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Chapter 1 Managerial Accounting and the Business Environment

True/False Questions

1. Although financial and managerial accounting differ in many ways, they are similar in that both rely on the same underlying financial data.

2. Managerial accounting is a branch of financial accounting and serves essentially the same purposes as financial accounting.

3. Managerial accounting places greater emphasis on the future than financial accounting, which is primarily concerned with the past.

4. Managerial accounting is not needed in a non-profit or governmental organization.

5. When carrying out their planning activities, managers select a course of action and specify how the action will be implemented.

6. When carrying out their planning activities, managers obtain feedback to ensure that the plan is actually carried out and is appropriately modified as circumstances change.

7. The controller occupies a line position in an organization.

8. Decentralization means the delegation of decision-making authority throughout an organization by allowing managers at various operating levels to make key decisions relating to their own area of responsibility.

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Chapter 1 Managerial Accounting and the Business Environment

9. A firm’s organization chart will normally show both the formal and informal lines of reporting and communication.

10. The Chief Financial Officer of an organization is responsible for ensuring that line operations run smoothly.

11. Traditionally, companies have maintained large amounts of raw materials, work in process, and finished goods inventories to act as buffers so that operations can proceed smoothly even if there are unanticipated disruptions.

12. Process Reengineering is generally considered to be a more radical approach to improvement than Total Quality Management.

13. Process Reengineering emphasizes a team approach involving front-line workers, whereas Total Quality Management is usually implemented using outside specialists and is imposed from above.

14. If ethical standards were not generally followed, one of the results would probably be fewer goods and services available in the marketplace.

15. The Standards of Ethical Conduct for Management Accountants promulgated by the Institute of Management Accountants specifically state that management accountants’ sole ethical responsibility is to not break any laws.

4 Garrison, Managerial Accounting, 12th Edition

Chapter 1 Managerial Accounting and the Business Environment

Multiple Choice Questions

16. Management accounting focuses primarily on providing data for: A) internal uses by managers.
B) external uses by stockholders and creditors. C) external uses by the Internal Revenue Service.
D) external uses by the Securities and Exchange Commission.

17. Managerial accounting:
A) is more future oriented than financial accounting.
B) tends to summarize information more than financial accounting
C) is primarily concerned with providing information to external users. D) is more concerned with precision than timeliness.

18. Compared to financial accounting, managerial accounting places more emphasis on: A) the flexibility of information.
B) the precision of information. C) the timeliness of information. D) both A and C above.

19. The function of management that compares planned results to actual results is known as:
A) planning.
B) directing and motivating. C) controlling.
D) decision making.

20. Which of the functions of management involves overseeing day-to-day activities? A) Planning
B) Directing and motivating C) Controlling
D) Decision making

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Chapter 1 Managerial Accounting and the Business Environment

21. Which of the following is not one of the three basic activities of a manager? A) Planning
B) Controlling
C) Directing and motivating
D) Compiling management accounting reports

22. The delegation of decision making to lower levels in an organization is known as: A) the planning and control cycle.
B) controlling.
C) decentralization. D) none of these.

23. Which of the following statements are false concerning line and staff functions?

I. Persons occupying staff functions have authority over persons occupying line functions.
II. Both line and staff functions are depicted on the organization chart.
III. Line functions are directly related to the basic objectives of an organization.

A) Only I B) Only II
C) Only I and II D) I, II, and III

24. Which of following would normally be found on a manufacturing company’s organization chart?
A) the layout of the factory assembly lines
B) a list of the materials needed to produce each of the company’s products C) the informal lines of reporting and communication
D) none of the above

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Chapter 1 Managerial Accounting and the Business Environment

25. For a hospital, what type of position (line or staff) is each of the following?

Emergency Room Manager A) Staff
B) Staff C) Line D) Line
Human Resources (Personnel) Manager Staff Line Staff Line

26. A detailed financial plan for the future is known as a: A) budget.
B) performance report. C) organization chart. D) segment.

27. A performance report is:
A) a detailed report comparing budgeted data to actual data for a specific time period. B) a formal statement of plans for the upcoming period.
C) required to be filed monthly by the Securities and Exchange Commission. D) not used in decentralized organizations.

28. A clustering of two or more machines at a single workstation is referred to as: A) a manufacturing cell.
B) an activity center. C) a functional layout. D) a setup.

29. A focused factory is:
A) a factory that makes only a single product.
B) a factory that performs a single step in the production process and subcontracts the other steps.
C) a plant layout in which all machines needed to make a particular product are brought together in one location.
D) required to bid for defense contracts.

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Chapter 1 Managerial Accounting and the Business Environment

30. Large work in process inventories:
A) are essential for efficient operations. B) reduce defect rates.
C) increase throughput time.
D) are a key part of Just-In-Time systems.

31. Ideally, how many units should be produced in a just-in-time manufacturing system? A) budgeted customer demand for the current week.
B) budgeted customer demand for the following week. C) actual customer demand for the current week.
D) maximum production capacity for the current week.

32. After careful planning, Jammu Manufacturing Corporation has decided to switch to a just-in-time inventory system. At the beginning of this switch, Jammu has 30 units of product in inventory. Jammu has 2,000 labor hours available in the first month of this switch. These hours could produce 500 units of product. Customer demand for this first month is 400 units. If just-in-time principles are correctly followed, how many units should Jammu plan to produce in the first month of the switch?
A) 370 B) 400 C) 430 D) 470

33. Process Reengineering includes all of the following steps except: A) constructing a diagram flowcharting the current process.
B) redesigning the process.
C) elimination of non-value-added activities. D) elimination of all constraints.

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Chapter 1 Managerial Accounting and the Business Environment

34. According to the Theory of Constraints, improvement efforts should usually be focused on:
A) work centers that are not constraints. B) the work center that is the constraint.
C) the work center with the highest total cost.
D) the work center with the most obsolete equipment.

35. Which of the following is true regarding the theory of constraints?
A) The theory of constraints does not apply to companies with multiple products because of capacity measurement difficulties.
B) In any profit-seeking company, there must be at least one constraint.
C) Constraints or bottlenecks stop organizations from selling an infinite number of units or services.
D) both B and C above.

36. Pizza World makes forty-three kinds of pizza for takeout and delivery. Which of the following could be the constraint at Pizza World?
A) the person who makes the pizza crust.
B) the person who puts toppings on the pizzas. C) the pizza oven.
D) any of the above could be the constraint.

37. The Standards of Ethical Conduct for Management Accountants developed by the Institute of Management Accountants contain a policy regarding confidentiality that requires management accountants to refrain from disclosing confidential information acquired in the course of their work:
A) except when authorized by management. B) in all situations.
C) except when authorized by management, unless legally obligated to do so. D) in all cases not prohibited by law.

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Chapter 1 Managerial Accounting and the Business Environment

38. Wide-spread adherence to ethical standards in an advanced market economy tends to result in all of the following except:
A) higher prices.
B) higher quality goods and services.
C) greater variety of goods and services available for sale. D) safer products.

39. The Institute of Management Accountants (IMA) has developed ethical standards for management accountants. What four categories has the IMA classified these standards into?
A) Reliability, Objectivity, Commitment, and Competence B) Objectivity, Integrity, Commitment, and Confidentiality C) Observation, Integrity, Closure, and Competence
D) Competence, Objectivity, Integrity, and Confidentiality E) Reliability, Understandability, Flexibility, and Integrity

40. Samantha Galloway is a managerial accountant in the accounting department of Mustang Industries, Inc. Samantha has just discovered evidence that some of the corporation’s marketing managers have been wrongfully inflating their expense reports in order to obtain higher reimbursements from the firm. According to the Institute of Management Accountants’ Standards of Ethical Conduct, what should Samantha do upon discovering this evidence?
A) notify the controller.
B) notify the marketing managers involved. C) notify the president of the corporation.
D) ignore the evidence because she is not part of the Marketing Department.

10 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

True/False Questions

1. Manufacturing overhead is an indirect cost with respect to units of product.

2. Depreciation on office equipment would not be included in the cost of goods manufactured.

,4

3. Rent on a factory building used in the production process would be classified as a period cost and as a fixed cost.

,5

4. Period costs are found only in manufacturing companies, not in merchandising companies.

5. Depreciation on equipment a company uses in its selling and administrative activities would be classified as a product cost.

6. If the finished goods inventory increases between the beginning and the end of a period, then the cost of goods manufactured is smaller than the cost of goods sold.

,4

7. The cost of goods manufactured is calculated by adding the amount of work in process at the end of the year to the cost of raw materials used, direct labor worked, and manufacturing overhead incurred for the year and then subtracting work in process at the beginning of the year.

8. A publisher that sells its books through agents who are paid a constant percentage commission on each book sold would classify the commissions as a fixed cost.

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Chapter 2 Cost Terms, Concepts, and Classifications

9. Variable costs per unit are affected by changes in activity.

10. A cost is either direct or indirect. The classification will not change if the cost object changes.

11. The amount that a manufacturing company could earn by renting unused portions of its warehouse is an example of an opportunity cost.

12. Labor fringe benefits may be charged to direct labor or manufacturing overhead while overtime premiums paid usually are considered a part of manufacturing overhead.

13. The cost of idle time should be charged as direct labor of the job that is in process when the breakdown occurs.

14. Internal failure costs result from identification of defects during the appraisal process. Such costs may include scrap, rejected products, rework, and downtime.

15. ISO 9000 certification is relatively easy to achieve because little documentation on quality control procedures is needed.

1

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Chapter 2 Cost Terms, Concepts, and Classifications

Multiple Choice Questions

16. Indirect labor is a part of: A) Prime cost.
B) Conversion cost. C) Period cost.
D) Nonmanufacturing cost.

,2 Source: CPA, adapted

17. The cost of lubricants used to grease a production machine in a manufacturing company is an example of a(n):
A) period cost.
B) direct material cost. C) indirect material cost. D) none of the above.

,2

18. The salary paid to the president of King Company would be classified on the income statement as a(n):
A) administrative expense. B) direct labor cost.
C) manufacturing overhead cost. D) selling expense.

19. Direct labor cost is a part of:

Conversion cost A) No
B) No C) Yes D) Yes
Prime cost No Yes Yes No

Source: CPA, adapted

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Chapter 2 Cost Terms, Concepts, and Classifications

20. Direct material cost is a:

Conversion cost A) No
B) No C) Yes D) Yes
Prime cost No Yes Yes No

Source: CPA, adapted

21. Prime cost and conversion cost share what common element of total cost? A) Direct materials.
B) Direct labor.
C) Variable overhead. D) Fixed overhead.

Source: CPA, adapted

22. Prime cost consists of:
A) direct labor and manufacturing overhead.
B) direct materials and manufacturing overhead. C) direct materials and direct labor.
D) direct materials, direct labor and manufacturing overhead.

23. Wages paid to a timekeeper in a factory are a:

Prime cost A) Yes
B) Yes C) No D) No
Conversion cost No Yes No Yes

Source: CPA, adapted

24. Property taxes on a company’s factory building would be classified as a(n): A) product cost.
B) opportunity cost. C) period cost.
D) variable cost.

,5,7

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Chapter 2 Cost Terms, Concepts, and Classifications

25. Depreciation on a personal computer used in the marketing department of a manufacturing firm would be classified as:
A) a product cost that is fixed with respect to the company’s output. B) a period cost that is fixed with respect to the company’s output.
C) a product cost that is variable with respect to the company’s output. D) a period cost that is fixed with respect to the company’s output.

,5

26. The nursing station on the fourth floor of Central Hospital is responsible for the care of patients who have undergone orthopedic surgery. The costs of drugs administered by the nursing station to patients would be classified as:
A) direct costs of the patients. B) indirect costs of the patients.
C) overhead costs of the nursing station. D) period costs of the hospital.

,6

27. All of the following would be classified as product costs except: A) property taxes on production equipment.
B) insurance on factory machinery. C) salaries of the advertising staff. D) wages of machine operators.

28. Product costs appear on the balance sheet:
A) only if goods are partially completed at the end of the period. B) only if goods are unsold at the end of a period.
C) only if goods are partially completed or are unsold at the end of a period. D) only in merchandising firms.

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Chapter 2 Cost Terms, Concepts, and Classifications

29. Ross Corporation shipped finished goods to a customer on credit, but the sale was not recorded and the costs of the finished goods were incorrectly included on the period’s balance sheet as part of the finished goods inventory. Which one of the following statements is correct concerning the effects of this error?
A) Accounts receivable was not affected, inventory was overstated, sales were understated, and cost of goods sold was understated.
B) Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was understated.
C) Accounts receivable was understated, inventory was overstated, sales were understated, and cost of goods sold was overstated.
D) Accounts receivable was understated, inventory was overstated, sales were understated, and cost of goods sold was understated.

Source: CMA, adapted

30. Data for Cost A and Cost B are as follows:

Number of Units Produced
Cost A
1 10 100
1,000

Cost B
1 10 100
1,000

Unit Cost

? ? ? ?

$5,000 $500 $50
$5

Total Cost

$10 $100 $1,000 $10,000

? ? ? ?

Which of the above best describes the behavior of Costs A and B? A) Cost A is fixed, Cost B is variable.
B) Cost A is variable, Cost B is fixed. C) Both Cost A and Cost B are variable. D) Both Cost A and Cost B are fixed.

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Chapter 2 Cost Terms, Concepts, and Classifications

31. Fixed costs expressed on a per unit basis: A) will increase with increases in activity. B) will decrease with increases in activity. C) are not affected by activity.
D) should be ignored in making decisions since they cannot change.

32. The costs of staffing and operating the accounting department at Central Hospital would be considered by the Department of Surgery to be:
A) direct costs. B) indirect costs.
C) incremental costs. D) opportunity costs.

,7

33. A cost incurred in the past that is not relevant to any current decision is classified as a(n):
A) period cost.
B) opportunity cost. C) sunk cost.
D) differential cost.

34. Differential costs can: A) only be fixed costs.
B) only be variable costs.
C) be either fixed or variable.
D) be incremental but not decremental.

35. John Johnson decided to leave his former job where he earned $12 per hour to go to a new job where he will earn $13 per hour. In the decision process, the former wage of $12 per hour would be classified as a(n):
A) sunk cost. B) direct cost. C) fixed cost.
D) opportunity cost.

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Chapter 2 Cost Terms, Concepts, and Classifications

36. The term that refers to costs incurred in the past that are not relevant to a decision is: A) marginal cost.
B) indirect cost. C) period cost. D) sunk cost.

37. Lathe operators at KF Manufacturing are hourly employees who are paid time and a half for hours worked in excess of 40 hours per week. Lester is a lathe operator who worked 45 hours during the current week and had no idle time. The correct accounting for the amounts paid to Lester would be:
A) charge only the overtime premium earned to the overhead account.
B) charge the hourly wage earned plus the overtime premium earned to the overhead account.
C) charge only the overtime premium earned to the direct labor cost for the project Lester was working on when the overtime was incurred.
D) charge the hourly wage earned plus the overtime premium earned to the direct labor cost for the project Lester was working on when the overtime was incurred.

38. The controller of the recently organized Crandall Company is considering the two methods listed below for accounting for labor fringe benefits. Which of the two methods is considered acceptable?

Method A:

Method B:
Treat all labor fringe benefits as indirect labor by adding them in total to manufacturing overhead.

Treat labor fringe benefits that relate to direct labor as additional direct labor cost and fringe benefits relating to indirect labor as part of manufacturing overhead.

A) Only Method A is acceptable. B) Only Method B is acceptable.
C) Both Method A and Method B are acceptable.
D) Neither Method A nor Method B is acceptable; labor fringe benefits should be treated as period expenses and should be charged off as incurred.

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Chapter 2 Cost Terms, Concepts, and Classifications

39. Which of the following would be classified as a prevention cost on a quality cost report?
A) Disposal of defective products. B) Net cost of spoilage.
C) Depreciation of test equipment.
D) Technical support provided to suppliers.

,10

40. Which of the following would be classified as a prevention cost on a quality cost report?
A) Debugging software errors. B) Quality training.
C) Test and inspection of incoming materials.
D) Cost of field servicing and handling complaints.

,10

41. Which of the following would be classified as a prevention cost on a quality cost report?
A) Supplies used in testing and inspection. B) Debugging software errors.
C) Quality improvement projects.
D) Lost sales arising from a reputation for poor quality.

,10

42. Which of the following would be classified as an appraisal cost on a quality cost report?
A) Final product testing and inspection. B) Net cost of spoilage.
C) Repairs and replacements beyond the warranty period. D) Rework labor and overhead.

,10

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Chapter 2 Cost Terms, Concepts, and Classifications

43. Which of the following would be classified as an appraisal cost on a quality cost report?
A) Quality improvement projects.
B) Supplies used in testing and inspection.
C) Audits of the effectiveness of the quality system. D) Quality data gathering, analysis, and reporting.

,10

44. Which of the following would be classified as an appraisal cost on a quality cost report?
A) Maintenance of test equipment.
B) Re-entering data because of keying errors. C) Debugging software errors.
D) Warranty repairs and replacements.

,10

45. Which of the following would be classified as an internal failure cost on a quality cost report?
A) Quality improvement projects.
B) Supervision of testing and inspection activities. C) Debugging software errors.
D) Warranty repairs and replacements.

,10

46. Which of the following would be classified as an internal failure cost on a quality cost report?
A) Final product testing and inspection. B) Warranty repairs and replacements. C) Depreciation of test equipment.
D) Debugging software errors.

,10

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Chapter 2 Cost Terms, Concepts, and Classifications

47. Which of the following would be classified as an internal failure cost on a quality cost report?
A) Rework labor and overhead.
B) Cost of field servicing and handling complaints. C) Technical support provided to suppliers.
D) Lost sales arising from a reputation for poor quality.

,10

48. Which of the following would be classified as an external failure cost on a quality cost report?
A) Reentering data because of keying errors.
B) Customer returns arising from quality problems. C) Test and inspection of in-process goods.
D) Rework labor and overhead.

,10

49. Which of the following would be classified as an external failure cost on a quality cost report?
A) Repairs and replacements beyond the warranty period. B) Technical support provided to suppliers.
C) Quality improvement projects. D) Rework labor and overhead.

,10

50. Which of the following would be classified as an external failure cost on a quality cost report?
A) Final product testing and inspection. B) Disposal of defective products.
C) Supervision of testing and inspection activities. D) Cost of field servicing and handling complaints.

,10

51. Inspection of products would be classified as a(n): A) prevention cost.
B) appraisal cost.
C) internal failure cost. D) external failure cost.

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Chapter 2 Cost Terms, Concepts, and Classifications

52. The cost of warranty repairs would be classified as a(n): A) prevention cost.
B) appraisal cost.
C) internal failure cost. D) external failure cost.

53. The cost of quality training would be classified as a(n): A) prevention cost.
B) appraisal cost.
C) internal failure cost. D) external failure cost.

54. The cost of labor time required to rework defective units would be classified as a(n): A) prevention cost.
B) appraisal cost.
C) internal failure cost. D) external failure cost.

55. Which of the following is (are) categorized as internal failure cost(s)?

I. Rework.
II. Responding to customer complaints. III. Statistical quality control procedures.

A) I only. B) II only. C) III only.
D) I, II, and III.

Source: CPA, adapted

26 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

56. Adolphson Corporation has provided the following summary of its quality cost report for the last two years:

Summary of Quality Cost Report (in thousands)

Prevention costs …………………….. Appraisal costs ……………………… Internal failure costs ………………. External failure costs ……………… Total quality costs ………………….
This Year $ 300
315 114
621 $1,350
Last Year $ 200
210 190
1,200 $1,800
% Change +50 +50 -40 -48 -25

On the basis of this report, which one of the following statements is most likely correct?
A) An increase in prevention and appraisal costs resulted in fewer defects, and therefore, resulted in a decrease in internal and external failure costs.
B) A decrease in internal and external failure costs resulted in less need for prevention and appraisal costs.
C) Quality costs such as scrap and rework decreased by 48%.
D) Quality costs such as returns and repairs under warranty decreased by 40%.

0 Source: CMA, adapted

57. The following costs were incurred in January:

Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………. Selling expenses ………………………. Administrative expenses …………….
$33,000 $28,000 $69,000 $16,000 $21,000

Conversion costs during the month totaled: A) $97,000
B) $167,000 C) $102,000 D) $61,000

,2

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Chapter 2 Cost Terms, Concepts, and Classifications

58. The following costs were incurred in February:

Direct materials ……………………. Direct labor …………………………. Manufacturing overhead ……….. Selling expenses …………………… Administrative expenses ………..
$43,000 $16,000 $37,000 $17,000 $26,000

Conversion costs during the month totaled: A) $59,000
B) $80,000 C) $53,000 D) $139,000

,2

59. The following costs were incurred in March:

Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………. Selling expenses ………………………. Administrative expenses …………….
$21,000 $17,000 $67,000 $16,000 $15,000

Conversion costs during the month totaled: A) $88,000
B) $38,000 C) $136,000 D) $84,000

,2

28 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

60. The following costs were incurred in January:

Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………. Selling expenses ………………………. Administrative expenses …………….
$39,000 $26,000 $21,000 $14,000 $27,000

Prime costs during the month totaled: A) $86,000
B) $65,000 C) $47,000 D) $127,000

,2

61. The following costs were incurred in February:

Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………. Selling expenses ………………………. Administrative expenses …………….
$39,000 $18,000 $14,000 $13,000 $29,000

Prime costs during the month totaled: A) $71,000
B) $32,000 C) $113,000 D) $57,000

,2

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Chapter 2 Cost Terms, Concepts, and Classifications

62. The following costs were incurred in March:

Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………. Selling expenses ………………………. Administrative expenses …………….
$39,000 $24,000 $14,000 $11,000 $19,000

Prime costs during the month totaled: A) $63,000
B) $107,000 C) $38,000 D) $77,000

,2

63. Aable Company’s manufacturing overhead is 20% of its total conversion costs. If direct labor is $45,000 and if direct materials are $53,000, the manufacturing overhead is:
A) $11,250 B) $13,250 C) $180,000 D) $24,500

64. Abair Company’s manufacturing overhead is 20% of its total conversion costs. If direct labor is $38,000 and if direct materials are $35,000, the manufacturing overhead is:
A) $18,250 B) $9,500 C) $8,750 D) $152,000

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Chapter 2 Cost Terms, Concepts, and Classifications

65. Abbey Company’s manufacturing overhead is 60% of its total conversion costs. If direct labor is $35,000 and if direct materials are $55,000, the manufacturing overhead is:
A) $135,000 B) $23,333 C) $82,500 D) $52,500

66. During the month of January, direct labor cost totaled $17,000 and direct labor cost was 60% of prime cost. If total manufacturing costs during January were $82,000, the manufacturing overhead was:
A) $11,333 B) $53,667 C) $28,333 D) $65,000

67. During the month of February, direct labor cost totaled $13,000 and direct labor cost was 40% of prime cost. If total manufacturing costs during February were $80,000, the manufacturing overhead was:
A) $32,500 B) $19,500 C) $67,000 D) $47,500

68. During the month of March, direct labor cost totaled $17,000 and direct labor cost was 70% of prime cost. If total manufacturing costs during March were $88,000, the manufacturing overhead was:
A) $24,286 B) $71,000 C) $63,714 D) $7,286

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Chapter 2 Cost Terms, Concepts, and Classifications

69. Knowel Company’s direct labor is 40 percent of its conversion cost. If the manufacturing overhead cost for the last period was $60,000 and the direct materials cost was $30,000, the direct labor cost was:
A) $90,000 B) $20,000 C) $60,000 D) $40,000

70. In January direct labor was 40% percent of conversion cost. If the manufacturing overhead cost for the month was $78,000 and the direct materials cost was $22,000, the direct labor cost was:
A) $14,667 B) $52,000 C) $33,000 D) $117,000

71. In February direct labor was 60% percent of conversion cost. If the manufacturing overhead cost for the month was $78,000 and the direct materials cost was $22,000, the direct labor cost was:
A) $52,000 B) $14,667 C) $117,000 D) $33,000

72. In March direct labor was 60% percent of conversion cost. If the manufacturing overhead cost for the month was $38,000 and the direct materials cost was $32,000, the direct labor cost was:
A) $21,333 B) $48,000 C) $25,333 D) $57,000

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Chapter 2 Cost Terms, Concepts, and Classifications

73. Crossland Company’s direct labor cost is 30% of its conversion cost. If the manufacturing overhead cost for the last period was $49,000 and the direct materials cost was $20,000, the direct labor cost was:
A) $ 6,000 B) $14,700 C) $21,000 D) $34,000

74. CF Company manufactures wooden rocking chairs. CF identified the following three material costs in its production process for July: $100,000 for springs for the rocking mechanism; two springs at a cost of $10 each are used in each chair; $1,700 for glue used as needed from one gallon containers; and $500 for stain used to touch up spots on the chairs. The total cost that should have been assigned to indirect material for July was:
A) $102,200 B) $500
C) $2,200 D) $1,700

75. Fab Co. manufactures textiles. Fab’s manufacturing costs last year included the following salaries and wages:

Loom operators …………………….. Factory foremen …………………… Machinery repairmen …………….
$120,000 $45,000 $30,000

What is the amount of direct labor included in this list? A) $195,000
B) $165,000 C) $150,000 D) $120,000

Source: CPA, adapted

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Chapter 2 Cost Terms, Concepts, and Classifications

76. A manufacturing company has provided the following cost data for a recent period:

Direct materials ……………………………………….. Manufacturing overhead ……………………………. Direct labor ……………………………………………… Increase in work-in-process ………………………..
$8,000 $12,000 $10,000 $4,000

Prime cost for the period was: A) $18,000
B) $26,000 C) $30,000 D) $34,000

Source: CIMA, adapted

77. A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $3,000 and is paid at the beginning of the first year. Three-fourths of the premium applies to factory operations and one-fourth applies to selling and administrative activities. What amounts should be considered product and period costs respectively for the first year of coverage?

Product Period A) $1,000 $0 B) $250 $750 C) $2,250 $750 D) $750 $250

78. Last month a manufacturing company had the following operating results:

Beginning finished goods inventory ……………. Ending finished goods inventory ………………… Sales ……………………………………………………….. Gross margin ……………………………………………
$72,000 $66,000 $465,000 $88,000

What was the cost of goods manufactured for the month? A) $371,000
B) $459,000 C) $383,000 D) $377,000

,4

34 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

79. Last month a manufacturing company had the following operating results:

Beginning finished goods inventory ………… Ending finished goods inventory …………….. Sales ……………………………………………………. Gross margin …………………………………………
$74,000 $50,000 $438,000 $63,000

What was the cost of goods manufactured for the month? A) $375,000
B) $414,000 C) $399,000 D) $351,000

,4

80. Gabert Inc. is a merchandising company. Last month the company’s merchandise purchases totaled $68,000. The company’s beginning merchandise inventory was $17,000 and its ending merchandise inventory was $13,000. What was the company’s cost of goods sold for the month?
A) $72,000 B) $68,000 C) $98,000 D) $64,000

81. Haag Inc. is a merchandising company. Last month the company’s cost of goods sold was $86,000. The company’s beginning merchandise inventory was $20,000 and its ending merchandise inventory was $21,000. What was the total amount of the company’s merchandise purchases for the month?
A) $86,000 B) $127,000 C) $87,000 D) $85,000

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Chapter 2 Cost Terms, Concepts, and Classifications

82. During February, the cost of goods manufactured was $83,000. The beginning finished goods inventory was $14,000 and the ending finished goods inventory was $13,000. What was the cost of goods sold for the month?
A) $83,000 B) $110,000 C) $82,000 D) $84,000

83. During March, the cost of goods manufactured was $62,000. The beginning finished goods inventory was $11,000 and the ending finished goods inventory was $19,000. What was the cost of goods sold for the month?
A) $70,000 B) $92,000 C) $54,000 D) $62,000

84. The following information is taken from the records of CL Company for last year:

Direct materials …………………………………………….. Manufacturing overhead …………………………………. Total manufacturing costs ………………………………. Beginning work in process inventory ……………….. Cost of goods manufactured …………………………….
$5,000 $6,000 $17,000 $1,000 $15,000

What are the correct amounts for direct labor and ending work in process inventory?

Direct Labor
A) $12,000 B) $11,000 C) $6,000 D) $6,000
Ending Work in Process $2,000 $2,000 $1,000 $3,000

36 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

85. The following information is taken from the records of DW Company for last year:

Direct materials ……………………………………… Direct labor …………………………………………… Manufacturing overhead …………………………. Ending work in process inventory ……………. Cost of goods manufactured …………………….
$8,000 $3,000 $11,000 $5,000 $19,000

The amount of beginning work in process inventory is: A) $24,000
B) $2,000 C) $22,000 D) $3,000

86. Using the following data for February, calculate the cost of goods manufactured:

Direct materials ……………………………………………… Direct labor …………………………………………………… Manufacturing overhead …………………………………. Beginning work in process inventory ……………….. Ending work in process inventory …………………….
$36,000 $20,000 $19,000 $10,000 $13,000

The cost of goods manufactured was: A) $78,000
B) $85,000 C) $72,000 D) $75,000

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Chapter 2 Cost Terms, Concepts, and Classifications

87. Using the following data for March, calculate the cost of goods manufactured:

Direct materials ……………………………………………… Direct labor …………………………………………………… Manufacturing overhead …………………………………. Beginning work in process inventory ……………….. Ending work in process inventory …………………….
$29,000 $19,000 $27,000 $11,000 $12,000

The cost of goods manufactured was: A) $74,000
B) $86,000 C) $76,000 D) $75,000

88. Jacobs is employed as a machinist for an aircraft manufacturer. She is paid $15 per hour for regular time and time and a half for all work in excess of 40 hours per week. During the past week, Jacobs was idle for two hours due to machine breakdowns and was idle four hours due to materials shortages. Jacobs worked 40 hours last week with no overtime. The allocation of Jacobs’ wages for the past week between direct labor cost and manufacturing overhead cost would be:

Direct Manufacturing Labor Overhead
A) $600 $0 B) $570 $30 C) $540 $60 D) $510 $90

38 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

89. Johnson is employed on the assembly line of a manufacturing company where he assembles a component part for one of the company’s products. He is paid $14 per hour for regular time and time and a half for all work in excess of 40 hours per week. During the past week, Johnson worked a total of 50 hours and had no idle time. The allocation of Johnson’s wages for the past week between direct labor cost and manufacturing overhead cost would be:

Direct Labor A) $770
B) $700 C) $560 D) $560
Manufacturing Overhead $0
$70 $210 $0

Use the following to answer questions 90-91:

Clyde Company has provided the following data for the month of November:

Inventories
Raw materials …………………. Work in process ………………. Finished goods ………………..
November 1 $17,000 $14,000
?
November 30 ?
$12,000 $9,000

Additional Data:
Sales revenue ……………………………………… Direct labor costs ………………………………… Manufacturing overhead costs ……………… Selling expenses …………………………………. Administrative expenses ……………………… Cost of goods manufactured …………………. Raw materials purchases ………………………

$102,000 $10,000 $12,000 $14,000 $16,000 $40,000 $10,000

90. The ending raw materials inventory was: A) $11,000
B) $23,000 C) $10,000 D) $12,000

,4

Garrison, Managerial Accounting, 12th Edition 39

Chapter 2 Cost Terms, Concepts, and Classifications

91. If the net operating income was $40,000, then the beginning finished goods inventory was:
A) $22,000 B) $9,000 C) $42,000 D) $1,000

,3,4

Use the following to answer questions 92-95:

The following data (in thousands of dollars) have been taken from the accounting records of Karsen Corporation for the just completed year.

Sales ……………………………………………………………. $930 Raw materials inventory, beginning ………………… $70 Raw materials inventory, ending ……………………… $40 Purchases of raw materials ……………………………… $190 Direct labor …………………………………………………… $150 Manufacturing overhead ………………………………… $210 Administrative expenses ………………………………… $90 Selling expenses ……………………………………………. $120 Work in process inventory, beginning ……………… $80 Work in process inventory, ending ………………….. $70 Finished goods inventory, beginning ……………….. $90 Finished goods inventory, ending ……………………. $140

Use these data to answer the following series of questions.

92. The cost of the raw materials used in production during the year (in thousands of dollars) was:
A) $230 B) $220 C) $160 D) $260

,3,4

40 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

93. The cost of goods manufactured (finished) for the year (in thousands of dollars) was: A) $590
B) $650 C) $660 D) $570

,3,4

94. The cost of goods sold for the year (in thousands of dollars) was: A) $680
B) $540 C) $640 D) $730

,3,4

95. The net operating income for the year (in thousands of dollars) was: A) $180
B) $170 C) $390 D) $190

,3,4

Use the following to answer questions 96-99:

The following data (in thousands of dollars) have been taken from the accounting records of Karsten Corporation for the just completed year.

Sales ……………………………………………………………. $990 Raw materials inventory, beginning ………………… $70 Raw materials inventory, ending ……………………… $30 Purchases of raw materials ……………………………… $100 Direct labor …………………………………………………… $200 Manufacturing overhead ………………………………… $160 Administrative expenses ………………………………… $180 Selling expenses ……………………………………………. $150 Work in process inventory, beginning ……………… $40 Work in process inventory, ending ………………….. $70 Finished goods inventory, beginning ……………….. $150 Finished goods inventory, ending ……………………. $130

Use these data to answer the following series of questions.

Garrison, Managerial Accounting, 12th Edition 41

Chapter 2 Cost Terms, Concepts, and Classifications

96. The cost of the raw materials used in production during the year (in thousands of dollars) was:
A) $130 B) $170 C) $140 D) $60

,3,4

97. The cost of goods manufactured (finished) for the year (in thousands of dollars) was: A) $530
B) $540 C) $470 D) $570

,3,4

98. The cost of goods sold for the year (in thousands of dollars) was: A) $490
B) $450 C) $620 D) $600

,3,4

99. The net operating income for the year (in thousands of dollars) was: A) $170
B) $140 C) $500 D) $200

,3,4

42 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 100-103:

The following data (in thousands of dollars) have been taken from the accounting records of Karstone Corporation for the just completed year.

Sales ………………………………………………………………. $880 Raw materials inventory, beginning …………………… $20 Raw materials inventory, ending ………………………… $30 Purchases of raw materials ………………………………… $150 Direct labor ……………………………………………………… $180 Manufacturing overhead …………………………………… $230 Administrative expenses …………………………………… $100 Selling expenses ………………………………………………. $130 Work in process inventory, beginning ………………… $80 Work in process inventory, ending …………………….. $30 Finished goods inventory, beginning ………………….. $120 Finished goods inventory, ending ………………………. $100

Use these data to answer the following series of questions.

100. The cost of the raw materials used in production during the year (in thousands of dollars) was:
A) $180 B) $140 C) $160 D) $170

,3,4

101. The cost of goods manufactured (finished) for the year (in thousands of dollars) was: A) $580
B) $600 C) $500 D) $630

,3,4

102. The cost of goods sold for the year (in thousands of dollars) was: A) $620
B) $580 C) $720 D) $700

,3,4

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Chapter 2 Cost Terms, Concepts, and Classifications

103. The net operating income for the year (in thousands of dollars) was: A) $260
B) $30 C) $90 D) ($30)

,3,4

Use the following to answer questions 104-105:

The manufacturing operations of QC Company had the following inventory balances for the month of March:

Inventories
Raw materials ……………….. Work in process …………….. Finished goods ………………
March 1 $10,000
$6,000 $30,000
March 31 $12,000
$7,000 $22,000

104. If the company purchased $18,000 of raw materials during March, what was the cost of raw materials used in production?
A) $16,000 B) $20,000 C) $41,000 D) $19,000

105. If the company transferred $38,000 of completed goods from work in process to finished goods during March, what was the amount of the cost of goods sold? A) $38,000
B) $43,000 C) $30,000 D) $46,000

Use the following to answer questions 106-107:

Servix, Inc., produces water pumps. Each water pump contains a small valve that costs $5. During May, 600 valves were drawn from the supply room and installed in water pumps in the production process. Eighty percent of these units were completed and transferred into finished goods warehouses. Of the units completed, thirty percent were still unsold at the end of the month. There were no beginning inventories.

44 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

106. The cost of valves in work in process at the end of May would be: A) $2,400
B) $3,000 C) $600 D) $720

107. The cost of valves in cost of goods sold for May would be: A) $1,680
B) $2,100 C) $900 D) $720

Use the following to answer questions 108-109:

The manufacturing operations of Jones Company had the following inventory balances for the month of March:

Inventories
Raw materials ……………….. Work in process …………….. Finished goods ………………
March 1 $12,000
$8,000 $32,000
March 31 $14,000
$9,000 $25,000

108. If the company purchased $20,000 of raw materials during March, what was the cost of raw materials used in production?
A) $24,000 B) $22,000 C) $32,000 D) $18,000

109. If the company transferred $40,000 of completed goods from work in process to finished goods during March, what was the amount of the cost of goods sold? A) $47,000
B) $40,000 C) $33,000 D) $44,000

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Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 110-111:

At a sales volume of 30,000 units, Carne Company’s total fixed costs are $30,000 and total variable costs are $45,000. The relevant range is 20,000 to 40,000 units.

110. If Carne Company were to sell 32,000 units, the total expected cost would be: A) $75,000
B) $78,000 C) $80,000 D) $77,000

111. If Carne Company were to sell 40,000 units, the total expected cost per unit would be: A) $2.50
B) $2.25 C) $2.13 D) $1.88

Use the following to answer questions 112-115:

Marrell is employed on the assembly line of a manufacturing company where she assembles a component part for one of the company’s products. She is paid $16 per hour for regular time and time and a half for all work in excess of 40 hours per week.

112. Marrell works 45 hours during a week in which there was no idle time. The allocation of Marrell’s wages for the week as between direct labor cost and manufacturing overhead cost would be:

Direct Labor A) $760
B) $720 C) $640 D) $610
Manufacturing Overhead
$0 $40 $80 $40

46 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

113. Marrell works 50 hours in a given week but is idle for 4 hours during the week due to equipment breakdowns. The allocation of Marrell’s wages for the week as between direct labor cost and manufacturing overhead cost would be:

Direct Labor A) $816
B) $800 C) $736 D) $640
Manufacturing Overhead
$64 $80 $144 $160

114. Marrell’s employer offers fringe benefits that cost the company $4 for each hour of employee time (either regular or overtime). During a given week, Marrell works 48 hours but is idle for 3 hours due to material shortages. The company treats all fringe benefits as part of manufacturing overhead. The allocation of Marrell’s wages for the week between the direct labor cost and manufacturing overhead would be:

Direct Labor A) $960
B) $768 C) $720 D) $640
Manufacturing Overhead
$64 $256 $304 $320

115. Marrell’s employer offers fringe benefits that cost the company $4 for each hour of employee time (either regular or overtime). During a given week, Marrell works 48 hours but is idle for 3 hours due to material shortages. The company treats all fringe benefits relating to direct labor as added direct labor cost. The allocation of Marrell’s wages for the week between direct labor cost and manufacturing overhead would be:

Direct Labor A) $832
B) $900 C) $912 D) $960
Manufacturing Overhead
$128 $124 $112 $64

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Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 116-119:

Eakle Company’s quality cost report is to be based on the following data:

Supervision of testing and inspection activities …………. Warranty repairs and replacements ………………………….. Net cost of scrap ……………………………………………………. Test and inspection of incoming materials ………………… Technical support provided to suppliers …………………… Disposal of defective products ………………………………… Quality data gathering, analysis, and reporting………….. Liability arising from defective products ………………….. Depreciation of test equipment ………………………………..
$29,000 $12,000 $53,000 $23,000 $71,000 $94,000 $47,000 $75,000 $22,000

116. What would be the total prevention cost appearing on the quality cost report? A) $118,000
B) $93,000 C) $76,000 D) $59,000

,10

117. What would be the total appraisal cost appearing on the quality cost report? A) $45,000
B) $52,000 C) $74,000 D) $76,000

,10

118. What would be the total internal failure cost appearing on the quality cost report? A) $106,000
B) $147,000 C) $75,000 D) $128,000

,10

48 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

119. What would be the total external failure cost appearing on the quality cost report? A) $426,000
B) $234,000 C) $106,000 D) $87,000

,10

Use the following to answer questions 120-123:

Ealsy Company’s quality cost report is to be based on the following data:

Maintenance of test equipment ……………………………….. Cost of field servicing and handling complaints ………… Statistical process control activities …………………………. Net cost of scrap ……………………………………………………. Downtime caused by quality problems …………………….. Technical support provided to suppliers …………………… Depreciation of test equipment ……………………………….. Supplies used in testing and inspection …………………….. Warranty repairs and replacements …………………………..
$95,000 $17,000 $77,000 $62,000 $23,000 $93,000 $81,000 $33,000 $24,000

120. What would be the total prevention cost appearing on the quality cost report? A) $172,000
B) $170,000 C) $174,000 D) $94,000

,10

121. What would be the total appraisal cost appearing on the quality cost report? A) $114,000
B) $95,000 C) $128,000 D) $209,000

,10

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Chapter 2 Cost Terms, Concepts, and Classifications

122. What would be the total internal failure cost appearing on the quality cost report? A) $85,000
B) $143,000 C) $40,000 D) $86,000

,10

123. What would be the total external failure cost appearing on the quality cost report? A) $41,000
B) $505,000 C) $126,000 D) $40,000

,10

Use the following to answer questions 124-127:

Eames Company’s quality cost report is to be based on the following data:

Technical support provided to suppliers ……………………. Test and inspection of in-process goods ……………………. Depreciation of test equipment ………………………………… Quality data gathering, analysis, and reporting…………… Warranty repairs and replacements …………………………… Debugging software errors ………………………………………. Downtime caused by quality problems ……………………… Returns arising from quality problems ………………………. Supervision of testing and inspection activities. ………….
$20,000 $67,000 $68,000 $46,000 $97,000 $22,000 $95,000 $12,000 $24,000

124. What would be the total prevention cost appearing on the quality cost report? A) $44,000
B) $66,000 C) $32,000 D) $113,000

,10

50 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

125. What would be the total appraisal cost appearing on the quality cost report? A) $163,000
B) $135,000 C) $159,000 D) $92,000

,10

126. What would be the total internal failure cost appearing on the quality cost report? A) $162,000
B) $34,000 C) $117,000 D) $192,000

,10

127. What would be the total external failure cost appearing on the quality cost report? A) $226,000
B) $451,000 C) $109,000 D) $34,000

,10

Use the following to answer questions 128-131:

Factoria Company’s quality cost report is to be based on the following data:

Disposal of defective products …………………………………. Statistical process control activities ………………………….. Test and inspection of in-process goods ……………………. Net cost of spoilage ………………………………………………… Test and inspection of incoming materials …………………. Warranty repairs and replacements …………………………… Downtime caused by quality problems ……………………… Quality training ……………………………………………………… Product recalls ………………………………………………………..

Garrison, Managerial Accounting, 12th Edition
$41,000 $29,000 $65,000 $23,000 $22,000 $14,000 $56,000 $42,000 $32,000

51

Chapter 2 Cost Terms, Concepts, and Classifications

128. What would be the total prevention cost appearing on the quality cost report? A) $71,000
B) $51,000 C) $107,000 D) $43,000

,10

129. What would be the total appraisal cost appearing on the quality cost report? A) $63,000
B) $87,000 C) $88,000 D) $158,000

,10

130. What would be the total internal failure cost appearing on the quality cost report? A) $120,000
B) $88,000 C) $70,000 D) $55,000

,10

131. What would be the total external failure cost appearing on the quality cost report? A) $88,000
B) $166,000 C) $324,000 D) $46,000

,10

52 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 132-135:

Fadden Company’s quality cost report is to be based on the following data:

Statistical process control activities ………………………….. Depreciation of test equipment ………………………………… Supplies used in testing and inspection ……………………… Re-entering data because of keying errors …………………. Debugging software errors ………………………………………. Quality circles ……………………………………………………….. Net cost of spoilage ………………………………………………… Returns arising from quality problems ………………………. Cost of field servicing and handling complaints ………….
$97,000 $87,000 $48,000 $12,000 $73,000 $84,000 $85,000 $28,000 $65,000

132. What would be the total prevention cost appearing on the quality cost report? A) $184,000
B) $125,000 C) $132,000 D) $181,000

,10

133. What would be the total appraisal cost appearing on the quality cost report? A) $133,000
B) $135,000 C) $99,000 D) $316,000

,10

134. What would be the total internal failure cost appearing on the quality cost report? A) $150,000
B) $170,000 C) $101,000 D) $133,000

,10

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Chapter 2 Cost Terms, Concepts, and Classifications

135. What would be the total external failure cost appearing on the quality cost report? A) $138,000
B) $93,000 C) $263,000 D) $579,000

,10

Use the following to answer questions 136-139:

Fado Company’s quality cost report is to be based on the following data:

Net cost of scrap ……………………………………………………. Quality circles ………………………………………………………. Depreciation of test equipment ……………………………….. Returns arising from quality problems ……………………… Systems development …………………………………………….. Supplies used in testing and inspection …………………….. Product recalls ………………………………………………………. Disposal of defective products ………………………………… Debugging software errors ………………………………………
$18,000 $84,000 $32,000 $59,000 $45,000 $68,000 $34,000 $62,000 $56,000

136. What would be the total prevention cost appearing on the quality cost report? A) $129,000
B) $116,000 C) $143,000 D) $113,000

,10

137. What would be the total appraisal cost appearing on the quality cost report? A) $100,000
B) $124,000 C) $229,000 D) $50,000

,10

54 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

138. What would be the total internal failure cost appearing on the quality cost report? A) $121,000
B) $90,000 C) $124,000 D) $136,000

,10

139. What would be the total external failure cost appearing on the quality cost report? A) $458,000
B) $96,000 C) $93,000 D) $229,000

,10

Essay Questions

140. The Plastechnics Company began operations several years ago. The company purchased a building and, since only half of the space was needed for operations, the remaining space was rented to another firm for rental revenue of $20,000 per year. The success of Plastechnics Company’s product has resulted in the company needing more space. The renter’s lease will expire next month and Plastechnics will not renew the lease in order to use the space to expand operations and meet demand.

The company’s product requires materials that cost $25 per unit. The company employs a production supervisor whose salary is $2,000 per month. Production line workers are paid $15 per hour to manufacture and assemble the product. The company rents the equipment needed to produce the product at a rental cost of $1,500 per month. Additional equipment will be needed as production is expanded and the monthly rental charge for this equipment will be $900 per month. The building is depreciated on the straight-line basis at $9,000 per year.

The company spends $40,000 per year to market the product. Shipping costs for each unit are $20 per unit.

The company plans to liquidate several investments in order to expand production. These investments currently earn a return of $8,000 per year.

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Chapter 2 Cost Terms, Concepts, and Classifications

Required:

Complete the answer sheet above by placing an “X” under each heading that identifies the cost involved. The “Xs” can be placed under more than one heading for a single cost, e.g., a cost might be a sunk cost, an overhead cost, and a product cost. An “X” can thus be placed under each of these headings opposite the cost.

Variable Cost

Fixed Cost

Direct Materials

Direct Labor
Manufact-uring Overhead

Period Cost
Oppor-tunity Cost

Sunk Cost

Rental revenue

Materials costs

Production supervisor salary

Production line workers wages

Equipment rental

Building depreciation

Marketing costs

Shipping costs

Return on present investments

,2,5,7

56 Garrison, Managerial Accounting, 12th Edition

Chapter 2 Cost Terms, Concepts, and Classifications

Answer:

Garrison, Managerial Accounting, 12th Edition 57

Chapter 2 Cost Terms, Concepts, and Classifications

141. The following data (in thousands of dollars) have been taken from the accounting records of Larder Corporation for the just completed year.

Sales ………………………………………………………………… $950 Purchases of raw materials …………………………………. $170 Direct labor ………………………………………………………. $210 Manufacturing overhead …………………………………….. $200 Administrative expenses …………………………………….. $180 Selling expenses ………………………………………………… $140 Raw materials inventory, beginning …………………….. $70 Raw materials inventory, ending …………………………. $80 Work in process inventory, beginning ………………….. $30 Work in process inventory, ending ………………………. $20 Finished goods inventory, beginning ……………………. $100 Finished goods inventory, ending ………………………… $70

Required:
a. Prepare a Schedule of Cost of Goods Manufactured in good form. b. Compute the Cost of Goods Sold.
c. Using data from your answers above as needed, prepare an Income Statement in good form

142. The following data (in thousands of dollars) have been taken from the accounting records of Larop Corporation for the just completed year.

Sales …………………………………………………………………….. $870 Purchases of raw materials ……………………………………… $190 Direct labor …………………………………………………………… $200 Manufacturing overhead …………………………………………. $230 Administrative expenses …………………………………………. $150 Selling expenses …………………………………………………….. $140 Raw materials inventory, beginning …………………………. $10 Raw materials inventory, ending ……………………………… $40 Work in process inventory, beginning ………………………. $20 Work in process inventory, ending …………………………… $50 Finished goods inventory, beginning ………………………… $90 Finished goods inventory, ending …………………………….. $130

Required:
a. Prepare a Schedule of Cost of Goods Manufactured in good form. b. Compute the Cost of Goods Sold.
c. Using data from your answers above as needed, prepare an Income Statement in good form

143. Gagnon Company’s quality cost report is to be based on the following data:

Maintenance of test equipment………………………………… Test and inspection of incoming materials ………………… Systems development …………………………………………….. Product recalls ……………………………………………………….. Quality training ……………………………………………………… Disposal of defective products …………………………………. Supervision of testing and inspection activities ………….. Warranty repairs and replacements …………………………… Net cost of scrap …………………………………………………….
$18,000 $73,000 $29,000 $91,000 $25,000 $55,000 $24,000 $58,000 $23,000

Required:

Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs.

,10

144. Gagnet Company’s quality cost report is to be based on the following data:

Liability arising from defective products …………………… Final product testing and inspection ………………………….. Returns arising from quality problems ………………………. Technical support provided to suppliers ……………………. Disposal of defective products …………………………………. Maintenance of test equipment…………………………………. Systems development ……………………………………………… Depreciation of test equipment…………………………………. Debugging software errors ……………………………………….
$82,000 $40,000 $24,000 $52,000 $98,000 $53,000 $67,000 $11,000 $87,000

Required:

Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs.

,10

145. Gaffney Company’s quality cost report is to be based on the following data:

Final product testing and inspection ………………………….. Rework labor and overhead ……………………………………… Statistical process control activities ………………………….. Quality data gathering, analysis, and reporting…………… Returns arising from quality problems ………………………. Liability arising from defective products …………………… Depreciation of test equipment…………………………………. Downtime caused by quality problems ……………………… Supervision of testing and inspection activities …………..
$60,000 $60,000 $78,000 $24,000 $77,000 $89,000 $62,000 $80,000 $11,000

Required:

Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs.

,10

146. Harvold Company’s quality cost report is to be based on the following data:

Test and inspection of incoming materials …………………. Supplies used in testing and inspection ……………………… Re-entering data because of keying errors …………………. Statistical process control activities ………………………….. Technical support provided to suppliers ……………………. Disposal of defective products …………………………………. Lost sales due to poor quality…………………………………… Net cost of scrap …………………………………………………….. Warranty repairs and replacements ……………………………
$71,000 $51,000 $60,000 $82,000 $91,000 $60,000 $87,000 $85,000 $70,000

Required:

Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs.

,10

147. Hartlie Company’s quality cost report is to be based on the following data:

Lost sales due to poor quality………………………………….. Rework labor and overhead …………………………………….. Statistical process control activities …………………………. Depreciation of test equipment………………………………… Re-entering data because of keying errors ………………… Debugging software errors ……………………………………… Quality data gathering, analysis, and reporting………….. Supervision of testing and inspection activities …………. Warranty repairs and replacements …………………………..
$11,000 $75,000 $26,000 $16,000 $86,000 $55,000 $48,000 $12,000 $75,000

Required:

Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs.

,10

148. Hartness Company’s quality cost report is to be based on the following data:

Depreciation of test equipment…………………………………. Rework labor and overhead ……………………………………… Quality circles ………………………………………………………… Quality training………………………………………………………. Test and inspection of incoming materials …………………. Product recalls ……………………………………………………….. Net cost of scrap …………………………………………………….. Re-entering data because of keying errors …………………. Cost of field servicing and handling complaints ………….
$75,000 $11,000 $46,000 $94,000 $64,000 $71,000 $12,000 $52,000 $25,000

Required:

Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal failure costs, and external failure costs.

Chapter 3 Systems Design: Job-Order Costing

True/False Questions

1. Process costing is used in those situations where many different products or services are produced each period to customer specifications.

2. The basic approach in job-order costing is to accumulate costs in a particular operation or department for an entire period (month, quarter, year) and then to divide this total by the number of units produced during the period.

3. If a company uses predetermined overhead rates, actual manufacturing overhead costs of a period will be recorded in the Manufacturing Overhead account, but they will not be recorded on the job cost sheets for the period.

4. In a job-order cost system, indirect labor is assigned to a job by using the labor time ticket as a source document.

5. The formula for computing the predetermined overhead rate is: Estimated total units in base ÷ Estimated total manufacturing costs

6. The fact that one department may be labor intensive while another department is machine intensive may explain in part the existence of multiple predetermined overhead rates in larger companies.

7. If a company closes any under- or overapplied overhead to the Cost of Goods Sold account, then Cost of Goods Sold will be credited if manufacturing overhead is overapplied for the period.

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8. The following entry would be used to record the transfer of material from the storeroom to production if 80% of the material was direct material and 20% was indirect material:

Work in Process ……………………….. 40,000 Manufacturing Overhead …………… 10,000
Raw Material …………………… 50,000

9. If a job is not completed at the end of the year, then no manufacturing overhead cost should be applied to that job.

10. When raw materials are purchased, they are recorded as an expense.

11. In a job-order cost system, depreciation on factory equipment should be charged directly to the Work in Process account.

12. The entire difference between the actual manufacturing overhead cost for a period and the applied manufacturing overhead cost is typically closed to the Work In Process account.

13. If the actual manufacturing overhead costs for a period exceed the manufacturing overhead costs applied, then overhead would be considered to be overapplied.

14. When the predetermined overhead rate is based on the level of activity at capacity, the overhead underapplied may be called the Cost of Unused Capacity and treated as a period expense.

Appendix: 3A

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15. The absorption cost approach is so named because it provides for the absorption of all manufacturing costs, fixed and variable, into units of product.

0

Multiple Choice Questions

16. Which of the following industries would be most likely to use a process costing system?
A) Ship builder B) Movie studio C) Oil refinery D) Hospital

17. A process cost system is employed in those situations where:
A) many different products, jobs, or batches of production are being produced each period.
B) where manufacturing involves a single, homogeneous product that flows evenly through the production process on a continuous basis.
C) a service is performed such as in a law firm or an accounting firm. D) full or absorption cost approach is not employed.

18. Emco Company uses direct labor cost as a basis for computing its predetermined overhead rate. In computing the predetermined overhead rate for last year, the company misclassified a portion of direct labor cost as indirect labor. The effect of this misclassification will be to:
A) understate the predetermined overhead rate. B) overstate the predetermined overhead rate.
C) have no effect on the predetermined overhead rate. D) cannot be determined from the information given.

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19. Which of the following entries would record correctly the application of overhead cost?

A) Work in Process ……………………………. XXX Accounts Payable …………………. XXX
B) Manufacturing Overhead ……………….. XXX Accounts Payable …………………. XXX
C) Manufacturing Overhead ……………….. XXX
Work in Process ……………………. XXX D) Work in Process ……………………………. XXX
Manufacturing Overhead ……….. XXX

,5

20. The operations of Kalispell Company resulted in overapplied overhead for the month just completed. Which of the following journal entries can be correct if Kalispell allocates under- or overapplied overhead among accounts?

A) Cost of Goods Sold …………………………… XXX Manufacturing Overhead …………… XXX
B) Manufacturing Overhead …………………… XXX
Cost of Goods Sold …………………… XXX C) Work in Process ……………………………….. XXX
Finished Goods ………………………………… XXX
Cost of Goods Sold …………………… XXX Manufacturing Overhead …………… XXX
D) Manufacturing Overhead …………………… XXX
Work in Process ……………………….. XXX Finished Goods ………………………… XXX Cost of Goods Sold …………………… XXX

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21. Which of the following entries would record correctly the monthly salaries earned by the top management of a manufacturing company?

A) Manufacturing Overhead ……………………… XXX Salaries and Wages Payable …………. XXX
B) Salaries Expense …………………………………. XXX Salaries and Wages Payable …………. XXX
C) Work in Process ………………………………….. XXX Salaries and Wages Payable …………. XXX
D) Salaries and Wages Payable ………………….. XXX Salaries Expense …………………………. XXX

22. The journal entry to record applying overhead during the production process is:

A) Manufacturing Overhead ……………………………… XXX
Work In Process ………………………………….. XXX B) Finished Goods …………………………………………… XXX
Manufacturing Overhead ……………………… XXX C) Manufacturing Overhead ……………………………… XXX
Finished Goods …………………………………… XXX D) Work In Process ………………………………………….. XXX
Manufacturing Overhead ……………………… XXX

23. When manufacturing overhead is applied to production, it is added to: A) the Cost of Goods Sold account.
B) the Raw Materials account. C) the Work in Process account.
D) the Finished Goods inventory account.

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24. Which of the following statements is true?

I. Overhead application may be made slowly as a job is worked on.
II. Overhead application may be made in a single application at the time of completion of the job.
III. Overhead application should be made to any job not completed at year-end in order to properly value the work in process inventory.

A) Only statement I is true. B) Only statement II is true.
C) Both statements I and II are true. D) Statements I, II, and III are all true.

25. On the Schedule of Cost of Goods Manufactured, the final Cost of Goods Manufactured figure represents:
A) the amount of cost charged to Work in Process during the period.
B) the amount of cost transferred from Finished Goods to Cost of Goods Sold during the period.
C) the amount of cost placed into production during the period.
D) the amount of cost of goods completed during the current year whether they were started before or during the current year.

26. Under a job-order costing system, the dollar amount transferred from Work in Process to Finished Goods is the sum of the costs charged to all jobs:
A) started in process during the period. B) in process during the period.
C) completed and sold during the period. D) completed during the period.

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27. If a company applies overhead to production on the basis of a predetermined rate, a debit balance in the Manufacturing Overhead account at the end of the period means that:
A) actual overhead cost was greater than the amount charged to production. B) actual overhead cost was less than the amount of direct labor cost.
C) more overhead cost has been charged to production than has been charged to finished goods during the period.
D) actual overhead cost was less than the amount charged to production.

28. Overapplied overhead means that:
A) the applied overhead cost was less than the actual overhead cost.
B) the applied overhead cost was greater than the actual overhead cost. C) the estimated overhead cost was less than the actual overhead cost. D) the estimated overhead cost was less than the applied overhead cost.

29. A job order cost system uses a predetermined overhead rate based on estimated activity and estimated manufacturing overhead cost. At the end of the year, underapplied overhead might be explained by which of the following situations?

Actual activity
A) Greater than estimated B) Greater than estimated C) Less than estimated D) Less than estimated
Actual manufacturing overhead costs Greater than estimated Less than estimated Greater than estimated Less than estimated

Source: CPA, adapted

30. Departmental overhead rates are generally preferred to plant-wide overhead rates when:
A) the activities of the various departments in the plant are not homogeneous. B) the activities of the various departments in the plant are homogeneous.
C) most of the overhead costs are fixed.
D) all departments in the plant are heavily automated.

0 Source: CMA, adapted

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31. The Work in Process inventory account of a manufacturing company shows a balance of $18,000 at the end of an accounting period. The job cost sheets of the two uncompleted jobs show charges of $6,000 and $3,000 for materials, and charges of $4,000 and $2,000 for direct labor. From this information, it appears that the company is using a predetermined overhead rate, as a percentage of direct labor costs, of:
A) 50% B) 200% C) 300% D) 20%

,3,5

32. Blackwood Co. uses a predetermined overhead rate based on direct labor cost to apply manufacturing overhead to jobs. The predetermined overhead rates for the year are 200% for Department A and 50% for Department B. Job 123, started and completed during the year, was charged with the following costs:

Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead …………….
Dept. A $25,000 ? $40,000
Dept. B $5,000
$30,000 ?

The total manufacturing costs associated with Job 123 should be: A) $135,000
B) $180,000 C) $195,000 D) $240,000
Source: CPA, adapted

,5

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33. Fisher Company uses a predetermined overhead rate based on direct labor cost to apply manufacturing overhead to jobs. The following information about Fisher Company’s Work in Process inventory account has been provided for the month of May:

May 1 balance ……………………………………. Debits during May:
Direct Materials ……………………………….. Direct Labor ……………………………………. Manufacturing Overhead ……………………
$26,000

$40,000 $50,000 $37,500

During the month, Fisher Company’s Work in Process inventory account was credited for $120,500, which represented the Cost of Goods Manufactured for the month. Only one job remained in process on May 31; this job had been charged with $9,600 of applied overhead cost. The amount of direct materials cost in the unfinished job would be:
A) $10,600 B) $16,700 C) $12,800 D) $23,400

,5,6,7

34. At the beginning of the year, manufacturing overhead for the year was estimated to be $477,590. At the end of the year, actual direct labor-hours for the year were 29,000 hours, the actual manufacturing overhead for the year was $472,590, and manufacturing overhead for the year was overapplied by $110. If the predetermined overhead rate is based on direct labor-hours, then the estimated direct labor-hours at the beginning of the year used in the predetermined overhead rate must have been:
A) 29,300 direct labor-hours B) 28,987 direct labor-hours C) 28,993 direct labor-hours D) 29,000 direct labor-hours

,5,8

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35. At the beginning of the year, manufacturing overhead for the year was estimated to be $670,700. At the end of the year, actual direct labor-hours for the year were 36,200 hours, the actual manufacturing overhead for the year was $665,700, and manufacturing overhead for the year was overapplied by $22,100. If the predetermined overhead rate is based on direct labor-hours, then the estimated direct labor-hours at the beginning of the year used in the predetermined overhead rate must have been:
A) 35,037 direct labor-hours B) 35,300 direct labor-hours C) 36,200 direct labor-hours D) 33,874 direct labor-hours

,5,8

36. At the beginning of the year, manufacturing overhead for the year was estimated to be $670,530. At the end of the year, actual direct labor-hours for the year were 29,400 hours, the actual manufacturing overhead for the year was $665,530, and manufacturing overhead for the year was underapplied by $27,550. If the predetermined overhead rate is based on direct labor-hours, then the estimated direct labor-hours at the beginning of the year used in the predetermined overhead rate must have been:
A) 30,900 direct labor-hours B) 29,400 direct labor-hours C) 30,670 direct labor-hours D) 31,939 direct labor-hours

,5,8

37. Bradbeer Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 17,500 hours. At the end of the year, actual direct labor-hours for the year were 16,000 hours, the actual manufacturing overhead for the year was $233,000, and manufacturing overhead for the year was underapplied by $15,400. The estimated manufacturing overhead at the beginning of the year used in the predetermined overhead rate must have been:
A) $249,375 B) $217,600 C) $228,000 D) $238,000

,5,8

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38. Braam Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 11,500 hours. At the end of the year, actual direct labor-hours for the year were 9,700 hours, the actual manufacturing overhead for the year was $143,350, and manufacturing overhead for the year was underapplied by $18,220. The estimated manufacturing overhead at the beginning of the year used in the predetermined overhead rate must have been:
A) $164,023 B) $125,130 C) $148,350 D) $138,350

,5,8

39. Braaten Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 14,100 hours. At the end of the year, actual direct labor-hours for the year were 13,500 hours, the actual manufacturing overhead for the year was $291,100, and manufacturing overhead for the year was underapplied by $7,600. The estimated manufacturing overhead at the beginning of the year used in the predetermined overhead rate must have been:
A) $286,100 B) $296,100 C) $298,816 D) $283,500

,5,8

40. Cribb Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 17,900 hours and the total estimated manufacturing overhead was $341,890. At the end of the year, actual direct labor-hours for the year were 16,700 hours and the actual manufacturing overhead for the year was $336,890. Overhead at the end of the year was:
A) $22,920 underapplied B) $17,920 overapplied C) $17,920 underapplied D) $22,920 overapplied

,5,8

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41. Crich Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 21,800 hours and the total estimated manufacturing overhead was $497,040. At the end of the year, actual direct labor-hours for the year were 21,500 hours and the actual manufacturing overhead for the year was $492,040. Overhead at the end of the year was:
A) $6,840 overapplied B) $6,840 underapplied C) $1,840 underapplied D) $1,840 overapplied

,5,8

42. Crick Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 14,400 hours and the total estimated manufacturing overhead was $355,680. At the end of the year, actual direct labor-hours for the year were 15,200 hours and the actual manufacturing overhead for the year was $350,680. Overhead at the end of the year was:
A) $24,760 underapplied B) $24,760 overapplied C) $19,760 underapplied D) $19,760 overapplied

,5,8

43. Dagger Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the total estimated manufacturing overhead was $423,870. At the end of the year, actual direct labor-hours for the year were 19,400 hours, manufacturing overhead for the year was underapplied by $5,650, and the actual manufacturing overhead was $418,870. The predetermined overhead rate for the year must have been closest to:
A) $21.59 B) $20.76 C) $21.30 D) $21.85

,5,8

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44. Daget Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the total estimated manufacturing overhead was $364,140. At the end of the year, actual direct labor-hours for the year were 24,000 hours, manufacturing overhead for the year was overapplied by $8,060, and the actual manufacturing overhead was $359,140. The predetermined overhead rate for the year must have been closest to:
A) $15.43 B) $15.30 C) $15.17 D) $14.96

,5,8

45. Dafoe Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the total estimated manufacturing overhead was $221,100. At the end of the year, actual direct labor-hours for the year were 14,400 hours, manufacturing overhead for the year was overapplied by $21,500, and the actual manufacturing overhead was $216,100. The predetermined overhead rate for the year must have been closest to:
A) $15.01 B) $17.73 C) $15.35 D) $16.50

,5,8

46. Juanita Corporation uses a job-order cost system and applies overhead on the basis of direct labor cost. At the end of October, Juanita had one job still in process. The job cost sheet for this job contained the following information:

Direct materials ……………………………………. $480 Direct labor ………………………………………….. $150 Manufacturing overhead applied …………….. $600

An additional $100 of labor was needed in November to complete this job. For this job, how much should Juanita have transferred to finished goods inventory in November when it was completed?
A) $1,330 B) $500 C) $1,230 D) $1,730

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47. Wall Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. The company’s estimated costs for the next year are:

Direct materials …………………………………………….. Direct labor …………………………………………………… Depreciation on factory equipment ………………….. Rent on factory ……………………………………………… Sales salaries …………………………………………………. Factory utilities ……………………………………………… Indirect labor …………………………………………………
$3,000 $20,000 $6,000 $12,000 $29,000 $15,000 $6,000

It is estimated that 10,000 direct labor hours will be worked during the year. The predetermined overhead rate will be:
A) $3.90 B) $5.90 C) $6.80 D) $9.10

48. The following information relates to Spock Manufacturing Company:

Total estimated manufacturing overhead at beginning of year .. Total manufacturing overhead applied to production during
the year ………………………………………………………………………… Total manufacturing overhead incurred during the year …………
$620,000

$625,000 $618,000

The company closes out the balance in the Manufacturing Overhead to Cost of Goods Sold at the end of the year. In the journal entry to close out the balance, the company would:
A) debit cost of goods sold for $2,000 B) credit cost of goods sold for $2,000 C) credit cost of goods sold for $7,000 D) debit cost of goods sold for $7,000

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49. Rio Manufacturing Company uses a job order cost system. At the beginning of February, Rio only had one job in process, Job #594. The direct costs assigned to this job at that time were $800 of materials and $650 of labor. Job #594 was finished during February incurring additional direct costs of $120 for materials and $370 for labor. Job #595 was started and finished during February. The direct costs assigned to this job were $310 for materials and $190 for labor. Job #596 was started during February but was not finished by the end of the month. The direct costs assigned to this job were $740 for materials and $300 for labor. Rio applies manufacturing overhead to its products at a rate of 200% of direct labor cost. What is Rio’s cost of goods manufactured for February?
A) $2,440 B) $3,750 C) $4,860 D) $6,500

,6

50. Serenje Manufacturing Company produces nameplates and uses a job-order cost system. The following amounts relate to nameplate production for the month of June:

Work in process inventory, June 1 ……………………………………………… $620 Cost of materials directly assigned to production during June ……….. $1,800 Cost of labor directly assigned to production during June ……………… $1,200 Cost of nameplates completed during June ………………………………….. $4,300

Serenje applies overhead at a predetermined overhead rate of 60% of direct material cost. At the end of June, only one job was in Work in Process inventory. This job had been charged with $150 of direct material cost. What is the direct labor cost assigned to this job?
A) $100 B) $160 C) $225 D) $530

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51. Dukes Company used a predetermined overhead rate this year of $2 per direct labor hour, based on an estimate of 20,000 direct labor hours to be worked during the year. Actual costs and activity during the year were:

Actual manufacturing overhead cost incurred …………….. Actual direct labor hours worked ………………………………
$38,000 18,500

The under- or overapplied overhead for the year was: A) $1,000 underapplied
B) $1,000 overapplied C) $3,000 underapplied D) $3,000 overapplied

,8

52. Sargent Company applies overhead cost to jobs on the basis of 80 percent of direct labor cost. If Job 210 shows $10,000 of manufacturing overhead cost applied, how much was the direct labor cost on the job?
A) $12,500 B) $11,000 C) $8,000 D) $10,000

53. In the Vasquez Company, any over- or underapplied overhead is closed out to Cost of Goods Sold. Last year, the company incurred $27,000 in actual manufacturing overhead cost, and applied $29,000 of overhead cost to jobs. The beginning and ending balances of Finished Goods were equal, and the Company’s Cost of Goods Manufactured for the year totaled $71,000. Given this information, Cost of Goods Sold, after adjustment for any over- or underapplied overhead, for the year must have been:
A) $98,000 B) $73,000 C) $71,000 D) $69,000

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54. In reviewing the accounting records at year-end, Garff Company’s accountant has determined that the following items and amounts were debited to the Manufacturing Overhead account during the year:

Factory supervisor’s salary ……………………………………… $8,000 Sales commissions …………………………………………………. $7,000 Vacation pay for the materials storeroom clerk …………. $2,000

Including the items listed above, the debits to the Manufacturing Overhead account totaled $245,000 for the year. Credits to the account totaled $240,000 for the year. Based on this information, if all entries had been made correctly during the year the Manufacturing Overhead account would have been:
A) overapplied by $4,000 B) overapplied by $12,000 C) underapplied by $5,000 D) overapplied by $2,000

,8

55. Compute the October cost of direct materials used if raw material purchases for the month were $30,000 and the inventories were as follows:

Direct materials ……………………….. Work in Process ……………………….. Finished goods ………………………….
Beginning $7,000 $6,000 $10,000
Ending $4,000 $7,500
$12,000

The cost of direct materials used would be: A) $31,500
B) $29,500 C) $27,000 D) $33,000

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56. Hardin Company’s manufacturing overhead account showed a $20,000 underapplied overhead balance on December 31. Other data as of December 31 appear below:

Cost of Goods Sold………………………………………………………….. Overhead applied during the year included in Cost of Goods
Sold ……………………………………………………………………………. Overhead applied during the year in the ending balances of:
Work in Process inventory …………………………………………….. Finished Goods inventory ………………………………………………
$800,000

$200,000

$80,000 $120,000

If the company allocates the underapplied overhead among Cost of Goods Sold and the appropriate inventory accounts based on the amount of overhead applied during the year in the accounts, Cost of Goods Sold after allocation will be:
A) $790,000 B) $820,000 C) $810,000 D) $780,000

Use the following to answer questions 57-60:

The accounting records of Omar Company contained the following information for last year:

Direct materials inventory ……………………. Work in process inventory …………………… Finished goods inventory ……………………..

Manufacturing costs incurred
Direct materials used …………………………… Overhead applied ……………………………….. Direct labor cost (10,000 hours) ……………. Depreciation ………………………………………. Rent ………………………………………………….. Taxes ………………………………………………… Cost of goods sold ……………………………….
*
Selling and administrative costs incurred Advertising ………………………………………… Rent ………………………………………………….. Clerical ………………………………………………
Beginning $9,000 $17,000 $10,000

$72,000 $24,000 $80,000 $10,000 $12,000 $8,000 $157,000*

$35,000 $20,000 $25,000
Ending $7,000
$31,000 $15,000

*Does not include over- or underapplied overhead.

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57. The amount of direct material purchased during the year was: A) $66,000
B) $70,000 C) $65,000 D) $74,000

58. The total costs added to Work in Process during the year were: A) $206,000
B) $162,000 C) $176,000 D) $182,000

59. If Omar Company applies overhead to jobs on the basis of direct labor hours and Job 3 took 120 hours, how much overhead should be applied to that job?
A) $960 B) $360 C) $528 D) $288

,5

60. The cost of goods manufactured for the year was: A) $190,000
B) $162,000 C) $168,000 D) $135,000

Use the following to answer questions 61-64:

At the beginning of the current year, Garber Corporation estimated that its manufacturing overhead would be $70,000 and the activity level would be 10,000 machine-hours. The level of activity at capacity is 14,000 machine-hours. The actual manufacturing overhead for the year was $63,300 and the actual level of activity was 10,100 machine-hours.

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61. If the company bases its predetermined overhead rate on estimated machine-hours, then its predetermined overhead rate would have been:
A) $6.27 B) $7.00 C) $5.00 D) $6.33

Appendix: 3A

62. If the company bases its predetermined overhead rate on estimated machine-hours, then its overhead for the year would have been:
A) $12,800 overapplied B) $12,800 underapplied C) $7,400 overapplied D) $7,400 underapplied

Appendix: 3A

63. If the company bases its predetermined overhead rate on machine-hours at capacity, then its predetermined overhead rate would have been:
A) $6.33 B) $6.27 C) $5.00 D) $7.00

,9 Appendix: 3A

64. If the company bases its predetermined overhead rate on machine-hours at capacity, then the cost of unused capacity reported on the income statement would have been: A) $700
B) $7,400 C) $6,700 D) $12,800

,9 Appendix: 3A

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Use the following to answer questions 65-67:

Acton Corporation, which applies manufacturing overhead on the basis of machine-hours, has provided the following data for its most recent year of operations.

Estimated manufacturing overhead ………………….. Estimated machine-hours ……………………………….. Actual manufacturing overhead ………………………. Actual machine-hours …………………………………….
$139,080 3,800 $137,000 3,780

The estimates of the manufacturing overhead and of machine-hours were made at the beginning of the year for the purpose of computing the company’s predetermined overhead rate for the year.

65. The predetermined overhead rate is closest to: A) $36.60
B) $36.41 C) $36.24 D) $36.05

66. The applied manufacturing overhead for the year is closest to: A) $136,269
B) $138,348 C) $136,987 D) $137,630

67. The overhead for the year was: A) $732 underapplied
B) $1,348 underapplied C) $732 overapplied D) $1,348 overapplied

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Use the following to answer questions 68-70:

Baker Corporation applies manufacturing overhead on the basis of direct labor-hours. At the beginning of the most recent year, the company based its predetermined overhead rate on total estimated overhead of $210,600 and 6,000 estimated direct labor-hours. Actual manufacturing overhead for the year amounted to $209,000 and actual direct labor-hours were 5,980.

68. The predetermined overhead rate for the year was closest to: A) $34.95
B) $34.83 C) $34.98 D) $35.10

69. The applied manufacturing overhead for the year was closest to: A) $208,283
B) $209,001 C) $209,898 D) $209,180

70. The overhead for the year was: A) $702 underapplied
B) $898 underapplied C) $702 overapplied D) $898 overapplied

Use the following to answer questions 71-73:

Caber Corporation applies manufacturing overhead on the basis of machine-hours. At the beginning of the most recent year, the company based its predetermined overhead rate on total estimated overhead of $60,600. Actual manufacturing overhead for the year amounted to $59,000 and actual machine-hours were 5,900. The company’s predetermined overhead rate for the year was $10.10 per machine-hour.

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71. The predetermined overhead rate was based on how many estimated machine-hours? A) 5,783
B) 6,000 C) 5,900 D) 5,842

72. The applied manufacturing overhead for the year was closest to: A) $58,017
B) $59,590 C) $60,600 D) $58,597

73. The overhead for the year was: A) $1,010 underapplied
B) $590 overapplied C) $590 underapplied D) $1,010 overapplied

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Use the following to answer questions 74-76:

Dapper Company had only one job in process on May 1. The job had been charged with $3,400 of direct materials, $4,640 of direct labor, and $9,200 of manufacturing overhead cost. The company assigns overhead cost to jobs using the predetermined overhead rate of $23.00 per direct labor-hour.

During May, the activity was recorded:

Raw materials (all direct materials):
Beginning balance ………………………………………………. Purchased during the month …………………………………. Used in production ………………………………………………
Labor:
Direct labor-hours worked during the month ………….. Direct labor cost incurred …………………………………….. Actual manufacturing overhead costs incurred …………..
Inventories:
Raw materials, May 30 ……………………………………….. Work in process, May 30 ……………………………………..

$8,500 $42,000 $48,500

2,200 $25,520 $52,800

? $32,190

Work in process inventory on May 30 contains $7,540 of direct labor cost. Raw materials consist solely of items that are classified as direct materials.

74. The balance in the raw materials inventory account on May 30 was: A) $33,500
B) $2,000 C) $40,000 D) $6,500

75. The cost of goods manufactured for May was: A) $109,670
B) $124,620 C) $143,300 D) $126,820

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76. The entry to dispose of the under- or overapplied overhead cost for the month would include a:
A) debit of $2,200 to Manufacturing Overhead B) debit of $14,950 to Manufacturing Overhead C) credit of $14,950 to Manufacturing Overhead D) credit of $2,200 to Manufacturing Overhead

,8

Use the following to answer questions 77-80:

The direct labor rate in Brent Company is $9.00 per hour, and manufacturing overhead is applied to products using a predetermined overhead rate of $6.00 per direct labor hour. During May, the company purchased $60,000 in raw materials (all direct materials) and worked 3,200 direct labor hours. The Raw Materials inventory (all direct materials) decreased by $3,000 between the beginning and end of May. The Work in Process inventory on May 1 consisted of one job which had been charged with $4,000 in direct materials and on which 300 hours of direct labor time had been worked. There was no Work in Process inventory on May 31.

77. The balance in the Work in Process inventory account on May 1 was: A) $0
B) $6,700 C) $4,500 D) $8,500

78. The debit to Work in Process for the cost of direct materials used during May was: A) $63,000
B) $61,000 C) $57,000 D) $67,000

79. The debit to Work in Process for direct labor cost during May was: A) $21,000
B) $26,100 C) $28,800 D) $31,500

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80. If overhead was underapplied by $2,500 during May, the actual overhead cost for the month must have been:
A) $16,700 B) $21,700 C) $18,500 D) $23,500

,8

Use the following to answer questions 81-84:

Chelm Music Company manufactures violins, violas, cellos, and fiddles and uses a job-order cost system.

81. What account should Chelm debit when the workers who carve the wood for the instruments are paid?
A) Direct Labor
B) Work in Process
C) Manufacturing Overhead
D) Salaries and Wages Receivable E) Salaries and Wages Expense

82. What account should Chelm debit when the production manager is paid? A) Direct Labor
B) Work in Process
C) Manufacturing Overhead
D) Salaries and Wages Receivable E) Salaries and Wages Expense

83. What account should Chelm debit when the president of the company is paid? A) Direct Labor
B) Work in Process
C) Manufacturing Overhead
D) Salaries and Wages Receivable E) Salaries and Wages Expense

Answer: E

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84. What is one of the accounts that Chelm should credit when goods are sold? A) Finished Goods
B) Work in Process
C) Cost of Goods Sold
D) Manufacturing Overhead
E) Cost of Goods Manufactured

Use the following to answer questions 85-89:

The following partially completed T-accounts summarize transactions for Western Company during the year:

Raw Material
Beg Bal 3,000 5,000 7,000
8,000

Finished Goods
Beg Bal 9,000 25,000
20,000

Work in Process
Beg Bal 6,000 6,500 9,000 7,000
25,000

Wages & Salaries Payable
10,000
2,000 Beg Bal 12,000

Manufacturing Overhead
1,500 2,000 750 3,000
7,000

Cost of Goods Sold
20,000

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85. The Cost of Goods Manufactured is: A) $20,000
B) $34,000 C) $22,500 D) $25,000

,7

86. The direct labor cost was: A) $9,000
B) $12,000 C) $10,000 D) $14,000

87. The direct materials cost was: A) $8,000
B) $6,500 C) $9,000 D) $6,000

88. The manufacturing overhead applied was: A) $9,000
B) $3,000 C) $500 D) $7,000

,7

89. The manufacturing overhead was: A) $250 overapplied
B) $750 underapplied C) $250 underapplied D) $750 overapplied

,8

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Use the following to answer questions 90-91:

Kapanga Manufacturing Company uses a job-order costing system and started the month of October with a zero balance in its work in process and finished goods inventory accounts. During October, Kapanga worked on three jobs and incurred the following direct costs on those jobs:

Direct materials ……………………….. Direct labor ………………………………
Job B18 $12,000
$8,000
Job B19 $25,000 $10,000
Job C11 $18,000
$5,000

Kapanga applies manufacturing overhead at a rate of 150% of direct labor cost. During October, Kapanga completed Jobs B18 and B19 and sold Job B19.

90. What is Kapanga’s cost of goods manufactured for October? A) $ 50,000
B) $ 55,000 C) $ 78,000 D) $ 82,000

,6

91. What is Kapanga’s work in process inventory balance at the end of October? A) $23,000
B) $30,500 C) $32,000 D) $43,000

,6

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Use the following to answer questions 92-95:

Dillon Company applies manufacturing overhead to jobs using a predetermined overhead rate of 75% of direct labor cost. Any under or overapplied overhead cost is closed out to Cost of Goods Sold at the end of the month. During May, the following transactions were recorded by the company:

Raw materials (all direct materials):
Purchased during the month …………………………………. Used in production ………………………………………………
Labor:
Direct labor hours worked during the month ………….. Direct labor cost incurred …………………………………….. Manufacturing overhead cost incurred (total) …………….
Inventories:
Raw materials (all direct), May 31 ………………………… Work in process, May 1 ………………………………………. Work in process, May 31 ……………………………………..

$38,000 $35,000

3,150 $30,000 $24,500

$8,000 $9,000 $12,000*

*Contains $4,400 in direct labor cost.

92. The balance on May 1 in the Raw Materials inventory account was: A) $11,000
B) $5,000 C) $7,000 D) $9,000

93. The amount of direct materials cost in the May 31 Work in Process inventory account was:
A) $7,600 B) $2,000 C) $6,300 D) $4,300

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94. The entry to dispose of the under or overapplied overhead cost for the month would include:
A) a debit of $2,000 to the Manufacturing Overhead account B) a credit of $2,500 to the Manufacturing Overhead account C) a debit of $2,000 to Cost of Goods Sold
D) a credit of $2,500 to Cost of Goods Sold

95. The Cost of Goods Manufactured for May was: A) $84,500
B) $95,000 C) $75,500 D) $81,500

Use the following to answer questions 96-98:

Farber Corporation uses a job-order cost system. The information below is from the financial records of the company for last year:

Total manufacturing costs ……………………. Cost of goods manufactured …………………. Predetermined overhead rate …………………
$2,500,000 $2,425,000
80% of direct labor cost

Applied overhead was 30% of total manufacturing costs. The Work in Process inventory at January 1 was 75% of the Work in Process inventory at December 31.

96. Farber Company’s total direct labor cost was: A) $750,000
B) $600,000 C) $900,000 D) $937,500

Source: CMA, adapted

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97. Total cost of direct material used by Farber Company was: A) $750,000
B) $812,500 C) $850,000 D) $1,150,000

Source: CMA, adapted

98. The Work in Process inventory at December 31 was: A) $300,000
B) $225,000 C) $100,000 D) $75,000

Source: CMA, adapted

Use the following to answer questions 99-101:

Killian Company began operations on January 1. The predetermined overhead rate was set at $6.00 per direct labor-hour. Debits to Work in Process for the year totaled $550,000. Credits to Work in Process totaled $480,000. Analysis of the Company’s records indicates that direct labor cost totaled $250,000 for the year, which represents 20,000 direct labor-hours.

99. The direct materials used in production during the year totaled: A) $180,000
B) $240,000 C) $130,000 D) $120,000

100. If the actual manufacturing overhead cost for the year totaled $145,000, then overhead was:
A) overapplied by $25,000 B) overapplied by $10,000 C) underapplied by $25,000 D) underapplied by $10,000

,8

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101. The Company’s ending work in process inventory consisted of one job, Job 42. The job had been charged with $28,000 of direct labor cost, which consisted of 2,000 actual labor-hours. The direct materials cost in Job 42 totaled:
A) $33,000 B) $42,000 C) $17,000 D) $30,000

Use the following to answer questions 102-103:

Echo Corporation uses a job-order costing system and applies overhead to jobs using a predetermined overhead rate. During the year the company’s Finished Goods inventory account was debited for $360,000 and credited for $338,800. The ending balance in the Finished Goods inventory account was $36,600. At the end of the year, manufacturing overhead was overapplied by $15,900.

102. The balance in the Finished Goods inventory account at the beginning of the year was: A) $15,900
B) $15,400 C) $21,200 D) $36,600

103. If the applied manufacturing overhead was $169,300, the actual manufacturing overhead cost for the year was:
A) $168,800 B) $153,400 C) $190,000 D) $185,200

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Use the following to answer questions 104-108:

The following partially completed T-accounts summarize transactions for Farwest Company during the year:

Raw Materials
Beg Bal 4,700 6,900
10,000

Finished Goods
Beg Bal 1,900 26,300
22,900

Work in Process
Beg Bal 4,600 7,400 8,000 6,800
26,300

Manufacturing Overhead
2,600 3,000 1,900
6,800

Wages & Salaries Payable
12,300
1,400 Beg Bal 11,000

Cost of Goods Sold
22,900

104. The Cost of Goods Manufactured was: A) $22,900
B) $26,300 C) $6,400 D) $49,200

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105. The direct labor cost was: A) $8,000
B) $12,300 C) $12,600 D) $11,000

106. The direct materials cost was: A) $8,000
B) $10,000 C) $7,400 D) $4,600

107. The manufacturing overhead applied was: A) $1,900
B) $6,800 C) $12,900 D) $3,000

108. The manufacturing overhead was: A) $1,900 underapplied
B) $700 underapplied C) $400 overapplied D) $3,200 overapplied

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Essay Questions

109. Aladili Company is a manufacturing firm that uses job-order costing. At the beginning of the year, the company’s inventory balances were as follows:

Raw materials ………………………….. Work in process ……………………….. Finished goods ………………………….
$36,000 $41,000 $104,000

The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 21,000 machine-hours and incur $210,000 in manufacturing overhead cost. The following transactions were recorded for the year:
a. Raw materials were purchased, $346,000.
b. Raw materials were requisitioned for use in production, $338,000 ($302,000 direct and $36,000 indirect).
c. The following employee costs were incurred: direct labor, $360,000; indirect labor, $68,000; and administrative salaries, $111,000.
d. Selling costs, $153,000.
e. Factory utility costs, $29,000.
f. Depreciation for the year was $102,000 of which $93,000 is related to factory operations and $9,000 is related to selling and administrative activities.
g. Manufacturing overhead was applied to jobs. The actual level of activity for the year was 19,000 machine-hours.
h. The cost of goods manufactured for the year was $870,000.
i. Sales for the year totaled $1,221,000 and the costs on the job cost sheets of the goods that were sold totaled $855,000.
j. The balance in the Manufacturing Overhead account was closed out to Cost of Goods Sold.

Required:

Prepare the appropriate journal entry for each of the items above (a. through j.). You can assume that all transactions with employees, customers, and suppliers were conducted in cash.

110. Quark Spy Equipment manufactures espionage equipment. Quark uses a job-order cost system and applies overhead to jobs the basis of direct labor-hours. For the current year, Quark estimated that it would work 100,000 direct labor-hours and incur $20,000,000 of manufacturing overhead cost. The following summarized information relates to January of the current year. The raw materials purchased include both direct and indirect materials.

Raw materials purchased on account ………………………… Direct materials requisitioned into production ……………. Indirect materials requisitioned into production …………. Direct labor cost (7,900 hours @ $40 per hour) ………….. Indirect labor cost (10,200 hours @ $16 per hour) ……… Depreciation on the factory building …………………………. Depreciation on the factory equipment ……………………… Utilities for the factory……………………………………………. Cost of jobs finished ……………………………………………….. Cost of jobs sold …………………………………………………….. Sales (all on account) ………………………………………………
$1,412,000 $1,299,500 $98,000 $316,000 $163,200 $190,500 $890,700 $79,600 $2,494,200 $2,380,000 $3,570,000

Required:

Prepare journal entries to record Quark’s transactions for the month of January. Do not close out the manufacturing overhead account.

111. Baar Company is a manufacturing firm that uses job-order costing. The company’s inventory balances were as follows at the beginning and end of the year:

Raw materials ………………………….. Work in process ……………………….. Finished goods ………………………….
Beginning Balance $26,000 $71,000 $66,000
Ending Balance $20,000 $53,000 $81,000

The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 44,000 machine-hours and incur $176,000 in manufacturing overhead cost. The following transactions were recorded for the year:
� Raw materials were purchased, $459,000.
� Raw materials were requisitioned for use in production, $465,000 ($431,000 direct and $34,000 indirect).
� The following employee costs were incurred: direct labor, $296,000; indirect labor, $63,000; and administrative salaries, $157,000.
� Selling costs, $134,000.
� Factory utility costs, $14,000.
� Depreciation for the year was $119,000 of which $114,000 is related to factory operations and $5,000 is related to selling and administrative activities.
� Manufacturing overhead was applied to jobs. The actual level of activity for the year was 47,000 machine-hours.
� Sales for the year totaled $1,287,000

Required:
a. Prepare a schedule of cost of goods manufactured in good form. b. Was the overhead under- or overapplied? By how much?
c. Prepare an income statement for the year in good form. The company closes any under- or overapplied overhead to Cost of Goods Sold.

112. Gonzalez, Inc. manufactures stereo speakers in two factories; one in Vandalia, Illinois and another in Modesto, California. The Vandalia factory uses DL$ for its overhead rate and the Modesto factory uses machine-hours (MHs) for its overhead rate. Information related to both plants for last year is presented below:

Estimated manufacturing overhead ……….. Estimated amount of allocation base ……… Predetermined overhead rate ………………… Actual amount of allocation base …………… Actual manufacturing overhead …………….. Applied manufacturing overhead …………… Under or overapplied overhead ………………
Vandalia factory $1,000,000 (a)______________ $10 per DL$ (b)______________ $1,092,500 $1,010,000 (c)______________
Modesto factory $1,600,000 200,000 MHs
(d)______________ 190,000 MHs $1,472,500 (e)_______________ (f)_______________

Required:

Fill in the lettered blanks above. SHOW YOUR CALCULATIONS.

113. Hacken Company has a job-order costing system. The company applies manufacturing overhead to jobs using a predetermined overhead rate based on direct labor cost. The information below has been taken from the cost records of Hacken Company for the past year:

Direct materials used in production …………………………………………….. $1,250 Total manufacturing costs charged to production during the year
(includes direct materials, direct labor, and applied factory
overhead) …………………………………………………………………………….. $6,050 Manufacturing overhead applied ………………………………………………… $2,800 Selling and administrative expenses……………………………………………. $1,000 Inventories:
Direct materials, January 1 ……………………………………………………… $130 Direct materials, December 31………………………………………………… $80 Work in process, January 1 …………………………………………………….. $250 Work in process, December 31……………………………………………….. $400 Finished goods, January 1 ………………………………………………………. $300 Finished goods, December 31…………………………………………………. $200

Required:

a. Compute the cost of direct materials purchased during the year.
b. Compute the predetermined overhead rate that was used during the past year. c. Compute the Cost of Goods Manufactured for the past year.
d. Compute the Cost of Goods Sold for the past year.

114. The Simkins Company uses a job order costing system. The following activities took place during the month of May:

a. Raw materials purchased, $40,000.
b. Raw materials (all direct) used in production, $35,000. c. Salaries and wages cost incurred:
Direct labor cost, $60,000. Indirect labor cost, $30,000. Sales salaries $25,000.
d. Factory utility costs incurred, $15,000.
e. Depreciation on factory equipment, $50,000. f. Advertising expense incurred, $80,000.
g. Manufacturing overhead is applied at the predetermined rate of 150% of direct labor cost. h. Cost of Goods Manufactured for the month, $180,000.
i. Cost of Goods Sold for the month, $150,000.

Required:

Prepare journal entries to record the information given above. Key your entries by the letters a through i.

115. The Commonwealth Company uses a job-order cost system and applies manufacturing overhead cost to jobs using a predetermined overhead rate based on the cost of materials used in production. At the beginning of the year, the following estimates were made as a basis for computing the predetermined overhead rate: manufacturing overhead cost, $186,000; direct materials cost, $155,000. The following transactions took place during the year (all purchases and services were acquired on account):

a. Raw materials purchased, $96,000.
b. Raw materials requisitioned for use in production (all direct materials), $88,000.
c. Utility bills incurred in the factory, $17,000.
d. Costs for salaries and wages incurred as follows: Direct labor, $174,000
Indirect labor, $70,000
Selling and administrative salaries, $124,000
e. Maintenance costs incurred in the factory, $12,000. f. Advertising costs incurred, $98,000.
g. Depreciation recorded for the year, $75,000 (75% relates to factory assets and the remainder relates to selling and administrative assets).
h. Rental cost incurred on buildings, $80,000 (80% of the space is occupied by the factory, and 20% is occupied by sales and administration).
i. Miscellaneous selling and administrative costs incurred, $12,000. j. Manufacturing overhead cost was applied to jobs.
k. Cost of goods manufactured for the year, $480,000.
l. Sales for the year (all on account) totaled $900,000. These goods cost $550,000 to manufacture

Required:

Prepare journal entries to record the information above. Key your entries to the letters a through l.

116. The following cost data relate to the manufacturing activities of the Kanaba Company last year:

Manufacturing overhead costs:
Property taxes ……………………………………………….. $ 1,500 Utilities, factory…………………………………………….. 2,500 Indirect labor …………………………………………………. 5,000 Depreciation, factory ……………………………………… 12,000 Insurance, factory …………………………………………… 3,000 Total …………………………………………………………….. $24,000

Other costs incurred:
Purchases of direct materials …………………………… $16,000 Direct labor cost …………………………………………….. $20,000

Inventories:
Direct materials, January 1 ……………………………… $4,000 Direct materials, December 31 ………………………… $3,500 Work in process, January 1 ……………………………… $3,000 Work in process, December 31………………………… $3,750

The company uses a predetermined overhead rate to apply manufacturing overhead cost to production. The rate last year was $5.00 per machine-hour; a total of 5,000 machine-hours were recorded for the year.

Required:

a. Compute the amount of under- or overapplied overhead cost for the year. b. Prepare a schedule of Cost of Goods Manufactured for the year.

117. Testor Products uses a job-order costing system with a predetermined overhead rate based on machine-hours. The company closes out any under- or overapplied overhead to Cost of Goods Sold.

Required:

If overhead is overapplied, what adjustment does the company make to Cost of Goods Sold? Is Cost of Goods Sold increased or decreased? Why?

Chapter 4 Systems Design: Process Costing

True/False Questions

1. When materials are purchased in a process costing system, a work in process account is debited with the cost of the materials.

2. Any difference in the equivalent units calculated under the weighted-average and the FIFO methods is due to the units in the ending work in process inventory.

,6 Appendix: 4

3. The equivalent units in beginning work in process inventory plus the equivalent units for the work done during the period equals the units transferred out plus the equivalent units in ending work in process inventory.

4. There is no difference in the unit costs computed under the weighted-average and FIFO methods of process costing if there are no beginning work in process inventories.

,8 Appendix: 4

5. Under the weighted-average method of process costing, costs from the prior period are averaged with those of the current period in computing unit costs.

6. In a process costing production report, the “Cost to be accounted for” will be the same whether the weighted-average or the FIFO method is used.

,9 Appendix: 4

7. Under the FIFO method of product costing, equivalent units of production consider units in the beginning inventory as if they were started and completed during the current period.

Appendix: 4

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8. The production report of a company using the FIFO cost method likely would show goods transferred from a department in two parts–one part consisting of units from the beginning inventory completed and transferred, and the other part consisting of units that were both started and completed during the month.

Appendix: 4

9. In computing the cost per equivalent unit on the production report, costs in the beginning work in process inventory are kept separate from current period costs when the FIFO method is used.

Appendix: 4

10. A major advantage of the FIFO method is that it allows managers to judge the performance of the current period independently of the performance of the prior period.

,10 Appendix: 4

11. Under a JIT inventory system, the differences between FIFO and weighted-average costing methods are reduced.

,10 Appendix: 4

12. When the FIFO method is used to prepare a production report, costs to the next department are accounted for in two separate blocks.

Appendix: 4

13. Costs are accumulated by department in a process costing system.

0

14. Operation costing is a hybrid system that employs certain aspects of both job-order and process costing.

0

15. Under job-order costing, costs are accumulated by department and are assigned equally to all units passing through the department during the period.

0

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Multiple Choice Questions

16. Which of the following journal entries would be used to record direct labor costs in a company having two processing departments (Department A and Department B)?

A) Work in Process XXX Salaries and Wages Payable XXX
B) Salaries and Wages Expense XXX Salaries and Wages Payable XXX
C) Work in Process-Department A XXX Work in Process-Department B XXX
Salaries and Wages Payable XXX D) Salaries and Wages Payable XXX
Work in Process XXX

17. Which of the following journal entries would be used to record application of manufacturing overhead to work in process in a process costing system with two processing departments, department A and department B?

A) Manufacturing Overhead XXX
Work in Process–Department A XXX Work in Process–Department B XXX
B) Work in Process–Department A XXX Work in Process–Department B XXX
Manufacturing Overhead XXX C) Work in Process–Department B XXX
Work in Process–Department A XXX Manufacturing Overhead XXX
D) Work in Process–Department A XXX
Work in Process–Department B XXX Manufacturing Overhead XXX

18. Costs in an operation costing system are accumulated by: A) department.
B) by individual job.
C) by both job and departments. D) by neither job nor department.

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19. A process costing system was used for a department that began operations in January. Approximately the same number of physical units, at the same degree of completion were in work in process at the end of both January and February. Monthly conversion costs are allocated between ending work in process and units completed. Compared to the FIFO method, would the weighted-average method use the same or a greater number of equivalent units to calculate the monthly allocations?

Equivalent units for weighted average compared to FIFO

January A) Same
B) Greater number C) Greater number D) Same
February Same
Greater number Same
Greater number

,6 Source: CPA, adapted Appendix: 4

20. The FIFO method provides a major advantage over the weighted-average method in that:
A) the calculation of equivalent units is less complex under the FIFO method.
B) the FIFO method treats units in the beginning inventory as if they were started and completed during the current period.
C) the FIFO method provides measurements of work done during the current period. D) the weighted-average method ignores units in the beginning and ending work in
process inventories.

,6 Appendix: 4

21. The weighted-average method of process costing differs from the FIFO method of process costing in that the weighted-average method:
A) can be used under any cost flow assumption.
B) does not require the use of predetermined overhead rates.
C) keeps costs in the beginning inventory separate from current period costs. D) does not consider the degree of completion of units in the beginning work in
process inventory when computing equivalent units of production.

,6 Appendix: 4

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22. Which of the following statements about process costing system is incorrect?
A) In a process costing system, each processing department has a work in process account.
B) In a process costing system, equivalent units are separately computed for materials and for conversion costs.
C) In a process costing system, overhead can be under- or overapplied just as in job-order costing.
D) In a process costing system, materials costs are traced to units of products.

,10

23. When the weighted-average method of process costing is used, a department’s equivalent units are computed by:
A) subtracting the equivalent units in beginning inventory from the equivalent units in ending inventory.
B) subtracting the equivalent units in beginning inventory from the equivalent units for work performed during the period.
C) adding the units transferred out to the equivalent units in ending inventory.
D) subtracting the equivalent units in beginning inventory from the sum of the units transferred out and the equivalent units in ending inventory.

24. Equivalent units for a process costing system using the FIFO method would be equal to:
A) units completed during the period plus equivalent units in the ending work in process inventory.
B) units started and completed during the period plus equivalent units in the ending work in process inventory.
C) units completed during the period and transferred out.
D) units started and completed during the period plus equivalent units in the ending work in process inventory plus work needed to complete units in the beginning work in process inventory.

Appendix: 4

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25. Which of the following types of entities would be most likely to use a process costing system?
A) a shipbuilder
B) a furniture manufacturer C) a law firm
D) a utility producing natural gas

0

26. Darvin Company uses the weighted-average method in its process costing system. The first processing department, the Welding Department, started the month with 20,000 units in its beginning work in process inventory that were 10% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $7,000. An additional 63,000 units were started into production during the month. There were 10,000 units in the ending work in process inventory of the Welding Department that were 10% complete with respect to conversion costs. A total of $237,600 in conversion costs were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.)
A) $3.255 B) $3.771 C) $3.500 D) $3.305

,3,4

27. Dedra Company uses the weighted-average method in its process costing system. The first processing department, the Welding Department, started the month with 10,000 units in its beginning work in process inventory that were 50% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $37,500. An additional 98,000 units were started into production during the month. There were 17,000 units in the ending work in process inventory of the Welding Department that were 80% complete with respect to conversion costs. A total of $727,080 in conversion costs were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.)
A) $6.322 B) $7.419 C) $7.500 D) $7.310

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28. Luster Company uses the weighted-average method in its process costing system. Operating data for the first processing department for the month of June appear below:

Units Beginning work in process inventory ………….. 13,000 Started into production during June ……………. 98,000 Ending work in process inventory ………………. 11,000
Percentage complete 40%

30%

According to the company’s records, the conversion cost in beginning work in process inventory was $39,364 at the beginning of June. Additional conversion costs of $721,035 were incurred in the department during the month.

What was the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.)
A) $6.615 B) $7.358 C) $7.361 D) $7.570

,3,4

29. Lumdal Company uses the weighted-average method in its process costing system. Operating data for the first processing department for the month of June appear below:

Units Beginning work in process inventory ………….. 10,000 Started into production during June ……………. 75,000 Ending work in process inventory ………………. 17,000
Percentage complete 90%

40%

According to the company’s records, the conversion cost in beginning work in process inventory was $77,490 at the beginning of June. Additional conversion costs of $552,062 were incurred in the department during the month.

What was the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.)
A) $8.610 B) $7.361 C) $6.001 D) $8.416

,3,4

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30. Boml Company uses the weighted-average method in its process costing system. The Assembly Department started the month with 4,000 units in its beginning work in process inventory that were 20% complete with respect to conversion costs. An additional 62,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 14,000 units in the ending work in process inventory of the Assembly Department that were 30% complete with respect to conversion costs.

What were the equivalent units for conversion costs in the Assembly Department for the month?
A) 56,200 B) 55,400 C) 72,000 D) 52,000

,3

31. Bricker Company uses the weighted-average method in its process costing system. The Assembly Department started the month with 5,000 units in its beginning work in process inventory that were 60% complete with respect to conversion costs. An additional 81,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 18,000 units in the ending work in process inventory of the Assembly Department that were 80% complete with respect to conversion costs.

What were the equivalent units for conversion costs in the Assembly Department for the month?
A) 79,400 B) 82,400 C) 94,000 D) 68,000

,3

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32. Jinker Company uses the weighted-average method in its process costing system. Operating data for the Painting Department for the month of April appear below:

Units Beginning work in process inventory ………………………… 6,700 Transferred in from the prior department during April … 57,800 Ending work in process inventory …………………………….. 7,600
Percentage complete 50%

60%

What were the equivalent units for conversion costs in the Painting Department for April?
A) 56,900 B) 61,460 C) 62,360 D) 58,700

,3

33. Jumil Company uses the weighted-average method in its process costing system. Operating data for the Painting Department for the month of April appear below:

Units Beginning work in process inventory ………………………… 4,700 Transferred in from the prior department during April … 56,600 Ending work in process inventory …………………………….. 6,300
Percentage complete 40%

60%

What were the equivalent units for conversion costs in the Painting Department for April?
A) 58,200 B) 60,380 C) 58,780 D) 55,000

,3

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34. Hafner Company uses the weighted-average method in its process costing system. The first processing department, the Welding Department, started the month with 13,000 units in its beginning work in process inventory that were 80% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $23,920. An additional 66,000 units were started into production during the month and 68,000 units were completed in the Welding Department and transferred to the next processing department. There were 11,000 units in the ending work in process inventory of the Welding Department that were 30% complete with respect to conversion costs. A total of $127,890 in conversion costs were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.)
A) $2.129 B) $2.300 C) $1.661 D) $1.938

,4

35. Hall Company uses the weighted-average method in its process costing system. The first processing department, the Welding Department, started the month with 18,000 units in its beginning work in process inventory that were 60% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $64,800. An additional 84,000 units were started into production during the month and 78,000 units were completed in the Welding Department and transferred to the next processing department. There were 24,000 units in the ending work in process inventory of the Welding Department that were 30% complete with respect to conversion costs. A total of $431,520 in conversion costs were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.)
A) $5.825 B) $3.996 C) $5.137 D) $6.000

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36. Pajona Company uses the weighted-average method in its process costing system. The Molding Department is the second department in its production process. The data below summarize the department’s operations in January.

Units Beginning work in process inventory ………………… 7,400 Transferred in from the prior department during
January ………………………………………………………. 66,000 Completed and transferred to the next department
during January ……………………………………………. 69,700 Ending work in process inventory …………………….. 3,700
Percentage complete 60%

70%

The accounting records indicate that the conversion cost that had been assigned to beginning work in process inventory was $31,302 and a total of $497,341 in conversion costs were incurred in the department during January.

What was the cost per equivalent unit for conversion costs for January in the Molding Department? (Round off to three decimal places.)
A) $7.535 B) $7.050 C) $7.313 D) $7.135

,4

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37. Pampin Company uses the weighted-average method in its process costing system. The Molding Department is the second department in its production process. The data below summarize the department’s operations in January.

Units Beginning work in process inventory ………………………… 9,600 Transferred in from the prior department during
January ………………………………………………………………. 43,000 Completed and transferred to the next department
during January ……………………………………………………. 45,500 Ending work in process inventory …………………………….. 7,100
Percentage complete 50%

10%

The accounting records indicate that the conversion cost that had been assigned to beginning work in process inventory was $17,328 and a total of $161,085 in conversion costs were incurred in the department during January.

What was the cost per equivalent unit for conversion costs for January in the Molding Department? (Round off to three decimal places.)
A) $3.610 B) $3.746 C) $3.215 D) $3.861

,4

38. Fabre Corporation uses the weighted-average method in its process costing system. The Assembly Department started the month with 3,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. An additional 90,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. During the month 75,000 units were completed in the Assembly Department and transferred to the next processing department. There were 18,000 units in the ending work in process inventory of the Assembly Department that were 50% complete with respect to conversion costs.

What were the equivalent units for conversion costs in the Assembly Department for the month?
A) 105,000 B) 75,000 C) 84,000 D) 81,900

136 Garrison, Managerial Accounting, 12th Edition

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39. Faivre Corporation uses the weighted-average method in its process costing system. The Assembly Department started the month with 13,000 units in its beginning work in process inventory that were 20% complete with respect to conversion costs. An additional 55,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. During the month 67,000 units were completed in the Assembly Department and transferred to the next processing department. There were 1,000 units in the ending work in process inventory of the Assembly Department that were 50% complete with respect to conversion costs.

What were the equivalent units for conversion costs in the Assembly Department for the month?
A) 43,000 B) 64,900 C) 67,000 D) 67,500

40. Nabeth Corporation uses the weighted-average method in its process costing system. Operating data for the Lubricating Department for the month of October appear below:

Beginning work in process inventory ………………………… Transferred in from the prior department during
October ……………………………………………………………… Completed and transferred to the next department
during October ……………………………………………………. Ending work in process inventory ……………………………..
Percentage Units complete
7,700 80%

48,800

55,400
1,100 90%

What were the equivalent units for conversion costs in the Lubricating Department for October?
A) 56,390 B) 42,200 C) 55,400 D) 49,790

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41. Naleer Corporation uses the weighted-average method in its process costing system. Operating data for the Lubricating Department for the month of October appear below:

Beginning work in process inventory ……………………….. Transferred in from the prior department during
October …………………………………………………………….. Completed and transferred to the next department
during October …………………………………………………… Ending work in process inventory …………………………….
Percentage Units complete
3,400 30%

49,500

48,800
4,100 90%

What were the equivalent units for conversion costs in the Lubricating Department for October?
A) 50,200 B) 48,800 C) 52,490 D) 53,190

42. Sadanand Corporation uses the weighted-average method in its process costing system. The Fitting Department is the second department in its production process. The data below summarize the department’s operations in March.

Units Beginning work in process inventory ………………… 1,100 Transferred in from the prior department during
March ………………………………………………………… 46,000 Ending work in process inventory ……………………… 4,600
Percentage complete 40%

30%

The Fitting Department’s production report indicates that the cost per equivalent unit for conversion cost for March was $9.24.

How much conversion cost was assigned to the units transferred out of the Fitting Department during March?
A) $388,634.40 B) $425,040.00 C) $435,204.00 D) $392,700.00

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43. Sadron Corporation uses the weighted-average method in its process costing system. The Fitting Department is the second department in its production process. The data below summarize the department’s operations in March.

Units Beginning work in process inventory ………………… 6,200 Transferred in from the prior department during
March ………………………………………………………… 45,000 Ending work in process inventory …………………….. 3,200
Percentage complete 20%

60%

The Fitting Department’s production report indicates that the cost per equivalent unit for conversion cost for March was $7.42.

How much conversion cost was assigned to the units transferred out of the Fitting Department during March?
A) $356,160.00 B) $379,904.00 C) $333,900.00 D) $346,959.20

,5

44. The Assembly Department started the month with 59,000 units in its beginning work in process inventory. An additional 367,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 35,000 units in the ending work in process inventory of the Assembly Department.

How many units were transferred to the next processing department during the month? A) 391,000
B) 426,000 C) 343,000 D) 461,000

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45. The Assembly Department started the month with 78,000 units in its beginning work in process inventory. An additional 254,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 21,000 units in the ending work in process inventory of the Assembly Department.

How many units were transferred to the next processing department during the month? A) 332,000
B) 311,000 C) 197,000 D) 353,000

46. Brooks Company uses the weighted-average method in its process costing system. The beginning work in process inventory in a particular department consisted of 12,000 units, 100% complete with respect to materials cost and 40% complete with respect to conversion costs. The total cost in the beginning work in process inventory was $25,000. During the month, 50,000 units were completed and transferred out of the department. The costs per equivalent unit were computed to be $1.50 for materials and $3.20 for conversion costs. The total cost of the units completed and transferred out of the department was:
A) $235,000. B) $226,640. C) $210,000. D) $201,640.

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47. Rameau Corporation uses the weighted-average method in its process costing system. The Molding Department is the second department in its production process. The data below summarize the department’s operations in January.

Units Beginning work in process inventory ………………………… 5,600 Transferred in from the prior department during
January ………………………………………………………………. 47,000 Completed and transferred to the next department
during January ……………………………………………………. 50,300 Ending work in process inventory …………………………….. 2,300
Percentage complete 60%

40%

The Molding Department’s production report indicates that the cost per equivalent unit for conversion cost for January was $5.29.

How much conversion cost was assigned to the ending work in process inventory in the Molding Department for January?
A) $7,300.20 B) $12,167.00 C) $11,849.60 D) $4,866.80

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48. Ramos Corporation uses the weighted-average method in its process costing system. The Molding Department is the second department in its production process. The data below summarize the department’s operations in January.

Units Beginning work in process inventory ………………………… 2,800 Transferred in from the prior department during
January ………………………………………………………………. 45,000 Completed and transferred to the next department
during January ……………………………………………………. 46,700 Ending work in process inventory …………………………….. 1,100
Percentage complete 40%

20%

The Molding Department’s production report indicates that the cost per equivalent unit for conversion cost for January was $1.12.

How much conversion cost was assigned to the ending work in process inventory in the Molding Department for January?
A) $985.60 B) $1,881.60 C) $1,232.00 D) $246.40

49. Ebart Company uses the FIFO method in its process costing system. The first processing department, the Welding Department, started the month with 14,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $20,580. An additional 53,000 units were started into production during the month. There were 17,000 units in the ending work in process inventory of the Welding Department that were 20% complete with respect to conversion costs. A total of $80,660 in conversion costs were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for the month on the department’s production report? (Round off to three decimal places.)
A) $1.522 B) $2.100 C) $1.850 D) $1.511

,7,8 Appendix: 4

142 Garrison, Managerial Accounting, 12th Edition

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50. Eden Company uses the FIFO method in its process costing system. The first processing department, the Welding Department, started the month with 10,000 units in its beginning work in process inventory that were 50% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $35,500. An additional 76,000 units were started into production during the month. There were 10,000 units in the ending work in process inventory of the Welding Department that were 80% complete with respect to conversion costs. A total of $541,150 in conversion costs were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for the month on the department’s production report? (Round off to three decimal places.)
A) $6.850 B) $7.120 C) $6.705 D) $7.100

,7,8 Appendix: 4

51. Maenhout Corporation uses the FIFO method in its process costing system. Operating data for the Casting Department for the month of September appear below:

Units Beginning work in process inventory ………………………… 21,000 Transferred in from the prior department during
September ………………………………………………………….. 64,000 Ending work in process inventory …………………………….. 22,000
Percentage complete 60%

70%

According to the company’s records, the conversion cost in beginning work in process inventory was $31,500 at the beginning of September. Additional conversion costs of $172,396 were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for September on the Casting Department’s production report? (Round off to three decimal places.)
A) $2.399 B) $2.694 C) $2.500 D) $2.620

,7,8 Appendix: 4

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52. Maher Corporation uses the FIFO method in its process costing system. Operating data for the Casting Department for the month of September appear below:

Beginning work in process inventory ………………………… Transferred in from the prior department during
September ………………………………………………………….. Ending work in process inventory ……………………………..
Percentage Units complete
14,000 10%

97,000
22,000 70%

According to the company’s records, the conversion cost in beginning work in process inventory was $8,960 at the beginning of September. Additional conversion costs of $671,560 were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for September on the Casting Department’s production report? (Round off to three decimal places.)
A) $6.520 B) $6.923 C) $6.400 D) $6.131

,7,8 Appendix: 4

53. Camel Company uses the FIFO method in its process costing system. The Assembly Department started the month with 5,000 units in its beginning work in process inventory that were 80% complete with respect to conversion costs. An additional 62,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 2,000 units in the ending work in process inventory of the Assembly Department that were 20% complete with respect to conversion costs.

What were the equivalent units for conversion costs in the Assembly Department for the month?
A) 65,400 B) 65,000 C) 59,000 D) 61,400

,7 Appendix: 4

144 Garrison, Managerial Accounting, 12th Edition

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54. Cawper Company uses the FIFO method in its process costing system. The Assembly Department started the month with 10,000 units in its beginning work in process inventory that were 10% complete with respect to conversion costs. An additional 55,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 19,000 units in the ending work in process inventory of the Assembly Department that were 20% complete with respect to conversion costs.

What were the equivalent units for conversion costs in the Assembly Department for the month?
A) 49,800 B) 48,800 C) 64,000 D) 46,000

,7 Appendix: 4

55. Kapstein Corporation uses the FIFO method in its process costing system. Operating data for the Enameling Department for the month of May appear below:

Units Beginning work in process inventory ………………………… 6,400 Transferred in from the prior department during May …. 51,200 Ending work in process inventory …………………………….. 3,800
Percentage complete 10%

40%

What were the equivalent units for conversion costs in the Enameling Department for May?
A) 53,800 B) 48,600 C) 55,320 D) 54,680

,7 Appendix: 4

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56. Kalra Corporation uses the FIFO method in its process costing system. Operating data for the Enameling Department for the month of May appear below:

Beginning work in process inventory ………………………… Transferred in from the prior department during May …. Ending work in process inventory ……………………………..
Percentage Units complete
7,200 20% 70,100
2,600 80%

What were the equivalent units for conversion costs in the Enameling Department for May?
A) 65,500 B) 76,780 C) 74,700 D) 75,340

,7 Appendix: 4

57. Overhill Company uses the FIFO method in its process costing system. In the Cutting Department in June, units were 80% complete with respect to conversion in the beginning work in process inventory and 25% complete with respect to conversion in the ending work in process inventory. Other data for the department for June follow:

Beginning work in process inventory ………………………… Units started into production, and costs incurred during
the month …………………………………………………………… Units completed and transferred out ………………………….

Units 20,000

150,000 130,000
Conversion Cost
$40,000

$186,000

The cost per equivalent unit for conversion cost is closest to: A) $1.48
B) $1.50 C) $1.16 D) $1.82

,8 Appendix: 4

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58. Inacio Corporation uses the FIFO method in its process costing system. The first processing department, the Forming Department, started the month with 22,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $38,500. An additional 71,000 units were started into production during the month and 72,000 units were completed and transferred to the next processing department. There were 21,000 units in the ending work in process inventory of the Forming Department that were 40% complete with respect to conversion costs. A total of $148,850 in conversion costs were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for the month on the Forming Department’s production report? (Round off to three decimal places.)
A) $2.500 B) $2.015 C) $2.096 D) $2.290

,8 Appendix: 4

59. Iyer Corporation uses the FIFO method in its process costing system. The first processing department, the Forming Department, started the month with 14,000 units in its beginning work in process inventory that were 20% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $3,360. An additional 92,000 units were started into production during the month and 95,000 units were completed and transferred to the next processing department. There were 11,000 units in the ending work in process inventory of the Forming Department that were 10% complete with respect to conversion costs. A total of $92,367 in conversion costs were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for the month on the Forming Department’s production report? (Round off to three decimal places.)
A) $1.004 B) $0.990 C) $1.200 D) $0.903

,8 Appendix: 4

Garrison, Managerial Accounting, 12th Edition 147

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60. Qimper Corporation uses the FIFO method in its process costing system. Operating data for the Cutting Department for the month of March appear below:

Beginning work in process inventory ………………………….. Transferred in from the prior department during March … Completed and transferred to the next department during
March ………………………………………………………………….. Ending work in process inventory ……………………………….
Percentage Units complete
6,600 70% 54,000

58,600
2,000 40%

According to the company’s records, the conversion cost in beginning work in process inventory was $38,069 at the beginning of March. Additional conversion costs of $444,047 were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for March on the Cutting Department’s production report? (Round off to three decimal places.)
A) $7.956 B) $8.223 C) $8.106 D) $8.240

,8 Appendix: 4

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61. Quis Corporation uses the FIFO method in its process costing system. Operating data for the Cutting Department for the month of March appear below:

Units Beginning work in process inventory …………………….. 9,600 Transferred in from the prior department during
March …………………………………………………………….. 47,000 Completed and transferred to the next department
during March ………………………………………………….. 49,600 Ending work in process inventory …………………………. 7,000
Percentage complete 70%

90%

According to the company’s records, the conversion cost in beginning work in process inventory was $26,880 at the beginning of March. Additional conversion costs of $190,130 were incurred in the department during the month.

What would be the cost per equivalent unit for conversion costs for March on the Cutting Department’s production report? (Round off to three decimal places.)
A) $3.866 B) $3.834 C) $4.045 D) $4.000

,8 Appendix: 4

62. Williams Company uses the FIFO method in its process costing system. The beginning work in process inventory in a particular department consisted of 10,000 units, 100% complete with respect to materials and 60% with respect to conversion costs. The total cost in the beginning work in process inventory was $48,200. During the month, 25,000 units were transferred out of the department. The costs per equivalent unit were computed to be $3.10 for materials and $4.50 for conversion costs. The total cost of the units completed and transferred out of the department was: A) $190,000
B) $189,200 C) $180,200 D) $132,000

,9 Appendix: 4

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63. Walden Company has a process costing system and uses the FIFO method. All materials are introduced at the beginning of the process in Department One. The following information is available for the month of January for Department One:

Units Work in process, January 1 (conversion 40% complete) ….. 500 Started in January ……………………………………………………….. 2,000 Transferred to Department Two during January ……………… 2,100 Work in process, January 31 (conversion 25% complete) … 400

What are the equivalent units for the month of January?

Materials A) 2,500 B) 2,500 C) 2,000 D) 2,000
Conversion Cost 2,200 1,900 2,200 2,000

Source: CPA, adapted Appendix: 4

64. Mann Company uses the FIFO method in its process costing system. Department A is the first stage of the company’s production process. The following information is available for conversion costs for the month of April in Department A:

Work in process, beginning (60% complete) ……………… Started in April ………………………………………………………. Completed in April and transferred to Department B ….. Work in process, ending (40% complete) …………………..
Units 20,000
340,000 320,000 40,000

The equivalent units for conversion costs are: A) 320,000
B) 324,000 C) 336,000 D) 360,000

Source: CPA, adapted Appendix: 4

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65. Laurie Company uses the FIFO method in its process costing system. Department A is the first stage of Laurie Company’s production process. The following information is available for conversion costs for the month of May for Department A:

Units Work in process, beginning (conversion 25% complete) ….. 8,000 Started in May ……………………………………………………………. 40,000 Completed in May and transferred to Department B ……….. 38,000 Work in process, ending (conversion 60% complete) ………. 10,000

The equivalent units of production for conversion costs for the month are: A) 42,000 units
B) 38,000 units C) 44,000 units D) 36,000 units

Appendix: 4

66. Richardson Company uses the FIFO method in its process costing system. During June, 40,000 units were completed in Department M. Of this total, 5,000 were in the beginning work in process and the remainder were started and completed during the month. Materials are added at the beginning of the process. A total of 10,000 units were in work in process at June 30; these units were 80% complete with respect to conversion costs. The work in process at June 1 was 40% complete with respect to conversion costs. The equivalent units for conversion costs were:
A) 39,000 units B) 45,000 units C) 46,000 units D) 48,000 units

Appendix: 4

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67. Gabel Corporation uses the FIFO method in its process costing system. The Grinding Department started the month with 10,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. An additional 85,000 units were transferred in from the prior department during the month to begin processing in the Grinding Department. During the month 81,000 units were completed in the Grinding Department and transferred to the next processing department. There were 14,000 units in the ending work in process inventory of the Grinding Department that were 90% complete with respect to conversion costs.

What were the equivalent units for conversion costs in the Grinding Department for the month?
A) 86,600 B) 93,600 C) 81,000 D) 89,000

Appendix: 4

68. Gabriel Corporation uses the FIFO method in its process costing system. The Grinding Department started the month with 15,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. An additional 58,000 units were transferred in from the prior department during the month to begin processing in the Grinding Department. During the month 64,000 units were completed in the Grinding Department and transferred to the next processing department. There were 9,000 units in the ending work in process inventory of the Grinding Department that were 90% complete with respect to conversion costs.

What were the equivalent units for conversion costs in the Grinding Department for the month?

A) 64,000 B) 72,100 C) 61,600 D) 52,000

Appendix: 4

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69. Osman Company uses the FIFO method in its process costing system. Operating data for the Brazing Department for the month of November appear below:

Beginning work in process inventory ………………………… Transferred in from the prior department during
November ………………………………………………………….. Completed and transferred to the next department
during November ………………………………………………… Ending work in process inventory ……………………………..
Percentage Units complete
7,600 30%

52,700

54,000
6,300 80%

What were the equivalent units for conversion costs in the Brazing Department for November?
A) 59,040 B) 54,000 C) 56,760 D) 51,400

Appendix: 4

70. Oreilley Company uses the FIFO method in its process costing system. Operating data for the Brazing Department for the month of November appear below:

Units Beginning work in process inventory ………………………… 5,300 Transferred in from the prior department during
November ………………………………………………………….. 30,000 Completed and transferred to the next department
during November ………………………………………………… 32,500 Ending work in process inventory …………………………….. 2,800
Percentage complete 30%

70%

What were the equivalent units for conversion costs in the Brazing Department for November?
A) 34,460 B) 32,500 C) 27,500 D) 32,870

Appendix: 4

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71. Steven Company uses the FIFO method in its process costing system. Department A’s beginning work in process inventory consisted of 15,000 units, 100% complete with respect to materials and 40% complete with respect to conversion costs. The total dollar value of this inventory was $31,000. A total of 40,000 units were transferred out during the month. The costs per equivalent unit were computed to be $1.30 for materials and $2.20 for conversion costs. The cost of the units completed and transferred out was:
A) $140,000 B) $138,300 C) $131,700 D) $118,500

Appendix: 4

72. Marlow Company uses the FIFO method in its process costing system. Department A’s beginning work in process inventory consisted of 12,000 units, 100% complete with respect to materials cost and 60% complete with respect to conversion costs. The total cost in the beginning work in process inventory was $56,400. A total of 25,000 units were transferred out during the month. The cost per equivalent unit was computed to be $3.40 for materials and $4.70 for conversion costs. The total cost of the units completed and transferred out was:
A) $195,540 B) $146,100 C) $202,500 D) $184,260

Appendix: 4

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73. Tanner Corporation uses the FIFO method in its process costing system. Operating data for the Curing Department for the month of March appear below:

Units Beginning work in process inventory ………………………… 8,200 Transferred in from the prior department during March . 52,000 Completed and transferred to the next department
during March ……………………………………………………… 54,200 Ending work in process inventory …………………………….. 6,000
Percentage complete 80%

50%

According to the company’s records, the conversion cost in beginning work in process inventory was $7,872 at the beginning of March. The cost per equivalent unit for conversion costs for March was $1.10.

How much conversion cost would be assigned to the units completed and transferred out of the department during March?
A) $52,404 B) $59,620 C) $60,276 D) $57,200

Appendix: 4

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74. Tanguy Corporation uses the FIFO method in its process costing system. Operating data for the Curing Department for the month of March appear below:

Units Beginning work in process inventory ………………………… 2,500 Transferred in from the prior department during March . 44,000 Completed and transferred to the next department
during March ……………………………………………………… 38,500 Ending work in process inventory …………………………….. 8,000
Percentage complete 70%

10%

According to the company’s records, the conversion cost in beginning work in process inventory was $7,350 at the beginning of March. The cost per equivalent unit for conversion costs for March was $4.10.

How much conversion cost would be assigned to the units completed and transferred out of the department during March?
A) $150,675 B) $180,400 C) $158,025 D) $157,850

Appendix: 4

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Use the following to answer questions 75-80:

Annenbaum Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 400 units. The costs and percentage completion of these units in beginning inventory were:

Cost Materials costs ………………. $5,700 Conversion costs …………… $6,800
Percent Complete 65% 45%

A total of 6,500 units were started and 5,900 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:

Materials costs ………………. Conversion costs ……………
$125,500 $207,000

The ending inventory was 50% complete with respect to materials and 35% complete with respect to conversion costs.

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

75. What are the equivalent units for conversion costs for the month in the first processing department?
A) 6,250 B) 5,900 C) 350 D) 6,900

,3

76. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $19.01 B) $19.61 C) $20.50 D) $18.19

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77. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $30.99 B) $35.92 C) $33.12 D) $34.21

78. The cost per equivalent whole unit for the month in the first processing department is closest to:
A) $58.47 B) $50.00 C) $57.99 D) $54.71

79. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $332,500 B) $345,000 C) $322,777 D) $377,485

80. The cost of ending work in process inventory in the first processing department according to the company’s cost system is closest to:
A) $19,148 B) $22,223 C) $54,708 D) $27,354

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Use the following to answer questions 81-87:

Bistrol Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 800 units. The costs and percentage completion of these units in beginning inventory were:

Materials costs ………………. Conversion costs ……………

Cost $15,700
$7,700
Percent Complete 75% 20%

A total of 8,400 units were started and 7,500 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:

Materials costs ………………. Conversion costs ……………
$186,300 $329,800

The ending inventory was 70% complete with respect to materials and 60% complete with respect to conversion costs.

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

81. How many units are in ending work in process inventory in the first processing department at the end of the month?
A) 7,600 B) 900 C) 1,700 D) 900

82. What are the equivalent units for conversion costs for the month in the first processing department?
A) 9,200 B) 8,520 C) 7,500 D) 1,020

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83. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $21.44 B) $21.96 C) $20.25 D) $23.25

84. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $41.59 B) $38.71 C) $39.61 D) $36.68

85. The cost per equivalent whole unit for the month in the first processing department is closest to:
A) $71.93 B) $62.86 C) $58.64 D) $66.63

86. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $516,100 B) $471,435 C) $539,500 D) $578,294

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87. The cost of ending work in process inventory in the first processing department according to the company’s cost system is closest to:
A) $68,067 B) $64,115 C) $74,801 D) $106,859

Use the following to answer questions 88-91:

Carpenter Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 600 units. The costs and percentage completion of these units in beginning inventory were:

Cost Materials costs ………………. $5,200 Conversion costs …………… $8,500
Percent Complete 60% 55%

A total of 7,800 units were started and 7,100 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:

Materials costs ………………. Conversion costs ……………
$95,000 $169,200

The ending inventory was 85% complete with respect to materials and 70% complete with respect to conversion costs.

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

88. How many units are in ending work in process inventory in the first processing department at the end of the month?
A) 1,300 B) 900 C) 7,200 D) 700

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89. What are the equivalent units for conversion costs for the month in the first processing department?
A) 910 B) 8,010 C) 7,100 D) 8,400

90. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $11.31 B) $12.21 C) $11.58 D) $11.93

91. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $264,200 B) $244,219 C) $288,935 D) $277,900

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Use the following to answer questions 92-94:

Esty Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 800 units. The costs and percentage completion of these units in beginning inventory were:

Materials costs ………………. Conversion costs ……………
Percent Cost Complete
$5,800 50% $6,500 30%

A total of 7,700 units were started and 6,600 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:

Materials costs ………………. Conversion costs ……………
$85,300 $168,000

The ending inventory was 70% complete with respect to materials and 10% complete with respect to conversion costs.

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

92. What are the equivalent units for conversion costs for the month in the first processing department?
A) 6,790 B) 8,500 C) 6,600 D) 190

,3

93. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $10.76 B) $10.04 C) $10.72 D) $11.49

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94. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $253,300 B) $245,441 C) $316,098 D) $265,600

Use the following to answer questions 95-96:

Fuller Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 700 units. The costs and percentage completion of these units in beginning inventory were:

Materials costs ………………. Conversion costs ……………

Cost $12,700 $10,900
Percent Complete 85% 30%

A total of 9,800 units were started and 8,800 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:

Materials costs ………………. Conversion costs ……………
$175,600 $420,900

The ending inventory was 85% complete with respect to materials and 70% complete with respect to conversion costs.

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

95. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $620,100 B) $646,832 C) $542,106 D) $596,500

,3,4,5

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96. The cost of ending work in process inventory in the first processing department according to the company’s cost system is closest to:
A) $77,994 B) $73,308 C) $104,725 D) $89,016

,3,4,5

Use the following to answer questions 97-104:

Gunes Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 800 units. The costs and percentage completion of these units in beginning inventory were:

Materials costs ………………. Conversion costs ……………

Cost $10,600 $12,800
Percent Complete 65% 30%

A total of 8,500 units were started and 7,400 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:

Materials costs ………………. Conversion costs ……………
$142,100 $359,500

The ending inventory was 50% complete with respect to materials and 35% complete with respect to conversion costs.

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

97. How many units are in ending work in process inventory in the first processing department at the end of the month?
A) 1,900 B) 1,100 C) 7,700 D) 900

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98. What are the equivalent units for materials for the month in the first processing department?
A) 7,400 B) 9,300 C) 8,350 D) 950

99. What are the equivalent units for conversion costs for the month in the first processing department?
A) 9,300 B) 8,065 C) 7,400 D) 665

100. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $18.29 B) $17.02 C) $16.42 D) $15.28

101. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $40.03 B) $46.16 C) $44.58 D) $48.47

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102. The cost per equivalent whole unit for the month in the first processing department is closest to:
A) $64.45 B) $56.45 C) $68.32 D) $70.95

103. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $476,923 B) $599,376 C) $501,600 D) $525,000

104. The cost of ending work in process inventory in the first processing department according to the company’s cost system is closest to:
A) $61,227 B) $48,071 C) $42,859 D) $122,453

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Use the following to answer questions 105-107:

Domingo Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 400 units. The costs and percentage completion of these units in beginning inventory were:

Cost Materials costs ………………. $5,500 Conversion costs …………… $1,700
Percent Complete 50% 20%

A total of 6,800 units were started and 6,100 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:

Materials costs ………………. Conversion costs ……………
$158,700 $120,400

The ending inventory was 85% complete with respect to materials and 75% complete with respect to conversion costs.

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

105. How many units are in ending work in process inventory in the first processing department at the end of the month?
A) 700 B) 900 C) 6,400 D) 1,100

106. What are the equivalent units for conversion costs for the month in the first processing department?
A) 7,200 B) 6,925 C) 6,100 D) 825

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107. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $22.04 B) $22.81 C) $23.34 D) $22.56

Use the following to answer questions 108-114:

Haffner Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory ………………….. Materials costs ……………………………………………………………… Conversion costs ………………………………………………………….. Percentage complete with respect to materials …………………. Percentage complete with respect to conversion ………………. Units started into production during the month …………………… Units transferred to the next department during the month …… Materials costs added during the month ……………………………… Conversion costs added during the month …………………………..
Ending work in process inventory:
Units in ending work in process inventory ………………………. Percentage complete with respect to materials …………………. Percentage complete with respect to conversion ……………….

500 $7,800 $9,100 85% 55% 7,000 6,100 $102,700 $184,400

1,400 60% 50%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

108. What are the equivalent units for materials for the month in the first processing department?
A) 840 B) 6,940 C) 7,500 D) 6,100

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109. What are the equivalent units for conversion costs for the month in the first processing department?
A) 6,100 B) 700 C) 6,800 D) 7,500

110. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $15.92 B) $14.80 C) $13.69 D) $14.73

111. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $28.46 B) $25.80 C) $29.88 D) $27.12

112. The cost per equivalent whole unit for the month in the first processing department is closest to:
A) $40.53 B) $47.04 C) $44.38 D) $49.84

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113. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $304,000 B) $332,835 C) $270,706 D) $287,100

114. The cost of ending work in process inventory in the first processing department according to the company’s cost system is closest to:
A) $37,278 B) $33,293 C) $62,129 D) $31,065

Use the following to answer questions 115-116:

Kurtulus Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory …………………… Materials costs ………………………………………………………………. Conversion costs …………………………………………………………… Percentage complete with respect to materials ………………….. Percentage complete with respect to conversion ……………….. Units started into production during the month ……………………. Units transferred to the next department during the month ……. Materials costs added during the month ………………………………. Conversion costs added during the month ……………………………
Ending work in process inventory:
Units in ending work in process inventory ……………………….. Percentage complete with respect to materials ………………….. Percentage complete with respect to conversion ………………..

600 $7,000 $2,300 55% 25% 6,500 5,700 $110,100 $83,200

1,400 70% 55%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

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115. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $202,600 B) $193,300 C) $175,247 D) $218,290

,4,5

116. The cost of ending work in process inventory in the first processing department according to the company’s cost system is closest to:
A) $23,674 B) $43,043 C) $30,130 D) $27,355

,4,5

Use the following to answer questions 117-120:

Lucas Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory ……………………… Materials costs …………………………………………………………………. Conversion costs ……………………………………………………………… Percentage complete with respect to materials …………………….. Percentage complete with respect to conversion ………………….. Units started into production during the month ………………………. Units transferred to the next department during the month ………. Materials costs added during the month …………………………………. Conversion costs added during the month ………………………………
Ending work in process inventory:
Units in ending work in process inventory ………………………….. Percentage complete with respect to materials …………………….. Percentage complete with respect to conversion …………………..

900 $9,600 $7,700 60% 45% 8,100 6,900 $115,800 $120,500

2,100 75% 20%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

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117. What are the equivalent units for materials for the month in the first processing department?
A) 9,000 B) 1,575 C) 6,900 D) 8,475

118. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $18.39 B) $16.46 C) $17.51 D) $14.24

119. The cost per equivalent whole unit for the month in the first processing department is closest to:
A) $28.18 B) $36.75 C) $32.31 D) $34.25

120. The cost of ending work in process inventory in the first processing department according to the company’s cost system is closest to:
A) $13,570 B) $50,888 C) $30,660 D) $67,851

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Use the following to answer questions 121-122:

Inacio Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory ………………… Materials costs ……………………………………………………………. Conversion costs ………………………………………………………… Percentage complete with respect to materials ……………….. Percentage complete with respect to conversion …………….. Units started into production during the month …………………. Units transferred to the next department during the month …. Materials costs added during the month ……………………………. Conversion costs added during the month …………………………
Ending work in process inventory:
Units in ending work in process inventory …………………….. Percentage complete with respect to materials ……………….. Percentage complete with respect to conversion ……………..

800 $12,900 $5,000 75% 20% 9,500 8,400 $172,000 $240,200

1,900 90% 30%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

121. What are the equivalent units for conversion costs for the month in the first processing department?
A) 8,400 B) 8,970 C) 570 D) 10,300

122. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $17.01 B) $17.95 C) $16.70 D) $18.29

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Use the following to answer questions 123-124:

Joos Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory …………………….. Materials costs ………………………………………………………………… Conversion costs …………………………………………………………….. Percentage complete with respect to materials ……………………. Percentage complete with respect to conversion …………………. Units started into production during the month ……………………… Units transferred to the next department during the month ……… Materials costs added during the month ………………………………… Conversion costs added during the month ……………………………..
Ending work in process inventory:
Units in ending work in process inventory …………………………. Percentage complete with respect to materials ……………………. Percentage complete with respect to conversion ………………….

600 $7,300 $2,300 50% 10% 9,400 8,600 $196,300 $315,800

1,400 70% 40%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

123. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $19.63 B) $21.25 C) $20.36 D) $20.49

,4

124. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $31.81 B) $34.73 C) $34.48 D) $36.47

,4

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Use the following to answer questions 125-128:

Harward Company’s Staining department recorded the following activity in June:

Work in process inventory, June 1 ………… Started into production during June ………. Work in process inventory, June 30 ……….

Number of Units
8,000 50,000 12,000
Labor and Overhead Percent Completed 35%

55%

All materials are added at the beginning of the process in the Staining Department.

125. The equivalent units for labor and overhead for June, using the FIFO method, were: A) 46,000 units
B) 49,800 units C) 43,200 units D) 52,600 units

Appendix: 4

126. The equivalent units for labor and overhead for June, using the weighted-average method, were:
A) 52,600 units B) 62,000 units C) 50,000 units D) 46,000 units

Appendix: 4

127. The equivalent units for materials for June, using the FIFO method, were: A) 46,000 units
B) 42,000 units C) 58,000 units D) 50,000 units

Appendix: 4

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128. The equivalent units for materials for June, using the weighted-average method, were: A) 58,000 units
B) 52,600 units C) 46,000 units D) 60,000 units

Appendix: 4

Use the following to answer questions 129-132:

Activity in Saggers Company’s Assembly Department for the month of March follows:

Percent Complete

Work in process inventory, March 1 …………… Started into production during March …………. Work in process inventory, March 31 ………….

Units Materials 6,000 60%
65,000
4,000 35%
Labor & Overhead 45%

20%

129. The equivalent units for labor and overhead for March, using the weighted-average method, are:
A) 69,600 units B) 67,800 units C) 71,000 units D) 69,000 units

Appendix: 4

130. The equivalent units for materials for March, using the weighted-average method, are: A) 69,000 units
B) 65,000 units C) 68,400 units D) 67,000 units

Appendix: 4

131. The equivalent units for labor and overhead for March, using the FIFO method, are: A) 63,100 units
B) 65,000 units C) 62,500 units D) 65,100 units

Appendix: 4

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Chapter 4 Systems Design: Process Costing

132. The equivalent units for materials for March, using the FIFO method, are: A) 64,800 units
B) 59,800 units C) 66,000 units D) 67,200 units

Appendix: 4

Use the following to answer questions 133-136:

Levitt Company uses a process costing system. All direct materials are added at the beginning of the process. Levitt’s production quantity schedule for November is reproduced below.

Units Work-in-process on November 1 (conversion 60% complete) …….. 1,000 Units started during November……………………………………………….. 5,000 Total units to account for ……………………………………………………….. 6,000

Units completed and transferred out from beginning inventory …… 1,000 Units started and completed during November………………………….. 3,000 Work-in-process on November 30 (conversion 20% complete) …… 2,000 Total units accounted for ………………………………………………………… 6,000

133. Using the FIFO method, the equivalent units for direct materials for November are: A) 5,000 units
B) 6,000 units C) 4,400 units D) 3,800 units

Source: CMA, adapted Appendix: 4

134. Using the FIFO method, the equivalent units for conversion costs for November are: A) 3,400 units
B) 3,800 units C) 4,000 units D) 4,400 units

Source: CMA, adapted Appendix: 4

178 Garrison, Managerial Accounting, 12th Edition

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135. Using the weighted-average method, the equivalent units for direct materials for November are:
A) 3,400 units B) 4,400 units C) 5,000 units D) 6,000 units

Source: CMA, adapted Appendix: 4

136. Using the weighted-average method, the equivalent units for conversion costs for November are:
A) 3,400 units B) 3,800 units C) 4,000 units D) 4,400 units

Source: CMA, adapted Appendix: 4

Use the following to answer questions 137-138:

Qu Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory ………………… Materials costs ……………………………………………………………. Conversion costs ………………………………………………………… Percentage complete with respect to materials ……………….. Percentage complete with respect to conversion …………….. Units started into production during the month …………………. Materials costs added during the month ……………………………. Conversion costs added during the month …………………………
Ending work in process inventory:
Units in ending work in process inventory …………………….. Percentage complete with respect to materials ……………….. Percentage complete with respect to conversion ……………..

900 $9,800 $9,200 55% 30% 8,400 $130,400 $220,600

2,200 65% 25%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

Garrison, Managerial Accounting, 12th Edition 179

Chapter 4 Systems Design: Process Costing

137. How many units were started AND completed during the month in the first processing department?
A) 8,400 B) 7,100 C) 6,200 D) 9,300

Appendix: 4

138. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $29.89 B) $34.07 C) $31.07 D) $31.38

,8 Appendix: 4

Use the following to answer questions 139-145:

Mullins Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory ………………… Materials costs ……………………………………………………………. Conversion costs ………………………………………………………… Percentage complete with respect to materials ……………….. Percentage complete with respect to conversion …………….. Units started into production during the month …………………. Units transferred to the next department during the month …. Materials costs added during the month ……………………………. Conversion costs added during the month …………………………
Ending work in process inventory:
Units in ending work in process inventory …………………….. Percentage complete with respect to materials ……………….. Percentage complete with respect to conversion ……………..

700 $11,500 $22,200 75% 65% 8,600 7,800 $159,300 $348,500

1,500 65% 50%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

180 Garrison, Managerial Accounting, 12th Edition

Chapter 4 Systems Design: Process Costing

139. What are the equivalent units for materials for the month in the first processing department?
A) 975 B) 8,250 C) 9,300 D) 7,100

Appendix: 4

140. What are the equivalent units for conversion costs for the month in the first processing department?
A) 8,095 B) 7,100 C) 9,300 D) 750

Appendix: 4

141. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $20.42 B) $21.90 C) $19.31 D) $17.13

Appendix: 4

142. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $48.79 B) $45.20 C) $44.68 D) $43.05

Appendix: 4

Garrison, Managerial Accounting, 12th Edition 181

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143. The cost per equivalent whole unit for the month in the first processing department is closest to:
A) $62.36 B) $76.27 C) $66.10 D) $58.23

Appendix: 4

144. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $490,382 B) $579,948 C) $507,800 D) $541,500

Appendix: 4

145. The cost of ending work in process inventory in the first processing department according to the company’s cost system is closest to:
A) $51,114 B) $46,770 C) $93,540 D) $60,801

Appendix: 4

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Chapter 4 Systems Design: Process Costing

Use the following to answer questions 146-148:

Puri Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory ………………….. Materials costs ……………………………………………………………… Conversion costs ………………………………………………………….. Percentage complete with respect to materials …………………. Percentage complete with respect to conversion ………………. Units started into production during the month …………………… Units transferred to the next department during the month …… Materials costs added during the month ……………………………… Conversion costs added during the month …………………………..
Ending work in process inventory:
Units in ending work in process inventory ………………………. Percentage complete with respect to materials …………………. Percentage complete with respect to conversion ……………….

400 $4,800 $3,300 85% 45% 5,800 5,100 $69,500 $82,300

1,100 55% 45%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

146. What are the equivalent units for materials for the month in the first processing department?
A) 605 B) 6,200 C) 4,700 D) 5,365

Appendix: 4

147. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $15.20 B) $18.33 C) $15.96 D) $16.14

Appendix: 4

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Chapter 4 Systems Design: Process Costing

148. The total cost transferred from the first processing department to the next processing department during the month is closest to:
A) $159,900 B) $151,800 C) $174,549 D) $144,540

Appendix: 4

Use the following to answer questions 149-150:

Normand Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory …………………….. Materials costs ………………………………………………………………… Conversion costs …………………………………………………………….. Percentage complete with respect to materials ……………………. Percentage complete with respect to conversion …………………. Units started into production during the month ……………………… Units transferred to the next department during the month ……… Materials costs added during the month ………………………………… Conversion costs added during the month ……………………………..
Ending work in process inventory:
Units in ending work in process inventory …………………………. Percentage complete with respect to materials ……………………. Percentage complete with respect to conversion ………………….

700 $8,700 $3,700 70% 10% 6,400 5,600 $92,200 $269,600

1,500 80% 25%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

149. What are the equivalent units for materials for the month in the first processing department?
A) 4,900 B) 1,200 C) 6,310 D) 7,100

Appendix: 4

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150. The cost per equivalent unit for conversion costs for the first department for the month is closest to:
A) $45.66 B) $52.86 C) $47.94 D) $48.14

Appendix: 4

Use the following to answer questions 151-152:

Ozdemir Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:

Beginning work in process inventory:
Units in beginning work in process inventory …………………….. Materials costs ………………………………………………………………… Conversion costs …………………………………………………………….. Percentage complete with respect to materials ……………………. Percentage complete with respect to conversion …………………. Units started into production during the month ……………………… Units transferred to the next department during the month ……… Materials costs added during the month ………………………………… Conversion costs added during the month ……………………………..
Ending work in process inventory:
Units in ending work in process inventory …………………………. Percentage complete with respect to materials ……………………. Percentage complete with respect to conversion ………………….

200 $1,800 $600 55% 10% 5,000 4,500 $74,800 $128,800

700 85% 70%

Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.

151. What are the equivalent units for conversion costs for the month in the first processing department?
A) 490 B) 4,300 C) 4,970 D) 5,200

Appendix: 4

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Chapter 4 Systems Design: Process Costing

152. The cost per equivalent unit for materials for the month in the first processing department is closest to:
A) $16.36 B) $14.38 C) $16.62 D) $15.01

Appendix: 4

Use the following to answer questions 153-154:

The information below was obtained from the records of Bapst Company for the month of May. The company uses the FIFO method in its process costing system.

Units Work in process inventory, May 1 ………… 3,000 Started into production ………………………… 20,000 Work in process inventory, May 31 ………. 4,000
Labor and Overhead Percent Complete 30%

40%

All materials are added at the beginning of the manufacturing process.

153. The equivalent units for material for the month are: A) 21,600 units
B) 22,500 units C) 16,000 units D) 20,000 units

Appendix: 4

154. The equivalent units for labor and overhead for the month are: A) 17,600 units
B) 18,500 units C) 19,700 units D) 21,600 units

Appendix: 4

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Use the following to answer questions 155-157:

Marlan Manufacturing produces a product that passes through two processing departments. The units from the Molding Department are completed in the Assembly Department. The activity in the Assembly Department for the current month is presented below. Marlan uses the FIFO method in its process costing system.

Units in beginning work in process inventory (materials 0%
complete; conversion 25% complete)…………………………………. 8,000 Units transferred in from the Molding Department during the
month …………………………………………………………………………….. 42,000 Units completed and transferred to finished goods ………………….. 38,000 Units in ending work in process inventory (materials 0%
complete; conversion 40% complete)…………………………………. 12,000

155. The equivalent units (with respect to the Molding Department’s costs) transferred from the Molding Department to the Assembly during the month were:
A) 30,000 units B) 38,000 units C) 40,800 units D) 42,000 units

Source: CMA, adapted Appendix: 4

156. The equivalent units for materials for the Assembly Department during the month were:
A) 30,000 units B) 38,000 units C) 40,800 units D) 42,000 units

Source: CMA, adapted Appendix: 4

157. The equivalent units for conversion costs for the Assembly Department during the month were:
A) 36,800 units B) 38,000 units C) 40,800 units D) 42,800 units

Source: CMA, adapted Appendix: 4

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Chapter 4 Systems Design: Process Costing

Essay Questions

158. Anchor Inc. uses the weighted-average method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………….. Stage of completion with respect to materials ………… Stage of completion with respect to conversion………. Costs in the beginning inventory:
Materials cost ………………………………………………….. Conversion cost ………………………………………………..

Units started into production during the month ………….. Units completed and transferred out …………………………

Costs added to production during the month:
Materials cost …………………………………………………….. Conversion cost …………………………………………………..

Work in process, ending:
Units in process ………………………………………………….. Stage of completion with respect to materials ………… Stage of completion with respect to conversion……….

800 60% 10%

$1,296 $2,416

16,000 16,500

$47,076 $497,213

300 60% 70%

Required:

Prepare a production report for the department using the weighted-average method.

,3,4,5

188 Garrison, Managerial Accounting, 12th Edition

159. Ayres Inc. uses the weighted-average method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………….. Stage of completion with respect to materials ………… Stage of completion with respect to conversion………. Costs in the beginning inventory:
Materials cost ………………………………………………….. Conversion cost ………………………………………………..

Units started into production during the month ………….. Units completed and transferred out …………………………

Costs added to production during the month:
Materials cost …………………………………………………….. Conversion cost …………………………………………………..

Work in process, ending:
Units in process ………………………………………………….. Stage of completion with respect to materials ………… Stage of completion with respect to conversion……….

300 60% 60%

$1,314 $6,102

22,000 21,800

$164,436 $728,058

500 60% 10%

Required:

Prepare a production report for the department using the weighted-average method.

,3,4,5

190 Garrison, Managerial Accounting, 12th Edition

160. Bae Inc. uses the weighted-average method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………….. Stage of completion with respect to materials ………… Stage of completion with respect to conversion………. Costs in the beginning inventory:
Materials cost ………………………………………………….. Conversion cost ………………………………………………..

Units started into production during the month ………….. Units completed and transferred out …………………………

Costs added to production during the month:
Materials cost …………………………………………………….. Conversion cost …………………………………………………..

Work in process, ending:
Units in process ………………………………………………….. Stage of completion with respect to materials ………… Stage of completion with respect to conversion……….

100 70% 90%

$182 $3,429

10,000 9,700

$27,986 $373,815

400 90% 70%

Required:

Using the weighted-average method:
a. Determine the equivalent units of production for materials and conversion costs. b. Determine the cost per equivalent unit for materials and conversion costs.
c. Determine the cost of units transferred out of the department during the month. d. Determine the cost of ending work in process inventory in the department.

,3,4,5

192 Garrison, Managerial Accounting, 12th Edition

161. Banerjee Inc. uses the weighted-average method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………….. Stage of completion with respect to materials ………… Stage of completion with respect to conversion………. Costs in the beginning inventory:
Materials cost ………………………………………………….. Conversion cost ………………………………………………..

Units started into production during the month ………….. Units completed and transferred out …………………………

Costs added to production during the month:
Materials cost …………………………………………………….. Conversion cost …………………………………………………..

Work in process, ending:
Units in process ………………………………………………….. Stage of completion with respect to materials ………… Stage of completion with respect to conversion……….

200 60% 20%

$756 $1,508

18,000 17,700

$116,569 $675,432

500 70% 80%

Required:

Using the weighted-average method:
a. Determine the equivalent units of production for materials and conversion costs. b. Determine the cost per equivalent unit for materials and conversion costs.
c. Determine the cost of units transferred out of the department during the month. d. Determine the cost of ending work in process inventory in the department.

162. Cagna Inc. uses the weighted-average method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process …………………………………………………… 700 Stage of completion with respect to materials …………. 90% Stage of completion with respect to conversion……….. 10% Units started into production during the month …………… 15,000
Work in process, ending:
Units in process …………………………………………………… 500 Stage of completion with respect to materials …………. 50% Stage of completion with respect to conversion……….. 40%

Required:

Using the weighted-average method, determine the equivalent units of production for materials and conversion costs by compiling the “Quantity Schedule and Equivalent Units” portion of the production report.

163. Callet Inc. uses the weighted-average method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process …………………………………………………… 500 Stage of completion with respect to materials …………. 90% Stage of completion with respect to conversion……….. 70% Units started into production during the month …………… 23,000
Work in process, ending:
Units in process …………………………………………………… 400 Stage of completion with respect to materials …………. 80% Stage of completion with respect to conversion……….. 90%

Required:

Using the weighted-average method, determine the equivalent units of production for materials and conversion costs by compiling the “Quantity Schedule and Equivalent Units” portion of the production report.

,3

164. Dachuna Inc. uses the FIFO method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………………. Stage of completion with respect to materials …………….. Stage of completion with respect to conversion…………… Costs in the beginning inventory:
Materials cost ………………………………………………………. Conversion cost ……………………………………………………. Units started into production during the month ………………. Units completed and transferred out ……………………………..
Costs added to production during the month:
Materials cost …………………………………………………………. Conversion cost ……………………………………………………….
Work in process, ending:
Units in process ………………………………………………………. Stage of completion with respect to materials …………….. Stage of completion with respect to conversion……………

500 60% 70%

$1,020 $8,925 10,000 9,600

$31,488 $259,548

900 60% 90%

Required:

Prepare a production report for the department using the FIFO method.

165. Dahal Inc. uses the FIFO method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………………. Stage of completion with respect to materials …………….. Stage of completion with respect to conversion…………… Costs in the beginning inventory:
Materials cost ………………………………………………………. Conversion cost ……………………………………………………. Units started into production during the month ………………. Units completed and transferred out ……………………………..
Costs added to production during the month:
Materials cost …………………………………………………………. Conversion cost ……………………………………………………….
Work in process, ending:
Units in process ………………………………………………………. Stage of completion with respect to materials …………….. Stage of completion with respect to conversion……………

900 80% 90%

$1,008 $27,621 19,000 19,700

$22,992 $650,504

200 90% 10%

Required:

Prepare a production report for the department using the FIFO method.

166. Ebert Inc. uses the FIFO method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………………. Stage of completion with respect to materials …………….. Stage of completion with respect to conversion…………… Costs in the beginning inventory:
Materials cost ………………………………………………………. Conversion cost ……………………………………………………. Units started into production during the month ………………. Units completed and transferred out ……………………………..
Costs added to production during the month:
Materials cost …………………………………………………………. Conversion cost ……………………………………………………….
Work in process, ending:
Units in process ………………………………………………………. Stage of completion with respect to materials …………….. Stage of completion with respect to conversion……………

600 60% 70%

$1,188 $16,548 18,000 18,400

$56,234 $715,394

200 50% 20%

Required:

Using the FIFO method:
a. Determine the equivalent units of production for materials and conversion costs. b. Determine the cost per equivalent unit for materials and conversion costs.
c. Determine the cost of units transferred out of the department during the month. d. Determine the cost of ending work in process inventory in the department.

167. Edwards Inc. uses the FIFO method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………………. Stage of completion with respect to materials …………….. Stage of completion with respect to conversion…………… Costs in the beginning inventory:
Materials cost ………………………………………………………. Conversion cost ……………………………………………………. Units started into production during the month ………………. Units completed and transferred out ……………………………..
Costs added to production during the month:
Materials cost …………………………………………………………. Conversion cost ……………………………………………………….
Work in process, ending:
Units in process ………………………………………………………. Stage of completion with respect to materials …………….. Stage of completion with respect to conversion……………

100 50% 90%

$260 $3,366 20,000 19,800

$99,650 $745,329

300 60% 20%

204 Garrison, Managerial Accounting, 12th Edition

Chapter 4 Systems Design: Process Costing

Required:

Using the FIFO method:
a. Determine the equivalent units of production for materials and conversion costs. b. Determine the cost per equivalent unit for materials and conversion costs.
c. Determine the cost of units transferred out of the department during the month. d. Determine the cost of ending work in process inventory in the department.

168. Fuller Inc. uses the FIFO method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………………. 300 Stage of completion with respect to materials …………….. 70% Stage of completion with respect to conversion…………… 50% Units started into production during the month ………………. 25,000
Work in process, ending:
Units in process ………………………………………………………. 300 Stage of completion with respect to materials …………….. 80% Stage of completion with respect to conversion…………… 20%

Required:

Using the FIFO method, determine the equivalent units of production for materials and conversion costs by compiling the “Quantity Schedule and Equivalent Units” portion of the production report.

169. Fulghieri Inc. uses the FIFO method in its process costing system. The following data concern the operations of the company’s first processing department for a recent month.

Work in process, beginning:
Units in process ………………………………………………………. 600 Stage of completion with respect to materials …………….. 70% Stage of completion with respect to conversion…………… 10% Units started into production during the month ………………. 10,000
Work in process, ending:
Units in process ………………………………………………………. 400 Stage of completion with respect to materials …………….. 70% Stage of completion with respect to conversion…………… 20%

Required:

Using the FIFO method, determine the equivalent units of production for materials and conversion costs by compiling the “Quantity Schedule and Equivalent Units” portion of the production report.

Chapter 5 Cost Behavior: Analysis and Use

True/False Questions

1. A variable cost is a cost that remains constant in total throughout wide ranges of activity.

2. If the activity level increases, then one would expect the variable cost per unit to increase as well.

3. Fixed costs expressed on a per unit basis vary inversely with changes in activity.

4. Calculation of fixed costs on a per unit basis is critical for internal reporting to managers.

5. Management’s strategy will determine to a large degree the classification of a fixed cost as discretionary or committed.

6. Committed fixed costs cannot be reduced to zero without seriously impairing the company’s long term goals.

7. Unless the behavior pattern of each cost of a company is understood, the impact of a company’s activities on its costs will not be known until after the activity has occurred.

8. When using the high-low method, if the high and low activity levels do not coincide with the high and low levels of cost, then the analyst should use the points with the high and low levels of cost.

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Chapter 5 Cost Behavior: Analysis and Use

9. A traditional functional income statement organizes costs on the basis of behavior.

10. The contribution income statement organizes costs according to behavior.

11. The contribution margin represents the amount available to contribute toward covering fixed expenses and toward profits for the period.

12. Most companies use the contribution approach in preparing financial statements for external reporting purposes.

13. In the least-squares regression method, total cost is considered to be “Y”, the dependent variable.

14. The least-squares regression method computes the regression line that minimizes the sum of the squared deviations from the plotted points to the line.

15. Account analysis is a special form of least-squares regression in which more than one account is analysed at the same time.

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Chapter 5 Cost Behavior: Analysis and Use

Multiple Choice Questions

16. As the level of activity increases, how will a mixed cost in total and per unit behave?

In Total A) Increase B) Increase C) Increase D) Decrease E) Decrease
Per Unit Decrease Increase No effect Increase No effect

17. Since Anytime Pizza is open 24 hours a day, its pizza oven is constantly on and is, therefore, always using natural gas. However, when there is no pizza in the oven, the oven automatically lowers its flame and reduces its natural gas usage by 70%. The cost of natural gas would best be described as a:
A) fixed cost. B) mixed cost.
C) step-variable cost. D) true variable cost.

18. When the activity level is expected to decline within the relevant range, what effects would be anticipated with respect to each of the following?

Fixed costs per unit
A) Increase B) Increase C) No change D) No change
Variable costs per unit Increase No change No change Increase

Source: CPA, adapted

19. Within the relevant range, variable costs can be expected to:
A) vary in total in direct proportion to changes in the activity level. B) remain constant in total as the activity level changes.
C) increase on a per unit basis as the activity level increases. D) increase on a per unit basis as the activity level decreases. E) none of these.

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Chapter 5 Cost Behavior: Analysis and Use

20. Which of the following is not correct when referring to fixed costs?
A) Whether a cost is committed or discretionary will depend in large part on management’s strategy.
B) Discretionary fixed costs arise from annual decisions by management. C) Fixed costs remain constant in total throughout the relevant range.
D) Committed fixed costs can often be reduced to zero for short periods of time without seriously impairing the long-run goals of the company.
E) The trend in companies today is toward greater fixed costs relative to variable costs.

21. Which of the following statements is true when referring to fixed costs?
A) Committed fixed costs arise from the annual decisions by management. B) As volume increases, unit fixed cost and total fixed cost will change. C) Fixed costs increase in total throughout the relevant range.
D) Discretionary fixed costs can often be reduced to zero for short periods of time without seriously impairing the long-run goals of the company.

22. For the past 8 months, Jinan Corporation has experienced a steady increase in its cost per unit even though total costs have remained stable This cost per unit increase may be due to _____________ costs because the level of activity at Jinan is _______________.
A) fixed, decreasing B) fixed, increasing
C) variable, decreasing D) variable, increasing

23. Discretionary fixed costs:
A) cannot be changed since they are fixed.
B) have a long-term planning horizon, generally encompassing many years. C) are made up of facilities, equipment, and basic organization.
D) responses b and c are both correct. E) none of these.

Answer: E

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Chapter 5 Cost Behavior: Analysis and Use

24. An example of a committed fixed cost is: A) management training seminars.
B) a long-term equipment lease. C) research and development. D) advertising.

25. Which of the following would usually be considered a committed fixed cost for a retail sales corporation?
A) lease payments made on its store buildings
B) the cost of the Caribbean trip given to the employee of the year C) the cost of running an annual leadership seminar for managers D) both a and c above

26. Which of the following would usually be considered a discretionary fixed cost for a financial planning company?
A) the cost of the annual employee picnic
B) property taxes on its corporate office building
C) the cost of internships for selected college seniors D) both a and c above

27. Which of the following is unlikely to be classified as a fixed cost with respect to the number of units produced and sold?
A) Property taxes on a headquarters building. B) Legal department salaries.
C) Cost of leasing the company’s mainframe computer. D) Production supplies.

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Chapter 5 Cost Behavior: Analysis and Use

28. The following data have been collected for four different cost items.

Cost Item W X Y Z
Cost at 100 units $8,000 $5,000 $6,500 $6,700
Cost at 140 units $10,560 $5,000 $9,100 $8,580

Which of the following classifications of these cost items by cost behavior is correct?

Cost W Cost X A) variable fixed B) mixed fixed C) variable fixed D) mixed fixed
Cost Y mixed variable variable mixed
Cost Z variable mixed variable mixed

Source: CIMA, adapted

29. Which of the following methods of analyzing mixed costs can be used to estimate an equation for the mixed cost?

High-Low A) Yes B) Yes C) No
D) No
Least-Squares Yes No Yes No

,5

30. A multiple regression equation has: A) more than one dependent variable.
B) more than one independent variable.
C) more than one amount for total fixed cost. D) both A and B above.

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31. In describing the cost formula equation, Y = a + bX, which of the following is correct: A) “Y” is the independent variable.
B) “a” is the variable cost per unit.
C) “a” and “b” are valid for all levels of activity.
D) in the high-low method, “b” equals the change in cost divided by the change in activity.

32. The high-low method is used with which of the following types of costs? A) Variable.
B) Mixed. C) Fixed.
D) Step-variable.

33. The contribution approach income statement: A) organizes costs on a functional basis.
B) provides owners with more cash flows.
C) is particularly helpful to the manager in planning and decision making.
D) provides a gross margin figure from which selling and administrative expenses are deducted.
E) none of these.

34. Contribution margin is:
A) Sales less cost of goods sold.
B) Sales less variable production, variable selling, and variable administrative expenses.
C) Sales less variable production expense. D) Sales less all variable and fixed expenses. E) none of the above.

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35. The contribution approach to income statement preparation:
A) organizes costs according to the functions of production, administration, and sales. B) is used for external reporting.
C) organizes costs according to their variable and fixed cost behavior. D) both b and c are true.
E) both a and b are true

36. Iaci Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $133.60 per unit.

Sales volume (units) ………………………………………. Cost of sales …………………………………………………. Selling, general, and administrative costs ………….
4,000 $383,600 $124,400
5,000 $479,500 $136,000

The best estimate of the total contribution margin when 4,300 units are sold is: A) $112,230
B) $162,110 C) $28,380 D) $45,150

,3,4

37. Iacob Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $103.40 per unit.

Sales volume (units) ……………………………………………….. Cost of sales …………………………………………………………… Selling, general, and administrative costs …………………..
5,000 $315,500 $162,500
6,000 $378,600 $177,600

The best estimate of the total contribution margin when 5,300 units are sold is: A) $56,710
B) $133,560 C) $41,340 D) $213,590

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38. Shipping costs at Columbia Mining Company are a mixture of variable and fixed components The company shipped 8,000 tons of coal for $400,000 in shipping costs in February and 10,000 tons for $499,000 in March Assuming that this activity is within the relevant range, expected shipping costs for 11,000 tons would be:
A) $544,500 B) $548,500 C) $422,222 D) $554,000

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39. Anderson Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume……………………. Direct materials ………………………… Direct labor ……………………………… Manufacturing overhead …………….
4,000 units $99.20 per unit $45.50 per unit $94.00 per unit
5,000 units $99.20 per unit $45.50 per unit $77.60 per unit

The best estimate of the total monthly fixed manufacturing cost is: A) $388,000
B) $954,800 C) $376,000 D) $328,000

,3

40. Andom Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume……………………. Direct materials ………………………… Direct labor ……………………………… Manufacturing overhead …………….
1,000 units $15.20 per unit $30.50 per unit $54.10 per unit
2,000 units $15.20 per unit $30.50 per unit $37.40 per unit

The best estimate of the total monthly fixed manufacturing cost is: A) $74,800
B) $54,100 C) $99,800 D) $33,400

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41. Baker Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume…………………….. Direct materials …………………………. Direct labor ………………………………. Manufacturing overhead ……………..
1,000 units $30.90 per unit $40.20 per unit $64.60 per unit
3,000 units $30.90 per unit $40.20 per unit $33.80 per unit

The best estimate of the total variable manufacturing cost per unit is: A) $89.50
B) $18.40 C) $71.10 D) $30.90

,3

42. Bakan Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume ……………………… Direct materials ………………………….. Direct labor ………………………………… Manufacturing overhead ……………….
3,000 units $86.30 per unit $26.40 per unit $75.90 per unit
4,000 units $86.30 per unit $26.40 per unit $60.40 per unit

The best estimate of the total variable manufacturing cost per unit is: A) $126.60
B) $86.30 C) $13.90 D) $112.70

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43. Cardiv Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume ……………………….. Direct materials ……………………………. Direct labor ………………………………….. Manufacturing overhead …………………
4,000 units $85.80 per unit $56.10 per unit $73.60 per unit
5,000 units $85.80 per unit $56.10 per unit $62.10 per unit

The best estimate of the total cost to manufacture 4,300 units is closest to: A) $877,200
B) $909,400 C) $901,925 D) $926,650

,3

44. Caraco Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

Production volume ………………………… Direct materials …………………………….. Direct labor …………………………………… Manufacturing overhead ………………….
7,000 units $87.40 per unit $20.20 per unit $101.50 per unit
8,000 units $87.40 per unit $20.20 per unit $90.80 per unit

The best estimate of the total cost to manufacture 7,300 units is closest to: A) $1,487,375
B) $1,448,320 C) $1,500,750 D) $1,526,430

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45. Davis Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume ………………………… Direct materials …………………………….. Direct labor …………………………………… Manufacturing overhead ………………….
1,000 units $44,200 $37,300 $48,500
2,000 units $88,400 $74,600 $62,200

The best estimate of the total monthly fixed manufacturing cost is: A) $130,000
B) $177,600 C) $34,800 D) $225,200

,3

46. Dacosta Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume ………………………… Direct materials …………………………….. Direct labor …………………………………… Manufacturing overhead ………………….
6,000 units $369,600 $309,600 $919,800
7,000 units $431,200 $361,200 $937,300

The best estimate of the total monthly fixed manufacturing cost is: A) $1,599,000
B) $1,664,350 C) $814,800 D) $1,729,700

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47. Eddy Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume ………………………….. Direct materials ………………………………. Direct labor …………………………………….. Manufacturing overhead ……………………
6,000 units $582,600 $136,200 $691,800
7,000 units $679,700 $158,900 $714,700

The best estimate of the total variable manufacturing cost per unit is: A) $22.90
B) $119.80 C) $142.70 D) $97.10

,3

48. Edal Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume …………………………… Direct materials ……………………………….. Direct labor ……………………………………… Manufacturing overhead …………………….
5,000 units $266,500 $52,000 $748,500
6,000 units $319,800 $62,400 $769,200

The best estimate of the total variable manufacturing cost per unit is: A) $63.70
B) $84.40 C) $53.30 D) $20.70

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49. Farmington Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume …………………………….. Direct materials …………………………………. Direct labor ……………………………………….. Manufacturing overhead ………………………
6,000 units $195,000 $113,400 $913,200
7,000 units $227,500 $132,300 $931,700

The best estimate of the total cost to manufacture 6,300 units is closest to: A) $1,162,350
B) $1,242,570 C) $1,222,515 D) $1,282,680

,3

50. Farac Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume ……………………………… Direct materials ………………………………….. Direct labor ………………………………………… Manufacturing overhead ……………………….
4,000 units $208,800 $119,200 $319,200
5,000 units $261,000 $149,000 $329,500

The best estimate of the total cost to manufacture 4,300 units is closest to: A) $674,890
B) $665,855 C) $695,740 D) $635,970

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51. Gambino Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $138.80 per unit.

Sales volume (units) …………………………………. Cost of sales …………………………………………….. Selling, general, and administrative costs …….
6,000 $369,000 $407,400
7,000 $430,500 $418,600

The best estimate of the total monthly fixed cost is: A) $776,400
B) $340,200 C) $812,750 D) $849,100

,3

52. Gamach Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $104.50 per unit.

Sales volume (units) ………………………………………. Cost of sales ………………………………………………….. Selling, general, and administrative costs ………….
5,000 $295,000 $186,000
6,000 $354,000 $202,800

The best estimate of the total monthly fixed cost is: A) $102,000
B) $518,900 C) $556,800 D) $481,000

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53. Harris Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $84.40 per unit.

Sales volume (units) ………………………………………. Cost of sales ………………………………………………….. Selling, general, and administrative costs ………….
5,000 $285,000 $107,500
6,000 $342,000 $120,000

The best estimate of the total variable cost per unit is: A) $77.00
B) $57.00 C) $69.50 D) $78.50

,3

54. Hara Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $159.80 per unit.

Sales volume (units) ………………………………………. Cost of sales ………………………………………………….. Selling, general, and administrative costs ………….
6,000 $363,600 $531,000
7,000 $424,200 $547,400

The best estimate of the total variable cost per unit is: A) $77.00
B) $60.60 C) $149.10 D) $138.80

,3

55. Given the cost formula Y = $12,500 + $5.00X, total cost for an activity level of 4,000 units would be:
A) $20,000 B) $12,500 C) $16,000 D) $32,500

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56. Given the cost formula Y = $13,000 + $7.00X, the total cost for an activity level of 3,000 units would be:
A) $13,000 B) $21,000 C) $18,000 D) $34,000

57. The following data pertains to activity and maintenance costs for two recent years:

Activity level in units ……………….. Maintenance cost ………………………
Year 2 Year 1 11,125 6,000 $6,250 $4,200

If the high-low method is used to separate fixed and variable components of the cost, which of the following statements is correct?
A) The variable cost is $0.70 per unit of activity B) The fixed cost is $2,050
C) The variable cost is $2.50 per unit of activity D) The fixed cost is $1,800

58. The following data relate to two levels of activity at an out-patient clinic in a hospital:

Number of patient-visits …………. General overhead ……………………
4,500 $269,750
5,750 $289,125

The best estimate of the variable general overhead cost per patient-visit is closest to: A) $15.50
B) $44.44 C) $59.94 D) $50.28

Source: CIMA, adapted

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59. At a sales level of $365,000, Lewis Company’s gross margin is $20,000 less than its contribution margin, its net operating income is $70,000, and its selling and administrative expenses total $130,000 At this sales level, its contribution margin would be:
A) $295,000 B) $180,000 C) $220,000 D) $200,000

60. Your boss would like you to estimate the fixed and variable components of a particular cost Actual data for this cost over four recent periods appear below.

Period 1 ……………… Period 2 ……………… Period 3 ……………… Period 4 ………………
Activity Cost 25 $363 22 $345 23 $348 20 $322

Using the least-squares regression method, what is the cost formula for this cost? A) Y = $164.50 + $8.00X
B) Y = $0.00 + $15.31X C) Y = $160.36 + $8.18X D) Y = $168.08 + $5.27X

Appendix: 5

61. Your boss would like you to estimate the fixed and variable components of a particular cost Actual data for this cost over four recent periods appear below.

Period 1 ……………….. Period 2 ……………….. Period 3 ……………….. Period 4 ………………..
Activity Cost 22 235 23 243 25 255 20 227

Using the least-squares regression method, what is the cost formula for this cost? A) Y = $107.45 + $5.89X
B) Y = $0.00 + $10.67X C) Y = $111.92 + $5.69X D) Y = $120.81 + $3.56X

Appendix: 5

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Use the following to answer questions 62-64:

Callis Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $141.60 per unit.

Sales volume (units) ………………………………………. Cost of sales …………………………………………………. Selling, general, and administrative costs ………….
5,000 $265,500 $393,500
6,000 $318,600 $406,800

62. The best estimate of the total monthly fixed cost is: A) $692,200
B) $725,400 C) $659,000 D) $327,000

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63. The best estimate of the total variable cost per unit is: A) $131.80
B) $53.10 C) $66.40 D) $120.90

,3

64. The best estimate of the total contribution margin when 5,300 units are sold is: A) $51,940
B) $469,050 C) $109,710 D) $398,560

,3,4

Use the following to answer questions 65-67:

Call Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $140.50 per unit.

Sales volume (units) ………………………………………. Cost of sales …………………………………………………. Selling, general, and administrative costs ………….
6,000 $497,400 $273,600
7,000 $580,300 $294,700

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65. The best estimate of the total monthly fixed cost is: A) $875,000
B) $147,000 C) $771,000 D) $823,000

,3

66. The best estimate of the total variable cost per unit is: A) $82.90
B) $128.50 C) $104.00 D) $125.00

,3

67. The best estimate of the total contribution margin when 6,300 units are sold is: A) $75,600
B) $97,650 C) $362,880 D) $229,950

,3,4

Use the following to answer questions 68-71:

Comparative income statements for Tudor Retailing Company for the last two months are presented below:

Sales in units ……………………………..

Sales revenue …………………………….. Less cost of goods sold ………………. Gross margin …………………………….. Less operating expenses …………….. : Shipping expense ……………………. Clerical expense ……………………… Maintenance expense ………………. Total operating expense ……………… Net operating income………………….
September 5,000

$100,000
40,000 60,000

7,500 10,000
17,000
34,500 $ 25,500
October 7,000

$140,000
56,000 84,000

10,500 12,000
17,000
39,500 $ 44,500

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68. Which of the following classifications best describes the behavior of shipping expense?
A) Mixed B) Variable C) Fixed
D) none of the above

69. Which of the following classifications best describes the behavior of clerical expense? A) Mixed
B) Variable C) Fixed
D) none of the above

70. Assuming that Tudor Retailing Company uses the high-low method of analysis, the total monthly fixed cost for Tudor Retailing Company would be estimated to be: A) $34,500
B) $17,000 C) $27,000 D) $22,000

71. Assuming that Tudor Retailing Company uses the high-low method of analysis, the total operating expense if Tudor Retailing Company sells 6,500 units during a month would be estimated to be:
A) $37,000 B) $44,850 C) $38,250 D) $36,679

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Chapter 5 Cost Behavior: Analysis and Use

Use the following to answer questions 72-73:

The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost Shown below are machine-hours and total overhead costs for the past six months:

Machine-Hours
Jan 150,000 Feb 140,000 Mar 160,000 Apr 130,000 May 170,000 Jun 200,000
Overhead Cost $339,000 $328,000 $350,000 $319,500 $362,500 $400,000

Assume that the relevant range includes all of the activity levels mentioned in this problem.

72. If Casablanca expects to incur 185,000 machine hours next month, what will the estimated total overhead cost be using the high-low method?
A) $212,750 B) $359,750 C) $382,750 D) $381,700

73. What is Casablanca’s independent variable? A) the year
B) the machine hours
C) the total overhead cost D) the relevant range

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Use the following to answer questions 74-75:

The management of the Medulla Fitness Club believes that the attendance by its members is an appropriate activity measure for total operating cost Shown below are attendance figures and total operating costs for the past six months:

Members Attendance
Jan 150,000 Feb 130,000 Mar 160,000 Apr 120,000 May 170,000 Jun 190,000
Operating Cost $786,000 $735,000 $792,000 $706,000 $799,000 $874,000

Assume that the relevant range includes all of the activity levels mentioned in this problem.

74. If Medulla expects to have 180,000 members attend the club in July, what will the estimated total operating cost be using the high-low method?
A) $836,500 B) $837,000 C) $850,000 D) $852,000

75. What is Medulla’s dependent variable? A) the month
B) the members’ attendance C) the total operating cost D) the relevant range

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Chapter 5 Cost Behavior: Analysis and Use

Use the following to answer questions 76-77:

Cosco, Inc. has accumulated the following data for the cost of maintenance on its machinery for the last four months:

Month September October November December
Maintenance Cost $26,020 $24,600 $22,300 $25,100
Machine Hours 21,000 18,500 15,000 19,000

Assume that the relevant range includes all of the activity levels mentioned in this problem

76. Assuming Cosco Company uses the high-low method of analysis, the fixed cost of maintenance would be estimated to be:
A) $14,500 B) $ 5,020 C) $13,000 D) $12,320

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77. Assuming Cosco Company uses the high-low method of analysis, if machine hours are budgeted to be 20,000 hours then the budgeted total maintenance cost would be expected to be:
A) $25,400 B) $25,560 C) $23,700 D) $24,720

,3

Use the following to answer questions 78-80:

The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:

Production volume……………………………… Direct materials ………………………………….. Direct labor ………………………………………… Manufacturing overhead ………………………
1,000 units $13.20 per unit $14.50 per unit $65.40 per unit
3,000 units $13.20 per unit $14.50 per unit $29.40 per unit

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78. The best estimate of the total monthly fixed manufacturing cost is: A) $65,400
B) $88,200 C) $93,100 D) $54,000

,3

79. The best estimate of the total variable manufacturing cost per unit is: A) $39.10
B) $27.70 C) $11.40 D) $13.20

,3

80. The best estimate of the total cost to manufacture 1,200 units is closest to: A) $68,520
B) $100,920 C) $111,720 D) $90,120

,3

Use the following to answer questions 81-83:

The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:

Production volume…………………… Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………
2,000 units $88.40 per unit $20.60 per unit $86.90 per unit
4,000 units $88.40 per unit $20.60 per unit $55.30 per unit

81. The best estimate of the total monthly fixed manufacturing cost is: A) $221,200
B) $391,800 C) $173,800 D) $126,400

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82. The best estimate of the total variable manufacturing cost per unit is: A) $132.70
B) $88.40 C) $23.70 D) $109.00

,3

83. The best estimate of the total cost to manufacture 2,200 units is closest to: A) $396,220
B) $430,980 C) $361,460 D) $418,340

,3

Use the following to answer questions 84-86:

Baker Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume…………………… Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………
6,000 units $194,400 $74,400 $758,400
7,000 units $226,800 $86,800 $779,800

84. The best estimate of the total monthly fixed manufacturing cost is: A) $1,027,200
B) $1,060,300 C) $1,093,400 D) $630,000

,3

85. The best estimate of the total variable manufacturing cost per unit is: A) $32.40
B) $44.80 C) $66.20 D) $21.40

,3

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86. The best estimate of the total cost to manufacture 6,300 units is closest to: A) $984,060
B) $1,031,310 C) $1,047,060 D) $1,078,560

,3

Use the following to answer questions 87-89:

Babson Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume…………………… Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………
5,000 units $103,500 $282,500 $667,000
6,000 units $124,200 $339,000 $679,800

87. The best estimate of the total monthly fixed manufacturing cost is: A) $1,098,000
B) $1,053,000 C) $1,143,000 D) $603,000

,3

88. The best estimate of the total variable manufacturing cost per unit is: A) $90.00
B) $77.20 C) $12.80 D) $20.70

,3

89. The best estimate of the total cost to manufacture 5,300 units is closest to: A) $1,116,180
B) $1,062,915 C) $1,080,000 D) $1,009,650

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Chapter 5 Cost Behavior: Analysis and Use

Use the following to answer questions 90-93:

Solo Company is a small merchandising firm. During the next month, the company expects to sell 500 units. The company has the following revenue and cost structure:

Selling price per unit ………………… Cost per unit ……………………………. Sales commission …………………….. Advertising expense …………………. Administrative expense ……………..
$60 $15
10% of sales $5,000 per month
$3,000 per month plus 20% of sales

90. The expected gross margin next month is: A) $ 5,500
B) $22,500 C) $13,500 D) $ 7,500

91. The expected contribution margin next month is: A) $13,500
B) $ 5,500 C) $ 7,300 D) $22,500

92. The expected total administrative expense next month is: A) $3,000
B) $4,000 C) $9,000 D) $6,000

93. The expected net operating income is: A) $22,500
B) $ 5,500 C) $ 7,500 D) $13,500

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Use the following to answer questions 94-97:

The University Store, Inc. is the major bookseller for four nearby colleges An income statement for the first quarter of the year is presented below:

University Store, Inc. Income Statement
For the Quarter Ended March 31

Sales ………………………………………… Cost of goods sold ……………………… Gross margin …………………………….. Less operating expenses …………….. : Selling ……………………………………… Administrative …………………………… Net operating income………………….

$100,000
110,000
$800,000
560,000 240,000

210,000 $ 30,000

On average, a book sells for $40.00. Variable selling expenses are $3.00 per book; the remaining selling expenses are fixed. The variable administrative expenses are 5% of sales; the remainder of the administrative expenses are fixed.

94. The contribution margin for the University Store for the first quarter is: A) $660,000
B) $700,000 C) $180,000 D) $140,000

95. The net operating income computed using the contribution approach for the first quarter is:
A) $ 30,000 B) $180,000 C) $140,000 D) $0

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96. The cost formula for operating expenses with “X” equal to the number of books sold is:
A) Y = $105,000 + $3X B) Y = $105,000 + $5X C) Y = $110,000 + $5X D) Y = $110,000 + $33X

97. If 25,000 books are sold during the second quarter and this activity is within the relevant range, the company’s expected contribution margin would be:
A) $875,000 B) $300,000 C) $175,000 D) $ 65,000

,4

Use the following to answer questions 98-101:

Dizzy Amusement Park is open from 8:00 am till midnight every day of the year. Dizzy charges its patrons a daily entrance fee of $30 per person which gives them unlimited access to all of the park’s 35 rides.

98. Dizzy gives out a free T-shirt to every 100th customer entering the park. The cost of this T-shirt would best be described as a:
A) fixed cost B) mixed cost
C) step-variable cost D) true variable cost

99. For liability insurance, Dizzy pays a set monthly fee plus a small additional amount for every patron entering the park. The cost of liability insurance would best be described as a:
A) fixed cost B) mixed cost
C) step-variable cost D) true variable cost

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100. Dizzy employees a certified operator for each of its 35 rides. Each operator is paid $20 per hour. The cost of the certified operators would best be described as a:
A) fixed cost B) mixed cost
C) step-variable cost D) true variable cost

101. Dizzy donates $2 of every entrance fee to a local homeless shelter. This charitable contribution would best be described as a:
A) fixed cost B) mixed cost
C) step-variable cost D) true variable cost

Use the following to answer questions 102-106:

Donner Company would like to estimate the variable and fixed components of its maintenance costs and has compiled the following data for the last five months of operations.

Labor Hours
January 160 February 130 March 180 April 190 May 110
Maintenance Cost $617 $553 $596 $623 $532

102. Using the high-low method of analysis, the estimated variable cost per labor hour for maintenance is closest to:
A) $0.83 B) $1.84 C) $1.30 D) $1.14

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103. Using the high-low method of analysis, the estimated total fixed cost per month for maintenance is closest to:
A) $440 B) $407 C) $470 D) $0

104. Using the least-squares regression method, the estimated variable cost per labor hour for maintenance is closest to:
A) $1.88 B) $1.52 C) $1.09 D) $1.96

Appendix: 5

105. Using the least-squares regression method, the estimated total fixed cost per month for maintenance is closest to:
A) $470 B) $416 C) $400 D) $378

Appendix: 5

106. Using the least-squares regression equation, the total maintenance cost for March is: A) above the regression line
B) on the regression line
C) below the regression line D) outside the relevant range

Appendix: 5

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Use the following to answer questions 107-108:

Golden Dragon Restaurant would like to estimate the variable and fixed components of its utilities costs and has compiled the following data for the last five months of operations.

Month December January February March April
Meals served 550 300 250 400 600
Utilities costs $401.00 $360.00 $347.50 $385.50 $414.00

107. Using the high-low method of analysis, the estimated variable utilities cost per meal served is:
A) $0.22 B) $0.73 C) $0.69 D) $0.19

108. Using the high-low method of analysis, the estimated monthly fixed component of utility cost is:
A) $ 66.50 B) $300.00 C) $303.00 D) $331.00

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Essay Questions

109. The owner of the Diamondhead restaurant in Honolulu would like to determine the fixed and variable components of the restaurant’s utility expenses. The owner believes that the variable component of the utilities cost is driven by the number of meals served.

Meals served
January 3,000 February 4,000 March 3,500 April 4,500 May 5,000 June 6,000 July 5,500
Utilities cost $450 $480 $490 $530 $570 $620 $560

Required:
a. Plot the data on the graph below.

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b. Using the quick-and-dirty scattergraph method, derive a cost formula for utilities cost.
c. c Use your cost formula to predict the utilities cost if 5,200 meals are served.

,2

110. Arlo’s T-shirt Shop only has three costs: T-shirt cost, rent cost on the shop, and utilities cost. Arlo’s sells the T-shirt for $14.50 each. Management has prepared the following estimated cost information for next month:

T-shirt cost ……………………. Rent cost ………………………. Utilities cost …………………..
At 8,000 T-shirts $48,000
$3,600 $6,800
At 10,000 T-shirts
$60,000 $3,600 $8,300

Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:
a. Calculate what Arlo’s should expect for total variable cost if 9,000 T-shirts are sold next month.
b. Prepare Arlo’s contribution approach income statement for a monthly sales volume level of 10,000 T-shirts.

111.Rapid Delivery, Inc., operates a parcel delivery service across the nation. The company keeps detailed records relating to operating costs of trucks, and has found that if a truck is driven 150,000 miles per year the average operating cost is 10 cents per mile. This cost increases to 11 cents per mile if a truck is driven only 100,000 miles per year.

Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:
a. Using the high-low method, derive the cost formula for truck operating costs. b. Using the cost formula you derived above, what total cost would you expect the
company to incur in connection with the truck if it is driven 130,000 miles in a year?

112. Butler Sales Company is a distributor that has an exclusive franchise to sell a particular product made by another company. Butler Sales Company’s income statements for the last two years are given below:

Units sold ……………………………………………

Sales revenue ……………………………………… Less cost of goods sold ………………………… Gross margin ……………………………………… Less operating expenses ………………………. Net operating income …………………………..
This Year 200,000

$1,000,000
700,000 300,000
210,000 $ 90,000
Last Year 160,000

$800,000
560,000 240,000
198,000 $ 42,000

Operating expenses are a mixture of fixed costs and variable and mixed costs that vary with respect to the number of units sold.

Required:
a. Estimate the company’s variable operating expenses per unit, and its total fixed operating expenses per year.
b. Compute the company’s contribution margin for this year.

113. SomethingNew is a small one-person company that provides elaborate and imaginative wedding cakes to order for very large wedding receptions. The owner of the company would like to understand the cost structure of the company and has compiled the following records of activity and costs incurred. The owner believes that the number of weddings catered is the best measure of activity.

Month January February March April May June
Weddings 3 2 6 9 12 20
Costs Incurred $3,800 $3,600 $4,000 $4,300 $4,500 $5,200

Required:
a. Using the high-low method, estimate the variable cost per wedding and the total fixed cost per month. (Round off the variable cost per wedding to the nearest cent and the total fixed cost to the nearest dollar.)
b. Using the least-squares regression method, estimate the variable cost per wedding and the total fixed cost per month. (Round off the variable cost per wedding to the nearest cent and the total fixed cost to the nearest dollar.)

,

114. The management of Buff Sports Stadium believes that the number of sporting events each month is a measure of activity for total clean up cost. Shown below are event figures and total clean up costs for the past four months:

July August September October
Number of Sporting Events 28 34 16 22
Total Clean-up Cost $30,900 $34,200 $20,700 $28,200

Required:
a. Estimate Buff’s cost formula for monthly clean up cost using the high-low method. b. Estimate Buff’s cost formula for monthly clean up cost using the least-squares
regression method.

115. CapeAir flies a medium-sized passenger jet on a route between Washington, D.C., and Cape Cod. The manager of the airline would like to estimate the relationship between the plane’s payload (i.e., total weight of passengers and cargo) and total fuel costs. On five recent flights, the payload varied between 22 tons and 35 tons.

Flight 1 Flight 2 Flight 3 Flight 4 Flight 5
Payload Fuel (tons) Cost 35 $780 26 $720 33 $765 28 $735 22 $700

Required:
Using the least-squares regression method, estimate the variable cost per ton and the fixed cost per flight. (Round off the variable cost per ton to the nearest cent and the fixed cost per flight to the nearest dollar.)

116. Below are cost and activity data for a particular cost over the last four periods. Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity.

Period 1 Period 2 Period 3 Period 4
Activity Cost 47 $474 44 $460 42 $450 40 $440

Required:
Using the least-squares regression method, estimate the cost formula for this cost.

117. Below are cost and activity data for a particular cost over the last four periods. Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity.

Period 1 Period 2 Period 3 Period 4
Activity Cost 46 $483 42 $465 45 $477 49 $500

Required:
Using the least-squares regression method, estimate the cost formula for this cost.

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True/False Questions

1. To estimate what the profit will be at various levels of activity, a manager can simply take the number of units to be sold over the break-even point and multiply that number by the unit contribution margin.

2. Incremental analysis is generally the simplest and most direct approach to decision making.

3. To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.

4. One assumption in CVP analysis is that inventories do not change.

5. On a CVP graph for a profitable company, the total expense line will be steeper than the total revenue line.

6. If sales volume increases, and all other factors remain unchanged, the contribution margin ratio will decrease.

7. The break-even point for a capital intensive, automated company will tend to be higher than for a less capital intensive company while the margin of safety will tend to be lower.

,7

8. An increase in the number of units sold will decrease a company’s break-even point.

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9. Assuming that the unit contribution margin is positive, a 10% decrease in selling price will increase the break-even point in terms of unit sales more than will a 10% increase in the variable expense.

10. The break-even point is the point where total contribution margin equals total variable expenses.

11. The break-even point can usually be determined by simply adding together all of the expenses from the income statement.

12. Two companies with the same margin of safety in dollars will also have the same total contribution margin.

13. If a company has high operating leverage, then profits will be very sensitive to changes in sales.

14. Operating leverage will decrease as the company’s margin of safety increases.

,8

15. The overall contribution margin ratio for a company producing three products may be obtained by adding the contribution margin ratios for the three products and dividing the total by three.

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Multiple Choice Questions

16. Which of the following is correct? The break-even point occurs on the CVP graph where:
A) total profit equals total expenses.
B) total profit equals total fixed expenses.
C) total contribution margin equals total fixed expenses. D) total variable expenses equal total contribution margin.

,2

17. If a company decreases its total fixed expenses while increasing the variable expense per unit, the total expense line relative to its previous position on a cost-volume-profit graph will:
A) shift upward and have a steeper slope. B) shift upward and have a flatter slope.
C) shift downward and have a steeper slope. D) shift downward and have a flatter slope.

18. East Company manufactures and sells a single product with a positive contribution margin. If the selling price and the variable expense per unit both increase 5% and fixed expenses do not change, what is the effect on the contribution margin per unit and the contribution margin ratio?

Contribution margin per unit
A) No change B) Increase C) Increase D) Increase
Contribution margin ratio No change Increase No change Decrease

,4 Source: CMA, adapted

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19. Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price increase next year will not cause unit sales to decrease. What effect would this price increase have on the following items for next year?

Contribution Margin Ratio
A) Increase B) Decrease C) Increase D) Decrease
Break-even Point Decrease Decrease No effect No effect

,5

20. The contribution margin ratio is equal to: A) Total manufacturing expenses/Sales. B) (Sales – Variable expenses)/Sales.
C) 1 – (Gross Margin/Sales).
D) 1 – (Contribution Margin/Sales).

21. The contribution margin ratio always increases when the: A) break-even point increases.
B) break-even point decreases.
C) variable expenses as a percentage of net sales decrease. D) variable expenses as a percentage of net sales increase.

Source: CPA, adapted

22. In the middle of the year, the price of Lake Corporation’s major raw material increased by 8%. How would this increase affect the company’s break-even point and margin of safety?

Break-even point A) Increase
B) Increase C) Decrease D) Decrease
Margin of safety Increase Decrease Decrease Increase

,7

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23. A $2.00 increase in a product’s variable expense per unit accompanied by a $2.00 increase in its selling price per unit will:
A) decrease the degree of operating leverage. B) decrease the contribution margin.
C) have no effect on the break-even volume.
D) have no effect on the contribution margin ratio.

,8

24. The break-even point in unit sales is found by dividing total fixed expenses by: A) the contribution margin ratio.
B) the variable expenses per unit. C) the sales price per unit.
D) the contribution margin per unit.

25. Which of the following would not affect the break-even point? A) number of units sold
B) variable expense per unit C) total fixed expenses
D) selling price per unit

Source: CMA, adapted

26. If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will:
A) decrease. B) increase. C) not change.
D) change but direction cannot be determined.

27. To obtain the dollar sales volume necessary to attain a given target profit, which of the following formulas should be used?
A) (Fixed expenses + Target net profit)/Total contribution margin B) (Fixed expenses + Target net profit)/Contribution margin ratio C) Fixed expenses/Contribution margin per unit
D) Target net profit/Contribution margin ratio

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28. Salinas Corporation has a degree of operating leverage of 8. This means that a 1% change in sales dollars at Salinas will generate an 8% change in:
A) variable expenses. B) fixed expenses.
C) contribution margin. D) net operating income.

29. In calculating the break-even point for a multi-product company, which of the following assumptions are commonly made?

I. Selling prices are constant.
II. Variable expenses are constant per unit. III. The sales mix is constant.

A) I and II B) I and III C) II and III
D) I, II, and III

30. The following information relates to the break-even point at Pezzo Corporation:

Sales dollars …………………. Total fixed expenses ………
$120,000 $30,000

If Pezzo wants to generate net operating income of $12,000, what will its sales dollars have to be?
A) $132,000 B) $136,000 C) $168,000 D) $176,000

,3,5,6

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31. The following information relates to Snowbird Corporation:

Sales at the break-even point ……… Total fixed expenses …………………. Net operating income ………………..
$312,500 $250,000 $150,000

What is Snowbird’s margin of safety? A) $62,500
B) $187,500 C) $100,000 D) $212,500

,3,5,7

32. The “Dog Hut” hot dog stand expects the following operating results for next year:

Sales ……………………………………….. Net operating income ……………….. Contribution margin ratio …………..
$280,000 $21,000 70%

What is Dog Hut’s break-even point next year in sales dollars? A) $120,000
B) $181,300 C) $196,000 D) $250,000

,3,5

33. The following information relates to Zinc Corporation for last year:

Sales ………………………………………………….. Net operating income ………………………….. Degree of operating leverage ………………..
$500,000 $25,000 5

Sales at Zinc are expected to be $600,000 next year. Assuming no change in cost structure, this means that net operating income for next year should be:
A) $30,000 B) $45,000 C) $50,000 D) $125,000

,3,8

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34. The following information pertains to Nova Co.’s cost-volume-profit relationships:

Breakeven point in units sold …………………. Variable expenses per unit …………………….. Total fixed expenses ………………………………
1,000 $500 $150,000

How much will be contributed to net operating income by the 1,001st unit sold? A) $650
B) $500 C) $150 D) $0

,5

35. Barnes Corporation expected to sell 150,000 games during the month of November. The following budgeted data are based on that level of sales:

Revenue (150,000 games)………………………………. Variable expenses ………………………………………….. Fixed manufacturing overhead expenses ………….. Fixed selling & administrative expenses …………… Net operating income ……………………………………..
$2,400,000 1,425,000 250,000 500,000 225,000

Barnes’ actual sales during November were 180,000 games. What should the actual net operating income during November have been?
A) $450,000 B) $270,000 C) $420,000 D) $510,000

Source: CMA, adapted

36. Carver Company produces a product which sells for $40. Variable manufacturing costs are $18 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit. A selling commission of 15% of the selling price is paid on each unit sold. The contribution margin per unit is:
A) $7 B) $17 C) $22 D) $16

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37. Tice Company is a medium-sized manufacturer of lamps. During the year a new line called “Horolin” was made available to Tice’s customers. The break-even point for sales of Horolin is $200,000 with a contribution margin of 40%. Assuming that the profit for the Horolin line during the year amounted to $100,000, total sales during the year would have amounted to:
A) $300,000 B) $420,000 C) $450,000 D) $475,000

,5,6 Source: CPA, adapted

38. Black Company’s sales are $600,000, its fixed expenses are $150,000, and its variable expenses are 60% of sales. Based on this information, the margin of safety is:
A) $90,000 B) $190,000 C) $225,000 D) $240,000

,5,7

39. Variable expenses for Alpha Company are 40% of sales. What are sales at the break-even point, assuming that fixed expenses total $150,000 per year:
A) $250,000 B) $375,000 C) $600,000 D) $150,000

,5

40. Minist Company sells a single product at a selling price of $15.00 per unit. Last year, the company’s sales revenue was $225,000 and its net operating income was $18,000. If fixed expenses totaled $72,000 for the year, the break-even point in unit sales was A) 15,000
B) 9,900 C) 14,100 D) 12,000

,5

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41. Winger Corp. sells a product for $5 per unit. The fixed expenses are $210,000 and the unit variable expenses are 60% of the selling price. What sales would be necessary in order for Winger Corp. to realize a profit of 10% of sales?
A) $700,000 B) $525,000 C) $472,500 D) $420,000

,6 Source: CPA, adapted

42. Sales in East Company declined from $100,000 per year to $80,000 per year, while net operating income declined by 300 percent. Given these data, the company must have had an operating leverage of:
A) 15 B) 2.7 C) 30 D) 12

,8

43. Darth Company sells three products. Sales and contribution margin ratios for the three products follow:

Sales in dollars …………………………. contribution margin ratio ……………

X $20,000
45%
Product Y
$40,000 40%

Z $100,000
15%

Given these data, the contribution margin ratio for the company as a whole would be: A) 25%
B) 75% C) 33.3%
D) it is impossible to determine from the given data

,9

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44. Sunnripe Company manufactures and sells two types of beach towels, standard and deluxe. Sunnripe expects the following operating results next year for each type of towel:

Sales ……………………………………….. Variable expenses (total) ……………
Standard $450,000 $360,000
Deluxe $50,000 $20,000

Sunnripe expects to have a total of $57,600 in fixed expenses next year. What is Sunnripe’s break-even point next year in sales dollars?
A) $72,000 B) $144,000 C) $192,000 D) $240,000

,9

45. Cindy, Inc. sells a product for $10 per unit. The variable expenses are $6 per unit, and the fixed expenses total $35,000 per period. By how much will net operating income change if sales are expected to increase by $40,000?
A) $16,000 increase B) $5,000 increase C) $24,000 increase D) $11,000 decrease

46. Birney Company has prepared the following budget data:

Sales …………………………………………………….. Selling price ………………………………………….. Variable expenses ………………………………….. Fixed manufacturing expenses ………………… Fixed selling and admin. expenses ……………
150,000 units $25 per unit $15 per unit $800,000 $700,000

An advertising agency claims that an aggressive advertising campaign would enable the company to increase its unit sales by 20%. What is the maximum amount that the company can pay for advertising and obtain a net operating income of $200,000?
A) $100,000 B) $200,000 C) $300,000 D) $550,000

,6 Source: CPA, adapted

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47. During last year, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed expenses of $1,000,000 and net operating income of $200,000. Because of an adverse legal decision, Thor’s liability insurance expenses this year will be $1,200,000 more than they were last year. Assuming that the volume and other costs are unchanged, what should be the sales price this year if Thor is to make the same $200,000 net operating income?
A) $120 B) $135 C) $150 D) $240

,6 Source: CPA, adapted

48. How much will a company’s net operating income change if it undertakes an advertising campaign given the following data:

Cost of advertising campaign ……………………………….. Variable expense as a percentage of sales ………………. Increase in sales …………………………………………………..
$25,000 42% $60,000

A) $200 increase
B) $25,200 increase C) $15,000 increase D) $9,800 increase

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49. Sun Company’s tentative budget for next year is as follows:

Sales ………………………………………………….. Variable expenses ……………………………….. Fixed expenses:
Manufacturing …………………………………. Selling and administrative …………………. Net operating income………………………..
$600,000 360,000

90,000 110,000 $40,000

Mr. Johnston, the marketing manager, has proposed an aggressive advertising campaign costing an additional $50,000 that he predicts will result in a 30% unit sales increase. Assuming that Johnston’s proposal is incorporated into the budget, what should be the increase in the budgeted net operating income for next year?
A) $12,000 B) $22,000 C) $72,000 D) $130,000

Source: CPA, adapted

50. Last year, variable expenses were 60% of total sales and fixed expenses were 10% of total sales. If the company increases its selling prices by 10%, but if fixed expenses, variable costs per unit, and unit sales remain unchanged, the effect of the increase in selling price on the company’s total contribution margin would be:
A) a decrease of 2% B) an increase of 5% C) an increase of 10% D) an increase of 25%

Source: CIMA, adapted

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51. Moruzzi Corporation is a single-product company that expects the following operating results for next year:

Sales ………………………………………………….. Contribution margin per unit ………………… Contribution margin ratio …………………….. Degree of operating leverage ………………..
$320,000 $0.20 25%
8

How many units would Moruzzi have to sell next year to break-even? A) 50,000
B) 200,000 C) 280,000 D) 350,000

52. Mason Company’s selling price was $20.00 per unit. Fixed expenses totaled $54,000, variable expenses were $14.00 per unit, and the company reported a profit of $9,000 for the year. The break-even point for Mason Company is:
A) 10,500 units B) 4,500 units C) 8,500 units D) 9,000 units

53. Given the following data:

Selling price per unit …………………………… $2.00 Variable production cost per unit ………….. $0.30 Fixed production cost ………………………….. $3,000 Sales commission per unit ……………………. $0.20 Fixed selling expenses …………………………. $1,500

The break-even point in dollars is: A) $6,000
B) $4,500 C) $2,647 D) $4,000

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54. Hollis Company sells a single product for $20 per unit. The company’s fixed expenses total $240,000 per year, and variable expenses are $12 per unit of product. The company’s break-even point is:
A) $400,000 B) $600,000 C) 20,000 units D) 12,000 units

55. Darwin, Inc., sells a particular textbook for $20. Variable expenses are $14 per book. At the current volume of 50,000 books sold per year the company is just breaking even. Given these data, the annual fixed expenses associated with the textbook total: A) $300,000
B) $1,000,000 C) $1,300,000 D) $700,000

56. Singapore Candy Cane Company is a single product firm with the following cost structure for next year:

Selling price per unit …………………………… Variable expenses per unit …………………… Total fixed expenses for the year …………..
$1.20 $0.72 $64,800

What is the company’s break-even point next year in sales dollars? A) $90,000
B) $108,000 C) $135,000 D) $162,000

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57. Garcia Veterinary Clinic expects the following operating results next year:

Sales (total) ……………………………… Variable expenses (total) …………… Fixed expenses (total) ………………..
$600,000 $120,000 $300,000

What is Garcia’s break-even point next year in sales dollars? A) $240,000
B) $375,000 C) $400,000 D) $420,000

58. Frank Company manufacturers a single product that has a selling price of $20.00 per unit. Fixed expenses total $45,000 per year, and the company must sell 5,000 units to break even. If the company has a target profit of $13,500, sales in units must be:
A) 6,000 B) 5,750 C) 6,500 D) 7,925

59. Spencer Company expects to sell 60,000 units next year. Variable production costs are $4 per unit, and variable selling costs are 10% of the selling price. Fixed expenses are $115,000 per year, and the company has set a target profit of $50,000. Based on this information, the unit selling price should be:
A) $7.00 B) $10.75 C) $7.50 D) $6.75

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60. Company X sold 25,000 units of product last year. The contribution margin per unit was $2, and fixed expenses totaled $40,000 for the year. This year fixed expenses are expected to increase to $45,000, but the contribution margin per unit will remain unchanged at $2. How many units must be sold this year to earn the same net operating income as was earned last year:
A) 22,500 B) 27,500 C) 35,000 D) 2,500

61. A product sells for $10 per unit and has variable expenses of $6 per unit. Fixed expenses total $45,000 per month. How many units of the product must be sold each month to yield a monthly profit of $15,000?
A) 6,000 units B) 3,750 units C) 15,000 units D) 10,000 units

62. The Breiden Company sells rodaks for $6.00 per unit. Fixed expenses total $37,500 per month and variable expenses are $2.00 per unit. How many rodaks must be sold each month to realize a profit before income taxes of 15% of sales (to the nearest whole unit):
A) 9,375 units B) 11,029 units C) 12,097 units D) 9,740 units

Source: CMA, adapted

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63. Chibu Corporation is a single product firm with the following cost formula for all of its costs for next year:

Y = $225,000 + $30X

Chibu sells its product for $120 per unit. What would Chibu’s total sales dollars have to be next year in order to generate $270,000 of net operating income?
A) $618,750 B) $660,000 C) $1,080,000 D) $1,980,000

64. Gamma Company has sales of $120,000, a contribution margin of $48,000, and a net operating income of $12,000. The company’s degree of operating leverage is:
A) 2.5 B) 4.0 C) 10.0 D) 4.8

65. Alpha Company reported the following data for its most recent year: sales, $500,000; variable expenses, $300,000; and fixed expenses, $150,000. The company’s degree of operating leverage is:
A) 10 B) 2 C) 4 D) 2.5

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66. Mason Enterprises has prepared the following budget for the month of July:

Product A …………… Product B …………… Product C ……………
Selling price per unit
$10.00 $15.00 $18.00
Variable Unit cost per unit sales
$4.00 15,000 $8.00 20,000 $9.00 5,000

Assuming that total fixed expenses will be $150,000 and the sales mix remains constant, the break-even point would be closest to:
A) $276,008 B) $235,292 C) $294,545 D) $141,278

Source: CMA, adapted

67. The unit contribution margins of Product X and Product Y are $10 and $9, respectively. Total fixed expenses will be the same regardless of which product is produced and sold. Which of the following statements will always be true:
A) Product X has a higher contribution margin ratio than Product Y.
B) if total sales are $300,000 no matter which product is sold, it is more profitable to sell Product X than Product Y.
C) less units would be required to break even if only Product X is sold than if only Product Y is sold.
D) responses A, B, and C are all correct.

68. A company sells two products–J and K. The sales mix is expected to be $3.00 of sales of Product K for every $1.00 of sales of Product J. Product J has a contribution margin ratio of 40% whereas Product K has a contribution margin ratio of 50%. Annual fixed expenses are expected to be $120,000. The overall break-even point for the company in dollar sales is expected to be closest to:
A) $196,000 B) $200,000 C) $253,000 D) $255,000

Source: CIMA, adapted

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Use the following to answer questions 69-71:

A cement manufacturer has supplied the following data:

Tons of cement produced and sold Sales revenue
Variable manufacturing expense Fixed manufacturing expense
Variable selling and administrative expense Fixed selling and administrative expense Net operating income
220,000 $924,000 $297,000 $280,000 $165,000 $82,000 $100,000

69. What is the company’s unit contribution margin? A) $4.20
B) $0.45 C) $1.90 D) $2.10

70. The company’s contribution margin ratio is closest to: A) 40.0%
B) 50.0% C) 60.0% D) 10.7%

71. If the company increases its unit sales volume by 5% without increasing its fixed expenses, then total net operating income should be closest to:
A) $5,000 B) $123,100 C) $105,000 D) $102,500

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Use the following to answer questions 72-74:

A tile manufacturer has supplied the following data:

Boxes of tiles produced and sold ……………………….. Sales revenue …………………………………………………… Variable manufacturing expense ………………………… Fixed manufacturing expense ……………………………. Variable selling and administrative expense ………… Fixed selling and administrative expense ……………. Net operating income………………………………………..
580,000 $2,842,000 1,653,000 784,000 145,000 128,000 $132,000

72. What is the company’s unit contribution margin? A) $0.23
B) $4.90 C) $3.10 D) $1.80

73. The company’s contribution margin ratio is closest to: A) 29.4%
B) 4.7% C) 63.3% D) 36.7%

74. If the company increases its unit sales volume by 5% without increasing its fixed expenses, then total net operating income should be closest to:
A) $6,600 B) $184,200 C) $134,422 D) $138,600

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Use the following to answer questions 75-78:

Drake Company’s income statement for the most recent year appears below:

Sales (26,000 units) …………………………….. Less: Variable expenses ………………………. Contribution margin ……………………………. Less: Fixed expenses …………………………… Net operating loss ………………………………..
$650,000
442,000 208,000
234,000 $ (26,000)

75. The unit contribution margin is: A) $17.00
B) $8.00 C) $1.00 D) $9.00

76. The break-even point in sales dollars is: A) $731,250
B) $676,000 C) $675,000 D) $720,000

77. If the company desires a net operating income of $20,000, the number of units needed to be sold is:
A) 28,500 B) 31,000 C) 31,750 D) 26,500

78. The sales manager is convinced that a $60,000 expenditure on advertising will increase unit sales by fifty percent without any other increase in fixed expenses. If the sales manager is correct, the company’s net operating income would increase by:
A) $44,000 B) $34,000 C) $30,000 D) $49,000

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Use the following to answer questions 79-81:

Roberts Company bases its budget on the following data:

Sales ……………………………. Selling price …………………. Variable expense …………… Fixed expenses ………………
3,600 units $50 per unit $15 per unit $40,530

79. If the company wants to increase its total contribution margin by 40%, it will need to increase its sales by about:
A) $48,840 B) $72,000 C) $50,400 D) $34,188

80. If the company wants its margin of safety to equal $40,000, it will need to sell about: A) 1,158 units
B) 1,958 units C) 2,300 units D) 800 units

81. If the company’s fixed expenses decrease by 20%, the break-even point will change from its previous level by about a:
A) 232 unit increase B) 510 unit decrease C) 232 unit decrease D) 510 unit increase

,5

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Use the following to answer questions 82-83:

The following data were supplied by Reader Corporation:

Sales ……………………………. Variable expenses ………….. Fixed expenses ………………
$600,000 $420,000 $141,000

82. The contribution margin is: A) $420,000
B) $54,000 C) $474,000 D) $180,000

83. The break-even point in sales dollars is: A) $470,000
B) $180,000 C) $420,000 D) $561,000

Use the following to answer questions 84-86:

A manufacturer of premium wire strippers has supplied the following data:

Units produced and sold ………………………………………….. Sales revenue …………………………………………………………. Variable manufacturing expense ………………………………. Fixed manufacturing expense ………………………………….. Variable selling and administrative expense ………………. Fixed selling and administrative expense ………………….. Net operating income………………………………………………
560,000 $4,704,000 2,436,000 1,200,000 616,000 272,000 $180,000

84. The company’s margin of safety in units is closest to: A) 384,762
B) 263,704 C) 61,017 D) 522,740

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85. The company’s unit contribution margin is closest to: A) $2.95
B) $5.45 C) $7.30 D) $4.05

86. The company’s degree of operating leverage is closest to: A) 9.18
B) 3.11 C) 2.07 D) 26.13

Use the following to answer questions 87-89:

A company that makes organic fertilizer has supplied the following data:

Bags produced and sold ………………………………………. Sales revenue ……………………………………………………… Variable manufacturing expense …………………………… Fixed manufacturing expense ………………………………. Variable selling and administrative expense …………… Fixed selling and administrative expense ………………. Net operating income…………………………………………..
240,000 $1,896,000 $804,000 $520,000 $180,000 $270,000 $122,000

87. The company’s margin of safety in units is closest to: A) 140,000
B) 202,238 C) 125,714 D) 32,105

88. The company’s unit contribution margin is closest to: A) $4.10
B) $3.80 C) $4.55 D) $7.15

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89. The company’s degree of operating leverage is closest to: A) 1.97
B) 15.54 C) 1.25 D) 7.48

Use the following to answer questions 90-92:

The following data was provided by Truxton Corporation:

Sales …………………………………………………. Selling price ………………………………………. Contribution margin ratio …………………….. Margin of safety percentage ………………….
10,000 units $30 per unit 30%
40%

90. The variable expense per unit is: A) $21
B) $9 C) $12 D) $18

91. The break-even level in sales dollars is: A) $180,000
B) $90,000 C) $210,000 D) $54,000

92. Net operating income at sales of 10,000 units is: A) $0
B) $36,000 C) $90,000 D) $300,000

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Use the following to answer questions 93-95:

A manufacturer of cedar shingles has supplied the following data:

Bundles of cedar shakes produced and sold ……………….. Sales revenue …………………………………………………………. Variable manufacturing expense ………………………………. Fixed manufacturing expense ………………………………….. Variable selling and administrative expense ………………. Fixed selling and administrative expense ………………….. Net operating income………………………………………………
280,000 $2,072,000 $1,134,000 $436,000 $238,000 $164,000 $100,000

93. The company’s break-even in unit sales is closest to: A) 130,149
B) 81,081 C) 25,038 D) 240,000

94. The company’s contribution margin ratio is closest to: A) 66.2%
B) 73.0% C) 27.0% D) 33.8%

95. The company’s degree of operating leverage is closest to: A) 2.80
B) 7.00 C) 2.29 D) 20.72

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Use the following to answer questions 96-98:

A manufacturer of tiling grout has supplied the following data:

Kilograms produced and sold …………………………………… Sales revenue …………………………………………………………. Variable manufacturing expense ………………………………. Fixed manufacturing expense ………………………………….. Variable selling and administrative expense ………………. Fixed selling and administrative expense ………………….. Net operating income………………………………………………
300,000 $1,950,000 $960,000 $266,000 $360,000 $232,000 $132,000

96. The company’s break-even in unit sales is closest to: A) 43,774
B) 237,143 C) 76,615 D) 80,606

97. The company’s contribution margin ratio is closest to: A) 67.7%
B) 74.2% C) 32.3% D) 25.8%

98. The company’s degree of operating leverage is closest to: A) 14.77
B) 2.65 C) 4.77 D) 2.27

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Use the following to answer questions 99-100:

Clarkson Industries produces an electronic calculator that sells for $75 per unit. Variable expenses are $45 per unit and fixed expenses are $150,000.

99. The break-even point for Clarkson Industries is: A) 2,000 units
B) 3,333 units C) 10,000 units D) 5,000 units

100. The contribution margin ratio is: A) 20%
B) 66.6% C) 60% D) 40%

Use the following to answer questions 101-103:

Kerensky Corporation, a wholesale company, has provided the following data:

Sales per period ………………………………….. Selling price ………………………………………. Variable production cost ……………………… Selling expenses …………………………………. Administrative expenses ………………………
1,000 units $35 per unit $15 per unit
$5,000 plus 5% of selling price $3,000 plus 10% of selling price

101. The contribution margin ratio is closest to: A) 57%
B) 58% C) 42% D) 62%

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102. The margin of safety percentage is closest to: A) 46%
B) 60% C) 42% D) 62%

103. The number of units needed to achieve a target net operating income of $20,000 is closest to:
A) 1,404 units B) 542 units C) 1,898 units D) 1,361 units

Use the following to answer questions 104-105:

Mark Corporation produces two models of calculators. The Business model sells for $60, and the Math model sells for $40. The variable expenses are given below:

Variable production costs per unit ……………………………. Variable selling and administrative expenses per unit ….
Business Math Model Model
$15 $16 $9 $6

The fixed expenses are $75,000 per month. The expected monthly sales of each model are: Business, 1,000 units; Math, 500 units.

104. The contribution margin ratio for the Business model is: A) 40 percent
B) 75 percent C) 85 percent D) 60 percent

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105. The break-even point for the expected sales mix is (round to nearest whole unit): A) 833 of each
B) 1,667 Business and 833 Math C) 1,667 of each
D) 833 Business and 1,667 Math

Use the following to answer questions 106-108:

Next year, Coma Paint Company expects to sell 18,000 gallons of paint. Coma is budgeting the following operating results for next year:

Sales ………………………………………. Variable expenses …………………….. Contribution margin …………………. Fixed expenses ………………………… Net operating income………………..
$270,000
108,000 162,000
90,000 $ 72,000

106. What is Coma’s break-even point next year in sales dollars? A) $49,500
B) $90,000 C) $108,000 D) $150,000

107. How many gallons of paint would Coma have to sell next year in order to double its projected net operating income of $72,000?
A) 22,800 gallons B) 25,200 gallons C) 26,000 gallons D) 36,000 gallons

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108. Assume that Coma wants to sell 20,000 gallons next year. What minimum selling price would Coma have to charge for each gallon in order to still obtain its projected net operating income of $72,000?
A) $11.00 B) $13.50 C) $14.00 D) $14.10

,6

Use the following to answer questions 109-111:

The following budgeted income statement was prepared by Fullton Corporation:

Sales (100 units at $100 a unit) ………………….. Cost of goods sold:
Direct labor (variable) ……………………………. Direct materials …………………………………….. Variable factory overhead ………………………. Fixed factory overhead …………………………… Gross margin ……………………………………………
Selling expenses:
Variable ……………………………………………….. Fixed …………………………………………………….
Administrative expenses:
Variable ……………………………………………….. Fixed ……………………………………………………. Net operating income………………………………..
$10,000

$1,500 1,400 1,000
500 4,400 5,600

600 1,000

500
1,000 3,100 $ 2,500

109. How many units would have to be sold to break even? A) 50
B) 58 C) 68 D) 75

Source: CPA, adapted

110. What would the net operating income be if sales increase by 25%? A) $3,125
B) $3,750 C) $4,000 D) $5,000

Source: CPA, adapted

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111. What would be the sales at the break-even point if fixed factory overhead increases by $1,700?
A) $6,700 B) $8,400 C) $8,666 D) $9,200

,5 Source: CPA, adapted

Use the following to answer questions 112-113:

Barnes Corporation’s income statement for last year appears below:

Sales ……………………………………………… Cost of sales:
Direct materials ……………………………. Direct labor (variable) …………………… Variable overhead ………………………… Fixed overhead …………………………….. Gross margin …………………………………..
Selling, general, and administrative: Variable ………………………………………. Fixed ……………………………………………
Net operating income……………………….

$250,000 150,000 75,000
100,000

200,000
250,000
$1,500,000

575,000 925,000

450,000 $ 475,000

112. The break-even point last year was: A) $146,341
B) $636,364 C) $729,730 D) $181,818

Source: CMA, adapted

113. The management of Barnes Corporation anticipates a 10 percent increase in total sales, a 12 percent increase in total variable expenses, and a $45,000 increase in total fixed expenses next year. The break-even point for next year is:
A) $729,027 B) $862,103 C) $214,018 D) $474,000

,5 Source: CMA, adapted

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Use the following to answer questions 114-117:

Holger Incorporated, which produces and sells a single product, has provided the following data:

Sales ……………………………. Selling price …………………. Variable expense …………… Fixed expense ………………..
2,000 units $60 per unit $40 per unit $20,000

Consider each of the following questions independently.

114. If the dollar contribution margin per unit is increased by 10% and if total fixed expense is decreased by 20%, net operating income is expected to:
A) increase by $2,000 B) increase by $12,000 C) increase by $8,000 D) increase by $16,000

115. If the sales volume decreases by 25% and the variable expense per unit increases by 15%, net operating income is expected to:
A) decrease by $19,000 B) decrease by $1,000 C) increase by $1,750 D) decrease by $15,000

116. If the company’s fixed expenses increased by $8,000, how many units must be sold to reach a target net operating income of $36,000:
A) 1,400 units B) 2,200 units C) 2,400 units D) 3,200 units

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117. If the company’s sales volume in units decreases by 30%, and if it desires a targeted net operating income of $29,000, then the selling price should be:
A) $58.85 B) $60.75 C) $64.50 D) $75.00

,6

Use the following to answer questions 118-119:

Given the following data:

Sales ………………………………………… Less variable expenses ……………….. Contribution margin …………………… Less fixed expenses ……………………. Net operating income………………….
Total $30,000
18,000 12,000
9,000 $ 3,000
Per Unit $10
6 $ 4

118. If sales decrease by 500 units, by how much would fixed expenses have to be reduced to maintain current net operating income?
A) $5,000 B) $3,000 C) $1,500 D) $2,000

119. The company has an opportunity to secure a special order of 800 units if it is willing to drop the selling price on these units to $9. In addition to the usual variable expenses, the costs of securing the special order would be $1,000. The company’s regular sales would not be affected by the special order. If the special order is accepted, the company’s overall net operating income will:
A) increase $2,400 B) increase $1,400 C) increase $2,200 D) decrease $2,200

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Use the following to answer questions 120-122:

Junior Bodway, Inc., has provided the following budgeted data:

Sales ……………………………. Selling price …………………. Variable expense …………… Fixed expense ………………..
10,000 units $50 per unit $30 per unit $180,000

120. What is the company’s break-even point in sales dollars? A) $450,000
B) $180,000 C) $300,000 D) $500,000

121. How many units would the company have to sell in order to have a net operating income of $40,000?
A) 20,000 units B) 9,000 units C) 11,000 units D) 7,333 units

122. At the budgeted sales level of 10,000 units, what is the company’s degree of operating leverage?
A) 10.0 B) 6.0 C) 22.5 D) 5.0

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Use the following to answer questions 123-125:

Pricher Corporation’s income statement for last year appears below:

Sales …………………………………………………. Cost of goods sold:
Direct materials ……………………………….. Direct labor (variable) ………………………. Variable manufacturing overhead ………. Fixed manufacturing overhead …………… Gross margin ………………………………………
Selling and administrative expenses: Variable ………………………………………….. Fixed ……………………………………………….
Net operating income…………………………..

$500,000 150,000 50,000
600,000

100,000
300,000
$2,000,000

1,300,000 700,000

400,000 $ 300,000

123. The break-even point last year was: A) $1,500,000
B) $2,571,429 C) $1,250,000 D) $900,000

124. The degree of operating leverage last year was: A) 0.33
B) 2.33 C) 4.00 D) 3.33

125. If fixed selling and administrative expenses increase by $60,000 and sales remain at the $2,000,000 level, what is the margin of safety in sales dollars:
A) $300,000 B) $200,000 C) $500,000 D) $400,000

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Use the following to answer questions 126-127:

Highjinks Inc. has provided the following budgeted data:

Sales ……………………………. Selling price …………………. Variable expense …………… Fixed expense ………………..
20,000 units $100 per unit $70 per unit $450,000

126. What is the company’s margin of safety as a percentage of sales? A) 50%
B) 25% C) 75% D) 100%

127. How many units would the company have to sell in order to have a net operating income equal to 5% of total sales dollars?
A) 18,000 units B) 20,000 units C) 15,333 units D) 14,286 units

Use the following to answer questions 128-129:

Douglas Corporation produces and sells two models of vacuum cleaners, Standard and Deluxe. Company records show the following data relating to these two products:

Selling price per unit ………………………………………………. Variable production costs per unit ……………………………. Variable selling and admin. expense per unit …………….. Expected monthly sales in units ………………………………..
Standard Deluxe $140 $155 $110 $116 $15 $12
600 1,200

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The company’s total monthly fixed expense is $15,000.

128. The break-even in sales dollars for the expected sales mix is closest to: A) $140,000
B) $85,000 C) $107,000 D) $98,000

129. If the expected monthly sales in units were divided equally between the two models (900 Standard and 900 Deluxe), the break-even level of sales would be:
A) the same as with the expected sales mix. B) higher than with the expected sales mix. C) lower than with the expected sales mix.
D) cannot be determined with the available data.

Essay Questions

130. Baker Company has a product that sells for $20 per unit. The variable expenses are $12 per unit, and fixed expenses total $30,000 per year.

Required:
a. What is the total contribution margin at the break-even point? b. What is the contribution margin ratio for the product?
c. If total sales increase by $20,000 and fixed expenses remain unchanged, by how much would net operating income be expected to increase?
d. The marketing manager wants to increase advertising by $6,000 per year. How many additional units would have to be sold to increase overall net operating income by $2,000?

,3,4

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131. Candice Corporation has decided to introduce a new product. The product can be manufactured using either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows:

Variable manufacturing cost per unit ………………… Fixed manufacturing cost per year …………………….
Capital -intensive
$14.00 $2,440,000
Labor
-intensive $17.60
$1,320,000

The company’s market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative expenses of the new product are $500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured.

Required:
a. Calculate the break-even point in units if Candice Corporation uses the: 1. capital-intensive manufacturing method.
2. labor-intensive manufacturing method.
b. Determine the unit sales volume at which the net operating income is the same for the two manufacturing methods.
c. Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the:
1. capital-intensive manufacturing method. 2. labor-intensive manufacturing method.
d. What is your recommendation to management concerning which manufacturing method should be used?

132. Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi’s management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed expenses associated with the new product are budgeted at $450,000 for the year. The variable expenses of the new product are $16 per unit.

Required:
a. How many units of the new product must Delphi sell during the next fiscal year in order to break even on the product?
b. What is the profit Delphi would earn on the new product if all of the manufacturing capacity allocated by management is used and the product is sold for $36 per unit?
c. What is the degree of operating leverage for the new product if 25,000 units are sold for $36 per unit?
d. The Marketing Department would like more manufacturing capacity to be devoted to the new product. What would be the percentage increase in net operating income for the new product if its unit sales could be expanded by 10% without any increase in fixed expenses and without any change in the unit selling price and unit variable expense?
e. Delphi’s management has stipulated that the new product must earn a profit of at least $125,000 in the next fiscal year. What unit selling price would achieve this target profit if all of the manufacturing capacity allocated by management is used and all of the output can be sold at that selling price?

133. Parkins Company produces and sells a single product. The company’s income statement for the most recent month is given below:

Sales (6,000 units at $40 per unit) …………. Less manufacturing costs:
Direct materials ……………………………….. Direct labor (variable) ………………………. Variable factory overhead …………………. Fixed factory overhead ……………………… Gross margin ………………………………………
Less selling and other expenses:
Variable selling and other expenses ……. Fixed selling and other expenses ………… Net operating income …………………………..

$48,000 60,000 12,000
30,000

24,000
42,000
$240,000

150,000 90,000

66,000 $ 24,000

There are no beginning or ending inventories.

Required:
a. Compute the company’s monthly break-even point in units of product.
b. What would the company’s monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses?
c. What dollar sales must the company achieve in order to earn a net operating income of $50,000 per month?
d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in units.

134. Zoran Corporation manufactures and sells a single product; cordless telephones. Zoran is considering upgrading its current manufacturing facilities with more modern equipment. Relevant cost data under the current facility and the upgraded facility is provided below:

Manufacturing costs:
Direct materials cost per unit …………….. Direct labor cost per unit …………………… Variable overhead cost per unit ………….. Fixed overhead cost in total ……………….
Selling and administrative expenses: Variable expense per unit ………………….. Fixed expense in total ………………………..
Current

$20.00 $18.00 $34.00 $43,000

$5.00 $12,000
Upgraded

$20.00 $10.00 $24.00 $160,000

$5.00 $12,000

Under either system, Zoran will sell the cordless phones for $125 per phone.

Required:
a. What is the break-even point (in number of phones) of each option?
b. At what level of sales (in number of phones) will it start being more profitable for Zoran to have the upgraded facilities?

135. Penury Company offers two products. At present, the following represents the usual results of a month’s operations:

Sales revenue ………………… Variable expenses ………….. Contribution margin ………. Fixed expenses ……………… Net operating income ……..
Product K Per
Amount Unit $120,000 $1.20
60,000 0.60 $ 60,000 $0.60
Product L Per
Amount Unit $80,000 $0.80
60,000 0.60 $20,000 $0.20

Combined Amount
$200,000
120,000 80,000
50,000 $ 30,000

Required:
a. Find the break-even point in terms of dollars. b. Find the margin of safety in terms of dollars.
c. The company is considering decreasing product K’s unit sales to 80,000 and increasing product L’s unit sales to 180,000, leaving unchanged the selling price per unit, variable expense per unit, and total fixed expenses. Would you advise adopting this plan?
d. Refer to (c) above. Under the new plan, find the break-even point in terms of dollars.
e. Under the new plan in (c) above, find the margin of safety in terms of dollars.

136. Lobo, International has two divisions, Manufacturing and Retail which had the following operating results over the last two years:

Sales (in units) ……………………. Sales (in dollars) …………………. Less cost of goods sold ………… Gross margin ………………………. Less selling and administrative expenses …………………………. Net operating income……………
Manufacturing Division Year 1 Year 2
5,000 6,500 $400,000 $520,000
290,000 353,000 110,000 167,000

50,000 59,000 $ 60,000 $108,000
Retail Division Year 1 Year 2
2,000 2,400 $250,000 $300,000
160,000 192,000 90,000 108,000

52,000 56,000 $ 38,000 $ 52,000

Assume that the cost structure in each division above did not change over the two years. Use the high-low method as needed to estimate variable and fixed expenses.

Required:
a. Calculate the break-even point in sales dollars for each division.
b. Calculate the degree of operating leverage for the Manufacturing Division for each year.

Chapter 7 Variable Costing: A Tool for Management

True/False Questions

1. The inventory value shown on the balance sheet is generally higher under absorption costing than under variable costing.

2. Under variable costing, inventoriable product costs consist of direct materials, direct labor, variable manufacturing overhead and variable selling and administration expenses.

3. Under variable costing, an increase in the fixed factory overhead will have no effect on the unit product cost.

4. Under the absorption costing method, a portion of fixed manufacturing overhead cost is allocated to each unit of product.

5. Under variable costing, it is possible to defer a portion of the fixed manufacturing overhead costs of the current period to future periods through the inventory account.

6. Under absorption costing, a portion of fixed manufacturing overhead cost is released from inventory when sales volume exceeds production volume.

7. Contribution margin and gross margin mean the same thing.

8. When reconciling variable costing and absorption costing net operating income, fixed manufacturing overhead costs deferred in inventory under absorption costing should be deducted from variable costing net operating income to arrive at the absorption costing net operating income.

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9. If production equals sales for the period, absorption costing and variable costing will produce the same net operating income under LIFO.

10. When the number of units in inventories decrease between the beginning and end of the period, absorption costing net operating income will typically be greater than variable costing net operating income.

11. When viewed over the long term, accumulated net operating income will be the same for variable and absorption costing if there are no ending inventories at the end of the term.

12. Under absorption costing, the profit for a period is not affected by changes in inventory.

13. When using absorption costing, a company may be able to show a profit even if it is operating below the breakeven point.

14. Variable costing is more compatible with cost-volume-profit analysis than is absorption costing.

15. Just-In-Time (JIT) methods generally increase the difference between absorption and variable costing net operating income.

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Multiple Choice Questions

16. Under variable costing, fixed manufacturing overhead is: A) carried in a liability account.
B) carried in an asset account. C) ignored.
D) immediately expensed as a period cost.

,2

17. Which of the following is true of a company that uses absorption costing? A) Net operating income fluctuates directly with changes in sales volume.
B) Fixed production and fixed selling costs are considered to be product costs. C) Unit product costs can change as a result of changes in the number of units
manufactured.
D) Variable selling expenses are included in product costs.

,2

18. Under absorption costing, fixed manufacturing overhead costs: A) are deferred in inventory when production exceeds sales. B) are always treated as period costs.
C) are released from inventory when production exceeds sales. D) none of these.

,2

19. Which of the following costs at a manufacturing company would be treated as a product cost under both absorption costing and variable costing?

Variable overhead
A) Yes B) Yes C) No D) No
Variable selling and administrative Yes No Yes No

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20. Under absorption costing, product costs include:

Fixed factory overhead
A) No B) No C) Yes D) Yes
Variable factory overhead No Yes Yes No

Source: CPA, adapted

21. Which of the following are included in product costs under variable costing?

I. Variable manufacturing overhead. II. Fixed manufacturing overhead.
III. Selling and administrative expenses.

A) I, II, and III. B) I and III.
C) I and II. D) I.

22. Under variable costing:
A) net operating income will tend to move up and down in response to changes in levels of production.
B) inventory costs will be lower than under absorption costing.
C) net operating income will tend to vary inversely with production changes. D) net operating income will always be higher than under absorption costing.

,3,4

23. In an income statement prepared using the variable costing method, fixed selling and administrative expenses would:
A) be used in the computation of the contribution margin.
B) be used in the computation of net operating income but not in the computation of the contribution margin.
C) be treated the same as variable manufacturing expenses. D) not be used.

Source: CPA, adapted

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24. In an income statement prepared using the variable costing method, fixed manufacturing overhead would:
A) not be used.
B) be used in the computation of the contribution margin.
C) be used in the computation of net operating income but not in the computation of the contribution margin.
D) be treated the same as variable manufacturing overhead.

Source: CPA, adapted

25. In an income statement prepared as an internal report using variable costing, variable selling and administrative expenses would:
A) not be used.
B) be used in the computation of the contribution margin.
C) be used in the computation of net operating income but not in the computation of the contribution margin.
D) be treated the same as fixed selling and administrative expenses.

26. When production exceeds sales, the net operating income reported under absorption costing generally will be:
A) less than net operating income reported under variable costing.
B) greater than net operating income reported under variable costing. C) equal to net operating income reported under variable costing.
D) higher or lower because no generalization can be made.

27. When sales exceed production, the net operating income reported under variable costing generally will be:
A) less than net operating income reported under absorption costing.
B) greater than net operating income reported under absorption costing. C) equal to net operating income reported under absorption costing.
D) higher or lower because no generalization can be made.

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28. A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced under absorption costing in year 2 was the same as in year 1. The year 2 variable costing statement reported a profit whereas the year 2 absorption costing statement reported a loss. The difference in reported income could be explained by units produced in year 2 being:
A) Less than units sold in year 2.
B) Less than the activity level used for allocating overhead to the product. C) In excess of the activity level used for allocating overhead to the product. D) In excess of units sold in year 2.

Source: CPA, adapted

29. The type of costing that provides the best information for breakeven analysis is: A) job-order costing.
B) variable costing. C) process costing. D) absorption costing.

Source: CMA, adapted

30. Advocates of variable costing argue that:
A) fixed production costs should be added to inventory because such costs have future service potential and therefore are inventoriable as an asset.
B) fixed production costs should be capitalized as an asset and amortized over future periods when benefits from such costs are expected to be received.
C) fixed production costs should be charged to the period in which they are incurred unless sales do not equal production in which case any difference should be capitalized as an asset and amortized over future periods.
D) fixed production costs should be charged to the period in which they are incurred.

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31. Gyro Gear Company produces a single product, a special gear used in automatic transmissions. Each gear sells for $28, and the company sells 500,000 gears each year. Unit cost data are presented below:

Direct material ……………………… Direct labor ………………………….. Manufacturing overhead ………… Selling & administrative …………
Variable Fixed $6.00
$5.00
$2.00 $7.00 $4.00 $3.00

The unit product cost of gears under variable costing is: A) $13
B) $20 C) $17 D) $27

Source: CPA, adapted

32. A company produces a single product. Variable production costs are $12 per unit and variable selling and administrative expenses are $3 per unit. Fixed manufacturing overhead totals $36,000 and fixed selling and administration expenses total $40,000. Assuming a beginning inventory of zero, production of 4,000 units and sales of 3,600 units, the dollar value of the ending inventory under variable costing would be:
A) $4,800 B) $8,400 C) $6,000 D) $3,600

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33. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
0 7,700 7,500 200

$40 $34 $3 $10

$146,300 $60,000

What is the unit product cost for the month under variable costing? A) $106
B) $87 C) $96 D) $77

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34. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
0 2,900 2,500 400

$27 $20 $6 $4

$72,500 $2,500

What is the unit product cost for the month under variable costing? A) $57
B) $53 C) $78 D) $82

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35. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price …………………………………………………..

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
$85

0 5,000 4,600 400

$19 $15 $2 $10

$110,000 $69,000

What is the total period cost for the month under the variable costing approach? A) $179,000
B) $110,000 C) $115,000 D) $225,000

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36. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price …………………………………………………..

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
$143

0 8,200 7,800 400

$49 $42 $3 $7

$270,600 $46,800

What is the total period cost for the month under the variable costing approach? A) $101,400
B) $372,000 C) $317,400 D) $270,600

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37. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price …………………………………………………..

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
$78

0 5,300 4,900 400

$31 $14 $2 $5

$68,900 $58,800

What is the total period cost for the month under the absorption costing approach? A) $152,200
B) $83,300 C) $68,900 D) $58,800

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38. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price …………………………………………………..

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
$100

0 2,400 2,100 300

$31 $11 $1 $8

$79,200 $8,400

What is the total period cost for the month under the absorption costing approach? A) $79,200
B) $8,400 C) $104,400 D) $25,200

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39. The following data pertain to last year’s operations at Tredder Corporation, a company that produces a single product:

Units in beginning inventory ……………………… Units produced ………………………………………… Units sold …………………………………………………

Selling price per unit …………………………………

Variable costs per unit:
Direct materials …………………………………….. Direct labor …………………………………………… Variable manufacturing overhead ……………. Variable selling and administrative …………..

Fixed costs per year:
Fixed manufacturing overhead ………………… Fixed selling and administrative ………………
0 20,000 19,000

$100.00

$12.00 $25.00 $3.00 $2.00

$500,000 $600,000

What was the variable costing net operating income last year? A) $12,000
B) $57,000 C) $2,000 D) $27,000

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40. The following data pertain to last year’s operations at Hruska Corporation, a company that produces a single product:

Units in beginning inventory ……………………… Units produced ………………………………………… Units sold …………………………………………………

Selling price per unit …………………………………

Variable costs per unit:
Direct materials …………………………………….. Direct labor …………………………………………… Variable manufacturing overhead ……………. Variable selling and administrative …………..

Fixed costs per year:
Fixed manufacturing overhead ………………… Fixed selling and administrative ………………
0 5,000 4,000

$180.00

$20.00 $30.00 $10.00 $20.00

$100,000 $300,000

What was the variable costing net operating income last year? A) $20,000
B) $80,000 C) $0
D) $60,000

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41. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$102

0 8,700 8,300 400

$29 $31 $2 $6

$269,700 $8,300

The total contribution margin for the month under the variable costing approach is: A) $282,200
B) $74,700 C) $332,000 D) $12,500

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42. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$121

0 5,300 5,200 100

$27 $46 $1 $5

$169,600 $31,200

The total contribution margin for the month under the variable costing approach is: A) $48,800
B) $244,400 C) $218,400 D) $78,000

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43. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$123

0 5,900 5,700 200

$40 $32 $3 $5

$135,700 $108,300

The total gross margin for the month under the absorption costing approach is: A) $245,100
B) $162,100 C) $142,500 D) $5,700

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44. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$86

0 3,500 3,400 100

$37 $15 $5 $10

$24,500 $27,200

The total gross margin for the month under the absorption costing approach is: A) $81,200
B) $74,800 C) $64,600 D) $13,600

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45. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$85

0 2,900 2,700 200

$22 $13 $3 $5

$46,400 $51,300

What is the net operating income for the month under variable costing? A) $8,100
B) $15,700 C) $18,900 D) $3,200

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46. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$103

0 1,700 1,600 100

$46 $14 $4 $9

$11,900 $22,400

What is the net operating income for the month under variable costing? A) $7,300
B) $14,400 C) $13,700 D) $700

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47. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….. $103

Units in beginning inventory ………………… 0 Units produced …………………………………… 1,700 Units sold …………………………………………… 1,400 Units in ending inventory …………………….. 300

Variable costs per unit:
Direct materials ……………………………….. $39 Direct labor ……………………………………… $32 Variable manufacturing overhead ………. $6 Variable selling and administrative …….. $5

Fixed costs:
Fixed manufacturing overhead …………… $6,800 Fixed selling and administrative ………… $8,400

What is the net operating income for the month under absorption costing? A) $14,200
B) ($8,900) C) $1,200 D) $15,400

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48. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$122

0 8,600 8,500 100

$34 $37 $7 $4

$292,400 $34,000

What is the net operating income for the month under absorption costing? A) $17,000
B) $3,400 C) $5,800 D) $13,600

49. Stead Company produces a single product. Last year, the company’s net operating income computed by the absorption costing method was $6,400, and its net operating income computed by the variable costing method was $9,100. The company’s unit product cost was $17 under variable costing and $20 under absorption costing. If the ending inventory consisted of 2,100 units, the beginning inventory in units must have been:
A) 1,200 B) 2,100 C) 3,000 D) 4,800

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50. King Company produces a single product. During March, the company had net operating income under absorption costing that was $3,500 lower than under variable costing. The company sold 7,000 units in March, and its variable costs were $7 per unit, of which $3 was variable selling expense. If fixed manufacturing overhead was $2 per unit under absorption costing, then how many units did the company produce during March?
A) 5,250 units B) 8,750 units C) 6,500 units D) 6,125 units

51. Johnson Company produces a single product. Last year, the company had 25,000 units in its ending inventory. Johnson’s variable production costs were $10 per unit and fixed manufacturing overhead costs were $5 per unit. The company’s net operating income last year was $10,000 higher under variable costing than it was under absorption costing. Given these facts, the number of units of product in beginning inventory last year must have been:
A) 24,000 units B) 27,000 units C) 23,000 units D) 24,333 units

52. Rose Corporation produces a single product. Last year, the company had net operating income of $50,000 using variable costing. Beginning and ending inventories were 13,000 units and 18,000 units, respectively. If the fixed manufacturing overhead cost was $2.00 per unit, what would have been the net operating income using absorption costing?
A) $40,000 B) $50,000 C) $60,000 D) $86,000

Source: CPA, adapted

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53. A company that produces a single product had a net operating income of $85,500 using variable costing and a net operating income of $90,000 using absorption costing. Total fixed manufacturing overhead was $150,000, and production was 100,000 units. Between the beginning and the end of the year, the inventory level:
A) increased by 4,500 units B) decreased by 4,500 units C) increased by 3,000 units D) decreased by 3,000 units

54. Olympia Company produces a single product. Last year, the company had a net operating income of $92,000 using absorption costing and a net operating income of $98,600 using variable costing. If the fixed manufacturing overhead cost was $3.00 per unit for the last two years, and if production was 18,000 units, then sales in units last year were:
A) 24,600 B) 20,200 C) 15,800 D) 15,000

55. Welk Company produces a single product. Last year, the company had 16,000 units in its beginning inventory. During the year, the company’s variable production costs were $6 per unit and its fixed manufacturing overhead costs were $4 per unit. The company’s net operating income for the year was $24,000 higher under absorption costing than it was under variable costing. Given these facts, the number of units in the ending inventory must have been:
A) 22,000 units B) 10,000 units C) 6,000 units D) 4,000 units

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Use the following to answer questions 56-58:

Cutterski Corporation manufactures a propeller. Shown below is Cutterski’s cost structure:

Manufacturing cost ………………… Selling and administrative ……….
Variable cost per propeller $114
$20
Total fixed cost for the year
$810,000 $243,000

In its first year of operations, Cutterski produced 60,000 propellers but only sold 54,000.

56. What is the total cost that would be assigned to Cutterski’s finished goods inventory at the end of the first year of operations under the variable costing method?
A) $765,000 B) $684,000 C) $804,000 D) $912,000

57. At what amount will Cutterski report its cost of goods sold for this first year for external reporting purposes?
A) $6,156,000 B) $6,885,000 C) $6,966,000 D) $8,208,000

58. Which costing method (variable or absorption) will generate a higher net operating income in Cutterski’s first year of operations and by how much?
A) variable by $81,000 B) variable by $108,000 C) absorption by $81,000
D) absorption by $108,000

,3

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Use the following to answer questions 59-66:

Abbey Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………
$129

0 6,300 6,100 200

$32 $50 $5 $11

$88,200 $97,600

59. What is the unit product cost for the month under variable costing? A) $87
B) $101 C) $112 D) $98

60. What is the unit product cost for the month under absorption costing? A) $101
B) $98 C) $87 D) $112

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61. The total contribution margin for the month under the variable costing approach is: A) $170,800
B) $256,200 C) $100,900 D) $189,100

62. The total gross margin for the month under the absorption costing approach is: A) $189,100
B) $6,100 C) $170,800 D) $191,000

63. What is the total period cost for the month under the variable costing approach? A) $252,900
B) $164,700 C) $88,200 D) $185,800

64. What is the total period cost for the month under the absorption costing approach? A) $88,200
B) $252,900 C) $97,600 D) $164,700

65. What is the net operating income for the month under variable costing? A) $3,300
B) $2,800 C) ($14,100) D) $6,100

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66. What is the net operating income for the month under absorption costing? A) $3,300
B) $2,800 C) ($14,100) D) $6,100

Use the following to answer questions 67-74:

Abbitt Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………
$142

0 2,500 2,300 200

$22 $57 $1 $6

$82,500 $41,400

67. What is the unit product cost for the month under variable costing? A) $80
B) $119 C) $113 D) $86

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68. What is the unit product cost for the month under absorption costing? A) $86
B) $119 C) $113 D) $80

69. The total contribution margin for the month under the variable costing approach is: A) $66,700
B) $128,800 C) $46,300 D) $142,600

70. The total gross margin for the month under the absorption costing approach is: A) $11,500
B) $66,700 C) $89,300 D) $128,800

71. What is the total period cost for the month under the variable costing approach? A) $55,200
B) $82,500 C) $137,700 D) $123,900

72. What is the total period cost for the month under the absorption costing approach? A) $137,700
B) $55,200 C) $41,400 D) $82,500

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73. What is the net operating income for the month under variable costing? A) $4,900
B) $11,500 C) $6,600 D) ($11,100)

74. What is the net operating income for the month under absorption costing? A) ($11,100)
B) $11,500 C) $6,600 D) $4,900

Use the following to answer questions 75-78:

Feasal Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………

Garrison, Managerial Accounting, 12th Edition
$108

0 7,700 7,500 200

$26 $38 $3 $4

$184,800 $90,000

343

Chapter 7 Variable Costing: A Tool for Management

75. What is the unit product cost for the month under variable costing? A) $71
B) $67 C) $95 D) $91

76. What is the unit product cost for the month under absorption costing? A) $71
B) $67 C) $95 D) $91

77. What is the net operating income for the month under variable costing? A) ($10,700)
B) $7,500 C) $4,800 D) $2,700

78. What is the net operating income for the month under absorption costing? A) $2,700
B) $7,500 C) $4,800 D) ($10,700)

344 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 79-82:

Feheln Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………
$114

0 7,300 7,200 100

$30 $53 $3 $8

$73,000 $57,600

79. What is the unit product cost for the month under variable costing? A) $94
B) $86 C) $96 D) $104

80. What is the unit product cost for the month under absorption costing? A) $104
B) $94 C) $96 D) $86

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Chapter 7 Variable Costing: A Tool for Management

81. What is the net operating income for the month under variable costing? A) $1,000
B) $14,400 C) $13,400 D) $4,800

82. What is the net operating income for the month under absorption costing? A) $14,400
B) $13,400 C) $1,000 D) $4,800

Use the following to answer questions 83-86:

Jamil Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………
$71

400 8,100 8,200 300

$20 $15 $6 $4

$64,800 $139,400

The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month.

346 Garrison, Managerial Accounting, 12th Edition

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83. What is the unit product cost for the month under variable costing? A) $49
B) $41 C) $53 D) $45

84. What is the unit product cost for the month under absorption costing? A) $45
B) $53 C) $41 D) $49

85. What is the net operating income for the month under variable costing? A) $9,000
B) $13,100 C) $8,200 D) $2,400

86. What is the net operating income for the month under absorption costing? A) $13,100
B) $9,000 C) $8,200 D) $2,400

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Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 87-90:

Jameson Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………
$80

600 8,400 8,600 400

$24 $33 $3 $5

$117,600 $8,600

The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month.

87. What is the unit product cost for the month under variable costing? A) $79
B) $60 C) $74 D) $65

88. What is the unit product cost for the month under absorption costing? A) $74
B) $60 C) $79 D) $65

348 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

89. What is the net operating income for the month under variable costing? A) $14,800
B) $2,800 C) $0
D) $5,600

90. What is the net operating income for the month under absorption costing? A) $5,600
B) $2,800 C) $14,800 D) $0

Use the following to answer questions 91-94:

Habib Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………

Garrison, Managerial Accounting, 12th Edition
$141

0 3,700 3,500 200

$38 $55 $5 $9

$51,800 $66,500

349

Chapter 7 Variable Costing: A Tool for Management

91. What is the unit product cost for the month under variable costing? A) $107
B) $98 C) $112 D) $121

92. The total contribution margin for the month under the variable costing approach is: A) $67,200
B) $101,500 C) $119,000 D) $150,500

93. What is the total period cost for the month under the variable costing approach? A) $149,800
B) $98,000 C) $51,800 D) $118,300

94. What is the net operating income for the month under variable costing? A) $2,800
B) $700
C) ($18,900) D) $3,500

350 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 95-98:

Haas Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………
$99

0 2,400 2,100 300

$12 $57 $7 $10

$19,200 $2,100

95. What is the unit product cost for the month under variable costing? A) $94
B) $84 C) $76 D) $86

96. The total contribution margin for the month under the variable costing approach is: A) $48,300
B) $27,300 C) $8,100 D) $31,500

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Chapter 7 Variable Costing: A Tool for Management

97. What is the total period cost for the month under the variable costing approach? A) $23,100
B) $42,300 C) $19,200 D) $21,300

98. What is the net operating income for the month under variable costing? A) $2,400
B) ($16,800) C) $8,400 D) $6,000

Use the following to answer questions 99-100:

Illa Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………

352
$131

0 5,700 5,400 300

$46 $25 $6 $7

$193,800 $43,200

Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

99. What is the unit product cost for the month under variable costing? A) $111
B) $118 C) $77 D) $84

100. What is the net operating income for the month under variable costing? A) $10,200
B) $27,000 C) ($6,300) D) $16,800

Use the following to answer questions 101-102:

Ibushi Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………………….

Units in beginning inventory ………………………… Units produced …………………………………………… Units sold ………………………………………………….. Units in ending inventory ……………………………..

Variable costs per unit:
Direct materials ……………………………………….. Direct labor …………………………………………….. Variable manufacturing overhead ………………. Variable selling and administrative ……………..

Fixed costs:
Fixed manufacturing overhead …………………… Fixed selling and administrative …………………

Garrison, Managerial Accounting, 12th Edition
$117

0 7,900 7,600 300

$29 $37 $4 $8

$205,400 $91,200

353

Chapter 7 Variable Costing: A Tool for Management

101. What is the unit product cost for the month under variable costing? A) $104
B) $70 C) $78 D) $96

102. What is the net operating income for the month under variable costing? A) ($21,200)
B) $7,600 C) $7,800 D) ($200)

Use the following to answer questions 103-104:

Johnston Company manufactures a single product. The company has supplied the following data:

Selling price ………………………………………. Variable costs per unit:
Production ………………………………………. Selling and administrative ………………….
Fixed costs in total:
Production ………………………………………. Selling and administrative ………………….
$30

$8 $5

$80,000 $60,000

Last year there was no beginning inventory. During the year, 20,000 units were produced and 17,000 units were sold.

103. Under absorption costing, the unit product cost would be: A) $20
B) $12 C) $13 D) $8

354 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

104. The company’s net operating income last year under variable costing would be: A) $110,000
B) $149,000 C) $161,000 D) $170,000

Use the following to answer questions 105-107:

The following data were provided by Rider, Inc, which produces a single product:

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………..

Variable costs per unit:
Production ………………………………………. Selling and administrative ………………….
Fixed costs, in total:
Production ………………………………………. Selling and administrative ………………….
0 5,000 4,500

$10 $4

$15,000 $10,000

105. Under variable costing, the unit product cost is: A) $14
B) $13 C) $10 D) $16

106. Under absorption costing, the unit product cost is: A) $19
B) $13 C) $10 D) $14

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Chapter 7 Variable Costing: A Tool for Management

107. For the year in question, one would expect the net operating income under absorption costing to be:
A) higher than the net operating income under variable costing. B) lower than the net operating income under variable costing. C) the same as the net operating income under variable costing. D) none of these.

Use the following to answer questions 108-110:

Rebel Company manufactures a single product and has the following cost structure:

Variable costs per unit:
Production ………………………………………… Selling and administrative ……………………
Fixed costs in total:
Production ………………………………………… Selling and administrative ……………………

$5 $3

$32,000 $16,000

Last year there were no beginning inventories, 8,000 units were produced, and 7,800 units were sold.

108. Under variable costing, the unit product cost would be: A) $5
B) $8 C) $9 D) $11

109. The carrying value on the balance sheet of the ending inventory under variable costing would be:
A) $1,400 higher than under absorption costing. B) $1,400 less than under absorption costing. C) $800 less than under absorption costing.
D) the same as under absorption costing.

356 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

110. Under absorption costing, the cost of goods sold would be: A) $62,400
B) $70,200 C) $71,000 D) $39,000

Use the following to answer questions 111-112:

Bayat Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$82

0 6,000 5,700 300

$46 $15 $3 $10

$30,000 $5,700

111. What is the unit product cost for the month under variable costing? A) $79
B) $64 C) $74 D) $69

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Chapter 7 Variable Costing: A Tool for Management

112. What is the unit product cost for the month under absorption costing? A) $69
B) $74 C) $79 D) $64

Use the following to answer questions 113-114:

Beanston Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$104

0 2,800 2,500 300

$18 $44 $4 $6

$50,400 $22,500

113. What is the unit product cost for the month under variable costing? A) $90
B) $66 C) $72 D) $84

358 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

114. What is the unit product cost for the month under absorption costing? A) $66
B) $72 C) $90 D) $84

Use the following to answer questions 115-116:

The following data were provided by Trusty Corp., which produces a single product:

Year 1 Year 2 Year 3 Units produced ……….. 6,000 7,000 5,000 Units sold ………………. 6,000 6,000 6,000

The selling price per unit, variable costs per unit, and total fixed costs are the same for each year.

115. If variable costing is in use, one would expect:
A) net operating income to be erratic over the three-year period. B) net operating income to be the same for each year.
C) the break-even point to be lower in Year 2 than in Year 3. D) net operating income to be higher in Year 2 than in Year 1.

116. Taking the three years together, one would expect total net operating income to be: A) the same under either absorption or variable costing.
B) higher under absorption costing than under variable costing. C) lower under absorption costing than under variable costing. D) none of these.

Garrison, Managerial Accounting, 12th Edition 359

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 117-118:

Clifton Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$63

0 1,500 1,100 400

$14 $15 $1 $7

$16,500 $5,500

117. The total contribution margin for the month under the variable costing approach is: A) $28,600
B) $36,300 C) $12,100 D) $24,200

118. The total gross margin for the month under the absorption costing approach is: A) $28,600
B) $24,200 C) $40,600 D) $11,000

360 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 119-120:

Clissold Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$120

0 3,900 3,500 400

$46 $47 $7 $4

$42,900 $3,500

119. The total contribution margin for the month under the variable costing approach is: A) $31,500
B) $13,100 C) $56,000 D) $70,000

120. The total gross margin for the month under the absorption costing approach is: A) $31,500
B) $56,000 C) $14,000 D) $75,900

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Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 121-122:

Deac Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$159

0 7,800 7,700 100

$47 $50 $2 $9

$304,200 $84,700

121. What is the total period cost for the month under the variable costing approach? A) $458,200
B) $388,900 C) $304,200 D) $154,000

122. What is the total period cost for the month under the absorption costing approach? A) $154,000
B) $304,200 C) $458,200 D) $84,700

362 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 123-124:

Dealey Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$63

0 4,600 4,400 200

$20 $16 $2 $4

$36,800 $48,400

123. What is the total period cost for the month under the variable costing approach? A) $66,000
B) $36,800 C) $102,800 D) $85,200

124. What is the total period cost for the month under the absorption costing approach? A) $102,800
B) $66,000 C) $36,800 D) $48,400

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Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 125-128:

Gaines Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$74

0 8,800 8,600 200

$12 $32 $2 $6

$176,000 $8,600

125. The total contribution margin for the month under the variable costing approach is: A) $13,200
B) $240,800 C) $68,800 D) $189,200

126. The total gross margin for the month under the absorption costing approach is: A) $189,200
B) $82,000 C) $68,800 D) $8,600

364 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

127. What is the total period cost for the month under the variable costing approach? A) $184,600
B) $176,000 C) $236,200 D) $60,200

128. What is the total period cost for the month under the absorption costing approach? A) $60,200
B) $8,600 C) $236,200 D) $176,000

Use the following to answer questions 129-132:

Gadzuk Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………

Garrison, Managerial Accounting, 12th Edition
$123

0 1,900 1,600 300

$32 $55 $1 $6

$43,700 $1,600

365

Chapter 7 Variable Costing: A Tool for Management

129. The total contribution margin for the month under the variable costing approach is: A) $46,400
B) $2,700 C) $19,200 D) $56,000

130. The total gross margin for the month under the absorption costing approach is: A) $19,200
B) $46,400 C) $52,500 D) $8,000

131. What is the total period cost for the month under the variable costing approach? A) $43,700
B) $54,900 C) $45,300 D) $11,200

132. What is the total period cost for the month under the absorption costing approach? A) $1,600
B) $43,700 C) $11,200 D) $54,900

366 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 133-134:

Eliason Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$72

0 7,300 7,200 100

$12 $24 $3 $8

$138,700 $36,000

133. What is the net operating income for the month under variable costing? A) $7,200
B) $1,900 C) $5,300 D) $1,400

134. What is the net operating income for the month under absorption costing? A) $1,400
B) $1,900 C) $7,200 D) $5,300

Garrison, Managerial Accounting, 12th Edition 367

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 135-136:

Elgin Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$126

0 1,400 1,000 400

$27 $49 $6 $9

$28,000 $3,000

135. What is the net operating income for the month under variable costing? A) $8,000
B) $4,000 C) $12,000 D) ($28,800)

136. What is the net operating income for the month under absorption costing? A) ($28,800)
B) $4,000 C) $12,000 D) $8,000

368 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 137-138:

Kezner Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$105

500 4,700 4,900 300

$14 $43 $1 $9

$173,900 $9,800

The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month.

137. What is the net operating income for the month under variable costing? A) ($4,900)
B) $11,100 C) $14,100 D) $2,500

138. What is the net operating income for the month under absorption costing? A) $2,500
B) $14,100 C) $11,100 D) ($4,900)

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Chapter 7 Variable Costing: A Tool for Management

Use the following to answer questions 139-140:

Khidir Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ……………………………………….

Units in beginning inventory ………………… Units produced …………………………………… Units sold ………………………………………….. Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor …………………………………….. Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$121

300 3,200 3,400 100

$45 $45 $1 $7

$70,400 $6,800

The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month.

139. What is the net operating income for the month under variable costing? A) ($3,400)
B) $2,200 C) $1,000 D) $19,200

140. What is the net operating income for the month under absorption costing? A) ($3,400)
B) $19,200 C) $1,000 D) $2,200

370 Garrison, Managerial Accounting, 12th Edition

Chapter 7 Variable Costing: A Tool for Management

Essay Questions

141. HJ Turner Corporation produces a single product. Data concerning the company’s operations last year appear below:

Units in beginning inventory …………………….. Units produced ……………………………………….. Units sold ………………………………………………..

Selling price per unit ………………………………..

Variable costs per unit:
Direct materials ……………………………………. Direct labor ………………………………………….. Variable manufacturing overhead …………… Variable selling and administrative ………….
Fixed costs in total:
Fixed manufacturing overhead ……………….. Fixed selling and administrative ……………..
0 10,000 9,000

$60

$15 $5 $2 $4

$200,000 $70,000

Assume direct labor is a variable cost.

Required:
a. Compute the unit product cost under both absorption and variable costing. b. Prepare an income statement for the year using absorption costing.
c. Prepare an income statement for the year using variable costing.
d. Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year.

,2,3

Garrison, Managerial Accounting, 12th Edition 371

142. Legaz Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price …………………………………………………..

Units in beginning inventory …………………………… Units produced ………………………………………………. Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials …………………………………………… Direct labor ………………………………………………… Variable manufacturing overhead ………………….. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative …………………….
$120

100 3,900 3,600 400

$31 $54 $5 $8

$54,600 $21,600

The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month.

Required:
a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the variable costing method.
d. Prepare an income statement for the month using the absorption costing method. e. Reconcile the variable costing and absorption costing net operating incomes for
the month.

143. Magnani Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price …………………………………………………..

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………

Garrison, Managerial Accounting, 12th Edition
$97

0 6,600 6,200 400

$40 $10 $4 $9

$184,800 $12,400

375

Chapter 7 Variable Costing: A Tool for Management

Required:
a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the variable costing method.
d. Prepare an income statement for the month using the absorption costing method. e. Reconcile the variable costing and absorption costing net operating incomes for
the month.

144. Duif Company’s absorption costing income statements for the last two years are presented below:

Sales …………………………………………………………….. Less cost of goods sold:
Beginning inventory ……………………………………. Add cost of goods manufactured …………………… Goods available for sale ………………………………. Less ending inventory …………………………………. Cost of goods sold …………………………………………. Gross margin ………………………………………………… Less selling & admin. expenses ………………………. Net operating income ……………………………………..
Year 1 $70,000

0
48,000 48,000
6,000
42,000 28,000
25,000 $ 3,000
Year 2 $90,000

6,000
48,000 54,000
0
54,000 36,000
31,000 $ 5,000

Data on units produced and sold in each of these years are given below:

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ………………………………………………………
Year 1 Year 2 0 1,000 8,000 8,000 7,000 9,000

Fixed factory overhead totaled $16,000 in each year. This overhead was applied to products at a rate of $2 per unit. Variable selling and administrative expenses were $3 per unit sold.

Required:
a. Compute the unit product cost in each year under variable costing. b. Prepare new income statements for each year using variable costing.
c. Reconcile the absorption costing and variable costing net operating income for each year.

145. Hanks Company produces a single product. Operating data for the company and its absorption costing income statements for the last two years are presented below:

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ………………………………………………………

Sales …………………………………………………………….. Less cost of goods sold:
Beginning inventory ……………………………………. Add cost of goods manufactured …………………… Goods available for sale ………………………………. Less ending inventory …………………………………. Cost of goods sold …………………………………………. Gross margin ………………………………………………… Less selling & admin. expenses ………………………. Net operating income ……………………………………..
Year 1 0 9,000 8,000

Year 1 $80,000

0
54,000 54,000
6,000
48,000 32,000
28,000 $ 4,000
Year 2 1,000 9,000
10,000

Year 2 $100,000

6,000
54,000 60,000
0
60,000 40,000
30,000 $ 10,000

Variable manufacturing costs are $4 per unit. Fixed factory overhead totals $18,000 in each year. This overhead was applied at a rate of $2 per unit. Variable selling and administrative expenses were $1 per unit sold.

Required:
a. What was the unit product cost in each year under variable costing? b. Prepare new income statements for each year using variable costing.
c. Reconcile the absorption costing and variable costing net operating income for each year.

146. Pacher Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$155

100 4,500 4,300 300

$28 $49 $7 $7

$175,500 $81,700

The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month.

Required:
a. What is the unit product cost for the month under variable costing?
b. Prepare an income statement for the month using the contribution format and the variable costing method.
c. Without preparing an income statement, determine the absorption costing net operating income for the month. (Hint: Use the reconciliation method.)

147. Qasimi Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price ………………………………………..

Units in beginning inventory ………………… Units produced …………………………………… Units sold …………………………………………… Units in ending inventory ……………………..

Variable costs per unit:
Direct materials ……………………………….. Direct labor ……………………………………… Variable manufacturing overhead ………. Variable selling and administrative ……..

Fixed costs:
Fixed manufacturing overhead …………… Fixed selling and administrative …………
$121

0 4,300 4,000 300

$44 $35 $7 $5

$34,400 $72,000

Required:
a. What is the unit product cost for the month under variable costing?
b. Prepare an income statement for the month using the contribution format and the variable costing method.
c. Without preparing an income statement, determine the absorption costing net operating income for the month. (Hint: Use the reconciliation method.)

,2,3

384 Garrison, Managerial Accounting, 12th Edition

148. Italia Espresso Machina Inc. produces a single product. Data concerning the company’s operations last year appear below:

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ………………………………………………………

Selling price per unit ………………………………………

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..
Fixed costs in total:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
0 2,000 1,900

$100

$30 $10 $5 $2

$40,000 $60,000

Required:
a. Compute the unit product cost under both absorption and variable costing. b. Prepare an income statement for the year using absorption costing.
c. Prepare an income statement for the year using variable costing.
d. Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year.

149. Netro Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price …………………………………………………..

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
$91

100 1,800 1,400 500

$49 $13 $2 $7

$14,400 $7,000

The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month.

Required:
a. Prepare an income statement for the month using the contribution format and the variable costing method.
b. Prepare an income statement for the month using the absorption costing method.

388 Garrison, Managerial Accounting, 12th Edition

150. Oakford Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price …………………………………………………..

Units in beginning inventory …………………………… Units produced ……………………………………………… Units sold ……………………………………………………… Units in ending inventory ………………………………..

Variable costs per unit:
Direct materials ………………………………………….. Direct labor ………………………………………………… Variable manufacturing overhead …………………. Variable selling and administrative ………………..

Fixed costs:
Fixed manufacturing overhead ……………………… Fixed selling and administrative ……………………
$143

0 1,200 1,000 200

$33 $52 $1 $7

$38,400 $4,000

Required:
a. Prepare an income statement for the month using the contribution format and the variable costing method.
b. Prepare an income statement for the month using the absorption costing method.

151. Vitamin T-Shirts, Inc. budgeted the following costs for its first year of manufacturing operations. These costs are based on a volume of 50,000 T-shirts produced and sold:

Direct materials ……………………….. Direct labor ……………………………… Manufacturing overhead ……………. Selling and administrative ………….
Total variable cost per year $36,000 $24,000 $60,000 $12,000
Total fixed cost per year – –
$72,000 $48,000

During the first year of operations, Vitamin actually produced 50,000 T-shirts but only sold 48,000 T-shirts. Actual costs did not fluctuate from the cost behavior patterns described above. The 48,000 T-shirts were sold for $10 per T-shirt.

Required:
Using the variable costing method, prepare Vitamin T-Shirts’ income statement for the year.

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True/False Questions

1. The costs of activities that are classified as unit-level should be proportional to the number of units produced.

2. Batch-level activities are performed each time a batch is handled or processed, regardless of how many units are in the batch.

3. Product-level activities relate to specific products and typically must be carried out regardless of how many batches are run or units of product are made.

4. Activity-based management seeks to eliminate waste by allocating costs to products that waste resources.

5. Activity-based costing may supplement, rather than replace, a company’s formal cost accounting system.

6. In activity-based costing, nonmanufacturing costs as well as manufacturing costs may be assigned to products.

7. When activity-based costing is used for internal decision-making, the costs of idle capacity should be considered period costs that flow through to the income statement as an expense of the current period.

8. A transaction driver provides a simple count of the number of times that an activity occurs.

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9. In activity-based costing, all manufacturing costs must be included in product costs.

10. The first-stage allocation in activity-based costing is the process by which overhead costs are assigned to activity cost pools.

11. The activity rates computed in activity-based costing can provide valuable clues concerning where there is waste and scope for improvement in an organization.

12. In the second-stage allocation in activity-based costing, costs that were not allocated in the first stage are assigned to the company’s most profitable products.

13. If a product has a negative product margin (i.e., loss) according to an activity-based costing system, it should be dropped.

14. When a company implements activity-based costing system, manufacturing overhead cost is often shifted from low volume products to high volume products, with a higher unit cost resulting for the high volume products.

15. An action analysis report provides more detail about costs and how they might adjust to changes in activity than a conventional activity-based costing analysis.

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Multiple Choice Questions

16. Which of the following costs should not be included in product costs for internal management reports that are used for decision-making?
A) Costs of unit-level activities. B) Costs of batch-level activities.
C) Costs of product-level activities.
D) Costs of organization-sustaining activities.

17. Which of the following would probably be the most accurate measure of activity to use for allocating the costs associated with a factory’s purchasing department?
A) Machine-hours
B) Direct labor-hours
C) Number of orders processed D) Cost of materials purchased

18. Guerra Electronics manufactures a variety of electronic gadgets for use in the home. Which of the following would probably be the most accurate measure of activity to use for allocating the costs of inspecting the finished products at Guerra?
A) Machine-hours
B) Direct labor-hours C) Inspection time
D) Number of inspections

19. The labor time required to assemble a product is an example of a: A) Unit-level activity.
B) Batch-level activity. C) Product-level activity.
D) Organization-sustaining activity.

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20. Production order processing is an example of a: A) Unit-level activity.
B) Batch-level activity. C) Product-level activity.
D) Organization-sustaining activity.

21. Assembling a product is an example of a: A) Unit-level activity.
B) Batch-level activity. C) Product-level activity.
D) Organization-sustaining.

22. Setting up a machine to change from producing one product to another is an example of a:
A) Unit-level activity. B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.

23. Designing a new product is an example of a: A) Unit-level activity.
B) Batch-level activity. C) Product-level activity.
D) Organization-sustaining activity.

24. The plant manager’s salary is an example of a: A) Unit-level activity.
B) Batch-level activity. C) Product-level activity.
D) Organization-sustaining activity.

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25. Machining a part for a product is an example of a: A) Unit-level activity.
B) Batch-level activity. C) Product-level activity.
D) Organization-sustaining activity.

26. If substantial batch-level or product-level costs exist, then overhead allocation based on a measure of volume such as direct labor-hours alone:
A) is a key aspect of the activity-based costing model.
B) will systematically overcost high-volume products and undercost low-volume products.
C) will systematically overcost low-volume products and undercost high-volume products.
D) must be used for external financial reporting since activity-based costing cannot be used for external reporting purposes.

27. If a cost object such as a product or customer has a negative yellow margin, then: A) its red margin will be positive.
B) its red margin may be either positive or negative. C) its red margin will be negative.
D) its red margin will be zero.

Appendix: 8A

28. If a cost object such as a product or customer has a negative red margin, then: A) its green margin will be positive.
B) its green margin may be positive, negative, or zero. C) its green margin will be negative.
D) its green margin will be zero.

Appendix: 8A

29. If a cost object such as a product or customer has a positive yellow margin, then: A) its green margin will be positive.
B) its green margin may be positive, negative, or zero. C) its green margin will be negative.
D) its green margin will be zero.

Appendix: 8A

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30. Hochberg Corporation uses an activity-based costing system with the following three activity cost pools:

Activity Cost Pool Fabrication ………………………. Order processing ………………. Other ……………………………….
Total Activity 30,000 machine-hours 300 orders
Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs.

The company has provided the following data concerning its costs:

Wages and salaries …………….. $340,000 Depreciation ……………………… 160,000 Occupancy ………………………… 220,000 Total …………………………………. $720,000

The distribution of resource consumption across activity cost pools is given below:

Wages and salaries ……………… Depreciation ………………………. Occupancy ………………………….

Fabrication 30% 15% 15%
Activity Cost Pools Order
Processing Other Total 60% 10% 100% 50% 35% 100% 55% 30% 100%

The activity rate for the Fabrication activity cost pool is closest to: A) $5.30 per machine-hour
B) $3.60 per machine-hour C) $7.20 per machine-hour D) $4.80 per machine-hour

,3

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31. Hettich Corporation uses an activity-based costing system with the following three activity cost pools:

Activity Cost Pool Fabrication ………………………. Order processing ………………. Other ……………………………….
Total Activity 20,000 machine-hours 200 orders
Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs.

The company has provided the following data concerning its costs:

Wages and salaries …………….. $480,000 Depreciation ……………………… 120,000 Occupancy ………………………… 200,000 Total …………………………………. $800,000

The distribution of resource consumption across activity cost pools is given below:

Wages and salaries ……………… Depreciation ………………………. Occupancy ………………………….

Fabrication 55% 10% 25%
Activity Cost Pools Order
Processing Other Total 20% 25% 100% 45% 45% 100% 40% 35% 100%

The activity rate for the Order Processing activity cost pool is closest to: A) $1,400 per order
B) $1,600 per order C) $1,150 per order D) $800 per order

,3

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32. Orzel Corporation has provided the following data concerning its overhead costs for the coming year:

Wages and salaries ………… Depreciation …………………. Rent …………………………….. Total ……………………………..
$240,000 120,000
180,000 $540,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year:

Activity Cost Pool Assembly ……………………… Order processing ……………. Other …………………………….
Total Activity 10,000 labor-hours 500 orders
Not applicable

The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs.

The distribution of resource consumption across activity cost pools is given below:

Wages and salaries ……. Depreciation …………….. Rent …………………………
Activity Cost Pools Order
Assembly Processing Other Total 30% 50% 20% 100% 15% 35% 50% 100%
5% 65% 30% 100%

The activity rate for the Assembly activity cost pool is closest to: A) $2.70 per labor-hour
B) $9.00 per labor-hour C) $9.90 per labor-hour D) $16.20 per labor-hour

,3

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33. Laguna Corporation has provided the following data concerning its overhead costs for the coming year:

Wages and salaries ………… Depreciation …………………. Rent …………………………….. Total ……………………………..
$260,000 100,000
180,000 $540,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year:

Activity Cost Pool Assembly ……………………… Order processing ……………. Other …………………………….
Total Activity 50,000 labor-hours 400 orders
Not applicable

The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs.

The distribution of resource consumption across activity cost pools is given below:

Wages and salaries ……. Depreciation …………….. Rent …………………………
Activity Cost Pools Order
Assembly Processing Other Total 60% 20% 20% 100%
5% 60% 35% 100% 30% 30% 40% 100%

The activity rate for the Order Processing activity cost pool is closest to: A) $415 per order
B) $405 per order C) $495 per order D) $270 per order

,3

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34. Poskey Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:
Wages and salaries ………… Depreciation …………………. Utilities………………………… Total ……………………………..

$400,000 160,000
100,000 $660,000

Distribution of resource consumption:
Activity Cost Pools Assembly Setting Up Other Total
Wages and salaries ………….. 40% 40% 20% 100% Depreciation …………………… 20% 35% 45% 100% Utilities………………………….. 25% 55% 20% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Assembly activity cost pool?
A) $187,000 B) $264,000 C) $217,000 D) $165,000

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35. Ginger Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:
Wages and salaries ………… Depreciation …………………. Utilities………………………… Total ……………………………..

$360,000 140,000
160,000 $660,000

Distribution of resource consumption:
Activity Cost Pools Assembly Setting Up Other Total
Wages and salaries ………….. 10% 80% 10% 100% Depreciation …………………… 5% 50% 45% 100% Utilities………………………….. 15% 60% 25% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Setting Up activity cost pool?
A) $528,000 B) $454,000 C) $418,000 D) $396,000

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36. Grandolfo Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:
Wages and salaries ………… Depreciation …………………. Utilities………………………… Total ……………………………..

$300,000 200,000
140,000 $640,000

Distribution of resource consumption:
Activity Cost Pools Assembly Setting Up Other Total
Wages and salaries ………….. 45% 35% 20% 100% Depreciation …………………… 20% 40% 40% 100% Utilities………………………….. 15% 55% 30% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other activity cost pool?
A) $192,000 B) $182,000 C) $128,000 D) $192,000

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37. Futter Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs:

Wages and salaries ……… Depreciation ………………. Occupancy …………………. Total …………………………..
$440,000 180,000
220,000 $840,000

The distribution of resource consumption across the three activity cost pools is given below:

Wages and salaries ……… Depreciation ………………. Occupancy ………………….

Fabricating 55% 20% 10%
Activity Cost Pools Order
Processing Other Total 35% 10% 100% 35% 45% 100% 50% 40% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Fabricating activity cost pool?
A) $84,000 B) $300,000 C) $238,000 D) $462,000

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Chapter 8 Activity Based Costing

38. Duerr Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs:

Wages and salaries ……… Depreciation ………………. Occupancy …………………. Total …………………………..
$400,000 180,000
200,000 $780,000

The distribution of resource consumption across the three activity cost pools is given below:

Wages and salaries ……… Depreciation ………………. Occupancy ………………….

Fabricating 55% 10% 35%
Activity Cost Pools Order
Processing Other Total 20% 25% 100% 50% 40% 100% 40% 25% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Order Processing activity cost pool?
A) $250,000 B) $286,000 C) $156,000 D) $312,000

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39. Grammer Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs:

Wages and salaries ……… Depreciation ………………. Occupancy …………………. Total …………………………..
$240,000 160,000
140,000 $540,000

The distribution of resource consumption across the three activity cost pools is given below:

Wages and salaries ……… Depreciation ………………. Occupancy ………………….

Fabricating 30% 20% 5%
Activity Cost Pools Order
Processing Other Total 45% 25% 100% 35% 45% 100% 65% 30% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other activity cost pool?
A) $135,000 B) $174,000 C) $162,000 D) $180,000

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Chapter 8 Activity Based Costing

40. Radakovich Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Assembly ………………… Processing orders ……… Inspection ………………..
Total Cost $436,240 $60,896 $82,767
Total Activity 28,000 machine-hours
1,600 orders
1,410 inspection-hours

The company makes 230 units of product F60N a year, requiring a total of 480 machine-hours, 50 orders, and 30 inspection-hours per year. The product’s direct materials cost is $12.70 per unit and its direct labor cost is $45.93 per unit. The product sells for $126.60 per unit.

According to the activity-based costing system, the product margin for product F60N is:
A) $6,251.70 per unit B) $4,490.70 per unit C) $6,393.70 per unit D) $15,633.10 per unit

,4,5

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41. Rosenbrook Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Assembly ………………… Processing orders ……… Inspection ………………..
Total Cost $710,770
$39,690 $119,116
Total Activity 37,000 machine-hours
1,800 orders
1,940 inspection-hours

Data concerning one of the company’s products, Product H73N, appear below:

Selling price per unit ………………………… Direct materials cost per unit ……………… Direct labor cost per unit …………………… Annual unit production and sales ……….. Annual machine-hours ……………………… Annual orders ………………………………….. Annual inspections ……………………………
$125.10 $34.94 $49.21 460 510
80 10

According to the activity-based costing system, the product margin for product H73N is:
A) $7,275.90 per unit B) $6,661.90 per unit C) $18,837.00 per unit D) $8,425.90 per unit

,4,5

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42. Belsky Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Assembly ………………… Processing orders ……… Inspection ………………..
Total Cost $313,490
$49,476 $73,882
Total Activity 29,000 machine-hours
1,400 orders
1,060 inspection-hours

The company makes 490 units of product Q19S a year, requiring a total of 1,080 machine-hours, 60 orders, and 20 inspection-hours per year. The product’s direct materials cost is $46.42 per unit and its direct labor cost is $20.22 per unit.

According to the activity-based costing system, the average cost of product Q19S is closest to:
A) $97.64 per unit B) $66.64 per unit C) $93.31 per unit D) $94.79 per unit

,4

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43. Ravelo Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Assembly ………………… Processing orders ……… Inspection ………………..
Total Cost $498,520
$54,263 $77,589
Total Activity 44,000 machine-hours
1,100 orders
1,110 inspection-hours

Data concerning the company’s product L19B appear below:

Annual unit production and sales ….. Annual machine-hours ………………… Annual number of orders ……………… Annual inspection hours ………………. Direct materials cost ……………………. Direct labor cost ………………………….
430 990 70 20
$37.74 per unit $10.45 per unit

According to the activity-based costing system, the average cost of product L19B is closest to:
A) $48.19 per unit B) $82.31 per unit C) $85.56 per unit D) $77.53 per unit

,4

414 Garrison, Managerial Accounting, 12th Edition

Chapter 8 Activity Based Costing

Use the following to answer questions 44-46:

Esmail Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries ………… Other expenses ……………… Total …………………………….

$380,000
220,000 $600,000

Distribution of resource consumption:

Filling Orders
Wages and salaries ………….. 55% Other expenses ……………….. 25%

Activity Cost Pools Customer
Support Other Total 35% 10% 100% 55% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Filling orders ………………… Customer support …………..
Activity 4,000 orders 60 customers

44. What would be the total overhead cost per order according to the activity based costing system? In other words, what would be the overall activity rate for the filling orders activity cost pool? (Round to the nearest whole cent.)
A) $60.00 B) $66.00 C) $82.50 D) $37.50

,3 Appendix: 8A

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Chapter 8 Activity Based Costing

45. What would be the total overhead cost per customer according to the activity based costing system? In other words, what would be the overall activity rate for the customer support activity cost pool? (Round to the nearest whole dollar.)
A) $3,500 B) $5,500 C) $4,233 D) $4,500

,3 Appendix: 8A

46. To the nearest whole dollar, how much wages and salaries cost would be allocated to a customer who made 6 orders in a year?
A) $2,264 B) $2,530 C) $1,998 D) $3,995

,3,4,7 Appendix: 8A

416 Garrison, Managerial Accounting, 12th Edition

Chapter 8 Activity Based Costing

Use the following to answer questions 47-49:

Eskenazy Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries ………… Other expenses ……………… Total …………………………….

$580,000
120,000 $700,000

Distribution of resource consumption:

Filling Orders
Wages and salaries ………….. 15% Other expenses ……………….. 55%

Activity Cost Pools Customer
Support Other Total 75% 10% 100% 25% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Filling orders ………………… Customer support …………..
Activity 2,000 orders 20 customers

47. What would be the total overhead cost per order according to the activity based costing system? In other words, what would be the overall activity rate for the filling orders activity cost pool? (Round to the nearest whole cent.)
A) $52.50 B) $76.50 C) $122.50 D) $192.50

,3 Appendix: 8A

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Chapter 8 Activity Based Costing

48. What would be the total overhead cost per customer according to the activity based costing system? In other words, what would be the overall activity rate for the customer support activity cost pool? (Round to the nearest whole dollar.)
A) $26,250 B) $17,500 C) $23,250 D) $8,750

,3 Appendix: 8A

49. To the nearest whole dollar, how much wages and salaries cost would be allocated to a customer who made 7 orders in a year?
A) $22,055 B) $17,682 C) $13,309 D) $26,618

,3,4,7 Appendix: 8A

418 Garrison, Managerial Accounting, 12th Edition

Chapter 8 Activity Based Costing

Use the following to answer questions 50-51:

Fornia Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries ………… Other expenses ……………… Total …………………………….

$ 70,000
60,000 $130,000

Distribution of resource consumption:

Making Bouquets
Wages and salaries ………….. 70% Other expenses ……………….. 45%

Activity Cost Pools

Delivery Other Total 20% 10% 100% 25% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Making bouquets …………….. Delivery ………………………….
Activity 40,000 bouquets 4,000 deliveries

50. What would be the total overhead cost per bouquet according to the activity based costing system? In other words, what would be the overall activity rate for the making bouquets activity cost pool? (Round to the nearest whole cent.)
A) $1.46 B) $1.90 C) $1.87 D) $2.28

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51. What would be the total overhead cost per delivery according to the activity based costing system? In other words, what would be the overall activity rate for the deliveries activity cost pool? (Round to the nearest whole cent.)
A) $7.25 B) $7.31 C) $8.13 D) $6.50

,3

Use the following to answer questions 52-53:

Foro Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries ………… Other expenses ……………… Total …………………………….

$ 80,000
40,000 $120,000

Distribution of resource consumption:

Making Bouquets
Wages and salaries ………….. 50% Other expenses ……………….. 60%

Activity Cost Pools

Delivery Other Total 40% 10% 100% 10% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Making bouquets …………….. Delivery ………………………….

420
Activity 20,000 bouquets 6,000 deliveries

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52. What would be the total overhead cost per bouquet according to the activity based costing system? In other words, what would be the overall activity rate for the making bouquets activity cost pool? (Round to the nearest whole cent.)
A) $3.00 B) $3.20 C) $3.30 D) $3.60

,3

53. What would be the total overhead cost per delivery according to the activity based costing system? In other words, what would be the overall activity rate for the deliveries activity cost pool? (Round to the nearest whole cent.)
A) $8.00 B) $5.00 C) $6.00 D) $2.00

,3

Use the following to answer questions 54-56:

Dimaio Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:
Manufacturing overhead ………………………………… Selling and administrative expenses ………………… Total …………………………………………………………….

$580,000
240,000 $820,000

Distribution of resource consumption:

Manufacturing overhead ………………… Selling and administrative expenses …

Activity Cost Pools Order Customer
Size Support Other Total 50% 40% 10% 100%
5% 75% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

You have been asked to complete the first-stage allocation of costs to the activity cost pools.

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54. How much cost, in total, would be allocated in the first-stage allocation to the Order Size activity cost pool?
A) $302,000 B) $41,000 C) $225,500 D) $410,000

55. How much cost, in total, would be allocated in the first-stage allocation to the Customer Support activity cost pool?
A) $328,000 B) $412,000 C) $471,500 D) $615,000

56. How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activity-based costing system is used for internal decision-making?
A) $0
B) $106,000 C) $82,000 D) $164,000

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Use the following to answer questions 57-59:

Dige Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:
Manufacturing overhead ………………………………… Selling and administrative expenses ………………… Total …………………………………………………………….

$480,000
220,000 $700,000

Distribution of resource consumption:

Manufacturing overhead ………………… Selling and administrative expenses …

Activity Cost Pools Order Customer
Size Support Other Total 50% 40% 10% 100% 30% 50% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

You have been asked to complete the first-stage allocation of costs to the activity cost pools.

57. How much cost, in total, would be allocated in the first-stage allocation to the Order Size activity cost pool?
A) $280,000 B) $306,000 C) $350,000 D) $210,000

58. How much cost, in total, would be allocated in the first-stage allocation to the Customer Support activity cost pool?
A) $315,000 B) $280,000 C) $302,000 D) $350,000

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59. How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activity-based costing system is used for internal decision-making?
A) $92,000 B) $0
C) $70,000 D) $140,000

Use the following to answer questions 60-62:

Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs using three activity cost pools. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

Activity Cost Pool Machine Setups ….. Quality Control …… Other Overhead …..

Estimated Activity 400 Number of setups
1,500 Number of inspections 30,000 Machine hours
Estimated Overhead Cost $150,000 $180,000 $480,000

Information (on a per unit basis) related to three popular products at Njombe are as follows:

Direct material cost ……………. Direct labor cost ………………… Number of setups ………………. Number of inspections ……….. Number of machine hours ……
Model #19 $400 $810
2 1 4
Model #36 $540 $600
3 3 8
Model #58 $310 $220
1 1 10

60. Under the traditional system, what would be the selling price of one unit of Model #36?
A) $2,536 B) $2,712 C) $4,080 D) $5,506

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61. Under the activity-based costing system, what would be the selling price of one unit of Model #36?
A) $2,536 B) $2,712 C) $4,080 D) $5,506

,4

62. In comparing the traditional system with the activity-based costing system, which of Njombe’s Models had higher unit product costs under the traditional system?
A) #19 B) #58
C) #19 and #58 D) #36 and #58

Use the following to answer questions 63-66:

Acklin Company has two products: A and B. Annual production and sales are 600 units of Product A and 900 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.5 direct labor hours per unit and Product B requires 0.3 direct labor hours per unit. The total estimated overhead for next period is $63,322.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory— with estimated overhead costs and expected activity as follows:

Activity Cost Pool Activity 1 ……………… Activity 2 ……………… General factory ……… Total …………………….
Estimated Overhead Cost
$18,900 15,631
28,791 $63,322

Expected Activity Product A Product B Total
700 200 900 1,000 100 1,100 300 270 570

(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor hours.)

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63. The predetermined overhead rate under the traditional costing system is closest to: A) $21.00
B) $14.21 C) $111.09 D) $50.51

64. The overhead cost per unit of Product A under the traditional costing system is closest to:
A) $10.50 B) $55.55 C) $25.26 D) $7.11

65. The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to:
A) $27.00 B) $94.50 C) $21.00 D) $70.36

66. The overhead cost per unit of Product A under the activity-based costing system is closest to:
A) $25.26 B) $73.44 C) $42.21 D) $55.55

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Use the following to answer questions 67-68:

Abbe Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 600 units. There are three activity cost pools, with estimated costs and expected activity as follows:

Expected Activity

Activity Cost Pool Activity 1 …………… Activity 2 …………… Activity 3 ……………
Estimated Cost $17,460 $19,987 $29,884
Product A 600
1,700 400
Product B Total 600 1,200 600 2,300 120 520

67. The activity rate for Activity 2 is closest to: A) $11.76
B) $8.69 C) $29.27 D) $33.31

68. The cost per unit of Product B is closest to: A) $25.90
B) $11.49 C) $34.73 D) $48.09

,4

Use the following to answer questions 69-70:

The controller of Hartis Company estimates the amount of materials handling overhead cost that should be allocated to the company’s two products using the data that are given below:

Total expected units produced ………….. Total expected material moves ………….. Expected direct labor-hours per unit …..
Wall Mirrors 8,000
300 5
Specialty Windows 7,000
900 7

The total materials handling cost for the year is expected to be $38,448.00.

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69. If the materials handling cost is allocated on the basis of direct labor-hours, how much of the total materials handling cost should be allocated to the wall mirrors? (Round off your answer to the nearest whole dollar.)
A) $19,696 B) $16,020 C) $19,224 D) $17,280

Source: CMA, adapted

70. If the materials handling cost is allocated on the basis of material moves, how much of the total materials handling cost should be allocated to the specialty windows? (Round off your answer to the nearest whole dollar.)
A) $18,752 B) $19,224 C) $22,428 D) $28,836

,4 Source: CMA, adapted

Use the following to answer questions 71-72:

The controller of Kleyman Company estimates the amount of materials handling overhead cost that should be allocated to the company’s two products using the data that are given below:

Total expected units produced ………….. Total expected material moves ………….. Expected direct labor-hours per unit …..
Wall Mirrors 4,000
500 7
Specialty Windows 3,000
400 6

The total materials handling cost for the year is expected to be $28,400.40.

71. If the materials handling cost is allocated on the basis of direct labor-hours, how much of the total materials handling cost should be allocated to the wall mirrors? (Round off your answer to the nearest whole dollar.)
A) $15,293 B) $16,176 C) $17,287 D) $14,200

Source: CMA, adapted

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72. If the materials handling cost is allocated on the basis of material moves, how much of the total materials handling cost should be allocated to the specialty windows? (Round off your answer to the nearest whole dollar.)
A) $12,622 B) $13,108 C) $12,224 D) $14,200

,4 Source: CMA, adapted

Use the following to answer questions 73-74:

In the past, Casiopia Hospital allocated all of its overhead costs to patients based on nursing time. Casiopia has decided to switch to an activity based costing system using three activity cost pools. Information related to the new system is as follows:

Activity Cost Pool Registration ………….. Patient care …………… Billing…………………..

Activity Measure Number of patients Nursing time Number of bills
Estimated Overhead Cost
$75,000 $900,000 $120,000

Estimated Activity 1,000 patients
150,000 hours 2,500 bills

Data concerning two patients follows:

Patient
Wells …………………… Muncie ………………….
Nursing time 100 hours 60 hours
Number of bills 2 3

73. Under the new activity-based costing system, how much overhead cost would be assigned to each patient?

Wells Muncie A) $696 $504 B) $723 $483 C) $730 $438 D) $771 $579

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74. To determine a price for its services, Casiopia Hospital takes the total cost assigned to a patient and multiplies that number by two. Compared to the old system, which patients above will be charged more under the new activity-based costing system?
A) neither patient will be charged more B) Wells
C) Muncie
D) both Wells and Muncie

,4

Use the following to answer questions 75-76:

Abrams Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 300 units and of Product B is 1,000 units. There are three activity cost pools, with estimated costs and expected activity as follows:

Activity Cost Pool Activity 1 …………… Activity 2 …………… Activity 3 ……………

Estimated Cost
$7,356 $30,555 $16,169
Expected Activity

Product A Product B Total 200 200 400 1,400 700 2,100 90 300 390

75. The activity rate for Activity 3 is closest to: A) $53.906
B) $138.67 C) $41.46 D) $18.71

76. The cost per unit of Product A is closest to: A) $41.60
B) $92.60 C) $12.44 D) $68.00

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Use the following to answer questions 77-78:

Anesni Corporation uses activity-based costing to determine product costs for external financial reports. The company has provided the following data concerning its activity-based costing system:

Activity Cost Pools (and Activity Measures) Machine related (machine-hours) ………………. Batch setup (setups) …………………………………. General factory (direct labor-hours) …………….
Estimated Overhead Cost $242,100 $713,900 $256,500

Expected Activity

Activity Cost Pools Machine related …….. Batch setup …………… General factory ………
Total Product X 9,000 6,000 11,000 6,000 9,000 1,000
Product Y 3,000 5,000 8,000

77. The activity rate for the batch setup activity cost pool is closest to: A) $142.80
B) $64.90 C) $110.20 D) $119.00

78. Assuming that actual activity turns out to be the same as expected activity, the total amount of overhead cost allocated to Product X would be closest to:
A) $606,250 B) $579,300 C) $714,000 D) $661,000

,4

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Use the following to answer questions 79-80:

Andry Corporation uses activity-based costing to determine product costs for external financial reports. The company has provided the following data concerning its activity-based costing system:

Activity Cost Pools (and Activity Measures) Machine related (machine-hours) ………………. Batch setup (setups) …………………………………. General factory (direct labor-hours) …………….
Estimated Overhead Cost $177,000 $453,600 $227,000

Expected Activity

Activity Cost Pools Machine related …….. Batch setup …………… General factory ………
Total Product X 10,000 7,000 7,000 5,000 10,000 6,000
Product Y 3,000 2,000 4,000

79. The activity rate for the batch setup activity cost pool is closest to: A) $122.50
B) $226.80 C) $90.70 D) $64.80

80. Assuming that actual activity turns out to be the same as expected activity, the total amount of overhead cost allocated to Product X would be closest to:
A) $613,000 B) $454,000 C) $428,800 D) $584,100

,4

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Use the following to answer questions 81-83:

Carsten Wedding Fantasy Company makes very elaborate wedding cakes to order. The owner of the company has provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools Size-related ……………… Complexity-related …… Order-related ……………
Activity Rate $0.75 per guest
$34.41 per tier $84.03 per order

The measure of activity for the size-related activity cost pool is the number of planned guests at the wedding reception. The greater the number of guests, the larger the cake. The measure of complexity is the number of tiers in the cake. The activity measure for the order-related cost pool is the number of orders. (Each wedding involves one order.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.

Data concerning two recent orders appear below:

Number of reception guests ……………………. Number of tiers on the cake ……………………. Cost of purchased decorations for cake …….
Ruise Wedding
79 2
$17.30
Karmo Wedding
164 4
$56.86

81. Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what amount would the company have to charge for the Ruise wedding cake to just break even?
A) $229.40 B) $84.03 C) $277.57 D) $17.30

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82. Assuming that the company charges $485.85 for the Karmo wedding cake, what would be the overall margin on the order?
A) $84.32 B) $141.18 C) $401.53 D) $168.35

,5

83. Suppose that the company decides that the present activity-based costing system is too complex and that all costs (except for the costs of purchased decorations) should be allocated on the basis of the number of guests. In that event, what would you expect to happen to the costs of cakes?
A) The cost of cakes for receptions with more than the average number of guests would go down.
B) The cost of cakes for receptions with fewer than the average number of guests would go down.
C) The costs of all cakes would go down. D) The costs of all cakes would go up.

Use the following to answer questions 84-85:

Thoen Nuptial Bakery makes very elaborate wedding cakes to order. The company has an activity-based costing system with three activity cost pools. The activity rate for the Size-Related activity cost pool is $0.96 per guest. (The greater the number of guests, the larger the cake.) The activity rate for the Complexity-Related cost pool is $54.24 per tier. (Cakes with more tiers are more complex.) Finally, the activity rate for the Order-Related activity cost pool is $56.44 per order. (Each wedding involves one order for a cake.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.

Data concerning two recent orders appear below:

Number of reception guests …………………. Number of tiers on the cake …………………. Cost of purchased decorations for cake ….
Nie Wedding
67 3
$23.50
Strobl Wedding
129 5
$31.31

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84. Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what amount would the company have to charge for the Nie wedding cake to just break even?
A) $56.44 B) $306.98 C) $23.50 D) $371.45

85. Assuming that the company charges $584.18 for the Strobl wedding cake, what would be the overall margin on the order?
A) $157.83 B) $101.39 C) $132.70 D) $482.79

,5

Use the following to answer questions 86-88:

Grip Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools Wages ……………….. Supplies …………….. Other expenses ……
Preparing Meals
$0.65 $0.40 $0.20
Arranging Functions
$145.00 $170.00 $80.00

The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool.

Management would like to know whether the company made any money on a recent function at which 50 meals were served. The company catered the function for a fixed price of $22.00 per meal. The cost of the raw ingredients for the meals was $12.60 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above.

For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost.

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86. According to the activity-based costing system, what was the total cost (including the costs of raw ingredients) of the function mentioned above? (Round to the nearest whole dollar.)
A) $1,088 B) $1,288 C) $588 D) $438

Appendix: 8A

87. Suppose an action analysis report is prepared for the function mentioned above. What would be the “red margin” in the action analysis report? (Round to the nearest whole dollar.)
A) $13 B) $(138) C) $(88) D) $163

,7 Appendix: 8A

88. Suppose an action analysis report is prepared for the function mentioned above. What would be the “yellow margin” in the action analysis report? (Round to the nearest whole dollar.)
A) $178 B) $228 C) $103 D) $283

,7 Appendix: 8A

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Use the following to answer questions 89-91:

Grisim Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools Wages ……………….. Supplies …………….. Other expenses ……
Preparing Meals
$0.75 $0.50 $0.35
Arranging Functions
$175.00 $280.00 $130.00

The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool.

Management would like to know whether the company made any money on a recent function at which 130 meals were served. The company catered the function for a fixed price of $11.00 per meal. The cost of the raw ingredients for the meals was $6.90 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above.

For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost.

89. According to the activity-based costing system, what was the total cost (including the costs of raw ingredients) of the function mentioned above? (Round to the nearest whole dollar.)
A) $1,040 B) $1,890 C) $1,690 D) $1,190

Appendix: 8A

90. Suppose an action analysis report is prepared for the function mentioned above. What would be the “red margin” in the action analysis report? (Round to the nearest whole dollar.)
A) $(110) B) $(360) C) $(410) D) $(260)

,7 Appendix: 8A

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91. Suppose an action analysis report is prepared for the function mentioned above. What would be the “yellow margin” in the action analysis report? (Round to the nearest whole dollar.)
A) $(10) B) $40 C) $95 D) $(85)

,7 Appendix: 8A

Essay Questions

92. Swagg Jewelry Corporation manufactures custom jewelry. In the past, Swagg has been using a traditional overhead allocation system based solely on direct labor hours. Sensing that this system was distorting costs and selling prices, Swagg has decided to switch to an activity-based costing system using three activity cost pools. Information on these activity cost pools are as follows:

Activity Cost Pool Labor related ………… Machine related ……. Quality control ………
Estimated Activity 8,000 direct labor hours
12,500 machine hours
800 number of inspections
Estimated Overhead Cost $40,000 $50,000 $12,000

Job #309 incurred $900 of direct material, 30 hours of direct labor at $40 per hour, 80 machine hours, and 5 inspections.

Required:
a. What is the cost of the job under the activity-based costing system?
b. Relative to the activity-based costing system, would Job #309 have been overcosted or undercosted under the traditional system and by how much?

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93. Imai Draperies makes custom draperies for homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity cost pools.

Overhead costs: Production overhead …. Office expense …………. Total ………………………..

$240,000
160,000 $400,000

Distribution of resource consumption: Making Job
Activity Cost Pools Drapes Support Production overhead ………. 35% 45% Office expense ………………. 15% 55%

Other Total 20% 100% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Making drapes …… Job support ……….. Other …………………
Annual Activity 4,000 yards 100 jobs
Not applicable

Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Making
Job

Drapes
Support
Other
Total

Production overhead ……

Office expense ……………

Total ………………………….

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b. Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes and Job Support activity cost pools by filling in the table below:

Making
Job

Drapes
Support

Production overhead ……

Office expense ……………

Total ………………………….

c. Prepare an action analysis report in good form of a job that involves making 53 yards of drapes and has direct materials and direct labor cost of $1,480. The sales revenue from this job is $5,200. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost.

,3,4,7 Appendix: 8A

94. Hastings Hardwood Floors installs oak and other hardwood floors in homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs: Production overhead …. Office expense …………. Total ………………………..

$110,000
130,000 $240,000

Distribution of resource consumption: Installing
Activity Cost Pools Floors Production overhead ………. 50% Office expense ………………. 5%

Job
Support Other Total 30% 20% 100% 65% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Installing floors …… Job support ………… Other ………………….
Annual Activity 400 squares 100 jobs
Not applicable

A “square” is a measure of area that is roughly equivalent to 1,000 square feet.

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Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Installing
Job

Floors
Support
Other
Total

Production overhead ……

Office expense ……………

Total ………………………….

b. Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors and Job Support activity cost pools by filling in the table below:

Installing
Job

Floors
Support

Production overhead ……

Office expense ……………

Total ………………………….

c. Compute the overhead cost, according to the activity-based costing system, of a job that involves installing 1.8 squares.

,3,4,7 Appendix: 8A

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95. Goldbard Company, a wholesale distributor, uses activity-based costing for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries ………… Nonwage expenses ………… Total ……………………………..

$540,000
220,000 $760,000

Distribution of resource consumption: Filling
Activity Cost Pools Orders Wages and salaries ………….. 55% Nonwage expenses ………….. 15%

Product Support 35% 65%

Other Total 10% 100% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Filling orders ……… Product support …… Other ………………….
Annual Activity 3,000 orders 30 products Not applicable

Required:

Compute the activity rates (i.e., cost per unit of activity) for the Filling Orders and Product Support activity cost pools by filling in the table below:

Filling
Product

Orders
Support

Wages and salaries ……..

Nonwage expenses …….

Total …………………………

96. Fields & Maaner PLC, a consulting firm, uses an activity-based costing in which there are three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:
Wages and salaries ………… Travel expenses …………….. Other expenses ……………… Total ……………………………..

$560,000 140,000
140,000 $840,000

Distribution of resource consumption: Working On
Activity Cost Pools Engagements Wages and salaries ………. 45% Travel expenses ………….. 60% Other expenses ……………. 30%

Business
Development Other Total 25% 30% 100% 30% 10% 100% 30% 40% 100%

Required:
a. How much cost, in total, would be allocated to the Working On Engagements activity cost pool?
b. How much cost, in total, would be allocated to the Business Development activity cost pool?
c. How much cost, in total, would be allocated to the Other activity cost pool?

97. Duckhorn Housecleaning provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system.

Activity Cost Pool Cleaning …………….. Job support ………… Client support …….. Other …………………. Total …………………..
Total Cost
$645,576 $129,546 $ 20,900 $110,000 $906,022

Total Activity 72,700 hours
5,400 jobs 760 clients Not applicable

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

One particular client, the Lumbard family, requested 31 jobs during the year that required a total of 62 hours of housecleaning. For this service, the client was charged $1,620

Required:
a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off all calculations to the nearest whole cent.
b. Using the activity-based costing system, compute the customer margin for the Lumbard family. Round off all calculations to the nearest whole cent.
c. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Lumbard family. Round off all calculations to the nearest whole cent.

98. The Thornes Cleaning Brigade Company provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system.

Activity Cost Pool Cleaning ………………….. Job support ……………… Client support ………….. Other ………………………. Total ………………………..
Total Cost
$274,170 $99,066 $9,796 $110,000 $493,032

Total Activity 48,100 hours
5,700 jobs 620 clients
Not applicable

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

One particular client, the Lazzara family, requested 37 jobs during the year that required a total of 222 hours of housecleaning. For this service, the client was charged $2,350

Required:
a. Using the activity-based costing system, compute the customer margin for the Lazzara family. Round off all calculations to the nearest whole cent.
b. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Lazzara family. Round off all calculations to the nearest whole cent.

,4,5,6

99. Jardon Painting paints the interiors and exteriors of homes and commercial buildings. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its activity-based costing system.

Activity Cost Pool Painting overhead ………….. Job support …………………… Other …………………………….
Activity Measure Square meters Jobs
None
Annual Activity 10,000 square meters
200 jobs Not applicable

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The company has already finished the first stage of the allocation process in which costs were allocated to the activity cost centers. The results are listed below:

Painting overhead ….. Office expense ………. Total ……………………..

Painting $ 99,000
14,000 $113,000
Job Support $ 77,000
84,000 $161,000

Other $44,000
42,000 $86,000

Total $220,000
140,000 $360,000

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job Support activity cost pools by filling in the table below. Round off all calculations to the nearest whole cent.

Job

Painting
Support

Painting overhead ……..

Office expense ………….

Total

b. Prepare an action analysis report in good form of a job that involves painting 69 square meters and has direct materials and direct labor cost of $2,190. The sales revenue from this job is $3,400. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; painting overhead as a Red cost; and office expense as a Yellow cost.

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100. Cabalo Company manufactures two products, Product C and Product D. The company estimated it would incur $130,890 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period’s operations appear below:

Estimated unit production ……………….. Direct labor hours per unit ………………. Direct materials cost per unit …………… Direct labor cost per unit …………………
Product C 400 units 0.70 hour $10.70 $11.20
Product D 1,200 units
1.20 hours $16.70 $19.20

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Required:
a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.
b. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

Activity Cost Pool Machine setups ………… Purchase orders ………… General factory …………
Estimated Overhead Costs
$ 13,570 91,520
25,800 $130,890

Expected Activity Product C Product D Total
100 130 230 810 1,270 2,080 280 1,440 1,720

Determine the unit product cost of each product for the current period using the activity-based costing approach.

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101. Danno Company manufactures two products, Product F and Product G. The company expects to produce and sell 600 units of Product F and 6,000 units of Product G during the current year. The company uses activity-based costing to compute unit product costs for external reports. Data relating to the company’s three activity cost pools are given below for the current year:

Activity Cost Pool Machine setups …… Purchase orders …… General factory ……
Estimated Overhead Costs
$5,250 $74,100 $89,880

Expected Activity Product F Product G Total
60 150 210 620 1,280 1,900 840 12,000 12,840

Required:

Using the activity-based costing approach, determine the overhead cost per unit for each product.

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True/False Questions

1. The sales budget is usually prepared before the production budget.

,2,3

2. The cash budget is the starting point in preparing the master budget.

,8

3. The first budget a company prepares in a master budget is the production budget.

4. One of the weaknesses of budgets is that they are of little value in uncovering potential bottlenecks in an organization.

5. One of the advantages of a self-imposed budget is that the person directly involved in an activity is more likely to be in a position to make good budget estimates.

6. The basic idea behind responsibility accounting is that top management is responsible for preparing detailed budgets by which the performance of middle and lower management will be evaluated.

7. Budgeting is a trade-off between planning and control in that increased use of budgeting will usually improve planning but will weaken control.

8. The sales budget often includes a schedule of expected cash collections.

9. Uncollectible amounts on credit sales to customers will be listed as cash outflows on the schedule of expected cash collections.

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10. The number of units to be produced in a period can be determined by adding the expected sales to the desired ending inventory and then deducting the beginning inventory.

11. When preparing a direct materials budget, beginning inventory for raw materials should be added to production needs, and desired ending inventory should be subtracted to determine the amount of raw materials to be purchased.

12. The manufacturing overhead budget provides a schedule of all costs of production other than direct materials and direct labor.

13. Both variable and fixed manufacturing overhead costs are included in the selling and administrative expense budget.

14. On a cash budget, the total amount of budgeted cash payments for manufacturing overhead should not include any amounts for depreciation on factory equipment.

15. In zero-base budgeting, only changes from the prior budget must be justified.

1

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Multiple Choice Questions

16. Which of the following budgets are prepared before the production budget?

Direct Materials Budget
A) Yes B) Yes C) No D) No

Sales Budget Yes No Yes No

17. Which of the following represents the normal sequence in which the below budgets are prepared?
A) Sales, Balance Sheet, Income Statement B) Balance Sheet, Sales, Income Statement C) Sales, Income Statement, Balance Sheet D) Income Statement, Sales, Balance Sheet

18. The budget method that maintains a constant twelve month planning horizon by adding a new month on the end as the current month is completed is called:
A) an operating budget. B) a capital budget.
C) a continuous budget. D) a master budget.

19. In preparing a master budget, top management is generally best able to: A) prepare detailed departmental-level budget figures.
B) provide a perspective on the company as a whole.
C) point out the particular persons who are to blame for inability to meet budget goals.
D) responses a, b, and c are all correct.

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20. Which of the following benefits could an organization reasonably expect from an effective budget program?

Increased employee motivation
A) Yes B) Yes C) No D) No

Exposure of bottlenecks Yes No Yes No

21. Which of the following is an advantage of implementing a self-imposed budgeting system?
A) Budgeting is quick and easy because only a few individuals are involved in the budgeting process.
B) Upper level management does not have to review budget estimates. C) Motivation to meet budget estimates is usually enhanced.
D) All of the above.

22. All the following are considered to be benefits of participative budgeting, except for: A) Individuals at all organizational levels are recognized as being part of a team; this
results in greater support for the organization.
B) The budget estimates are prepared by those in directly involved in activities.
C) When managers set their own targets for the budget, top management need not be concerned with the overall profitability of operations.
D) Managers are held responsible for reaching their goals and cannot easily shift responsibility by blaming unrealistic goals set by others.

Source: CMA, adapted

23. Which of the following is NOT an objective of the budgeting process?
A) To communicate management’s plans throughout the entire organization.
B) To provide a means of allocating resources to those parts of the organization where they can be used most effectively.
C) To ensure that the company continues to grow.
D) To uncover potential bottlenecks before they occur.

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24. When preparing a production budget, the required production equals: A) budgeted sales + beginning inventory + desired ending inventory. B) budgeted sales – beginning inventory + desired ending inventory. C) budgeted sales – beginning inventory – desired ending inventory. D) budgeted sales + beginning inventory – desired ending inventory.

Source: CIMA, adapted

25. The direct labor budget is based on:
A) the desired ending inventory of finished goods. B) the beginning inventory of finished goods.
C) the required production for the period.
D) the required materials purchases for the period.

26. Which of the following might be included as a disbursement on a cash budget?

Depreciation on factory equipment
A) Yes B) Yes C) No D) No

Income taxes to be paid Yes No Yes No

27. Thirty percent of Sharp Company’s sales are for cash and 70% are on account. Sixty percent of the account sales are collected in the month of sale, 25% in the month following sale, and 12% in the second month following sale. The remainder is uncollectible. The following are budgeted sales data for the company:

January Total sales ………… $50,000
February $60,000
March $40,000
April $30,000

Total cash receipts in April are expected to be: A) $24,640
B) $35,200 C) $31,560 D) $33,640

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28. Razz Company is estimating the following sales:

July ……………………. $45,000 August ……………….. $50,000 September ………….. $65,000 October ………………. $80,000 November …………… $75,000 December…………… $60,000

Sales at Razz are normally collected as follows: 10% in the month of sale; 60% in the month following the sale; and the remaining 30% in the second month following the sale. In Razz’s budgeted balance sheet at December 31, at what amount will accounts receivable be shown?
A) $49,500 B) $76,500 C) $120,500 D) $135,500

29. On January 1, Colver Company has 6,500 units of Product A on hand. During the year, the company plans to sell 15,000 units of Product A, and plans to have 5,000 units on hand at year end. How many units of Product A must be produced during the year? A) 13,500
A) 16,500 B) 15,000 C) 20,000

30. Douglas Company plans to sell 24,000 units of Product A during July and 30,000 units during August. Sales of Product A during June were 25,000 units. Past experience has shown that end-of-month inventory should equal 3,000 units plus 30% of the next month’s sales. On June 30 this requirement was met. Based on these data, how many units of Product A must be produced during the month of July?
A) 28,800 B) 22,200 C) 24,000 D) 25,800

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31. Villi Manufacturing Corporation’s most recent sales budget indicates the following expected sales (in units):

July Expected unit sales ………… 230,000
August 275,000
September 310,000

Villi wants to maintain a finished goods inventory of 20% of the next month’s expected sales. How many units should Villi plan on producing for the month of August?
A) 268,000 units B) 282,000 units C) 291,000 units D) 337,000 units

32. Sharp Company, a retailer, plans to sell 15,000 units of Product X during the month of August. If the company has 2,500 units on hand at the start of the month, and plans to have 2,000 units on hand at the end of the month, how many units of Product X must be purchased from the supplier during the month?
A) 14,500 B) 15,500 C) 15,000 D) 17,000

33. The following are budgeted data:

Sales in units …………………. Production in units ………….
January 15,000 18,000
February March 20,000 18,000 19,000 16,000

One pound of material is required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month’s production needs. Purchases of raw materials for February should be:
A) 19,600 pounds B) 20,400 pounds C) 18,400 pounds D) 18,600 pounds

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34. Rhett Company manufactures and sells dress shirts. Each shirt (unit) requires 3 yards of cloth. Selected data from Rhett’s master budget for next quarter are shown below:

Budgeted sales (in units) …………………………………………. Budgeted production (in units) …………………………………. Desired ending inventory of cloth (in yards) ……………….
April May June 26,000 28,000 32,000 28,000 32,000 36,000
2,100 2,800 3,000

How many yards of cloth should Rhett plan on purchasing in May? A) 84,700 yards
B) 96,700 yards C) 98,100 yards D) 98,800 yards

35. Sparks Company has a cash balance of $7,500 on April 1. The company must maintain a minimum cash balance of $6,000. During April, cash receipts of $48,000 are planned. Cash disbursements during the month are expected to total $52,000. Ignoring interest payments, during April the company will need to borrow:
A) $3,500 B) $2,500 C) $6,000 D) $4,000

36. For May, Young Company has budgeted its cash receipts at $125,000 and its cash disbursements at $138,000. The company’s cash balance on May 1 is $17,000. If the desired May 31 cash balance is $20,000, then how much cash must the company borrow during the month (before considering any interest payments)?
A) $4,000 B) $8,000 C) $12,000 D) $16,000

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Use the following to answer questions 37-39:

Home Company will open a new store on January 1. Based on experience from its other retail outlets, Home Company is making the following sales projections:

January ……………… February ……………. March ……………….. April ………………….
Cash Sales $60,000 $30,000 $40,000 $40,000
Credit Sales $40,000 $50,000 $60,000 $80,000

Home Company estimates that 70% of the credit sales will be collected in the month following the month of sale, with the balance collected in the second month following the month of sale.

37. Based on these data, the balance in accounts receivable on January 31 will be: A) $40,000
B) $28,000 C) $12,000 D) $58,000

38. The March 31 balance in accounts receivable will be: A) $100,000
B) $60,000 C) $95,000 D) $75,000

39. In a cash budget for the month of April, the total cash receipts will be: A) $74,000
B) $57,000 C) $114,000 D) $97,000

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Use the following to answer questions 40-42:

Roberts Company manufactures home cleaning products. One of the products, Quickclean, requires 2 pounds of Material A and 5 pounds of Material B per unit manufactured. Material A can be purchased from the supplier for $0.30 per pound and Material B can be purchased for $0.50 per pound. The finished goods inventory on hand at the end of each month must be equal to 4,000 units plus 25% of the next month’s sales. The raw materials inventory on hand at the end of each month (for either Material A or Material B) must be equal to 80% of the following month’s production needs.

40. Assume that on January 1 the inventory of Quickclean was 8,000 units. Expected sales in January are 14,000 units and expected sales in February are 18,000 units. The number of units needed to be manufactured in January would be:
A) 10,500 B) 14,000 C) 14,500 D) 15,000

41. Assume that the production budget calls for 26,000 units of Quickclean to be manufactured in June and 32,000 units of Quickclean to be manufactured in July. On May 31 there will be 41,600 pounds of Material A in inventory. The number of pounds of Material A needed for production during June would be:
A) 61,600 B) 51,200 C) 35,600 D) 52,000

42. Assume that the production budget calls for 26,000 units of Quickclean to be manufactured in June and 32,000 units to be manufactured in July. On May 31 there will be 104,000 pounds of Material B in inventory. The number of pounds of Material B to be purchased during June would be:
A) 128,000 B) 130,000 C) 154,000 D) 160,000

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Use the following to answer questions 43-44:

The TS Company has budgeted sales for the year as follows:

Quarter 1 Sales in units ……….. 10,000
Quarter 2 12,000
Quarter 3 14,000
Quarter 4 16,000

The ending inventory of finished goods for each quarter should equal 25% of the next quarter’s budgeted sales in units. The finished goods inventory at the start of the year is 2,500 units. Four pounds of raw materials are required for each unit produced. Raw materials on hand at the start of the year total 4,200 pounds. The raw materials inventory at the end of each quarter should equal 10% of the next quarter’s production needs in material.

43. Scheduled production for the third quarter should be: A) 14,500 units
B) 18,500 units C) 15,500 units D) 13,500 units

44. Scheduled purchases of raw materials for the second quarter should be: A) 50,000 pounds
B) 55,800 pounds C) 50,800 pounds D) 55,000 pounds

Use the following to answer questions 45-46:

Sarter Corporation is in the process of preparing its annual budget. The following beginning and ending inventory levels are planned for the year.

Finished goods (units) …………. Raw material (grams) …………..
Beginning Inventory 70,000 50,000
Ending Inventory 20,000 60,000

Each unit of finished goods requires 3 grams of raw material.

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45. If the company plans to sell 880,000 units during the year, the number of units it would have to manufacture during the year would be:
A) 900,000 units B) 930,000 units C) 880,000 units D) 830,000 units

46. How much of the raw material should the company purchase during the year? A) 2,550,000 grams
B) 2,490,000 grams C) 2,480,000 grams D) 2,500,000 grams

Use the following to answer questions 47-49:

The following are budgeted data for the Bingham Company, a merchandising company:

January ……………… February ……………. March ……………….. April ………………….
Budgeted Sales (at retail) $300,000 $340,000 $400,000 $350,000

Cost of goods sold as a percentage of sales is 60%. The desired ending inventory is 75% of next month’s sales.

47. Assuming that the Bingham Company had inventory on hand of $70,000 (at cost) on January 1, the purchases for January (at cost) would be:
A) $180,000 B) $250,000 C) $263,000 D) $110,000

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48. The desired ending inventory (at cost) for the month of February would be: A) $180,000
B) $300,000 C) $240,000 D) $160,000

49. Assume that all purchases are paid for in the month following the month of purchase. The cash disbursements for purchases that would appear in the April cash budget would be:
A) $180,000 B) $157,500 C) $240,000 D) $217,500

Use the following to answer questions 50-51:

LFM Corporation makes and sells a product called Product WZ. Each unit of Product WZ requires 3.5 hours of direct labor at the rate of $16.00 per direct labor-hour. Management would like you to prepare a Direct Labor Budget for June.

50. The budgeted direct labor cost per unit of Product WZ would be: A) $4.57
B) $19.50 C) $16.00 D) $56.00

51. The company plans to sell 31,000 units of Product WZ in June. The finished goods inventories on June 1 and June 30 are budgeted to be 100 and 600 units, respectively. Budgeted direct labor costs for June would be:
A) $1,764,000 B) $504,000 C) $1,708,000 D) $1,736,000

,5

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Use the following to answer questions 52-53:

Marty’s Merchandise has budgeted sales as follows for the second quarter of the year:

April ……………. May …………….. June ……………..
$30,000 $60,000 $50,000

Cost of goods sold is equal to 70% of sales. The company wants to maintain a monthly ending inventory equal to 120% of the cost of goods sold for the following month. The inventory on March 31 was below this target and was only $22,000. The company is now preparing a Merchandise Purchases Budget for April, May, and June.

52. The desired beginning inventory for June is: A) $42,000
B) $35,000 C) $50,000 D) $38,000

53. The budgeted purchases for May are: A) $49,400
B) $50,400 C) $60,000 D) $33,600

Use the following to answer questions 54-55:

Harris, Inc., has budgeted sales in units for the next five months as follows:

June …………………… July …………………… August ………………. September ………….. October ………………
9,400 units 7,800 units 7,300 units 5,400 units 4,100 units

Past experience has shown that the ending inventory for each month should be equal to 20% of the next month’s sales in units. The inventory on May 31 contained 1,880 units. The company needs to prepare a production budget for the next five months.

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54. The beginning inventory for September should be: A) 820 units
B) 1,880 units C) 1,460 units D) 1,080 units

55. The total number of units produced in July should be: A) 9,260 units
B) 7,700 units C) 7,800 units D) 7,900 units

Use the following to answer questions 56-57:

Hamway Products, Inc. makes and sells a single product called a Wob. It takes two yards of material A to make one Wob. Budgeted production of Wobs for the next four months is as follows:

April ……………. May …………….. June …………….. July ………………
12,000 units 13,500 units 12,400 units 11,200 units

The company wants to maintain monthly ending inventories of material A equal to 10% of the following month’s production needs. On March 31 this target had not been met since only 1,500 yards of material A were on hand. The cost of material A is $.90 per yard.

56. The total cost of material A to be purchased in April is: A) $22,680
B) $24,750 C) $26,750 D) $26,780

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57. The desired ending inventory of material A for the month of June is A) 2,480 yards
B) 1,120 yards C) 1,870 yards D) 2,240 yards

Use the following to answer questions 58-60:

The Gerald Company makes and sells a single product called a Clop. Each Clop requires the use of 1.1 hours of direct labor time. The planned cost of direct labor time is $8.20 per hour. The direct labor workforce is fully adjusted each month to the required workload. The company wishes to prepare a Direct Labor Budget for the first quarter of the year.

58. If the company has budgeted to produce 20,000 Clops in January, then the budgeted direct labor cost for January is:
A) $164,000 B) $180,400 C) $172,200 D) $195,600

59. If the budgeted direct labor cost for February is $162,360, then the budgeted production of Clops for February is:
A) 23,200 units B) 21,000 units C) 19,800 units D) 18,000 units

60. The budgeted direct labor cost per Clop is: A) $7.45
B) $8.20 C) $9.02 D) $9.76

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Use the following to answer questions 61-62:

Acmal Manufacturing Company is estimating the following raw material purchases for the last four months of the year:

September …………….. October ………………… November …………….. December ……………..
$850,000 $900,000 $810,000 $780,000

At Acmal, 25% of raw materials purchases are normally paid for in the month of purchase. The remaining 75% is paid for in the month following the purchase.

61. How much cash should Acmal expect to pay out for raw material purchases during the month of November?
A) $202,500 B) $832,500 C) $862,500 D) $877,500

62. In Acmal’s budgeted balance sheet at December 31, at what amount will accounts payable be shown? (Assume that accounts payable is only used for raw material purchases.)
A) $585,000 B) $607,500 C) $780,000 D) $802,500

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Use the following to answer questions 63-64:

Cashan Corporation makes and sells a product called a Miniwarp. One Miniwarp requires 1.5 kilograms of the raw material Jurislon. Budgeted production of Miniwarps for the next five months is as follows:

August …………………. September …………….. October ………………… November …………….. December ……………..
24,500 units 24,700 units 24,600 units 26,400 units 24,500 units

The company wants to maintain monthly ending inventories of Jurislon equal to 30% of the following month’s production needs. On July 31, this requirement was not met since only 10,400 kilograms of Jurislon were on hand. The cost of Jurislon is $4.00 per kilogram. The company wants to prepare a Direct Materials Purchase Budget for the next five months.

63. The desired ending inventory of Jurislon for the month of September is: A) $29,640
B) $29,520 C) $44,460 D) $44,280

64. The total cost of Jurislon to be purchased in August is: A) $149,860
B) $252,400 C) $191,460 D) $147,000

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Use the following to answer questions 65-68:

The Panza Company makes and sells only one product called a Deb. The company is in the process of preparing its Selling and Administrative Expense Budget for next year. The following budget data are available:

Sales commissions ……………………………… Shipping ……………………………………………. Advertising ………………………………………… Executive salaries ……………………………….. Depreciation on office equipment …………. Other ………………………………………………….

Monthly Fixed Cost

$30,000 $25,000 $15,000 $7,000
Variable Cost Per Deb Sold $0.75 $1.30 $0.20

All of these expenses (except depreciation) are paid in cash in the month they are incurred.

65. If the company has budgeted to sell 18,000 Debs in January, then the total budgeted variable selling and administrative expenses for January will be:
A) $13,500 B) $23,400 C) $37,900 D) $40,500

66. If the company has budgeted to sell 16,000 Debs in February, then the total budgeted fixed selling and administrative expenses for February is:
A) $36,000 B) $77,000 C) $62,000 D) $98,000
E) none of these

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67. If the company has budgeted to sell 20,000 Debs in March, then the total budgeted selling and administrative expenses per unit sold for March is:
A) $2.25 B) $5.35 C) $5.80 D) $6.10

68. If the budgeted cash disbursements for selling and administrative expenses for April total $116,000, then how many Debs does the company plan to sell in April?
A) 17,333 units B) 18,250 units C) 24,000 units D) 26,800 units

Use the following to answer questions 69-71:

Davey Corporation is preparing its Manufacturing Overhead Budget for the fourth quarter of the year. The budgeted variable factory overhead rate is $3.00 per direct labor-hour; the budgeted fixed factory overhead is $66,000 per month, of which $10,000 is factory depreciation.

69. If the budgeted direct labor time for October is 6,000 hours, then the total budgeted factory overhead for October is:
A) $28,000 B) $56,000 C) $74,000 D) $84,000

70. If the budgeted direct labor time for November is 9,000 hours, then the total budgeted cash disbursements for November must be:
A) $56,000 B) $83,000 C) $37,000 D) $93,000

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71. If the budgeted direct labor time for December is 4,000 hours, then the predetermined factory overhead per direct labor-hour for December would be:
A) $3.00 B) $19.50 C) $5.50 D) $17.00

Use the following to answer questions 72-74:

Poriss Corporation makes and sells a single product called a Yute. The company is in the process of preparing its Selling and Administrative Expense Budget for the last quarter of the year. The following budget data are available:

Sales commissions …………………………… Shipping …………………………………………. Advertising ……………………………………… Executive salaries …………………………….. Depreciation on office equipment ………. Other ……………………………………………….
Variable Cost Per Yute Sold $2.10 $3.90 $7.40

$0.60
Monthly Fixed Cost

$34,000 $198,000 $10,000 $38,000

All of these expenses (except depreciation) are paid in cash in the month they are incurred.

72. If the company has budgeted to sell 19,000 Yutes in November, then the total budgeted variable selling and administrative expenses for November would be: A) $546,000
B) $280,000 C) $266,000 D) $536,000

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73. If the company has budgeted to sell 16,000 Yutes in December, then the budgeted total cash disbursements for selling and administrative expenses for December would be:
A) $280,000 B) $494,000 C) $224,000 D) $504,000

74. If the budgeted cash disbursements for selling and administrative expenses for October total $459,200, then how many Yutes does the company plan to sell in October?
A) 13,300 units B) 12,500 units C) 13,000 units D) 12,800 units

Use the following to answer questions 75-77:

Sipan Retail Company was recently created with a beginning cash balance of $12,000. The owner expects the following for the first month of operations:

Cash sales to customers ……………………………………….. Sales on account to customers ………………………………. Cash collected from account customers …………………. Cost of merchandise purchased …………………………….. Cash paid for merchandise purchased ……………………. Cost of merchandise sold …………………………………….. Cash paid for display cases ………………………………….. Selling and administrative expenses ………………………
$8,000 $30,000 $12,000 $35,000 $24,500 $26,600 $9,600 $4,000

The display cases above were purchased at the beginning of the month and are being depreciated at a rate of $200 per month. This amount is included in the selling and administrative expenses figure above. All other selling and administrative expenses are paid as incurred. Sipan wants to maintain a cash balance of $10,000. Any amount below this can be borrowed from a local bank as needed in increments of $1,000. All borrowings are made at month end.

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Chapter 9 Profit Planning

75. In Sipan’s cash budget for this first month, how much money will Sipan need to borrow at month end?
A) $7,000 B) $16,000 C) $17,000 D) $28,000

76. In Sipan’s budgeted income statement for this first month, what will net income (loss) be for this first month?
A) $(1,000) B) $(2,000) C) $7,400 D) $9,500

77. In Sipan’s budgeted balance sheet at the end of this first month, at what amount will accounts receivable be shown?
A) $0
B) $9,600 C) $18,000 D) $26,000

0

Use the following to answer questions 78-79:

The Ellis Company has budgeted its activity for September according to the following information:
� Sales are budgeted at $392,000 and all sales are for cash.
� All purchases of merchandise inventory are for cash. Merchandise inventory was $150,000 on August 31 and the planned merchandise inventory on September 30 is $140,000. All merchandise is sold at 40% above cost.
� The selling and administrative expenses are budgeted at $92,000 for the month. All of these expenses are paid for in cash except for depreciation of $12,000.

482 Garrison, Managerial Accounting, 12th Edition

Chapter 9 Profit Planning

78. The budgeted net income for September is: A) $20,000
B) $143,200 C) $112,000 D) $64,800

79. The budgeted cash disbursements for September are: A) $140,000
B) $270,000 C) $350,000 D) $362,000

Garrison, Managerial Accounting, 12th Edition 483

Chapter 9 Profit Planning

Use the following to answer questions 80-83:

Kelly Company is a retail sporting goods store. Facts regarding Kelly’s operations are as follows:

� Sales are budgeted at $220,000 for November and $200,000 for December.
� Collections are expected to be 60% in the month of sale and 38% in the month following the sale. 2% of sales are expected to be uncollectible.
� The cost of goods sold is 75% of sales.
� A total of 80% of the merchandise is purchased in the month prior to the month of sale and 20% is purchased in the month of sale. Payment for merchandise is made in the month following the purchase.
� Other monthly expenses to be paid in cash are $22,600. � Monthly depreciation is $18,000.

Kelly Company Statement of Financial Position
October 31

Assets
Cash ……………………………………………………………………. Accounts receivable
(net of allowance for uncollectible accounts) ………… Inventory …………………………………………………………….. Property, plant and equipment
(net of $680,000 accumulated depreciation) …………. Total assets …………………………………………………………..

Liabilities and Stockholders’ Equity Accounts payable …………………………………………………. Common stock …………………………………………………….. Retained earnings …………………………………………………. Total liabilities and stockholders’ equity ………………….

$ 22,000

76,000 132,000

870,000 $1,100,000

$ 162,000 800,000
138,000 $1,100,000

80. The budgeted cash collections for November are: A) $208,000
B) $132,000 C) $203,600 D) $212,000

Source: CMA, adapted

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81. The net income for November is: A) $32,400
B) $28,000 C) $14,400 D) $10,000

Source: CMA, adapted

82. The projected balance in accounts payable on November 30 is: A) $162,000
B) $204,000 C) $153,000 D) $160,000

0 Source: CMA, adapted

83. The projected balance in inventory on November 30 is: A) $160,000
B) $120,000 C) $153,000 D) $150,000

0 Source: CMA, adapted

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Chapter 9 Profit Planning

Use the following to answer questions 84-92:

Dilbert Farm Supply is located in a small town in the rural west. Data regarding the store’s operations follow:

� Sales are budgeted at $260,000 for November, $230,000 for December, and $210,000 for January.
� Collections are expected to be 80% in the month of sale, 19% in the month following the sale, and 1% uncollectible.
� The cost of goods sold is 65% of sales.
� The company purchases 60% of its merchandise in the month prior to the month of sale and 40% in the month of sale. Payment for merchandise is made in the month following the purchase.
� Other monthly expenses to be paid in cash are $20,300. � Monthly depreciation is $20,000.
� Ignore taxes.

Statement of Financial Position October 31

Assets
Cash ……………………………………………………………………………….. Accounts receivable
(net of allowance for uncollectible accounts) ……………………. Inventory ………………………………………………………………………… Property, plant and equipment
(net of $574,000 accumulated depreciation) …………………….. Total assets ………………………………………………………………………

Liabilities and Stockholders’ Equity
Accounts payable …………………………………………………………….. Common stock ………………………………………………………………… Retained earnings …………………………………………………………….. Total liabilities and stockholders’ equity ……………………………..

$ 27,000

79,000 101,400

1,082,000 $1,289,400

$ 169,000 740,000
380,400 $1,289,400

84. Expected cash collections in December are: A) $230,000
B) $184,000 C) $233,400 D) $49,400

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85. The cost of December merchandise purchases would be: A) $141,700
B) $169,000 C) $81,900 D) $149,500

86. December cash disbursements for merchandise purchases would be: A) $141,700
B) $149,500 C) $157,300 D) $81,900

87. The excess (deficiency) of cash available over disbursements for December would be: A) $55,800
B) $37,900 C) $93,700 D) $17,900

88. The net income for December would be: A) $60,200
B) $37,900 C) $40,200 D) $55,800

89. The cash balance at the end of December would be: A) $180,500
B) $153,500 C) $82,800 D) $27,000

0

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90. The accounts receivable balance, net of uncollectible accounts, at the end of December would be:
A) $46,000 B) $93,100 C) $43,700 D) $81,300

0

91. Accounts payable at the end of December would be: A) $81,900
B) $141,700 C) $59,800 D) $149,500

0

92. Retained earnings at the end of December would be: A) $380,400
B) $418,300 C) $471,300 D) $466,400

0

488 Garrison, Managerial Accounting, 12th Edition

Chapter 9 Profit Planning

Use the following to answer questions 93-96:

Bracken Corporation is a small wholesaler of gourmet food products. Data regarding the store’s operations follow:

� Sales are budgeted at $330,000 for November, $340,000 for December, and $340,000 for January.
� Collections are expected to be 80% in the month of sale, 17% in the month following the sale, and 3% uncollectible.
� The cost of goods sold is 75% of sales.
� The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase.
� Other monthly expenses to be paid in cash are $21,800. � Monthly depreciation is $19,000.
� Ignore taxes.

Statement of Financial Position October 31

Assets
Cash ……………………………………………………………………………….. Accounts receivable
(net of allowance for uncollectible accounts) ……………………. Inventory ………………………………………………………………………… Property, plant and equipment
(net of $604,000 accumulated depreciation) …………………….. Total assets ………………………………………………………………………

Liabilities and Stockholders’ Equity
Accounts payable …………………………………………………………….. Common stock ………………………………………………………………… Retained earnings …………………………………………………………….. Total liabilities and stockholders’ equity ……………………………..

$ 28,000

76,000 173,250

1,170,000 $1,447,250

$ 255,000 840,000
352,250 $1,447,250

93. Expected cash collections in December are: A) $340,000
B) $328,100 C) $272,000 D) $56,100

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94. The cost of December merchandise purchases would be: A) $225,000
B) $178,500 C) $247,500 D) $255,000

95. December cash disbursements for merchandise purchases would be: A) $178,500
B) $255,000 C) $225,000 D) $252,750

96. The excess (deficiency) of cash available over disbursements for December would be: A) $34,000
B) $19,550 C) $87,550 D) $53,550

490 Garrison, Managerial Accounting, 12th Edition

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Use the following to answer questions 97-101:

Carter Lumber sells lumber and general building supplies to building contractors in a medium-sized town in Montana. Data regarding the store’s operations follow:

� Sales are budgeted at $380,000 for November, $390,000 for December, and $400,000 for January.
� Collections are expected to be 70% in the month of sale, 27% in the month following the sale, and 3% uncollectible.
� The cost of goods sold is 65% of sales.
� The company purchases 80% of its merchandise in the month prior to the month of sale and 20% in the month of sale. Payment for merchandise is made in the month following the purchase.
� Other monthly expenses to be paid in cash are $22,000. � Monthly depreciation is $20,000.
� Ignore taxes.

Statement of Financial Position October 31

Assets
Cash ……………………………………………………………………………….. Accounts receivable
(net of allowance for uncollectible accounts) ……………………. Inventory ………………………………………………………………………… Property, plant and equipment
(net of $502,000 accumulated depreciation) …………………….. Total assets ………………………………………………………………………

Liabilities and Stockholders’ Equity
Accounts payable …………………………………………………………….. Common stock ………………………………………………………………… Retained earnings …………………………………………………………….. Total liabilities and stockholders’ equity ……………………………..

$ 13,000

77,000 197,600

992,000 $1,279,600

$ 240,000 780,000
259,600 $1,279,600

97. The net income for December would be: A) $114,500
B) $94,500 C) $101,400 D) $82,800

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98. The cash balance at the end of December would be: A) $182,400
B) $114,400 C) $13,000 D) $195,400

0

99. The accounts receivable balance, net of uncollectible accounts, at the end of December would be:
A) $105,300 B) $88,700 C) $117,000 D) $207,900

0

100. Accounts payable at the end of December would be: A) $253,500
B) $50,700 C) $208,000 D) $258,700

0

101. Retained earnings at the end of December would be: A) $259,600
B) $342,400 C) $422,000 D) $445,100

0

492 Garrison, Managerial Accounting, 12th Edition

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Essay Questions

102. Mate Boomerang Corporation manufactures and sells plastic boomerangs. Expected boomerang sales (in units) for the upcoming months are as follows:

July Aug. Sept. Oct. Nov. Dec. Expected unit sales ……… 12,000 15,000 10,000 8,000 7,000 11,000

Seven ounces of plastic resin are needed to produce every boomerang. Mate likes to have enough plastic resin on hand at the end of the month to cover 25% of the next month’s production requirements. Mate also likes to maintain a finished goods inventory equal to 10% of the next month’s estimated sales.

Required:
How many ounces of plastic resin should Mate plan on purchasing during the month of October?

103. All sales at Meeks Company, a wholesaler, are made on credit. Experience has shown that 70% of the accounts receivable are collected in the month of the sale, 26% are collected in the month following the sale, and the remaining 4% are uncollectible. Actual sales for March and budgeted sales for the following four months are given below:

March (actual sales) ……….. April …………………………….. May ……………………………… June ……………………………… July ………………………………
$200,000 $300,000 $500,000 $700,000 $400,000

The company’s cost of goods sold is equal to 60% of sales. All purchases of inventory are made on credit. Meeks Company pays for one half of a month’s purchases in the month of purchase, and the other half in the month following purchase. The company requires that end-of-month inventories be equal to 25% of the cost of goods sold for the next month.

Required:
a. Compute the amount of cash, in total, which the company can expect to collect in May.
b. Compute the budgeted dollar amount of inventory which the company should have on hand at the end of April.
c. Compute the amount of inventory that the company should purchase during the months of May and June.
d. Compute the amount of cash payments that will be made to suppliers during June for purchases of inventory.

,3,4

104. The following information is budgeted for McCracken Plumbing Supply Company for next quarter:

Sales ………………………………………………….. Merchandise purchases ………………………… Selling and administrative expenses ……….
April $110,000
$85,000 $50,000
May $130,000
$92,000 $50,000
June $180,000 $105,000
$50,000

All sales at McCracken are on credit. Forty percent are collected in the month of sale, 58% in the month following the sale, and the remaining 2% are uncollectible. Merchandise purchases are paid in full the month following the month of purchase. The selling and administrative expenses above include $8,000 of depreciation on display fixtures and warehouse equipment. All other selling and administrative expenses are paid as incurred. McCracken wants to maintain a cash balance of $15,000. Any amount below this can be borrowed from a local bank as needed in increments of $1,000. All borrowings are made at month end.

Required:
Prepare McCracken’s cash budget for the month of May. Use good form. McCracken expects to have $24,000 of cash on hand at the beginning of May.

,3,7,8

105. The Fraley Company, a merchandising firm, has planned the following sales for the next four months:

March Total budgeted sales ………. $50,000
April $70,000
May $90,000
June $60,000

Sales are made 40% for cash and 60% on account. From experience, the company has learned that a month’s sales on account are collected according to the following pattern:

Month of sale ………………………………………………… 70% First month following month of sale ………………… 20% Second month following month of sale …………….. 8% Uncollectible ………………………………………………… 2%

The company requires a minimum cash balance of $4,000 to start a month.

Required:
a. Compute the budgeted cash receipts for June. b. Assume the following budgeted data for June:

Purchases …………………………………………….. Selling and administrative expenses ……….. Depreciation ………………………………………… Equipment purchases …………………………….. Cash balance, beginning of June ……………..
$52,000 $10,000 $8,000 $15,000 $6,000

Using this data, along with your answer to part (1) above, prepare a cash budget in good form for June. Clearly show any borrowing needed during the month. The company can borrow in any dollar amount, but will not pay any interest until the following month.

,8

Garrison, Managerial Accounting, 12th Edition 497

106. Bledso Supply Corporation manufactures and sells cotton gauze. Expected sales of gauze (in boxes) for upcoming months are as follows:

June …………………… 36,000 July …………………… 40,000 August ………………. 50,000 September ………….. 38,000 October ……………… 30,000 November ………….. 24,000 December…………… 35,000

Management likes to maintain a finished goods inventory equal to 25% of the next month’s estimated sales.

Required:
Prepare the company’s production budget for the third quarter of this year (the months of July, August and September) in good form. Include a column for each month and a total column for the entire quarter.

107. Weldon Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store’s operations follow:

� Sales are budgeted at $360,000 for November, $380,000 for December, and $350,000 for January.
� Collections are expected to be 75% in the month of sale, 20% in the month following the sale, and 5% uncollectible.
� The cost of goods sold is 65% of sales.
� The company purchases 60% of its merchandise in the month prior to the month of sale and 40% in the month of sale. Payment for merchandise is made in the month following the purchase.
� Other monthly expenses to be paid in cash are $21,900. � Monthly depreciation is $20,000.
� Ignore taxes.

Statement of Financial Position October 31

Assets
Cash ………………………………………………………………………………… Accounts receivable
(net of allowance for uncollectible accounts) …………………….. Inventory …………………………………………………………………………. Property, plant and equipment
(net of $500,000 accumulated depreciation) ……………………… Total assets ……………………………………………………………………….

Liabilities and Stockholders’ Equity
Accounts payable ……………………………………………………………… Common stock ………………………………………………………………….. Retained earnings ……………………………………………………………… Total liabilities and stockholders’ equity ………………………………

$ 16,000

74,000 140,400

1,066,000 $1,296,400

$ 240,000 640,000
416,400 $1,296,400

Required:
a. Prepare a Schedule of Expected Cash Collections for November and December. b. Prepare a Merchandise Purchases Budget for November and December.
c. Prepare Cash Budgets for November and December.
d. Prepare Budgeted Income Statements for November and December. e. Prepare a Budgeted Balance Sheet for the end of December.

,3,8,9,10

500 Garrison, Managerial Accounting, 12th Edition

108. Caprice Corporation is a wholesaler of industrial goods. Data regarding the store’s operations follow:

� Sales are budgeted at $350,000 for November, $320,000 for December, and $300,000 for January.
� Collections are expected to be 80% in the month of sale, 16% in the month following the sale, and 4% uncollectible.
� The cost of goods sold is 70% of sales.
� The company purchases 60% of its merchandise in the month prior to the month of sale and 40% in the month of sale. Payment for merchandise is made in the month following the purchase.
� The November beginning balance in the accounts receivable account is $78,000. � The November beginning balance in the accounts payable account is $254,000.

Required:
a. Prepare a Schedule of Expected Cash Collections for November and December. b. Prepare a Merchandise Purchases Budget for November and December.

,3

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Chapter 10 Standard Costs and the Balanced Scorecard

True/False Questions

1. A direct material quantity standard generally includes an allowance for waste.

2. Practical standards allow for normal machine downtime and employee rest periods.

3. Ideal standards can be used in forecasting and planning whereas practical standards cannot be used for such purposes.

4. Most companies compute the materials price variance when materials are placed into production.

5. A materials price variance is favorable if the actual price exceeds the standard price.

6. An unfavorable materials quantity variance occurs when the actual quantity used in production is less than the standard quantity allowed for the actual output of the period.

7. An unfavorable labor rate variance can occur if workers with high hourly wage rates are assigned to work on products whose standards assume workers with low hourly wage rates.

8. If variable manufacturing overhead is applied based on direct labor-hours, it is impossible to have a favorable labor efficiency variance and unfavorable variable overhead efficiency variance for the same period.

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Chapter 10 Standard Costs and the Balanced Scorecard

9. A balanced scorecard contains both customer and internal business process performance measures since improvements in customer satisfaction should result in improvements in internal business processes.

10. Different companies, having different strategies, should have different balanced scorecards even if they are in the same industry.

11. A manufacturing cycle efficiency (MCE) ratio of less than 1.00 is desirable since this ratio measures the amount of non-value-added time to throughput time.

12. A favorable materials quantity variance would appear as a debit in a journal entry.

Appendix: 10

13. Although formal entry of standard costs and variances into the accounting records is not required, some organizations make such entries in order to emphasize the importance of variances as well as to simplify the bookkeeping process.

Appendix: 10

14. A standard can be regarded as the budgeted cost for one unit of product.

15. In using a statistical control chart, observation points plotted between the upper and lower limits are considered to be random or chance occurrences and would not typically result in an investigation.

508 Garrison, Managerial Accounting, 12th Edition

Chapter 10 Standard Costs and the Balanced Scorecard

Multiple Choice Questions

16. Which of the following statements concerning ideal standards is incorrect? A) Ideal standards generally do not provide the best motivation for workers. B) Ideal standards do not make allowances for waste, spoilage, and machine
breakdowns.
C) Ideal standards are better suited for cash budgeting than practical standards. D) Ideal standards may be better than practical standards when managers seek
continual improvement.

Source: CMA, adapted

17. Under traditional standard costing, which of the following would commonly be included when setting a standard quantity for direct material?

An allowance for material wasted during production
A) Yes B) Yes C) No D) No
An allowance for material rejected during production Yes No Yes No

18. When computing standard cost variances, the difference between actual and standard price multiplied by actual quantity yields a(n):
A) combined price and quantity variance. B) efficiency variance.
C) price variance. D) quantity variance.

,3 Source: CMA, adapted

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19. Poor quality materials could have an unfavorable effect on which of the following variances?

Labor Efficiency Variance
A) Yes B) Yes C) No D) No
Materials Quantity Variance Yes No Yes No

,3

20. When the actual price paid on credit for a raw material exceeds its standard price, the journal entry would include:
A) Debit to Raw Materials; Credit to Materials Price Variance
B) Debit to Accounts Payable; Credit to Materials Price Variance C) Debit to Raw Materials; Debit to Materials Price Variance
D) Debit to Accounts Payable; Debit to Materials Price Variance

,7 Appendix: 10

21. When the actual price paid on credit for a raw material is less than its standard price, the journal entry would include:
A) Credit to Raw Materials; Credit to Materials Price Variance
B) Credit to Accounts Payable; Credit to Materials Price Variance C) Credit to Raw Materials; Debit to Materials Price Variance
D) Credit to Accounts Payable; Debit to Materials Price Variance

,7 Appendix: 10

22. When the actual amount of a raw material used in production is less than the standard amount allowed for the actual output, the journal entry would include:
A) Credit to Raw Materials; Credit to Materials Quantity Variance B) Credit to Work-In-Process; Credit to Materials Quantity Variance C) Credit to Raw Materials; Debit to Materials Quantity Variance D) Credit to Work-In-Process; Debit to Materials Quantity Variance

,7 Appendix: 10

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Chapter 10 Standard Costs and the Balanced Scorecard

23. When the actual amount of a raw material used in production is greater than the standard amount allowed for the actual output, the journal entry would include: A) Credit to Raw Materials; Credit to Materials Quantity Variance
B) Credit to Work-In-Process; Credit to Materials Quantity Variance C) Credit to Raw Materials; Debit to Materials Quantity Variance D) Credit to Work-In-Process; Debit to Materials Quantity Variance

,7 Appendix: 10

24. Which of the following would produce a materials price variance? A) an excess quantity of materials used.
B) an excess number of direct labor-hours worked in completing a job. C) shipping materials to the plant by air freight rather than by truck. D) breakage of materials in production.

25. The standard price per unit of materials is used in the calculation of which of the following variances?

Materials price variance
A) No B) No C) Yes D) Yes
Materials quantity variance No Yes No Yes

Source: CPA, adapted

26. A labor efficiency debit balance indicates that:
A) The wage rate paid to production workers was less the standard. B) The wage rate paid to production workers was above the standard.
C) Less labor time was spent on production than was called for by the standard. D) More labor time was spent on production than was called for by the standard.

,7 Source: CPA, adapted Appendix: 10

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Chapter 10 Standard Costs and the Balanced Scorecard

27. When the actual wage rate paid to direct labor workers exceeds the standard wage rate, the journal entry would include:
A) Credit to Wages Payable; Credit to Labor Rate Variance B) Credit to Work-In-Process; Credit to Labor Rate Variance C) Credit to Wages Payable; Debit to Labor Rate Variance D) Credit to Work-In-Process; Debit to Labor Rate Variance

,7 Appendix: 10

28. When the actual wage rate paid to direct labor workers is less than the standard wage rate, the journal entry would include:
A) Debit to Wages Payable; Credit to Labor Rate Variance B) Debit to Work-In-Process; Credit to Labor Rate Variance C) Debit to Wages Payable; Debit to Labor Rate Variance D) Debit to Work-In-Process; Debit to Labor Rate Variance

,7 Appendix: 10

29. When the actual direct labor-hours exceed the standard direct labor-hours allowed for the actual output of the period, the journal entry would include:
A) Credit to Wages Payable; Credit to Labor Efficiency Variance B) Credit to Work-In-Process; Credit to Labor Efficiency Variance C) Credit to Wages Payable; Debit to Labor Efficiency Variance D) Credit to Work-In-Process; Debit to Labor Efficiency Variance

,7 Appendix: 10

30. Which of the following would produce a labor rate variance?
A) Poor quality materials causing breakage and work interruptions.
B) Use of persons with high hourly wage rates in tasks that call for low hourly wage rates.
C) Excessive number of hours worked in completing a job. D) An unfavorable variable overhead spending variance.

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31. In a certain standard costing system direct labor-hours are used as the base for applying variable manufacturing overhead costs. The standard direct labor rate is twice the variable manufacturing overhead rate. Last period the labor efficiency variance was unfavorable. From this information one can conclude that last period the variable overhead efficiency variance was:
A) unfavorable and half the labor efficiency variance. B) favorable and half the labor efficiency variance.
C) unfavorable and twice the labor efficiency variance. D) favorable and twice the labor efficiency variance.

32. A manager would like to see a decreasing trend in all of the following operating measures except:
A) Customer complaints as a percentage of units sold. B) Scrap as a percentage of total cost.
C) Setup time.
D) Manufacturing cycle efficiency.

33. Which of the following will increase a company’s manufacturing cycle efficiency (MCE)?

Decrease in Inspection Time
A) Yes B) Yes C) No D) No
Decrease in Queue Time Yes No Yes No

34. If raw materials are carried in the raw materials inventory at standard cost, then it is reasonable to assume that:
A) the price variance is recognized when materials are purchased.
B) the price variance is recognized when materials are placed into production.
C) all variances are prorated between work in process, finished goods, and cost of goods sold.
D) the raw materials account is overstated.

Appendix: 10

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Chapter 10 Standard Costs and the Balanced Scorecard

35. Which of the following statements is a good description of the variances that should be investigated under the management by exception concept?
A) all variances should be investigated.
B) only unfavorable variances should be investigated.
C) a small random sample of all variances should be investigated.
D) unusually large favorable and unfavorable variances should be investigated.

36. The following direct labor information pertains to the manufacture of product Glu:

Time required to make one unit ……………………………. Number of direct labor workers ……………………………. Number of productive hours per week, per worker ….. Weekly wages per worker ……………………………………. Workers’ benefits treated as direct labor costs …………
2 direct labor-hours 50 workers
40 hours $500
20% of wages

What is the standard direct labor cost per unit of product Glu? A) $30
B) $24 C) $15 D) $12

Source: CPA, adapted

37. Anderson Company purchased 20,000 pounds of direct material at $0.70 per pound. The standard cost per pound of material is $0.60 per pound. The general ledger entry to record the issuance of materials would include:
A) a debit to Materials Price Variance $2,000.
B) a credit to Materials Price Variance of $2,000.
C) a credit to Raw Materials of $0.70 per pound times the number of pounds issued. D) a credit to Raw Materials of $0.60 per pound times the number of pounds issued.

,7 Appendix: 10

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38. The following materials standards have been established for a particular raw material used in the company’s sole product:

Standard quantity per unit of output ………. Standard price ……………………………………..
1.0 pound
$16.60 per pound

The following data pertain to operations concerning the product for the last month:

Actual materials purchased ………………….. Actual cost of materials purchased ………… Actual materials used in production ………. Actual output ………………………………………
2,200 pounds $34,650 1,900 pounds 2,100 units

What is the materials quantity variance for the month? A) $3,320 F
B) $3,150 F C) $4,980 U D) $4,725 U

39. The following materials standards have been established for a particular raw material used in the company’s sole product:

Standard quantity per unit of output ………. Standard price ……………………………………..
0.1 pound
$18.20 per pound

The following data pertain to operations for the last month:

Actual materials purchased ………………….. Actual cost of materials purchased ………… Actual materials used in production ………. Actual output ………………………………………
5,700 pounds $100,320 5,600 pounds 55,800 units

What is the materials price variance for the month? A) $1,820 U
B) $1,760 U C) $3,420 F D) $352 U

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Chapter 10 Standard Costs and the Balanced Scorecard

40. A quantity of a particular raw material was purchased for $43,250. The standard cost of the material was $2.00 per kilogram and there was an unfavorable materials price variance of $3,250. How many kilograms were purchased?
A) 20,000 B) 21,625 C) 23,250 D) 24,875

Source: CIMA, adapted

41. A total of 6,850 kilograms of a raw material was purchased at a total cost of $21,920. The material price variance was $1,370 favorable. The standard price per kilogram for the raw material must be:
A) $0.20 B) $3.00 C) $3.20 D) $3.40

Source: CIMA, adapted

42. Results of operations for the Anderson Company indicated that the actual direct labor rate for the month of May was $9.75 while the standard rate was $10.00. The general ledger entry to record the incurrence of direct labor cost would include:
A) a debit to Work-In-Process for the actual number of hours times $9.75 per hour. B) a debit to Work-In-Process for the standard number of hours times $10.00 per
hour.
C) a debit to Work-In-Process for the standard number of hours times $9.75 per hour. D) a debit to Work-In-Process for the actual number of hours times $10.00 per hour.

,7 Appendix: 10

516 Garrison, Managerial Accounting, 12th Edition

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43. The following labor standards have been established for a particular product:

Standard labor-hours per unit of output …………. Standard labor rate ……………………………………….
8.0 hours $13.10 per hour

The following data pertain to operations concerning the product for the last month:

Actual hours worked ………… Actual total labor cost ……….. Actual output ……………………
4,000 hours $53,000 400 units

What is the labor efficiency variance for the month? A) $10,600 U
B) $11,080 U C) $11,080 F D) $10,480 U

44. The following labor standards have been established for a particular product:

Standard labor-hours per unit of output …………. Standard labor rate ……………………………………….
2.4 hours $15.45 per hour

The following data pertain to operations concerning the product for the last month:

Actual hours worked ………… Actual total labor cost ……….. Actual output ……………………
5,400 hours $85,860 2,200 units

What is the labor rate variance for the month? A) $1,908 U
B) $2,430 U C) $4,284 U D) $4,284 F

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Chapter 10 Standard Costs and the Balanced Scorecard

45. The following information pertains to Bates Company’s direct labor for March:

Standard direct labor-hours ………………….. 21,000 Actual direct labor-hours ……………………… 20,000 Favorable direct labor rate variance ………. $8,400 Standard direct labor rate per hour ………… $6.30

What was Bates’ total actual direct labor cost for March? A) $117,600
B) $118,000 C) $134,000 D) $134,400

Source: CPA, adapted

46. The direct labor standards for a particular product are:

4 hours of direct labor @ $12.00 per direct labor-hour = $48.00

During October, 3,350 units of this product were made, which was 150 units less than budgeted. The labor cost incurred was $159,786 and 13,450 direct labor-hours were worked. The direct labor variances for the month were:

Labor Rate Variance A) $1,614 U
B) $1,614 U C) $1,614 F D) $1,614 F
Labor Efficiency Variance $600 U $600 F $600 U $600 F

Source: CIMA, adapted

47. The standard cost card of a particular product specifies that it requires 4.5 direct labor-hours at $12.80 per direct labor-hour. During March, 2,300 units of the product were produced and direct labor wages of $128,300 were incurred. A total of 11,700 direct labor-hours were worked. The direct labor variances for the month were:

Labor Rate Variance A) $4,180 F
B) $4,180 F C) $21,460 F D) $21,460 F
Labor Efficiency Variance $14,804 U $17,280 U $14,804 U $17,280 U

Source: CIMA, adapted

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48. The following standards for variable manufacturing overhead have been established for a company that makes only one product:

Standard hours per unit of output ………….. Standard variable overhead rate …………….
5.6 hours $19.15 per hour

The following data pertain to operations for the last month:

Actual hours ………………………………………… 5,100 hours Actual total variable overhead cost …………. $99,195 Actual output ……………………………………….. 1,100 units

What is the variable overhead efficiency variance for the month? A) $20,299 F
B) $18,769 F C) $1,848 F D) $20,617 F

49. The following standards for variable manufacturing overhead have been established for a company that makes only one product:

Standard hours per unit of output ………….. Standard variable overhead rate …………….
2.8 hours $16.30 per hour

The following data pertain to operations for the last month:

Actual hours ………………………………………… 7,600 hours Actual total variable overhead cost …………. $127,300 Actual output ……………………………………….. 2,500 units

What is the variable overhead spending variance for the month? A) $3,420 U
B) $3,150 F C) $10,050 U D) $13,200 U

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Chapter 10 Standard Costs and the Balanced Scorecard

50. Sanchez Custom Yachts, Inc. manufactures and sells luxury yachts. From the time an order is placed till the time the yacht reaches the customer averages 200 days. These 200 days are spent as follows:

Wait time ……………………… 50 days Move time …………………….. 10 days Process time………………….. 90 days Queue time …………………… 30 days Inspection time……………… 20 days

What is Sanchez’s manufacturing cycle efficiency (MCE) for its yachts? A) 0.45
B) 0.50 C) 0.60 D) 0.65

51. During the month of May, Domino Manufacturing Corporation purchased materials that had a total standard cost of $57,000. The Materials Price Variance on these materials was $3,000 favorable. What summary journal entry would Domino make to record this purchase and variance for May?

A) Work in Process 57,000 Materials Price Variance 3,000
Raw Materials 60,000

B) Work in Process 54,000 Materials Price Variance 3,000
Raw Materials 57,000

C) Raw Materials 57,000 Materials Price Variance 3,000 Accounts Payable 54,000

D) Raw Materials 57,000 Materials Price Variance 3,000
Accounts Payable 60,000

Appendix: 10

520 Garrison, Managerial Accounting, 12th Edition

Chapter 10 Standard Costs and the Balanced Scorecard

Use the following to answer questions 52-54:

Stench Foods Company uses a standard cost system to collect costs related to the production of its garlic flavored yogurt. The garlic (materials) standards for each container of yogurt produced are 0.8 ounces of crushed garlic at a standard cost of $2.30 per ounce.

During the month of June, Stench purchased 75,000 ounces of crushed garlic at a total cost of $171,000. Stench used 64,000 of these ounces to produce 71,500 containers of yogurt.

52. What is Stench’s materials price variance for the month of June? A) $1,500 favorable
B) $15,640 unfavorable C) $17,250 favorable D) $23,800 favorable

53. What is Stench’s materials quantity variance for the month of June? A) $1,500 favorable
B) $15,640 unfavorable C) $17,250 favorable D) $23,800 favorable

54. Assume that it takes 15 minutes of labor time to crush enough garlic to fill one container of yogurt. Because the smell of the garlic can be unbearable, workers are given (and they take it!) 10 minutes of break time every hour (i.e., 50 minutes of work, 10 minutes of break). How many minutes should Stench use as a standard quantity of labor time per container of yogurt?
A) 18.0 B) 16.2 C) 17.0 D) 17.5

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Chapter 10 Standard Costs and the Balanced Scorecard

Use the following to answer questions 55-57:

Holiday Chemical Company uses a standard cost system to collect costs related to the production of its “bowling ball” fruitcakes. The direct labor standard for each fruitcake is 1.25 hours at a standard cost of $11.00 per hour. During the month of November, Holiday’s fruitcake production used 9,820 direct labor hours at a total direct labor cost of $106,547. This resulted in production of 8,500 fruitcakes for November.

55. What is Holiday’s labor rate variance for November? A) $8,855 favorable
B) $1,473 favorable
C) $13,047 unfavorable D) $14,520 unfavorable

56. What is Holiday’s labor efficiency variance for November? A) $8,855 favorable
B) $10,328 favorable C) $13,047 unfavorable D) $14,520 unfavorable

57. Assume that 7 ounces of pecans are included in each bowling ball fruitcake. Because Holiday wants only the best pecans in its fruitcakes, the pecans they buy are inspected and some are discarded as unacceptable for fruitcake production. The loss rate is expected to be 1 ounce of pecans for every 5 ounces inspected. Under traditional standard costing, how many ounces of pecans should Holiday use as a standard quantity per fruitcake?
A) 7.20 B) 7.80 C) 8.40 D) 8.75

522 Garrison, Managerial Accounting, 12th Edition

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Use the following to answer questions 58-59:

Debit Dave and his four teaching assistants grade all 1,000 of their managerial accounting exams as a group. The average number of exams graded per hour by each person is as follows:

Debit Dave Joanne Number of exams 45 32
Karen Andy Tom 28 25 20

Debit Dave is considering the above information in setting a standard for grading the next examination.

58. Which amount above best represents a practical standard? A) 45
B) 32 C) 25 D) 20

59. Which amount above best represents an ideal standard? A) 45
B) 32 C) 25 D) 20

Garrison, Managerial Accounting, 12th Edition 523

Chapter 10 Standard Costs and the Balanced Scorecard

Use the following to answer questions 60-65:

Pardoe, Inc., manufactures a single product in which variable manufacturing overhead is assigned on the basis of direct labor hours. The company uses a standard cost system and has established the following standards for one unit of product:

Direct materials ……………………….. Direct labor ……………………………… Variable manufacturing overhead .
Standard Quantity 1.5 pounds 0.6 hours 0.6 hours
Standard Price or Rate
$3.00 per pound $6.00 per hour $1.25 per hour
Standard Cost $4.50 $3.60 $0.75

During March, the following activity was recorded by the company:

� The company produced 3,000 units during the month.
� A total of 8,000 pounds of material were purchased at a cost of $23,000.
� There was no beginning inventory of materials on hand to start the month; at the end of the month, 2,000 pounds of material remained in the warehouse.
� During March, 1600 direct labor hours were worked at a rate of $6.50 per hour. � Variable manufacturing overhead costs during March totaled $1,800.

60. The materials price variance for March is: A) $1,000 F
B) $1,000 U C) $750 F D) $750 U

61. The materials quantity variance for March is: A) $4,500 F
B) $10,500 F C) $10,500 U D) $4,500 U

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62. The labor rate variance for March is: A) $480 U
B) $800 U C) $480 F D) $800 F

63. The labor efficiency variance for March is: A) $5,040 U
B) $1,200 U C) $1,200 F D) $5,040 F

64. The variable overhead spending variance for March is: A) $200 U
B) $600 U C) $600 F D) $200 F

65. The variable overhead efficiency variance for March is: A) $1,050 F
B) $1,050 U C) $250 F D) $250 U

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Chapter 10 Standard Costs and the Balanced Scorecard

Use the following to answer questions 66-67:

The following data pertain to Nell Company’s operations for June:

Standard quantity of materials per unit of product …… Standard cost of materials per pound …………………….. Standard direct labor hours ………………………………….. Standard wage rate per hour …………………………………. Actual output ……………………………………………………… Materials purchased ……………………………………………. Actual cost of materials purchased per pound ………… Materials used ……………………………………………………. Actual direct labor hours required …………………………. Actual direct labor cost per hour ……………………………
5 pounds $0.20 0.04 hours $7.00
100,000 units 100,000 pounds $0.17
60,000 pounds 3,900 hours $7.20

The materials price variance is recognized when materials are purchased.

66. Nell’s materials price variance for June was: A) $3,000 favorable
B) $3,000 unfavorable C) $2,000 favorable D) $2,000 unfavorable

Source: CMA, adapted

67. Nell’s labor efficiency variance for June was: A) $780 favorable
B) $780 unfavorable C) $700 favorable D) $700 unfavorable

Source: CMA, adapted

526 Garrison, Managerial Accounting, 12th Edition

Chapter 10 Standard Costs and the Balanced Scorecard

Use the following to answer questions 68-71:

The Collins Company uses standard costing and has established the following direct material and direct labor standards for each unit of the single product it makes:

Direct materials ……….. Direct labor ………………
4 gallons at $8 per gallon 1 hour at $16 per hour

During July, the company made 6,000 units of product and incurred the following costs:

Direct materials purchased ……… Direct materials used ……………… Direct labor used ……………………
26,800 gallons at $8.20 per gallon 25,200 gallons
5,600 hours at $15.30 per hour

68. The material price variance for July was: A) $5,360 favorable
B) $5,360 unfavorable C) $5,040 favorable D) $5,040 unfavorable

69. The materials quantity variance for July was: A) $22,960 unfavorable
B) $22,400 unfavorable C) $9,600 unfavorable D) $9,840 unfavorable

70. The labor rate variance for July was: A) $3,920 unfavorable
B) $6,120 unfavorable C) $1,120 favorable D) $3,920 favorable

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Chapter 10 Standard Costs and the Balanced Scorecard

71. The labor efficiency variance for July was: A) $6,400 favorable
B) $89,600 favorable C) $10,320 favorable D) $6,120 favorable

Use the following to answer questions 72-75:

Jackson Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Jackson has established the following standards for one unit of product.

Standard Quantity
Direct materials ………. 5 pounds Direct labor …………….. 1.25 hours
Standard Price or Rate
$3.60 per pound $12.00 per hour
Standard Cost $18.00 $15.00

During May, Jackson purchased 125,000 pounds of direct material at a total cost of $475,000. The total factory wages for May were $364,000, 90 percent of which were for direct labor. Jackson manufactured 22,000 units of product during May using 108,000 pounds of direct material and 28,000 direct labor hours.

72. The price variance for the direct material acquired by Jackson Industries during May is:
A) $21,600 favorable B) $25,000 unfavorable C) $28,000 favorable D) $21,600 unfavorable

Source: CMA, adapted

73. The direct material quantity variance for May is: A) $7,200 unfavorable
B) $7,600 favorable C) $5,850 unfavorable D) $7,200 favorable

Source: CMA, adapted

528 Garrison, Managerial Accounting, 12th Edition

Chapter 10 Standard Costs and the Balanced Scorecard

74. The direct labor rate variance for May is: A) $8,400 favorable
B) $7,200 unfavorable C) $8,400 unfavorable D) $6,000 favorable

Source: CMA, adapted

75. The direct labor efficiency variance for May is: A) $5,850 favorable
B) $7,200 favorable C) $6,000 unfavorable D) $5,850 unfavorable

Source: CMA, adapted

Use the following to answer questions 76-79:

Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for one unit of product.

Direct material ………. Direct labor ……………
Standard Quantity 8 pounds 0.25 hour
Standard Price or Rate
$1.80 per pound $8.00 per hour
Standard Cost $14.40 $2.00

During November, Arrow purchased 160,000 pounds of direct material at a total cost of $304,000. The total factory wages for November were $42,000, 90 percent of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct material and 5,000 direct labor hours.

76. The direct material price variance for November is: A) $16,000 favorable
B) $16,000 unfavorable C) $14,250 favorable D) $14,250 unfavorable

Source: CMA, adapted

Garrison, Managerial Accounting, 12th Edition 529

Chapter 10 Standard Costs and the Balanced Scorecard

77. The direct material quantity variance for November is: A) $14,400 unfavorable
B) $1,100 favorable
C) $17,100 unfavorable D) $17,100 favorable

Source: CMA, adapted

78. The direct labor rate variance for November is: A) $2,200 favorable
B) $1,900 unfavorable C) $2,000 unfavorable D) $2,090 favorable

Source: CMA, adapted

79. The direct labor efficiency variance for November is: A) $2,200 favorable
B) $2,000 favorable C) $2,000 unfavorable D) $1,800 unfavorable

Source: CMA, adapted

Use the following to answer questions 80-84:

The Dresden Company uses standard costing for the single product the company makes and sells. The following data are for the month of April:

� Actual cost of direct material purchased and used: $62,400 � Material price variance: $4,800 unfavorable
� Total materials variance: $14,400 unfavorable � Standard cost per pound of material: $6
� Standard cost per direct labor hour: $8 � Actual direct labor hours: 3,800 hours
� Labor efficiency variance: $1,600 favorable
� Standard number of direct labor hour per unit of product: 2 � Total labor variance: $680 unfavorable

530 Garrison, Managerial Accounting, 12th Edition

Chapter 10 Standard Costs and the Balanced Scorecard

80. The total number of units produced during April was: A) 8,000
B) 12,000 C) 2,000 D) 3,800

81. The standard quantity of material allowed to produce one unit of product was: A) 1 pound
B) 4 pounds C) 6 pounds D) 2 pounds

82. The actual material cost per pound was: A) $6.50
B) $6.00 C) $5.00 D) $7.20

83. The actual direct labor rate per hour was: A) $16.00
B) $6.50 C) $8.00 D) $8.60

84. The labor rate variance was: A) $2,280 favorable
B) $2,280 unfavorable C) $920 favorable
D) $920 unfavorable

Garrison, Managerial Accounting, 12th Edition 531

Chapter 10 Standard Costs and the Balanced Scorecard

Use the following to answer questions 85-86:

The following materials standards have been established for a particular product:

Standard quantity per unit of output ………. Standard price ……………………………………..
9.6 meters $14.80 per meter

The following data pertain to operations concerning the product for the last month:

Actual materials purchased ………………….. Actual cost of materials purchased ……….. Actual materials used in production ………. Actual output ………………………………………
2,600 meters $37,830 2,200 meters 400 units

85. What is the materials price variance for the month? A) $650 F
B) $550 U C) $550 F D) $650 U

86. What is the materials quantity variance for the month? A) $5,820 U
B) $24,272 F C) $5,920 U D) $23,862 F

Use the following to answer questions 87-88:

Blaster, Inc., manufactures portable radios. Each radio requires 3 units of Part XBEZ52, which has a standard cost of $1.45 per unit. During May, the company purchased 12,000 units of the part for a total of $18,000. Also during May, the company manufactured 3,000 radios, using 10,000 units of part XBEZ52.

87. During May, the materials price variance for part XBEZ52 was: A) $450 U
B) $450 F C) $600 F D) $600 U

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Chapter 10 Standard Costs and the Balanced Scorecard

88. During May, the materials quantity variance for part XBEZ52 was: A) $1,450 U
B) $1,450 F C) $4,350 F D) $4,350 U

Use the following to answer questions 89-90:

The following labor standards have been established for a particular product:

Standard labor hours per unit of output …….. Standard labor rate …………………………………
7.7 hours $15.55 per hour

The following data pertain to operations concerning the product for the last month:

Actual hours worked ………… Actual total labor cost ………. Actual output ……………………
9,800 hours $151,900 1,200 units

89. What is the labor rate variance for the month? A) $490 F
B) $60 F C) $60 U D) $490 U

90. What is the labor efficiency variance for the month? A) $8,680 U
B) $8,708 U C) $8,218 F D) $8,218 U

Garrison, Managerial Accounting, 12th Edition 533

Chapter 10 Standard Costs and the Balanced Scorecard

Use the following to answer questions 91-92:

A product’s standard cost card specifies that a unit of the product requires 4 direct labor-hours. During September, 3,350 units were made, which was 150 units less than budgeted. The total budgeted direct labor cost for September was $117,600. The direct labor cost incurred during September was $111,850 and 13,450 direct labor-hours were worked.

91. The direct labor rate variance for the month was: A) $5,750 F
B) $5,750 U C) $1,130 F D) $1,130 U

92. The direct labor efficiency variance for the month was: A) $420.00 U
B) $420.00 F C) $415.80 U D) $415.80 F

Use the following to answer questions 93-94:

The following standards for variable manufacturing overhead have been established for a company that makes only one product:

Standard hours per unit of output ………….. Standard variable overhead rate …………….
3.2 hours $12.70 per hour

The following data pertain to operations for the last month:

Actual hours ………………………………………… 1,600 hours Actual total variable overhead cost …………. $19,600 Actual output ……………………………………….. 400 units

93. What is the variable overhead spending variance for the month? A) $3,344 F
B) $720 U C) $3,344 U D) $720 F

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Chapter 10 Standard Costs and the Balanced Scorecard

94. What is the variable overhead efficiency variance for the month? A) $576 U
B) $4,064 U C) $3,920 U D) $3,920 F

Use the following to answer questions 95-96:

The Maxwell Company has a standard costing system in which variable manufacturing overhead is assigned to production on the basis of machine hours. The following data are available for July:

� Actual variable manufacturing overhead cost incurred: $22,620 � Actual machine hours worked: 1,600
� Variable overhead spending variance: $3,420 unfavorable � Total variable overhead variance: $4,620 unfavorable

95. The variable overhead efficiency variance for July is: A) $8,040 unfavorable
B) $8,040 favorable C) $1,200 unfavorable D) $1,200 favorable

96. The standard number of machine hours allowed for July production is: A) 1,500 hours
B) 1,600 hours C) 1,700 hours D) 2,270 hours

Garrison, Managerial Accounting, 12th Edition 535

Chapter 10 Standard Costs and the Balanced Scorecard

Use the following to answer questions 97-98:

Vermeillen Corporation uses a standard costing system in which variable manufacturing overhead is assigned to production on the basis of the number of machine setups. The following data pertain to one month’s operations:

� Variable manufacturing overhead cost incurred: $70,000 � Total variable overhead variance: $4,550 favorable
� Standard machine setups allowed for actual production: 3,550 � Actual machine setups incurred: 3,500

97. The standard variable overhead rate per machine setup is: A) $20.00
B) $21.30 C) $18.44 D) $21.00

98. The variable overhead spending variance is: A) $1,000 favorable
B) $1,000 unfavorable C) $3,500 unfavorable D) $3,500 favorable

Use the following to answer questions 99-101:

The following data pertain to operations at Quick Incorporated:

Throughput time ……………. 4 hours Delivery cycle time……….. 8 hours Process time …………………. 1 hour Queue time …………………… 2 hours

99. The wait time for this operation would be: A) 4 hours
B) 2 hours C) 8 hours
D) cannot be determined from information provided

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Chapter 10 Standard Costs and the Balanced Scorecard

100. The combined inspection and move time for this operation would be: A) 4 hours
B) 1 hour C) 2 hours
D) cannot be determined from information provided

101. The manufacturing cycle efficiency (MCE) for this operation would be: A) 50%
B) 75% C) 25% D) 12´%

Essay Questions

102. The following standards have been established for a raw material used in the production of product G13:

Standard quantity of the material per unit of output ……. Standard price of the material …………………………………..
2.3 liters $19.00 per liter

The following data pertain to a recent month’s operations:

Actual material purchased ……………………. Actual cost of material purchased …………. Actual material used in production ……….. Actual output ………………………………………
5,100 liters $100,725 4,700 liters
2,040 units of product G13

Required:
a. What is the materials price variance for the month?
b. What is the materials quantity variance for the month?
c. Prepare journal entries to record the purchase and use of the raw material during the month. (All raw materials are purchased on account.)

,7 Appendix: 10

Garrison, Managerial Accounting, 12th Edition 537

103. The standards for product F28 call for 2.7 pounds of a raw material that costs $16.50 per pound. Last month, 4,100 pounds of the raw material were purchased for $70,520. The actual output of the month was 1,300 units of product F28. A total of 3,500 pounds of the raw material were used to produce this output.

Required:
a. What is the materials price variance for the month?
b. What is the materials quantity variance for the month?
c. Prepare journal entries to record the purchase and use of the raw material during the month. (All raw materials are purchased on account.)

,7 Appendix: 10

538 Garrison, Managerial Accounting, 12th Edition

104. The following materials standards have been established for a particular product:

Standard quantity per unit of output ………… Standard price ……………………………………….
0.2 grams $18.90 per gram

The following data pertain to operations concerning the product for the last month:

Actual materials purchased …………………….. Actual cost of materials purchased …………… Actual materials used in production …………. Actual output …………………………………………
4,800 grams $86,880 4,200 grams 21,080 units

Required:
a. What is the materials price variance for the month?
b. What is the materials quantity variance for the month?

Garrison, Managerial Accounting, 12th Edition 539

105. The following standards have been established for a raw material used to make product I92:

Standard quantity of the material per unit of output … Standard price of the material ……………………………….
4.5 pounds $13.90 per pound

The following data pertain to a recent month’s operations:

Actual material purchased …………………. Actual cost of material purchased ………. Actual material used in production …….. Actual output ……………………………………
2,000 pounds $26,200 1,300 pounds
220 units of product I92

Required:
a. What is the materials price variance for the month?
b. What is the materials quantity variance for the month?

106. The standards for product K17 call for 5.0 meters of a raw material that costs $19.10 per meter. Last month, 2,700 meters of the raw material were purchased for $51,435. The actual output of the month was 460 units of product K17. A total of 2,500 meters of the raw material were used to produce this output.

Required:
a. What is the materials price variance for the month?
b. What is the materials quantity variance for the month?

107. The following direct labor standards have been established for product N30A:

Standard direct labor-hours ……………. Standard direct labor wage rate ……….
3.3 hours per unit of N30A $10.50 per hour

The following data pertain to the most recent month’s operations during which 400 units of product N30A were made:

Actual direct labor-hours worked …….. Actual direct labor wages paid …………
1,100 $11,385

Required:
a. What was the labor rate variance for the month?
b. What was the labor efficiency variance for the month?
c. Prepare a journal entry to record direct labor costs during the month, including the direct labor variances.

,7 Appendix: 10

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108. The standards for product Q58W specify 8.4 direct labor-hours per unit at $14.00 per direct labor-hour. Last month 400 units of product Q58W were produced using 2,800 direct labor-hours at a total direct labor wage cost of $41,020.

Required:
a. What was the labor rate variance for the month?
b. What was the labor efficiency variance for the month?
c. Prepare a journal entry to record direct labor costs during the month, including the direct labor variances.

,7 Appendix: 10

542 Garrison, Managerial Accounting, 12th Edition

109. The following labor standards have been established for a particular product:

Standard labor hours per unit of output ….. Standard labor rate ……………………………….
3.2 hours $19.10 per hour

The following data pertain to operations concerning the product for the last month:

Actual hours worked ……… Actual total labor cost …….. Actual output …………………
5,500 hours $105,050 1,900 units

Required:
a. What is the labor rate variance for the month?
b. What is the labor efficiency variance for the month?

110. The following direct labor standards have been established for product S57S:

Standard direct labor-hours ………………….. Standard direct labor wage rate ……………..
1.5 hours per unit of S57S $14.70 per hour

The following data pertain to last month’s operations:

Actual output of product S57S ……………….. 720 units Actual direct labor-hours worked ……………. 1,000 Actual direct labor wages paid ……………….. $14,800

Required:
a. What was the labor rate variance for the month?
b. What was the labor efficiency variance for the month?

111. The standards for product F88W specify 3.4 direct labor-hours per unit at $13.00 per direct labor-hour. Last month 800 units of product F88W were produced using 2,500 direct labor-hours at a total direct labor wage cost of $30,500.

Required:
a. What was the labor rate variance for the month?
b. What was the labor efficiency variance for the month?

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112. The following standards for variable manufacturing overhead have been established for a company that makes only one product:

Standard hours per unit of output ………….. Standard variable overhead rate …………….
0.6 hours $17.55 per hour

The following data pertain to operations for the last month:

Actual hours ………………………………………… 6,200 hours Actual total variable overhead cost …………. $110,670 Actual output ……………………………………….. 10,200 units

Required:
a. What is the variable overhead spending variance for the month? b. What is the variable overhead efficiency variance for the month?

113. Deschamp Corporation’s variable manufacturing overhead is applied on the basis of direct labor-hours. The company has established the following variable manufacturing overhead standards for product O28H:

Standard direct labor-hours ………………………………. Standard variable manufacturing overhead rate ……
2.5 hours per unit of O28H $7.70 per hour

The following data pertain to the most recent month’s operations during which 2,160 units of product O28H were made:

Actual direct labor-hours worked ……………………………… Actual variable manufacturing overhead incurred ……….
5,200 $44,980

Required:
a. What was the variable overhead spending variance for the month? b. What was the variable overhead efficiency variance for the month?

114. Shawl Corporation’s variable manufacturing overhead is applied on the basis of direct labor-hours. The standard cost card for product F02E specifies 5.5 direct labor-hours per unit of F02E. The standard variable manufacturing overhead rate is $6.80 per direct labor-hour. During the most recent month, 1,560 units of product F02E were made and 8,700 direct labor-hours were worked.
The actual variable manufacturing overhead incurred was $52,635.

Required:
a. What was the variable overhead spending variance for the month? b. What was the variable overhead efficiency variance for the month?

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115. Pardun Corporation’s management keeps track of the time it takes to process orders. During the most recent month, the following average times were recorded per order:

Days Wait time …………….. 15.6 Inspection time…….. 0.8 Process time…………. 1.6 Move time ……………. 0.7 Queue time ………….. 3.9

Required:
a. Compute the throughput time.
b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities? d. Compute the delivery cycle time.

116. During the most recent month at Luinstra Corporation, queue time was 4.5 days, inspection time was 0.8 day, process time was 1.9 days, wait time was 5.1 days, and move time was 0.7 day.

Required:
a. Compute the throughput time.
b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities? d. Compute the delivery cycle time.

117. Rintharamy Corporation’s management reports that its average delivery cycle time is 25.2 days, its average throughput time is 7.6 days, its manufacturing cycle efficiency (MCE) is 0.25, its average move time is 0.9 day, and its average queue time is 4.0 days.

Required:
a. What is the wait time?
b. What is the process time?
c. What is the inspection time?

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True/False Questions

1. Fixed costs should not be included in a flexible budget since such costs are not likely to be controllable by managers.

2. It is not important that the activity base and overhead costs be causally related when developing a flexible budget.

3. The activity base for a flexible budget should usually be expressed in units of activity rather than in dollars.

4. The static budget should be used primarily to determine whether cost control is being maintained.

5. A company that wants to report both spending and efficiency variances for overhead must compute budget allowances for both the actual amount of activity that occurred and the standard level of activity allowed for the level of output achieved.

6. Responsibility for the overhead efficiency variance should be assigned to whoever is responsible for control of the activity base underlying the flexible budget.

7. A favorable variable overhead efficiency variance indicates that overhead has been used efficiently.

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8. A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company’s choice of the denominator level of activity has no effect on the fixed overhead budget variance.

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9. In a standard cost system, overhead is applied on the basis of the actual level of activity rather than the standard level of activity allowed for the output of a period.

10. A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company’s choice of the denominator level of activity has no effect on the fixed portion of the predetermined overhead rate.

11. The budget variance for fixed overhead represents the difference between actual fixed overhead costs incurred and the amount of fixed overhead applied to work in process.

12. There can be no volume variance for variable overhead.

13. An unfavorable volume variance means that a company operated at an activity level greater than that planned for the period.

14. The volume variance for fixed overhead is an activity-related variance based on the difference between the denominator level of activity and the standard level of activity allowed for the output of a period.

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15. A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. A fixed overhead volume variance will NOT necessarily occur in a month in which production volume differs from sales volume.

Multiple Choice Questions

16. When using a flexible budget, what will occur to fixed costs as the activity level increases within the relevant range?
A) fixed costs per unit will decrease.
B) fixed costs per unit will remain unchanged. C) fixed costs per unit will increase.
D) fixed costs are not considered in flexible budgeting.

Source: CPA, adapted

17. A major disadvantage of static budgets is:
A) the difficulty in developing such budgets due to the high cost of gathering the necessary information.
B) the cost behavior pattern of manufacturing overhead, which is primarily fixed. C) that the variances between actual and budget on a static budget result from
comparing actual costs at one level of activity to budgeted costs at a different level of activity.
D) their length and complexity.

18. Comparing actual results to a budget based on actual activity for the period is possible with the use of a:
A) monthly budget. B) master budget. C) flexible budget. D) rolling budget.

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19. A static budget is:
A) a budget for a single level of activity. B) a budget that ignores inflation.
C) used only for fixed costs.
D) used when the mix of products does not change.

20. Last year, a department’s standard costing system reported an unfavorable variable overhead spending variance and an unfavorable volume variance. The denominator activity level selected for allocating overhead to the product was based on 80% of capacity. If 100% of capacity had been selected instead as the denominator level, how would the reported unfavorable spending and volume variances be affected?

Spending variance A) Increased
B) Increased C) Unchanged D) Unchanged
Volume variance Unchanged Increased Increased Unchanged

,5 Source: CPA, adapted

21. The overhead spending variance:
A) measures the variance in amount spent for fixed overhead items.
B) includes elements of waste or excessive usage as well as elements of price variance.
C) is generally considered to be the least useful of all overhead variances.
D) measures the difference between denominator activity and standard hours allowed.

22. If the price a company paid for overhead items, such as utilities, decreased during the year, the company would probably report a(n):
A) favorable efficiency variance. B) favorable spending variance.
C) unfavorable efficiency variance. D) unfavorable spending variance.

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23. Variable overhead is applied on the basis of standard direct labor-hours. If the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be:
A) favorable. B) unfavorable. C) zero.
D) indeterminable since it is not related to the labor efficiency variance.

Source: CMA, adapted

24. Alex Company has a large underapplied overhead balance in the manufacturing overhead account. This could be explained by:
A) an unfavorable volume variance, assuming all other variances are zero. B) a favorable volume variance, assuming all other variances are zero.
C) standard hours allowed for the period’s output being greater than denominator hours for the period.
D) none of these.

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25. In a standard cost system, overhead is applied to production on the basis of: A) the denominator hours chosen for the period.
B) the actual hours required to complete the output of the period. C) the standard hours allowed to complete the output of the period. D) none of these.

26. The fixed overhead budget variance is measured by:
A) the difference between budgeted fixed overhead cost and actual fixed overhead cost.
B) the difference between actual fixed overhead cost and applied fixed overhead cost. C) the difference between budgeted fixed overhead cost and applied fixed overhead
cost.
D) none of these.

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27. The Santos Company erred in selecting a denominator level of activity and chose a much lower level than was realistic. This error would most likely result in a large: A) favorable variable overhead efficiency variance.
B) favorable fixed overhead budget variance. C) favorable fixed overhead volume variance. D) unfavorable fixed overhead budget variance.

28. A fixed overhead volume variance based on standard direct labor-hours measures: A) deviation from standard direct labor hour capacity.
B) deviation from the denominator level of direct labor hours. C) fixed overhead efficiency.
D) fixed overhead spending.

Source: CMA, adapted

29. Papenfuss Family Inn is a bed and breakfast establishment in a converted 100-year-old mansion. The Inn’s guests appreciate its gourmet breakfasts and individually decorated rooms. The Inn’s overhead budget for the most recent month appears below:

Activity level …………………………….. Variable overhead costs:
Supplies …………………………………. Laundry ………………………………….
Fixed overhead costs: Utilities………………………………….. Salaries and wages ………………….. Depreciation ……………………………
Total overhead cost …………………….
86 guests

$ 86.00 507.40

340.00 4,790.00
2,620.00 $8,343.40

The Inn’s variable overhead costs are driven by the number of guests.

What would be the total budgeted overhead cost for a month if the activity level is 76 guests? Assume that the activity levels of 86 guests and 76 guests are within the same relevant range.
A) $52,848.40 B) $8,343.40 C) $8,274.40 D) $7,373.24

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30. Hatzenbuhler Manufacturing Corporation has prepared the following overhead budget for next month.

Activity level …………………………… Variable overhead costs:
Supplies ……………………………….. Indirect labor …………………………
Fixed overhead costs:
Supervision …………………………… Utilities………………………………… Depreciation …………………………. Total overhead cost ………………..
6,800 machine-hours

$ 22,440 55,760

19,300 5,700
7,400 $110,600

The company’s variable overhead costs are driven by machine-hours.

What would be the total budgeted overhead cost for next month if the activity level is 6,600 machine-hours rather than 6,800 machine-hours? Assume that the activity levels of 6,800 machine-hours and 6,600 machine-hours are within the same relevant range. A) $107,824.00
B) $110,600.00 C) $108,300.00 D) $107,347.06

31. Mcgahen Medical Clinic measures its activity in terms of patient-visits. Last month, the budgeted level of activity was 1,080 patient-visits and the actual level of activity was 990 patient-visits. The clinic’s director budgets for variable overhead costs of $3.30 per patient-visit and fixed overhead costs of $10,600 per month. The actual variable overhead cost last month was $3,380 and the actual fixed overhead cost was $8,780. In the clinic’s flexible budget performance report for last month, what would have been the variance for the total overhead cost?
A) $113 U B) $297 F C) $1,707 F D) $2,004 F

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32. Sesareo Tile Installation Corporation measures its activity in terms of square feet of tile installed. Last month, the budgeted level of activity was 1,130 square feet and the actual level of activity was 1,180 square feet. The company’s owner budgets for supply costs, a variable overhead cost, at $2.60 per square foot. The actual supply cost last month was $2,130. In the company’s flexible budget performance report for last month, what would have been the variance for supply costs?
A) $808 F B) $938 F C) $90 U D) $130 U

33. Eng Natural Dying Corporation measures its activity in terms of skeins of yarn dyed. Last month, the budgeted level of activity was 16,800 skeins and the actual level of activity was 16,600 skeins. The company’s owner budgets for dye costs, a variable overhead cost, at $0.44 per skein. The actual dye cost last month was $7,690. In the company’s flexible budget performance report for last month, what would have been the variance for dye costs?
A) $298 U B) $93 F C) $88 F D) $386 U

34. Mcneeley Footwear Corporation’s flexible budget cost formula for supplies, a variable overhead cost, is $2.94 per unit of output. The company’s flexible budget performance report for last month showed a $4,998 favorable variance for supplies. During that month, 11,900 units were produced. Budgeted activity for the month had been 12,300 units. The actual costs incurred for indirect materials must have been closest to:
A) $2.94 B) $2.03 C) $2.10 D) $2.52

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35. Goy Corporation’s flexible budget performance report for last month shows that actual indirect materials cost, a variable overhead cost, was $28,194 and that the variance for indirect materials cost was $1,887 unfavorable. During that month, the company worked 11,100 machine-hours. Budgeted activity for the month had been 11,200 machine-hours. The cost formula per machine-hour for indirect materials cost must have been closest to:
A) $2.69 B) $2.71 C) $2.35 D) $2.37

36. At Cady Company, maintenance is a variable cost that varies directly with machine-hours. The performance report for June showed that actual maintenance costs totaled $9,600 and that the associated spending variance was $400 unfavorable. If 8,000 machine-hours were actually worked during June, the budgeted maintenance cost per machine-hour was:
A) $1.30 B) $1.25 C) $1.20 D) $1.15

37. Suski Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:

Budgeted level of activity ……………………………….. Actual level of activity …………………………………… Cost formula for variable overhead cost …………… Budgeted fixed overhead cost …………………………. Actual total variable overhead …………………………. Actual total fixed overhead ……………………………..
7,400 MHs 7,500 MHs $5.90 per MH
$60,000 $42,750 $61,000

What was the variable overhead spending variance for the month? A) $1,500 favorable
B) $590 unfavorable C) $910 favorable
D) $1,000 unfavorable

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38. Masek Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:

Budgeted level of activity ………………………………………… Actual level of activity ……………………………………………. Cost formula for variable manufacturing overhead cost . Budgeted fixed manufacturing overhead cost …………….. Actual total variable manufacturing overhead ……………. Actual total fixed manufacturing overhead …………………
2,000 MHs 2,400 MHs $5.90 per MH
$50,000 $14,880 $49,000

What was the fixed overhead budget variance for the month? A) $2,360 unfavorable
B) $1,000 unfavorable C) $2,360 favorable D) $1,000 favorable

39. Omary Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:

Budgeted level of activity ………………………………………… Actual level of activity ……………………………………………. Cost formula for variable manufacturing overhead cost . Budgeted fixed manufacturing overhead cost …………….. Actual total variable manufacturing overhead ……………. Actual total fixed manufacturing overhead …………………
3,900 MHs 4,100 MHs $7.60 per MH
$50,000 $31,980 $54,000

What was the total of the variable overhead spending and fixed overhead budget variances for the month?
A) $1,520 unfavorable B) $3,180 favorable C) $4,820 unfavorable D) $6,340 unfavorable

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40. Coblentz Fabrication Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company’s cost formula for variable manufacturing overhead is $6.20 per MH. The company had budgeted its fixed manufacturing overhead cost at $40,000 for the month. During the month, the actual total variable manufacturing overhead was $48,970 and the actual total fixed manufacturing overhead was $43,000. The actual level of activity for the period was 8,300 MHs. What was the total of the variable overhead spending and fixed overhead budget variances for the month?
A) $2,490 favorable B) $510 favorable C) $510 unfavorable
D) $2,490 unfavorable

41. Sholette Manufacturing Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company’s cost formula for variable manufacturing overhead is $5.00 per MH. During the month, the actual total variable manufacturing overhead was $22,540 and the actual level of activity for the period was 4,600 MHs. What was the variable overhead spending variance for the month?
A) $92 favorable B) $92 unfavorable
C) $460 unfavorable D) $460 favorable

42. Tropiano Electronics Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company had budgeted its fixed manufacturing overhead cost at $62,100 for the month and its level of activity at 3,200 MHs. The actual total fixed manufacturing overhead was $61,600 for the month and the actual level of activity was 3,000 MHs. What was the fixed overhead budget variance for the month to the nearest dollar? A) $3,381 unfavorable
B) $500 favorable C) $500 unfavorable D) $3,381 favorable

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43. Merle Corporation applies manufacturing overhead to products on the basis of standard machine-hours. For the most recent month, the company based its budget on 4,000 machine-hours. Budgeted and actual overhead costs for the month appear below:

Original Budget Based on 4,000
Machine- Actual Hours Costs
Variable overhead costs:
Supplies …………………………….. $14,000 $13,150 Indirect labor ……………………… 27,200 24,390
Fixed overhead costs:
Supervision ………………………… 19,900 19,540 Utilities……………………………… 4,700 4,360 Factory depreciation ……………. 8,800 8,620 Total overhead cost ……………….. $74,600 $70,060

The company actually worked 3,690 machine-hours during the month. The standard hours allowed for the actual output were 3,620 machine-hours for the month. What was the overall variable overhead efficiency variance for the month?
A) $721 unfavorable B) $467 favorable C) $254 unfavorable D) $880 favorable

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44. Schley Corporation applies manufacturing overhead to products on the basis of standard machine-hours. Budgeted and actual overhead costs for the most recent month appear below:

Variable overhead costs:
Supplies ……………………………….. Indirect labor ………………………… Total variable overhead cost ……
Original Budget

$ 3,840
22,400 $26,240
Actual Costs

$ 4,730
25,260 $29,990

The original budget was based on 3,200 machine-hours. The company actually worked 3,510 machine-hours during the month and the standard hours allowed for the actual output were 3,660 machine-hours. What was the overall variable overhead efficiency variance for the month?
A) $550 favorable
B) $1,208 unfavorable C) $22 favorable
D) $1,230 favorable

45. Machain Corporation applies manufacturing overhead to products on the basis of standard machine-hours. The company’s cost formula for variable overhead cost is $2.90 per machine-hour. The actual variable overhead cost for the month was $15,270. The original budget for the month was based on 5,000 machine-hours. The company actually worked 5,090 machine-hours during the month. The standard hours allowed for the actual output of the month totaled 5,200 machine-hours. What was the variable overhead efficiency variance for the month?
A) $580 unfavorable B) $190 unfavorable C) $509 unfavorable D) $319 favorable

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46. Pizzi, Inc. had the following fixed overhead variances last year:

Fixed overhead budget variance ……………. Fixed overhead volume variance ……………
$30,000 $6,000
unfavorable favorable

Pizzi uses machine-hours as an activity base for overhead and used 48,000 machine-hours as the denominator activity level for the year. Total actual fixed overhead was $150,000. The actual number of machine-hours incurred was 50,000. What were Pizzi’s standard hours allowed for actual output?
A) 40,000 B) 42,000 C) 50,400 D) 52,500

,6

47. Ferro Enterprises, Inc., uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of standard direct labor-hours. During the month of September, the company applied $52,000 in fixed manufacturing overhead cost to units of product. At the end of the month, manufacturing overhead was overapplied by $3,000. If there was no volume variance in September, then the budgeted fixed manufacturing overhead cost for the month was:
A) $49,000 B) $52,000 C) $55,000 D) $58,000

,6

48. Hall Company’s standards call for 750 direct labor-hours to produce 500 units. During May 400 units were produced. The company worked 650 direct labor-hours. The standard hours allowed for May production would be:
A) 750 hours B) 650 hours C) 600 hours D) 100 hours

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49. Dexter Company uses a standard cost system and applies manufacturing overhead cost to units of product on the basis of standard direct labor-hours (DLHs). Information on Dexter Company’s manufacturing overhead costs for last period is given below:

Actual hours worked ………………………………………… Standard hours allowed for actual production ………. Denominator hours used in computing the
predetermined overhead rate …………………………… Predetermined overhead rate ……………………………… Actual overhead costs incurred …………………………..
40,000 DLHs 38,000 DLHs

35,000 DLHs $4 per DLH
$150,000

Given these data, the under- or overapplied overhead cost for the period would be: A) $10,000 overapplied
B) $2,000 overapplied C) $10,000 underapplied D) $8,000 underapplied

50. At the end of April, the Manufacturing Overhead account of Askey Company showed a debit balance of $6,000 after overhead had been applied for the month. If the actual total manufacturing overhead cost incurred in April was $108,600, and if 8,550 units were produced in April, then the total (combined) rate for applying manufacturing overhead cost per unit is:
A) $13.40 B) $13.00 C) $12.80 D) $12.00

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51. Semaan Corporation applies manufacturing overhead to products on the basis of standard machine-hours. Budgeted and actual overhead costs for the month appear below:

Variable overhead costs:
Supplies …………………………………. Indirect labor …………………………..
Fixed overhead costs:
Supervision …………………………….. Utilities………………………………….. Factory depreciation ………………… Total overhead cost …………………….
Original Budget

$11,340 15,120

14,900 5,800
9,700 $56,860
Actual Costs

$12,850 17,080

14,640 6,010
9,410 $59,990

The company based its original budget on 2,700 machine-hours. The company actually worked 2,960 machine-hours during the month. The standard hours allowed for the actual output of the month totaled 3,030 machine-hours. What was the overall fixed overhead budget variance for the month?
A) $3,130 unfavorable B) $340 unfavorable C) $340 favorable
D) $3,130 favorable

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52. Acuff Corporation applies manufacturing overhead to products on the basis of standard machine-hours. Budgeted and actual overhead costs for the most recent month appear below:

Fixed overhead costs: Supervision ……………………….. Utilities…………………………….. Factory depreciation …………… Total fixed overhead cost …….
Original Budget

$15,600 5,000
6,800 $27,400
Actual Costs

$15,950 5,070
6,700 $27,720

The company based its original budget on 6,200 machine-hours. The company actually worked 6,560 machine-hours during the month. The standard hours allowed for the actual output of the month totaled 6,420 machine-hours. What was the overall fixed overhead budget variance for the month?
A) $320 favorable B) $320 unfavorable C) $972 favorable D) $972 unfavorable

53. Reidenbach Corporation applies manufacturing overhead to products on the basis of standard machine-hours. The budgeted fixed overhead cost for the most recent month was $17,100 and the actual fixed overhead cost for the month was $17,450. The company based its original budget on 4,500 machine-hours. The standard hours allowed for the actual output of the month totaled 4,810 machine-hours. What was the overall fixed overhead budget variance for the month?
A) $1,178 unfavorable B) $350 unfavorable C) $350 favorable
D) $1,178 favorable

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54. Steinhagen Corporation applies manufacturing overhead to products on the basis of standard machine-hours. Budgeted and actual overhead costs for the most recent month appear below:

Variable overhead costs:
Supplies ……………………………….. Indirect labor …………………………
Fixed overhead costs:
Supervision …………………………… Utilities………………………………… Factory depreciation ………………. Total overhead cost …………………..
Original Budget

$ 5,460 3,640

9,100 5,980
22,100 $46,280
Actual Costs

$ 6,570 4,410

9,450 5,850
22,520 $48,800

The company based its original budget on 2,600 machine-hours. The company actually worked 2,790 machine-hours during the month. The standard hours allowed for the actual output of the month totaled 2,960 machine-hours. What was the overall fixed overhead volume variance for the month?
A) $5,148 favorable B) $5,148 unfavorable C) $2,717 favorable D) $2,717 unfavorable

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55. Denby Corporation applies manufacturing overhead to products on the basis of standard machine-hours. Budgeted and actual fixed overhead costs for the most recent month appear below:

Fixed overhead costs:
Supervision …………………………… Utilities………………………………… Factory depreciation ………………. Total fixed overhead cost ………..
Original Budget

$12,800 8,320
46,720 $67,840
Actual Costs

$13,190 8,260
46,540 $67,990

The company based its original budget on 6,400 machine-hours. The company actually worked 6,710 machine-hours during the month. The standard hours allowed for the actual output of the month totaled 6,540 machine-hours. What was the overall fixed overhead volume variance for the month?
A) $3,286 favorable B) $1,484 unfavorable C) $3,286 unfavorable D) $1,484 favorable

56. Diseth Corporation applies manufacturing overhead to products on the basis of standard machine-hours. The company bases its predetermined overhead rate on 5,300 machine-hours. The company’s total budgeted fixed manufacturing overhead is $12,720. In the most recent month, the total actual fixed manufacturing overhead was $12,370. The company actually worked 5,350 machine-hours during the month. The standard hours allowed for the actual output of the month totaled 5,540 machine-hours. What was the overall fixed overhead volume variance for the month?
A) $350 favorable B) $120 favorable C) $120 unfavorable D) $576 favorable

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57. Bruley Corporation applies manufacturing overhead to products on the basis of standard machine-hours. The company’s predetermined overhead rate for fixed manufacturing overhead is $3.30 per machine-hour and the denominator level of activity is 3,500 machine-hours. In the most recent month, the total actual fixed manufacturing overhead was $11,570 and the company actually worked 3,430 machine-hours during the month. The standard hours allowed for the actual output of the month totaled 3,450 machine-hours. What was the overall fixed overhead volume variance for the month?
A) $66 favorable B) $231 favorable
C) $231 unfavorable D) $165 unfavorable

Use the following to answer questions 58-61:

The Steimer Company bases its flexible budget for manufacturing overhead on direct labor-hours (DLH). The company uses the following information in its flexible budget:

Supplies …………….. Utilities……………… Insurance …………… Indirect labor ……… Depreciation ……….
$0.45 per DLH
$9,000 per month plus $0.30 per DLH $3,000 per month
$15,000 per month plus $0.25 per DLH $18,000 per month

The company uses standard costing and uses 50,000 DLHs as its denominator activity.

58. The variable manufacturing overhead rate per direct labor-hour is: A) $0.45
B) $0.55 C) $1.00 D) $1.25

59. The fixed manufacturing overhead rate per direct labor-hour is: A) $0.55
B) $0.90 C) $1.00 D) $1.30

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60. At an activity level of 40,000 direct labor-hours, the total budgeted manufacturing overhead for a month would be:
A) $45,000 B) $60,000 C) $67,000 D) $85,000

61. Suppose that 48,000 actual direct labor-hours are worked during one month. If 45,000 standard direct labor-hours are allowed for the month’s output, then the variable overhead efficiency variance for supplies for the month would be:
A) $400 U B) $400 F C) $1,350 U D) $1,350 F

Use the following to answer questions 62-64:

The Minard Company uses the following condensed flexible budget for manufacturing overhead:

Variable overhead …………. Fixed overhead ………………
$5.80 per direct labor-hour $420,000 per year

62. At an activity level of 600,000 direct labor-hours per year, the budgeted manufacturing overhead cost would be:
A) $3,840,000 B) $3,900,000 C) $1,020,000 D) $420,000

63. At an activity level of 400,000 direct labor-hours, the budgeted variable manufacturing overhead cost would be:
A) $2,740,000 B) $2,320,000 C) $820,000 D) $420,000

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64. At a denominator activity level of 700,000 direct labor-hours, the predetermined overhead rate (per direct labor-hour) would be:
A) $7.00 B) $6.40 C) $6.00 D) $5.80

Use the following to answer questions 65-70:

A manufacturing company has a standard costing system based on standard machine-hours (MHs) as the measure of activity. Data from the company’s flexible budget for manufacturing overhead are given below:

Denominator level of activity …………………………….. Overhead costs at the denominator activity level: Variable overhead cost ……………………………………… Fixed overhead cost …………………………………………..
6,300 MHs

$34,020 $120,960

The following data pertain to operations for the most recent period:

Actual hours …………………………………………………. Standard hours allowed for the actual output …….. Actual total variable overhead cost ………………….. Actual total fixed overhead cost ……………………….
6,800 MHs 6,384 MHs
$38,080 $122,710

65. What is the predetermined overhead rate to the nearest cent? A) $22.79
B) $24.60 C) $25.52 D) $23.65

66. How much overhead was applied to products during the period to the nearest dollar? A) $154,980
B) $157,046 C) $167,280 D) $160,790

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67. What was the variable overhead spending variance for the period to the nearest dollar? A) $4,060 F
B) $4,060 U C) $1,360 U D) $1,360 F

68. What was the variable overhead efficiency variance for the period to the nearest dollar?
A) $2,330 U B) $2,246 U C) $4,060 U D) $1,277 F

69. What was the fixed overhead budget variance for the period to the nearest dollar? A) $137 F
B) $1,750 U C) $7,850 U D) $7,507 F

70. What was the fixed overhead volume variance for the period to the nearest dollar? A) $9,600 F
B) $7,987 U C) $1,613 F D) $1,615 U

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Chapter 11 Flexible Budgets and Overhead Analysis

Use the following to answer questions 71-74:

Pohl Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard machine-hours. For June, the company’s manufacturing overhead flexible budget showed the following total budgeted costs at a denominator activity level of 20,000 machine-hours:

Variable overhead costs (total): Maintenance …………………………. Utilities…………………………………
Fixed overhead costs (total): Supervision …………………………… Depreciation ………………………….

$16,000 $10,000

$20,500 $9,500

During June, 17,000 machine-hours were used to complete 13,000 units of product, and the following actual total overhead costs were incurred:

Variable overhead costs (total): Maintenance …………………………. Utilities…………………………………
Fixed overhead costs (total): Supervision …………………………… Depreciation ………………………….

$14,620 $10,710

$19,320 $9,500

At standard, each unit of finished product requires 1.4 hours of machine time.

71. The variable overhead spending variance for maintenance cost for June was A) $1,020 F
B) $1,020 U C) $3,230 F D) $3,230 U

72. The variable overhead efficiency variance for utilities cost for June was A) $400 F
B) $400 U C) $600 F D) $600 U

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73. The total predetermined overhead rate per machine-hour for June was: A) $2.57
B) $1.30 C) $2.80 D) $3.15

74. The fixed overhead budget variance (in total) for June was: A) $3,230 F
B) $3,230 U C) $1,180 F D) $1,180 U

Use the following to answer questions 75-78:

Standard Company has developed standard manufacturing overhead costs based on a capacity of 180,000 direct labor-hours (DLHs) as follows:

Standard overhead costs per unit:
Variable portion ……… 2 DLHs @ $3 per DLH = $6 Fixed portion ………….. 2 DLHs @ $5 per DLH = $10

The following data pertain to operations in April:
Actual output ……………………………………… 80,000 units Actual direct labor cost ……………………….. $644,000
Actual direct labor-hours worked ………….. 165,000 DLHs Variable overhead cost incurred ……………. $518,000
Fixed overhead cost incurred ……………….. $860,000

75. The variable overhead spending variance for April was: A) $15,000 unfavorable
B) $23,000 unfavorable C) $38,000 favorable D) $38,000 unfavorable

Source: CMA, adapted

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Chapter 11 Flexible Budgets and Overhead Analysis

76. The variable overhead efficiency variance for April was: A) $15,000 unfavorable
B) $23,000 unfavorable C) $38,000 favorable D) $38,000 unfavorable

Source: CMA, adapted

77. The fixed overhead budget variance for April was: A) $40,000 unfavorable
B) $40,000 favorable C) $60,000 favorable D) $60,000 unfavorable

Source: CMA, adapted

78. The fixed overhead volume variance for April was: A) $60,000 unfavorable
B) $60,000 favorable C) $100,000 favorable
D) $100,000 unfavorable

Source: CMA, adapted

Use the following to answer questions 79-81:

Sulema, Inc. repairs and refinishes antique furniture. Manufacturing overhead at Sulema is applied to production on the basis of standard direct labor-hours.

79. Which overhead variance(s) at Sulema would be favorably affected if the actual direct labor-hours incurred are less than the standard direct labor-hours allowed for output? A) variable overhead spending variance
B) variable overhead efficiency variance C) fixed overhead budget variance
D) fixed overhead volume variance

,4,6

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80. Which overhead variance(s) at Sulema would be unfavorably affected if the cost of solvents used to strip the old paint and varnish from the furniture unexpectedly doubles in price?
A) variable overhead spending variance B) variable overhead efficiency variance C) fixed overhead budget variance
D) fixed overhead volume variance

,4,6

81. Which overhead variance(s) at Sulema would be unfavorably affected if a significant amount of glue is being wasted by inexperienced direct labor workers?
A) variable overhead spending variance B) variable overhead efficiency variance C) fixed overhead budget variance
D) fixed overhead volume variance

,4,6

Use the following to answer questions 82-83:

A manufacturing company that has only one product has established the following standards for its variable manufacturing overhead. The company uses direct labor-hours (DLHs) as its measure of activity.

Standard hours per unit of output ………….. Standard variable overhead rate …………….
3.9 DLHs $16.55 per DLH

The following data pertain to operations for the last month:

Actual direct labor-hours ……………………….. Actual total variable overhead cost …………. Actual output ………………………………………..
7,700 DLHs $127,050
1,700 units

82. What is the variable overhead spending variance for the month? A) $385 F
B) $17,324 U C) $385 U D) $17,324 F

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Chapter 11 Flexible Budgets and Overhead Analysis

83. What is the variable overhead efficiency variance for the month? A) $17,655 F
B) $17,655 U C) $17,709 U D) $332 U

Use the following to answer questions 84-86:

Cuda Manufacturing Company uses a standard cost system with machine-hours (MHs) as the activity base for overhead. The following information relates to Cuda’s operations last year:

Denominator activity level in machine-hours …………….. Standard machine-hours allowed for actual output ……… Actual number of machine-hours incurred ………………… Predetermined overhead rate for variable overhead …….. Predetermined overhead rate for fixed overhead ………… Total variable overhead incurred ……………………………… Total fixed overhead incurred during …………………………
50,000 55,000 52,000
$7.00 per MH $12.00 per MH
$370,000 $615,000

84. What was Cuda’s variable overhead spending variance? A) $6,000 unfavorable
B) $15,000 favorable C) $20,000 unfavorable D) $21,000 favorable

85. What was Cuda’s fixed overhead budget variance? A) $9,000 favorable
B) $15,000 unfavorable C) $45,000 favorable D) $45,000 unfavorable

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Chapter 11 Flexible Budgets and Overhead Analysis

86. What total amount of manufacturing overhead cost (variable and fixed) did Cuda apply to production?
A) $950,000 B) $985,000 C) $988,000 D) $1,045,000

Use the following to answer questions 87-89:

Vette Tie Corporation has developed the following manufacturing overhead standards to use in applying overhead to the production of its hand-painted silk ties. Manufacturing overhead at Vette is applied to production on the basis of standard direct labor-hours (DLHs).

Standard Cost Per Tie
Variable overhead (1.1 DLHs @ $14.00 per DLH) …….. $15.40 Fixed overhead (1.1 DLHs @ $8.00 per DLH) …………… $8.80

The above standards were based on an expected annual volume of 60,000 ties. The actual results for last year were as follows:

Number of ties produced …………… Direct labor-hours worked ………… Variable overhead cost ……………… Fixed overhead cost …………………..
58,000 64,000 $880,000 $525,000

87. What was Vette’s variable overhead spending variance? A) $2,800 unfavorable
B) $13,200 favorable C) $16,000 favorable D) $68,000 unfavorable

88. What was Vette’s fixed overhead budget variance? A) $1,600 unfavorable
B) $3,000 favorable
C) $13,000 unfavorable D) $17,600 unfavorable

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Chapter 11 Flexible Budgets and Overhead Analysis

89. What total amount of manufacturing overhead cost (variable and fixed) did Vette apply to the 58,000 ties produced during the year?
A) $1,276,000 B) $1,403,600 C) $1,421,200 D) $1,452,000

Use the following to answer questions 90-92:

Tantanka Manufacturing Company uses a standard cost system with machine-hours as the activity base for overhead. The following information relates to production for last year:

Total budgeted overhead (at denominator level of activity) ………………………………………………………………
Total applied overhead ……………………………………………. Total actual overhead ………………………………………………
Variable

$432,000 $410,400 $456,000
Fixed

$684,000 $649,800 $655,500

The standard machine-hours allowed for actual output during the year were 7,600. The actual machine-hours incurred were 7,500.

90. What did Tantanka use as a predetermined overhead rate for fixed overhead? A) $85.50 per machine-hour
B) $86.64 per machine-hour C) $87.40 per machine-hour D) $90.00 per machine-hour

91. What was Tantanka’s fixed overhead volume variance? A) $5,700 unfavorable
B) $14,440 unfavorable C) $28,500 favorable D) $34,200 unfavorable

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92. What was Tantanka’s variable overhead efficiency variance? A) $5,400 favorable
B) $5,472 unfavorable C) $21,600 unfavorable D) $51,000 unfavorable

Use the following to answer questions 93-96:

Norman Enterprises has a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard direct labor-hours (DLHs). The company has provided the following data concerning its fixed manufacturing overhead costs for last year:

Total actual fixed overhead cost incurred ………. Fixed overhead cost overapplied …………………… Number of units produced ……………………………. Volume variance, unfavorable ……………………… Standard labor-hours per unit ………………………..
$42,000 $6,000 12,500 $3,600
1.6 DLHs

93. The fixed portion of the predetermined overhead rate last year was: A) $1.80 per DLH
B) $2.40 per DLH C) $2.88 per DLH D) $3.84 per DLH

94. The budgeted fixed overhead cost last year was: A) $41,000
B) $42,000 C) $44,400 D) $51,600

95. The budget variance for fixed overhead last year was: A) $9,600 F
B) $9,600 U C) $2,400 F D) $2,400 U

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Chapter 11 Flexible Budgets and Overhead Analysis

96. The denominator activity level in direct labor-hours last year was: A) 20,000
B) 21,500 C) 22,000 D) 23,500

Use the following to answer questions 97-98:

The Chuba Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard direct labor-hours (DLHs). During December, the company actually used 7,200 direct labor-hours and made 1,900 units of finished product. The standard cost card for one unit of product includes the following data concerning manufacturing overhead:

Variable overhead: Fixed overhead:
4 DLHs @ $5.25 per DLH 4 DLHs @ $2.00 per DLH

For December, the company incurred $16,550 in fixed overhead costs and recorded an $800 unfavorable volume variance.

97. The budgeted fixed overhead cost was: A) $15,200
B) $16,000 C) $16,550 D) $13,700 E) $14,400

,6

98. The denominator activity level in direct labor-hours used by Chuba in setting the predetermined overhead rate was:
A) 7,600 hours B) 7,800 hours C) 8,000 hours D) 7,200 hours

,6

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Chapter 11 Flexible Budgets and Overhead Analysis

Use the following to answer questions 99-102:

Zotta Enterprises uses standard costing and applies manufacturing overhead cost to products on the basis of standard direct labor-hours (DLHs). Budgeted and actual data relating to manufacturing overhead for last year appear below:

Actual fixed overhead cost …………………… Denominator activity …………………………… Standard hours allowed for one unit ……… Units produced …………………………………… Fixed overhead budget variance …………….
$38,900 20,000 1.2 17,000 $1,300

DLHs DLHs units
Unfavorable

99. The budgeted fixed manufacturing overhead cost was: A) $24,000
B) $38,900 C) $40,200 D) $37,600

,6

100. The standard direct labor-hours allowed for the output was: A) 14,167 hrs
B) 19,600 hrs C) 20,000 hrs D) 20,400 hrs

,6

101. The fixed manufacturing overhead cost applied to products was: A) $31,960
B) $37,250 C) $38,352 D) $39,846

,6

102. The volume variance was: A) $5,640 U
B) $5,640 F C) $752 U D) $752 F

,6

586 Garrison, Managerial Accounting 12th Edition

Chapter 11 Flexible Budgets and Overhead Analysis

Use the following to answer questions 103-106:

A furniture manufacturer has a standard costing system based on direct labor-hours (DLHs) as the measure of activity. Data from the company’s flexible budget for manufacturing overhead are given below:

Denominator level of activity …………………………………… Overhead costs at the denominator activity level:
Variable overhead cost …………………………………………. Fixed overhead cost ……………………………………………..
5,400 DLHs

$14,310 $50,490

The following data pertain to operations for the most recent period:

Actual hours ………………………………………………………….. Standard hours allowed for the actual output ……………… Actual total variable overhead cost …………………………… Actual total fixed overhead cost ………………………………..
5,900 DLHs 5,700 DLHs
$16,225 $50,490

103. What is the predetermined overhead rate to the nearest cent? A) $12.35
B) $10.98 C) $12.00 D) $11.31

104. How much overhead was applied to products during the period to the nearest dollar? A) $64,800
B) $68,400 C) $66,715 D) $70,800

105. What was the fixed overhead budget variance for the period to the nearest dollar? A) $4,675 U
B) $2,805 U C) $1,712 F D) $0

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Chapter 11 Flexible Budgets and Overhead Analysis

106. What was the fixed overhead volume variance for the period to the nearest dollar? A) $2,805 F
B) $4,675 F C) $1,870 U D) $2,657 F

Use the following to answer questions 107-110:

A manufacturer of playground equipment has a standard costing system based on direct labor-hours (DLHs) as the measure of activity. Data from the company’s flexible budget for manufacturing overhead are given below:

Denominator level of activity ………….. Fixed overhead cost ………………………..
8,100 DLHs $78,975

The following data pertain to operations for the most recent period:

Actual hours ………………………………………………………….. Standard hours allowed for the actual output ……………… Actual total fixed overhead cost ………………………………..
8,300 DLHs 8,229 DLHs
$78,125

107. What is the predetermined fixed overhead rate to the nearest cent? A) $9.41
B) $9.65 C) $9.52 D) $9.75

108. How much fixed overhead was applied to products during the period to the nearest dollar?
A) $80,233 B) $80,925 C) $78,975 D) $78,125

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109. What was the fixed overhead budget variance for the period to the nearest dollar? A) $668 F
B) $850 F C) $2,800 U D) $2,108 U

110. What was the fixed overhead volume variance for the period to the nearest dollar? A) $1,258 F
B) $1,225 F C) $1,950 F D) $692 U

Use the following to answer questions 111-112:

A manufacturer of industrial equipment has a standard costing system based on direct labor-hours (DLHs) as the measure of activity. Data from the company’s flexible budget for manufacturing overhead are given below:

Denominator level of activity …………………………………… Overhead costs at the denominator activity level:
Variable overhead cost …………………………………………. Fixed overhead cost ……………………………………………..
900 DLHs

$7,740 $10,755

The following data pertain to operations for the most recent period:

Actual hours ………………………………………………………….. Standard hours allowed for the actual output ……………… Actual total variable overhead cost …………………………… Actual total fixed overhead cost ………………………………..
1,000 DLHs 888 DLHs
$8,600 $11,755

111. What is the predetermined overhead rate to the nearest cent? A) $22.62
B) $18.50 C) $20.55 D) $20.36

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112. How much overhead was applied to products during the period to the nearest dollar? A) $18,495
B) $18,248 C) $20,550 D) $20,355

Use the following to answer questions 113-114:

Homer Company has a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard machine-hours (MHs). The company has provided the following data concerning its manufacturing overhead costs for last year:

Actual machine-hours …………………………………………….. Standard machine-hours allowed for the actual output … Denominator activity ………………………………………………. Actual fixed overhead costs …………………………………….. Budgeted fixed overhead costs …………………………………. Predetermined overhead rate ($1 variable + $4 fixed) ….
840 MHs 900 MHs 1,000 MHs
$3,800 $4,000
$5 per MH

113. The fixed overhead budget variance was: A) $200 F
B) $400 U C) $300 F D) $240 U

114. The volume variance was: A) $200 F
B) $400 U C) $300 F D) $240 U

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Use the following to answer questions 115-116:

Difazzio Manufacturing Company uses a standard cost system with machine-hours as the activity base for overhead. Difazzio budgeted its fixed overhead costs at $728,000 for the year but ended up incurring only $691,600. The following data relate to machine-hours for the year:

Denominator activity level in machine-hours …………….. 2,600 Standard machine-hours allowed for actual output ……… 2,800 Actual number of machine-hours incurred ………………… 2,500

115. What was Difazzio’s fixed overhead budget variance? A) $8,400 favorable
B) $9,408 favorable C) $36,400 favorable
D) $41,600 unfavorable

116. What was Difazzio’s fixed overhead volume variance? A) $9,408 favorable
B) $26,000 favorable C) $56,000 favorable D) $84,000 favorable

Use the following to answer questions 117-118:

An outdoor barbecue grill manufacturer has a standard costing system based on standard machine-hours (MHs) as the measure of activity. Data from the company’s flexible budget for manufacturing overhead are given below:

Denominator level of activity …….. Fixed overhead cost …………………..
8,900 MHs $98,790

The following data pertain to operations for the most recent period:

Actual hours ………………………………………………………….. Standard hours allowed for the actual output ……………… Actual total fixed overhead cost ………………………………..
9,000 MHs 8,982 MHs
$100,240

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117. What was the fixed overhead budget variance for the period to the nearest dollar? A) $340 F
B) $1,450 U C) $540 F D) $200 F

118. What was the fixed overhead volume variance for the period to the nearest dollar? A) $1,110 F
B) $200 U C) $910 F D) $915 F

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Essay Questions

119. Lindon Company’s flexible budget for variable manufacturing overhead is given below:

Overhead costs Supplies ………………….. Indirect labor …………… Utilities…………………… Total overhead cost …..
Cost Formula per DLH
$0.20 0.50
0.05 $0.75

6,000 8,000 10,000 DLHs DLHs DLHs $1,200 $1,600 $2,000
3,000 4,000 5,000
300 400 500 $4,500 $6,000 $7,500

During a recent period, the company produced 2,500 units of product using 7,600 direct labor-hours (DLHs). The standard allows 3 direct labor-hours per unit. Actual variable overhead costs incurred were:

Supplies ……………………….. $1,900 Indirect labor ………………… 3,040 Utilities………………………… 570 Total overhead cost ……….. $5,510

The company had originally budgeted to produce 2,600 units during the period using 7,800 direct labor-hours.

Required:
Prepare a performance report for the period showing only the spending variances for each overhead cost category.

,2

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120. The following overhead data are for a department in a large company.

Activity level (in units) …….. Variable costs:
Indirect materials ………….. Power …………………………..
Fixed costs:
Administration ……………… Rent …………………………….
Actual Costs Static Incurred Budget
400 380

$9,050 $8,132 $2,540 $2,394

$5,080 $5,100 $8,590 $8,600

Required:

Prepare a report that would be useful in assessing how well costs were controlled in this department.

,2

594 Garrison, Managerial Accounting 12th Edition

121. The following overhead data are for a department in a large company.

Activity level (in units) …….. Variable costs:
Supplies ………………………. Power …………………………..
Fixed costs:
Administration ……………… Depreciation …………………
Actual
Costs Static Incurred Budget
200 220

$4,050 $4,906 $1,690 $1,892

$6,240 $6,200 $6,280 $6,200

Required:
Prepare a report that would be useful in assessing how well costs were controlled in this department.

,2

Garrison, Managerial Accounting, 12th Edition 595

122. Layt Clock Company has developed the following flexible budget for its overhead costs. Manufacturing overhead at Layt is applied to production on the basis of standard machine-hours:

Machine Hours

Clocks produced ………………. Variable overhead cost ……… Fixed overhead cost …………..
21,600 18,000 $127,440 $171,072
24,000 20,000 $141,600 $171,072
26,400 22,000 $155,760 $171,072

Layt was expecting to produce 22,000 clocks last year. The actual results for the year were as follows:

Number of clocks produced ………. Machine-hours incurred ……………. Variable overhead cost ……………… Fixed overhead cost …………………..
21,500 24,940 $145,899 $170,540

Required:

Compute all four manufacturing overhead variances for Layt.

,4,5,6

596 Garrison, Managerial Accounting 12th Edition

123. Parker Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard direct labor-hours. The company’s total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $14,000 for variable overhead and $6,000 for fixed overhead. The predetermined overhead rate, including both fixed and variable components, is $4 per direct labor-hour. The standards call for 2 direct labor-hours per unit of output produced. Last year, the company produced 3,000 units of product and worked 6,200 direct labor-hours. Actual costs were $15,500 for variable overhead and $6,300 for fixed overhead.

Required:
a. What is the denominator level of activity?
b. What were the standard hours allowed for the output last year? c. What was the variable overhead spending variance?
d. What was the variable overhead efficiency variance? e. What was the fixed overhead budget variance?
f. What was the fixed overhead volume variance?

,4,5,6

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124. Cajun Candy Corporation manufactures giant gourmet suckers. The cost standards developed by Cajun appear below. Manufacturing overhead at Cajun is applied to production on the basis of standard direct labor-hours:

Direct materials ……………………….. Direct labor ……………………………… Variable overhead …………………….. Fixed overhead ………………………… Total standard cost per sucker …….
Standard quantity per sucker 0.75 ounces
1.2 hours 1.2 hours 1.2 hours
Standard cost per ounce or hour
$20.00 $12.00 $3.00 $5.00
Standard cost per sucker
$15.00 14.40 3.60
6.00 $39.00

The standards above were based on an expected annual volume of 8,000 suckers. The actual results for last year were as follows:

Number of suckers produced ……………………………………. Direct labor-hours incurred ……………………………………… Ounces of direct materials purchased ………………………… Ounces of direct materials used in production ……………. Total cost of direct materials purchased …………………….. Total direct labor cost ……………………………………………… Total variable overhead cost …………………………………….. Total fixed overhead cost …………………………………………
8,200 10,000 7,900 6,070 $156,815 $122,800 $28,600 $47,500

Required:
Compute the following variances for Cajun. a. Materials price variance.
b. Materials quantity variance. c. Labor rate variance.
d. Variable overhead spending variance. e. Variable overhead efficiency variance. f. Fixed overhead budget variance.

,4,6,7

Garrison, Managerial Accounting, 12th Edition 599

125. Eastern Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard direct labor-hours (DLHs). The denominator activity level is 60,000 direct labor-hours, or 300,000 units.

� A standard cost card for the company’s product follows:

Direct materials ……….. Direct labor ……………… Variable overhead …….. Fixed overhead ………… Total standard cost …….
Standard quantity or hours
0.25 kilogram 0.20 DLH 0.20 DLH 0.20 DLH

Standard price or rate
$16 per kilogram $10 per DLH $5 per DLH $10 per DLH

Standard cost
$4 2 1
2 $9

� Actual data for the year follow:

Units produced and sold ………………………………………….. Actual direct labor-hours worked ……………………………… Actual variable manufacturing overhead cost …………….. Actual fixed manufacturing overhead cost ………………….
330,000 64,800 $327,240 $612,000

Required:
a. Compute the variable manufacturing overhead spending and efficiency variances. b. Compute the fixed manufacturing overhead budget and volume variances.

,4,6

600 Garrison, Managerial Accounting 12th Edition

126. Pierce Company uses a standard cost system in which it applies manufacturing overhead to its product on the basis of standard direct labor-hours (DLHs). Below is the standard cost card for the product:

Direct materials, 4.5 feet at $3.80 per foot …………………. $17.10 Direct labor, 3.0 DLHs at $9.50 per DLH ………………….. 28.50 Variable overhead, 3.0 DLHs at $2.00 per DLH …………. 6.00 Fixed overhead, 3.0 DLHs at $8.00 per DLH …………….. 24.00 $75.60

Last year, the company produced 6,000 units of product using 17,000 direct labor-hours. The actual total fixed overhead cost for the year was $140,000 and the volume variance was $12,000, favorable.

Required:
a. Compute the total fixed overhead cost that was originally budgeted.
b. Compute the denominator activity figure that the company used in computing predetermined overhead rates.

,6

Garrison, Managerial Accounting, 12th Edition 601

127. Moozi Dairy Products processes and sells two products: milk and butter. Last year, Moozi budgeted $1,200,000 of fixed manufacturing overhead and chose a denominator level of activity of 80,000 machine-hours. Each unit of milk at Moozi has a standard of 0.1 machine-hours and each unit of butter has a standard of 0.08
machine-hours. Last year, Moozi processed 560,000 units of milk and 340,000 units of butter. Moozi’s total fixed overhead incurred last year was $1,256,000. Actual machine-hours incurred for the year were 82,000. Moozi applies manufacturing overhead to its products on the basis of standard machine-hours.

Required:
Compute Moozi’s fixed manufacturing overhead variances for last year.

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Chapter 12 Segment Reporting and Decentralization

True/False Questions

1. Only those fixed costs labeled “common” are charged to the individual segments when preparing a segmented income statement.

2. A company has two divisions, each selling several product lines. If segment reports are prepared at the product line level, the division managers’ salaries would be considered as common fixed costs of the product lines.

3. A segment margin is computed by deducting variable and traceable fixed expenses from the sales of a segment.

4. Those fixed costs that arise because of the existence of the segment and that would disappear if the segment were eliminated are called traceable fixed costs of the segment.

5. Suppose a company evaluates divisional performance using both ROI and residual income. The company’s minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is less than 12%.

,3

6. Return on investment (ROI) encourages managers to accept all investment decisions that will benefit the company as a whole when it is used as a measure of performance.

7. Just-in-time practices improve return on investment (ROI) by decreasing turnover.

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8. Whenever the selling division must give up outside sales in order to sell internally, it has an opportunity cost that should be considered in setting the transfer price.

Appendix: 12

9. If transfer prices are to be based on cost, then the costs should be actual costs rather than standard costs.

Appendix: 12

10. Setting transfer prices at full cost can lead to bad decisions since, among other reasons, full cost does not take into account opportunity costs.

Appendix: 12

11. The selling division in a transfer pricing situation would want the transfer price to be set to cover at least the full cost per unit plus the lost contribution margin per unit on outside sales.

Appendix: 12

12. Under a responsibility accounting system, fewer expenses are charged against managers the higher one moves upward in an organization.

13. Responsibility accounting functions most effectively in decentralized organizations.

14. In a strongly centralized organization there is a large amount of freedom to make decisions at all levels of management.

15. All profit centers are responsibility centers, but not all responsibility centers are profit centers.

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Multiple Choice Questions

16. If a cost is a common cost of the segments on a segmented income statement, the cost should:
A) be allocated to the segments on the basis of segment sales. B) not be allocated to the segments.
C) excluded from the income statement.
D) treated as a product cost rather than as a period cost.

17. Spiedino Company sells its products to both residential and commercial customers in eight sales territories. In which of the following ways could Spiedino be segmented? A) by product and then further segmented by type of customer.
B) by type of customer and then further segmented by sales territory. C) by sales territory and then further segmented by product line.
D) all of the above.

18. Which of the following is generally considered to be part of the value chain of a manufacturing company?
A) marketing activities
B) customer service activities
C) research and development activities D) both A and C above
E) all of the above

Answer: E

19. A national retail company has segmented its income statement by sales territories. If each sales territory statement is further segmented by individual stores, which of the following will most likely occur?
A) some common fixed expenses in the sales territory segmented statement will become traceable fixed expenses in the individual store segmented statement.
B) some traceable fixed expenses in the sales territory segmented statement will become common fixed expenses in the individual store segmented statement.
C) the sum total of the individual stores’ segment margins in each sales territory will be equal to the segment margin for the sales territory.
D) both A and C above.

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20. Hayworth Company has just segmented last year’s income statements into its ten product lines. The chief executive officer (CEO) is curious as to what effect dropping one of the product lines at the beginning of last year would have had on overall company profit. What is the best number for the CEO to look at to determine the effect of this elimination on the net operating income of the company as a whole?
A) the product line’s sales dollars.
B) the product line’s contribution margin. C) the product line’s segment margin.
D) the product line’s segment margin minus an allocated portion of common fixed expenses.

21. In an income statement segmented by product line, a fixed expense that cannot be allocated among product lines on a cause-and-effect basis should be:
A) classified as a variable expense.
B) allocated to the product lines on the basis of sales dollars.
C) allocated to the product lines on the basis of segment margin. D) classified as a common fixed expense and not allocated.
E) classified as a traceable fixed expense and not allocated.

22. Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is:
A) Residual income can be computed without having to measure operating assets. B) Managers are more likely to accept projects that are beneficial to the company. C) ROI does not take into account both turnover and margin.
D) A minimum rate of return does not have to be specified when the residual income approach is used.

,3 Source: CMA, adapted

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23. Which of the following performance measures will decrease if the minimum required rate of return increases?

Return on Investment
A) Yes B) No C) Yes D) No
Residual Income Yes Yes No No

,3

24. Which of the following performance measures will increase if inventory decreases and all else remains the same?

Return on Investment
A) Yes B) No C) Yes D) No
Residual Income Yes Yes No No

,3

25. Some investment opportunities which should be accepted from the viewpoint of the entire company may be rejected by a manager who is evaluated on the basis of:
A) return on investment. B) residual income.
C) contribution margin. D) segment margin.

26. Which of the following would be an argument for using the gross cost of plant and equipment as part of operating assets in return on investment computations?
A) It is consistent with the computation of net operating income, which includes depreciation as an operating expense.
B) It is consistent with the balance sheet presentation of plant and equipment. C) It eliminates the age of equipment as a factor in ROI computations.
D) It discourages the replacement of old, worn-out equipment because of the dramatic, adverse effect on ROI.

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27. Which of the following would not be included in operating assets in return on investment calculations?
A) Cash.
B) Accounts Receivable. C) Equipment
D) Factory building rented to (and occupied by) another company.

28. Which of the following statements is correct concerning return on investment calculations?
A) Margin equals stockholders’ equity divided by sales.
B) Return on investment equals margin divided by turnover. C) Turnover equals return on investment divided by margin. D) Sales equals turnover divided by margin.

29. All other things equal, which of the following would increase a division’s residual income?
A) Increase in expenses.
B) Decrease in average operating assets. C) Increase in minimum required return. D) Decrease in net operating income.

30. The basic objective of the residual income approach to performance measurement and evaluation is to have a division maximize its:
A) return on investment (ROI). B) cash flows.
C) cash flows in excess of a desired minimum amount. D) net operating income in excess of a minimum return.

Source: CMA, adapted

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31. Residual income:
A) is the return on investment (ROI) percentage multiplied by average operating assets.
B) is the net operating income earned above a certain minimum required return on sales.
C) is the net operating income earned above a certain minimum required return on average operating assets.
D) will always be greater than zero.

32. A company is analyzing the performance of responsibility centers. Controllable costs would be included in the performance reports of which of the following types of responsibility centers?

Investment centers A) No
B) No C) Yes D) Yes
Profit Centers No Yes Yes No

Source: CPA, adapted

33. Controllable revenue would be included in a performance report for a:

Profit center A) No
B) No C) Yes D) Yes
Cost center No Yes Yes No

Source: CPA, adapted

34. Walsh Company has three Stores: X, Y, and Z. During August, the variable expenses in Store X were $90,000 and the contribution margin ratio was 25%. Store Y had a contribution margin of $27,000 and a contribution margin ratio of 20%. Store Z had variable expenses of $120,000 and a variable expense ratio of 60% of sales. For August, Walsh Company’s sales were:
A) $318,000 B) $455,000 C) $485,000 D) $555,000

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35. Channing Company has two divisions, S and T. The company’s overall contribution margin ratio is 30% when sales in the two divisions total $750,000. If variable expenses are $450,000 in Division S, and if Division S’s contribution margin ratio is 25%, then sales in Division T must be:
A) $75,000 B) $150,000 C) $225,000 D) $300,000

36. Insider Company has two divisions, J and K. During March, the contribution margin in J was $30,000. The contribution margin ratio in K was 40%, its sales were $125,000, and its segment margin was $32,000. The common fixed expenses in the company were $40,000, and the company’s net operating income was $18,000. The segment margin for Division J was:
A) $26,000 B) $32,000 C) $8,000 D) $58,000

37. Davison Inc. consists of two districts, A and B. The company as a whole had sales of $400,000, a contribution margin ratio of 25% and a combined segment margin totaling $35,000. District A had sales of $90,000 during May, a contribution margin ratio of 45%, and a segment margin of $16,000. If the net operating income of Davison Inc. for May is $12,000, the traceable fixed expenses in District B must have been:
A) $23,000 B) $24,500 C) $49,000 D) $40,500

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38. Domingos Company has two product lines, C and J. Line C has sales of $100,000 during March, a segment margin ratio of 19%, and traceable fixed expenses of $20,000. The company as a whole had a contribution margin ratio of 25% and $105,000 in total contribution margin. Based on this information, total variable expenses for product J must have been:
A) $61,000 B) $176,000 C) $315,000 D) $254,000

39. Bennett Company has two stores, P and Q. During April, Store P had a segment margin of $8,000 and variable expenses equal to 65% of sales. Traceable fixed expenses for Store Q were $18,000. Bennett Company as a whole had a contribution margin ratio of 40%, a combined segment margin of $20,000, and sales of $180,000. Given this data, the sales for store Q were:
A) $157,143 B) $60,000 C) $30,000 D) $120,000

40. Brummitt Corporation has two divisions: the BAJ Division and the CBB Division. The corporation’s net operating income is $10,700. The BAJ Division’s divisional segment margin is $76,100 and the CBB Division’s divisional segment margin is $42,300. What is the amount of the common fixed expense not traceable to the individual divisions?
A) $86,800 B) $107,700 C) $53,000 D) $118,400

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41. Sorto Corporation has two divisions: the East Division and the West Division. The corporation’s net operating income is $93,200. The East Division’s divisional segment margin is $223,200 and the West Division’s divisional segment margin is $15,900. What is the amount of the common fixed expense not traceable to the individual divisions?
A) $316,400 B) $145,900 C) $109,100 D) $239,100

42. Quinnett Corporation has two divisions: the Export Products Division and the Business Products Division. The Export Products Division’s divisional segment margin is $34,300 and the Business Products Division’s divisional segment margin is $86,700. The total amount of common fixed expenses not traceable to the individual divisions is $95,600. What is the company’s net operating income?
A) $216,600 B) $121,000 C) $25,400 D) ($121,000)

43. Gunderman Corporation has two divisions: the Alpha Division and the Charlie Division. The Alpha Division has sales of $230,000, variable expenses of $131,100, and traceable fixed expenses of $63,300. The Charlie Division has sales of $540,000, variable expenses of $307,800, and traceable fixed expenses of $120,700. The total amount of common fixed expenses not traceable to the individual divisions is $119,200. What is the company’s net operating income?
A) $147,100 B) $331,100 C) $27,900 D) $211,900

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44. Given the following data:

Return on investment …………………………… Sales ………………………………………………….. Average operating assets ……………………… Turnover ……………………………………………. Minimum required rate of return …………… Margin on sales …………………………………..
25% $100,000 $40,000 2.5
18% 10%

The residual income would be: A) $2,800
B) $0
C) $6,000 D) $8,000

,3

45. Given the following data:

Average operating assets …………… Total liabilities …………………………. Sales ……………………………………….. Contribution margin …………………. Net operating income ………………..
$250,000 $100,000 $600,000 $150,000 $30,000

Return on investment (ROI) would be: A) 5%
B) 12% C) 25% D) 60%

46. Last year a company had sales of $400,000, a turnover of 2.4, and a return on investment of 36%. The company’s net operating income for the year was: A) $144,000
B) $120,000 C) $80,000 D) $60,000

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Chapter 12 Segment Reporting and Decentralization

47. Cabot Company had the following results during June: net operating income, $2,500; turnover, 4; and ROI, 20%. Cabot Company’s average operating assets were:
A) $50,000 B) $200,000 C) $12,500 D) $10,000

48. The following information pertains to Quest Company’s Gold Division for last year:

Sales ……………………………………….. Variable expenses …………………….. Traceable fixed expenses …………… Average operating assets ……………
$311,000 $250,000 $50,000 $40,000

The Gold Division’s return on investment is: A) 10.00%
B) 13.33% C) 27.50% D) 30.00%

Source: CPA, adapted

49. The following information relates to last year’s operations at the Paper Division of Germane Corporation:

Minimum required rate of return …………… Return on investment (ROI) …………………. Sales ………………………………………………….. Turnover (on operating assets) ………………
15% 18% $810,000 5 times

What was the Paper Division’s net operating income last year? A) $24,300
B) $29,160 C) $145,800 D) $162,000

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50. The following information is available on Company X:

Sales ………………………………………………….. Net operating income ………………………….. Average operating assets ……………………… Stockholders’ equity ……………………………. Minimum required rate of return ……………
$90,000 $3,600 $30,000 $25,000 10%

Company X’s residual income would be: A) $1,100
B) $5,400 C) $360 D) $600

51. The following information relates to last year’s operations at the Bread Division of Rison Bakery, Inc.:

Residual income………………………. Net operating income ……………….. Sales ……………………………………….. Average operating assets ……………
$12,000 $60,000 $300,000 $400,000

What was the Bread Division’s minimum required rate of return last year? A) 12%
B) 4% C) 15% D) 20%

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52. Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Selling price to outside customers …………. Variable cost per unit ………………………….. Total fixed costs …………………………………. Capacity in units ………………………………….
$75 $50
$400,000 25,000

Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y’s needs without any increase in fixed costs and without cutting into outside sales of the part. What is the lowest acceptable transfer price from the standpoint of the selling division?
A) $75 B) $66 C) $16 D) $50

Appendix: 12

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Chapter 12 Segment Reporting and Decentralization

53. The Blade Division of Dana Company produces hardened steel blades. One-third of the Blade Division’s output is sold to the Lawn Products Division of Dana; the remainder is sold to outside customers. The Blade Division’s estimated sales and standard cost data for the next year are as follows:

Unit sales ……………… Sales …………………….. Variable costs ……….. Fixed costs …………….
Sales To
Lawn Products Outsiders 10,000 20,000
$15,000 $40,000 $10,000 $20,000 $3,000 $6,000

The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an outside supplier at a cost of $1.25 per unit on a continuing basis. The Blade Division cannot sell any additional products to outside customers because the market is saturated. This decision would have no effect on the company’s total fixed costs. If the Blade Division refuses to meet the $1.25 price internally and the Lawn Products Division starts buying from the outside supplier, the company as a whole will be:
A) better off by $500 each period. B) worse off by $1,500 each period. C) better off by $2,500 each period. D) worse off by $2,500 each period.

Source: CPA, adapted Appendix: 12

54. Using the formula in the text, if the lowest acceptable transfer price for the viewpoint of the selling division is $80 and the lost contribution margin per unit on outside sales is $30, then the variable cost per unit must be:
A) $50 B) $30 C) $110 D) $80

Appendix: 12

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55. Mar Company has two decentralized divisions, X and Y. Division X has always purchased certain units from Division Y at $75 per unit. Because Division Y plans to raise the price to $100 per unit, Division X is seeking an outside supplier of the part for the old price of $75 per unit. Division Y’s costs follow:

Y’s variable costs per unit ………………………………. Y’s annual fixed costs ……………………………………. Y’s annual production of these units for X ………..
$70 $15,000 1,000 units

If Division X buys from an outside supplier, the facilities Division Y uses to manufacture these units would be idle. What would be the result if the top management of Mar Company insists that Division X purchase from Division Y at a transfer price of $100 per unit?
A) it would reduce the company’s overall profit because Division X should buy from outside suppliers at $75 per unit if possible.
B) it would provide lower overall company net operating income than the old transfer price of $75 per unit.
C) it would provide higher overall company net operating income than the old transfer price of $75 per unit.
D) it would be more profitable for the company than allowing X to buy from outside suppliers at $75 per unit.

Source: CPA, adapted Appendix: 12

Use the following to answer questions 56-58:

Meyer Company has two sales areas: North and South. During April, the contribution margin in the North was $90,000, or 30% of sales. The segment margin in the South was $25,000, or 10% of sales. Traceable fixed expenses were $30,000 in the North and $15,000 in the South. Meyer Company reported a total net operating income of $52,000.

56. The total sales for Meyer Company were: A) $983,333
B) $430,000 C) $550,000 D) $480,000

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57. The total fixed expenses for Meyer Company were: A) $45,000
B) $33,000 C) $85,000 D) $78,000

58. The variable costs for the South area were: A) $180,000
B) $210,000 C) $225,000 D) $120,000

Use the following to answer questions 59-62:

The Rialto Company’s income statement for May is given below:

Sales ………………………………………. Variable expenses …………………….. Contribution margin …………………. Traceable fixed expenses ………….. Segment margin ………………………. Common fixed expenses …………… Net operating income………………..
Total $300,000
153,000 147,000
97,000 50,000
25,000 $ 25,000
Division L $165,000
99,000 66,000
45,000 $ 21,000
Division M $135,000
54,000 81,000
52,000 $ 29,000

59. If sales for Division L increase $30,000 with a $9,000 increase in the Division’s traceable fixed expenses, the overall company net operating income should:
A) decrease by $4,000 B) increase by $21,000 C) increase by $3,000 D) increase by $5,700

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60. During May, the sales clerks in Division L received salaries totaling $25,000. Assume that during June the salaries of these sales clerks are discontinued and instead they are paid a commission of 18% of sales. If sales in Division L increase by $35,000 as a result of this change, the June segment margin for Division L should be:
A) $30,300 B) $24,000 C) $5,300 D) $60,000

61. If the sales in Division M increase by 25% while traceable fixed expenses decrease by $7,000, the segment margin for Division M should:
A) increase by $13,250 B) increase by $7,250 C) decrease by $17,750 D) increase by $27,250

62. A proposal has been made that will lower variable costs in Division M to 37% of sales. The reduction can be accomplished only if Division M’s traceable fixed costs are allowed to increase $12,000. If this proposal is implemented, and if sales remain constant, overall company net operating income should:
A) increase by $12,000 B) increase by $16,050 C) decrease by $7,950 D) decrease by $12,000

Use the following to answer questions 63-64:

Miller Company has two sales areas: North and South. In June, the contribution margin in the North was $50,000, or 20% of sales. The segment margin in the South was $15,000, or 8% of sales. Traceable fixed expenses are $15,000 in the North and $10,000 in the South. During June, Miller Company reported total net operating income of $26,000.

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63. The total fixed expenses (traceable and common) for Miller Company in June were: A) $49,000
B) $25,000 C) $24,000 D) $50,000

64. The variable costs for the South in June were: A) $230,000
B) $185,000 C) $162,500 D) $65,000

Use the following to answer questions 65-66:

Nantua Sunglasses Corporation has two divisions, Southern and Northern. The following information was taken from last year’s income statement segmented by division:

Sales ………………………………………. Contribution margin …………………. Divisional segment margin ………..
Total $4,000,000 $1,650,000
$850,000
Southern $2,500,000 $1,050,000
$700,000
Northern $1,500,000
$600,000 $150,000

Net operating income last year for Nantua Company was $400,000.

65. In last year’s income statement segmented by division, what were Nantua’s total common fixed expenses?
A) $450,000 B) $800,000 C) $1,250,000 D) $1,300,000

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66. If the Northern Division’s sales last year were $300,000 higher, how would this have changed Nantua’s net operating income? (Assume no change in the revenue or cost structure.)
A) $30,000 increase B) $80,000 increase C) $120,000 increase D) $300,000 increase

Use the following to answer questions 67-68:

Brandon, Inc. has provided the following data for last year’s operations:

Sales …………………………………………………. Net operating income………………………….. Average operating assets ……………………… Stockholders’ equity ……………………………. Minimum required rate of return ……………
$100,000 $6,000 $40,000 $25,000 10%

67. Brandon’s residual income is: A) $2,000
B) $4,000 C) $3,500 D) $2,500

68. Brandon’s return on investment (ROI) is: A) 6%
B) 10% C) 15% D) 24%

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Use the following to answer questions 69-70:

The following selected data pertain to the belt division of Allen Corp. for last year:

Sales …………………………………………………. Average operating assets ……………………… Net operating income………………………….. Turnover ……………………………………………. Minimum required return ……………………..
$1,000,000 $400,000 $100,000 2.5
20%

69. How much is the return on investment? A) 25%
B) 10% C) 20% D) 15%

Source: CPA, adapted

70. How much is the residual income? A) $100,000
B) $20,000 C) $80,000 D) $900,000

Source: CPA, adapted

Use the following to answer questions 71-72:

Yola Co.’s East Division had the following results last year:

Sales …………………………………………………. Variable expenses ……………………………….. Traceable fixed expenses …………………….. Average operating assets ……………………… Minimum required rate of return ……………
$620,000 $500,000 $100,000 $50,000 18%

71. The return on investment was: A) 40.00%
B) 29.00% C) 18.00% D) 8.33%

Source: CPA, adapted

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72. The residual income was: A) $3,600
B) $9,000 C) $11,000 D) $20,000

Source: CPA, adapted

Use the following to answer questions 73-74:

Data pertaining to Mar Co.’s Alo Division for last year follows:

Sales …………………………………………………… Variables expenses ……………………………….. Traceable fixed expenses ………………………. Average operating assets ……………………….. Minimum required rate of return ……………..
$100,000 $60,000 $10,000 $20,000 12%

73. Alo’s return on investment was: A) 60%
B) 75% C) 138% D) 150%

Source: CPA, adapted

74. Alo’s residual income was: A) $27,600
B) $30,000 C) $32,400 D) $40,000

Source: CPA, adapted

Use the following to answer questions 75-76:

The following selected data pertain to the Maple Division of Beyer Corp. for last year:

Sales …………………………………………………. Average operating assets ……………………… Net operating income………………………….. Turnover ……………………………………………. Minimum required rate of return ……………

Garrison, Managerial Accounting, 12th Edition
$300,000 $100,000 $20,000 3.0
12%

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Chapter 12 Segment Reporting and Decentralization

75. The return on investment was: A) 6.67%
B) 8.00% C) 20.00% D) 33.33%

Source: CPA, adapted

76. The residual income was: A) $2,400
B) $5,600 C) $6,667 D) $8,000

Source: CPA, adapted

Use the following to answer questions 77-78:

The Northern Division of the Kimball Company reported the following data for last year:

Sales …………………………………………………. Operating expenses …………………………….. Stockholders’ equity ……………………………. Average operating assets ……………………… Minimum required rate of return ……………
$800,000 $690,000 $250,000 $400,000 14%

77. The return on investment last year for the Northern Division was: A) 50%
B) 80% C) 27.5% D) 44%

78. The residual income for the Northern Division last year was: A) $112,000
B) $144,000 C) $110,000 D) $54,000

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Use the following to answer questions 79-82:

The following data are for the Akron Division of Consolidated Rubber, Inc.:

Sales …………………………………………………. Net operating income………………………….. Stockholders’ equity ……………………………. Average operating assets ……………………… Residual income………………………………….
$750,000 $45,000 $75,000 $250,000 $15,000

79. The margin used in calculating the return on investment for the past year was: A) 6.00%
B) 8.67% C) 10.00% D) 8.00%

80. The return on investment for the past year was: A) 6%
B) 30% C) 18% D) 26%

81. The turnover used in calculating the return on investment for the past year was: A) 1.4
B) 3.3 C) 10.0 D) 3.0

82. The minimum required rate of return used in calculating the residual income for the past year was:
A) 30% B) 12% C) 15% D) 6%

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Chapter 12 Segment Reporting and Decentralization

Use the following to answer questions 83-86:

Cebe Products is a division of a major corporation. Last year the division had total sales of $26,800,000, net operating income of $1,768,800, and average operating assets of $8,000,000. The company’s minimum required rate of return is 12%.

83. The division’s margin is closest to: A) 22.1%
B) 6.6% C) 29.9% D) 36.5%

84. The division’s turnover is closest to: A) 0.22
B) 2.74 C) 15.15 D) 3.35

85. The division’s return on investment (ROI) is closest to: A) 74.0%
B) 5.1% C) 22.1% D) 1.5%

86. The division’s residual income is closest to: A) $808,800
B) $1,768,800 C) $(1,447,200) D) $2,728,800

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Chapter 12 Segment Reporting and Decentralization

Use the following to answer questions 87-90:

Dealey Products is a division of a major corporation. The following data are for the last year of operations:

Sales …………………………………………………………………….. Net operating income……………………………………………… Average operating assets …………………………………………. The company’s minimum required rate of return ………..
$12,700,000 $1,549,400 $5,000,000 10%

87. The division’s margin is closest to: A) 12.2%
B) 39.4% C) 31.0% D) 51.6%

88. The division’s turnover is closest to: A) 0.31
B) 2.54 C) 8.20 D) 1.94

89. The division’s return on investment (ROI) is closest to: A) 31.0%
B) 3.8% C) 78.7% D) 8.8%

90. The division’s residual income is closest to: A) $279,400
B) $1,549,400 C) $1,049,400 D) $2,049,400

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Use the following to answer questions 91-94:

The Portland Division’s operating data for the past two years is as follows:

Return on investment ……………….. Stockholders’ equity …………………. Net operating income……………….. Turnover …………………………………. Sales ……………………………………….
Year 1 12% $500,000 ? ?
$1,600,000
Year 2 24% $200,000 $288,000 2 ?

The Portland Division’s margin in Year 2 was 150% of the margin for Year 1.

91. The turnover for Year 1 was: A) 10.00
B) 2.00 C) 1.50 D) 3.20

92. The net operating income for Year 1 was: A) $192,000
B) $128,000 C) $266,667 D) $208,000

93. The sales for Year 2 were: A) $750,000
B) $2,000,000 C) $3,846,154 D) $2,400,000

94. The average operating assets for Year 2 were: A) $750,000
B) $400,000 C) $1,200,000 D) $800,000

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Chapter 12 Segment Reporting and Decentralization

Use the following to answer questions 95-96:

Data from the Trendall Company for last year follow:

Sales …………………………………………………. Stockholders’ equity ……………………………. Return on investment ………………………….. Turnover ……………………………………………. Minimum required rate of return ……………
$750,000 $400,000 12%
1.5 10%

95. The average operating assets were: A) $300,000
B) $400,000 C) $500,000 D) $600,000

96. The margin used in calculating return on investment was: A) 6.67%
B) 16.67% C) 20.00% D) 8.00%

Use the following to answer questions 97-99:

Ahalt Industries is a division of a major corporation. Data concerning the most recent year appears below:

Sales ………………………………………. Net operating income……………….. Average operating assets ……………
$17,340,000 $1,248,480 $6,000,000

97. The division’s margin is closest to: A) 41.8%
B) 7.2% C) 20.8% D) 34.6%

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98. The division’s turnover is closest to: A) 2.39
B) 13.89 C) 0.21 D) 2.89

99. The division’s return on investment (ROI) is closest to: A) 1.5%
B) 20.8% C) 5.3% D) 17.2%

Use the following to answer questions 100-102:

Beach Industries is a division of a major corporation. Last year the division had total sales of $11,360,000, net operating income of $624,800, and average operating assets of $4,000,000.

100. The division’s margin is closest to: A) 15.6%
B) 35.2% C) 5.5% D) 40.7%

101. The division’s turnover is closest to: A) 2.84
B) 18.18 C) 2.46 D) 0.16

102. The division’s return on investment (ROI) is closest to: A) 0.9%
B) 15.6% C) 4.1% D) 13.5%

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Chapter 12 Segment Reporting and Decentralization

Use the following to answer questions 103-104:

Division A makes a part with the following characteristics:

Production capacity in units …………………. Selling price to outside customers …………. Variable cost per unit ………………………….. Fixed cost per unit ………………………………. Total fixed costs ………………………………….
15,000 units $30 $20
$4 $60,000

Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $28 each.

103. Suppose that Division A has ample idle capacity to handle all of Division B’s needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the $28 price internally, the company as a whole will be:
A) worse off by $40,000 each period. B) worse off by $20,000 each period. C) better off by $10,000 each period. D) worse off by $30,000 each period.

Appendix: 12

104. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at $28 per unit (Division B’s outside price), the company as a whole will be:
A) better off by $20,000 each period. B) worse off by $10,000 each period. C) worse off by $40,000 each period.
D) There will be no change in the status of the company as a whole.

Appendix: 12

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Chapter 12 Segment Reporting and Decentralization

Use the following to answer questions 105-107:

Division T of Clocker Company makes a timer which it sells for $30 to outside customers. The division has supplied the following data concerning the timer:

Monthly capacity ……………………… Variable cost per unit ……………….. Fixed cost per unit …………………….
12,000 timers $15 $10

Presently, Division S of Clocker Company is currently buying 5,000 similar timers each month from an overseas supplier at $27 each. Division S would like to acquire its timers from Division T if the price is right.

105. Suppose Division T is operating at capacity and can sell all of the timers it produces to outside customers at its usual selling price. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $30 B) $27 C) $25 D) $15

Appendix: 12

106. Suppose Division T is operating at capacity and can sell all of the timers it produces to outside customers at its usual selling price. If Division T meets the price of the overseas supplier and sells 5,000 timers to Division S each month, the effect on the monthly net operating income of the company as a whole will be:
A) increase of $15,000 B) decrease of $15,000 C) decrease of $60,000 D) increase of $10,000

Appendix: 12

107. Suppose that Division T can sell only 10,000 timers to outside customers. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $24 B) $27 C) $30 D) $15

Appendix: 12

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Chapter 12 Segment Reporting and Decentralization

Use the following to answer questions 108-109:

Division A of Tripper Company produces a part that it sells to other companies. Sales and cost data for the part follow:

Capacity in units …………………………………. 60,000 Selling price per unit …………………………… $40 Variable costs per unit …………………………. $28 Fixed costs per unit at capacity …………….. $9

Division B, another division of Tripper Company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $38 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.

108. Assume that Division A is presently operating at capacity. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $37 B) $39 C) $36 D) $38

Appendix: 12

109. Assume that Division A has ample idle capacity to handle all of Division B’s needs without any increase in fixed costs and without cutting into outside sales. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $40 B) $39 C) $28 D) $27

Appendix: 12

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Chapter 12 Segment Reporting and Decentralization

Use the following to answer questions 110-111:

Division S of Kracker Company makes a part that it sells to other companies. Data on that part appear below:

Selling price on the intermediate market ………….. $30 Variable costs per unit ……………………………………. $22 Fixed costs per unit (based on capacity) …………… $7 Capacity in units ……………………………………………. 50,000

Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin purchasing from Division S.

110. Suppose that Division S has ample idle capacity to handle all of Division B’s needs without any increase in fixed costs or cutting into sales to outside customers. If Division S refuses to accept a transfer price of $28 or less and Division B continues to buy from the outside supplier, the company as a whole will:
A) gain $20,000 in potential profit. B) lose $60,000 in potential profit. C) lose $70,000 in potential profit. D) lose $20,000 in potential profit.

Appendix: 12

111. Suppose that Division S can sell all that it can produce to outside customers. If Division S sells to Division B at a price of $28 per unit, the company as a whole will be:
A) worse off by $80,000 each period. B) worse off by $70,000 each period. C) better off by $20,000 each period. D) worse off by $20,000 each period.

Appendix: 12

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Chapter 12 Segment Reporting and Decentralization

Use the following to answer questions 112-114:

Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2. The following data are available from last month:

Division 1:
Selling price per wheel to outside customers ……………………….. $50 Variable cost per wheel when sold to outside customers ……….. $35 Capacity in wheels …………………………………………………………… 15,000

Division 2:
Number of wheels needed per month ………………………………….. 5,000 Price per wheel paid to an outside supplier ………………………….. $47

If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per wheel in sales commissions.

112. Suppose that Division 1 sells 7,500 units per month to outside customers. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division if Division 2 requires 5,000 units per month from Division 1?
A) $33 B) $35 C) $47 D) $50

Appendix: 12

113. What is the maximum price per wheel that Division 2 should be willing to pay Division 1 if a transfer were to take place?
A) $33 B) $35 C) $47 D) $50

Appendix: 12

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Chapter 12 Segment Reporting and Decentralization

114. Suppose that Division 1 sells 11,500 units each month to outside customers. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $47.00 B) $43.50 C) $37.50 D) $34.73

Appendix: 12

Essay Questions

115. Omstadt Company produces and sells only two products that are referred to as RIPS and PITS. Production is “for order” only, and no finished goods inventories are maintained; work in process inventories are negligible.
The following data have been extracted relating to last month:

Sales ……………………………………….. Manufacturing costs:
Materials ………………………………. Labor …………………………………… Overhead ……………………………… Selling expenses ………………………. Administrative expenses …………….
RIPS $180,000

$18,000 $54,000 $72,000 $14,400 $12,000
PITS $180,000

$24,000 $48,000 $84,000 $10,080 $18,000

An analysis has been made of the manufacturing overhead. Although the items listed above are traceable to the products, $36,000 of the overhead assigned to RIPS and $72,000 of that assigned to PITS is fixed. The balance of the overhead is variable.

Selling expenses consist entirely of commissions paid as a percentage of sales. Direct labor is completely variable.

Administrative expenses in the data above are fixed and cannot be traced to the products but have been arbitrarily allocated to the products.

Required:

Prepare a segmented income statement, in total and for the two products. Use the contribution approach.

640 Garrison, Managerial Accounting, 12th Edition

116. Financial data for Redstone Company for last year appear below:

Redstone Company Statements of Financial Position

Assets:
Cash ………………………………………………….. Accounts receivable ……………………………. Inventory …………………………………………… Plant and equipment (net) …………………….. Investment in Balsam Company ……………. Land (undeveloped) …………………………….. Total assets …………………………………………

Liabilities and owners’ equity:
Accounts payable ……………………………….. Long-term debt …………………………………… Owners’ equity …………………………………… Total liabilities and owners’ equity ………..
Beginning Balance

$120,000 110,000 50,000 180,000 50,000
120,000 $630,000

$ 70,000 500,000
60,000 $630,000
Ending Balance

$160,000 100,000 60,000 160,000 60,000
120,000 $660,000

$ 90,000 500,000
70,000 $660,000

Redstone Company Income Statement

Sales ………………………………………………….. Less operating expenses ………………………. Net operating income ………………………….. Less interest and taxes:
Interest expense ……………………………….. Tax expense …………………………………….. Net income …………………………………………

$60,000
20,000
$1,222,000
1,099,800 122,200

80,000 $ 42,200

The company paid dividends of $32,200 last year. The “Investment in Balsam Company” on the statement of financial position represents an investment in the stock of another company.

Required:
a. Compute the company’s margin, turnover, and return on investment for last year. b. The Board of Directors of Redstone has set a minimum required return of 25%.
What was the company’s residual income last year?

,3

642 Garrison, Managerial Accounting, 12th Edition

117. Eban Wares is a division of a major corporation. The following data are for the latest year of operations:

Sales ……………………………………………………………………… Net operating income ……………………………………………… Average operating assets …………………………………………. The company’s minimum required rate of return ………..
$10,890,000 $609,840 $3,000,000 16%

Required:
a. What is the division’s margin? b. What is the division’s turnover?
c. What is the division’s return on investment (ROI)? d. What is the division’s residual income?

,3

118. Ferrel Wares is a division of a major corporation. The following data are for the latest year of operations:

Sales ……………………………………………………………………… Net operating income ……………………………………………… Average operating assets …………………………………………. The company’s minimum required rate of return ………..
$25,550,000 $1,149,750 $7,000,000 14%

Required:
a. What is the division’s return on investment (ROI)? b. What is the division’s residual income?

,3

Chapter 12 Segment Reporting and Decentralization

119. Geary Industries is a division of a major corporation. Last year the division had total sales of $7,920,000, net operating income of $190,080, and average operating assets of $3,000,000. The company’s minimum required rate of return is 16%.

Required:
a. What is the division’s margin? b. What is the division’s turnover?
c. What is the division’s return on investment (ROI)?

120. Heady Fabrication is a division of a major corporation. Last year the division had total sales of $6,480,000, net operating income of $667,440, and average operating assets of $2,000,000. The company’s minimum required rate of return is 10%.

Required:
What is the division’s return on investment (ROI)?

121. Idom Industries is a division of a major corporation. The following data are for the latest year of operations:

Sales …………………………………………………………………….. Net operating income …………………………………………….. Average operating assets ………………………………………… The company’s minimum required rate of return ……….
$12,480,000 $449,280 $4,000,000 12%

Required:
What is the division’s residual income?

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122. Fedori Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company’s Machinery Division has asked the Parts Division to provide it with 4,000 special parts each year. The special parts would require $23.00 per unit in variable production costs.

The Machinery Division has a bid from an outside supplier for the special parts at $37.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the YR24 that it presently is producing. The YR24 sells for $40.00 per unit, and requires $28.00 per unit in variable production costs. Packaging and shipping costs of the YR24 are $3.00 per unit. Packaging and shipping costs for the new special part would be only $1.50 per unit. The Parts Division is now producing and selling 15,000 units of the YR24 each year. Production and sales of the YR24 would drop by 20% if the new special part is produced for the Machinery Division.

Required:
a. What is the range of transfer prices within which both the Divisions’ profits would increase as a result of agreeing to the transfer of 4,000 special parts per year from the Parts Division to the Machinery Division?
b. Is it in the best interests of Fedori Corporation for this transfer to take place? Explain.

Appendix: 12

646 Garrison, Managerial Accounting, 12th Edition

123. Division B has asked Division A of the same company to supply it with 6,000 units of part L763 this year to use in one of its products. Division B has received a bid from an outside supplier for the parts at a price of $17.00 per unit. Division A has the capacity to produce 30,000 units of part L763 per year. Division A expects to sell 27,000 units of part L763 to outside customers this year at a price of $18.00 per unit. To fill the order from Division B, Division A would have to cut back its sales to outside customers. Division A produces part L763 at a variable cost of $9.00 per unit. The cost of packing and shipping the parts for outside customers is $1.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division B.

Required:
a. What is the range of transfer prices within which both the Divisions’ profits would increase as a result of agreeing to the transfer of 6,000 parts this year from Division B to Division A?
b. Is it in the best interests of the overall company for this transfer to take place? Explain.

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Chapter 13 Relevant Costs for Decision Making

True/False Questions

1. Fixed costs are sunk costs and are therefore irrelevant in decisions.

2. A complete income statement must be prepared as part of a differential cost analysis.

3. Future costs that do not differ between the alternatives in a decision are avoidable costs.

4. The book value of an old machine is always considered a sunk cost in a decision.

5. A product that does not cover its allocated share of general corporate administrative expenses should be dropped.

6. In a decision to drop a product, the product should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable.

7. Making rather than buying a part that goes into one of the company’s products would increase the company’s degree of vertical integration.

8. In a special order situation that involves using existing idle capacity, opportunity costs are zero.

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Chapter 13 Relevant Costs for Decision Making

9. When a company has a production constraint, the product with the highest contribution margin per unit of the constrained resource should be given highest priority.

10. Payment of overtime to a worker in order to relax a production constraint could increase the profits of a company.

11. In a plant operating at capacity, every machine and person in the plant would be working at the maximum possible rate.

12. Lumber produced in a lumber mill results in several different products being produced from each log; such products are called joint products.

13. In a sell or process further decision, an avoidable fixed production cost incurred after the split-off point is relevant to the decision.

14. Joint processing after the split-off point is profitable if the incremental revenue from such processing exceeds the incremental processing costs.

15. A cost that is traceable to a segment through activity-based costing is always an avoidable cost for decision making.

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Chapter 13 Relevant Costs for Decision Making

Multiple Choice Questions

16. Hal Etoesus currently works as the fry guy at Burger Breath Drive Thru but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost in this decision?
A) the cost of the textbooks
B) the cost of the cola that Hal will consume during class C) Hal’s lost wages at Burger Breath
D) both A and B above

17. Which of the following would be relevant in the decision to sell or throw out obsolete inventory?

Direct material cost assigned to the inventory
A) Yes B) Yes C) No D) No
Fixed overhead cost assigned to the inventory Yes No Yes No

18. Buff Corp. is considering replacing an old machine with a new machine. Which of the following items is relevant to Buff’s decision? (Ignore income tax considerations.)

Book value of old machine
A) Yes B) No C) No D) Yes
Disposal value of new machine No Yes No Yes

Source: CPA, adapted

19. In a make-or-buy decision, relevant costs include: A) unavoidable fixed costs
B) avoidable fixed costs
C) fixed factory overhead costs applied to products D) fixed selling and administrative expenses

Source: CMA, adapted

654 Garrison, Managerial Accounting, 12th Edition

Chapter 13 Relevant Costs for Decision Making

20. In situations where management must decide between accepting or rejecting a one-time-only special order where there is sufficient idle capacity to fill the order, which one of the following is NOT relevant in making the decision?
A) absorption costing unit product costs B) variable costs
C) incremental costs D) differential costs

Source: CMA, adapted

21. When a multi-product factory operates at full capacity, decisions must be made about what products to emphasize. In making such decisions, products should be ranked based on:
A) selling price per unit
B) contribution margin per unit
C) contribution margin per unit of the constraining resource D) unit sales volume

Source: CMA, adapted

22. Two or more products produced from a common input are called: A) common costs.
B) joint products. C) joint costs.
D) sunk costs.

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Chapter 13 Relevant Costs for Decision Making

23. Product X-547 is one of the joint products in a joint manufacturing process. Management is studying whether to sell X-547 at the split-off point or to process X-547 further into Xylene. The following data have been gathered:

I. Selling price of X-547
II. Variable cost of processing X-547 into Xylene.
III. The avoidable fixed costs of processing X-547 into Xylene. IV.The selling price of Xylene.
V. The joint cost of the process from which X-547 is produced.

Which of the above items are relevant in a decision of whether to sell the X-547 as is or process it further into Xylene?
A) I, II, and IV.
B) I, II, III, and IV. C) II, III, and V. D) I, II, III, and V.

Source: CMA, adapted

24. Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100. What would be the incremental effect on the company’s overall profit of reworking and selling the material rather than selling it as is as scrap?
A) -$22,000 B) -$67,600 C) $51,500 D) $5,900

Source: CIMA, adapted

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Chapter 13 Relevant Costs for Decision Making

25. Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for $5.55 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $1.67 per kilogram. An alternative would be to use material L in one of the company’s current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C. However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced. Bosques Corporation has now received a request from a company that could use material L in its production process. Assuming that Bosques Corporation could use all of its stock of material L to make product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?
A) $5.36 B) $3.80 C) $2.13 D) $1.67

Source: CIMA, adapted

26. Mankus Inc. is considering using stocks of an old raw material in a special project. The special project would require all 120 kilograms of the raw material that are in stock and that originally cost the company $816 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.75 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $50.00 for all 120 kilograms. What is the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the special project?
A) $810 B) $870 C) $760 D) $816

Source: CIMA, adapted

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Chapter 13 Relevant Costs for Decision Making

27. Narciso Corporation is preparing a bid for a special order that would require 880 liters of material R19S. The company already has 280 liters of this raw material in stock that originally cost $6.20 per liter. Material R19S is used in the company’s main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $5.45 per liter. New stocks of the material can be readily purchased for $6.20 per liter. What is the relevant cost of the 880 liters of the raw material when deciding how much to bid on the special order?
A) $5,006 B) $5,456 C) $4,796 D) $5,456

Source: CIMA, adapted

28. Yehle Inc. regularly uses material Y51B and currently has in stock 460 liters of the material for which it paid $2,530 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $4.55 per liter. New stocks of the material can be purchased on the open market for $5.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 720 liters of the material to be used in a job for a customer. The relevant cost of the 720 liters of material Y51B is:
A) $3,924 B) $5,450 C) $3,510 D) $3,276

Source: CIMA, adapted

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Chapter 13 Relevant Costs for Decision Making

29. Roddey Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 2,900 units of component GEE. Each unit of GEE requires 3 units of material R39 and 8 units of material I59. Data concerning these two materials follow:

Material R39
I59
Units in Stock
340 23,700
Original Cost Per Unit $4.70 $8.20
Current Market Price Per Unit $4.35 $8.05
Disposal Value Per Unit $3.95 $6.85

Material R39 is in use in many of the company’s products and is routinely replenished. Material I59 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product GEE?
A) $224,605 B) $196,765 C) $228,204 D) $193,285

Source: CIMA, adapted

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Chapter 13 Relevant Costs for Decision Making

30. Moyer Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 2,300 units of component TIB. Each unit of TIB requires 9 units of material F58 and 7 units of material D66. Data concerning these two materials follow:

Material F58 D66
Units in Stock 18,940 15,700
Original Cost Per Unit $4.40 $6.10
Current Market Price Per Unit $4.65 $6.50
Disposal Value Per Unit $4.35 $4.80

Material F58 is in use in many of the company’s products and is routinely replenished. Material D66 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product TIB?
A) $189,890 B) $174,215 C) $168,533 D) $200,905

Source: CIMA, adapted

31. Kahn Company produces and sells 8,000 units of Product X each year. Each unit of Product X sells for $10 and has a contribution margin of $6. It is estimated that if Product X is discontinued, $50,000 of the $60,000 in fixed costs charged to Product X could be eliminated. These data indicate that if Product X is discontinued, overall company net operating income should:
A) increase by $2,000 per year B) decrease by $2,000 per year C) increase by $38,000 per year D) decrease by $38,000 per year

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32. The Milham Company has two divisions – East and West. The divisions have the following revenues and expenses:

Sales …………………………………………………….. Variable costs ……………………………………….. Traceable fixed costs ……………………………… Allocated common corporate costs ………….. Net operating income (loss) …………………….
East $720,000
370,000 130,000
120,000 $100,000
West $350,000
240,000 80,000
50,000 $ (20,000)

Management at Milham is pondering the elimination of the West Division since it has shown an operating loss for the past several years. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income of:
A) $100,000 B) $80,000 C) $120,000 D) $50,000

33. The following information relates to next year’s projected operating results of the Aluminum Division of Wroclaw Corporation:

Contribution margin …………………. Fixed expenses ………………………… Net operating loss ……………………..
$1,500,000
1,700,000 $ (200,000)

If Aluminum Division is dropped, $1,000,000 of the above fixed costs would be eliminated. What will be the effect on Wroclaw’s profit next year if Aluminum Division is dropped instead of being kept?
A) $500,000 decrease B) $800,000 increase C) $1,000,000 increase D) $1,200,000 increase

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34. Teich Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 15,000 of the components each year. The unit product cost of the component according to the company’s absorption cost accounting system is given as follows:

Direct materials ………………………………….. $ 7.90 Direct labor ………………………………………… 2.10 Variable manufacturing overhead …………. 1.10 Fixed manufacturing overhead ……………… 4.00 Unit product cost ………………………………… $15.10

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 10% is avoidable if the component were bought from the outside supplier; the remainder is not avoidable. In addition, making the component uses 3 minutes on the machine that is the company’s current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 6 minutes on the constraining machine and that has a contribution margin of $8.10 per unit.

When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?
A) $15.55 B) $11.50 C) $19.15 D) $15.10

Source: CIMA, adapted

35. Jordan Company budgeted sales of 400,000 calculators at $40 per unit last year. Variable manufacturing costs were budgeted at $16 per unit, and fixed manufacturing costs at $10 per unit. A special order for 40,000 calculators at $23 each was received by Jordan in March. Jordan has sufficient plant capacity to manufacture the additional quantity without incurring any additional fixed manufacturing costs; however, the production would have to be done on an overtime basis at an estimated additional cost of $3 per calculator. Acceptance of the special order would not affect Jordan’s normal sales and no selling expenses would be incurred. What would be the effect on net operating income if the special order were accepted?
A) $120,000 decrease B) $160,000 increase C) $240,000 decrease D) $280,000 increase

Source: CPA, adapted

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36. Marley Company makes three products (X, Y, & Z) with the following characteristics:

Selling price per unit ………………… Variable cost per unit ……………….. Machine hours per unit ………………
Product
X Y Z $10 $15 $20
$6 $10 $10 2 4 10

The company has a capacity of 2,000 machine hours, but there is virtually unlimited demand for each product. In order to maximize total contribution margin, how many units of each product should the company produce?
A) 2,000 units of X, 500 units of Y, and 200 units of Z B) 0 units of X, 0 units of Y, and 200 units of Z
C) 0 units of X, 500 units of Y, and 0 units of Z D) 1,000 units of X, 0 units of Y, and 0 units of Z

37. Two products, LB and NH, emerge from a joint process. Product LB has been allocated $30,800 of the total joint costs of $44,000. A total of 2,000 units of product LB are produced from the joint process. Product LB can be sold at the split-off point for $13 per unit, or it can be processed further for an additional total cost of $14,000 and then sold for $15 per unit. If product LB is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?
A) $16,000 more profit B) $20,800 more profit C) $40,800 less profit D) $10,000 less profit

Source: CIMA, adapted

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Use the following to answer questions 38-39:

Jebb’s Lettuce Stand currently sells 60,000 heads of lettuce each year for $1.00 per head. Jebb is thinking of expanding operations and serving the customer better by purchasing a “slice and dice” machine that will cut up each head of lettuce into bite-size pieces that can be used for salads. Jebb expects he will then be able to sell his lettuce for $1.70 per head. Jebb has prepared the following analysis for each option based on sales of 60,000 heads of lettuce:

Selling Unsliced Lettuce:

Variable costs ………………………….. Fixed costs ………………………………. Total ……………………………………….

Selling Sliced Lettuce:

Variable costs ………………………….. Fixed costs ………………………………. Total ……………………………………….

Per Head $0.25
0.30 $0.55

Per Head $0.30
0.90 $1.20

Total $15,000
18,000 $33,000

Total $18,000
54,000 $72,000

38. Based on the information above, what will be Jebb’s increase or decrease in profit for the year if he chooses to start slicing up the lettuce instead of selling it whole?
A) $3,000 increase B) $3,000 decrease C) $12,000 decrease D) $30,000 increase

39. Assume that Jebb is currently selling only 50,000 heads of lettuce per year instead of 60,000. Under this scenario, what will be Jebb’s increase or decrease in profit for the year if he chooses to start slicing up the lettuce instead of selling it whole?
A) $2,000 increase B) $2,500 decrease C) $3,000 increase D) $3,500 decrease

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Use the following to answer questions 40-41:

Bayshore Company manufactures and sells Product K. Results for last year are as follows:

Sales (10,000 units at $150 each) ………….. Less expenses:
Variable production costs ………………….. Sales commissions (15% of sales) ……… Salary of product line manager ………….. Traceable fixed advertising expense …… Fixed manufacturing overhead …………… Total expenses ……………………………………. Net operating loss ………………………………..

$900,000 225,000 190,000 175,000
160,000
$1,500,000

1,650,000 $ (150,000)

Bayshore is reexamining all of its product lines and is trying to decide whether to discontinue Product K. Dropping the product would have no effect on the total fixed manufacturing overhead incurred by the company.

40. Assume that dropping Product K will have no effect on the sale of other product lines. If the company drops Product K, the change in annual net operating income due to this decision will be a:
A) $10,000 decrease B) $150,000 increase C) $160,000 decrease D) $310,000 decrease

41. Assume that dropping Product K would result in a $15,000 increase in the contribution margin of other product lines. If Bayshore chooses to drop Product K, then the change in net operating income next year due to this action will be a:
A) $150,000 increase B) $150,000 decrease C) $5,000 increase D) $140,000 increase

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Use the following to answer questions 42-43:

The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines. The expected cost and revenue data for the F-27 fan are as follows:

Annual sales ………………………………………. Unit selling price ………………………………… Unit variable costs:
Production ………………………………………. Selling…………………………………………….
Avoidable fixed costs per year: Production ………………………………………. Selling…………………………………………….
4,000 units $58

$34 $4

$20,000 $30,000

If the F-27 model is added as a new product line, it is expected that the contribution margin of other product lines at Flint will drop by $7,000 per year.

42. If the F-27 product line is added next year, the change in operating income should be: A) $30,000 increase
B) $5,000 decrease C) $23,000 increase D) $15,000 increase

43. What is the lowest unit selling price that could be charged for the F-27 model and still make it economically desirable for Flint to add the new product line?
A) $52.25 B) $50.50 C) $55.75 D) $49.00

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Use the following to answer questions 44-45:

Key Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows:

Annual sales …………………………………………………. Selling price per unit ……………………………………
Variable costs per unit:
Production …………………………………………………. Selling……………………………………………………….
Avoidable fixed costs per year:
Production …………………………………………………. Selling………………………………………………………. Allocated common corporate costs per year ……
2,500 units $304

$125 $49

$50,000 $75,000 $55,000

If the new product is added, the combined contribution margin of the other, existing product lines is expected to drop $65,000 per year. Total common corporate costs would be unaffected by the decision of whether to add the new product.

44. If the new product line is added next year, the increase in net operating income resulting from this decision would be:
A) $325,000 B) $200,000 C) $145,000 D) $135,000

45. What is the lowest selling price per unit that could be charged for the new product line and still make it economically desirable to add the new product line?
A) $246 B) $250 C) $232 D) $282

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Use the following to answer questions 46-47:

The Talbot Company makes wheels that it uses in the production of bicycles. Talbot’s costs to produce 100,000 wheels annually are:

Direct materials ……………………….. Direct labor ……………………………… Variable overhead ……………………. Fixed overhead …………………………
$30,000 $50,000 $20,000 $70,000

An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45,000 per year.

46. If Talbot chooses to buy the wheel from the outside supplier, then the change in annual net operating income due to accepting the offer is a:
A) $35,000 increase B) $10,000 decrease C) $45,000 increase D) $70,000 increase

47. What is the highest price that Talbot could pay the outside supplier for the wheel and still be economically indifferent between making or buying the wheels?
A) $1.70 B) $1.60 C) $1.55 D) $1.15

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Use the following to answer questions 48-49:

Melbourne Company has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs:

Direct materials …………….. Direct labor …………………… Variable overhead …………. Fixed overhead ………………
$250,000 $200,000 $190,000 $120,000

Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, there would be no effect of this decision on the total fixed overhead of the company.

48. If Melbourne decides to purchase the subcomponent from the outside supplier, what would be the impact on the company’s net operating income for the year?
A) $120,000 higher B) $20,000 higher C) $120,000 lower D) $20,000 lower

49. At what price per unit charged by the outside supplier would Melbourne be economically indifferent between making the subcomponent or buying it from outside?
A) $29 B) $25 C) $21 D) $24

Use the following to answer questions 50-51:

Regis Company makes the plugs it uses in one of its products at a cost of $36 per unit. This cost includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell them to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.

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50. If Regis Company purchases the plugs but does not rent the unused facility, the company would:
A) save $3.00 per unit. B) lose $6.00 per unit. C) save $6.00 per unit. D) lose $3.00 per unit.

Source: CMA, adapted

51. If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in savings annually. To achieve this goal, the minimum annual rent on the facility must be:
A) $10,000 B) $40,000 C) $70,000 D) $190,000

Source: CMA, adapted

Use the following to answer questions 52-53:

Ahringer Company makes 50,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials ………………………………….. $19.10 Direct labor ………………………………………… 21.70 Variable manufacturing overhead …………. 2.10 Fixed manufacturing overhead ……………… 14.20 Unit product cost ………………………………… $57.10

An outside supplier has offered to sell the company all of these parts it needs for $50.10 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $135,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $9.30 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company’s remaining products.

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52. How much of the unit product cost of $57.10 is relevant in the decision of whether to make or buy the part?
A) $57.10 B) $21.70 C) $47.80 D) $42.90

53. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
A) $350,000 B) $135,000 C) $(115,000) D) $20,000

Use the following to answer question 54:

Regis Company makes the plugs it uses in one of its products at a cost of $36 per unit. This cost includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell them to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.

54. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 50,000 units required each year?
A) $57.10 B) $50.50 C) $59.80 D) $2.70

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Chapter 13 Relevant Costs for Decision Making

Use the following to answer questions 55-57:

Dockwiller Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as D53. Data concerning this product are given below:

Selling price ……………………………………………. Direct materials ……………………………………….. Direct labor ……………………………………………… Variable manufacturing overhead ………………. Fixed manufacturing overhead …………………… Variable selling expense …………………………… Fixed selling and administrative expense …….
Per Unit Data $150
$26 $3 $1 $17 $2 $18

The above per unit data are based on annual production of 8,000 units of the component. Direct labor can be considered to be a variable cost.

55. The company has received a special, one-time-only order for 500 units of component D53. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Dockwiller has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?
A) $67 B) $30 C) $150 D) $47

Source: CMA, adapted

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56. The company has received a special, one-time-only order for 300 units of component D53. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Dockwiller has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $1,800. What is the minimum price per unit on the special order below which the company should not go?
A) $73 B) $36 C) $53 D) $6

,5 Source: CMA, adapted

57. Refer to the original data in the problem. What is the current contribution margin per unit for component D53 based on its selling price of $150 and its annual production of 8,000 units?
A) $83 B) $118 C) $32 D) $120

Source: CMA, adapted

Use the following to answer questions 58-59:

The following are the Jensen Company’s unit costs of making and selling an item at a volume of 1,000 units per month (which represents the company’s capacity):

Manufacturing:
Direct materials ………………………….. $1.00 Direct labor ……………………………….. $2.00 Variable overhead ………………………. $0.50 Fixed overhead …………………………… $0.40
Selling and Administrative:
Variable …………………………………….. $2.00 Fixed …………………………………………. $0.80

Present sales amount to 700 units per month. An order has been received from a customer in a foreign market for 100 units. The order would not affect current sales. Jensen’s total fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 700 units and 1,000 units. The variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales.

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58. How much will the company’s profits be increased or (decreased) if it prices the 100 units at $7 each?
A) $(30) B) $150 C) $0 D) $310

59. Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company’s other sales. What cost is relevant as a guide for setting a minimum price?
A) $5.50 B) $5.90 C) $2.00 D) $3.50

Use the following to answer questions 60-61:

The Molis Company has the capacity to produce 15,000 haks each month. Current regular production and sales are 10,000 haks per month at a selling price of $15 each. Based on this level of activity, the following unit costs are incurred:

Direct materials ………………………………….. $5.00 Direct labor ………………………………………… $3.00 Variable manufacturing overhead …………. $0.75 Fixed manufacturing overhead ……………… $1.50 Variable selling expense ……………………… $0.25 Fixed administrative expense ……………….. $1.00

The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10,000 to 15,000 haks per month.

The Molis Company has received a special order from a customer who wants to pay a reduced price of $10 per hak. There would be no selling expense in connection with this special order. And, this order would have no effect on the company’s other sales.

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60. Suppose the special order is for 4,000 haks this month. If this offer is accepted by Molis, the company’s operating income for the month will:
A) increase by $6,000 B) decrease by $6,000 C) increase by $5,000 D) decrease by $5,000

61. Suppose the special order is for 6,000 haks this month and thus some regular sales would have to be given up. If this offer is accepted by Molis, the company’s operating income for the month will:
A) increase by $6,000 B) increase by $7,500 C) increase by $5,000 D) increase by $1,500

Use the following to answer questions 62-64:

Elferts Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 70,000 units per month is as follows:

Direct materials …………………………………………….. $41.40 Direct labor …………………………………………………… $7.10 Variable manufacturing overhead ……………………. $2.40 Fixed manufacturing overhead ………………………… $18.30 Variable selling & administrative expense ……….. $1.00 Fixed selling & administrative expense ……………. $6.10

The normal selling price of the product is $85.80 per unit.

An order has been received from an overseas customer for 4,000 units to be delivered this month at a special discounted price. This order would have no effect on the company’s normal sales and would not change the total amount of the company’s fixed costs. The variable selling and administrative expense would be $0.60 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

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62. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $80.60 per unit. By how much would this special order increase (decrease) the company’s net operating income for the month?
A) $44,000 B) $(18,400) C) $117,200 D) $17,200

63. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
A) $9.50 B) $10.10 C) $5.20 D) $33.90

64. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 100 units for regular customers. The minimum acceptable price per unit for the special order is closest to:
A) $69.20 B) $76.30 C) $85.80 D) $52.15

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Use the following to answer questions 65-67:

The Melrose Company produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

Direct materials ………………………………….. $20 Direct labor ………………………………………… $17 Variable manufacturing overhead …………. $13 Fixed manufacturing overhead ……………… $14 Variable selling expense ……………………… $12 Fixed selling expense ………………………….. $8

The regular selling price of one unit of Product C is $100. A special order has been received by Melrose from Moore Company to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $10,500 and will have no use after the special order is filled.

65. Assume that Melrose expects to sell 60,000 units of Product C to regular customers next year. At what selling price for the 7,000 units would Melrose be economically indifferent between accepting and rejecting the special order from Moore?
A) $53.00 B) $54.50 C) $75.00 D) $76.50

66. Assume Melrose expects to sell 60,000 units of Product C to regular customers next year. If Moore company offers to buy the special units at $90 per unit, the effect of accepting the special order on Melrose’s net operating income for next year will be: A) $42,000 increase
B) $54,000 decrease C) $105,000 increase D) $248,500 increase

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67. Suppose Melrose can sell 68,000 units of Product C to regular customers next year. If Moore Company offers to buy the special order units at $95 per unit, the effect of accepting the special order for 7,000 units on Melrose’s net operating income for next year will be a:
A) $93,500 increase B) $104,000 increase C) $114,500 increase D) $294,000 increase

Use the following to answer questions 68-71:

Broyles Company makes four products in a single facility. These products have the following unit product costs:

Product

Direct materials ………………………………….. Direct labor ………………………………………… Variable manufacturing overhead …………. Fixed manufacturing overhead ……………… Unit product cost …………………………………
A B $10.70 $ 5.40
19.10 21.40 1.20 1.50
22.40 16.00 $53.40 $44.30
C D
$ 5.10 $ 7.20 29.00 34.40 1.80 1.60
15.00 17.60 $50.90 $60.80

Additional data concerning these products are listed below.

Product

Grinding minutes per unit ……………………. Selling price per unit …………………………… Variable selling cost per unit ………………… Monthly demand in units ……………………..
A B 2.20 1.20
$65.40 $58.50 $3.60 $3.80 1,000 4,000
C D 1.70 1.80
$70.70 $76.20 $2.00 $3.40 1,000 4,000

The grinding machines are potentially the constraint in the production facility. A total of 14,400 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

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68. How many minutes of grinding machine time would be required to satisfy demand for all four products?
A) 13,400 B) 15,900 C) 10,000 D) 14,400

69. Which product makes the LEAST profitable use of the grinding machines? A) Product A
B) Product B C) Product C D) Product D

70. Which product makes the MOST profitable use of the grinding machines? A) Product A
B) Product B C) Product C D) Product D

71. Up to how much should the company be willing to pay for one additional hour of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.)
A) $26.40 B) $12.00 C) $14.00 D) $0.00

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Use the following to answer questions 72-75:

Craves Company makes four products in a single facility. Data concerning these products appear below:

Selling price per unit …………………………… Variable manufacturing cost per unit …….. Variable selling cost per unit ………………… Milling machine minutes per unit …………. Monthly demand in units ……………………..
Product
A B C D $28.20 $26.60 $20.40 $24.70 $11.40 $7.70 $6.30 $9.30
$3.40 $1.50 $3.50 $1.80 2.60 1.40 0.70 0.90 1,000 3,000 4,000 1,000

The milling machines are potentially the constraint in the production facility. A total of 10,400 minutes are available per month on these machines.

72. How many minutes of milling machine time would be required to satisfy demand for all four products?
A) 9,000 B) 10,500 C) 10,400 D) 9,900

73. Which product makes the LEAST profitable use of the milling machines? A) Product A
B) Product B C) Product C D) Product D

74. Which product makes the MOST profitable use of the milling machines? A) Product A
B) Product B C) Product C D) Product D

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75. Up to how much should the company be willing to pay for one additional hour of milling machine time if the company has made the best use of the existing milling machine capacity? (Round off to the nearest whole cent.)
A) $10.60 B) $0.00 C) $5.15 D) $17.40

Use the following to answer questions 76-77:

The Madison Company produces three products with the following costs and selling prices:

Product

Selling price per unit ………………… Variable cost per unit ……………….. Direct labor hours per unit ………… Machine hours per unit ………………
A B C $15 $20 $20
$8 $10 $12 1 1.5 2 3.5 2 2.5

76. If Madison has a limit of 10,000 direct labor hours but no limit on machine hours, then the three products should be produced in the order:
A) A, B, C B) B, C, A C) C, A, B D) A, C, B

77. If Madison has a limit of 15,000 machine hours but no limit on direct labor hours, then the three products should be produced in the order:
A) A, B, C B) B, C, A C) A, C, B D) C, A, B

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Use the following to answer questions 78-79:

The Wester Company produces three products with the following costs and selling prices:

Selling price per unit ………………… Variable cost per unit ……………….. Fixed cost per unit ……………………. Direct labor hours per unit ………… Machine hours per unit ………………
Product
A B C $21 $12 $32 $11 $7 $18
$5 $3 $9 0.4 0.1 0.7 0.2 0.5 0.2

The company has insufficient capacity to fulfill all of the demand for these three products.

78. If direct labor hours are the constraint, then the three products should be produced in the order:
A) A, B, C B) B, A, C C) C, A, B D) A, C, B

79. If machine hours are the constraint, then the three products should be produced in the order:
A) A, B, C B) B, C, A C) A, C, B D) C, A, B

Use the following to answer questions 80-81:

The Carter Company makes products A and B in a joint process from a single input, R. During a typical production run, 50,000 units of R yield 20,000 units of A and 30,000 units of B at the split-off point. Joint production costs total $90,000 per production run. The unit selling price for A is $4 and for B is $3.80 at the split-off point. However, B can be processed further at a total cost of $60,000 and then sold for $7.00 per unit.

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80. In a decision between selling B at the split-off point or processing B further, which of the following items is not relevant:
A) the $60,000 cost to process B beyond the split-off point B) the $3.80 unit sales price of B at the split-off point
C) the portion of the $90,000 joint production cost allocated to B D) the $7 unit selling price for B after further processing

81. If product B is processed beyond the split-off point, the change in operating income from a production run (as compared to selling B at the split-off point) would be:
A) $36,000 increase B) $96,000 increase C) $42,000 decrease D) $10,000 decrease

Use the following to answer questions 82-83:

Paulsen Company makes two products, W and P, in a joint process. At the split-off point, 50,000 units of W and 60,000 units of P are available each month. Monthly joint production costs are $290,000. Product W can be sold at the split-off point for $5.60 per unit. Product P either can be sold at the split-off point for $4.75 per unit or it can be further processed and sold for $7.20 per unit. If P is processed further, additional processing costs of $3.10 per unit will be incurred.

82. If P is processed further and then sold, rather than being sold at the split-off point, the change in monthly net operating income would be a:
A) $147,000 decrease B) $147,000 increase C) $39,000 increase D) $39,000 decrease

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83. What would the selling price per unit of Product P need to be after processing in order for Paulsen Company to be economically indifferent between selling P at the split-off point or processing P further?
A) $7.85 B) $8.58 C) $9.49 D) $11.68

Use the following to answer questions 84-86:

Dockham Company makes two products from a common input. Joint processing costs up to the split-off point total $33,600 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

Allocated joint processing costs ……………. Sales value at split-off point …………………. Costs of further processing …………………… Sales value after further processing ……….
Product X $14,000 $20,000 $26,300 $50,200
Product Y $19,600 $28,000 $24,500 $48,600
Total $33,600 $48,000 $50,800 $98,800

84. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?
A) $23,900 B) $29,900 C) $3,900 D) $9,900

85. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?
A) $(3,900) B) $24,100 C) $32,500 D) $4,500

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86. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?
A) $23,900 B) $40,300 C) $50,200 D) $14,000

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Essay Questions

87. Lakeshore Tours Inc., operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company’s overall operating performance. One such tour is a two-day Battlefields of the French and Indian Wars bus tour. An income statement from one of these tours is given below:

Ticket revenue
(100 seats × 45% occupancy × $80 ticket price) … Less variable expenses ($24 per person) ……………… Contribution margin …………………………………………. Less fixed tour expenses:
Tour promotion …………………………………………….. Salary of bus driver ……………………………………….. Fee, tour guide ………………………………………………. Fuel for bus…………………………………………………… Depreciation of bus ……………………………………….. Liability insurance, bus ………………………………….. Overnight parking fee, bus ……………………………… Room and meals, bus driver and tour guide ………. Bus maintenance and preparation ……………………. Total fixed tour expenses ………………………………….. Net operating loss ……………………………………………..

$3,600 100%
1,080 30% 2,520 70%

$620 400 825 100 400 250 50 75
325
3,045 $ (525)

Dropping this tour would not affect the number of buses in the company’s fleet or the number of bus drivers on the company’s payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The “Bus maintenance and preparation” cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company’s fleet of buses in good operating condition. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company’s fleet and not upon how much they are used.

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Required:
a. Prepare an analysis showing what the impact will be on company profits if this tour is discontinued.
b. The company’s tour director has been criticized because only about 50% of the seats on the company’s tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company’s average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director’s conclusion? Explain your response.

88. Boa Mining Company currently is operating at less than 50% of practical capacity. The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price per ton is $3 and the variable cost per ton is $2. Fixed costs per month total $10,000.

Management is concerned that a further drop in sales volume will generate a loss and accordingly is considering temporarily suspending operations until demand in the metals markets rebounds and prices once again rise. Management has implemented a cost reduction program over the past year, but at this point suspension of operations appears to be the only viable alternative. Management estimates that suspension of operations would reduce fixed costs from $10,000 to $4,000 per month.

Required:
a. Why does management believe that the fixed costs will persist at $4,000 even though the mine is temporarily closed?
b. At what sales volume per month will the company be indifferent between continuing to operate the mine and closing it?

89. Fothergill Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials ………………………………….. $23.40 Direct labor ………………………………………… 22.30 Variable manufacturing overhead …………. 1.40 Fixed manufacturing overhead ……………… 24.60 Unit product cost ………………………………… $71.70

An outside supplier has offered to sell the company all of these parts it needs for $59.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $352,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company’s remaining products.

Required:
a. How much of the unit product cost of $71.70 is relevant in the decision of whether to make or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

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90. Bulan Inc. makes a range of products. The company’s predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead …………. Fixed manufacturing overhead ……………… Direct labor-hours ………………………………..
$140,000 $560,000 35,000

Component T6 is used in one of the company’s products. The unit product cost of the component according to the company’s cost accounting system is determined as follows:

Direct materials ……………………………………. Direct labor ………………………………………….. Manufacturing overhead applied …………….. Unit product cost …………………………………..
$ 45.00 32.00
40.00 $117.00

An outside supplier has offered to supply component T6 for $101 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Bulan chronically has idle capacity.

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Required:
Is the offer from the outside supplier financially attractive? Why?

Source: CIMA, adapted

91. Jiambalvo Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 40,000 units per month is as follows:

Direct materials ……………………………………….. $38.80 Direct labor ……………………………………………… $9.70 Variable manufacturing overhead ………………. $2.30 Fixed manufacturing overhead …………………… $18.10 Variable selling & administrative expense …… $1.70 Fixed selling & administrative expense ………. $8.80

The normal selling price of the product is $81.10 per unit.

An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company’s normal sales and would not change the total amount of the company’s fixed costs. The variable selling and administrative expense would be $0.20 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Required:
a. Suppose the company has ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $75.30 per unit. By how much would this special order increase (decrease) the company’s net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
c. Suppose the company does not have enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers. What would be the minimum acceptable price per unit for the special order?

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92. Pilgrim Corporation makes a range of products. The company’s predetermined overhead rate is $23 per direct labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead …………. Fixed manufacturing overhead ……………… Direct labor-hours ………………………………..
$200,000 $375,000 25,000

Management is considering a special order for 800 units of product N89E at $69 each. The normal selling price of product N89E is $88 and the unit product cost is determined as follows:

Direct materials ……………………………………. $28.00 Direct labor ………………………………………….. 22.50 Manufacturing overhead applied …………….. 34.50 Unit product cost ………………………………….. $85.00

If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.

Required:
If the special order were accepted, what would be the impact on the company’s overall profit?

Source: CIMA, adapted

694 Garrison, Managerial Accounting, 12th Edition

93. Adamyan Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 15,000 medals each month; current monthly production is 12,750 medals. The company normally charges $120 per medal. Cost data for the current level of production are shown below:

Variable costs:
Direct materials ……………………………….. Direct labor ……………………………………… Selling and administrative ………………….
Fixed costs:
Manufacturing …………………………………. Selling and administrative ………………….

$624,750 $306,000 $15,300

$506,175 $123,675

The company has just received a special one-time order for 700 medals at $83 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.

Required:
Should the company accept this special order? Why?

Source: CMA, adapted

94. Albertine Co. manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has the capacity to produce 16,000 trophies each month; current monthly production is 12,800 trophies. The company normally charges $113 per trophy. Cost data for the current level of production are shown below:

Variable costs:
Direct materials …………………….. Direct labor …………………………… Selling and administrative ……….
Fixed costs:
Manufacturing ………………………. Selling and administrative ……….

$614,400 $256,000 $35,840

$294,400 $94,720

The company has just received a special one-time order for 1,200 trophies at $61 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.

Required:
Should the company accept this special order? Why?

Source: CMA, adapted

95. Gluth Company makes three products in a single facility. These products have the following unit product costs:

Direct materials …………………………………… Direct labor ………………………………………… Variable manufacturing overhead ………….. Fixed manufacturing overhead ……………… Unit product cost ………………………………….
Products
A B C $22.50 $22.40 $29.20
13.60 11.40 12.50 3.00 3.40 4.50
19.20 20.10 26.50 $58.30 $57.30 $72.70

Additional data concerning these products are listed below.

Mixing minutes per unit ………………………… Selling price per unit …………………………….. Variable selling cost per unit …………………. Monthly demand in units ……………………….
Products
A B C 3.30 1.70 1.80
$74.70 $76.10 $87.50 $1.80 $2.40 $2.90 4,000 2,000 4,000

The mixing machines are potentially the constraint in the production facility. A total of 23,200 minutes are available per month on these machines.
Direct labor is a variable cost in this company.

Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all four products?
b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

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96. Holtz Company makes three products in a single facility. Data concerning these products follow:

Selling price per unit …………………………… Direct materials ………………………………….. Direct labor ………………………………………… Variable manufacturing overhead …………. Variable selling cost per unit ………………… Mixing minutes per unit ………………………. Monthly demand in units ………………………
Product
A B C $75.90 $71.10 $73.40 $29.70 $30.20 $33.40 $21.20 $19.80 $19.60
$4.90 $5.60 $7.60 $1.30 $3.90 $1.80 2.10 1.70 1.30 4,000 1,000 2,000

The mixing machines are potentially the constraint in the production facility. A total of 12,500 minutes are available per month on these machines.
Direct labor is a variable cost in this company.

Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all four products?
b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

700 Garrison, Managerial Accounting, 12th Edition

97. Wright, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

Selling price ……………………………………….. Variable costs …………………………………….. Fixed costs …………………………………………. Tapping machine time (minutes) ……………
Product
C D E $90 $30 $60 $35 $10 $20 $45 $15 $30
5 4 2

Fixed costs are applied to the products on the basis of direct labor hours.

Demand for the three products exceeds the company’s productive capacity. The tapping machine is the constraint, with only 2,400 minutes of tapping machine time available this week.

Required:
a. Given the tapping machine constraint, which product should be emphasized? Support your answer with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of tapping machine time?

98. Iden Company makes two products from a common input. Joint processing costs up to the split-off point total $64,800 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

Allocated joint processing costs ………… Sales value at split-off point ……………… Costs of further processing ……………….. Sales value after further processing …….
Product X $32,400 $36,000 $20,300 $55,400
Product Y $32,400 $36,000 $14,300 $53,000
Total $64,800 $72,000 $34,600
$108,400

Required:
a. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?
b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?
c. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?
d. What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

99. Benjamin Company produces products C, J, and R from a joint production process. Each product may be sold at the split-off point or processed further. Joint production costs of $95,000 per year are allocated to the products based on the relative number of units produced. Data for Benjamin’s operations for last year follow:

Additional sales values and costs if processed further

Product C
J R
Units Produced 6,000 9,000 4,000
Sales values at split-off $75,000 $70,000 $46,500

Sales values $100,000 $115,000
$55,000

Added costs* $20,000 $36,000 $10,000

*All variable and traceable to the products involved.

Required:
Which products should be processed beyond the split-off point?

Chapter 14 Capital Budgeting Decisions

True/False Questions

1. An investment project with a project profitability index of -0.02 has an internal rate of return that is larger than the discount rate.

,2,4

2. Both the net present value method and the internal rate of return method can be used as a screening tool in capital budgeting decisions.

,2

3. When considering a number of investment projects, the project that has the best payback period will also always have the highest net present value.

,5

4. When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project.

5. Discounted cash flow techniques automatically provide for recovery of initial investment.

6. The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project.

7. Because of the uncertainty and large cost involved in investments in automated equipment, any intangible benefits from these projects should be ignored.

8. When the internal rate of return method is used to rank investment proposals, the lower the internal rate of return, the more desirable the investment.

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9. When computing the project profitability index of an investment project, the investment required will include any investment made in working capital at the beginning of the project.

10. If investment funds are limited, the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal.

11. In calculating payback where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be deducted from the cost of the new equipment.

12. In the payback method, depreciation is added back to net operating income when computing the net annual cash flow.

13. The simple rate of return method is desirable because of its simplicity and the fact that it takes the time value of money into account.

14. The present value of a cash flow will never be greater than the future dollar amount of the cash flow.

15. If salvage value is ignored in depreciating an asset for tax purposes, any sales proceeds received at the end of the life of the asset are fully taxable as income.

Appendix: 14D

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Multiple Choice Questions

16. If a company has computed a project profitability index of -0.015 for an investment project, then:
A) the project’s internal rate of return is less than the discount rate.
B) the project’s internal rate of return is greater than the discount rate. C) the project’s internal rate of return is equal to the discount rate.
D) the relationship of the internal rate of return and the discount rate is impossible to determine from the data given.

,2,4

17. If the project profitability index of an investment project is zero, then: A) the project’s internal rate of return is less than the discount rate.
B) the project’s internal rate of return is greater than the discount rate. C) the project’s internal rate of return is equal to the discount rate.
D) the relationship of the rate of return and the discount rate is impossible to determine from the data given.

,2,4

18. If the internal rate of return of an investment in equipment is equal to the discount rate:
A) the net present value of the investment will be zero.
B) the payback period of the investment will be equal to the useful life of the equipment.
C) neither A nor B above will be true. D) both A and B above will be true.

,2,5

19. Neu Company is considering the purchase of an investment that has a positive net present value based on a discount rate of 12%. The internal rate of return would be: A) zero.
B) 12%.
C) greater than 12%. D) less than 12%.

,2 Source: CPA, adapted

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20. The assumption that the cash flows from an investment project are reinvested at the company’s discount rate applies to:
A) both the internal rate of return and the net present value methods. B) only the internal rate of return method.
C) only the net present value method.
D) neither the internal rate of return nor net present value methods.

,2

21. The net present value of a proposed investment is negative. Therefore, the discount rate used must be:
A) greater than the project’s internal rate of return. B) less than the project’s internal rate of return.
C) greater than the minimum required rate of return. D) less than the minimum required rate of return.

,2 Source: CMA, adapted

22. Some investment projects require that a company increase its working capital. Under the net present value method, the investment and eventual recovery of working capital should be treated as:
A) an initial cash outflow. B) a future cash inflow.
C) both an initial cash outflow and a future cash inflow. D) irrelevant to the net present value analysis.

23. The net present value (NPV) method of investment project analysis assumes that the project’s cash flows are reinvested at the:
A) internal rate of return.
B) discount rate used in the NPV calculation. C) firm’s simple rate of return.
D) firm’s average ROI.

Source: CMA, adapted

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24. If taxes are ignored, all of the following items are included in a discounted cash flow analysis except:
A) future operating cash savings. B) depreciation expense.
C) future salvage value.
D) investment in working capital.

Source: CMA, adapted

25. In capital budgeting computations, discounted cash flow methods: A) automatically provide for recovery of initial investment.
B) can’t be used unless cash flows are uniform from year to year. C) assume that all cash flows occur at the beginning of a period. D) responses a, b, and c are all correct.

26. The internal rate of return for a project can be determined: A) only if the project’s cash flows are constant.
B) by finding the discount rate that yields a zero net present value for the project.
C) by subtracting the company’s cost of capital from the project’s profitability index. D) only if the project profitability index is greater than zero.

Source: CMA, adapted

27. The investment required for the project profitability index should:
A) be reduced by the amount of any salvage recovered from the sale of old equipment.
B) be reduced by the amount of any salvage recovered from the sale of the new equipment at the end of its useful life.
C) be reduced by the amount of any salvage recovered from the sale of both the old and new equipment.
D) none of the above is correct.

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28. Which of the following represents the correct treatment of a loss on the sale of an old asset in a net present value analysis under the total cost approach?
A) Multiply the amount of the loss times one minus the tax rate prior to discounting. B) Multiply the amount of the loss times the tax rate prior to discounting.
C) Make no adjustment to the amount of the loss prior to discounting. D) None of the above.

Appendix: 14D

29. In net present value analysis, the release of working capital at the end of a project should be:
A) ignored.
B) included as a cash outflow. C) included as a cash inflow. D) included as a tax deduction.

Appendix: 14D

30. Buret Corporation is contemplating a plant expansion capital budgeting decision. The plant expansion will require an $80,000 increase in working capital. This amount will be released at the end of the useful life of this project. Which of the following will increase the present value of the cash flows associated with the increase and release of the $80,000 of working capital?
A) an increase in the cost of capital. B) an increase in the tax rate.
C) an increase in the useful life of the project. D) none of the above.

Appendix: 14D

31. (Ignore income taxes in this problem.) Ataxia Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 10 years with no salvage value at the end of the 10 years. Ataxia expects net annual cash inflows of $54,000 from this equipment. Ataxia’s internal rate of return on this equipment is 14%. Ataxia’s discount rate is also 14%. What is the payback period on this equipment?
A) 1.92 years B) 2.70 years C) 3.70 years D) 5.22 years

,2,5

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32. (Ignore income taxes in this problem.) Ludington, Inc. purchased a new machine on January 1 for $350,000. The machine is expected to have a useful life of 8 years and no salvage value. Straight-line depreciation is to be used. The internal rate of return on the project is 14%. The present value of the annual cash inflows generated by the machine was calculated to be $371,120 using the internal rate of return of 14%. What was the annual cash inflow that was used in the calculation of the present value?
A) $350,000 x 0.351 B) $350,000 ÷ 4.639 C) $371,120 x 0.351 D) $371,120 ÷ 4.639

,2 Source: CPA, adapted

33. (Ignore income taxes in this problem.) An investment project has the following characteristics:

Cost of equipment …………. Annual cash inflows ………. Internal rate of return ………
$22,820 $5,000 12%

The life of the equipment would be:
A) It is impossible to determine from the data given. B) 7 years
C) 12 years D) 4.56 years.

,2

34. (Ignore income taxes in this problem.) The Allen Company is planning an investment with the following characteristics:

Useful life ………………………….. Yearly net cash inflow …………. Salvage value ……………………… Internal rate of return …………… Discount rate ……………………….
7 years $40,000 $0
20% 16%

The initial cost of the equipment is: A) $240,080
B) $152,480 C) $144,200
D) Cannot be determined from the given information.

,2

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35. (Ignore income taxes in this problem.) Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life. Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable to estimate the cash flows associated with the intangible benefits. Using the company’s 12% required rate of return, the net present value of the cash flows associated with just the tangible costs and benefits is a negative $282,500. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment?
A) $20,000 B) $28,250 C) $35,000 D) $50,000

,3

36. (Ignore income taxes in this problem.) A company wants to have $40,000 at the end of a five-year period through investment of a single sum now. How much needs to be invested in order to have the desired sum in five years, if the money can be invested at 10%:
A) $10,551 B) $8,000 C) $24,840 D) $12,882

37. (Ignore income taxes in this problem.) The following data on a proposed investment project have been provided:

Cost of equipment …………………………………. Working capital required ………………………… Salvage value of equipment ……………………. Annual cash inflows from the project ………. Required rate of return …………………………… Life of the project …………………………………..
$50,000 $30,000 $0 $20,000 20%
8 years

The net present value of the project would be: A) $3,730
B) $0
C) $32,450 D) $88,370

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38. (Ignore income taxes in this problem.) Stratford Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $9,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, and assuming the company’s discount rate is 10%, what is the purchase price of the machine if the net present value of the investment is $17,000? A) $43,812
B) $26,812 C) $17,000 D) $22,195

39. (Ignore income taxes in this problem.) Anthony operates a part time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 in Year 1, $2,100 in Year 2, and $3,200 in Year 3. If Anthony’s required rate of return is 10%, then the most he would be willing to pay for the new computer system would be:
A) $4,599 B) $5,501 C) $5,638 D) $5,107

40. (Ignore income taxes in this problem.) Fossa Road Paving Company is considering an investment in a curb-forming machine. The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the end of 10 years. The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years. Fossa’s discount rate is 18%. What is the net present value of this machine?
A) $5,840 B) $37,280 C) $(48,780) D) $69,640

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41. (Ignore income taxes in this problem.) Apnea Video Rental Store is considering the purchase of an almost new minivan to use as a vehicle to deliver and pick up video tapes for customers. The minivan will cost $18,000 and is expected to last 8 years but only if the engine is overhauled at a cost of $3,000 at the end of year 3. The minivan is expected to have a $1,000 salvage value at the end of 8 years. This delivery service is expected to generate net cash inflows of $6,000 per year in each of the 8 years. Apnea’s discount rate is 14%. What is the net present value of this investment opportunity?
A) $(2,826) B) $(3,801) C) $7,185 D) $8,160

42. (Ignore income taxes in this problem.) In an effort to reduce costs, Pontic Manufacturing Corporation is considering an investment in equipment that will reduce defects. This equipment will cost $420,000, will have an estimated useful life of 10 years, and will have an estimated salvage value of $50,000 at the end of 10 years. Pontic’s discount rate is 22%. What amount of cost savings will this equipment have to generate per year in each of the 10 years in order for it to be an acceptable project?
A) $50,690 or more B) $41,315 or more C) $105,315 or more D) $94,316 or more

43. (Ignore income taxes in this problem.) Naomi Corporation has a capital budgeting project that has a negative net present value of $36,000. The life of this project is 6 years. Naomi’s discount rate is 20%. By how much would the annual cash inflows from this project have to increase in order to have a positive net present value?
A) $1,200 or more B) $2,412 or more C) $6,000 or more D) $10,824 or more

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44. (Ignore income taxes in this problem.) The following data pertain to an investment project:

Investment required ……….. Annual savings ……………… Life of the project …………..
$34,055 $5,000 15 years

The internal rate of return is: A) 12%
B) 14% C) 10% D) 8%

45. (Ignore income taxes in this problem.) The Laws company has decided to buy a machine costing $16,000. Estimated cash savings from using the new machine amount to $4,120 per year. The machine will have no salvage value at the end of its useful life of six years. If the required rate of return for Laws Company is 12%, the machine’s internal rate of return is closest to:
A) 12% B) 14% C) 16% D) 18%

46. (Ignore income taxes in this problem.) James Company is considering buying a new machine costing $30,000. James estimates that the machine will save $6,900 per year in cash operating expenses for the next six years. If the machine has no salvage value at the end of six years and the discount rate used by James is 8%, then the machine’s internal rate of return is closest to:
A) 8% B) 10% C) 12% D) 14%

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47. A project requires an initial investment of $70,000 and has a project profitability index of 0.932. The present value of the future cash inflows from this investment is:
A) $70,000 B) $36,231 C) $135,240
D) Cannot be determined from the data provided.

48. Bowen Company is considering several investment proposals, as shown below:

A Investment required ………………….. $95,000 Present value of future net cash
flows …………………………………… $107,000
Investment Proposal B C $120,000 $90,000

$130,000 $105,000

D $150,000

$180,000

If the project profitability index is used, the ranking of the projects would be: A) D C A B
B) D B A C C) B A C D D) D A B C

49. Information on four investment proposals is given below:

Proposal Number 1 2 3 4
Investment Required
$20,000 $15,000 $12,000 $18,000
Net Present Value
$10,000 $6,000 $9,600 $10,800

Rank the proposals in terms of preference according to the project profitability index: A) 1, 4, 3, 2
B) 4, 1, 3, 2 C) 3, 4, 1, 2 D) 2, 1, 4, 3

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50. Information on four investment proposals is given below:

Proposal Number 1 2 3 4
Investment Required
$8,000 $12,000 $10,000 $4,000
Net Present Value
$3,200 $3,600 $2,500 $2,000

Rank the proposals in terms of preference using the project profitability index: A) 3, 2, 1, 4
B) 2, 3, 1, 4 C) 2, 1, 3, 4 D) 4, 1, 2, 3

51. The Gomez Company is considering two projects, T and V. The following information has been gathered on these projects:

Initial investment needed ……………………… Present value of future cash inflows ………. Useful life …………………………………………..
Project T $112,500 $168,000 10 years
Project V $75,000 $107,000 10 years

Based on this information, which of the following statements is (are) true?

I. Project T has the highest ranking according to the project profitability index criterion.
II. Project V has the highest ranking according to the net present value criterion.

A) Only I B) Only II
C) Both I and II D) Neither I nor II

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52. (Ignore income taxes in this problem.) Major Corporation is considering the purchase of a new machine for $5,000. The machine has an estimated useful life of 5 years and no salvage value. The machine will increase Major’s cash flows by $2,000 annually for 5 years. Major uses straight-line depreciation. The company’s required rate of return is 10%. What is the payback period for the machine?
A) 5.00 years B) 2.50 years C) 7.58 years D) 8.34 years

Source: CPA, adapted

53. (Ignore income taxes in this problem.) Harrison Company is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project:

Sales ……………………………………….. Less cash variable expenses ………. Contribution margin …………………. Less fixed expenses:
Fixed cash expenses ………………. Depreciation expenses ……………. Net operating income ………………..

$150,000
37,500
$500,000
200,000 300,000

187,500 $112,500

The company’s required rate of return is 10%. What is the payback period for this project?
A) 3 years B) 2 years C) 2.5 years D) 2.67 years

54. (Ignore income taxes in this problem.) An investment project requires an initial investment of $100,000. The project is expected to generate net cash inflows of $28,000 per year for the next five years. Assuming a 12% discount rate, the project’s payback period is:
A) 0.28 years B) 3.36 years C) 3.57 years D) 1.40 years

Source: CMA, adapted

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55. (Ignore income taxes in this problem.) Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $250,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $12,000 per year to operate and maintain, but would save $55,000 per year in labor and other costs. The old machine can be sold now for scrap for $10,000. The simple rate of return on the new machine is closest to:
A) 17.9% B) 7.5% C) 22.0% D) 7.2%

56. (Ignore income taxes in this problem.) Pearson Co. is considering the purchase of a $200,000 machine that is expected to reduce operating cash expenses by $65,000 per year. This machine, which has no salvage value, has an estimated useful life of 5 years and will be depreciated on a straight-line basis. For this machine, the simple rate of return would be:
A) 10% B) 12.5% C) 20% D) 32.5%

Source: CPA, adapted

57. (Ignore income taxes in this problem.) Assume you can invest money at a 14% rate of return. How much money must be invested now in order to be able to withdraw $5,000 from this investment at the end of each year for 8 years, the first withdrawal occurring one year from now?
A) $24,840 B) $23,195 C) $21,440 D) $1,755

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58. (Ignore income taxes in this problem.) How much would you have to invest today in the bank at an interest rate of 5% to have an annuity of $1,400 per year for 5 years, with nothing left in the bank at the end of the 5 years? Select the amount below that is closest to your answer.
A) $6,667 B) $6,061 C) $7,000 D) $1,098

59. (Ignore income taxes in this problem.) You have deposited $15,584 in a special account that has a guaranteed interest rate. If you withdraw $3,700 at the end of each year for 5 years, you will completely exhaust the balance in the account. The guaranteed interest rate is closest to:
A) 6% B) 19% C) 24% D) 4%

60. (Ignore income taxes in this problem.) You have deposited $16,700 in a special account that has a guaranteed interest rate of 11% per year. If you are willing to completely exhaust the account, what is the maximum amount that you could withdraw at the end of each of the next 6 years? Select the amount below that is closest to your answer.
A) $3,465 B) $3,089 C) $2,783 D) $3,947

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61. (Ignore income taxes in this problem.) Latting Corporation has entered into a 7 year lease for a building it will use as a warehouse. The annual payment under the lease will be $4,781. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. What is the present value of the lease payments if the discount rate is 6%?
A) $31,573 B) $22,257 C) $33,467 D) $26,688

62. (Ignore income taxes in this problem.) Schaad Corporation has entered into a 8 year lease for a piece of equipment. The annual payment under the lease will be $2,500, with payments being made at the beginning of each year. If the discount rate is 14%, the present value of the lease payments is closest to:
A) $20,000 B) $7,011 C) $17,544 D) $13,220

63. A company anticipates a taxable cash receipt of $50,000 in year 3 of a project. The company’s tax rate is 30% and its discount rate is 10%. The present value of this future cash flow is closest to:
A) $11,270 B) $15,000 C) $35,000 D) $26,296

Appendix: 14D

64. A company anticipates a taxable cash expense of $70,000 in year 2 of a project. The company’s tax rate is 30% and its discount rate is 10%. The present value of this future cash flow is closest to:
A) $(40,496) B) $(17,355) C) $(21,000) D) $(49,000)

Appendix: 14D

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65. A company anticipates a depreciation deduction of $10,000 in year 2 of a project. The company’s tax rate is 30% and its discount rate is 10%. The present value of the depreciation tax shield resulting from this deduction is closest to:
A) $3,000 B) $2,479 C) $5,785 D) $7,000

Appendix: 14D

66. A company needs an increase in working capital of $30,000 in a project that will last 4 years. The company’s tax rate is 30% and its discount rate is 8%. The present value of the release of the working capital at the end of the project is closest to:
A) $22,051 B) $21,000 C) $9,000 D) $15,436

Appendix: 14D

67. The Moline Company had sales of $400,000 and expenses of $185,000 last year. All sales were cash sales and all expenses were cash expenses. Moline’s tax rate is 30%. The after-tax net cash inflow was:
A) $64,500 B) $150,500 C) $280,000 D) $55,500

Appendix: 14D

68. Last year the sales at Seidelman Company were $600,000 and were all cash sales. The company’s expenses were $400,000 and were all cash expenses. The tax rate was 30%. The after-tax net cash inflow at Seidelman last year was:
A) $600,000 B) $200,000 C) $60,000 D) $140,000

Appendix: 14D

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69. Sales of the Kotter Company during the past year were all cash sales. Similarly, all expenses were paid in cash. The tax rate was 30%. If the after-tax net cash inflow from these operations last year was $15,000, and if the total before-tax cash sales were $60,000, then the total before-tax cash expenses must have been:
A) $21,429 B) $27,000 C) $45,000 D) $38,571

Appendix: 14D

Use the following to answer questions 70-71:

The Weston Company is analyzing projects A, B, and C as possible investment opportunities. Each of these projects has a useful life of five years. The following information has been obtained:

Initial investment required …………………… Present value of future cash inflows ……… Internal rate of return …………………………..
Project A $500,000 $675,000 18%
Project B $480,000 $520,000 14%
Project C $630,000 $690,000 16%

70. Which of the following statements is correct?
A) Project B is preferred over Project C according to the project profitability index. B) Project B is preferred over Project A according to the internal rate of return.
C) Project C is preferred over Project A according to the project profitability index. D) Project A is preferred over Project C according to a net present value ranking.

,2,4

71. Which project has the highest ranking according to the net present value and the project profitability index criteria?

Net Present Value A) Project B
B) Project A C) Project B D) Project C
Profitability Index Project B Project A Project A Project C

,4

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Use the following to answer questions 72-75:

(Ignore income taxes in this problem.) Overland Company has gathered the following data on a proposed investment project:

Investment in depreciable equipment ……….. Annual cash flows …………………………………. Salvage value of equipment……………………. Life of the equipment …………………………….. Required rate of return ……………………………
$150,000 $40,000 $0
10 years 10%

The company uses straight-line depreciation on all equipment.

72. The payback period for the investment is: A) 0.27 years
B) 3.75 years C) 10.00 years D) 2.13 years

73. The simple rate of return on the investment is: A) 26.67%
B) 16.67% C) 36.67% D) 10.00%

74. The net present value of this investment is: A) $40,000
B) $3,625 C) $57,831 D) $95,800

75. The internal rate of return on the investment is closest to: A) 23%
B) 25% C) 24% D) 21%

728 Garrison, Managerial Accounting, 12th Edition

Chapter 14 Capital Budgeting Decisions

Use the following to answer questions 76-79:

(Ignore income taxes in this problem.) Perky Food Corporation produces and sells coffee jelly. Perky currently produces the jelly using a manual operation but is considering the purchase of machinery to automate its operations. Information related to the two operations is as follows:

Cost of machinery ………………………………. Useful life of machinery ………………………. Expected salvage value in 12 years ……….. Expected annual revenue (50,000 jars) ….. Expected annual variable costs …………….. Expected annual fixed costs ………………….
Manual Operation – – –
$210,000 $135,000 $30,000
Automated Operation
$420,000 12 years $0 $210,000 $42,000 $72,000

Perky’s discount rate is 12%. Perky uses the straight-line method of depreciation.

76. What is the net present value of automating operations using the incremental cost approach?
A) $11,940 B) $56,940 C) $(104,106) D) $112,684

77. Within what range does the internal rate of return fall? A) 6% to 8%
B) 10% to 12% C) 12% to 14% D) 18% to 20%

78. What is the simple rate of return for automating operations? A) 3.8%
B) 12.1% C) 14.5% D) 22.9%

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79. What will be the effect on the net present value of the decision to automate operations if 60,000 jars instead of 50,000 jars are expected to be sold each year? (Assume no change in cost structure or selling price.)
A) no effect
B) $52,030 decrease C) $63,179 increase D) $115,208 increase

Use the following to answer questions 80-82:

(Ignore income taxes in this problem.) Tam Company is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in cash operating costs. The equipment’s estimated useful life is 10 years, with no salvage value, and would be depreciated by the straight-line method. Tam’s required rate of return is 12%.

80. The net present value of this investment is: A) $5,760
B) $6,440 C) $12,200 D) $13,000

Source: CPA, adapted

81. The payback period of this investment is: A) 4 years
B) 1 year C) 10 years D) 5 years

Source: CPA, adapted

82. The simple rate of return of this investment is: A) 8%
B) 20% C) 12% D) 10%

Source: CPA, adapted

730 Garrison, Managerial Accounting, 12th Edition

Chapter 14 Capital Budgeting Decisions

Use the following to answer questions 83-84:

(Ignore income taxes in this problem.) Evans Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows:

Years 1-10 ……. Year 11 ………… Year 12 …………
$100,000 $(30,000)
$110,000

In addition, Evans Company would need to purchase equipment costing $275,000. The equipment would have a 12-year life and a $25,000 salvage value. The company’s required rate of return is 10%.

83. The payback period on this investment is: A) 3.00 years
B) 2.75 years C) 1.50 years D) 4.00 years

84. The net present value of the project is closest to: A) $364,090
B) $372,065 C) $339,090 D) $389,090

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Use the following to answer questions 85-86:

Baldock Inc. is considering the acquisition of a new machine that costs $420,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are:

Incremental Net Operating Income
Year 1 $61,000 Year 2 $67,000 Year 3 $78,000 Year 4 $41,000 Year 5 $83,000
Incremental Net Cash Flows $145,000 $151,000 $162,000 $125,000 $167,000

85. If the discount rate is 12%, the net present value of the investment is closest to: A) $330,000
B) $539,365 C) $119,365 D) $420,000

Source: CMA, adapted

86. The payback period of this investment is closest to: A) 5.0 years
B) 3.2 years C) 1.9 years D) 2.8 years

Source: CMA, adapted

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Use the following to answer questions 87-88:

Delley Inc. is considering the acquisition of equipment that costs $340,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are:

Incremental Net Cash Flows
Year 1 $94,000 Year 2 $133,000 Year 3 $96,000 Year 4 $116,000 Year 5 $115,000 Year 6 $87,000

87. If the discount rate is 17%, the net present value of the investment is closest to: A) $45,811
B) $385,811 C) $301,000 D) $117,341

Source: CMA, adapted

88. The payback period of this investment, rounded off to the nearest tenth of a year, is closest to:
A) 3.9 years B) 3.6 years C) 3.1 years D) 5.0 years

Source: CMA, adapted

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Use the following to answer questions 89-90:

(Ignore income taxes in this problem.) Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

Purchase cost when new ……………. Accumulated depreciation …………. Overhaul costs needed now ……….. Annual cash operating costs ………. Salvage value now ……………………. Salvage value in 8 years ……………. Working capital required ……………
Present System $150,000 $140,000 $130,000
$80,000 $60,000 $52,000
New System $200,000

$70,000

$65,000 $100,000

Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of eight years.

89. The net present value of overhauling the present system is: A) $(321,084)
B) $(532,516) C) $(560,536) D) $(592,516)

90. The net present value of the new system alternative is: A) $(483,095)
B) $(583,095) C) $(596,395) D) $(536,395)

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Use the following to answer questions 91-92:

(Ignore income taxes in this problem.) Lambert Manufacturing has $100,000 to invest in either Project A or Project B. The following data are available on these projects:

Cost of equipment needed now ……………………….. Working capital investment needed now ………….. Annual cash operating inflows ………………………… Salvage value of equipment in 6 years ………………
Project A $100,000

$40,000 $10,000
Project B $60,000 $40,000 $35,000

Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert’s required rate of return is 14%. The company uses the total cost approach to evaluating alternatives.

91. The net present value of Project A is: A) $51,000
B) $60,120 C) $55,560 D) $94,450

92. The net present value of Project B is: A) $90,355
B) $76,115 C) $36,115 D) $54,355

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Chapter 14 Capital Budgeting Decisions

Use the following to answer questions 93-95:

(Ignore income taxes in this problem.) Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following information has been gathered relative to this decision:
Present New Equipment Equipment
Purchase cost new ………………………………………. $50,000 $48,000 Remaining book value …………………………………. $30,000
Cost to rebuild now …………………………………….. $25,000
Major maintenance at the end of 3 years ……….. $8,000 $5,000 Annual cash operating costs …………………………. $10,000 $8,000 Salvage value at the end of 5 years ……………….. $3,000 $7,000 Salvage value now ………………………………………. $9,000

Carlson uses the total cost approach and a discount rate of 12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson Manufacturing plans to close its domestic manufacturing operations and to move these operations to foreign countries.

93. If the new equipment is purchased, the present value of all cash flows that occur now is:
A) $(48,000) B) $(39,000) C) $(41,000) D) $(37,000)

94. If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is:
A) $(28,840) B) $(19,160) C) $(14,420) D) $(36,050)

95. If the equipment is rebuilt, the present value of all cash flows that occur now is: A) $(55,000)
B) $(25,000) C) $(16,000) D) $(23,000)

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Use the following to answer questions 96-99:

(Ignore income taxes in this problem.) Cedar Hill Hospital needs to expand its facilities and desires to obtain a new building on a piece of property adjacent to its present location. Two options are available to Cedar Hill, as follows:

Option 1: Buy the property, erect the building, and install the fixtures at a total cost of $600,000. This cost would be paid off in five installments: an immediate payment of $200,000, and a payment of $100,000 at the end of each of the next four years. The annual cash operating costs associated with the new facilities are estimated to be $12,000 per year. The new facilities would be occupied for thirteen years, and would have a total resale value of $300,000 at the end of the 13-year period.

Option 2: A leasing company would buy the property and construct the new facilities for Cedar Hill which would then be leased back to Cedar Hill at an annual lease cost of $70,000. The lease period would run for 13 years, with each payment being due at the BEGINNING of the year. Additionally, the company would require an immediate $10,000 security deposit, which would be returned to Cedar Hill at the end of the 13-year period. Finally, Cedar Hill would have to pay the annual maintenance cost of the facilities, which is estimated to be $4,000 per year. There would be no resale value at the end of the 13-year period under this option.

The hospital uses a discount rate of 14% and the total-cost approach to net present value analysis in evaluating its investment decisions.

96. Under option 1, the present value of all cash outflows associated with buying the property, erecting the building, and installing the fixtures is closest to:
A) $(200,000) B) $(491,400) C) $(600,000) D) $(387,200)

97. Under option 1, the net present value of all cash flows is closest to: A) $(456,000)
B) $(600,000) C) $(300,000) D) $(507,000)

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98. Under option 2, the present value of all the annual lease payments of $70,000 is closest to:
A) $(466,200) B) $(408,900) C) $(483,700) D) $(910,000)

99. Under option 2, the present value of all cash flows associated with maintenance costs is closest to:
A) $(23,400) B) $(52,000) C) $(70,100) D) $(4,000)

Use the following to answer questions 100-104:

Hasko Inc. has provided the following data to be used in evaluating a proposed investment project:

Initial investment……………………… Annual cash receipts ………………… Life of the project …………………….. Annual cash expenses ………………. Salvage value ………………………….. Tax rate ……………………………………
$820,000 $656,000 9 years $295,000 $41,000 30%

For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 7 years. The company uses a discount rate of 10%.

100. When computing the net present value of the project, what are the annual after-tax cash receipts?
A) $410,000 B) $196,800 C) $459,200 D) $60,589

Appendix: 14D

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Chapter 14 Capital Budgeting Decisions

101. When computing the net present value of the project, what are the annual after-tax cash expenses?
A) $254,000 B) $206,500 C) $88,500 D) $383,500

Appendix: 14D

102. When computing the net present value of the project, what is the annual amount of the depreciation tax shield? In other words, by how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?
A) $82,000 B) $35,143 C) $63,778 D) $27,333

Appendix: 14D

103. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?
A) $28,700 B) $41,000 C) $0
D) $12,300

Appendix: 14D

104. The net present value of the project is closest to: A) $635,299
B) $647,468 C) $818,544 D) $806,375

Appendix: 14D

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Use the following to answer questions 105-108:

Whitsitt Inc. has provided the following data to be used in evaluating a proposed investment project:

Initial investment……………………… Annual cash receipts ………………… Life of the project …………………….. Annual cash expenses ………………. Salvage value …………………………..
$840,000 $630,000 9 years $284,000 $84,000

The company’s tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without any reduction for salvage value. The company uses a discount rate of 17%.

105. When computing the net present value of the project, what are the annual after-tax cash receipts?
A) $441,000 B) $189,000 C) $378,000 D) $58,800

106. When computing the net present value of the project, what are the annual after-tax cash expenses?
A) $85,200 B) $200,000 C) $198,800 D) $369,200

107. When computing the net present value of the project, what is the annual amount of the depreciation tax shield? In other words, by how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?
A) $65,333 B) $28,000 C) $36,000 D) $84,000

740 Garrison, Managerial Accounting, 12th Edition

Chapter 14 Capital Budgeting Decisions

108. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?
A) $84,000 B) $25,200 C) $0
D) $58,800

Use the following to answer questions 109-110:

Weichman Inc. has provided the following data concerning an investment project that has been proposed:

Initial investment……………………… Annual cash receipts ………………… Life of the project …………………….. Annual cash expenses ………………. Salvage value …………………………..
$960,000 $624,000 8 years $281,000 $48,000

The company’s tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without any reduction for salvage value. The company uses a discount rate of 15%.

109. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?
A) $48,000 B) $14,400 C) $33,600 D) $0

Appendix: 14D

110. The net present value of the project is closest to: A) $299,470
B) $288,483 C) $117,329 D) $128,316

Appendix: 14D

Garrison, Managerial Accounting, 12th Edition 741

Chapter 14 Capital Budgeting Decisions

Use the following to answer questions 111-112:

Yandell Inc. is considering an investment project that would require an initial investment of $310,000 and that would last for 8 years. The annual cash receipts from the project would be $233,000 and the annual cash expenses would be $117,000. The equipment used in the project could be sold at the end of the project for a salvage value of $16,000. The company’s tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without any reduction for salvage value. The company uses a discount rate of 19%.

111. When computing the net present value of the project, what are the annual after-tax cash receipts?
A) $116,000 B) $163,100 C) $188,714 D) $69,900

Appendix: 14D

112. The net present value of the project is closest to: A) $11,065
B) $60,302 C) $63,090 D) $13,854

Appendix: 14D

742 Garrison, Managerial Accounting, 12th Edition

Chapter 14 Capital Budgeting Decisions

Essay Questions

113. (Ignore income taxes in this problem.) Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,500,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows:

Sales ………………………………………………….. Less variable expenses ………………………… Contribution margin ……………………………. Less fixed expenses:
Fixed out-of-pocket cash expenses …….. Depreciation ……………………………………. Net operating income …………………………..

$500,000
150,000
$2,000,000
1,100,000 900,000

650,000 $ 250,000

All of the above items, except for depreciation, represent cash flows. The company’s required rate of return is 12%.

Required:
a. Compute the project’s net present value.
b. Compute the project’s internal rate of return to the nearest whole percent. c. Compute the project’s payback period.
d. Compute the project’s simple rate of return.

,2,5,6

Garrison, Managerial Accounting, 12th Edition 743

114. (Ignore income taxes in this problem.) Allen Company’s required rate of return is 12%. The company is considering the purchase of three machines as indicated below. Consider each machine independently.

Required:
a. Machine A will cost $15,000 and have a life of 8 years. Its salvage value will be $1,000 and cost savings are projected at $3,000 per year. Compute the machine’s net present value.
b. How much would Allen Company be willing to pay for Machine B if the machine promises annual cash inflows of $6,000 per year for 10 years?
c. Machine C has a projected life of 12 years. What is the machine’s internal rate of return, to the nearest whole percent, if it costs $18,000 and will save $2,500 annually in cash operating costs? Would you recommend purchase? Explain.

,2

744 Garrison, Managerial Accounting, 12th Edition

115. (Ignore income taxes in this problem.) Five years ago, the City of Paranoya spent $30,000 to purchase a computerized radar system called W.A.S.T.E. (Watching Aliens Sent To Earth). Recently, a sales rep from W.A.S.T.E. Radar Company told the city manager about a new and improved radar system that can be purchased for $50,000. The rep also told the manager that the company would give the city $10,000 in trade on the old system. The new system will last 10 years. The old system will also last that long but only if a $4,000 upgrade is done in 5 years. The manager assembled the following information to use in the decision as to which system is more desirable:

Cost of radar system…………………. Current salvage value ……………….. Salvage value in 10 years ………….. Annual operating costs ……………… Upgrade required in 5 years ………. Discount rate …………………………….
Old System $30,000 $10,000 $5,000 $34,000 $4,000 14%
New System $50,000
– $8,000
$29,000 –
14%

Required:
a. What is the City of Paranoya’s net present value for the decision described above? Use the total cost approach.
b. Should the City of Paranoya purchase the new system or keep the old system?

746 Garrison, Managerial Accounting, 12th Edition

116. (Ignore income taxes in this problem.) The following data concern an investment project:

Investment in equipment ………………… Net annual cash inflows …………………. Working capital required ………………… Salvage value of the equipment ……….. Life of the project ………………………….. Required rate of return ……………………
$10,000 $2,400 $5,000 $1,000 8 years 10%

The working capital will be released for use elsewhere at the conclusion of the project.

Required:
Compute the project’s net present value.

Garrison, Managerial Accounting, 12th Edition 747

117. (Ignore income taxes in this problem.) Five years ago, Joe Sarver purchased 600 shares of 9%, $100 par value preferred stock for $75 per share. Sarver received dividends on the stock each year for five years, and finally sold the stock for $90 per share. Instead of purchasing the preferred stock, Sarver could have invested the funds in a money market certificate yielding a 16% rate of return.

Required:
Determine whether or not the preferred stock provided at least the 16% rate of return that could have been received on the money market certificate.

118. (Ignore income taxes in this problem.) Big Blue Co. is considering three investment opportunities having cash flows as described below:

� Project I would require an immediate cash outlay of $10,000 and would result in cash savings of $3,000 each year for 8 years.
� Project II would require cash outlays of $3,000 per year and would provide a cash inflow of $30,000 at the end of 8 years.
� Project III would require a cash outlay of $10,000 now and would provide a cash inflow of $30,000 eight years from now.

Required:
If Big Blue has a required rate of return of 14%, determine which, if any, of the three projects is acceptable. Use the NPV method.

119. (Ignore income taxes in this problem.) Axillar Beauty Products Corporation is considering the production of a new conditioning shampoo which will require the purchase of new mixing machinery. The machinery will cost $375,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $50,000 at the end of 10 years. The machinery will also need a $35,000 overhaul at the end of year 6. A $40,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $85,000 per year for each of the 10 years. Axillar’s discount rate is 16%.

Required:
a. What is the net present value of this investment opportunity?
b. Based on your answer to (a) above, should Axillar go ahead with the new conditioning shampoo?

.

Items

120. (Ignore income taxes in this problem.) Lajara Inc. has provided the following data concerning a proposed investment project:

Initial investment……………………… Life of the project …………………….. Annual net cash inflows ……………. Salvage value ……………………………
$850,000 8 years $255,000 $128,000

The company uses a discount rate of 13%.

Required:
Compute the net present value of the project.

121. (Ignore income taxes in this problem.) Burba Inc. is considering investing in a project that would require an initial investment of $200,000. The life of the project would be 8 years. The annual net cash inflows from the project would be $60,000. The salvage value of the assets at the end of the project would be $30,000. The company uses a discount rate of 17%.

Required:
Compute the net present value of the project.

122. (Ignore income taxes in this problem.) Grossett Corporation has provided the following data concerning a proposed investment project:

Initial investment……………………….. Life of the project ………………………. Working capital required …………….. Annual net cash inflows ……………… Salvage value ……………………………..
$160,000 6 years $35,000 $56,000 $24,000

The company uses a discount rate of 10%. The working capital would be released at the end of the project.

Required:
Compute the net present value of the project.

123. (Ignore income taxes in this problem.) Woolfolk Corporation is considering investing $210,000 in a project. The life of the project would be 9 years. The project would require additional working capital of $46,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $42,000. The salvage value of the assets used in the project would be $32,000. The company uses a discount rate of 17%.

Required:
Compute the net present value of the project.

752 Garrison, Managerial Accounting, 12th Edition

124. (Ignore income taxes in this problem.) Allen Company’s required rate of return is 14%. The company is considering the purchase of a new machine that will save $10,000 per year in cash operating costs. The machine will cost $40,000 and will have an 8-year useful life with zero salvage value. Straight-line depreciation will be used.

Required:
Compute the machine’s internal rate of return to the nearest whole percent. Would you recommend purchase of the machine? Explain.

125. (Ignore income taxes in this problem.) The management of an amusement park is considering purchasing a new ride for $40,000 that would have a useful life of 10 years and a salvage value of $5,000. The ride would require annual operating costs of $21,000 throughout its useful life. The company’s discount rate is 13%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence of the ride would attract new customers.

Required:
How much additional revenue would the ride have to generate per year to make it an attractive investment?

Garrison, Managerial Accounting, 12th Edition 753

126. (Ignore income taxes in this problem.) Swaggerty Company is considering purchasing a machine that would cost $462,000 and have a useful life of 7 years. The machine would reduce cash operating costs by $115,500 per year. The machine would have no salvage value.

Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.

,6

127. (Ignore income taxes in this problem.) Alesi Company is considering purchasing a machine that would cost $243,600 and have a useful life of 8 years. The machine would reduce cash operating costs by $76,125 per year. The machine would have a salvage value of $60,900 at the end of the project.

Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.

,6

128. A company is considering purchasing an asset for $60,000 that would have a useful life of 5 years and would have a salvage value of $7,000. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the straight-line method and the salvage value would be ignored. The asset would generate annual net cash inflows of $27,000 throughout its useful life. The project would require additional working capital of $1,000, which would be released at the end of the project. The company’s tax rate is 30% and its discount rate is 10%.

Required:
What is the net present value of the asset?

Appendix: 14D

Garrison, Managerial Accounting, 12th Edition 755

129. Management is considering purchasing an asset for $50,000 that would have a useful life of 5 years and no salvage value. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the straight-line method. The asset would generate annual net cash inflows of $20,000 throughout its useful life. The project would require additional working capital of $7,000, which would be released at the end of the project. The company’s tax rate is 30% and its discount rate is 13%.

Required:
What is the net present value of the asset?

Appendix: 14D

756 Garrison, Managerial Accounting, 12th Edition

130. Partida Inc. has provided the following data concerning a proposed investment project:

Initial investment…………… Annual cash receipts ………. Life of the project ………….. Annual cash expenses …….. Salvage value …………………
$861,000 $603,000 5 years $332,000 $129,000

The company’s tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 3 years. The company uses a discount rate of 11%.

Required:

Compute the net present value of the project.

Appendix: 14D

Garrison, Managerial Accounting, 12th Edition 757

131. Rucci Inc. is considering a project that would require an initial investment of $462,000 and would have a useful life of 7 years. The annual cash receipts would be $300,000 and the annual cash expenses would be $120,000. The salvage value of the assets used in the project would be $69,000. The company’s tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of 18%.

Required:
Compute the net present value of the project.

Appendix: 14D

758 Garrison, Managerial Accounting, 12th Edition

759

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

True/False Questions

1. An increase in long-term notes payable is considered to be a financing activity and a source of cash on the statement of cash flows.

,2

2. Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, an increase in accounts receivable would be deducted from net income to arrive at net cash provided by financing activities.

,3

3. A loss on the sale of an asset would be deducted from net income in computing cash from operating activities under the indirect method on the statement of cash flows.

,3

4. Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, an increase in accounts payable would be recorded as a deduction from net income.

,3

5. Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, an increase in inventory would be added to net income.

,3

6. In computing the net cash provided by operating activities under the indirect method on the statement of cash flows, a decrease in accounts payable would be added to net income.

,3

7. An increase in a prepaid expense would be deducted from net income in computing net cash provided by operating activities on the statement of cash flows under the indirect method.

,3

796 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

8. A gain on the sale of equipment would be included as part of a company’s investing activities on the statement of cash flows.

9. Payment of cash dividends to shareholders is considered to be an operating activity on the statement of cash flows.

10. Payment of accrued taxes is considered an operating activity on the statement of cash flows.

11. The sale of preferred stock for cash would be classified as an investing activity in the statement of cash flows.

12. The collection of a long-term loan made to a supplier would be treated as an investing activity on a statement of cash flows.

13. Borrowing on a long-term note would be considered a financing activity and a source of cash on the statement of cash flows.

14. Under the direct method of determining the net cash provided by operating activities on the statement of cash flows, an increase in inventory would be deducted from cost of goods sold to convert cost of goods sold to a cash basis.

Appendix: 16

15. Under the direct method of determining the net cash provided by operating activities on the statement of cash flows, a decrease in prepaid expenses would be added to operating expenses to convert operating expenses to a cash basis.

Appendix: 16

Garrison, Managerial Accounting, 12th Edition 797

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

Multiple Choice Questions

16. Which of the following would be considered a “source” of cash for purposes of constructing a statement of cash flows?
A) a decrease in accounts payable.
B) dividends paid to the company’s own shareholders. C) an increase in accrued liabilities.
D) an increase in prepaid expenses.

17. Which of the following would be considered a “source” of cash for purposes of constructing a statement of cash flows?
A) a decrease in accounts receivable. B) an increase in prepaid expenses. C) an increase in accrued liabilities.
D) an increase in plant and equipment.

18. Martin Corporation uses the indirect method to prepare its statement of cash flows. If Martin purchases additional equipment, which results in additional depreciation charges, what net effect will the purchase of this additional equipment have on the net cash provided (used) in the following sections of Martin’s statement of cash flows?

Operating Activities
A) increase B) increase C) decrease D) no effect E) no effect
Financing Activities decrease no effect no effect decrease no effect

Answer: E ,3

19. Under the indirect method of determining net cash provided by operating activities on the statement of cash flows, which of the following would be recorded as a deduction from net income?
A) A decrease in accounts receivable? B) An increase in accounts payable. C) A decrease in accounts payable. D) An increase in deferred revenue.

,3

798 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

20. An increase in accounts receivable of $1,000 over the course of a year would be shown on the company’s statement of cash flows prepared under the indirect method as:
A) an addition to net income of $1,000 in order to arrive at net cash provided by operating activities.
B) a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities.
C) an addition of $1,000 under financing activities. D) a deduction of $1,000 under financing activities.

,3

21. A decrease in the taxes payable account of $1,000 over the course of a year would be shown on the company’s statement of cash flows prepared under the indirect method as:
A) an addition to net income of $1,000 in order to arrive at net cash provided by operating activities.
B) a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities.
C) an addition of $1,000 under financing activities. D) a deduction of $1,000 under financing activities.

,3

22. Shoshoni Corporation prepares its statement of cash flows using the indirect method. Which of the following would be added to net income in the operating activities section of the statement?

Increase in Accounts Receivable
A) Yes B) Yes C) No D) No
Decrease in Accounts Payable Yes No Yes No

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Garrison, Managerial Accounting, 12th Edition 799

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

23. Fawn Corporation prepares its statement of cash flows using the indirect method. Which of the following would be added to net income in the operating activities section of the statement?

Increase in Merchandise Inventory
A) Yes B) Yes C) No D) No
Increase in Deferred Income Taxes Yes No Yes No

,3

24. Adah Corporation prepares its statement of cash flows using the indirect method. Which of the following would be deducted from net income in the operating activities section of the statement?

Decrease in Accounts Receivable
A) Yes B) Yes C) No D) No
Decrease in Merchandise Inventory Yes No Yes No

,3

25. Tomlin Corporation prepares its statement of cash flows using the indirect method. Which of the following would be deducted from net income in the operating activities section of the statement?

Increase in Interest Receivable
A) Yes B) Yes C) No D) No
Decrease in Interest Payable Yes No Yes No

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800 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

26. During the year the balance in the accounts receivable account increased by $6,000. In order to adjust the company’s net income to a cash basis using the direct method on the statement of cash flows, it would be necessary to:
A) deduct the $6,000 from the sales revenue reported on the income statement. B) add the $6,000 to the sales revenue reported on the income statement.
C) deduct the $6,000 from the cost of goods sold reported on the income statement. D) add the $6,000 to the cost of goods sold reported on the income statement.

,4 Appendix: 16

27. Wesi Corporation prepares its statement of cash flows using the direct method. Which of the following should Wesi classify as an operating activity on its statement?

Dividends Taxes Paid Paid
A) Yes Yes B) No Yes C) Yes No D) No No

,4 Appendix: 16

28. In a statement of cash flows, a change in accounts receivables would be classified as: A) an operating activity.
B) a financing activity. C) an investing activity.
D) a noncash item that need not appear on the statement of cash flows.

29. In a statement of cash flows, a change in the taxes payable account would be classified as:
A) an operating activity. B) a financing activity. C) an investing activity.
D) a noncash item that need not appear on the statement of cash flows.

Garrison, Managerial Accounting, 12th Edition 801

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

30. In a statement of cash flows, a change in the plant and equipment account would ordinarily be classified as:
A) an operating activity. B) a financing activity. C) an investing activity.
D) a noncash item that need not appear on the statement of cash flows.

31. In a statement of cash flows, a change in the bonds payable account would ordinarily be classified as:
A) an operating activity. B) a financing activity. C) an investing activity.
D) a noncash item that need not appear on the statement of cash flows.

32. In a statement of cash flows, a change in the common stock account would ordinarily be classified as:
A) an operating activity. B) a financing activity. C) an investing activity.
D) a noncash item that need not appear on the statement of cash flows.

33. Which of the following should be classified as a financing activity on a statement of cash flows?
A) cash received from the sale of merchandise. B) cash received from the sale of equipment.
C) cash received from the issuance of bonds payable. D) both A and B above
E) none of the above

802 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

34. Hauta Corporation prepares its statement of cash flows using the indirect method. Which of the following would be deducted from net income in the operating activities section of the statement?

Amortization Expense
A) Yes B) Yes C) No D) No
Gain on Sale of Building Yes No Yes No

35. Which of the following is not considered to be a cash equivalent for purposes of preparing the statement of cash flows?
A) Accounts receivable. B) Treasury bills.
C) Money market funds. D) Commercial paper.

36. Frizz Hair Salon had net income of $93,000 for the year just ended. Frizz collected the following additional information to prepare its statement of cash flows for the year:

Increase in accounts receivable ………………….. Decrease in accounts payable …………………….. Increase in retained earnings ……………………… Cash received from sale of equipment ………… Loss on sale of equipment …………………………. Depreciation expense ………………………………..
$10,000 $2,000 $31,000 $18,000 $5,000 $16,000

Frizz uses the indirect method to prepare its statement of cash flows. What is Frizz’s net cash provided (used) by operating activities?
A) $92,000 B) $102,000 C) $120,000 D) $126,000

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Garrison, Managerial Accounting, 12th Edition 803

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

37. Majorn Auto Parts Store had net income of $81,000 for the year just ended. Majorn collected the following additional information to prepare its statement of cash flows for the year:

Increase in accounts receivable …………….. Decrease in merchandise inventory ……….. Decrease in accounts payable ……………….. Increase in retained earnings ………………… Cash received from sale of building ………. Gain on sale of building ………………………. Depreciation expense …………………………..
$102,000 $18,000 $35,000 $29,000 $215,000 $47,000 $32,000

Majorn uses the indirect method to prepare its statement of cash flows. What is Majorn’s net cash provided (used) by operating activities?
A) $41,000 B) $(53,000) C) $185,000 D) $279,000

,3

38. On January 1, Joyuda Corporation sold a building for $350,000. The building was purchased eight years ago for $400,000. The accumulated depreciation on the building on the date of sale was $128,000. Joyuda uses the indirect method to prepare its statement of cash flows. What net effect will this sale have on the net cash provided (used) in the operating activities section of Joyuda’s statement of cash flows?
A) no effect
B) $78,000 increase C) $78,000 decrease D) $50,000 decrease

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804 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

39. The following information relates to Jelsa Corporation for last year:

Net income ……………………………………………………………. Net decrease in all current assets except cash …………….. Net increase in current liabilities ………………………………. Dividends paid on common stock …………………………….. Depreciation expense ……………………………………………… Loss on sale of machinery ………………………………………..
$64,000 $7,000 $16,000 $10,000 $8,000 $5,000

What is Jelsa’s net cash provided (used) by operating activities for last year on the statement of cash flows? (Assume that current liabilities do not contain any notes payable.)
A) $54,000 B) $58,000 C) $68,000 D) $100,000

,3

40. The following information relates to Siem, Inc. for last year:

Net income ……………………………………………………………. Net increase in all current assets except cash ……………… Net decrease in current liabilities ……………………………… Dividends paid on common stock …………………………….. Depreciation expense ……………………………………………… Gain on sale of building …………………………………………..
$5,000 $43,000 $27,000 $25,000 $30,000 $11,000

What is Siem’s net cash provided (used) by operating activities for last year on the statement of cash flows? (Assume that current liabilities do not contain any notes payable.)
A) $8,000 B) $(17,000) C) $(46,000) D) $(71,000)

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Garrison, Managerial Accounting, 12th Edition 805

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

41. Klutz Dance Studio had net income of $167,000 for the year just ended. Klutz collected the following additional information to prepare its statement of cash flows for the year:

Decrease in accounts receivable ………………………………… Increase in accounts payable …………………………………….. Increase in retained earnings …………………………………….. Cash paid for purchase of new music equipment …………. Depreciation expense ……………………………………………….
$24,000 $11,000 $92,000 $20,000 $5,000

Klutz uses the indirect method to prepare its statement of cash flows. What is Klutz’s net cash provided (used) by operating activities?
A) $95,000 B) $137,000 C) $185,000 D) $207,000

,3

42. Morgan Company’s net income last year was $73,000 and cash dividends declared and paid to the company’s stockholders totaled $14,000. Changes in selected balance sheet accounts for the year appear below:

Debit balances:
Accounts receivable …………………………. Prepaid expenses ………………………………
Credit balances:
Accumulated depreciation …………………. Accounts payable …………………………….. Bonds payable ………………………………….
Increases (Decreases)

$10,000 $(3,000)

$16,000 $(4,000)
$80,000

Based solely on this information, the net cash provided by operations under the indirect method on the statement of cash flows would be:
A) $89,000 B) $78,000 C) $68,000 D) $154,000

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806 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

43. Mori Company’s net income last year was $25,000 and cash dividends declared and paid to the company’s stockholders totaled $10,000. Changes in selected balance sheet accounts for the year appear below:

Debit balances:
Accounts receivable …………………………. Inventory ………………………………………… Prepaid expenses ……………………………… Long term investments ………………………
Credit balances:
Accumulated depreciation …………………. Accounts payable …………………………….. Taxes payable …………………………………..
Increases (Decreases)

$(6,000) $2,000
$(1,000) $20,000

$12,000 $9,000
$(5,000)

Based solely on this information, the net cash provided by operations under the indirect method on the statement of cash flows would be:
A) $46,000 B) $4,000 C) $36,000 D) $37,000

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Garrison, Managerial Accounting, 12th Edition 807

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

44. Moretta Company’s net income last year was $32,000 and cash dividends declared and paid to the company’s stockholders totaled $14,000. Changes in selected balance sheet accounts for the year appear below:

Debit balances:
Accounts receivable ………………………….. Inventory …………………………………………. Prepaid expenses ………………………………. Long term investments ………………………
Credit balances:
Accumulated depreciation …………………. Accounts payable ……………………………… Taxes payable …………………………………..
Increases (Decreases)

$7,000 $(4,000) $(1,000)
$8,000

$17,000 $(6,000)
$7,000

Based solely on this information, the net cash provided by operations under the indirect method on the statement of cash flows would be:
A) $24,000 B) $36,000 C) $16,000 D) $48,000

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808 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

45. Nornang Company’s net income last year was $47,000. Changes in selected balance sheet accounts for the year appear below:

Debit balances:
Accounts receivable …………………………. Inventory ………………………………………… Prepaid expenses ………………………………
Credit balances:
Accumulated depreciation …………………. Accounts payable …………………………….. Accrued liabilities ……………………………. Taxes payable ………………………………….. Deferred taxes ………………………………….
Increases (Decreases)

$(13,000) $15,000
$4,000

$32,000 $(13,000)
$8,000 $9,000 $0

Based solely on this information, the net cash provided by operations under the indirect method on the statement of cash flows would be:
A) $77,000 B) $89,000 C) $79,000 D) $17,000

,3

Garrison, Managerial Accounting, 12th Edition 809

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

46. Norman Company’s net income last year was $26,000. Changes in selected balance sheet accounts for the year appear below:

Debit balances:
Accounts receivable …………………………… Inventory ………………………………………….. Prepaid expenses ………………………………..
Credit balances:
Accumulated depreciation …………………… Accounts payable ………………………………. Accrued liabilities ……………………………… Taxes payable ……………………………………. Deferred taxes ……………………………………
Increases (Decreases)

$8,000 $12,000
$(6,000)

$24,000 $(15,000)
$9,000 $0 $5,000

Based solely on this information, the net cash provided by operations under the indirect method on the statement of cash flows would be:
A) $50,000 B) $35,000 C) $17,000 D) $63,000

,3

47. Four years ago, Sulu Corporation purchased a $75,000 long-term investment in bonds of another corporation. During the current year, this investment was sold for $80,000. Sulu uses the indirect method to prepare its statement of cash flows. What effect will the above transaction have on the investing activities section of Sulu’s statement of cash flows for the current year?
A) $80,000 increase B) $5,000 decrease C) $5,000 increase D) $75,000 increase

,3

810 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

48. Severn Corporation prepares its statement of cash flows using the direct method. Last year, Severn reported Income Tax Expense of $27,000. At the beginning of last year, Severn had a $2,000 balance in the Taxes Payable account. At the end of last year, Severn had a $5,000 balance in the account. On its statement of cash flows for last year, what amount should Severn have shown for its Income Tax Expense adjusted to a cash basis (i.e., income taxes paid)?
A) $20,000 B) $22,000 C) $24,000 D) $30,000

,4 Appendix: 16

49. Honalo Corporation had net sales of $515,000 for the just completed year. Shown below are the beginning and ending balances of various Honalo accounts:

Cash ……………………………………….. Accounts receivable …………………. Inventory ………………………………… Accounts payable …………………….. Retained earnings ……………………..
Ending $102,000 $254,000 $461,000
$77,000 $367,000
Beginning $136,000 $218,000 $527,000 $96,000 $298,000

Honalo prepares its statement of cash flows using the direct method. On its statement of cash flows, what amount should Honalo show for its net sales adjusted to a cash basis (i.e., cash received from sales)?
A) $479,000 B) $526,000 C) $545,000 D) $551,000

,4 Appendix: 16

Garrison, Managerial Accounting, 12th Edition 811

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

50. Khmer, Inc. had cost of goods sold of $114,000 for the just completed year. Shown below are the beginning and ending balances of various Khmer accounts:

Cash …………………………………………. Accounts receivable …………………… Inventory ………………………………….. Accounts payable ………………………. Retained earnings ……………………….
Ending $60,000 $86,000 $47,000 $29,000 $82,000
Beginning $47,000 $96,000 $54,000 $13,000 $5,000

Khmer prepares its statement of cash flows using the direct method. On its statement of cash flows, what amount should Khmer show for its cost of goods sold adjusted to a cash basis (i.e., cash paid to suppliers)?
A) $91,000 B) $123,000 C) $137,000 D) $147,000

,4 Appendix: 16

51. Last year Cumpton Company reported a cost of goods sold of $40,000. Inventories decreased by $8,000 during the year, and accounts payable increased by $11,000. The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. The cost of goods sold adjusted to a cash basis would be:
A) $21,000 B) $59,000 C) $32,000 D) $29,000

,4 Appendix: 16

52. Last year Cumba Company reported a cost of goods sold of $30,000. Inventories decreased by $7,000 during the year, and accounts payable decreased by $13,000. The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. The cost of goods sold adjusted to a cash basis would be:
A) $23,000 B) $24,000 C) $36,000 D) $43,000

,4 Appendix: 16

812 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

53. Last year Lawrence Company reported sales of $100,000 on its income statement. During the year, accounts receivable decreased by $15,000 and accounts payable decreased by $20,000. The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. The sales revenue adjusted to a cash basis for the year would be:
A) $95,000 B) $115,000 C) $105,000 D) $120,000

,4 Appendix: 16

54. Last year Lawson Company reported sales of $140,000 on its income statement. During the year, accounts receivable decreased by $20,000 and accounts payable increased by $15,000. The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows. The sales revenue adjusted to a cash basis for the year would be:
A) $175,000 B) $105,000 C) $125,000 D) $160,000

,4 Appendix: 16

55. Cridland Company’s operating expenses for last year totaled $220,000. During the year the company’s prepaid expense account balance decreased by $2,000 and accrued liabilities decreased by $6,000. Depreciation charges for the year were $15,000. Based on this information, operating expenses adjusted to a cash basis under the direct method on the statement of cash flows would be:
A) $231,000 B) $239,000 C) $209,000 D) $201,000

,4 Appendix: 16

Garrison, Managerial Accounting, 12th Edition 813

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

56. Criddle Company’s operating expenses for last year totaled $260,000. During the year the company’s prepaid expense account balance increased by $24,000 and accrued liabilities increased by $15,000. Depreciation charges for the year were $33,000. Based on this information, operating expenses adjusted to a cash basis under the direct method on the statement of cash flows would be:
A) $302,000 B) $236,000 C) $218,000 D) $284,000

,4 Appendix: 16

57. Crider Company’s operating expenses for last year totaled $240,000. During the year the company’s prepaid expense account balance decreased by $15,000 and accrued liabilities increased by $13,000. Depreciation charges for the year were $23,000. Based on this information, operating expenses adjusted to a cash basis under the direct method on the statement of cash flows would be:
A) $245,000 B) $291,000 C) $235,000 D) $189,000

,4 Appendix: 16

58. The Simplex Company reported cost of goods sold on its income statement of $10,000. The following account balances appeared on the company’s comparative balance sheet for the same year:

Inventory ………………………………… Accounts Payable ……………………..
Ending $22,000 $14,000
Beginning $20,000 $11,000

The company uses the indirect method to determine the net cash provided by operating activities. The cost of goods sold, adjusted to a cash basis, on the company’s statement of cash flows for the year would be:
A) $11,000 B) $10,000 C) $9,000 D) $5,000

,4 Appendix: 16

814 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

59. Crossland Company reported sales on its income statement of $435,000. On the statement of cash flows, which used the direct method, sales adjusted to a cash basis were $455,000. Crossland Company reported the following account balances on its balance sheet for the year:

Account
Accounts receivable …………………. Prepaid expenses ……………………… Inventory …………………………………
Ending $30,000 $14,000 $18,000
Beginning ?
$11,000 $20,000

Based on this information, the beginning balance in accounts receivable was: A) $50,000
B) $40,000 C) $30,000 D) $20,000

,4 Appendix: 16

60. Duke Company reported cost of goods sold last year of $270,000 on its income statement. Additional information concerning the company’s closing and opening account balances last year follows:

Inventory ……………………… Accounts payable …………..
December 31 $60,000 $26,000
January 1 $45,000 $39,000

Duke Company uses the direct method to determine the net cash provided by operating activities on its statement of cash flows. What amount should Duke report as cash paid to suppliers in its statement of cash flows for last year?
A) $242,000 B) $268,000 C) $272,000 D) $298,000

,4 Source: CPA, adapted Appendix: 16

Garrison, Managerial Accounting, 12th Edition 815

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

61. Last year Marks Company sold equipment with a net book value of $135,000 for $110,000 in cash. This equipment was originally purchased for $215,000. What will be the net effect of this transaction on the net cash provided by investing activities on the statement of cash flows?
A) A net addition of $105,000 to cash.
B) A net deduction of $105,000 from cash. C) A net addition of $25,000 to cash.
D) A net deduction of $25,000 from cash.

62. Last year Marymoor Company sold equipment with a net book value of $95,000 for $70,000 in cash. This equipment was originally purchased for $130,000. What will be the net effect of this transaction on the net cash provided by investing activities on the statement of cash flows?
A) A net addition of $25,000 to cash.
B) A net deduction of $25,000 from cash. C) A net addition of $60,000 to cash.
D) A net deduction of $60,000 from cash.

63. The following transactions occurred last year at Joyce Company:

Issuance of shares of the company’s own common stock ………………. Dividends paid to the company’s own shareholders ……………………… Dividends received from investments in other companies’ shares ….. Interest paid on the company’s own bonds ………………………………….. Repayment of principal on the company’s own bonds ………………….. Proceeds from sale of the company’s used equipment…………………… Purchase of land ……………………………………………………………………….
$80,000 $3,000 $5,000 $6,000 $50,000 $22,000 $140,000

Based solely on the above information, the net cash provided by financing activities for the year on the statement of cash flows would be:
A) $306,000 B) $21,000 C) $(92,000) D) $27,000

816 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

64. The following transactions occurred last year at Jost Company:

Issuance of shares of the company’s own common stock ……………. Dividends paid to the company’s own shareholders …………………… Dividends received from investments in other companies’ shares .. Interest paid on the company’s own bonds ……………………………….. Repayment of principal on the company’s own bonds ……………….. Proceeds from sale of the company’s used equipment………………… Purchase of land …………………………………………………………………….
$170,000 $7,000 $4,000 $11,000 $40,000 $23,000 $120,000

Based solely on the above information, the net cash provided by financing activities for the year on the statement of cash flows would be:
A) $112,000 B) $123,000 C) $375,000 D) $19,000

65. Martin Company’s cash and cash equivalents consist of cash and marketable securities. Last year the company’s cash account increased by $42,000 and its marketable securities account decreased by $61,000. Cash provided by operating activities was $140,000. Net cash used for financing activities was $102,000. Based on this information, the net cash flow from investing activities on the statement of cash flows was:
A) a net $103,000 increase. B) a net $103,000 decrease. C) a net $38,000 decrease. D) a net $57,000 decrease.

66. Last year Burke Company’s cash account decreased by $17,000. Net cash used in investing activities was $19,000. Net cash provided by financing activities was $25,000. The net cash flow provided by (used in) operating activities on the statement of cash flows was:
A) $(11,000) B) $(17,000) C) $(23,000) D) $6,000

Garrison, Managerial Accounting, 12th Edition 817

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

67. Last year Burach Company’s cash account increased by $20,000. Net cash used in investing activities was $34,000. Net cash provided by financing activities was $12,000. On the statement of cash flows, the net cash flow provided by (used in) operating activities was:
A) $20,000 B) $42,000 C) $(2,000) D) $(22,000)

Use the following to answer questions 68-69:

Samarium Retail Corporation’s most recent comparative Balance Sheet is as follows:

Assets
Cash …………………………………………………………….. Accounts receivable, net ………………………………… Merchandise inventory …………………………………… Equipment……………………………………………………. Accumulated depreciation ………………………………. Total assets ……………………………………………………

Liabilities and Stockholders’ Equity
Accounts payable ………………………………………….. Taxes payable ……………………………………………….. Notes payable ……………………………………………….. Common stock ……………………………………………… Retained earnings ………………………………………….. Total liabilities and stockholders’ equity …………..
Ending

$ 51,000 83,000 96,000 120,000
(65,000) $285,000

$ 12,000 1,000 30,000 100,000
142,000 $285,000
Beginning

$ 64,000 41,000 87,000 120,000
(50,000) $262,000

$ 38,000 3,000 5,000 80,000
136,000 $262,000

Samarium’s net income was $46,000. No direct exchange transactions occurred at Samarium during the year. No equipment was sold or purchased. Cash dividends of $40,000 were declared and paid. Samarium uses the indirect method to prepare its statement of cash flows.

68. What is Samarium’s net cash provided (used) by operating activities? A) $(18,000)
B) $(33,000) C) $69,000 D) $84,000

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818 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

69. What is Samarium’s net cash provided (used) by investing activities? A) $0
B) $(15,000) C) $25,000 D) $45,000

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Use the following to answer questions 70-71:

Chenay Service Corporation’s most recent comparative Balance Sheet is as follows:

Assets
Cash …………………………………………………………….. Accounts receivable, net ………………………………… Prepaid expenses …………………………………………… Equipment……………………………………………………. Accumulated depreciation ………………………………. Total assets ……………………………………………………

Liabilities and Stockholders’ Equity
Accounts payable ………………………………………….. Notes payable ……………………………………………….. Common stock ……………………………………………… Retained earnings ………………………………………….. Total liabilities and stockholders’ equity …………..
Ending

$ 59,000 108,000 10,000 350,000
(50,000) $477,000

$ 29,000 78,000 225,000
145,000 $477,000
Beginning

$ 70,000 82,000 4,000 300,000
(40,000) $416,000

$ 16,000 90,000 200,000
110,000 $416,000

Chenay’s net income was $35,000. No direct exchange transactions occurred at Chenay during the year. No equipment was sold and no dividends were paid during the year. Chenay uses the indirect method to prepare its statement of cash flows.

70. What is Chenay’s net cash provided (used) by operating activities? A) $16,000
B) $26,000 C) $80,000 D) $90,000

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Garrison, Managerial Accounting, 12th Edition 819

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

71. What is Chenay’s net cash provided (used) by financing activities? A) $13,000
B) $25,000 C) $(37,000) D) $(62,000)

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Use the following to answer questions 72-74:

Waste Company’s comparative balance sheet and income statement for last year appear below:

Statement of Financial Position

Cash ………………………………………………….. Accounts receivable ……………………………. Inventory …………………………………………… Prepaid expenses ………………………………… Long-term investments ………………………… Plant and equipment ……………………………. Accumulated depreciation ……………………. Total assets …………………………………………

Accounts payable ……………………………….. Accrued liabilities ………………………………. Taxes payable …………………………………….. Bonds payable ……………………………………. Deferred taxes ……………………………………. Common stock …………………………………… Retained earnings ……………………………….. Total liabilities and owners’ equity ………..

Ending Balance $ 60,000
40,000 43,000 22,000 260,000 480,000
(257,000) $648,000

$ 32,000 51,000 34,000 120,000 28,000 180,000
203,000 $648,000

Beginning Balance $ 22,000
54,000 61,000 10,000 200,000 480,000
(222,000) $605,000

$ 50,000 25,000 24,000 160,000 16,000 150,000
180,000 $605,000

820 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

Income Statement

Sales …………………………………………………. Less cost of goods sold ……………………….. Gross margin ……………………………………… Less operating expenses ………………………. Net operating income………………………….. Less income taxes ………………………………. Net income…………………………………………
$600,000
340,000 260,000
160,000 100,000
30,000 $ 70,000

The company declared and paid $47,000 in cash dividends during the year. The following questions pertain to the company’s statement of cash flows.

72. The net cash provided by (used in) operating activities last year was: A) $(15,000)
B) $105,000 C) $70,000 D) $155,000

,3

73. The net cash provided by (used in) investing activities last year was: A) $(60,000)
B) $60,000 C) $(30,000) D) $30,000

,3

74. The net cash provided by (used in) financing activities last year was: A) $57,000
B) $(57,000) C) $10,000 D) $(10,000)

,3

Garrison, Managerial Accounting, 12th Edition 821

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

Use the following to answer questions 75-77:

Megrey Company’s net income last year was $82,000. Changes in the company’s balance sheet accounts for the year appear below:

Debit balances:
Cash ……………………………………………….. Accounts receivable …………………………. Inventory ………………………………………… Prepaid expenses ……………………………… Long-term investments …………………….. Plant and equipment ………………………….

Credit balances:
Accumulated depreciation …………………. Accounts payable …………………………….. Accrued liabilities ……………………………. Taxes payable ………………………………….. Bonds payable …………………………………. Deferred taxes …………………………………. Common stock ………………………………… Retained earnings ……………………………..
Increases (Decreases)

$3,000 $5,000 $1,000 $(8,000)
$80,000 $25,000

$66,000 $(7,000) $(2,000)
$0 $(40,000)
$15,000 $20,000 $54,000

The company declared and paid cash dividends of $28,000 last year. The following questions pertain to the company’s statement of cash flows.

75. The net cash provided by (used in) operating activities last year was: A) $90,000
B) $156,000 C) $82,000 D) $148,000

,3

76. The net cash provided by (used in) investing activities last year was: A) $85,000
B) $(85,000) C) $105,000 D) $(105,000)

,3

822 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

77. The net cash provided by (used in) financing activities last year was: A) $48,000)
B) $(48,000) C) $20,000 D) $(20,000)

,3

Use the following to answer questions 78-80:

Meguro Company’s net income last year was $77,000. Changes in the company’s balance sheet accounts for the year appear below:

Debit balances:
Cash ……………………………………………….. Accounts receivable …………………………. Inventory ………………………………………… Prepaid expenses ……………………………… Long-term investments …………………….. Plant and equipment ………………………….

Credit balances:
Accumulated depreciation …………………. Accounts payable …………………………….. Accrued liabilities ……………………………. Taxes payable ………………………………….. Bonds payable …………………………………. Deferred taxes …………………………………. Common stock ………………………………… Retained earnings ……………………………..
Increases (Decreases)

$5,000 $1,000
$(4,000) $(5,000)
$40,000 $25,000

$70,000 $(5,000)
$6,000 $14,000
$(50,000) $(6,000)
$20,000 $13,000

The company declared and paid cash dividends of $64,000 last year. The following questions pertain to the company’s statement of cash flows.

78. The net cash provided by (used in) operating activities last year was: A) $164,000
B) $77,000 C) $147,000 D) $94,000

,3

Garrison, Managerial Accounting, 12th Edition 823

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows

79. The net cash provided by (used in) investing activities last year was: A) $65,000
B) $(65,000) C) $45,000 D) $(45,000)

,3

80. The net cash provided by (used in) financing activities last year was: A) $(94,000)
B) $94,000 C) $(30,000) D) $30,000

,3

Use the following to answer questions 81-82:

Spad Company recorded the following events last year:

Issuance of shares of the company’s own common stock …………… Purchase of bonds issued by other companies ………………………….. Dividends paid to the company’s own shareholders ………………….. Dividends received from investments in other companies’ shares . Repayment of principal on the company’s own bonds ………………. Interest paid on the company’s own bonds ………………………………. Collection of the principal amount of a loan made to another
company…………………………………………………………………………… Purchase of equipment …………………………………………………………..
$350,000 $60,000 $36,000 $16,000 $260,000 $3,000

$220,000 $330,000

On the statement of cash flows, some of these events are classified as operating activities, some are classified as investing activities, and some are classified as financing activities.

81. Based solely on the information above, the net cash provided by (used in) financing activities on the statement of cash flows would be:
A) $54,000
B) $1,275,000 C) $51,000 D) $299,000

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824 Garrison, Managerial Accounting, 12th Edition

Chapter 16 “How Well Am I Doing?” Statement of Cash Flows

82. Based solely on the information above, the net cash provided by (used in) investing activities on the statement of cash flows would be:
A) $(1,275,000) B) $(390,000) C) $(170,000) D) $(650,000)

,3

Use the following to answer questions 83-84:

On December 31, Year 1, Rex Corporation borrowed $100,000 from the Third National Bank of Springfield. Rex has five years to pay off the note. On December 31,