overhead cost $8,400
Flexible-budget amount for variable manufacturing overhead $9,000
Variable manufacturing overhead efficiency variance $180 unfavorable

74)

What is the variable overhead flexible-budget variance?
A)

$600 favorable
B)

$420 unfavorable
C)

$780 favorable
D)

$600 unfavorable

75)

What is the variable overhead spending variance?
A)

$420 unfavorable
B)

$600 favorable
C)

$600 unfavorable
D)

$780 favorable

Answer the following questions using the information below:

Roberts Corporation manufactured 100,000 buckets during February. The overhead cost-allocation base is $5.00 per machine-hour. The following variable overhead data pertain to February:

Actual Budgeted
Production 100,000 units 100,000 units
Machine-hours 9,800 hours 10,000 hours
Variable overhead cost per machine-hour $5.25 $5.00

76)

What is the actual variable overhead cost?
A)

$49,000
B)

$50,000
C)

$51,450
D)

None of these answers is correct.

77)

What is the flexible-budget amount?
A)

$49,000
B)

$50,000
C)

$51,450
D)

None of these answers is correct.

78)

What is the variable overhead spending variance?
A)

$1,000 favorable
B)

$1,450 unfavorable
C)

$2,450 unfavorable
D)

None of these answers is correct.

79)

What is the variable overhead efficiency variance?
A)

$1,000 favorable
B)

$1,450 unfavorable
C)

$2,450 unfavorable
D)

None of these answers is correct.

Answer the following questions using the information below:

Roberson Corporation manufactured 30,000 ice chests during September. The overhead cost-allocation base is $11.25 per machine-hour. The following variable overhead data pertain to September:

Actual Budgeted
Production 30,000 units 24,000 units
Machine-hours 15,000 hours 10,800 hours
Variable overhead cost per machine-hour: $11.00 $11.25

80)

What is the actual variable overhead cost?
A)

$121,500
B)

$151,875
C)

$165,000
D)

$168,750

81)

What is the flexible-budget amount?
A)

$121,500
B)

$151,875
C)

$165,000
D)

$168,750

82)

What is the variable overhead spending variance?
A)

$3,750 favorable
B)

$16,875 unfavorable
C)

$13,125 unfavorable
D)

$30,375 unfavorable

83)

What is the variable overhead efficiency variance?
A)

$3,750 favorable
B)

$16,875 unfavorable
C)

$13,125 unfavorable
D)

$30,375 unfavorable

Answer the following questions using the information below:

Russo Corporation manufactured 16,000 space heaters during November. The overhead cost-allocation base is $15.75 per machine-hour. The following variable overhead data pertain to November:

Actual Budgeted
Production 16,000 units 18,000 units
Machine-hours 7,875 hours 9,000 hours
Variable overhead cost per machine-hour: $15.50 $15.75

84)

What is the actual variable overhead cost?
A)

$122,063
B)

$ 139,500
C)

$124,031
D)

$125,000

85)

What is the flexible-budget amount?
A)

$ 124,031.30
B)

$126,000.00
C)

$124,000.00
D)

$139,500.00

86)

What is the variable overhead spending variance?
A)

$2,250 unfavorable
B)

$1,968.75 unfavorable
C)

$2,250 favorable
D)

$1,968.75 favorable

87)

What is the variable overhead efficiency variance?
A)

$1,968.75 favorable
B)

$1,968.75 unfavorable
C)

$2,250 favorable
D)

$2,250 unfavorable

88)

What is the total variable overhead variance
A)

$3,937.50 unfavorable
B)

$1,968.75 unfavorable
C)

$3,937.50 favorable
D)

$1,968.75 favorable

89)

The variable overhead efficiency variance is computed ________ and interpreted ________ the direct-cost efficiency variance.
A)

the same as; the same as
B)

the same as; differently than
C)

differently than; the same as
D)

differently than; differently than

90)

An unfavorable variable overhead efficiency variance indicates that:
A)

variable overhead items were not used efficiently
B)

the price of variable overhead items was less than budgeted
C)

the variable overhead cost-allocation base was not used efficiently
D)

the denominator level was not accurately determined

91)

Variable overhead costs can be managed by:
A)

reducing the consumption of the cost-allocation base
B)

eliminating nonvalue-adding variable costs
C)

planning for appropriate capacity levels
D)

Both A and B are correct.

92)

When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to a favorable variable overhead efficiency variance is:
A)

excessive machine breakdowns
B)

the production scheduler’s impressive scheduling of machines
C)

a decline in the cost of energy
D)

strengthened demand for the product

93)

When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to an unfavorable variable overhead efficiency variance is:
A)

using more machine hours than budgeted
B)

workers wastefully using variable overhead items
C)

unused capacity
D)

more units being produced than planned

94)

When machine-hours are used as an overhead cost-allocation base, a rush order resulting in unplanned overtime that used less-skilled workers on the machines would MOST likely contribute to reporting a(n):
A)

favorable variable overhead spending variance
B)

unfavorable variable overhead efficiency variance
C)

favorable fixed overhead flexible-budget variance
D)

unfavorable production-volume variance

95)

When machine-hours are used as an overhead cost-allocation base and annual leasing costs for equipment unexpectedly increase, the MOST likely result would be to report a(n):
A)

unfavorable variable overhead spending variance
B)

favorable variable overhead efficiency variance
C)

unfavorable fixed overhead flexible-budget variance
D)

favorable production-volume variance

96)

The fixed overhead cost variance can be further subdivided into the:
A)

price variance and the efficiency variance
B)

spending variance and flexible-budget variance
C)

production-volume variance and the efficiency variance
D)

flexible-budget variance and the production-volume variance

97)

The amount reported for fixed overhead on the static budget is also reported:
A)

as actual fixed costs
B)

as allocated fixed overhead
C)

on the flexible budget
D)

Both B and C are correct.

98)

An unfavorable fixed overhead spending variance indicates that:
A)

there was more excess capacity than planned
B)

the price of fixed overhead items cost more than budgeted
C)

the fixed overhead cost-allocation base was not used efficiently
D)

the denominator level was more than planned

99)

A favorable fixed overhead spending variance might indicate that:
A)

more capacity was used than planned
B)

the denominator level was less than planned
C)

the fixed overhead cost-allocation base was not used efficiently
D)

a plant expansion did not proceed as originally planned

100)

For fixed manufacturing overhead, there is no:
A)

spending variance
B)

efficiency variance
C)

flexible-budget variance
D)

production-volume variance

Answer the following questions using the information below:

Jenny’s Corporation manufactured 25,000 grooming kits for horses during March. The fixed-overhead cost-allocation rate is $20.00 per machine-hour. The following fixed overhead data pertain to March:

Actual Static Budget
Production 25,000 units 24,000 units
Machine-hours 6,100 hours 6,000 hours
Fixed overhead costs for March $123,000 $120,000

101)

What is the flexible-budget amount?
A)

$120,000
B)

$122,000
C)

$123,000
D)

$125,000

102)

What is the amount of fixed overhead allocated to production?
A)

$120,000
B)

$122,000
C)

$123,000
D)

$125,000

103)

What is the fixed overhead spending variance?
A)

$1,000 unfavorable
B)

$2,000 favorable
C)

$3,000 unfavorable
D)

$5,000 favorable

104)

What is the fixed overhead production-volume variance?
A)

$1,000 unfavorable
B)

$2,000 favorable
C)

$3,000 unfavorable
D)

$5,000 favorable

Answer the following questions using the information below:

Rutch Corporation manufactured 54,000 door jambs during September. The fixed-overhead cost-allocation rate is $50.00 per machine-hour. The following fixed overhead data pertain to September:

Actual Static Budget
Production 54,000 units 60,000 units
Machine-hours 985 hours 1150 hours
Fixed overhead costs for September $53,400 $57,500

105)

What is the flexible-budget amount?
A)

$100,000
B)

$53,400
C)

$57,500
D)

$51,750

106)

What is the amount of fixed overhead allocated to production?
A)

$51,750
B)

$100,000
C)

$53,400
D)

$57,500

107)

What is the fixed overhead spending variance?
A)

$5,750 unfavorable
B)

$5,750 favorable
C)

$4,100 favorable
D)

$4,100 unfavorable

Answer the following questions using the information below:

Matthew’s Corporation manufactured 10,000 golf bags during March. The fixed overhead cost-allocation rate is $20.00 per machine-hour. The following fixed overhead data pertain to March:

Actual Static Budget
Production 10,000 units 12,000 units
Machine-hours 5,100 hours 6,000 hours
Fixed overhead cost for March $122,000 $120,000

108)

What is the flexible-budget amount?
A)

$100,000
B)

$102,000
C)

$120,000
D)

$122,000

109)

What is the amount of fixed overhead allocated to production?
A)

$100,000
B)

$102,000
C)

$120,000
D)

$122,000

110)

What is the fixed overhead production-volume variance?
A)

$2,000 unfavorable
B)

$18,000 favorable
C)

$20,000 unfavorable
D)

$22,000 unfavorable

111)

Fixed overhead is:
A)

overallocated by $2,000
B)

underallocated by $2,000
C)

overallocated by $22,000
D)

underallocated by $22,000

112)

The production-volume variance may also be referred to as the:
A)

flexible-budget variance
B)

denominator-level variance
C)

spending variance
D)

efficiency variance

113)

A favorable production-volume variance indicates that the company:
A)

has good management
B)

has allocated more fixed overhead costs than budgeted
C)

has a total economic gain from using excess capacity
D)

should increase capacity

114)

An unfavorable production-volume variance of $40,000 indicates that the company has:
A)

unused fixed manufacturing overhead capacity
B)

overallocated $40,000 of fixed manufacturing overhead costs
C)

$40,000 more capacity than needed
D)

an economic loss of $40,000 from selling fewer products than planned

115)

When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to a favorable production-volume variance is:
A)

an increase in the selling price of the product
B)

the purchase of a new manufacturing machine costing considerably less than expected
C)

a decline in the cost of energy
D)

strengthened demand for the product

116)

When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to an unfavorable production-volume variance is:
A)

a new competitor gaining market share
B)

a new manufacturing machine costing considerably more than expected
C)

an increase in the cost of energy
D)

strengthened demand for the product

117)

Excess capacity is a sign:
A)

that capacity should be reduced
B)

that capacity may need to be re-evaluated
C)

that the company is suffering a significant economic loss
D)

of good management decisions

118)

An unfavorable production-volume variance:
A)

is not a good measure of a lost production opportunity
B)

measures the total economic gain or loss due to unused capacity
C)

measures the amount of extra fixed costs planned for but not used
D)

takes into account the effect of additional revenues due to maintaining higher prices

119)

The difference between budgeted fixed manufacturing overhead and the fixed manufacturing overhead allocated to actual output units achieved is called the fixed overhead:
A)

efficiency variance
B)

flexible-budget variance
C)

combined-variance analysis
D)

production-volume variance

120)

Variable overhead costs:
A)

never have any unused capacity
B)

have no production-volume variance
C)

allocated are always the same as the flexible-budget amount
D)

All of these answers are correct.

121)

Fixed overhead costs:
A)

never have any unused capacity
B)

should be unitized for planning purposes
C)

are unaffected by the degree of operating efficiency in a given budget period
D)

Both A and B are correct.

122)

Fixed overhead costs must be unitized for:
A)

financial reporting purposes
B)

planning purposes
C)

calculating the production-volume variance
D)

Both A and C are correct.

123)

Generally Accepted Accounting Principles require that unitized fixed manufacturing costs be used for:
A)

pricing decisions
B)

costing decisions
C)

external reporting
D)

All of these answers are correct.

124)

A nonfinancial measure of performance evaluation is:
A)

increased sales
B)

reducing distribution costs
C)

energy used per machine-hour
D)

All of these answers are correct.

125)

Variance information regarding nonmanufacturing costs can be used to:
A)

plan capacity in the service sector
B)

control distribution costs in the retail sector
C)

determine the most profitable services offered by a bank
D)

All of these answers are correct.

126)

Tucker Company uses a standard cost system. In March, $133,000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $150,000. Which of the following variable manufacturing overhead entries would have been recorded for March?
A)

Accounts Payable Control and other accounts 150,000
Work-in-Process Control 150,000
B)

Variable Manufacturing Overhead Allocated 150,000
Accounts Payable and other accounts 150,000
C)

Work-in-Process Control 133,000
Accounts Payable Control and other accounts 133,000
D)

Variable Manufacturing Overhead Control 133,000
Accounts Payable Control and other accounts 133,000

127)

Alvarado Company made the following journal entry:

Variable Manufacturing Overhead Allocated 100,000
Variable Manufacturing Overhead Efficiency Variance 30,000
Variable Manufacturing Overhead Control 125,000
Variable Manufacturing Overhead Spending Variance 5,000

A)

Alvarado overallocated variable manufacturing overhead.
B)

A $5,000 favorable spending variance was recorded.
C)

Work-in-Process is currently overstated.
D)

This entry may be recorded yearly to provide timely feedback to managers.

128)

John’s Football Manufacturing Company reported:
Actual fixed overhead $800,000
Fixed manufacturing overhead spending variance $20,000 favorable
Fixed manufacturing production-volume variance $30,000 unfavorable

To isolate these variances at the end of the accounting period, John would debit Fixed Manufacturing Overhead Allocated for:
A)

$780,000
B)

$790,000
C)

$800,000
D)

$810,000

129)

Brandon’s Basketball Manufacturing Company reported:
Actual fixed overhead $1,000,000
Fixed manufacturing overhead spending variance $60,000 unfavorable
Fixed manufacturing production-volume variance $40,000 unfavorable

To isolate these variances at the end of the accounting period, Brandon would:
A)

debit Fixed Manufacturing Overhead Allocated for $1,000,000
B)

debit Fixed Manufacturing Overhead Spending Variance for $60,000
C)

credit Fixed Manufacturing Production-Volume Variance for $40,000
D)

credit Fixed Manufacturing Control Allocated for $900,000

130)

Jovana Company uses a standard cost system. In March, $117,000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $120,000. Which of the following variable manufacturing overhead entries would have been recorded for March?
A)

Accounts Payable Control and other accounts 120,000
Work-in-Process Control 120,000
B)

Work-in-Process Control 120,000
Variable Manufacturing Overhead Allocated 120,000
C)

Work-in-Process Control 117,000
Accounts Payable Control and other accounts 117,000
D)

Accounts Payable Control and other accounts 117,000
Variable Manufacturing Overhead Control 117,000

131)

Tate Company makes the following journal entry:

Variable Manufacturing Overhead Allocated 150,000
Variable Manufacturing Overhead Efficiency Variance 5,000
Variable Manufacturing Overhead Control 125,000
Variable Manufacturing Overhead Spending Variance 30,000

A)

Tate underallocated variable manufacturing overhead.
B)

A $30,000 unfavorable spending variance was recorded.
C)

Work-in-Process is currently understated.
D)

A $25,000 favorable flexible-budget variance was recorded.

132)

Jeremy’s Football Manufacturing Company reported:
Actual fixed overhead $500,000
Fixed manufacturing overhead spending variance $30,000 favorable
Fixed manufacturing production-volume variance $20,000 unfavorable

To isolate these variances at the end of the accounting period, Jeremy would debit Fixed Manufacturing Overhead Allocated for:
A)

$480,000
B)

$490,000
C)

$500,000
D)

$510,000

133)

Kristin’s Basketball Manufacturing Company reported:
Actual fixed overhead $800,000
Fixed manufacturing overhead spending variance $60,000 favorable
Fixed manufacturing production-volume variance $40,000 favorable

To isolate these variances at the end of the accounting period, Kristin would debit:
A)

Fixed Manufacturing Overhead Allocated for $900,000
B)

Fixed Manufacturing Overhead Spending Variance for $60,000
C)

Fixed Manufacturing Production-Volume Variance for $40,000
D)

All of these answers are correct.

Answer the following questions using the information below:

Production-
Variances Spending Efficiency Volume
Variable manufacturing overhead $ 4,500 F $15,000 U (B)
Fixed manufacturing overhead $10,000 U (A) $40,000 U

134)

Above is a:
A)

4-variance analysis
B)

3-variance analysis
C)

2-variance analysis
D)

1-variance analysis

135)

In the above chart, the amounts for (A) and (B), respectively, are:
A)

$10,500 U; $55,000 U
B)

$10,500 U; Zero
C)

Zero; $55,000 U
D)

Zero; Zero

136)

In a 3-variance analysis the spending variance should be:
A)

$ 4,500 F
B)

$10,000 U
C)

$ 5,500 U
D)

$10,500 U

137)

In a 2-variance analysis the flexible-budget variance and the production-volume variance should be ________, respectively.
A)

$5,500 U; $55,000 U
B)

$20,500 U; $40,000 U
C)

$10,500 U; $50,000 U
D)

$60,500 U; Zero

138)

In a 1-variance analysis the total overhead variance should be:
A)

$20,500 U
B)

$60,500 U
C)

$121,000 U
D)

None of these answers is correct.

Answer the following questions using the information below:

Munoz, Inc., produces a special line of plastic toy racing cars. Munoz, Inc., produces the cars in batches. To manufacture a batch of the cars, Munoz, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car.

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2004:

Actual Static-budget
Amounts Amounts
Units produced and sold 15,000 11,250
Batch size (number of units per batch) 250 225
Setup-hours per batch 5 5.25
Variable overhead cost per setup-hour $40 $38
Total fixed setup overhead costs $14,400 $14,000

139)

Calculate the efficiency variance for variable setup overhead costs.
A)

$1,900 unfavorable
B)

$600 unfavorable
C)

$1,900 favorable
D)

$600 favorable

140)

Calculate the spending variance for variable setup overhead costs.
A)

$1,900 unfavorable
B)

$1,900 favorable
C)

$600 unfavorable
D)

$600 favorable

141)

Calculate the flexible-budget variance for variable setup overhead costs.
A)

$600 favorable
B)

$1,300 favorable
C)

$600 unfavorable
D)

$1,300 unfavorable

142)

Calculate the spending variance for fixed setup overhead costs.
A)

$3,200 unfavorable
B)

$400 unfavorable
C)

$3,600 unfavorable
D)

$400 favorable

143)

Calculate the production-volume variance for fixed setup overhead costs.
A)

$4,666.67 unfavorable
B)

$400 unfavorable
C)

$4,666.67 favorable
D)

$400 favorable

Answer the following questions using the information below:

Lukehart Industries, Inc., produces air purifiers. Lukehart, Inc., produces the air purifiers in batches. To manufacture a batch of the purifiers, Lukehart, Inc., must set up the machines and assembly line tooling. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and tooling for different models of the air purifiers.

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2008:

Budget Actual
Amounts Amounts
Units produced and sold 10,000 9,000
Batch size (number of units per batch) 400 375
Setup-hours per batch 6 5.5
Variable overhead cost per setup-hour $50 $52
Total fixed setup overhead costs $18,000 $17,750

144)

Calculate the efficiency variance for variable setup overhead costs.
A)

$150 favorable
B)

$114 favorable
C)

$264 unfavorable
D)

$264 favorable

145)

Calculate the spending variance for variable setup overhead costs.
A)

$150 unfavorable
B)

$150 favorable
C)

$264 unfavorable
D)

$264 favorable

146)

Calculate the flexible-budget variance for variable setup overhead costs.
A)

$114 favorable
B)

$264 favorable
C)

$264 unfavorable
D)

$114 unfavorable

147)

Calculate the spending variance for fixed setup overhead costs.
A)

$250 unfavorable
B)

$150 unfavorable
C)

$250 favorable
D)

$150 favorable

148)

Calculate the production-volume variance for fixed setup overhead costs.
A)

$1,800 favorable
B)

$1,800 unfavorable
C)

$250 unfavorable
D)

$250 favorable
149)

Fixed and variable cost variances can ________ be applied to activity-based costing systems.
A)

always
B)

most times
C)

seldom
D)

never

150)

Jael Equipment uses a flexible budget for its indirect manufacturing costs. For 20X5, the company anticipated that it would produce 18,000 units with 3,500 machine-hours and 7,200 employee days. The costs and cost drivers were to be as follows:

Fixed Variable Cost driver
Product handling $30,000 $0.40 per unit
Inspection 8,000 8.00 per 100 unit batch
Utilities 400 4.00 per 100 unit batch
Maintenance 1,000 0.20 per machine-hour
Supplies 5.00 per employee day

During the year, the company processed 20,000 units, worked 7,500 employee days, and had 4,000 machine-hours. The actual costs for 20X5 were:

Actual costs
Product handling $36,000
Inspection 9,000
Utilities 1,600
Maintenance 1,200
Supplies 37,500

Required:
a. Prepare the static budget using the overhead items above and then compute the static-budget variances.
b. Prepare the flexible budget using the overhead items above and then compute the flexible-budget variances.

151)

Heather’s Pillow Company manufactures pillows. The 20X5 operating budget is based on production of 20,000 pillows with 0.5 machine-hour allowed per pillow. Variable manufacturing overhead is anticipated to be $220,000.

Actual production for 20X5 was 18,000 pillows using 9,500 machine-hours. Actual variable costs were $20 per machine-hour.

Required:

Calculate the variable overhead spending and efficiency variances.

152)

Cirilla’s Weathervane Company manufactures weathervanes. The 2008 operating budget is based on the production of 10,000 weathervanes with 1.25 machine-hour allowed per weathervane. Variable manufacturing overhead is anticipated to be $300,000.

Actual production for 2008 was 11,000 weathervanes using 12,100 machine-hours. Actual variable costs were $23.75 per machine-hour.

Required:

Calculate the variable overhead spending and the efficiency variances.

153)

McKenna Company manufactured 1,000 units during April with a total overhead budget of $12,400. However, while manufacturing the 1,000 units the microcomputer that contained the month’s cost information broke down. With the computer out of commission, the accountant has been unable to complete the variance analysis report. The information missing from the report is lettered in the following set of data:

Variable overhead:
Standard cost per unit: 0.4 labor hour at $4 per hour
Actual costs: $2,100 for 376 hours
Flexible budget: a
Total flexible-budget variance: b
Variable overhead spending variance: c
Variable overhead efficiency variance: d

Fixed overhead:
Budgeted costs: e
Actual costs: f
Flexible-budget variance: $500 favorable

Required:
Compute the missing elements in the report represented by the lettered items.

154)

Everjoice Company makes clocks. The fixed overhead costs for 20X5 total $720,000. The company uses direct labor-hours for fixed overhead allocation and anticipates 240,000 hours during the year for 480,000 units. An equal number of units are budgeted for each month.

During June, 42,000 clocks were produced and $63,000 were spent on fixed overhead.

Required:
a. Determine the fixed overhead rate for 20X5 based on units of input.
b. Determine the fixed overhead static-budget variance for June.
c. Determine the production-volume overhead variance for June.

155)

Brown Company makes watches. The fixed overhead costs for 2008 total $324,000. The company uses direct labor-hours for fixed overhead allocation and anticipates 10,800 hours during the year for 540,000 units. An equal number of units are budgeted for each month.

During October, 48,000 watches were produced and $28,000 was spent on fixed overhead.

Required:
a. Determine the fixed overhead rate for 2008 based on the units of input.
b. Determine the fixed overhead static-budget variance for October.
c. Determine the production-volume overhead variance for October.

156)

Lungren has budgeted construction overhead for August of $260,000 for variable costs and $435,000 for fixed costs. Actual costs for the month totaled $275,000 for variable and $445,000 for fixed. Allocated fixed overhead totaled $440,000. The company tracks each item in an overhead control account before allocations are made to individual jobs. Spending variances for August were $10,000 unfavorable for variable and $10,000 unfavorable for fixed. The production-volume overhead variance was $5,000 favorable.

Required:
a. Make journal entries for the actual costs incurred.
b. Make journal entries to record the variances for August.

157)

Different management levels in Bates, Inc., require varying degrees of managerial accounting information. Because of the need to comply with the managers’ requests, four different variances for manufacturing overhead are computed each month. The information for the September overhead expenditures is as follows:

Budgeted output units 3,200 units
Budgeted fixed manufacturing overhead $20,000
Budgeted variable manufacturing overhead $5 per direct labor hour
Budgeted direct manufacturing labor hours 2 hours per unit
Fixed manufacturing costs incurred $26,000
Direct manufacturing labor hours used 7,200
Variable manufacturing costs incurred $35,600
Actual units manufactured 3,400

Required:
a. Compute a 4-variance analysis for the plant controller.
b. Compute a 3-variance analysis for the plant manager.
c. Compute a 2-variance analysis for the corporate controller.
d. Compute the flexible-budget variance for the manufacturing vice president.

158)

Casey Corporation produces a special line of basketball hoops. Casey Corporation produces the hoops in batches. To manufacture a batch of the basketball hoops, Casey Corporation must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of basketball hoops.

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to January 2005.

Static-budget Actual
Amounts Amounts
Basketball hoops produced and sold 30,000 28,000
Batch size (number of units per batch) 200 250
Setup-hours per batch 5 4
Variable overhead cost per setup hour $10 $9
Total fixed setup overhead costs $22,500 $21,000

Required:

a. Calculate the efficiency variance for variable setup overhead costs.
b. Calculate the spending variance for variable setup overhead costs.
c. Calculate the flexible-budget variance for variable setup overhead costs.
d. Calculate the spending variance for fixed setup overhead costs.
e. Calculate the production-volume variance for fixed setup overhead costs.

159)

Briefly explain the meaning of the variable overhead efficiency variance and the variable overhead spending variance.

160)

Briefly explain why a favorable variable overhead spending variance may not always be desireable.

161)

Can the variable overhead efficiency variance
a. be computed the same way as the efficiency variance for direct-cost items?
b. be interpreted the same way as the efficiency variance for direct-cost items? Explain.

162)

Explain why there is no efficiency variance for fixed manufacturing overhead costs.

163)

How is a budgeted fixed overhead cost rate calculated?

164)

Explain why there is no production-volume variance for variable manufacturing overhead costs.

165)

Abby Company has just implemented a new cost accounting system that provides two variances for fixed manufacturing overhead. While the company’s managers are familiar with the concept of spending variances, they are unclear as to how to interpret the production-volume overhead variances. Currently, the company has a production capacity of 54,000 units a month, although it generally produces only 46,000 units. However, in any given month the actual production is probably something other than 46,000.

Required:

a. Does the production-volume overhead variance measure the difference between the 54,000 and 46,000, or the difference between the 46,000 and the actual monthly production? Explain.

b. What advice can you provide the managers that will help them interpret the production-volume overhead variances?

166)

Explain the meaning of a favorable production-volume variance.

167)

What are the arguments for prorating a production-volume variance that has been deemed to be material among work-in-process, finished goods, cost and cost of goods sold as opposed to writing it all off to cost of goods sold?

168)

Explain two concerns when interpreting the production-volume variance as a measure of the economic cost of unused capacity.

169)

Explain why sales-volume variance could be helpful to managers.

170)

The chapter shows that variance analysis of overhead costs can be presented in 4, 3, 2, and 1-variance analysis. Explain what each of the variances presented under each method shows about overhead costs.

Chapter 9

Inventory Costing and Capacity Analysis

1)

The two most common methods of costing inventories in manufacturing companies are variable costing and fixed costing.

2)

Absorption costing “absorbs” only variable manufacturing costs.

3)

Variable costing includes all variable costsboth manufacturing and nonmanufacturingin inventory.

4)

Under both variable and absorption costing, all variable manufacturing costs are inventoriable costs.

5)

The main difference between variable costing and absorption costing is the way in which fixed manufacturing costs are accounted for.

6)

Under variable costing, fixed manufacturing costs are treated as an expense of the period.

7)

The contribution-margin format of the income statement is used with absorption costing.

8)

The contribution-margin format of the income statement distinguishes manufacturing costs from nonmanufacturing costs.

9)

The gross-margin format of the income statement highlights the lump sum of fixed manufacturing costs.

10)

In absorption costing, all nonmanufacturing costs are subtracted from gross margin.

11)

Direct costing is a perfect way to describe the variable-costing inventory method.

12)

When variable costing is used, an income statement will show gross margin.

13)

The income under variable costing will always be the same as the income under absorption costing.

14)

Absorption costing is required by GAAP (Generally Accepted Accounting Principles) for external reporting.

15)

When production deviates from the denominator level, a production-volume variance always exists under absorption costing.

16)

Fixed manufacturing costs included in cost of goods available for sale + the production-volume variance will always = total fixed manufacturing costs under absorption costing.

17)

The production-volume variance only exists under absorption costing and not under variable costing.

18)

When the unit level of inventory increases during an accounting period, operating income is greater under variable costing than absorption costing.

19)

The difference in operating income under absorption costing and variable costing is due solely to the timing difference of expensing fixed manufacturing costs.
20)

If managers report inventories of zero at the start and end of each accounting period, operating incomes under absorption costing and variable costing will be the same.

21)

Under absorption costing, managers can increase operating income by holding more inventories at the end of the period.

22)

Many companies use variable costing for internal reporting to reduce the undesirable incentive to build up inventories.

23)

Under variable costing, managers can increase operating income by simply producing more inventory at the end of the accounting period even if that inventory never gets sold.

24)

Nonfinancial measures such as comparing units in ending inventory this period to units in ending inventory last period can help reduce buildup of excess inventory.

25)

One of the most common problems reported by companies using variable costing is the difficulty of classifying costs into fixed or variable categories.

26)

Managers can increase operating income when absorption costing is used by producing more inventory.

27)

A manager can increase operating income by deferring maintenance beyond the current accounting period when absorption costing is used.

28)

Throughput costing considers only direct materials and direct manufacturing labor to be truly variable costs.

29)

Throughput costing is also referred to as super-variable costing.

30)

When production quantity exceeds sales, throughput costing results in reporting greater operating income than variable costing.

31)

Throughput costing provides more incentive to produce for inventory than does absorption costing.

32)

A company may use absorption costing for external reports and still choose to use throughput costing for internal reports.

33)

Throughput contribution equals revenues minus all product costs.

34)

Throughput costing results in a higher amount of manufacturing costs being placed in inventory than either variable or absorption costing.

35)

Determining the “right” level of capacity is one of the most strategic and difficult decisions managers face.

36)

Both theoretical and practical capacity measure capacity in terms of demand for the output.

37)

Normal capacity utilization is the expected level of capacity utilization for the current budget period, which is typically one year.

38)

Normal capacity utilization is not the same as master-budget capacity utilization.

39)

Theoretical capacity is generally much larger than master-budget capacity utilization.

40)

Theoretical capacity allows time for regular machine maintenance.

41)

Estimates of human factors such as the increased risk of injury when machines work at faster speeds are important when estimating practical capacity.

42)

Theoretical capacity is unattainable in the real world.

43)

Theoretical capacity is the capacity level that represents what the firm is able to obtain under reasonable circumstances.

44)

Fixed manufacturing cost per unit will be the same no matter what capacity concept is used.

45)

Data from normal costing and standard costing are used in pricing and product-mix decisions.

46)

If a company chooses practical capacity for planning purposes, it must also use practical capacity for performance evaluation.

47)

Theoretical capacity is most often used to cost a product.

48)

Practical capacity highlights capacity acquired but currently not used.

49)

For benchmarking purposes it is best to use master-budget capacity because all competitors use about the same about of capacity for production.

50)

Using normal capacity for pricing decisions can lead to setting noncompetitive selling prices.

51)

Using master-budget capacity for pricing purposes can lead to a downward demand spiral.

52)

Using practical capacity is best for evaluating the marketing manager’s performance for a particular year.

53)

The production-volume variance is affected by the choice of capacity concept used to determine the denominator level.

54)

The higher the denominator level the higher the budgeted fixed manufacturing cost rate per unit.

55)

Master-budget capacity utilization can be more reliably estimated than normal capacity utilization.

56)

Unused capacity is considered wasted resources and the result of poor planning.

57)

Challenges only result from estimating the denominator level, but not the costs in the numerator of the fixed manufacturing cost rate.

58)

Estimating capacity costs is unique to manufacturing and it is not applicable to nonmanufacturing entities.

59)

If the capacity level chosen to calculate the budgeted fixed overhead cost rate is more than the actual production, an unfavorable production-volume variance will result.
60)

The breakeven points are the same under both variable costing and absorption costing.

61)

Which of the following cost(s) are inventoried when using variable costing?
A)

direct manufacturing costs
B)

variable marketing costs
C)

fixed manufacturing costs
D)

Both A and B are correct.

62)

Which of the following cost(s) are inventoried when using absorption costing?
A)

direct manufacturing costs
B)

variable marketing costs
C)

fixed manufacturing costs
D)

Both A and C are correct.

63)

________ is a method of inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs.
A)

Variable costing
B)

Mixed costing
C)

Absorption costing
D)

Standard costing

64)

Absorption costing is required for all of the following EXCEPT:
A)

generally accepted accounting principles
B)

determining a competitive selling price
C)

external reporting to shareholders
D)

income tax reporting

65)

Absorption costing:
A)

expenses marketing costs as cost of goods sold
B)

treats direct manufacturing costs as a period cost
C)

includes fixed manufacturing overhead as an inventoriable cost
D)

is required for internal reports to managers

66)

Variable costing:
A)

expenses administrative costs as cost of goods sold
B)

treats direct manufacturing costs as a product cost
C)

includes fixed manufacturing overhead as an inventoriable cost
D)

is required for external reporting to shareholders

67)

________ method(s) expense(s) variable marketing costs in the period incurred.
A)

Variable costing
B)

Absorption costing
C)

Throughput costing
D)

All of these answers are correct.

68)

________ method(s) include(s) fixed manufacturing overhead costs as inventoriable costs.
A)

Variable costing
B)

Absorption costing
C)

Throughput costing
D)

All of these answers are correct.

69)

________ method(s) expense(s) direct material costs as cost of goods sold.
A)

Variable costing
B)

Absorption costing
C)

Throughput costing
D)

All of these answers are correct.

70)

________ method(s) is required for tax reporting purposes.
A)

Variable costing
B)

Absorption costing
C)

Throughput costing
D)

All of these answers are correct.

71)

________ is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs.
A)

Fixed costing
B)

Variable costing
C)

Absorption costing
D)

Mixed costing

72)

Variable costing regards fixed manufacturing overhead as a(n):
A)

administrative cost
B)

inventoriable cost
C)

period cost
D)

product cost

73)

The only difference between variable and absorption costing is the expensing of:
A)

direct manufacturing costs
B)

variable marketing costs
C)

fixed manufacturing costs
D)

Both A and C are correct.

Answer the following questions using the information below:

Marie’s Decorating produces and sells a mantel clock for $100 per unit. In 20X5, 100,000 clocks were produced and 80,000 were sold. Other information for the year includes:

Direct materials $30.00 per unit
Direct manufacturing labor $ 2.00 per unit
Variable manufacturing costs $ 3.00 per unit
Sales commissions $ 5.00 per part
Fixed manufacturing costs $25.00 per unit
Administrative expenses, all fixed $15.00 per unit

74)

What is the inventoriable cost per unit using variable costing?
A)

$32
B)

$35
C)

$40
D)

$60

75)

What is the inventoriable cost per unit using absorption costing?
A)

$32
B)

$35
C)

$60
D)

$80

Answer the following questions using the information below:

Gabe’s Auto produces and sells an auto part for $30.00 per unit. In 20X5, 100,000 parts were produced and 75,000 units were sold. Other information for the year includes:

Direct materials $12.00 per unit
Direct manufacturing labor $ 2.25 per unit
Variable manufacturing costs $ 0.75 per unit
Sales commissions $ 3.00 per part
Fixed manufacturing costs $375,000 per year
Administrative expenses, all fixed $135,000 per year

76)

What is the inventoriable cost per unit using variable costing?
A)

$14.25
B)

$15.00
C)

$18.00
D)

$21.75

77)

What is the inventoriable cost per unit using absorption costing?
A)

$15.00
B)

$18.00
C)

$18.75
D)

$21.75

78)

Which of the following inventory costing methods shown below is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting?
A)

absorption costing
B)

variable costing
C)

throughput costing
D)

direct costing

79)

The contribution-margin format of the income statement:
A)

is used with absorption costing
B)

calculates gross margin
C)

distinguishes between manufacturing and nonmanufacturing costs
D)

is used with variable costing

80)

The gross-margin format of the income statement:
A)

is used with variable costing
B)

is used with absorption costing
C)

calculates contribution margin
D)

distinguishes variable costs from fixed costs

81)

The contribution-margin format of the income statement:
A)

is used with absorption costing
B)

highlights the lump sum of fixed manufacturing costs
C)

distinguishes manufacturing costs from nonmanufacturing costs
D)

calculates gross margin

82)

The gross-margin format of the income statement:
A)

distinguishes between manufacturing and nonmanufacturing costs
B)

distinguishes variable costs from fixed costs
C)

is used with variable costing
D)

calculates contribution margin

83)

________ are subtracted from sales to calculate contribution margin.
A)

Variable manufacturing costs
B)

Variable marketing costs
C)

Fixed manufacturing costs
D)

Both A and B are correct.

84)

________ are subtracted from sales to calculate gross margin.
A)

Variable manufacturing costs
B)

Variable marketing costs
C)

Fixed manufacturing costs
D)

Both A and C are correct.

Answer the following questions using the information below:

Peggy’s Pillows produces and sells a decorative pillow for $75.00 per unit. In the first month of operation, 2,000 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:

Variable manufacturing costs $20.00 per unit
Variable marketing costs $ 3.00 per unit
Fixed manufacturing costs $ 7.00 per unit
Administrative expenses, all fixed $15.00 per unit
Ending inventories:
Direct materials -0-
WIP -0-
Finished goods 250 units

85)

What is cost of goods sold per unit using variable costing?
A)

$20
B)

$23
C)

$30
D)

$45

86)

What is cost of goods sold using variable costing?
A)

$35,000
B)

$40,000
C)

$47,250
D)

$54,000

87)

What is contribution margin using variable costing?
A)

$96,250
B)

$91,000
C)

$104,000
D)

$110,000

88)

What is operating income using variable costing?
A)

$52,500
B)

$78,750
C)

$65,750
D)

$47,000

Answer the following questions using the information below:

Andrea’s Hobbies produces and sells a luxury animal pillow for $40.00 per unit. In the first month of operation, 3,000 units were produced and 2,250 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:

Variable manufacturing costs $19 per unit
Variable marketing costs $ 1 per unit
Fixed manufacturing costs $30,000 per month
Administrative expenses, all fixed $6,000 per month
Ending inventories:
Direct materials -0-
WIP -0-
Finished goods 750 units

89)

What is cost of goods sold per unit when using absorption costing?
A)

$19
B)

$20
C)

$29
D)

$32

90)

What is gross margin when using absorption costing?
A)

$45,000
B)

$54,750
C)

$77,250
D)

$24,750

91)

What is operating income when using absorption costing?
A)

$4,000
B)

$16,500
C)

($11,750)
D)

$18,750

92)

An unfavorable production-volume variance occurs when:
A)

production exceeds the denominator level
B)

the denominator level exceeds production
C)

production exceeds unit sales
D)

unit sales exceed production

93)

If the unit level of inventory increases during an accounting period, then:
A)

less operating income will be reported under absorption costing than variable costing
B)

more operating income will be reported under absorption costing than variable costing
C)

operating income will be the same under absorption costing and variable costing
D)

the exact effect on operating income cannot be determined

94)

The difference between operating incomes under variable costing and absorption costing centers on how to account for:
A)

direct materials costs
B)

fixed manufacturing costs
C)

variable manufacturing costs
D)

Both B and C are correct.

95)

One possible means of determining the difference between operating incomes for absorption costing and variable costing is by:
A)

subtracting sales of the previous period from sales of this period
B)

subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory
C)

multiplying the number of units produced by the budgeted fixed manufacturing cost rate
D)

adding fixed manufacturing costs to the production-volume variance

96)

When comparing the operating incomes between absorption costing and variable costing, and beginning finished inventory exceeds ending finished inventory, it may be assumed that:
A)

sales increased during the period
B)

variable cost per unit is less than fixed cost per unit
C)

there is an unfavorable production-volume variance
D)

variable costing operating income exceeds absorption costing operating income

97)

Which of the following statements is FALSE?
A)

Absorption costing allocates fixed manufacturing overhead to actual units produced during the period.
B)

Nonmanufacturing costs are expensed in the future under variable costing.
C)

Fixed manufacturing costs in ending inventory are expensed in the future under absorption costing.
D)

Operating income under absorption costing is higher than operating income under variable costing when production units exceed sales units.

98)

Helton Company has the following information for the current year:

Beginning fixed manufacturing overhead in inventory $95,000
Fixed manufacturing overhead in production 375,000
Ending fixed manufacturing overhead in inventory 25,000

Beginning variable manufacturing overhead in inventory $10,000
Variable manufacturing overhead in production 50,000
Ending variable manufacturing overhead in inventory 15,000

What is the difference between operating incomes under absorption costing and variable costing?
A)

$70,000
B)

$50,000
C)

$40,000
D)

$5,000

99)

The following information pertains to Brian Stone Corporation:

Beginning fixed manufacturing overhead in inventory $60,000
Ending fixed manufacturing overhead in inventory 45,000
Beginning variable manufacturing overhead in inventory $30,000
Ending variable manufacturing overhead in inventory 14,250

Fixed selling and administrative costs $724,000
Units produced 5,000 units
Units sold 4,800 units

What is the difference between operating incomes under absorption costing and variable costing?
A)

$750
B)

$7,500
C)

$15,000
D)

$30,750

Answer the following questions using the information below:

Heinrich Corporation incurred fixed manufacturing costs of $6,000 during 20X5. Other information for 20X5 includes:
The budgeted denominator level is 1,000 units.
Units produced total 750 units.
Units sold total 600 units.
Beginning inventory was zero.

The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

100)

Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:
A)

$3,600
B)

$4,800
C)

$6,000
D)

101)

Fixed manufacturing costs included in ending inventory total:
A)

$1,200
B)

$1,500
C)

$900
D)

102)

The production-volume variance is:
A)

$2,000
B)

$1,500
C)

$2,400
D)

0
103)

Operating income using absorption costing will be ________ than operating income if using variable costing.
A)

$2,400 higher
B)

$2,400 lower
C)

$900 higher
D)

$3,600 lower

Answer the following questions using the information below:

Veach Corporation incurred fixed manufacturing costs of $6,000 during 20X5. Other information for 20X5 includes:
The budgeted denominator level is 1,000 units.
Units produced total 750 units.
Units sold total 600 units.
Beginning inventory was zero.

The company uses VARIABLE COSTING and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

104)

Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:
A)

$3,600
B)

$4,800
C)

$6,000
D)

0

105)

Fixed manufacturing costs included in ending inventory total:
A)

$1,200
B)

$1,500
C)

$900
D)

0

106)

The production-volume variance totals:
A)

$2,000
B)

$1,500
C)

$2,400
D)

0

107)

Operating income using variable costing will be ________ than operating income if using absorption costing.
A)

$2,400 higher
B)

$2,400 lower
C)

$3,600 higher
D)

$900 lower

Answer the following questions using the information below:

Morse Corporation incurred fixed manufacturing costs of $7,200 during 20X5. Other information for 20X5 includes:
The budgeted denominator level is 800 units.
Units produced total 1,000 units.
Units sold total 950 units.
Beginning inventory was zero.

The fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

108)

Under absorption costing, fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:
A)

$8,550
B)

$9,000
C)

$7,200
D)

0

109)

Under absorption costing, the production-volume variance is:
A)

$450
B)

$1,350
C)

$1,800
D)

0

110)

Under variable costing, the fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:
A)

$8,550
B)

$7,200
C)

$9,000
D)

0

111)

Operating income using absorption costing will be ________ operating income if using variable costing.
A)

$450 higher than
B)

$900 higher than
C)

$1,350 lower than
D)

the same as

112)

At the end of the accounting period Susan Corporation reports operating income of $30,000 and the fixed overhead cost rate is $20 per unit. Under absorption costing, if this company now produces an additional 100 units of inventory, then operating income:
A)

will increase by $2,000
B)

will increase by $2,000 only if the additional 100 units of inventory are sold
C)

will not be affected
D)

is indeterminable

113)

At the end of the accounting period Bumsted Corporation reports operating income of $30,000 and the fixed overhead cost rate is $20 per unit. Under variable costing, if this company produces 100 more units of inventory, then operating income:
A)

will increase by $2,000
B)

will increase by $2,000 only if the 100 additional units of inventory are sold
C)

will not be affected
D)

is indeterminable

114)

Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by:
A)

changes in the quantity of units actually sold
B)

changes in the quantity of units produced
C)

changes in ending inventory
D)

changes in sales price per unit

115)

Companies have recently been able to reduce inventory levels because:
A)

there is better sharing of information between suppliers and manufacturers
B)

just-in-time production strategies are being implemented
C)

production quotas are being implemented
D)

Both A and B are correct.

116)

Many companies have switched from absorption costing to variable costing for internal reporting:
A)

to comply with external reporting requirements
B)

to increase bonuses for managers
C)

to reduce the undesirable incentive to build up inventories
D)

so the denominator level is more accurate

117)

Ways to “produce for inventory” that result in increasing operating income include:
A)

switching production to products that absorb the least amounts of fixed manufacturing costs
B)

delaying items that absorb the greatest amount of fixed manufacturing costs
C)

deferring maintenance to accelerate production
D)

All of these answers are correct.

118)

Switching production to products that absorb the highest amount of fixed manufacturing costs is also called:
A)

cost reduction
B)

cherry picking
C)

producing for sales
D)

throughput costing

119)

To discourage producing for inventory, management can:
A)

evaluate nonfinancial measures such as units in ending inventory compared to units in sales
B)

evaluate performance over a three- to five-year period rather than a single year
C)

incorporate a carrying charge for inventory in the internal accounting system
D)

All of these answers are correct.

120)

Which method is NOT a way to discourage producing for inventory?
A)

incorporate a carrying charge for inventory
B)

focus on careful budgeting and inventory planning
C)

include nonfinancial measures when evaluating performance
D)

evaluate performance on a quarterly basis only

121)

Under absorption costing, if a manager’s bonus is tied to operating income, then increasing inventory levels compared to last year would result in:
A)

increasing the manager’s bonus
B)

decreasing the manager’s bonus
C)

not affecting the manager’s bonus
D)

being unable to determine the manager’s bonus using only the above information

122)

Under variable costing, if a manager’s bonus is tied to operating income, then increasing inventory levels compared to last year would result in:
A)

increasing the manager’s bonus
B)

decreasing the manager’s bonus
C)

not affecting the manager’s bonus
D)

being unable to determine the manager’s bonus using only the above information

123)

Critics of absorption costing suggest to evaluate management on their ability to:
A)

exceed production quotas
B)

increase operating income
C)

decrease inventory costs
D)

All of these answers are correct.

124)

Differences between absorption costing and variable costing are much smaller when a:
A)

large part of the manufacturing process is subcontracted out
B)

just-in-time inventory strategy is implemented
C)

significant portion of manufacturing costs are fixed
D)

Both A and B are correct.

125)

All of the following are examples of drawbacks of using absorption costing EXCEPT:
A)

management has the ability to manipulate operating income via production schedules
B)

manipulation of operating income may ultimately increase the company’s costs incurred over the long run
C)

operating income solely reflects income from the sale of units and excludes the effects of manipulating production schedules
D)

decreasing maintenance activities and increasing production result in increased operating income

126)

Which of the following inventory costing methods shown below is MOST likely to cause undesirable incentives for managers to build up finished goods inventory?
A)

absorption costing
B)

variable costing
C)

throughput costing
D)

direct costing

127)

Throughput costing is also called:
A)

absorption costing
B)

super-variable costing
C)

mixed costing
D)

direct costing

128)

Advocates of throughput costing argue that:
A)

only direct materials are truly variable
B)

direct manufacturing labor is relatively fixed
C)

variable manufacturing costs are a cost of the period
D)

All of these answers are correct.

129)

Variable and absorption costing may be combined with all costing systems EXCEPT:
A)

mixed costing
B)

actual costing
C)

normal costing
D)

standard costing

130)

Throughput contribution equals:
A)

variable costs minus fixed costs
B)

revenues minus all direct labor costs
C)

revenues minus all direct material cost of goods sold
D)

revenues minus manufacturing overhead

131)

If 600 units are produced and only 400 units are sold, ________ results in the greatest amount of expense reported on the income statement.
A)

throughput costing
B)

variable costing
C)

absorption costing
D)

period costing

132)

If 400 units are produced and 600 units are sold, ________ results in the greatest amount of operating income.
A)

throughput costing
B)

variable costing
C)

absorption costing
D)

period costing

133)

Advocates of throughput costing maintain that:
A)

both variable and fixed are necessary to produce goods; therefore, both types of costs should be inventoried
B)

all manufacturing costs plus some design costs should be inventoried
C)

fixed manufacturing costs are related to the capacity to produce rather than to the actual production of specific units
D)

Both A and C are correct.

Answer the following questions using the information below:

Reusser Company produces wood statues. Management has provided the following information:

Actual sales 80,000 statues
Budgeted production 100,000 statues
Selling price $20.00 per statue

Direct material costs $5.00 per statue
Variable manufacturing costs $1.50 per statue
Variable administrative costs $2.50 per statue
Fixed manufacturing overhead $2.00 per statue

134)

What is the cost per statue if throughput costing is used?
A)

$11.00
B)

$9.50
C)

$7.50
D)

$5.00

135)

What is the total throughput contribution?
A)

$1,500,000
B)

$2,000,000
C)

$720,000
D)

$1,200,000

Answer the following questions using the information below:

Stober Company produces a specialty item. Management has provided the following information:

Actual sales 60,000 units
Budgeted production 50,000 units
Selling price $40.00 per unit

Direct material costs $10.00 per unit
Variable manufacturing overhead $3.00 per unit
Variable administrative costs $5.00 per unit
Fixed manufacturing overhead $4.00 per unit

136)

What is the cost per statue if throughput costing is used?
A)

$22.00
B)

$19.00
C)

$15.00
D)

$10.00

137)

What is the total throughput contribution?
A)

$1,500,000
B)

$1,620,000
C)

$1,380,000
D)

$1,800,000

138)

Which of the following inventory costing methods results in the least amount of costs being inventoried?
A)

absorption costing
B)

variable costing
C)

throughput costing
D)

direct costing

139)

Which of the following inventory costing methods shown below is LEAST likely to cause undesirable incentives for managers to build up finished goods inventory?
A)

absorption costing
B)

variable costing
C)

throughput costing
D)

direct costing

140)

Practical capacity is the denominator-level concept that:
A)

reduces theoretical capacity for unavoidable operating interruptions
B)

is the maximum level of operations at maximum efficiency
C)

is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year
D)

is based on anticipated levels of capacity utilization for the coming budget period

141)

________ reduces theoretical capacity for unavoidable operating interruptions.
A)

Practical capacity
B)

Theoretical capacity
C)

Master-budget capacity utilization
D)

Normal capacity utilization

142)

________ is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year.
A)

Practical capacity
B)

Theoretical capacity
C)

Master-budget capacity utilization
D)

Normal capacity utilization

143)

________ is (are) based on the demand for the output of the plant.
A)

Practical capacity
B)

Master-budget capacity utilization
C)

Normal capacity utilization
D)

Both B and C are correct.

144)

________ is the level of capacity based on producing at full efficiency all the time.
A)

Practical capacity
B)

Theoretical capacity
C)

Normal capacity
D)

Demand capacity

145)

Theoretical capacity allows for:
A)

preventive machine maintenance
B)

interruptions due to uncontrollable power failures
C)

rework of the expected number of defective units
D)

None of these answers is correct.

146)

Theoretical capacity:
A)

is unattainable in the real world
B)

represents an ideal goal of capacity usage
C)

is based on engineering studies that provide information about the technical capabilities of machines used in production
D)

All of these answers are correct.

147)

The budgeted fixed manufacturing cost rate is the lowest for:
A)

practical capacity
B)

theoretical capacity
C)

master-budget capacity utilization
D)

normal capacity utilization

148)

________ provides the lowest estimate of denominator-level capacity.
A)

Practical capacity
B)

Theoretical capacity
C)

Master-budget capacity utilization
D)

Normal capacity utilization

149)

________ is the level of capacity utilization that satisfies average customer demand over a period that includes seasonal, cyclical, and trend factors.
A)

Normal capacity utilization
B)

Theoretical capacity
C)

Master-budget capacity utilization
D)

Practical capacity

Answer the following questions using the information below:

A manufacturing firm is able to produce 1,000 pairs of shoes per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 800 units per hour. The plant actually operates only 27 days per month.

150)

What is the theoretical capacity for the month of April?
A)

1,000,000 units
B)

720,000 units
C)

518,400 units
D)

240,000 units

151)

What is the practical capacity for the month of April?
A)

1,000,000 units
B)

720,000 units
C)

518,400 units
D)

240,000 units

152)

Theoretical capacity:
A)

represents real capacity available to the company
B)

provides the best perspective of actual long-run costs
C)

when used for product costing results in the lowest cost estimate of the four capacity options
D)

replicates the cost of capacity in a competitor’s cost structure

153)

The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit because it is based on:
A)

real available capacity
B)

an unattainable level of capacity
C)

normal capacity utilization
D)

normal costing

154)

Budgeted fixed manufacturing costs of a product using practical capacity:
A)

represents the cost per unit of supplying capacity
B)

can result in setting selling prices that are not competitive
C)

includes the cost of unused capacity
D)

should be used to evaluate a marketing manager’s performance in the current year

155)

Normal capacity utilization:
A)

represents real capacity available to the company
B)

can result in setting selling prices that are not competitive
C)

when used for product costing results in the lowest cost estimate of the four capacity options
D)

represents the maximum units of production intended for current capacity

156)

Master-budget capacity utilization:
A)

hides the amount of unused capacity
B)

represents the maximum units of production intended for current capacity
C)

provides the best cost estimate for benchmarking purposes
D)

when used for product costing results in the lowest cost estimate of the four capacity options

157)

From the perspective of long-run product costing it is best to use:
A)

master-budget capacity utilization to highlight unused capacity
B)

normal capacity utilization for benchmarking purposes
C)

practical capacity for pricing decisions
D)

theoretical capacity for performance evaluation

158)

Customers expect to pay a price that includes:
A)

the cost of unused capacity
B)

the cost of actual capacity used
C)

no capacity costs
D)

Both A and B are correct.

159)

The marketing manager’s performance evaluation is most fair when based on a denominator level using:
A)

practical capacity
B)

theoretical capacity
C)

master-budget capacity utilization
D)

normal capacity utilization

160)

________ is the continuing reduction in the demand for a company’s products that occurs when competitor prices are not met.
A)

Downward demand spiral
B)

Theoretical capacity
C)

Normal capacity
D)

Practical capacity

161)

Using master-budget capacity to set selling prices:
A)

avoids the recalculation of unit costs when expected demand levels change
B)

spreads fixed costs over available capacity
C)

can result in a downward demand spiral
D)

uses the perspective of long-run product pricing

162)

When large differences exist between practical capacity and master-budget capacity utilization, companies may:
A)

classify the difference as planned unused capacity
B)

use master-budget capacity utilization for setting selling prices
C)

use practical capacity for meaningful feedback to the marketing manager
D)

All of these answers are correct.

163)

The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in:
A)

greater utilization of capacity
B)

increased unit costs
C)

more competitive selling prices
D)

greater demand for the product

164)

The higher the denominator level, the:
A)

higher the budgeted fixed manufacturing cost rate
B)

lower the amount of fixed manufacturing costs allocated to each unit produced
C)

higher the favorable production-volume variance
D)

more likely actual output will exceed the denominator level

165)

Operating income reported on the end-of-period financial statements is changed when ________ is (are) used to handle the production-volume variance at the end of the accounting period.
A)

the adjusted allocation-rate approach
B)

the proration approach
C)

the write-off variances to cost of goods sold approach
D)

All of these answers are correct.

166)

Practical capacity may:
A)

increase over time due to improvements in plant layout
B)

decrease over time due to efficiencies offered by new technologies
C)

cannot be altered unless there is a major plant expansion
D)

Both A and B are correct.

167)

The Internal Revenue Service requires the use of ________ for calculating fixed manufacturing costs per unit.
A)

practical capacity
B)

theoretical capacity
C)

master-budget capacity utilization
D)

normal capacity utilization

168)

It is most difficult to estimate ________ because of the need to predict demand for the next few years.
A)

practical capacity
B)

theoretical capacity
C)

master-budget capacity utilization
D)

normal capacity utilization

169)

Managers face uncertainty when estimating:
A)

demand of the product
B)

the denominator level for practical capacity
C)

total fixed manufacturing costs for the next accounting period
D)

All of these answers are correct.

170)

Unused capacity:
A)

is a definite sign of wasted resources
B)

is intended for future use
C)

provides capacity for potential demand surges
D)

Both B and C are correct.

171)

Capacity costs:
A)

are difficult to estimate
B)

don’t provide a useful planning tool for nonmanufacturing firms
C)

cannot be used with activity-based costing
D)

All of these answers are correct.

172)

The breakeven point using absorption costing depends on all of the following factors, EXCEPT:
A)

the number of units sold during the current period
B)

the budgeted level of production
C)

the denominator level chosen for the fixed manufacturing overhead rate
D)

fulfillment of current production quotas

173)

There is not an output-level variance for variable costing, because:
A)

the inventory level decreased during the period
B)

the inventory level increased during the period
C)

fixed manufacturing overhead is allocated to work in process
D)

fixed manufacturing overhead is not allocated to work in process

Answer the following questions using the information below:

Ms. Andrea Chadwick, the company president, has heard that there are multiple breakeven points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for 20X5 is as follows:

Total fixed manufacturing overhead $180,000
Total other fixed expenses $200,000
Total variable manufacturing expenses $120,000
Total other variable expenses $120,000
Units produced 30,000 units
Budgeted production 30,000 units
Units sold 25,000 units
Selling price $40

174)

What are breakeven sales in units using variable costing?
A)

5,625 units
B)

5,769 units
C)

11,875 units
D)

12,180 units

175)

What are breakeven sales in units using absorption costing?
A)

5,625 units
B)

6,667 units
C)

7,692 units
D)

8,000 units

176)

What are breakeven sales in units using absorption costing if the production units are actually 25,000?
A)

5,625 units
B)

6,667 units
C)

7,667 units
D)

8,847 units

Answer the following questions using the information below:

The following information pertains to the Bean Company:

Selling price per unit $123
Standard fixed manufacturing costs per unit $60
Variable selling and administrative costs per unit $12
Standard variable manufacturing costs per unit $3
Fixed selling and administrative costs $48,000
Units produced 10,000 units
Units sold 9,600 units

177)

What is the variable costing breakeven point in units?
A)

833 units
B)

5,556 units
C)

5,838 units
D)

6,000 units

178)

What is the absorption costing breakeven point in units?
A)

917 units
B)

1,000 units
C)

5,838 units
D)

6,000 units

Answer the following questions using the information below:

Greene Manufacturing incurred the following expenses during 20X5:

Fixed manufacturing costs $45,000
Fixed nonmanufacturing costs $35,000
Unit selling price $100
Total unit cost $40
Variable manufacturing cost rate $20
Units produced 1,340 units

179)

What will be the breakeven point if variable costing is used?
A)

1,334 units
B)

1,125 units
C)

1,000 units
D)

563 units

180)

What will be the breakeven point in units if absorption costing is used?
A)

1,330 units
B)

1,000 units
C)

887 units
D)

563 units

181)

What is the breakeven point in units using absorption costing if the units produced are actually 2,250?
A)

1,330 units
B)

1,000 units
C)

887 units
D)

584 units

182)

The formula for computing the breakeven point in units under variable costing includes all of the following EXCEPT:
A)

total fixed costs
B)

contribution margin percentage
C)

target operating income
D)

contribution margin per unit

183)

Bosely Corporation is in the business of selling computers. The following expenses were incurred in March 20X8:

Fixed manufacturing costs $75,000
Fixed nonmanufacturing costs $35,000
Unit selling price $1,200
Variable manufacturing cost $700
Units produced 1,500

What will be the breakeven point if variable costing is used?
A)

150 units
B)

220 units
C)

157 units
D)

92 units

184)

For 20X5, Nichols, Inc., had sales of 75,000 units and production of 100,000 units. Other information for the year included:

Direct manufacturing labor $187,500
Variable manufacturing overhead 100,000
Direct materials 150,000
Variable selling expenses 100,000
Fixed administrative expenses 100,000
Fixed manufacturing overhead 200,000

There was no beginning inventory.

Required:

a. Compute the ending finished goods inventory under both absorption and variable costing.
b. Compute the cost of goods sold under both absorption and variable costing.

185)

Normandeau Corporation manufactures and sells laptop computers and uses standard costing. For the month of September there was no beginning inventory, there were 1,500 units produced and 1,250 units sold. The manufacturing variable cost per unit is $770 and the operating cost per unit was $625. The fixed manufacturing cost is $450,000 and the fixed operating cost is $75,000. The selling price per unit is $1,850.

Required:

Prepare the income statement for Normandeau Corporation for September under variable costing.

186)

Bruster Company sells its products for $66 each. The current production level is 25,000 units, although only 20,000 units are anticipated to be sold.

Unit manufacturing costs are:
Direct materials $12.00
Direct manufacturing labor $18.00
Variable manufacturing costs $9.00
Total fixed manufacturing costs $180,000
Marketing expenses $6.00 per unit, plus $60,000 per year

Required:
a. Prepare an income statement using absorption costing.
b. Prepare an income statement using variable costing.

187)

Ireland Corporation planned to be in operation for three years.

∙ During the first year, 20×1, it had no sales but incurred $120,000 in variable manufacturing expenses and $40,000 in fixed manufacturing expenses.
∙ In 20×2, it sold half of the finished goods inventory from 20×1 for $100,000 but it had no manufacturing costs.
∙ In 20×3, it sold the remainder of the inventory for $120,000, had no manufacturing expenses and went out of business.
∙ Marketing and administrative expenses were fixed and totaled $20,000 each year.

Required:

a. Prepare an income statement for each year using absorption costing.
b. Prepare an income statement for each year using variable costing.

188)

Jarvis Golf Company sells a special putter for $20 each. In March, it sold 28,000 putters while manufacturing 30,000. There was no beginning inventory on March 1. Production information for March was:

Direct manufacturing labor per unit 15 minutes
Fixed selling and administrative costs $ 40,000
Fixed manufacturing overhead 132,000
Direct materials cost per unit 2
Direct manufacturing labor per hour 24
Variable manufacturing overhead per unit 4
Variable selling expenses per unit 2

Required:

a. Compute the cost per unit under both absorption and variable costing.
b. Compute the ending inventories under both absorption and variable costing.
c. Compute operating income under both absorption and variable costing.

189)

Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200 equal size lots.
As the lots are sold, they are cleared at an average cost of $5,000.
Storm drains and driveways are installed at an average cost of $8,000 per site.
Sales commissions are 10% of selling price.
Administrative costs are $850,000 per year.
The average selling price was $160,000 per lot during 20X5 when 50 lots were sold.

During 20X6, the company bought another 2,000-acre island and developed it exactly the same way. Lot sales in 20X6 totaled 300 with an average selling price of $160,000. All costs were the same as in 20X5.

Required:

Prepare income statements for both years using both absorption and variable costing methods.

190)

Megredy Company prepared the following absorption-costing income statement for the year ended May 31, 20X5.

Sales (16,000 units) $320,000
Cost of goods sold 216,000
Gross margin $104,000
Selling and administrative expenses 46,000
Operating income $ 58,000

Additional information follows:

Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning inventory, and 17,500 units were produced. Variable manufacturing costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs.

Required:

Prepare a variable-costing income statement for the same period.

191)

The following data are available for Ruggles Company for the year ended September 30, 20X5.

Sales: 24,000 units at $50 each
Expected and actual production: 30,000 units
Manufacturing costs incurred:
Variable: $525,000
Fixed: $372,000
Nonmanufacturing costs incurred:
Variable: $144,800
Fixed: $77,400
Beginning inventories: none

Required:

a. Determine operating income using the variable-costing approach.
b. Determine operating income using the absorption-costing approach.
c. Explain why operating income is not the same under the two approaches.

192)

Bobby Smith and Sons Company was concerned that increased sales did not result in increased profits for 20X6. Both variable unit and total fixed manufacturing costs for 20X5 and 20X6 remained constant at $20 and $2,000,000, respectively.

In 20X5, the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no beginning inventory in 20X5. In 20X6, the company made 70,000 units and sold 90,000 units at a price of $50. Selling and administrative expenses were all fixed at $100,000 each year.

Required:

a. Prepare income statements for each year using absorption costing.
b. Prepare income statements for each year using variable costing.
c. Explain why the income was different each year using the two methods. Show computations.

193)

Ernsting Bottling Works manufactures glass bottles. January and February operations were identical in every way except for the planned production.

January had a production denominator of 35,000 units.
February had a production denominator of 36,000 units.
Fixed manufacturing costs totaled $126,000.

Sales for both months totaled 45,000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.40 per unit variable and $60,000 fixed. The selling price was $10 per unit.

Required:

Compute the operating income for both months using absorption costing.

194)

Calvin Enterprises produces a specialty statue item. The following information has been provided by management:

Actual sales 150,000 units
Budgeted production 160,000 units
Selling price $34 per unit

Direct manufacturing costs $9 per unit
Fixed manufacturing costs $5 per unit
Variable manufacturing costs $4 per unit
Variable administrative costs $2 per unit

Required:

a. What is the cost per statue if absorption costing is used?
b. What is the cost per statue if “super-variable costing” is used?
c. What is the total throughput contribution?

195)

Match each of the following items with one or more of the denominator-level capacity concepts by putting the appropriate letter(s) by each item:
a. Theoretical capacity
b. Practical capacity
c. Normal capacity utilization
d. Master-budget capacity utilization

1. Reduces theoretical capacity by considering unavoidable operating interruptions
2. Producing at full efficiency all the time
3. Measures capacity levels in terms of demand
4. Level of capacity utilization that satisfies average customer demand over a period
5. Does not allow for plant maintenance
6. Engineering and human resource factors are important when estimating capacity
7. Level of capacity utilization that managers expect for the current budget period
8. Ideal goal of capacity utilization
9. Takes into account seasonal, cyclical, and trend factors
10. Measures capacity levels in terms of what a plant can supply

196)

Wallace’s Wrench Company manufactures socket wrenches.
∙ For next month, the vice president of production plans on producing 4,400 wrenches per day.
∙ The company can produce as many as 5,000 wrenches per day, but is more likely to produce 4,500 per day.
∙ The demand for wrenches for the next three years is expected to average 4,250 wrenches per day.
∙ Fixed manufacturing costs per month total $336,600.
∙ The company works 20 days a month.
∙ Fixed manufacturing overhead is charged on a per-wrench basis.

Required:

a. What is the theoretical fixed manufacturing overhead rate per wrench?
b. What is the practical fixed manufacturing overhead rate per wrench?
c. What is the normal fixed manufacturing overhead rate per wrench?
d. What is the master-budget fixed manufacturing overhead rate per wrench?

197)

Sutton Hot Dog Stand sells hot dogs for $1.35. Variable costs are $1.05 per unit with fixed production costs of $90,000 per month at a level of 400,000 units. Fixed administrative costs total $30,000. Sales average 400,000 units per month, with planned production of 400,000 hot dogs.

Required:

a. What are breakeven unit sales under variable costing?
b. What are breakeven unit sales under absorption costing if she sells everything she prepares?
c. What are breakeven unit sales under absorption costing if average sales are 498,000 and planned production is changed to 500,000?

198)

a. Explain the difference between the variable and absorption costing methods.
b. Which method(s) are required for external reporting? For internal reporting?

199)

Explain the difference between the gross margin format and the contribution margin format for the income statement. What information is highlighted with each?

200)

The manager of the manufacturing division of Iowa Windows does not understand why income went down when sales went up. Some of the information he has selected for evaluation include:
January February
Units produced 40,000 30,000
Units sold 30,000 40,000

Sales $600,000 $800,000
Beginning inventory 0 150,000
Cost of production 600,000 550,000
Ending inventory 150,000 0
Operating income 70,000 35,000

The division operated at normal capacity during January.
Variable manufacturing cost per unit was $5, and the fixed costs were $400,000.
Selling and administrative expenses were all fixed.

Required:
Explain the profit differences. How would variable costing income statements help the manager understand the division’s operating income?

201)

Galliart Company has two identical divisions, East and West. Their sales, production volume, and fixed manufacturing costs have been the same for the last five years. The amounts for each division were as follows:
20X1 20X2 20X3 20X4 20X5
Units produced 50,000 55,000 55,000 44,000 44,000
Units sold 45,000 45,000 50,000 50,000 50,000
Fixed manufacturing costs $55,000 $55,000 $55,000 $55,000 $55,000

East Division uses absorption costing and West Division uses variable costing.
Both use FIFO inventory methods.
Variable manufacturing costs are $5 per unit.
Selling and administrative expenses were identical for each division.
There were no inventories at the beginning of 20X1.

Which division reports the highest income each year? Explain.

202)

Kaiser Company just hired its fourth production manager in three years. All three previous managers had quit because they could not get the company above the break-even point, even though sales had increased somewhat each year. The company was operating at about 60 % of plant capacity. The flatware industry was growing, so increased sales were not out of the question.

I. R. Thinking took the job as manager of the production division with a very attractive salary package. After interviewing for the position, he proposed a salary and bonus package that would give him a very small salary but a large bonus if he took the operating income (using absorption costing) above the breakeven point during his very first year.

Required:

What do you think Mr. Thinking had in mind for increasing the company’s operating income?

203)

Explain three methods under absorption costing that managers can use to improve operating income.

204)

Briefly discuss two methods of reducing the undesirable incentives associated with the use of absorption costing to evaluate the performance of a plant manager.

205)

What is throughput costing? What advantages is it purported to have over variable and absorption costing?

206)

a. List the four different measures of capacity.
b. Which measure of capacity is best for setting prices? Why?
c. Which measure of capacity is best for evaluating the performance of the marketing manager for the current year? Why?

207)

Explain how using master-budget capacity utilization for setting prices can lead to a downward demand spiral.

208)

Should a company with high fixed costs and unused capacity raise selling prices to try to fully recoup its costs?

209)

How does the capacity level chosen to compute the budgeted fixed overhead cost rate affect the production-volume variance?

210)

Discuss the three methods to dispose of production volume variance.

Chapter 10

Determining How Costs Behave

1)

One assumption frequently made in cost behavior estimation is that changes in total costs can be explained by changes in the level of a single activity.

2)

A cost function is a mathematical description of how a cost changes with changes in the level of an activity relating to that cost.

3)

All cost functions are linear.

4)

When plotted on a graph, cost functions are usually displayed by having the level of activity (machine hours, etc.) plotted on the vertical axis (called the y-axis ) and the amount of total costs corresponding to (or dependent on) the levels of that activity on the horizontal axis (called the x-axis).

5)

When estimating a cost function, cost behavior can be approximated by a linear cost function within the relevant range.

6)

y = a + bX represents the general form of the linear cost function.

7)

A linear cost function can only represent fixed cost behavior.

8)

In a graphical display of a cost function, the steepness of the slope represents the total amount of fixed costs.

9)

The longer the time horizon, the more likely that a cost will have a fixed cost behavior.

10)

Outside of the relevant range, variable and fixed cost-behavior patterns may change.

11)

Any linear cost function can be graphed by knowing only the slope coefficient.

12)

Knowing the proper relevant range is essential to properly classify costs.

13)

It can be inferred that when there is a high correlation between two variables, one is the cause of the other.

14)

An example of a physical cause-and-effect relationship is when additional units of production increase total direct material costs.

15)

Managers should use past data to create a cost function and then use the exact information provided by that cost function to create the budgetary forecast for the next year.

16)

The industrial engineering method of cost estimation is based on opinions from various departments and is quick and of low cost to apply.

17)

The account analysis method of cost estimation classifies account costs as fixed, mixed, or variable using qualitative judgments.

18)

The industrial engineering method uses a formal mathematical method to identify cause-and-effect relationships among past data observations.

19)

The quantitative analysis method uses a formal mathematical method to identify cause-and-effect relationships among past data observations.

20)

Individual cost items included in the dependent variable should have the same cost driver or more than one cost function should be estimated.

21)

The first step in estimating a cost function using quantitative analysis is to identify the independent variable.

22)

In estimating a cost function using quantitative analysis, the independent variable is the factor used to predict the dependent variable.

23)

An example of time-series data is to compile maintenance costs of twelve different manufacturing plants incurred during 20X5.

24)

Evidence of relationships and extreme observations are highlighted when costs and their cost drivers are plotted graphically.

25)

The most common forms of quantitative analysis are the conference method and the account analysis method.

26)

Regression analysis relies on only two observations to estimate a linear cost function.

27)

The y-intercept of a linear cost function is an accurate cost assessment of using zero machine-hours, even if zero machine-hours is outside of the relevant range.

28)

A positive slope of a regression line indicates that total costs are lower for higher values of the cost driver.

29)

The high-low method is more accurate than the regression method of estimating a cost function.

30)

If inaccurate cost estimates are too high, then a company may unknowingly reward a manager for poor performance.

31)

Simple regression is known as “simple” because it is much less complex than the high-low method.

32)

The high-low method involves choosing the period of highest cost driver activity and the period of lowest cost driver activity.

33)

A strength of the high-low method of cost estimation is that the high point and the low point are representative of all data points.

34)

In regression analysis, the term “goodness of fit” indicates the strength of the relationship between the cost driver and the costs.

35)

Accurate cost estimation is useful both in understanding past cost relationships and as a means of predicting costs.

36)

Machine-hours is a more economically plausible cost driver of machine maintenance than number of direct manufacturing labor-hours.

37)

The smaller the vertical difference between actual costs and predicted costs the better the goodness of fit.

38)

Choosing an economically plausible cost driver for indirect costs is fairly simple and knowledge of operations is unnecessary.

39)

A flat or slightly sloped regression line indicates a strong relationship.

40)

When using an activity-based costing system, a batch-level cost must have a batch-level cost driver.

41)

Activity-based costing systems use the quantitative analysis method exclusively for cost estimation because of its accuracy.

42)

Economic plausibility is an important criterion for choosing a cost driver.

43)

An “economy of scale” function is an example of a linear cost function.

44)

A step cost function is an example of a nonlinear cost function.

45)

Step fixed-cost functions are variable over the long run.

46)

An example of a step variable-cost function is the cost of material-handling labor when inputs are acquired in discrete quantities.

47)

A learning curve measures the effect of learning on efficiency.

48)

Plotting learning curve observations is helpful in selecting the appropriate learning curve model.

49)

When new products are introduced, learning-curve effects can have a major influence on production scheduling.

50)

It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance.

51)

The cumulative average-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture.

52)

The incremental unit-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture.

53)

A learning curve is a function that measures how labor-hours per unit decrease, as units of production increase.

54)

Data collection problems can arise when data is recorded manually rather than electronically.

55)

Misinterpretation of data can arise when fixed costs are reported on a per unit basis.

56)

Inflation is a fact, and therefore its influence should not be removed from the data.

57)

Fixed costs are sometimes allocated to individual products as part of the standard costing system. When this is the case, they should be treated as variable costs for purposes of future cost estimation.

58)

The coefficient of determination (r2) measures the percentage of variation in Y explained by X (the independent variable).

59)

Generally a coefficient of determination (r2) that is less than 0.30 indicates a goodness of fit.

60)

Multicollinearity is NOT a concern in simple regression.

61)

Multicollinearity exists in multiple regression when two or more independent variables are highly correlated with each other.

62)

Which of the following statements related to assumptions about estimating linear cost functions is FALSE?
A)

Variations in a single cost driver explain variations in total costs.
B)

A cost object is anything for which a separate measurement of costs is desired.
C)

A linear function approximates cost behavior within the relevant range of the cost driver.
D)

A high correlation between two variables ensures that a cause-and-effect relationship exists.

63)

A high correlation between two variables s and t indicates that:
A)

s may cause t, or t may cause s
B)

both may be affected by a third variable
C)

the correlation may be due to random chance
D)

All of these answers are correct.

64)

Which of the following does NOT represent a cause-and-effect relationship?
A)

Material costs increase as the number of units produced increases.
B)

A company is charged 40 cents for each brochure printed and mailed.
C)

Utility costs increase at the same time that insurance costs increase.
D)

It makes sense that if a complex product has a large number of parts it will take longer to assemble than a simple product with fewer parts.

65)

Dougherty Company employs 20 individuals. Eight employees are paid $12 per hour and the rest are salaried employees paid $3,000 a month. How would total costs of personnel be classified?
A)

variable
B)

mixed
C)

a variable cost within a relevant range
D)

a fixed cost within a relevant range

66)

McDevitt Company employs 6 individuals. They are all paid $12.50 per hour. How would total costs of personnel be classified?
A)

variable
B)

mixed
C)

a variable cost within a relevant range
D)

a fixed cost within a relevant range

67)

For January, the cost components of a picture frame include $0.35 for the glass, $.65 for the wooden frame, and $0.80 for assembly. The assembly desk and tools cost $400. 1,000 frames are expected to be produced in the coming year. What cost function best represents these costs?
A)

y = 1.80 + 400X
B)

y = 400 +1.80X
C)

y = 2.20 + 1,000X
D)

y = 1.00 + 400X

68)

The cost components of an air conditioner include $35 for the compressor, $11.50 for the sheet molded compound frame, and $80 per unit for assembly. The factory machines and tools cost is $55,000. The company expects to produce 1,500 air conditioners in the coming year. What cost function best represents these costs?
A)

y = 1500 + 126.5X
B)

y = 1,500 +55,000X
C)

y = 55,000 + 1,500X
D)

y = 55,000 +126.50X

69)

A linear cost function can represent:
A)

mixed cost behaviors
B)

fixed cost behaviors
C)

variable cost behaviors
D)

All of these answers are correct.

70)

The cost function y = 1,000 + 5X:
A)

has a slope coefficient of 1,000
B)

has an intercept of 5
C)

is a straight line
D)

represents a fixed cost

71)

The cost function y = 100 + 10X:
A)

has a slope coefficient of 100
B)

has an intercept of 100
C)

is a nonlinear
D)

represents a fixed cost

72)

The cost function y = 8,000 + 4X:
A)

represents a mixed cost
B)

will intersect the y-axis at 4
C)

has a slope coefficient of 8,000
D)

is a curved line

73)

The cost function y = 80 + 4X:
A)

has a slope coefficient of -4
B)

will intersect the y-axis at 4
C)

has a slope coefficient of 4
D)

is a curved line

74)

Which of the following is an equation of a variable cost function?
A)

y = b
B)

y = a + bX
C)

y = bX
D)

y = a

75)

The industrial engineering method estimates cost functions:
A)

based on analysis and opinions gathered from various departments
B)

quickly while incurring little cost
C)

using qualitative rather than quantitative analysis
D)

by analyzing the relationship between inputs and outputs in physical terms

76)

The conference method estimates cost functions:
A)

using quantitative methods that can be very time consuming and costly
B)

based on analysis and opinions gathered from various departments
C)

using time-and-motion studies
D)

by mathematically analyzing the relationship between inputs and outputs in physical terms

77)

The account analysis method estimates cost functions:
A)

by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis
B)

using time-and-motion studies
C)

at a high cost, which renders it seldom used
D)

in a manner that cannot be usefully combined with any other cost estimation methods

78)

Quantitative analysis methods estimate cost functions:
A)

which depend on the experience and judgment of the analyst for accuracy
B)

based on analysis and opinions gathered from various departments
C)

using significant amounts of historical data
D)

using the pooling of knowledge from each value chain function

79)

Gathering cost information through observations and interviews from departments within an organization is known as the:
A)

account analysis method
B)

conference method
C)

industrial engineering method
D)

quantitative analysis method

80)

Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fixed, or mixed using qualitative methods?
A)

the account analysis method
B)

the conference method
C)

the industrial engineering method
D)

the quantitative analysis method

81)

Which cost estimation method uses a formal mathematical method to develop cost functions based on past data?
A)

the account analysis method
B)

the conference method
C)

the industrial engineering method
D)

the quantitative analysis method

82)

Which cost estimation method may use time-and-motion studies to analyze the relationship between inputs and outputs in physical terms?
A)

the account analysis method
B)

the conference method
C)

the industrial engineering method
D)

the quantitative analysis method

Answer the following questions using the information below:

At the Jordan Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs.
Total personnel department costs are $160,000.

Department A B C
Number of employees 30 270 100
The number of new hires 8 12 5

83)

If the number of employees is considered the cost driver, what amount of personnel costs will be allocated to Department A?
A)

$12,000
B)

$5,333
C)

$51,200
D)

$20,000

84)

If the number of new hires is considered the cost driver, what amount of personnel costs will be allocated to Department A?
A)

$12,000
B)

$5,333
C)

$51,200
D)

$20,000

85)

Which cost estimation method is being used by Jordan Company?
A)

the industrial engineering method
B)

the conference method
C)

the account analysis method
D)

the quantitative analysis method

Answer the following questions using the information below:

At the Holden Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs.
Total library and information center costs are $75,000.

Department A B C
Number of employees 125 500 125
The number of engineers 0 75 25

86)

Which cost estimation method is being used by Holden Company?
A)

the quantitative analysis method
B)

the industrial engineering method
C)

the conference method
D)

the account analysis method

87)

If the number of employees is considered the cost driver, what amount of library and information center costs will be allocated to Department A?
A)

$50,000
B)

$12,500
C)

$0
D)

$56,250

88)

If the number of engineers is considered the cost driver, what amount of library and information center costs will be allocated to Department A?
A)

$50,000
B)

$12,500
C)

$0
D)

$56,250

Answer the following questions using the information below:

Penny’s TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 20X8 operations.

Sales (2,000 televisions) $ 900,000
Cost of goods sold 400,000
Store manager’s salary per year 70,000
Operating costs per year 157,000
Advertising and promotion per year 15,000
Commissions (4% of sales) 36,000

89)

What was the variable cost per unit sold for 20X8?
A)

$18
B)

$218
C)

$339
D)

$200

90)

What were total fixed costs for 20X8?
A)

$678,000
B)

$436,000
C)

$242,000
D)

$227,000

91)

What are the estimated total costs if Penny’s expects to sell 3,000 units next year?
A)

$896,000
B)

$678,000
C)

$1,017,000
D)

$799,000

92)

Which cost estimation method is being used by Penny’s TV and Appliance Store?
A)

the industrial engineering method
B)

the conference method
C)

the account analysis method
D)

the quantitative analysis method

Answer the following questions using the information below:

Miller’s Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2008 operations.

Sales (5,000 microwave ovens) $ 1,350,000
Cost of goods sold 540,000
Store manager’s salary per year 75,000
Operating costs per year 225,000
Advertising and promotion per year 25,000
Commissions (4% of sales) 67,500

93)

Which cost estimation method is being used by Miller’s Good Value Appliance Store?
A)

the account analysis method
B)

the conference method
C)

the quantitative analysis method
D)

the industrial engineering method

94)

What was the variable cost per unit sold for 2008?
A)

$13.50
B)

$108
C)

$121.50
D)

$186.50

95)

What were total fixed costs for 2008?
A)

$932,500
B)

$325,000
C)

$250,000
D)

$225,000

96)

What are the estimated total costs if Miller’s expects to sell 6,500 units next year?
A)

$932,500
B)

$1,104,750
C)

$1,017,500
D)

$665,000

97)

The cost to be predicted is referred to as the:
A)

independent variable
B)

dependent variable
C)

cost driver
D)

regression

98)

The independent variable:
A)

is also referred to as the cost driver
B)

may also be called the cost-allocation base if referring to an indirect cost
C)

should have an economically plausible relationship with the dependent variable
D)

All of these answers are correct.

99)

How many separate cost pools should be formed given the following information:
Cost Cost driver
Postage costs # of brochures mailed
Printing and paper costs # of brochures mailed
Quality control costs # of inspections
Customer service costs # of customers served

A)

1 cost pool
B)

2 cost pools
C)

3 cost pools
D)

4 cost pools

100)

Place the following steps in order for estimating a cost function using quantitative analysis:
A = Plot the data
B = Estimate the cost function
C = Choose the dependent variable
D = Identify the cost driver

A)

D C A B
B)

C D A B
C)

A D C B
D)

D C B A

101)

All individual cost items included in the dependent variable should have:
A)

the same cost driver
B)

a cause-and-effect relationship with the independent variable
C)

an economically plausible relationship with the independent variable
D)

All of these answers are correct.

102)

Collecting data on the dependent variable and the cost driver may include:
A)

interviews with managers
B)

collecting data over a long period of time
C)

collecting data from different entities over the same period of time
D)

All of these answers are correct.

103)

A plot of data that results in bunched points with little slope generally indicates:
A)

a strong relationship
B)

a weak relationship
C)

a positive relationship
D)

a negative relationship

104)

A plot of data that results in one extreme observation MOST likely indicates that:
A)

more than one cost pool should be used
B)

an unusual event such as a plant shutdown occurred during that month
C)

the cost-allocation base has been incorrectly identified
D)

individual cost items do not have the same cost driver

105)

Cross-sectional data analysis includes:
A)

using a variety of time periods to measure the dependent variable
B)

using the highest and lowest observation
C)

observing different entities during the same time period
D)

comparing information in different cost pools

106)

Time-series data analysis includes:
A)

using a variety of time periods to measure the dependent variable
B)

using the highest and lowest observation
C)

observing different entities during the same time period
D)

comparing information in different cost pools

107)

When using the high-low method, the two observations used are the high and low observations of the:
A)

cost driver
B)

dependent variables
C)

slope coefficient
D)

residual term

108)

When using the high-low method, the denominator of the equation that determines the slope is the:
A)

dependent variable
B)

independent variable
C)

difference between the high and low observations of the cost driver
D)

difference between the high and low observations of the dependent variables

109)

The high-low method:
A)

easily handles estimating the relationship between the dependent variable and two or more independent variables
B)

is more accurate than the regression method
C)

calculates the slope coefficient using only two observed values within the relevant range
D)

uses the residual term to measure goodness of fit

110)

Put the following steps in order for using the high-low method of estimating a cost function:
A = Identify the cost function
B = Calculate the constant
C = Calculate the slope coefficient
D = Identify the highest and lowest observed values

A)

D C A B
B)

C D A B
C)

A D C B
D)

D C B A

111)

Regression analysis:
A)

is simple to compute
B)

measures the change in a dependent variable associated with one or more independent variables
C)

is mathematical so it does not require an understanding of operations
D)

uses the constant to measure goodness of fit

112)

Simple regression differs from multiple regression in that:
A)

multiple regression uses all available data to estimate the cost function, whereas simple regression only uses simple data
B)

simple regression is limited to the use of only the dependent variables and multiple regression can use both dependent and independent variables
C)

simple regression uses only one independent variable and multiple regression uses more than one independent variable
D)

simple regression uses only one dependent variable and multiple regression uses more than one dependent variable

113)

The slope of the line of regression is the:
A)

rate at which the dependent variable varies
B)

rate at which the independent variable varies
C)

level of total fixed costs
D)

level of total variable costs

Answer the following questions using the information below:

The Hunter Company uses the high-low method to estimate the cost function. The information for 20X5 is provided below:
Machine-hours Labor Costs
Highest observation of cost driver 400 $10,000
Lowest observation of cost driver 240 $ 6,800

114)

What is the slope coefficient per machine-hour?
A)

$28.33
B)

$0.05
C)

$20.00
D)

$25.00

115)

What is the constant for the estimating cost equation?
A)

$2,000
B)

$6,800
C)

$8,000
D)

$10,000

116)

What is the estimate of the total cost when 300 machine-hours are used?
A)

$2,000
B)

$4,000
C)

$6,000
D)

$8,000

Answer the following questions using the information below:

The Taranto Company uses the high-low method to estimate it’s cost function. The information for 2008 is provided below:
Machine-hours Costs
Highest observation of cost driver 2,000 $225,000
Lowest observation of cost driver 1,000 $ 125,000

117)

What is the slope coefficient per machine-hour?
A)

$125.00
B)

$12.50
C)

$10.00
D)

$100.00

118)

What is the constant for the estimating cost equation?
A)

$125,000
B)

$225,000
C)

$25,000
D)

$0

119)

What is the estimate of the total cost when 1,100 machine-hours are used?
A)

$125,000
B)

$135,000
C)

$150,000
D)

$200,000

Answer the following questions using the information below:

For Carroll Company, labor-hours are 12,500 and wages $47,000 at the high point of the relevant range, and labor-hours are 7,500 and wages $35,000 at the low point of the relevant range.

120)

What is the slope coefficient per labor-hour?
A)

$4.67
B)

$3.76
C)

$2.40
D)

$0.42

121)

What is the constant?
A)

$17,000
B)

$12,000
C)

$5,000
D)

$41,750

122)

What is the estimate of total labor costs at Carroll Company when 10,000 labor-hours are used?
A)

$17,000
B)

$41,000
C)

$21,167
D)

$27,000

Answer the following questions using the information below:

The Barnett Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Barnett Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

Cost Hours
$24,900 5,250
24,000 5,500
36,400 7,500
44,160 9,750
45,000 9,500

123)

What is the cost function?
A)

y = $43,191 + $0.19X
B)

y = $4,875 + $5.25X
C)

y = $41,900 + $0.23X
D)

y = $2,430 + $4.28X

124)

What is the estimated total cost at an operating level of 8,000 hours?
A)

$43,740
B)

$36,670
C)

$46,875
D)

$37,125

Answer the following questions using the information below:

Presented below are the production data for the first six months of the year for the mixed costs incurred by Gallup Company.

Month Cost Units
January $4,890 4,100
February 4,024 3,200
March 6,480 5,300
April 8,840 7,500
May 5,800 4,800
June 7,336 6,600

Gallup Company uses the high-low method to analyze mixed costs.

125)

How would the cost function be stated?
A)

y = $440 + $1.12X
B)

y = $3,562.30 + $0.144X
C)

y = $107.20 + $1.224X
D)

y = $7,850 + $0.132X

126)

What is the estimated total cost at an operating level of 5,000 units?
A)

$6,227.20
B)

$6,040.00
C)

$4,283.20
D)

$8,510.00

Answer the following questions using the information below:

The Gangwere Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Gangwere Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

Month Cost Hours
January $40,000 3,500
February 24,400 2,000
March 31,280 2,450
April 36,400 3,000
May 44,160 3,900
June 42,400 3,740

127)

How is the cost function stated?
A)

y = $26,672 + $1.84X
B)

y = $21,360 + $1.52X
C)

y = $10,112 + $8.64X
D)

y = $3,600 + $10.40X

128)

What is the estimated total cost at an operating level of 2,850 hours?
A)

$25,692
B)

$33,240
C)

$32,016
D)

$34,736

129)

An inaccurate cost function with a slope coefficient that is estimated too low may MOST likely result in:
A)

predicting total costs that are too high
B)

initiating cost cutting measures when they are unnecessary
C)

evaluating a weak manager as having strong performance
D)

promoting a product that is actually more profitable than budgeted

130)

An inaccurate cost function with a constant that is estimated too high may MOST likely result in:
A)

evaluating a weak manager as providing strong performance
B)

promoting a product that is actually less profitable than budgeted
C)

predicting total costs that are too low
D)

replicating processes that are truly cost saving

131)

A cost function with a lower constant than a year ago could indicate all of the following EXCEPT:
A)

last year’s cost function was inaccurate
B)

a new operations manager is being effective
C)

the sales commission percentage has decreased
D)

insurance premiums have decreased

132)

A cost function with a lower slope coefficient than a year ago could indicate that:
A)

total variable costs have decreased
B)

new cost-cutting initiatives are beneficial
C)

production has decreased
D)

rental costs have decreased

133)

If machine maintenance is scheduled at a time when production is at a low level, then:
A)

low production is the cost driver of high repair costs
B)

an understanding of operations is needed to determine an appropriate cost driver
C)

low production should be avoided since it is the cause of machine maintenance
D)

machine maintenance cannot be accurately predicted

134)

Goodness-of-fit measures how well the predicted values in a cost estimating equation:
A)

match the cost driver
B)

determine the level of activity
C)

match the actual cost observations
D)

rely on the independent variable

135)

A steeply sloped regression line indicates:
A)

a strong relationship between the cost driver and costs
B)

a greater proportion of fixed costs than variable costs
C)

an economically plausible relationship exists
D)

management should cut costs

136)

The smaller the residual term the:
A)

stronger the relationship between the cost driver and costs
B)

weaker the relationship between the cost driver and costs
C)

steeper the slope of the cost function
D)

gentler the slope of the cost function

137)

When using activity-based costing all of the following are true EXCEPT that:
A)

all cost drivers should be output unit-level cost drivers
B)

there are a great number and variety of cost drivers and cost pools
C)

industrial engineering, conference, and regression analysis can be used to estimate slope coefficients
D)

the more cost pools, the greater the chance of estimation error

138)

When evaluating and choosing cost drivers all of the following are true EXCEPT:
A)

the cost driver is economically plausible.
B)

there is a significance of effect of the independent variable
C)

there is an independent verification of the relationship by a committee of cost accountants
D)

there is a goodness of fit between the various data points and the regression line

139)

Over the short run, a nonlinear cost function would MOST likely result from all of the following EXCEPT:
A)

quantity discounts for each additional 10,000 parts purchased
B)

purchasing another $250,000 printing machine to double production
C)

hiring a third production supervisor
D)

incurring greater total utility costs for each machine-hour of operation

140)

Examples of nonlinear cost functions include all of the following EXCEPT:
A)

step variable-cost functions
B)

step fixed-cost functions
C)

learning curves
D)

mixed cost functions

141)

A step fixed-cost function:
A)

is fixed over the short run but not over the long run
B)

is often approximated with a continuous variable-cost function
C)

remains the same over a narrow range of activity
D)

example includes setup costs

142)

A step variable-cost function:
A)

is fixed over the long run but not over the short run
B)

is often approximated with a continuous variable-cost function
C)

remains the same over a wide range of activity
D)

example includes adding additional warehouse space

143)

A learning curve is a function:
A)

that measures the decline in labor-hours per unit due to workers becoming better at a job
B)

that increases at a greater rate as workers become more familiar with their tasks
C)

where unit costs increase as productivity increases
D)

that is linear

144)

An experience curve:
A)

is a narrower application of the learning curve
B)

measures the decline in cost per unit as production decreases for various value-chain functions such as marketing as production increases
C)

only measures the decline in labor-hours per unit as units produced increases
D)

measures the increase in cost per unit as productivity increases

145)

To complete the first setup on a new machine took an employee 200 minutes. Using an 80% cumulative average-time learning curve indicates that the second setup on the new machine is expected to take:
A)

160 minutes
B)

120 minutes
C)

80 minutes
D)

60 minutes

146)

To complete the first setup on a new machine took an employee 200 minutes. Using an 80% incremental unit-time learning model indicates that the second setup on the new machine is expected to take:
A)

160 minutes
B)

120 minutes
C)

80 minutes
D)

60 minutes

147)

Learning curve effects can be incorporated:
A)

into performance evaluations
B)

into production schedules
C)

when using costs to price products
D)

All of these answers are correct.

148)

The learning-curve models presented in the text examine:
A)

how quality increases over time
B)

how efficiency increases as more units are produced
C)

how setup costs decline as more workers are added
D)

the change in variable costs when quantity discounts are available

149)

The ideal database contains:
A)

numerous cost driver observations
B)

reliably measured observations
C)

cost driver observations spanning a wide range
D)

All of these answers are correct.

150)

Data collection problems arise when:
A)

data are recorded electronically rather than manually
B)

accrual-basis costs are used rather than cash-basis costs
C)

fixed and variable costs are not separately identified and both are allocated to products on a per unit basis
D)

purely inflationary price effects are removed

151)

Managers who design data collection reports that regularly and routinely obtain required data are helping to ensure that:
A)

inflationary effects are removed
B)

all data are recorded
C)

extreme values are not used to calculate cost functions
D)

the relationship between the cost driver and the cost remains stable over time

152)

Extreme values of observations may be the result of:
A)

a misplaced decimal point in the recorded data
B)

classifying a cost incorrectly
C)

a temporary plant shutdown
D)

All of these answers are correct.

153)

All of the following are cost analysis problems EXCEPT:
A)

fixed costs are allocated as if they are variable costs
B)

extreme observations are adjusted or removed
C)

time periods differ for measuring items included in the dependent variable and the cost driver(s)
D)

homogeneous relationships between individual cost items in the dependent variable pool and cost drivers may not be present

154)

The coefficient of determination is important in explaining variances in estimating equations. For a certain estimating equation, the unexplained variation was given as 26,505. The total variation was given as 46,500. What is the coefficient of determination for the equation?
A)

0.34
B)

0.43
C)

0.57
D)

0.66

155)

The Bhaskara Corporation used regression analysis to predict the annual cost of indirect materials. The results were as follows:

Indirect Materials Cost Explained by Units Produced
Constant $21,890
Standard error of Y estimate $4,560
r2 0.7832
Number of observations 22

X coefficient(s) 11.75
Standard error of coefficient(s) 2.1876

What is the linear cost function?
A)

Y = $21,890 + $11.75X
B)

Y = $4,560 + $5.15X
C)

Y = $20,100 + $4.60X
D)

None of these answers is correct.

156)

Craig’s Cola was to manufacture 1,000 cases of cola next week. The accountant provided the following analysis of total manufacturing costs.

Variable Coefficient Standard Error t-Value
Constant 100 71.94 1.39
Independent variable 200 91.74 2.18

r2 = 0.82

What is the estimated cost of producing the 1,000 cases of cola?
A)

$200,100
B)

$142,071
C)

$100,200
D)

$9,000

157)

Pam’s Stables used two different independent variables (trainer hours and number of horses) in two different equations to evaluate the cost of training horses. The most recent results of the two regressions are as follows:

Trainer’s hours:
Variable Coefficient Standard Error t-Value
Constant $913.32 $198.12 4.61
Independent Variable $20.90 $2.94 7.11

r2 = 0.56

Number of horses:
Variable Coefficient Standard Error t-Value
Constant $4,764.50 $1,073.09 4.44
Independent Variable $864.98 $247.14 3.50

r2 = 0.63

What is the estimated total cost for the coming year if 16,000 trainer hours are incurred and the stable has 400 horses to be trained, based on the best cost driver?
A)

$99,929.09
B)

$350,756.50
C)

$335,313.32
D)

$13,844,444.50

158)

A major concern that arises with multiple regression is multicollinearity, which exists when:
A)

in simple regression, when the dependent variable is not normally distributed
B)

in simple regression, when the R2 statistic is low
C)

in multiple regression, when the R2 statistic is low
D)

in multiple regression, when two or more independent variables are correlated with one another

159)

In multiple regression, when two or more independent variables are correlated with one another, the situation is known as:
A)

heteroscedasticity
B)

homoscedasticity
C)

multicollinearity
D)

autocorrelation

160)

Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver.

a. Direct manufacturing labor is $10 per hour.
b. Direct materials cost $9.20 per cubic yard.
c. Utilities have a minimum charge of $1,000, plus a charge of $0.05 per kilowatt-hour.
d. Machine operating costs include $200,000 of machine depreciation per year, plus $75 of utility costs for each day the machinery is in operation.

161)

Write a linear cost function equation for each of the following conditions. Use y for estimated costs and x for activity of the cost driver.

a. Direct materials cost is $.75 per pound.
b. Direct labor cost is $16.75 per hour.
c. Auto rental has a fixed fee of $75.00 per day plus $.50 per mile driven.
d. Machine operating costs include $350 of maintenance per month, and $5.00 of coolant usage costs for each day the machinery is in operation.

162)

The cost of the personnel department at the Miller Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are $120,000.
Department Department Department
Cost Driver A B C
Number of employees 300 250 50
The number of new hires 15 25 10

Required:
Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is
a. number of employees.
b. the number of new hires.
c. Which cost estimation method is being used by Miller Company?

163)

The managers of the production department have decided to use the production levels of 20X2 and 20X4 as examples of the highest and lowest years of operating levels. Data for those years are as follows:

Year Chemicals used Overhead Costs
20X2 140,000 gallons $115,000
20X4 120,000 gallons $100,000

Required:

What is the cost estimating equation for the department if gallons of chemicals are used as the cost driver?

164)

Wimmer’s Storage ran its freezer in February, a slow month, for 360 hours for a total cost of $57,600. In July, a peak month, the freezer ran for 720 hours for a total cost of $82,080.

Required:

a. What is the cost estimating equation for the department if hours of freezer use are used as the cost driver?

b. What is the estimated total cost at an operating level of 500 hours?

165)

The Wildcat Company has provided the following information:

Units of Output 30,000 Units 42,000 Units
Direct materials $ 180,000 $ 252,000
Workers’ wages 1,080,000 1,512,000
Supervisors’ salaries 312,000 312,000
Equipment depreciation 151,200 151,200
Maintenance 81,600 110,400
Utilities 384,000 528,000
Total $2,188,800 $2,865,600

Using the high-low method and the information provided above,
a. identify the linear cost function equation and
b. estimate the total cost at 36,000 units of output.

166)

As part of his job as cost analyst, Max Thompson collected the following information concerning the operations of the Machining Department:

Observation Machine-hours Total Operating Costs
January 4,000 $45,000
February 4,600 49,500
March 3,800 45,750
April 4,400 48,000
May 4,500 49,800

Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. If June’s estimated machine-hours total 4,200, what are the total estimated costs of the Machining Department?

167)

Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, Kansas. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected:

Machine-hours Kilowatt-hours Total Overhead Costs
January 3,800 4,520,000 $138,000
February 3,650 4,340,000 136,800
March 3,900 4,500,000 139,200
April 3,300 4,290,000 136,800
May 3,250 4,200,000 126,000
June 3,100 4,120,000 120,000

Required:

a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
c. For July, the company ran the machines for 3,000 hours and used 4,000,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July?

168)

Patrick Ross, the president of Ross’s Wild Game Company, has asked for information about the cost behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available:

Month Machine-hours Overhead Costs
February 1,700 $20,500
March 2,800 22,250
April 1,000 19,950
May 2,500 21,500
June 3,500 23,950

Required:

Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver.

169)

Harry’s Picture manufactures various picture frames. Each new employee takes 5 hours to make the first picture frame and 4 hours to make the second. The manufacturing overhead charge per hour is $20.

Required:

a. What is the learning-curve percentage, assuming the cumulative average method?
b. What is the time needed to build 8 picture frames by a new employee using the cumulative average-time method? You may use an index of -0.1520.
c. What is the time needed to produce the 16th frame by a new employee using the incremental unit-time method? You may use an index of -0.3219.
d. How much manufacturing overhead would be charged to the 16 picture frames using the average-time approach?

170)

Each time Mayberry Nursery hires a new employee, it must wait for some period of time before the employee can meet production standards. Management is unsure of the learning curve in its operations but it knows the first job by a new employee averages 30 hours and the second job averages 24 hours. Assume all jobs to be equal in size.

Required:

a. What is the learning-curve percentage, assuming the cumulative average-time method?
b. What is the time for a new employee to build 16 units with this learning curve using the cumulative average-time method? You may use an index of -0.1520.

171)

Joe’s Copy Center hires a new employee. Joe knows he has to be patient with the employee until the employee gains enough experience to meet production standards. Joe is unsure of the learning curve in his operation, but he knows the first job by a new employee averages 40 minutes and the second job averages 32 minutes. Assume all jobs to be equal in size.

Required:

a. What is the learning-curve percentage, assuming the cumulative average-time method?
b. What is the time for a new employee to do 32 jobs with this learning curve using the cumulative average-time method? You may use an index of -0.1520.

172)

The new cost analyst in your accounting department has just received a computer-generated report that contains the results of a simple regression program for cost estimation. The summary results of the report appear as follows:

Variable Coefficient Standard Error t-Value
Constant $35.92 $16.02 2.24
Independent variable $563.80 $205.40 2.74

r2 = 0.75

Required:
a. What is the cost estimation equation according to the report?
b. What is the goodness of fit? What does it tell about the estimating equation?

173)

Newton Company used least squares regression analysis to obtain the following output:
Payroll Department Cost
Explained by Number of Employees
Constant $5,800
Standard error of Y estimate 630
r2 0.8924
Number of observations 20

X coefficient(s) $1.902
Standard error of coefficient(s) 0.0966

Required:
a. What is the total fixed cost?
b. What is the variable cost per employee?
c. Prepare the linear cost function.
d. What is the coefficient of determination? Comment on the goodness of fit.
174)

Schotte Manufacturing Company uses two different independent variables (machine-hours and number of packages) in two different equations to evaluate costs of the packaging department. The most recent results of the two regressions are as follows:

Machine-hours:
Variable Coefficient Standard Error t-Value
Constant $748.30 $341.20 2.19
Independent Variable $52.90 $35.20 1.50

r2 = 0.33

Number of packages:
Variable Coefficient Standard Error t-Value
Constant $242.90 $75.04 3.24
Independent Variable $5.60 $2.00 2.80

r2 = 0.73

Required:

a. What are the estimating equations for each cost driver?
b. Which cost driver is best and why?

175)

What are the two assumptions behind a simple linear cost function? Briefly explain the three ways that a linear cost function may behave?

176)

Munir Hassan, controller, gathered data on overhead costs and direct labor-hours over the past 12 months. List and discuss the different approaches Munir can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver.

177)

List and briefly describe the six steps in estimating a cost function under quantitative analysis.

178)

What are the three criteria a company should use to evaluate and choose a cost driver? Briefly explain each of the three criteria.

179)

Discuss the potential use of nonlinear curves in cost functions and cost analysis. Give some examples.

180)

Explain the difference between the cumulative average-time learning model and the incremental unit-time learning model.

181)

Roger Moon has just purchased the film studio of a movie company that specializes in comedies. He found that the company did not try to estimate the cost of making a movie. Instead, it just gave the producer a budget and told him/her to make a movie within budget. Mr. Moon does not like the former movie-budget concept and desires to establish a formal cost estimation system.

Required:

What are some of the potential problems that may be encountered in changing from a budget to a cost estimation movie making system?

182)

Arfaei Company manufactures chairs. Because the efforts of manufacturing are approximately equal between labor and machinery, management is considering other possible cost drivers. By considering different cost drivers, it is anticipated that the estimating process can be improved. The following cost estimating equations with their r2 values have been determined for 20X5:

1. X = cutting time y = $19,500 + $20X r2 = 0.65
2. X = labor y = $5,000 + $25X r2 = 0.49
3. X = machinery y = $44,500 + $5X r2 = 0.55

Required:
a. Which equation should be selected for the analysis?
b. What other factors should be included in the selection of the estimating equation?