Test Bank for Managerial Accounting 16th Edition By Carl Warren, Jefferson Jones, William Tayler (Al

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Chapter 1: Introduction to Managerial Accounting True / False 1. Managerial accounting reports must be prepared according to generally accepted accounting principles. a. True b. False ANSWER: False 2. Managerial accounting uses only past data in reports to aid management in the decision-making process. a. True b. False ANSWER: False 3. Managerial accounting information includes both historical and estimated data. a. True b. False ANSWER: True 4. Although finance and accounting professionals often work within verticals and other horizontals, they do not normally report directly to the heads of those units or departments. a. True b. False ANSWER: True 5. The philosophy of focusing on “unexpected” good or bad performance is called management by exception. a. True b. False ANSWER: True 6. The functions reporting to the CFO sometimes are grouped together and referred to as corporate finance. a. True b. False ANSWER: True 7. In smaller companies, the term controller may be used to refer to the chief financial officer. a. True b. False ANSWER: True 8. The role of horizontals is to provide services, assistance, and advice to the various verticals and other horizontal departments. a. True b. False ANSWER: True 9. Horizontals are departments within a company that are responsible for developing products.

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Chapter 1: Introduction to Managerial Accounting a. True b. False ANSWER: False 10. While no two company structures are identical, most large companies are organized in terms of verticals and diagonals. a. True b. False ANSWER: False 11. Verticals prepare their own income statements. a. True b. False ANSWER: True 12. Managerial accounting reports are designed to meet the specific needs of a company’s management. a. True b. False ANSWER: True 13. Strategic planning is the process of monitoring operating results and comparing actual results with the expected results. a. True b. False ANSWER: False 14. Operational planning is the process of developing the company’s short-term objectives and actions needed to achieve the company’s long-term, strategic objectives. a. True b. False ANSWER: True 15. Control is the process of choosing goals and deciding how to achieve them. a. True b. False ANSWER: False 16. Evaluation is the process by which management monitors operations by comparing actual and expected results. a. True b. False ANSWER: True 17. A major focus of managerial accounting is the development of costing information. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting ANSWER: True 18. Managerial accounting information is for external users as well as company managers. a. True b. False ANSWER: False 19. A report analyzing how many products need to be sold to cover operating costs is not typically a managerial accounting report. a. True b. False ANSWER: False 20. A report analyzing the dollar savings of purchasing new equipment to speed up the production process is a managerial accounting report. a. True b. False ANSWER: True 21. A performance report that identifies the amount of employee downtime is a financial accounting report. a. True b. False ANSWER: False 22. Managerial accounting provides useful information to managers on product costs. a. True b. False ANSWER: True 23. In a service company, the cost of services is accumulated and reported as inventory. a. True b. False ANSWER: False 24. A cost is a sacrifice made to obtain some benefit. a. True b. False ANSWER: True 25. Goods that are partway through the manufacturing process, but not yet complete, are referred to as materials inventory. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 26. The cost of a manufactured product generally consists of direct materials cost, direct labor cost, and factory overhead cost. a. True b. False ANSWER: True 27. The cost of materials entering directly into the manufacturing process is classified as factory overhead cost. a. True b. False ANSWER: False 28. The cost of wages paid to employees directly involved in converting materials to finished product is classified as direct labor cost. a. True b. False ANSWER: True 29. If the cost of employee wages is not a significant portion of the total product cost, the wages are classified as direct materials cost. a. True b. False ANSWER: False 30. For a construction contractor, the wages of carpenters would be classified as overhead cost. a. True b. False ANSWER: False 31. For an automotive repair shop, the wages of mechanics would be classified as direct labor cost. a. True b. False ANSWER: True 32. Costs other than direct materials cost and direct labor cost incurred in the manufacturing process are classified as factory overhead cost. a. True b. False ANSWER: True 33. Depreciation on factory plant and equipment is an example of factory overhead cost. a. True b. False ANSWER: True 34. The cost of oil used to lubricate factory machinery and equipment is an example of a direct materials cost.

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Chapter 1: Introduction to Managerial Accounting a. True b. False ANSWER: False 35. If the cost of materials is not a significant portion of the total product cost, the materials may be classified as part of factory overhead cost. a. True b. False ANSWER: True 36. Factory overhead cost is sometimes referred to as factory burden. a. True b. False ANSWER: True 37. Conversion cost is the combination of direct labor cost and factory overhead cost. a. True b. False ANSWER: True 38. Conversion cost is the combination of direct materials cost and factory overhead cost. a. True b. False ANSWER: False 39. Factory overhead is an example of a product cost. a. True b. False ANSWER: True 40. Direct labor costs are included in the conversion costs of a product. a. True b. False ANSWER: True 41. The costs of materials and labor that do not enter directly into the finished product are classified as factory overhead. a. True b. False ANSWER: True 42. The costs of materials and labor that do not enter directly into the finished product are classified as cost of goods sold. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 43. Indirect labor would be included in factory overhead. a. True b. False ANSWER: True 44. A cost object can be anything to which costs are assigned and will vary depending upon the decision-making needs of management. a. True b. False ANSWER: True 45. Direct costs are identified with and can be traced to a cost object. a. True b. False ANSWER: True 46. Indirect costs are identified with and can be traced to a cost object. a. True b. False ANSWER: False 47. Period (nonmanufacturing) costs are classified into two categories: selling and administrative. a. True b. False ANSWER: True 48. Prime costs are the combination of direct labor costs and factory overhead costs. a. True b. False ANSWER: False 49. Prime costs are the combination of direct materials and direct labor costs. a. True b. False ANSWER: True 50. Conversion costs are the combination of direct labor, direct materials, and factory overhead costs. a. True b. False ANSWER: False 51. Manufacturers use machinery and labor to convert direct materials into finished products. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 52. Period costs include direct materials and direct labor. a. True b. False ANSWER: False 53. Period costs can be found on both the balance sheet and the income statement. a. True b. False ANSWER: False 54. Product costs are not expensed until the product is sold. a. True b. False ANSWER: True 55. The plant manager’s salary in a manufacturing business would be considered an indirect cost. a. True b. False ANSWER: True 56. Operating expenses are product costs and are expensed when the product is sold. a. True b. False ANSWER: False 57. Period costs are operating costs that are expensed in the period in which the goods are sold. a. True b. False ANSWER: False 58. Factory overhead includes all manufacturing costs other than direct materials and direct labor. a. True b. False ANSWER: True 59. Labor costs that are directly traceable to the product are part of factory overhead. a. True b. False ANSWER: False 60. Product costs include direct labor and advertising expense. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 61. Indirect labor and indirect materials would be part of factory overhead. a. True b. False ANSWER: True 62. Prime costs consist of factory overhead and direct labor. a. True b. False ANSWER: False 63. Conversion costs consist of product costs and period costs. a. True b. False ANSWER: False 64. Prime costs consist of direct materials, indirect materials, and direct labor. a. True b. False ANSWER: False 65. Only the value of the inventory that is sold will appear on the income statement. a. True b. False ANSWER: True 66. On the balance sheet for a manufacturing business, the costs of direct materials, direct labor, and factory overhead are categorized as either materials inventory, work in process inventory, or finished goods inventory. a. True b. False ANSWER: True 67. The statement of cost of goods manufactured is an extension of the income statement for a manufacturing company. a. True b. False ANSWER: True 68. Lower utilization rates are considered favorable, while higher utilization rates are considered unfavorable. a. True b. False ANSWER: False Multiple Choice 69. In order to be useful to managers, managerial accounting reports should possess which of the following Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting characteristics? a. provide objective measures of past operations and subjective estimates about future decisions b. all of these choices c. be provided at any time management needs information d. be prepared to report information for any unit of the business to support decision making ANSWER: b 70. Which of the following is the primary criterion for the preparation of managerial accounting reports? a. relevance of the reports b. manager needs c. timing of the reports d. cost of the reports ANSWER: b 71. Which of the following is most associated with managerial accounting? a. must follow GAAP b. may rely on estimates and forecasts c. is prepared for users outside the organization d. always reports on the entire entity ANSWER: b 72. Which of the following is most associated with financial accounting reports? a. can have both objective and subjective information b. can be prepared periodically, or as needed c. prepared in accordance with GAAP d. can be prepared for the entity or segment ANSWER: c 73. Which of the following statements is false? a. There is no overlap between financial and managerial accounting. b. Managerial accounting sometimes relies on past information. c. Managerial accounting does not need to conform to GAAP. d. Financial accounting must conform to GAAP. ANSWER: a 74. Managerial accounting reports are a. prepared according to GAAP b. prepared according to management needs c. prepared periodically only d. related to the entire business entity only ANSWER: b 75. Which of the following individuals are charged with the responsibility of directing the day-to-day operations of a business?

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Chapter 1: Introduction to Managerial Accounting a. investors b. managers c. shareholders d. customers ANSWER: b 76. Which of the following are basic functions of the management process? a. supervising and directing b. decision making and supervising c. organizing and directing d. strategic planning and control ANSWER: d 77. Which of the following terms is used to describe the process by which managers monitor operations and compare actual and expected results? a. measurement b. control c. evaluation d. strategic planning ANSWER: c 78. Accounting designed to meet the needs of decision makers inside the business is a. general accounting b. financial accounting c. managerial accounting d. external accounting ANSWER: c 79. Which of the following terms is used to describe the process of developing the organization’s long-term objectives? a. control b. strategic planning c. measurement d. evaluation ANSWER: b 80. The primary goal of managerial accounting is to provide information to a. investors b. creditors c. managers d. external auditors ANSWER: c 81. Which of the following is the primary guideline for preparing managerial accounting reports? a. usefulness to management Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting b. cost of preparation c. clarity d. GAAP ANSWER: a 82. Which of the following is a characteristic of useful managerial accounting reports? a. accurate b. all of these choices c. historical and estimated data d. prepared as needed ANSWER: b 83. Managers use managerial accounting information for which of the following purposes? a. all of these choices b. to analyze the performance of a company’s operations c. to support strategic planning decisions d. to determine the cost of manufacturing a product ANSWER: a 84. Financial accountants would prepare which of the following reports? a. performance report identifying amounts of scrap b. control report comparing direct material usage over time c. sales report targeting monthly sales and potential bonuses d. annual report for external regulators such as the SEC ANSWER: d 85. Which of the following would be least likely to be considered a managerial accounting report? a. report to analyze potential efficiencies and savings for the purchase of new production equipment b. schedule of total manufacturing costs incurred c. statement of cost of goods manufactured d. statement of stockholders’ equity ANSWER: d 86. Compute conversion costs given the following data: direct materials, $347,500; direct labor, $196,300; factory overhead, $187,900; and selling expenses, $45,290. a. $543,800 b. $187,900 c. $731,700 d. $384,200 ANSWER: d 87. Which of the following is false with regard to direct materials for a bakery? a. Flour and sugar would probably be direct materials. b. Eggs would probably be a direct material.

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Chapter 1: Introduction to Managerial Accounting c. Oil to lubricate factory machines would be an indirect material. d. Paper cupcake liners, that become part of the product, must be accounted for as direct materials.

ANSWER: d 88. The cost of a manufactured product generally consists of which of the following costs? a. direct materials cost and factory overhead cost only b. direct labor cost and factory overhead cost only c. direct labor cost, direct materials cost, and factory overhead cost d. direct materials cost and direct labor cost only ANSWER: c 89. Which of the following must be true in order for materials to be classified as direct materials? a. They must be classified as both prime costs and conversion costs. b. They must be introduced into the process in both work in process inventories and finished goods inventories. c. They must be an integral part of the finished product but can be an insignificant portion of the total product cost. d. They must be an integral part of the finished product and a significant portion of the total product cost.

ANSWER: d 90. Which of the following is an example of direct materials cost for an automobile manufacturer? a. cost of oil lubricants for factory machinery b. cost of assembly worker wages c. salary of production supervisor d. cost of interior upholstery ANSWER: d 91. A plant manager’s salary is a(n) a. direct cost and an indirect cost b. direct cost c. indirect cost d. period cost ANSWER: c 92. If the cost of a direct material is a small portion of total production cost, it may be classified as part of a. direct labor cost b. selling and administrative costs c. miscellaneous costs d. factory overhead cost ANSWER: d 93. The cost of wages paid to employees directly involved in the manufacturing process in converting materials into finished products is classified as a. factory overhead cost b. direct labor cost Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting c. miscellaneous costs d. direct materials cost ANSWER: b 94. Which of the following is an example of direct labor cost for a cell phone manufacturer? a. cost of oil lubricants for factory machinery b. cost of assembly worker wages c. salary of plant supervisor d. cost of phone components ANSWER: b 95. Costs other than direct materials cost and direct labor cost incurred in the manufacturing process are classified as a. factory overhead cost b. miscellaneous expense c. product costs d. period cost ANSWER: a 96. Which of the following is an example of a factory overhead cost? a. repair and maintenance cost on the administrative building b. factory heating and lighting cost c. insurance premiums on salespersons' automobiles d. president's salary ANSWER: b 97. Period costs include a. current assets on the balance sheet b. current liabilities on the balance sheet c. operating costs that are shown on the income statement when products are sold d. operating costs that are shown on the income statement in the period in which they are incurred ANSWER: d 98. Another term for factory overhead is a. surplus b. period cost c. supervisory cost d. factory burden ANSWER: d 99. Which of the following costs are conversion costs? a. direct labor cost and factory overhead cost b. direct materials cost and direct labor cost c. factory overhead cost d. direct materials cost and factory overhead cost Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting ANSWER: a 100. Which of the following terms refers to the cost of changing direct materials into a finished manufactured product? a. factory overhead cost b. period cost c. conversion cost d. direct labor cost ANSWER: c 101. Which of the following items would be classified as part of factory overhead? a. all of these choices b. amortization of manufacturing patents c. production supervisors' salaries d. factory supplies used ANSWER: a 102. Which of the following is part of factory overhead cost? a. sales commissions b. depreciation of factory equipment and machines c. depreciation of sales-person's vehicle d. direct materials used ANSWER: b 103. Which of the following manufacturing costs is an indirect cost of producing a product? a. oil lubricants used for factory machinery b. commissions for sales personnel c. hourly wages of an assembly worker d. memory chips for a microcomputer manufacturer ANSWER: a 104. Which of the following would most likely be considered an indirect material by a manufacturer? a. steel b. fabric c. glue d. lumber ANSWER: c 105. Prime costs are a. direct materials and factory overhead b. direct materials and direct labor c. direct labor and factory overhead d. period costs and factory overhead ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 106. A product cost is a. expensed in the period in which the product is manufactured b. shown with current liabilities on the balance sheet c. shown with operating expenses on the income statement d. expensed in the period the product is sold ANSWER: d 107. Conversion costs are a. direct materials and direct labor b. direct materials and factory overhead c. factory overhead and direct labor d. direct materials and indirect labor ANSWER: c 108. Which of the following is not a conversion cost? a. plant janitor’s wages b. direct labor wages c. machine operator wages d. salesperson's salary and commission ANSWER: d 109. Darwin Company reports the following information: Sales Direct materials used Depreciation on factory equipment Indirect labor Direct labor Factory rent Factory utilities Sales salaries expense Office salaries expense Indirect materials

$76,500 7,300 4,700 5,900 10,500 4,200 1,200 15,600 8,900 1,200

Product costs are a. $24,500 b. $30,300 c. $29,200 d. $35,000 ANSWER: d 110. Product costs a. appear only on the balance sheet b. appear only on the income statement c. are expensed as costs are incurred for direct labor, direct materials, and factory overhead Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting d. appear on both the income statement and balance sheet ANSWER: d 111. Which of the following is a period cost? a. direct materials b. sales salaries expense c. direct labor d. factory overhead ANSWER: b 112. Indirect labor and indirect materials are classified as a. factory overhead and product costs b. factory overhead and period costs c. operating costs and period costs d. operating costs and product costs ANSWER: a 113. An example of a period cost is a. advertising expense b. indirect materials c. depreciation on factory equipment d. property taxes on plant facilities ANSWER: a 114. Direct labor and direct materials are a. product costs and expensed when the goods are sold b. product costs and expensed when incurred c. period costs and expensed when incurred d. period costs and expensed when the goods are sold ANSWER: a 115. Indirect costs incurred in a manufacturing environment that cannot be traced directly to a product are treated as a. period costs and expensed when incurred b. product costs and expensed when the goods are sold c. product costs and expensed when incurred d. period costs and expensed when the goods are sold ANSWER: b 116. Rent expense on a factory building would be treated as a a. period cost b. product cost c. none of these choices d. direct materials cost ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 117. Insurance expense incurred on a factory building would be treated as a a. direct cost b. period cost c. product cost d. selling cost ANSWER: c (The following information is used for the next two questions.)

Jensen Company reports the following: Direct materials used Direct labor incurred Factory overhead incurred Operating expenses

$345,000 250,000 400,000 175,000

118. Jensen Company’s period costs are a. $345,000 b. $250,000 c. $400,000 d. $175,000 ANSWER: d 119. Jensen Company’s product costs are a. $995,000 b. $920,000 c. $825,000 d. $770,000 ANSWER: a 120. Which of the following is a prime cost? a. wood used in furniture production b. insurance on factory equipment c. salaries of production supervisors d. property tax on factory building ANSWER: a 121. Factory overhead includes a. factory rent and direct labor b. direct materials and direct labor c. indirect materials and direct materials d. indirect labor and indirect materials ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 122. Darwin Company reports the following information: Sales Direct materials used Depreciation on factory equipment Indirect labor Direct labor Factory rent Factory utilities Sales salaries expense Office salaries expense Indirect materials

$76,500 7,300 4,700 5,900 10,500 4,200 1,200 15,600 8,900 1,200

Period costs are a. $24,500 b. $30,300 c. $29,200 d. $35,000 ANSWER: a 123. Which of the following is an example of direct labor? a. maintenance personnel b. janitorial personnel c. machine operators d. plant managers ANSWER: c 124. Which of the following accounts will be found on the income statement? a. Inventory b. Work in Process c. Finished Goods d. Cost of Goods Sold ANSWER: d 125. Given the following data: Cost of materials used Direct labor costs Factory overhead Work in process, beginning Work in process, ending Finished goods, beginning Finished goods, ending

$45,000 48,000 39,000 28,000 18,000 28,000 18,000

What is cost of goods sold? a. $152,000 b. $142,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting c. $10,000 d. $128,000 ANSWER: a 126. Given the following data: Beginning raw materials inventory Materials purchased Ending raw materials inventory

$30,000 65,000 40,000

What is the amount of raw materials used? a. $5,000 b. $55,000 c. $75,000 d. $30,000 ANSWER: b 127. A company manufactured 50,000 units of a product at a cost of $450,000. It sold 45,000 units at $15 each. The gross profit is a. $750,000 b. $240,000 c. $600,000 d. $270,000 ANSWER: d 128. The following information is taken from the financial records of Gunner Manufacturing: Cost of materials used Direct labor costs Factory overhead Work in process, beginning Work in process, ending

$45,000 48,000 39,000 18,000 28,000

What is the cost of goods manufactured? a. $178,000 b. $132,000 c. $122,000 d. $142,000 ANSWER: c 129. Goods that are partially completed by a manufacturer are a. merchandise inventory b. work in process inventory c. finished goods inventory d. materials inventory Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting ANSWER: b 130. The income statement for both a merchandiser and a manufacturer would include a. operating expenses b. direct materials c. direct labor incurred d. cost of goods manufactured ANSWER: a 131. On the income statement of a manufacturing company, which of the following replaces purchases in the "Cost of goods sold" section of a retail company? a. finished goods b. cost of merchandise available c. cost of goods manufactured d. work in process ANSWER: c 132. Cost of goods sold for a manufacturer equals cost of goods manufactured plus a. beginning work in process inventory minus ending work in process inventory b. ending work in process inventory minus beginning work in process inventory c. beginning finished goods inventory minus ending finished goods inventory d. ending finished goods inventory minus beginning finished goods inventory ANSWER: c 133. Given the following data: Work in process, beginning Work in process, ending Direct labor costs Cost of goods manufactured Factory overhead

$14,000 20,000 4,000 8,000 8,000

Direct materials used is a. $2,000 b. $4,000 c. $8,000 d. $14,000 ANSWER: a 134. Cost of goods manufactured is equal to a. total manufacturing costs plus ending materials inventory minus beginning materials inventory b. cost of goods sold plus beginning work in process inventory minus ending work in process inventory c. total manufacturing costs plus ending work in process inventory minus beginning work in process inventory d. total manufacturing costs plus beginning work in process inventory minus ending work in process inventory ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 135. Finished goods inventory is reported on the a. income statement as a period cost b. balance sheet as a long-term asset c. balance sheet as a current asset d. income statement as revenue ANSWER: c 136. Beginning work in process is equal to a. cost of goods manufactured plus ending work in process minus manufacturing costs incurred during the current period b. cost of goods manufactured minus ending work in process plus manufacturing costs incurred during the current period c. ending work in process plus manufacturing costs incurred during the current period d. manufacturing costs incurred during the current period minus ending work in process ANSWER: a 137. Which of the following would be omitted from the “Current assets” section of the balance sheet? a. factory overhead b. materials inventory c. finished goods inventory d. work in process inventory ANSWER: a 138. Smith Company reports the following information: Cost of goods manufactured Direct materials used Direct labor incurred Work in process inventory, January 1

$68,250 27,000 25,000 11,000

Factory overhead is 75% of the cost of direct labor. Work in process inventory on December 31 is a. $16,250 b. $8,500 c. $18,750 d. $13,500 ANSWER: d 139. At the beginning of the current year, Grant Company’s work in process inventory account had a balance of $30,000.

During the year, $68,000 of direct materials were used in production, and $66,000 of direct labor costs were incurred.

Factory overhead for the year amounted to $90,000. Cost of goods manufactured is $230,000. The balance in work in process inventory on December 31 is a. $24,000 b. $44,000 c. $66,000 d. $36,000 ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 140. A company used $35,000 of direct materials, incurred $73,000 in direct labor cost, and had $114,000 in factory overhead costs during the period. If beginning and ending work in process inventories were $28,000 and $32,000, respectively, the cost of goods manufactured was a. $218,000 b. $226,000 c. $190,000 d. $222,000 ANSWER: a 141. Cost of goods manufactured during the year is $240,000, and work in process inventory on December 31 is $50,000.

Work in process inventory during the year decreased by 60%. Total manufacturing costs incurred are a. $190,000 b. $165,000 c. $290,000 d. $315,000 ANSWER: b 142. Work in process inventory on December 31 of the current year is $44,000. Work in process inventory increased by 60% during the year. Cost of goods manufactured amounts to $275,000. The total manufacturing costs incurred in the current year are a. $291,500 b. $302,000 c. $275,750 d. $233,750 ANSWER: a 143. Work in process inventory on December 31 is $42,000. Work in process inventory decreased by 40% during the year. Total manufacturing costs incurred amount to $260,000. The cost of goods manufactured is a. $232,000 b. $302,000 c. $288,000 d. $190,000 ANSWER: c 144. Work in process inventory increased by $20,000 during the current year. Cost of goods manufactured was $180,000.

Total manufacturing costs incurred are a. $198,000 b. $160,000 c. $189,000 d. $200,000 ANSWER: d 145. Which of the following will be found on the income statement of a manufacturing company? a. cost of goods sold Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting b. materials c. work in process d. finished goods ANSWER: a 146. A company sells goods for $150,000 that cost $54,000 to manufacture. Which of the following statements is true? a. The company will recognize sales on the balance sheet of $150,000. b. The company will recognize $96,000 in gross profit on the balance sheet. c. The company will decrease finished goods by $54,000. d. The company will increase finished goods by $54,000.

ANSWER: c 147. The cost of goods sold for Michaels Manufacturing in the current year was $233,000. The January 1 finished goods inventory balance was $31,600, and the December 31 finished goods inventory balance was $24,200. Cost of goods manufactured during the period was a. $233,000 b. $225,600 c. $288,800 d. $240,400 ANSWER: b 148. In the hotel industry, the occupancy rate is a measure of a. risk b. solvency c. profitability d. utilization ANSWER: d 149. Nearly _____ of U.S. economic activity is represented by services. a. 40% b. 50% c. 60% d. 80% ANSWER: d 150. SunnyRest Hotel has 300 rooms. During the month of March, it had 7,440 guests, each staying a single night. The occupancy rate for SunnyRest Hotel for the month of March was a. 80% b. 83% c. 98% d. 121% ANSWER: a 151. ShadyPalms Hotel has 100 rooms. During the month of February, it had 500 guests, each staying 5 nights, and 10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting guests, each staying 2 nights. The occupancy rate for ShadyPalms Hotel for the month of February (not a leap year) was a. 28% b. 84% c. 90% d. 111% ANSWER: c 152. Which of the following terms is used to describe the management process where managers develop and agree upon performance metrics on how well the company is achieving its objectives? a. control b. strategic planning c. measurement d. evaluation ANSWER: c 153. A lawn mower manufacturer would classify wheels as which type of cost? a. direct materials b. direct labor c. factory overhead d. nonmanufacturing cost ANSWER: a 154. A lawn mower manufacturer would classify grease for wheel axles as which type of cost? a. direct materials b. direct labor c. factory overhead d. nonmanufacturing cost ANSWER: c 155. A cake factory would classify which of the following as both a prime cost and a conversion cost? a. frosting b. wages of the baker c. sprinkles for the topping (considered an indirect material) d. depreciation on oven ANSWER: b 156. Which of the following is an indirect cost? a. labor for machine maintenance b. office equipment depreciation c. salespersons’ salaries d. all of these choices ANSWER: a 157. Which of the following is an indirect cost?

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Chapter 1: Introduction to Managerial Accounting a. utilities on factory building b. factory equipment depreciation c. materials not traceable to specific items d. all of these choices ANSWER: d 158. Which of the following is factory overhead? a. utilities on factory building b. factory equipment depreciation c. materials not traceable to specific items d. all of these choices ANSWER: d 159. Which of the following is factory overhead? a. sales supplies used b. indirect materials used c. wages of assembly line personnel d. cost of primary material used to make a product ANSWER: b 160. Which of the following is an administrative expense? a. advertising expense b. rent on office facilities c. salespersons’ salaries d. sales supplies used ANSWER: b 161. Which of the following would be a period cost for a cake factory? a. flour b. baker’s wages c. frosting d. transportation out ANSWER: d 162. Which of the following is a period versus a product cost? a. direct materials used b. factory utilities c. salespersons' commissions d. salary of plant manager ANSWER: c 163. Which of the following is a product versus a period cost? a. depreciation on store equipment b. indirect materials used Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting c. salespersons' commissions d. advertising expense ANSWER: b 164. Which of the following is both a prime cost and a conversion cost for Cupcake Company? a. frosting b. baker’s wages c. sprinkles for decoration (indirect material) d. factory rent ANSWER: b 165. Which of the following is a direct cost for Bartel Corporation, a producer of bar stools for restaurants? a. wages for the bar stool assemblers b. factory supervisor’s salary c. lubricants used on the bar stool manufacturing equipment d. glue used in the assembly of the bar stools ANSWER: a 166. Which of the following is an indirect cost for Bartel Corporation, a producer of bar stools for restaurants? a. wages for the bar stool assemblers b. factory supervisor’s salary c. wood and steel used in the bar stools d. leather used for seat cushions ANSWER: b 167. Which of the following is a period cost for Bartow Corporation, a bicycle manufacturer? a. tires for the bicycles b. factory supervisor’s salary c. electricity costs to run the factory d. accountant salaries ANSWER: d Subjective Short Answer 168. Differentiate between financial and managerial accounting, addressing such issues as users, nature of information, guidelines for preparation, timeliness of reporting, and focus of reporting.

ANSWER: Managerial Accounting Financial Accounting Users Management External users and company management Nature of information Objective and subjective Objective Guidelines for Prepared according to Prepared according to preparation management needs GAAP Timeliness of reporting Prepared at fixed Prepared at fixed intervals and on an as- intervals needed basis Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting Focus of reporting

Company as a whole or Company as a whole as a segment

169. Differentiate between: a. direct materials versus indirect materials b. direct labor versus indirect labor ANSWER: a. Direct materials must become a physical part of the finished product, and their costs must be separately and conveniently traceable through the manufacturing process to finished goods inventory. Examples include wood, leather, steel, etc.

Indirect materials become part of the finished product, but their minor costs cannot conveniently be traced directly to particular finished products. They are included as part of factory overhead. b. Direct labor cost is the compensation of employees who physically convert materials into the company’s products and whose effort can be traced directly to finished goods inventory. Examples include machine operators and assemblers.

Indirect labor is factory labor that is difficult to trace to specific products. Instead, the cost is included in factory overhead. Examples include forklift operators, janitors, and plant managers.

170. Putney Company reports the following information: Sales Direct materials used Depreciation on factory equipment Indirect labor Direct labor Factory rent Factory utilities Sales salaries expense Office salaries expense Indirect materials

$76,500 7,300 4,700 5,900 10,500 4,200 1,200 15,600 8,900 1,200

Compute: a. Product costs b. Period costs ANSWER: a. Product Costs = $7,300 + $4,700 + $5,900 + $10,500 + $4,200 + $1,200 + $1,200 = $35,000 b. Period Costs = $15,600 + $8,900 = $24,500 171. The following information is available for Carter Corporation: 1. Materials inventory decreased $4,000.

2. Materials inventory on December 31 was 50% of materials inventory on January 1.

3. Beginning work in process inventory was $145,000.

4. Ending finished goods inventory was $65,000.

5. Purchases of direct materials were $154,700.

6. Direct materials used were 2.5 times the cost of direct labor.

7. Total manufacturing costs incurred were $246,400, 80% of cost of goods manufactured and $156,000 less than cost of goods sold.

Compute: a. Finished goods inventory on January 1 b. Work in process inventory on December 31 c. Direct labor incurred Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting d. Factory overhead incurred e. Materials inventory on January 1 f. Materials inventory on December 31 g. Direct materials used ANSWER: a. Cost of Goods Sold = $246,400 + $156,000 = $402,400 Cost of Goods Manufactured = $246,400/0.80 = $308,000 Finished Goods Inventory on January 1 = $402,400 + $65,000 – $308,000 = $159,400 b. Work in Process Inventory on December 31 $246,400 + $145,000 – $308,000 = $83,400 c. Direct Labor Incurred = $158,700 ÷ 2.5 = $63,480 d. Factory Overhead Incurred = $246,400 – $158,700 – $63,480 = $24,220 e. Materials Inventory on January 1: X = January 1 Materials Inventory $4,000 = 0.5X X = $8,000 f. Materials Inventory on December 31 = $8,000 – $4,000 = $4,000 g. Direct Materials Used = $8,000 + $154,700 – $4,000 = $158,700 172. Zoe Corporation has the following information for the month of March. Determine the (a) cost of goods manufactured and (b) cost of goods sold.

Cost of materials placed in production Direct labor Factory overhead Work in process, March 1 Work in process, March 31 Finished goods inventory, March 1 Finished goods inventory, March 31 ANSWER: a.

Beginning work in process inventory Direct materials Direct labor Factory overhead Total manufacturing costs incurred Total manufacturing costs Less ending work in process inventory Cost of goods manufactured b.

Finished goods inventory, March 1 Cost of goods manufactured Cost of finished goods available for sale Less finished good inventory, March 31 Cost of goods sold Copyright Cengage Learning. Powered by Cognero.

$69,000 27,000 34,000 15,000 19,500 25,000 23,000 $ 15,000 $69,000 27,000 34,000 130,000 $145,000 (19,500) $125,500 $ 25,000 125,500 $150,500 (23,000) $127,500 Page 28

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Chapter 1: Introduction to Managerial Accounting 173. Sienna Company has the following information for January: Cost of materials used in production Direct labor Factory overhead Work in process inventory, January 1 Work in process inventory, January 31

$20,000 15,000 24,000 2,900 3,500

Determine the cost of goods manufactured.

ANSWER: Beginning work in process inventory Direct materials Direct labor Factory overhead Total manufacturing costs incurred Total manufacturing costs Less ending work in process inventory Cost of goods manufactured

$ 2,900 $20,000 15,000 24,000 59,000 $61,900 (3,500) $58,400

174. Magnus Industries has the following data: Beginning raw materials inventory Materials purchased Ending raw materials inventory

$75,000 40,000 60,000

Determine the cost of raw materials used.

ANSWER: Raw Materials Used = $75,000 + $40,000 – $60,000 = $55,000 175. Watson Company has the following data: Work in process, beginning Work in process, ending Direct labor costs incurred Cost of goods manufactured Factory overhead

$18,000 25,000 5,000 9,000 7,000

Determine the amount of direct materials used.

ANSWER: Direct Materials Used = ($25,000 – $18,000 + $9,000) – ($7,000 + $5,000) = $4,000 176. Laramie Technologies had the following data: Cost of materials used Direct labor costs Factory overhead Work in process, beginning Work in process, ending

$50,000 56,000 28,000 45,000 32,000

Determine the cost of goods manufactured.

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Chapter 1: Introduction to Managerial Accounting ANSWER: Cost of Goods Manufactured = $50,000 + $56,000 + $28,000 + ($45,000 – $32,000) = $147,000 177. Keeton Company had the following data: Cost of materials used Direct labor costs Factory overhead Work in process, beginning Work in process, ending Finished goods, beginning Finished goods, ending

$60,000 58,000 33,000 29,000 18,000 32,000 18,000

Determine the cost of goods sold.

ANSWER: Cost of Goods Sold = $60,000 + $58,000 + $33,000 + ($29,000 – $18,000) + ($32,000 – $18,000) = $176,000 178. Zoe Corporation has the following information for the month of March: Purchases Materials inventory, March 1 Materials inventory, March 31 Direct labor Factory overhead Work in process inventory, March 1 Work in process inventory, March 31 Finished goods inventory, March 1 Finished goods inventory, March 31 Sales Sales and administrative expenses

$ 92,000 6,000 8,000 25,000 37,000 22,000 23,500 21,000 30,000 257,000 79,000

Prepare (a) a statement of cost of goods manufactured, (b) an income statement for the month ended March 31, and (c) the "Inventory" section of the balance sheet.

ANSWER: a.

Zoe Corporation Statement of Cost of Goods Manufactured For the Month Ended March 31 Beginning work in process inventory, March 1 Direct materials: Beginning materials inventory Purchases Cost of materials for use Less ending materials inventory Cost of direct materials used Direct labor Factory overhead Total manufacturing costs incurred Total manufacturing costs Less ending work in process inventory Copyright Cengage Learning. Powered by Cognero.

$ 22,000 $ 6,000 92,000 $98,000 (8,000) $90,000 25,000 37,000 152,000 $174,000 (23,500) Page 30

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Chapter 1: Introduction to Managerial Accounting $150,500

Cost of goods manufactured b.

Zoe Corporation Income Statement For the Month Ended March 31 Sales Cost of goods sold: Beginning finished goods inventory Plus cost of goods manufactured Cost of finished goods available for sale Less ending finished goods inventory Cost of goods sold Gross profit Operating expenses: Sales and administrative expenses Net income c.

Inventories: Finished goods Work in process Materials Total inventories

$257,000 $ 21,000 150,500 $171,500 (30,000) (141,500) $115,500 (79,000) $ 36,500

$30,000 23,500 8,000 $61,500

179. The following data (in thousands of dollars) have been taken from the accounting records of Rayburn Corporation for the current year.

Sales Selling expenses Manufacturing overhead Direct labor Administrative expenses Purchases of direct materials Finished goods inventory, beginning Finished goods inventory, ending Direct materials inventory, beginning Direct materials inventory, ending Work in process inventory, beginning Work in process inventory, ending

$1,980 280 460 400 300 240 240 320 80 140 140 100

a. What was the cost of the direct materials used in production during the year? b. What was the cost of goods manufactured for the year? c. What was the cost of goods sold for the year? d. What was the net income for the year?

Present all calculations in thousands of dollars.

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Chapter 1: Introduction to Managerial Accounting ANSWER:

a. The cost of the direct materials used in production during the year is determined as follows: Direct materials inventory, beginning Purchases of direct materials Less direct materials inventory, ending Direct materials used in production

$ 80 240 (140) $180

b. The cost of goods manufactured (finished) during the year is determined as follows: Raw materials used in production Direct labor Manufacturing overhead Total manufacturing costs Plus: work in process inventory, beginning Total manufacturing costs Less: work in process inventory, ending Cost of goods manufactured

$ 180 400 460 $1,040 140 $1,180 (100) $1,080

c. The cost of goods sold for the year is determined as follows: Finished goods inventory, beginning Cost of goods manufactured Less: finished goods inventory, ending Cost of goods sold

$ 240 1,080 (320) $1,000

d. Net income for the year is determined as follows: Sales Cost of goods sold Gross profit Operating expenses: Administrative expenses Selling expenses Net income

$ 1,980 (1,000) $ 980 $300 280 $

(580) 400

180. Allen Company used $71,000 of direct materials and incurred $37,000 of direct labor costs during the current year. Indirect labor amounted to $2,700, while indirect materials used totaled $1,600. Other operating costs pertaining to the factory included utilities of $3,100, maintenance of $4,500, supplies of $1,800, depreciation of $7,900, and property taxes of $2,600. There was no beginning or ending finished goods inventory, but work in process inventory began the year with a $5,500 balance and ended the year with a $7,500 balance.

Prepare a statement of cost of goods manufactured.

ANSWER: Allen Company Statement of Cost of Goods Manufactured For the Year Ended December 31 Beginning work in process inventory $ 5,500 Direct materials $71,000 Direct labor 37,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting Factory overhead: Indirect labor Indirect materials Utilities Maintenance Supplies Depreciation Property taxes Total manufacturing costs incurred Total manufacturing costs Less ending work in process inventory Cost of goods manufactured

$2,700 1,600 3,100 4,500 1,800 7,900 2,600 24,200 132,200 $137,700 (7,500) $130,200

181. Davis Manufacturing Company had the following data: Accounts receivable Materials inventory Work in process inventory Finished goods inventory

January 1 $27,000 22,500 70,200 3,000

December 31 $33,000 6,000 48,000 15,000

Collections on account were $625,000.

Cost of goods sold was 68% of sales.

Direct materials purchased amounted to $90,000.

Factory overhead was 300% of the cost of direct labor.

Compute: a. Sales revenue (all sales were on account) b. Cost of goods sold c. Cost of goods manufactured d. Direct materials used e. Direct labor incurred f. Factory overhead incurred ANSWER: a. Sales Revenue = $33,000 + $625,000 – $27,000 = $631,000 b. Cost of Goods Sold = $631,000 × 0.68 = $429,080 c. Cost of Goods Manufactured = $15,000 + $429,080 – $3,000 = $441,080 d. Direct Materials Used = $22,500 + $90,000 – $6,000 = $106,500 e. Direct Labor Incurred = $441,080 + $48,000 – $70,200 = $418,880 Total Manufacturing Costs Added $418,880 – $106,500 = $312,380 $312,380 = Factory Overhead + Direct Labor Let X = Direct Labor 3X + X = $312,380 4X = $312,380 Direct Labor = $78,095 f. Factory Overhead Incurred = $78,095 × 3 = $234,285 Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting 182. Taylor Industries had a fire and some of its accounting records were destroyed. Available information is presented below for the year ended December 31.

Materials inventory, December 31 Direct materials purchased Direct materials used Cost of goods manufactured

$ 15,000 28,000 22,900 135,000

Additional information: Factory overhead is 150% of direct labor cost.

Finished goods inventory decreased by $18,000 during the year.

Work in process inventory increased by $12,000 during the year.

Determine: a. Materials inventory, January 1 b. Direct labor cost c. Factory overhead incurred d. Cost of goods sold ANSWER: a. Materials Inventory, January 1 = $15,000 + $22,900 – $28,000 = $9,900 b. Direct Labor Cost = $135,000 + $12,000 = $147,000 Total Manufacturing Costs $147,000 – $22,900 = $124,100 Direct Labor and Factory Overhead Let X = Direct Labor Cost X + 1.5X = $124,100 2.5X = $124,100 Direct Labor = $49,640 c. Factory Overhead Incurred = $49,640 × 1.5 = $74,460 d. Cost of Goods Sold = $135,000 + $18,000 = $153,000 Essay 183. What is strategic planning? How does it overlap with operational planning?

ANSWER: Strategic planning is developing long-term objectives for the company. For example, a company might set an objective of increasing its market share by developing new products or expanding into new markets. Strategic planning normally involves a time horizon of five to ten years. To achieve its long-term, strategic objectives, management sets a variety of short-term objectives and actions. The process of developing these short-term objectives and actions is often referred to as operational planning. For example, to develop new products, a company might increase its annual spending on research and development.

184. Differentiate between verticals and horizontals.

ANSWER: Verticals are sometimes referred to as business units, because they are often structured as separate businesses within the parent company. These verticals normally develop products that are sold directly to customers.

Verticals prepare their own income statements, also referred to as profit and loss (P&L) statements, which report their ongoing performance and profitability.

Horizontals are departments within a company that are not responsible for developing products. The role of horizontals is to provide services to the various verticals and other horizontals. As such, horizontals do not report profit and loss (P&L) statements. Marketing, Human Resources, Information Technology, Legal, Copyright Cengage Learning. Powered by Cognero.

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Chapter 1: Introduction to Managerial Accounting Facilities, Accounting, and Finance are normally horizontal departments within a company.

185. Differentiate between period and product costs and include examples of each type of cost.

ANSWER: Period costs consist of selling and administrative expenses. Selling expenses are incurred in marketing the product and delivering the product to customers. Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions. Selling expenses include advertising expenses, sales salaries expense, and commissions expense. Administrative expenses include office salaries expense, office supplies expense, and depreciation expense of the office building and equipment.

Product costs consist of manufacturing costs: direct materials, direct labor, and factory overhead. Direct materials are the materials that go into the production of the product. The direct materials for a bakery include flour, sugar, eggs, and shortening. Direct labor costs are the wages or salaries of the employees that are actually assembling the product. Factory overhead would include the salaries of production supervisors, depreciation, insurance, and taxes on the manufacturing building and equipment.

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Chapter 2: Job Order Costing True / False 1. Cost systems measure, record, and report product costs. a. True b. False ANSWER: True 2. Job order costing provides for a separate record of the cost of each particular quantity of product that passes through the factory. a. True b. False ANSWER: True 3. Process costing provides for a separate record of the cost of each particular quantity of product that passes through the factory. a. True b. False ANSWER: False 4. Process costing provides product costs for each of the departments or processes within the factory. a. True b. False ANSWER: True 5. Process costing is best used by companies that manufacture units of product that are indistinguishable from each other and are manufactured using a continuous production process. a. True b. False ANSWER: True 6. Process costing is appropriate where few products are manufactured, and each product is made to customers' specifications. a. True b. False ANSWER: False 7. Job order costing would be appropriate for a crude oil refining business. a. True b. False ANSWER: False 8. Perpetual inventory controlling accounts and subsidiary ledgers are maintained for materials, work in process, and finished goods in job order costing. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing ANSWER: True 9. When goods are sold, their costs are transferred from Work in Process to Finished Goods. a. True b. False ANSWER: False 10. The materials requisition serves as the source document for debiting the accounts in the materials ledger. a. True b. False ANSWER: False 11. Materials are transferred from the storeroom to the factory in response to materials requisitions. a. True b. False ANSWER: True 12. The document that serves as the basis for recording direct labor on a job cost sheet is the time ticket. a. True b. False ANSWER: True 13. Depreciation expense on factory equipment is part of factory overhead cost. a. True b. False ANSWER: True 14. Factory overhead is applied to production using a predetermined overhead rate. a. True b. False ANSWER: True 15. If factory overhead applied exceeds the actual costs, the factory overhead account will have a credit balance. a. True b. False ANSWER: True 16. If factory overhead applied exceeds the actual costs, overhead is said to be underapplied. a. True b. False ANSWER: False 17. If the underapplied factory overhead amount is immaterial, it is transferred to Cost of Goods Sold at the end of the fiscal year. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing b. False ANSWER: True 18. In job order costing, each account in the work in process subsidiary ledger is called a job cost sheet. a. True b. False ANSWER: True 19. In job order costing, the finished goods account is the controlling account for the factory overhead ledger. a. True b. False ANSWER: False 20. The inventory accounts generally maintained by a manufacturing firm are only Finished Goods and Materials. a. True b. False ANSWER: False 21. Generally accepted accounting principles require companies to use only one factory overhead rate for product costing. a. True b. False ANSWER: False 22. Activity-based costing is a method of accumulating and allocating factory overhead costs for each type of factory overhead activity. a. True b. False ANSWER: True 23. Interim financial statements for a manufacturing business would report overapplied factory overhead as a deferred item on the balance sheet. a. True b. False ANSWER: True 24. The debit to Factory Overhead for the cost of indirect materials is obtained from the summary of the materials requisitions. a. True b. False ANSWER: True 25. Indirect materials are any materials needed to make a product that can be directly traced to the product. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing 26. Nonmanufacturing costs are generally classified into two categories: selling and administrative. a. True b. False ANSWER: True 27. The current year's advertising costs are normally considered period costs. a. True b. False ANSWER: True 28. Direct labor cost is an example of a period cost. a. True b. False ANSWER: False 29. A manufacturing business reports just two types of inventory on its balance sheet: work in process inventory and finished goods inventory. a. True b. False ANSWER: False 30. On the balance sheet for a manufacturing business, the cost of direct materials, direct labor, and factory overhead, which have entered into the manufacturing process but are associated with products that have not been finished, are reported as direct materials inventory. a. True b. False ANSWER: False 31. As product costs are incurred in the manufacturing process, they are accounted for as assets and reported on the balance sheet as inventory. a. True b. False ANSWER: True 32. A receiving report is prepared when purchased materials are first received by the manufacturing department. a. True b. False ANSWER: False 33. Period costs are costs that are incurred for the production requirements of a certain period. a. True b. False ANSWER: False

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Chapter 2: Job Order Costing 34. Job order costing is inappropriate for service organizations. a. True b. False ANSWER: False 35. A law firm would use job order costing to accumulate all of the costs associated with a particular client engagement, such as lawyer time, copying charges, filing fees, and overhead. a. True b. False ANSWER: True 36. Job order costing can be used only for companies that manufacture a product. a. True b. False ANSWER: False 37. The direct labor and overhead costs of providing services to clients are accumulated in a work in process account. a. True b. False ANSWER: True 38. In a job order costing system for a service business, materials costs are normally included as part of overhead. a. True b. False ANSWER: True 39. A service organization will not use job order costing because it has no direct materials. a. True b. False ANSWER: False 40. Using job order costing, service organizations are able to bill customers on a weekly or monthly basis, even when the job has not been completed. a. True b. False ANSWER: True 41. Job order costing can be used to compare unit costs of similar jobs to determine if costs are staying within expected ranges. a. True b. False ANSWER: True 42. Job cost sheets can provide information to managers on unit cost trends, the cost impact of continuous improvement in the manufacturing process, the cost impact of materials changes, and the cost impact of direct materials price or direct Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing labor rate changes over time. a. True b. False ANSWER: True 43. Information about costs developed through a job order costing system cannot be used to evaluate an organization’s cost performance. a. True b. False ANSWER: False 44. Hybrid costing would be appropriate for a company that manufactures classes of products that are unique from one another but share a variety of common components. a. True b. False ANSWER: True Multiple Choice 45. Which of the following are the two main types of costing systems for manufacturing operations? a. process costing and operations costing b. job order costing and process costing c. job order costing and hybrid costing d. process costing and hybrid costing ANSWER: b 46. Which of the following would most likely use job order costing? a. paper mill b. swimming pool installer c. company that manufactures chlorine for swimming pools d. oil refinery ANSWER: b 47. Which of the following would most likely use process costing? a. custom furniture manufacturer b. auto body repair shop c. law firm d. lawn fertilizer manufacturer ANSWER: d 48. Which of the following systems provides for a separate record of the cost of each particular quantity of product that passes through the factory? a. job order costing b. general costing c. replacement costing Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing d. process costing ANSWER: a 49. For which of the following businesses would job order costing be appropriate? a. canned soup processor b. oil refinery c. lumber mill d. hospital ANSWER: d 50. For which of the following businesses would process costing be appropriate? a. custom cabinet maker b. landscaper c. paper mill d. catering firm ANSWER: c 51. Which of the following is a characteristic of process costing? a. It accumulates costs for each manufacturing department within the factory. b. It provides a separate record for the cost of each quantity of product that passes through the factory. c. It is best suited for industries that manufacture custom goods. d. It uses only one work in process account.

ANSWER: a 52. A manufacturer of which of the following products would most likely use job order costing? a. cell phone b. highlighter pen c. graduation invitation d. recliner ANSWER: c 53. Another name for hybrid costing is a. job order costing b. operations costing c. process costing d. inventory tracking system ANSWER: b 54. Which of the following costs is included in finished goods inventory? a. direct labor b. factory overhead c. all of these choices d. direct materials ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing 55. Which of the following is the correct flow of manufacturing costs? a. raw materials, work in process, finished goods, cost of goods sold b. raw materials, finished goods, cost of goods sold, work in process c. work in process, finished goods, raw materials, cost of goods sold d. cost of goods sold, raw materials, work in process, finished goods ANSWER: a 56. In job order costing, on which of the following would labor costs be initially recorded? a. clock cards b. job cost sheets c. time tickets d. payroll register ANSWER: c 57. Thomlin Company forecasts that total factory overhead for the current year will be $15,500,000 with 250,000 total machine hours. Year to date, the actual factory overhead is $16,000,000 and the actual machine hours are 330,000 hours.

The predetermined factory overhead rate based on machine hours is a. $48 per machine hour b. $62 per machine hour c. $45 per machine hour d. $50 per machine hour ANSWER: b 58. Thomlin Company forecasts that total factory overhead for the current year will be $15,000,000 with 300,000 total machine hours. Year to date, the actual factory overhead is $16,000,000 and the actual machine hours are 330,000 hours.

If Thomlin Company uses a predetermined overhead rate based on machine hours for applying overhead, as of this point in time (year to date), the overhead is a. $1,000,000 overapplied b. $1,000,000 underapplied c. $500,000 overapplied d. $500,000 underapplied ANSWER: c 59. At the end of the year, factory overhead applied was $42,000,000. Actual factory overhead was $40,300,000. Closing over/underapplied overhead into Cost of Goods Sold would cause net income to a. increase by $1,700,000 b. decrease by $1,700,000 c. increase by $3,400,000 d. decrease by $3,400,000 ANSWER: a 60. Which of the following is a period cost? a. depreciation on factory lunchroom furniture b. salary of telephone receptionist in the sales office Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing c. salary of a security guard for the factory parking lot d. computer chips used by a computer manufacturer ANSWER: b 61. Which of the following is a product cost? a. salary of a sales manager b. advertising for a particular product c. drill bits for a drill press used in the plant assembly area d. salary of the company receptionist ANSWER: c 62. The document authorizing the issuance of materials from the storeroom is a a. materials requisition b. purchase requisition c. receiving report d. purchase order ANSWER: a 63. The source document for the data for debiting Work in Process for direct materials is a a. purchase order b. purchase requisition c. materials requisition d. receiving report ANSWER: c 64. In job order costing, the journal entry for the flow of direct materials into production consists of a a. debit to Work in Process and a credit to Materials b. debit to Materials and a credit to Work in Process c. debit to Factory Overhead and a credit to Materials d. debit to Work in Process and a credit to Supplies ANSWER: a 65. A summary of the materials requisitions completed during a period serves as the basis for transferring the cost of the materials from the controlling account in the general ledger to the controlling accounts for a. Work in Process and Cost of Goods Sold b. Work in Process and Factory Overhead c. Finished Goods and Cost of Goods Sold d. Work in Process and Finished Goods ANSWER: b 66. In job order costing, when goods that have been ordered are received, the receiving department personnel count the goods, inspect the goods, and complete a a. purchase order b. sales invoice Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing c. receiving report d. purchase requisition ANSWER: c 67. In job order costing, the amount of time spent by an employee on an individual job is recorded on a(n) a. pay stub b. in-and-out card c. time ticket d. employees' earnings record ANSWER: c 68. The basis for the journal entry recording direct labor for the period is a summary of the a. job order cost sheets b. time tickets c. employees' earnings records d. clock cards ANSWER: b 69. In job order costing, the journal entry for the flow of direct labor costs into production consists of a a. debit to Factory Overhead and a credit to Work in Process b. debit to Finished Goods and a credit to Wages Payable c. debit to Work in Process and a credit to Wages Payable d. debit to Factory Overhead and a credit to Wages Payable ANSWER: c 70. At the end of July, the first month of the current fiscal year, the factory overhead account had a debit balance. Which of the following describes the nature of this balance and how it would be reported on the interim balance sheet? a. overapplied, deferred credit b. underapplied, deferred debit c. underapplied, deferred credit d. overapplied, deferred debit ANSWER: b 71. At the end of the fiscal year, the balance in Factory Overhead is small. The balance will be a. transferred to Work in Process b. transferred to Cost of Goods Sold c. transferred to Finished Goods d. allocated between Work in Process and Finished Goods ANSWER: b 72. Selected accounts with amounts omitted are as follows: Aug. 1 Balance 31 Direct materials

Work in Process 275,000 Aug. 31 X

Copyright Cengage Learning. Powered by Cognero.

Goods finished

1,030,000 Page 10

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Chapter 2: Job Order Costing 31 Direct labor 31 Factory overhead Aug. 1–31 Costs incurred

450,000 X Factory Overhead 145,000 Aug. 1 Balance 31 Applied (30% of direct labor cost)

15,000 X

If the balance of Work in Process on August 31 is $220,000, what was the amount debited to Work in Process for direct materials in August? a. $390,000 b. $170,000 c. $525,000 d. $580,000 ANSWER: a 73. Selected accounts with some amounts omitted are as follows: Aug. 1 Balance 31 Direct materials 31 Direct labor 31 Factory overhead

Aug. 1–31 Costs incurred

Work in Process 275,000 Aug. 31 Goods finished X 450,000 X Factory Overhead Aug. 145,000 Balance 1 31

1,030,000

15,000

Applied

X

If the balance of Work in Process on August 31 is $220,000, what was the amount debited to Work in Process for factory overhead in August, assuming a factory overhead rate of 30% of direct labor costs? a. $135,000 b. $10,000 c. $120,000 d. $70,000 ANSWER: a 74. Selected accounts with some amounts omitted are as follows: Oct. 1 31 31 31 Oct. 1 31

Balance Direct materials Direct labor Factory overhead

Work in Process 20,000 Oct. 31 96,700 201,000 X

Balance Goods finished

Finished Goods 52,000 360,000

Goods finished

X

If the balance of Work in Process on October 31 is $21,000, what was the amount of factory overhead applied in October? a. $63,300 Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing b. $21,300 c. $42,300 d. $11,300 ANSWER: a 75. If the amount of factory overhead cost incurred exceeds the amount applied, the factory overhead account will have a a. debit balance and be underapplied b. credit balance and be underapplied c. credit balance and be overapplied d. debit balance and be overapplied ANSWER: a 76. Journalizing the entry for the indirect labor costs incurred for general factory use would include a debit to a. Factory Overhead b. Wages Payable c. Wages Expense d. Cost of Goods Sold ANSWER: a 77. Journalizing the entry for the application of factory overhead costs to jobs would include a credit to a. Factory Overhead b. Wages Payable c. Work in Process d. Cost of Goods Sold ANSWER: a 78. Journalizing the entry for a job completed would include a debit to a. Factory Overhead b. Finished Goods c. Work in Process d. Cost of Goods Sold ANSWER: b 79. Journalizing the entry for a job completed would include a credit to a. Factory Overhead b. Finished Goods c. Work in Process d. Cost of Goods Sold ANSWER: c 80. Journalizing the entries for jobs shipped and customers billed would include a debit to a. Accounts Payable b. Cash c. Finished Goods Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing d. Cost of Goods Sold ANSWER: d 81. Journalizing the entries for jobs shipped and customers billed would include a credit to a. Accounts Payable b. Cash c. Finished Goods d. Cost of Goods Sold ANSWER: c 82. The finished goods account is the controlling account for the a. cost ledger b. materials ledger c. work in process ledger d. stock ledger ANSWER: d 83. The controlling account for the job cost sheets is a. Finished Goods b. Materials c. Work in Process d. Cost of Goods Sold ANSWER: c 84. Reynolds Manufacturers Inc. has estimated total factory overhead costs of $95,000 and expected direct labor hours of 9,500 for the current fiscal year. If Job 117 incurs 2,300 direct labor hours, Work in Process will be debited and Factory Overhead will be credited for a. $21,850 b. $2,300 c. $95,000 d. $23,000 ANSWER: d 85. A widely used activity base for developing factory overhead rates in highly automated settings is a. direct labor hours b. direct labor dollars c. direct materials d. machine hours ANSWER: d 86. When Job 117 was completed, direct materials totaled $4,400; direct labor, $5,600; and factory overhead, $2,400. A total of 1,000 units were produced at a per-unit cost of a. $12,400 b. $1,240 Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing c. $124 d. $12.40 ANSWER: d 87. The journal entries for the cost and sale of a finished good on account are a. debit Cost of Goods Sold, credit Finished Goods; debit Accounts Payable, credit Sales b. debit Cost of Goods Sold, credit Finished Goods; debit Accounts Receivable, credit Sales c. debit Sales Expense, credit Finished Goods; debit Cash, credit Accounts Receivable d. debit Work in Process, credit Finished Goods; debit Accounts Receivable, credit Sales ANSWER: b 88. Which of the following would be an inappropriate activity base for allocating factory overhead costs? a. salaries of supervisors b. direct labor hours c. machine hours d. direct labor cost ANSWER: a 89. Materials purchased on account during the month totaled $190,000. Materials requisitioned and placed in production totaled $165,000. The journal entry for the materials purchased on account is a. Materials 165,000 Accounts Payable 165,000 b. Materials 190,000 Accounts Payable 190,000 c. Materials 190,000 Cash 190,000 d. Accounts Payable 190,000 Materials 190,000 ANSWER: b 90. Materials purchased on account during the month amounted to $190,000. Materials requisitioned and placed in production totaled $156,000. The journal entry for the materials requisitioned by the production department is a. Materials 156,000 Work in Process 156,000 b. Work in Process 190,000 Materials 190,000 c. Work in Process 156,000 Materials 156,000 d. Work in Process 156,000 Cash 156,000 ANSWER: c 91. During the period, labor costs incurred on account amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use (indirect labor). In addition, factory overhead charged to production was $32,000. The journal entry for the direct labor costs is a. Work in Process 150,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing Wages Payable b. Work in Process Wages Payable c. Wages Payable Work in Process d. Wages Payable Work in Process ANSWER: a

150,000 175,000 175,000 175,000 175,000 150,000 150,000

92. During the period, labor costs incurred on account amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use. Factory overhead applied to production was $32,000. The journal entry for the actual factory overhead costs incurred is a. Accounts Payable 25,000 Factory Overhead 25,000 b. Factory Overhead 32,000 Accounts Payable 32,000 c. Work in Process 25,000 Wages Payable 25,000 d. Factory Overhead 25,000 Wages Payable 25,000 ANSWER: d 93. During the period, labor costs incurred on account amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use. Factory overhead applied to production was $23,000. The journal entry for the factory overhead applied to production is a. Work in Process 25,000 Factory Overhead 25,000 b. Factory Overhead 23,000 Work in Process 23,000 c. Work in Process 23,000 Factory Overhead 23,000 d. Factory Overhead 25,000 Accounts Payable 25,000 ANSWER: c 94. The cost of production of completed and transferred goods during the period amounted to $540,000, and the finished products shipped to customers had total production costs of $375,000. The journal entry for the transfer of costs from work in process to finished goods is a. Finished Goods 375,000 Work in Process 375,000 b. Finished Goods 540,000 Work in Process 540,000 c. Work in Process 540,000 Finished Goods 540,000 d. Work in Process 375,000 Finished Goods 375,000 ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing 95. The cost of production of completed and transferred goods during the period amounted to $540,000, and the finished products shipped to customers had production costs of $375,000. The journal entry for the transfer of costs from finished goods to cost of goods sold is a. Finished Goods 540,000 Cost of Goods Sold 540,000 b. Finished Goods 375,000 Cost of Goods Sold 375,000 c. Cost of Goods Sold 375,000 Finished Goods 375,000 d. Cost of Goods Sold 540,000 Finished Goods 540,000 ANSWER: c 96. Costs that are incurred in generating revenues during the period, but not involved in the manufacturing process, are referred to as a. period costs b. conversion costs c. factory overhead costs d. product costs ANSWER: a 97. Costs that are treated as assets until the product is sold are a. product costs b. period costs c. administrative expenses d. selling expenses ANSWER: a 98. The period costs of a textbook printer would include a. wages of a press operator b. factory insurance costs c. CEO salary expense d. paper costs ANSWER: c 99. Which of the following types of inventories does a manufacturing business report on the balance sheet? a. finished goods inventory and work in process inventory only b. direct materials inventory and work in process inventory only c. direct materials inventory, work in process inventory, and finished goods inventory d. direct materials inventory and finished goods inventory only ANSWER: c 100. For a manufacturing business, products that are in the process of being manufactured are referred to as a. supplies inventory Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing b. work in process inventory c. finished goods inventory d. direct materials inventory ANSWER: b 101. The journal entry for the purchase of $45,000 of raw materials is a. Materials 45,000 Accounts Receivable 45,000 b. Materials 45,000 Accounts Payable 45,000 c. Inventory 45,000 Accounts Receivable 45,000 d. Inventory 45,000 Cash 45,000 ANSWER: b 102. The journal entry for the transfer of 1,600 units of Part No. 1177, with a value of $2.50 each, to work in process is a. Materials 4,000 Work in Process 4,000 b. Work in Process 4,000 Factory Overhead 4,000 c. Work in Process 4,000 Materials 4,000 d. Work in Process 4,000 Cash 4,000 ANSWER: c 103. Which of the following represents the factory overhead applied to a product? a. predetermined factory overhead rate times estimated activity base b. actual factory overhead rate times estimated activity base c. predetermined factory overhead rate times actual activity base d. actual factory overhead rate times actual activity base ANSWER: c 104. Which of the following is the formula to compute the predetermined factory overhead rate? a. estimated total factory overhead costs divided by estimated activity base b. actual total factory overhead costs divided by estimated activity base c. estimated total factory overhead costs divided by actual activity base d. actual total factory overhead costs divided by actual activity base ANSWER: a 105. Aspen Technologies has the following budget data: Estimated direct labor hours Estimated direct labor dollars Estimated factory overhead costs Copyright Cengage Learning. Powered by Cognero.

15,000 $90,000 $198,000 Page 17

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Chapter 2: Job Order Costing If factory overhead is to be applied based on direct labor hours, the predetermined factory overhead rate is a. $7.50 b. $13.20 c. $2.20 d. $16.50 ANSWER: b 106. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that total factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual factory overhead costs incurred were $377,200, and actual direct labor hours were 36,000. What is the amount of over- or underapplied factory overhead at the end of the year? a. $6,000 overapplied b. $6,000 underapplied c. $54,800 overapplied d. $54,800 underapplied ANSWER: c 107. The following budget data are available for Sharp Company: Estimated direct labor hours Estimated direct labor dollars Estimated factory overhead costs Actual direct labor hours Actual direct labor dollars Actual factory overhead costs

12,000 $90,000 $179,000 11,500 $92,000 $180,000

If factory overhead is to be applied based on direct labor dollars, the predetermined factory overhead rate is a. 199% b. 196% c. $14.92 d. $15.65 ANSWER: a 108. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that total factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual factory overhead costs incurred were $377,200, and actual direct labor hours were 36,000. What is the predetermined factory overhead rate per direct labor hour? a. $12.00 b. $10.00 c. $12.57 d. $10.48 ANSWER: a 109. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that total factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual factory overhead costs incurred were $377,200, and actual direct labor hours were 36,000. The journal entry to apply the factory Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing overhead costs for the year would include a a. debit to Factory Overhead for $360,000 b. credit to Factory Overhead for $432,000 c. debit to Factory Overhead for $377,200 d. credit to Factory Overhead for $360,000 ANSWER: b 110. The following budget data are available for Sharp Company: Estimated direct labor hours Estimated direct labor dollars Estimated factory overhead costs Actual direct labor hours Actual direct labor dollars Actual factory overhead costs

12,000 $90,000 $180,000 11,500 $92,000 $181,000

If factory overhead is applied based on direct labor hours, the amount of overhead to be applied is a. $180,000 b. $181,000 c. $172,500 d. $184,000 ANSWER: c Adams Company is a manufacturing company that has worked on several production jobs during the first quarter of the year. The jobs for the quarter are as follows: Job 356 Job 357 Job 358 Job 359 Job 360

Balance $ 450 1,235 378 689 456

Jobs 356, 357, 358, and 359 were completed. Jobs 356 and 357 were sold at a profit of $500 on each job.

111. What is the ending balance of Work in Process for Adams Company at the end of the first quarter? a. $0 b. $456 c. $3,208 d. $2,752 ANSWER: b 112. What is the ending balance of Cost of Goods Sold for Adams Company at the end of the first quarter? a. $456 b. $2,685 c. $1,685 d. $685 Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing ANSWER: c 113. What is the ending balance of Finished Goods for Adams Company at the end of the first quarter? a. $456 b. $1,067 c. $1,685 d. $2,752 ANSWER: b 114. What is the balance of Sales for Adams Company at the end of the first quarter? a. $1,685 b. $2,685 c. $1,000 d. $685 ANSWER: b 115. What is the gross profit for Adams Company at the end of the first quarter? a. $1,685 b. $2,685 c. $1,000 d. $685 ANSWER: c 116. A separate account for each material is found in a a. general ledger b. materials ledger c. receiving report d. job cost sheet ANSWER: b 117. The materials requisition is used to a. release materials from the storeroom to the factory b. release finished goods to the Shipping Department c. record the acquisition of materials from a vendor d. record and electronically transmit materials data in place of a receiving report ANSWER: a 118. Period costs are a. found on the balance sheet b. not involved in the production process c. classified as direct labor, direct materials, or factory overhead d. found on the job order cost sheets ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing 119. Cavy Company estimates that the total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. The machine hours for the month of April for all of the jobs were 4,780. If the actual factory overhead for April totaled $141,800, determine the over- or underapplied amount for the month. a. $7,575 underapplied b. $35,220 underapplied c. $7,575 overapplied d. $35,220 overapplied ANSWER: c 120. Period costs are classified as either a. selling expenses or production expenses b. administrative expenses or production expenses c. selling expenses or administrative expenses d. general expenses or selling expenses ANSWER: c 121. Winston Company estimates that the total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours.

The total machine hours for the year were 54,300. The actual factory overhead for the year was $1,375,000. Determine the over- or underapplied amount for the year. a. $17,500 overapplied b. $17,500 underapplied c. $118,250 overapplied d. $118,250 underapplied ANSWER: b 122. Sanders Inc. has applied $567,988 of factory overhead to jobs. Actual factory overhead at the end of the year is $575,000. The adjustment for over- or underapplied factory overhead is a. $7,012 overapplied, increase Cost of Goods Sold b. $7,012 underapplied, increase Cost of Goods Sold c. $7,012 overapplied, decrease Cost of Goods Sold d. $7,012 underapplied, decrease Cost of Goods Sold ANSWER: b 123. Which of the following statements is false regarding product costs? a. Product costs are found on the balance sheet until they are sold. b. Product costs consist of direct labor, direct materials, and factory overhead. c. Product costs can be found in three accounts on the balance sheet. d. Product costs include sales and administrative expenses.

ANSWER: d 124. When a service business uses job order costing, the details concerning the costs incurred for clients are accumulated in a work in process account and supported by a a. stock ledger Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing b. materials ledger c. cost ledger d. creditors ledger ANSWER: c 125. Each document in the cost ledger of a service business is called a a. finished goods sheet b. stock record c. materials requisition d. job cost sheet ANSWER: d 126. Which of the following would be missing in the accounting system of a service provider? a. cost ledger b. finished goods ledger c. deferred revenue account d. job cost sheets ANSWER: b 127. A service provider and a manufacturer both use job order costing. Which of the following entries would only be found on the books of the manufacturer? a. a debit to Work in Process and a credit to Materials b. a debit to Work in Process and a credit to Wages Payable c. a debit to Work in Process and a credit to Overhead d. a debit to Cost of Services and a credit to Work in Process ANSWER: a 128. In a job order costing system used by a service business, which of the following items would normally be included as part of overhead? a. materials and supplies b. materials and direct labor c. direct labor and supplies d. administrative expenses and supervisor salaries ANSWER: a 129. The direct labor and overhead costs of providing services to clients are accumulated in a. Finished Services Expense b. Work in Process c. Administrative Salaries Expense d. Overhead ANSWER: b 130. When a job is completed in a service organization that uses job order costing, the job costs are transferred to the a. work in process account Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing b. cost of services account c. finished goods account d. cost of goods sold account ANSWER: b 131. A difference in quantity of materials used on two comparable jobs may be caused by a. inadequately trained employees b. poor quality materials c. incorrect instructions attached to the job d. all of these choices ANSWER: d 132. The following data were compiled from job cost sheets for similar products: Direct Labor Date Job Direct Rate Completed No. Count Labor Hours per Hour May 4 Job 108 10 10 $20.00 May 20 Job 120 20 18 20.00 June 4 Job 160 16 13 20.00 June 30 Job 200 18 14 20.00 July 10 Job 218 28 22 20.00 July 18 Job 230 30 23 20.00

Total Direct Labor Cost $200.00 360.00 260.00 280.00 440.00 460.00

Direct Labor Cost per Unit $20.00 18.00 16.25 15.56 15.71 15.33

Direct Labor Hours per Unit 1.00 0.90 0.81 0.78 0.79 0.77

Based on the trends you can observe in the data, which of the following is likely true? a. Production processes are becoming more efficient. b. Increased production efficiencies are exactly offsetting increased labor costs. c. Increased labor costs are outweighing increases in production efficiencies. d. In the wake of increasing labor costs, management needs to address production inefficiencies.

ANSWER: a 133. When applied factory overhead is more than actual factory overhead, the result is called a. unbalanced factory overhead b. underapplied factory overhead c. overapplied factory overhead d. unreconciled factory overhead ANSWER: c 134. Which of the following is typically used by companies that make custom products? a. job order costing b. process costing c. hybrid costing d. operations costing Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing ANSWER: a 135. Which of the following is typically used by companies whose products are indistinguishable from each other? a. job order costing b. process costing c. hybrid costing d. operations costing ANSWER: b 136. When applied factory overhead is less than actual factory overhead, the result is called a. unbalanced factory overhead b. underapplied factory overhead c. overapplied factory overhead d. unreconciled factory overhead ANSWER: b 137. Which of the following is a product cost that is included in factory overhead? a. factory depreciation b. machine operator's wages c. salespersons' commissions d. wood ANSWER: a 138. Which of the following is a product cost that is included in direct labor? a. factory supervisor’s salary b. president’s salary c. salespersons' commissions d. assembler’s wages ANSWER: d 139. Which of the following is a product cost that is included in direct materials? a. office supplies b. machine operator's wages c. plastic parts d. maintenance supplies ANSWER: c 140. Which of the following describes cost allocation? a. process by which factory overhead is assigned to a cost object b. serves as the basis for recording direct labor on a job cost sheet c. serves as the basis for recording materials used d. completed when materials that have been ordered are received and inspected ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing 141. Which of the following describes time tickets? a. make up the work in process subsidiary ledger b. serve as the basis for recording direct labor on a job cost sheet c. serves as the basis for recording materials used d. completed when materials that have been ordered are received and inspected ANSWER: c 142. The salary of the director of internal auditing would be classified as a a. product cost—direct labor b. product cost—factory overhead c. period cost—selling expense d. period cost—administrative expense ANSWER: d 143. The long-distance telephone bill for calls made by salespersons would be classified as a a. product cost—direct labor b. product cost—factory overhead c. period cost—selling expense d. period cost—administrative expense ANSWER: c 144. Electricity used to operate factory machinery would be classified as a a. product cost—direct labor b. product cost—factory overhead c. period cost—selling expense d. period cost—administrative expense ANSWER: b 145. Steel for a construction contractor would be classified as a a. product cost—direct labor b. product cost—factory overhead c. period cost—selling expense d. period cost—administrative expense ANSWER: a Subjective Short Answer 146. Define and discuss the two main types of cost systems for manufacturing operations.

ANSWER: The two main types of cost systems are job order costing and process costing. Each system differs in how it accumulates and records costs.

Job order costing provides product costs for each quantity of product that is manufactured. Each quantity of product that is produced is called a job. This type of system is used by companies that manufacture custom products or batches of similar products.

Process costing provides product costs for each manufacturing department or process. Process costing is used by companies that manufacture products that are indistinguishable from each other and manufactured using a Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing continuous process.

147. Journalize the entries for the following transactions: 1.

Mar. 10: 500 units of raw materials were purchased on account at $4.00 per unit.

2.

Mar. 15: 250 units of raw materials were requisitioned at $4.50 per unit for production, Job 872.

3.

Mar. 25: 215 units of raw materials were requisitioned at $5.00 per unit for production, Job 879.

ANSWER:

Mar. 10 Materials Accounts Payable

2,000

15 Work in Process Materials

1,125

25 Work in Process Materials

1,075

2,000

1,125

1,075

148. Cavy Company accumulated 560 hours of direct labor on Job 345 and 800 hours on Job 777. The direct labor was incurred at a rate of $20 per direct labor hour for Job 345 and $21 per direct labor for Job 777. Journalize the entry for the flow of labor costs into production.

ANSWER: Work in Process 28,000* Wages Payable 28,000 *(560 × $20) + (800 × $21) = $28,000 149. During April, Cavy Company incurred factory overhead as follows: Indirect materials Factory supervision labor Utilities Depreciation (factory) Small tools Equipment rental

$11,000 4,000 500 700 300 750

Journalize the entry for the factory overhead incurred during April.

ANSWER: Factory Overhead 17,250 Materials Wages Payable Utilities Payable Accumulated Depreciation Small Tools Equipment Rental Payable

11,000 4,000 500 700 300 750

150. Cavy Company estimates that total factory overhead costs will be $660,000 for the year. The company has decided that the basis for applying factory overhead should be direct labor hours, which are estimated to be 100,000 hours. a. Compute the predetermined factory overhead rate. b. Determine the amount of factory overhead applied to Job 345 if the amount of direct labor hours is 560 and to Job 777 if the amount of direct labor hours is 800. c. Journalize the entry for the factory overhead applied if Jobs 345 and 777 are the only jobs for the period.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing ANSWER: a. $660,000 ÷ 100,000 = $6.60 b. Job 345: 560 hrs. × $6.60 = $3,696 Job 777: 800 hrs. × $6.60 = $5,280 c.

Work in Process Factory Overhead

8,976 8,976

151. Cavy Company estimates that total factory overhead costs for the following year will be $1,470,000. The company has decided that the basis for applying factory overhead should be machine hours, which are estimated to be 40,000 hours.

Compute the predetermined factory overhead rate.

ANSWER: $1,470,000 ÷ 40,000 = $36.75 per machine hour 152. Cavy Company estimates that total factory overhead costs for the following year will be $1,250,000. The company has determined that the basis for applying factory overhead will be machine hours, which are estimated to be 40,000 hours. There are 4,780 machine hours for all of the jobs in the month of April. What amount of factory overhead will be applied to the jobs for April?

ANSWER: Predetermined factory overhead rate: $1,250,000 ÷ 40,000 hours = $31.25 per machine hour Applied factory overhead for April: 4,780 hours × $31.25 = $149,375 153. Cavy Company estimates that total factory overhead costs for the following year will be $1,470,000. The company has decided that the basis for applying factory overhead should be machine hours, which are estimated to be 40,000 hours.

The machine hours for the month of April for all of the jobs were 4,780. Journalize the entry for the factory overhead applied in April.

ANSWER: Work in Process 175,665* Factory Overhead 175,665 *($1,470,000 ÷ 40,000) × 4,780 154. At the end of April, Cavy Company had completed Jobs 766 and 765. The individual job cost sheets reveal the following information: Job 765 Job 766

Direct Materials $5,670 8,900

Direct Labor $3,500 4,775

Machine Hours 27 44

Job 765 produced 152 units, and Job 766 consisted of 250 units.

Assuming that factory overhead is applied using machine hours at a rate of $200 per hour, determine (a) the balance on each job cost sheet and (b) the cost per unit for each job at the end of April (rounded to the nearest cent).

ANSWER: a. Job 765 = $14,570 [$5,670 + $3,500 + (27 × $200)] Job 766 = $22,475 [$8,900 + $4,775 + (44 × $200)] b. Job 765 = $95.86 ($14,570 ÷ 152) Job 766 = $89.90 ($22,475 ÷ 250) 155. Cavy Company completed 26,000 units during the year at a cost of $2,139,800. The beginning finished goods inventory was 5,000 units valued at $405,000. Assuming a FIFO cost flow, determine the cost of goods sold for 20,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing units.

ANSWER: $405,000 + [15,000 × ($2,139,800 ÷ 26,000)] = $1,639,500 156. Cavy Company estimates that total factory overhead costs for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which are estimated to be 40,000 hours.

The machine hours for the month of April for all of the jobs were 4,780. If the actual factory overhead for April totaled $141,800, determine the over- or underapplied amount for the month.

ANSWER: $1,250,000 ÷ 40,000 = $31.25 per machine hour $31.25 × 4,780 machine hours = $149,375 factory overhead applied $141,800 – $149,375 = $7,575 overapplied 157. Winston Company estimates that total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which are estimated to be 50,000 hours.

The actual total machine hours for the year were 54,300 hours. The actual factory overhead for the year was $1,375,000. a. Determine the total factory overhead applied. b. Compute the over- or underapplied factory overhead for the year. c. Journalize the entry to transfer the over- or underapplied factory overhead to Cost of Goods Sold.

ANSWER: a. $1,250,000 ÷ 50,000 = $25 per machine hour 54,300 machine hours × $25 = $1,357,500 factory overhead applied b. $1,375,000 actual – $1,357,500 applied = $17,500 underapplied c.

Cost of Goods Sold Factory Overhead

17,500 17,500

158. Winston Company estimates that total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which are estimated to be 50,000 hours.

The total machine hours for the year were 54,300. The actual factory overhead for the year was $1,348,800. a. Determine the total factory overhead applied. b. Compute the over- or underapplied factory overhead for the year. c. Journalize the entry to transfer the over- or underapplied factory overhead to Cost of Goods Sold.

ANSWER: a. $1,250,000 ÷ 50,000 = $25 per machine hour 54,300 machine hours × $25 = $1,357,500 factory overhead applied b. $1,348,800 actual – $1,357,500 applied = $8,700 overapplied c.

Factory Overhead Cost of Goods Sold

8,700 8,700

159. Cranston Company estimates the following factory overhead costs for the coming year: Equipment depreciation Equipment maintenance Supervisory salaries Factory rent Total

$160,000 60,000 40,000 100,000 $360,000

Cranston is also budgeting $600,000 in direct labor costs and estimating 15,000 machine hours for the coming year.

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Chapter 2: Job Order Costing a. Compute the predetermined factory overhead rate using direct labor costs as the allocation base. b. Compute the predetermined factory overhead rate using machine hours as the allocation base.

ANSWER: a. $360,000 ÷ $600,000 = 60% of direct labor costs b. $360,000 ÷ 15,000 machine hours = $24 per machine hour 160. Flagler Company allocates factory overhead based on machine hours. It estimated total factory overhead costs for the year to be $420,000. Estimated machine hours were 50,000. Actual hours and costs for the year were 46,000 machine hours and $380,000 of factory overhead. a. Compute the predetermined factory overhead rate for the year. b. Determine the factory overhead applied for the year. c. Compute the under- or overapplied factory overhead for the year.

ANSWER: a. $420,000 ÷ 50,000 = $8.40 per machine hour b. $8.40 × 46,000 machine hours = $386,400 factory overhead applied c. $380,000 – $386,400 = $6,400 overapplied 161. Jase Company allocates factory overhead based on a predetermined overhead rate of $9 per direct labor hour. Job J904 required 8 tons of direct materials at a cost of $600 per ton and took employees who earn $21 per hour a total of 80 hours to complete. What is the total cost of Job J904?

ANSWER: Direct materials 8 tons × $600 $4,800 Direct labor 80 hours × $21 1,680 Manufacturing overhead 80 hours × $9 720 Total cost of J904 $7,200 162. Technics Inc., a manufacturing company, utilizes job order costing. Each division establishes its own estimates regarding factory overhead, which are as follows: Total estimated overhead Total estimated machine hours Total estimated direct labor costs

Division A $128,000 16,000 $155,000

Division B $261,000 72,500 $290,000

If Division A allocates factory overhead on the basis of machine hours and Division B allocates factory overhead as a percentage of direct labor costs, what would the predetermined factory overhead rate be for each division?

ANSWER: Division A: $128,000 ÷ 16,000 = $8 per machine hour Division B: $261,000 ÷ $290,000 = 90% of direct labor costs 163. Crain Company estimated 35,000 direct labor hours and incurred 40,000 of actual direct labor hours. It estimated total factory overhead costs of $735,000 and incurred $780,000 of actual factory overhead costs.

What is Crain’s predetermined factory overhead rate? Was overhead over- or underapplied for the year? By how much?

ANSWER: Predetermined factory overhead rate: $735,000 ÷ 35,000 = $21 per direct labor hour Applied factory overhead ($21 × 40,000) Actual factory overhead Overapplied factory overhead

$840,000 (780,000) $ 60,000

164. National Survey Company uses job order costing.

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Chapter 2: Job Order Costing a.

Indicate the source of the data for debiting Work in Process for each of the following: 1.

Direct materials requisitioned 2.

Direct labor used

b.

Indicate the source of the data for crediting Work in Process for jobs completed.

c.

Present a list of the three controlling accounts used in the general ledger for the inventories and, in each case, indicate the related subsidiary ledger.

ANSWER: a. 1.

2.

Summary of materials requisitions Summary of time tickets

b. Summary of job cost sheets for jobs completed c. Controlling Account Materials Work in Process

Subsidiary Ledger Materials ledger Job cost sheets (or cost ledger) Finished goods ledger (or stock ledger)

Finished Goods

165. During August, the receipts and distributions of Material No. B4G9 are as follows: Aug.

Received 1,100 units at $15 1,700 units at $17 900 units at $18

3 16 29

Issued 700 units for Job 116 1,900 units for Job 117 800 units for Job 118

Aug. 11 18 31 a.

Determine the cost of each of the three issues under a perpetual system, using the first-in, first-out method.

b.

Journalize a summary entry for the issuance of the materials for the month, assuming that the cost of issuances is determined by the first-in, first-out method.

ANSWER: a.

Aug. 11 18 31

issue: 700 × $15 issue: (400 × $15) + (1,500 × $17) issue: (200 × $17) + (600 × $18)

b. Work in Process Materials

$10,500 31,500 14,200 $56,200

56,200 56,200

166. A summary of the time tickets for August follows: Description Job 321 Job 329

Amount $11,000 9,200

Description Job 342 Job 346

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Amount $8,300 5,700 Page 30

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Chapter 2: Job Order Costing Job 336

5,000 Indirect labor

8,000

Journalize the entries for (a) the labor cost incurred and (b) the application of factory overhead to production for August.

The predetermined factory overhead rate is 70% of direct labor cost.

ANSWER: a.

Work in Process 39,200 Factory Overhead 8,000 Wages Payable 47,200 b.

Work in Process Factory Overhead

27,440 27,440

167. The following account appears in the ledger after only part of the postings have been completed for July, the first month of the current fiscal year: July 1 Balance Direct materials Direct labor

Work in Process 60,200 147,000 120,000

Factory overhead is applied to jobs at the rate of 60% of direct labor cost. The actual factory overhead incurred for July was $75,000. Jobs completed during the month totaled $301,200. a.

Journalize the entries for (1) the application of factory overhead to production during July and (2) the jobs completed during July.

b.

What is the balance of the factory overhead account on July 31?

c.

Was factory overhead over- or underapplied on July 31?

d.

Determine the balance of Work in Process on July 31.

ANSWER: a. 1. Work in Process Factory Overhead

72,000

2. Finished Goods Work in Process

301,200

72,000

301,200

b. $3,000 debit c. Underapplied d. Total debits to Work in Process: Balance, July 1 Direct materials Direct labor Factory overhead Less cost of goods finished, during July Balance, Work in Process, July 31

$ 60,200 147,000 120,000 72,000

$ 399,200 (301,200) $ 98,000

168. Journalize the entries for the following summarized operations related to production for a company using job order costing: Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing a. b. c.

d.

e. f. g. h. i. j.

Materials purchased on account Prepaid expenses incurred on account Materials requisitioned: For production orders For general factory use Factory labor used: On production orders For general factory purposes Depreciation on factory equipment Expiration of prepaid expenses, chargeable to factory Factory overhead costs incurred on account Factory overhead applied, based on machine hours Jobs finished Jobs shipped to customers: Cost Selling price (assume all sold on account)

ANSWER: a.

$176,000 12,200 153,700 2,700 141,300 12,000 37,000 6,100 76,000 105,300 415,300 412,000 638,000

Materials Accounts Payable

176,000

b. Prepaid Expenses Accounts Payable

12,200

c.

Work in Process Factory Overhead Materials

153,700 2,700

d. Work in Process Factory Overhead Wages Payable

141,300 12,000

e.

Factory Overhead Accumulated Depreciation— Factory Equipment

37,000

Factory Overhead Prepaid Expenses

6,100

g. Factory Overhead Accounts Payable

76,000

h. Work in Process Factory Overhead

105,300

i.

Finished Goods Work in Process

415,300

Cost of Goods Sold Finished Goods

412,000

Accounts Receivable

638,000

f.

j.

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176,000

12,200

156,400

153,300

37,000

6,100

76,000

105,300

415,300

412,000

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Chapter 2: Job Order Costing Sales

638,000

169. The balance of Material Q on May 1 and the receipts and issuances during May are as follows: Balance, May 1 Received, May 11 Received, May 25

8 at $32 23 at $33 15 at $35

Issued, May 17 Issued, May 27

14 18

Determine the cost of each of the issuances under a perpetual system, using the FIFO method.

ANSWER: May 17 issue: (8 × $32) + (6 × $33) = $454 May 27 issue: (17 × $33) + (1 × $35) = $596 170. Journalize the entry for the use of materials and labor, based on the following: Raw materials issued: Job 609, $850; for general use in factory, $600 Labor time tickets: Job 609, $1,600; $400 for supervision ANSWER: Work in Process 850 Factory Overhead 600 Raw Materials 1,450 Work in Process Factory Overhead Wages Payable

1,600 400 2,000

171. Six selected transactions for the current month are indicated by letters in the following T accounts in a job order costing system: Materials (a)

Wages Payable (b) Factory Overhead (a) (c) (b) (f)

Work in Process (a) (d) (b) (c) (f)

Finished Goods (d) (e) (f)

Cost of Goods Sold (e) (f) Describe each of the six transactions.

ANSWER: (a) Direct and indirect materials are issued. (b) Direct and indirect labor costs are incurred. (c) Factory overhead is applied. (d) Completed goods are transferred to finished goods. (e) Goods are sold.

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Chapter 2: Job Order Costing (f)

Underapplied factory overhead is allocated.

172. On November 2, Newsprint Manufacturing purchases 5 rolls of paper on account at $125 per roll for use within the production process. On November 5, 4 rolls of this paper are issued to Job 157A in the Printing Department. The Printing Department applies $675 in direct labor and $1,150 of factory overhead to Job 157A. On November 8, Printing transfers Job 157A to the Folding Department. The Folding Department applies $450 in direct labor and $655 in factory overhead to Job 157A. Job 157A is transferred to finished goods inventory on November 9. a.

Journalize the entry for the purchase of the paper.

b.

Journalize the entries for the transfer of raw materials to work in process, the application of direct labor, and the application of manufacturing overhead to Job 157A while in the Printing Department.

c.

Journalize the entries for the transfer of Job 157A to the Folding Department at actual cost.

d.

Journalize the entries for the application of direct labor and the application of manufacturing overhead to Job 157A while in the Folding Department.

e.

Journalize the entry for the transfer of Job 157A to finished goods inventory at actual cost.

ANSWER: a. Nov. 2 Raw Materials Accounts Payable b. Nov. 5 5 5 c. Nov. 8 d. Nov. 8 8 e. Nov. 9

625 625

Work in Process—Printing Raw Materials

500

Work in Process—Printing Wages Payable

675

Work in Process—Printing Factory Overhead

1,150

Work in Process—Folding Work in Process—Printing

2,325

500 675 1,150 2,325

Work in Process—Folding Wages Payable

450

Work in Process—Folding Factory Overhead

655

Finished Goods Work in Process—Folding

450 655 3,430 3,430

173. On May 15, the Stamping Department accepted Job 051507A to make 1,000 funnels. Materials requisitioned were 1,100 sheets at $1.20 per sheet and 1,150 grommets at $0.15 per set. The cost driver used by the Stamping Department is the drop-forge strokes indicated by a machine-mounted counter. Factory overhead is applied at $2.25 for each drop-forge stroke. Additionally, $375.00 of overhead is applied to each job due to setup and tear down. Assume the number of dropforge strokes is 1,115. Direct labor is applied at $22.50 per hour for the machine operator and $11.10 for the machine loader. The job required 6.5 hours of labor.

Upon completion, the job was transferred to finished goods inventory.

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Chapter 2: Job Order Costing Journalize the entries for all events as of May 15.

ANSWER: May 15 Work in Process ($1,320.00 + $172.50) Raw Materials *(1,100 × $1.20) + (1,150 × $0.15) 15

15

15

1,492.50* 1,492.50

Work in Process Factory Overhead **$375 + (1,115 × $2.25)

2,883.75** 2,883.75

Work in Process Wages Payable ***($22.50 + $11.10) × 6.5 hrs.

218.40*** 218.40

Finished Goods 4,594.65**** Work in Process ****$1,492.50 + $2,883.75 + $218.40

4,594.65

174. On November 14, the Milling Department accepted Job 111407A for 1,000 pounds of cereal mix.

Materials: Oats Wheat Barley Malt Honey Water Time: Miller Loader

Standard Qty. 525 pounds 450 pounds 85 pounds 65 pounds 25 quarts 25 gallons

Standard Cost $1.25 per pound $1.15 per pound $1.45 per pound $2.15 per pound $1.20 per quart $0.45 per gallon

4.5 hours 1.5 hours

$22.75 per hour $11.50 per hour

Overhead is applied at $5.75 per pound completed. The recipe produced 1,025 pounds of cereal mix. a.

Journalize the entry for the transfer of raw materials to Job 111407A.

b.

Journalize the entry for the direct labor incurred for Job 111407A.

c.

Journalize the entry for the manufacturing overhead applied to Job 111407A.

d.

Journalize the entry for the transfer of Job 111407A to Finished Goods on November 14.

ANSWER: a. Nov. 14 Work in Process Materials

1,478.00 1,478.00

(525 × $1.25) + (450 × $1.15) + (85 × $1.45) + (65 × $2.15) + (25 × $1.20) + (25 × $0.45) = $1,478.00 b. Nov. 14 Work in Process Wages Payable

119.63 119.63

(4.5 × $22.75) + (1.5 × $11.50) = $119.63 (rounded) c. Nov. 14 Work in Process Factory Overhead Copyright Cengage Learning. Powered by Cognero.

5,893.75 5,893.75 Page 35

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Chapter 2: Job Order Costing (1,025 × $5.75) = $5,893.75 d. Nov. 14 Finished Goods Work in Process

7,491.38 7,491.38

$1,478.00 + $119.63 + $5,893.75 = $7,491.38 175. Put the following in the order of the flow of manufacturing costs for a company. a. Close under- or overapplied factory overhead to Cost of Goods Sold. b. Purchase materials. c. Use factory labor and incur factory overhead in production. d. Transfer completed jobs to finished goods. e. Apply factory overhead to jobs according to the predetermined overhead rate. f. Requisition materials to jobs. g. Upon sale, move cost of finished product to Cost of Goods Sold.

ANSWER: b. Purchase materials. f. Requisition materials to jobs. c. Use factory labor and incur factory overhead in production. e. Apply factory overhead to jobs according to the predetermined overhead rate. a. Close under- or overapplied factory overhead to Cost of Goods Sold. d. Transfer completed jobs to finished goods. g. Upon sale, move cost of finished product to Cost of Goods Sold.

176. At the end of the period, Carson Company had the following balances in selected accounts: Materials Finished Goods Work in Process Cost of Goods Sold Factory Overhead

$

80,000 190,000 70,000 1,000,000 30,000

a. The factory overhead balance is relatively small; prepare the journal entry to close the factory overhead account assuming a debit balance. What does a debit balance mean? b. The factory overhead balance is relatively small; prepare the journal entry to close the factory overhead account assuming a credit balance. What does a credit balance mean?

ANSWER: a. Cost of Goods Sold 30,000 Factory Overhead 30,000 A debit balance indicates that the factory overhead was underapplied. b. Factory Overhead Cost of Goods Sold

30,000 30,000

A credit balance indicates the factory overhead was overapplied.

177. List the accounts used in the cost flow for (a) a manufacturer and (b) a service provider.

ANSWER: a.

Materials Wages Payable Factory Overhead Work in Process Finished Goods Copyright Cengage Learning. Powered by Cognero.

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Chapter 2: Job Order Costing Cost of Goods Sold b.

Supplies Wages Payable Overhead Work in Process Cost of Services

178. Discuss the use of job order costing for professional services businesses. What are the similarities and differences between service and manufacturing business job order costing?

ANSWER: Professional service providers—attorneys, physicians, advertising agencies, etc.—may use job order cost accounting systems. In such cases, clients are considered jobs.

Like manufacturers, direct labor and overhead costs for service companies are accumulated in work in process accounts. Unlike manufacturers, materials costs for service companies are usually insignificant and treated as overhead. When a job is completed, it is transferred to Cost of Services, which is similar to Cost of Goods Sold. Service companies do not use finished goods accounts.

179. Discuss how job order costing information is used in decision making. What are some possible reasons that the actual costs of materials would exceed expected costs for a job?

ANSWER: Job order costing accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs. In this way, job order costing can be used by managers for evaluating and controlling costs.

Possible reasons that actual materials costs would exceed expected costs include new or poorly trained employees, poor quality materials, faulty tools or equipment, and incorrect instructions attached to the job.

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Chapter 3: Process Costing True / False 1. Process manufacturing usually reflects a manufacturer that produces small quantities of unique items. a. True b. False ANSWER: False 2. Process costing uses job cost sheets to accumulate cost data. a. True b. False ANSWER: False 3. Both process costing and job order costing maintain perpetual inventory accounts with subsidiary ledgers. a. True b. False ANSWER: True 4. If the principal products of a manufacturing process are identical, process costing is more appropriate than job order costing. a. True b. False ANSWER: True 5. If the products of a manufacturing process are produced to customer specifications, process costing is more appropriate than job order costing. a. True b. False ANSWER: False 6. Process manufacturers typically use large machines to process a continuous flow of raw materials into a finished state. a. True b. False ANSWER: True 7. In process costing, each process will have a work in process inventory account. a. True b. False ANSWER: True 8. Industries that typically use process costing include chemicals, oil, metals, food, paper, and pharmaceuticals. a. True b. False ANSWER: True 9. Equivalent units are the sum of direct materials used and direct labor incurred.

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Chapter 3: Process Costing a. True b. False ANSWER: False 10. In process costing, direct materials, direct labor, and factory overhead are assigned to each manufacturing process. a. True b. False ANSWER: True 11. Custom-made goods would be accounted for using process costing. a. True b. False ANSWER: False 12. In process costing, a separate work in process inventory account is maintained for each customer’s job. a. True b. False ANSWER: False 13. In process costing, product costs are accumulated by processing department rather than by job. a. True b. False ANSWER: True 14. One of the differences in process costing compared to job order costing is that the amounts used to transfer goods from one department to the next come from the cost of production report instead of job cost sheets. a. True b. False ANSWER: True 15. In process costing, costs flow into finished goods inventory only from the work in process inventory of the last manufacturing process. a. True b. False ANSWER: True 16. In process costing, costs are transferred from one work in process inventory account to the next as units are transferred from one processing department to another. a. True b. False ANSWER: True 17. Conversion costs include direct materials, direct labor, and factory overhead. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing ANSWER: False 18. The direct materials costs and direct labor costs incurred by a production department are referred to as conversion costs. a. True b. False ANSWER: False 19. The direct labor costs and factory overhead costs incurred by a production department are referred to as conversion costs. a. True b. False ANSWER: True 20. The first step in preparing a cost of production report is to compute equivalent units of production. a. True b. False ANSWER: False 21. In process costing, conversion costs are usually incurred evenly throughout a process. a. True b. False ANSWER: True 22. Equivalent units of production are the number of units that could have been manufactured from start to finish during an accounting period. a. True b. False ANSWER: True 23. Both job order costing and process costing use equivalent units of production to determine costs. a. True b. False ANSWER: False 24. If 30,000 units of materials enter production during the first year of operations, 25,000 of the units are finished, and 5,000 are 50% completed, the number of equivalent units of production would be 28,500. a. True b. False ANSWER: False 25. If 16,000 units of materials enter production during the first year of operations, 12,000 of the units are finished, and 4,000 are 75% completed, the number of equivalent units of production would be 15,000. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing ANSWER: True 26. If the costs for direct materials, direct labor, and factory overhead were $277,300, $52,600, and $61,000, respectively, for 14,000 equivalent units of production, the total conversion costs were $390,900. a. True b. False ANSWER: False 27. If the costs for direct materials, direct labor, and factory overhead were $60,000, $35,000, and $25,000, respectively, for 20,000 equivalent units of production, the conversion cost per equivalent unit was $6. a. True b. False ANSWER: False 28. If the costs for direct materials, direct labor, and factory overhead were $522,200, $82,700, and $45,300, respectively, for 16,000 equivalent units of production, the conversion cost per equivalent unit was $8. a. True b. False ANSWER: True 29. If 10,000 units that were 50% completed are in process at November 1, 90,000 units were completed during November, and 20,000 were 20% completed at November 30, the number of equivalent units of production for November was 90,000. (Assume no loss of units in production and that inventories are costed by the first-in, first-out method.) a. True b. False ANSWER: False 30. If 10,000 units that were 40% completed are in process at November 1, 80,000 units were completed during November, and 12,000 were 20% completed at November 30, the number of equivalent units of production for November was 75,600. (Assume no loss of units in production and that inventories are costed by the first-in, first-out method.) a. True b. False ANSWER: False 31. In applying the first-in, first-out method of costing inventories, if 8,000 units which were 30% completed are in process at June 1, 28,000 units were completed during June, and 4,000 units were 75% completed at June 30, the number of equivalent units of production for June was 33,400. a. True b. False ANSWER: False 32. In applying the first-in, first-out method of costing inventories, if 8,000 units which were 30% completed are in process at June 1, 28,000 units were completed during June, and 4,000 units were 80% completed at June 30, the number of equivalent units of production for June was 28,600. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing ANSWER: False 33. The cost of production report reports the cost of goods sold. a. True b. False ANSWER: False 34. The cost of production report reports the cost charged to production and the costs allocated to finished goods and work in process. a. True b. False ANSWER: True 35. The cost of production report summarizes (1) the units for which the department is accountable and the units to be assigned costs and (2) the costs charged to the department and the allocation of those costs. a. True b. False ANSWER: True 36. Conversion costs are seldom added evenly throughout the manufacturing process. a. True b. False ANSWER: False 37. Equivalent units should be computed separately for direct materials and conversion costs. a. True b. False ANSWER: True 38. In process costing, the cost per equivalent unit is computed before computing equivalent units. a. True b. False ANSWER: False 39. Costs of ending work in process inventory are included in the cost per equivalent unit computation. a. True b. False ANSWER: True 40. Conversion and direct materials costs are generally both added at the end of the production process. a. True b. False ANSWER: False 41. Gilbert Corporation had 25,000 finished units and 8,000 units 35% complete. The equivalent units totaled 30,200.

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Chapter 3: Process Costing a. True b. False ANSWER: False 42. The last step in the preparation of a cost of production report is the computation of equivalent units of production. a. True b. False ANSWER: False 43. Equivalent units of production are always the same as the total number of physical units finished during the period. a. True b. False ANSWER: False 44. Once equivalent units are computed for materials, this number will also be used for direct labor and factory overhead. a. True b. False ANSWER: False 45. If a department that applies the FIFO inventory cost flow method starts the reporting period with 50,000 physical units that were 25% complete with respect to direct materials and 40% complete with respect to conversion, it must add 12,500 equivalent units of direct materials and 20,000 equivalent units to direct labor to complete them. a. True b. False ANSWER: False 46. The FIFO method separates work done on beginning inventory in the previous period from work done on it in the current period. a. True b. False ANSWER: True 47. In process costing, the purchase of materials is recorded with a credit to the materials account. a. True b. False ANSWER: False 48. In process costing, indirect materials are charged to Work in Process. a. True b. False ANSWER: False 49. In process costing, the amount journalized showing the cost added to finished goods is taken from the cost of production report. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing b. False ANSWER: True 50. In process costing, all actual factory overhead costs are charged directly to the work in process account. a. True b. False ANSWER: False 51. The journal entry to transfer goods in process from Department X to Department Y includes a debit to Work in Process—Department X. a. True b. False ANSWER: False 52. All costs of the processes in a process costing system ultimately pass through the cost of goods sold account. a. True b. False ANSWER: True 53. One of the primary uses of a cost of production report is to assist management in controlling production costs. a. True b. False ANSWER: True 54. The cost of production report is often used by managers for analyzing the change in the conversion and direct materials cost per equivalent unit between periods. a. True b. False ANSWER: True 55. Yield measures the ratio of the materials output quantity to the materials input quantity. a. True b. False ANSWER: True 56. Computing the yield of a process will identify the level of materials losses from waste. a. True b. False ANSWER: True 57. Companies that use the weighted average method for process costing have unit costs that include costs from more than one accounting period. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing 58. If a company uses the weighted average method instead of FIFO, it will still get the same unit costs. a. True b. False ANSWER: False 59. The FIFO method of process costing is simpler than the weighted average method. a. True b. False ANSWER: False Multiple Choice 60. For which of the following businesses would process costing be appropriate? a. boat repair service b. shampoo manufacturer c. dressmaker d. custom furniture manufacturer ANSWER: b 61. Which of the following statements is false regarding the similarities between process costing and job order costing? a. Both accumulate product costs—direct materials, direct labor, and factory overhead. b. Both allocate product costs to units produced. c. Both maintain perpetual inventories. d. Both use job cost sheets.

ANSWER: d 62. The cost system best suited to industries that manufacture a large number of identical units of commodities on a continuous basis is a. process costing b. departmental costing c. first-in, first-out costing d. job order costing ANSWER: a 63. In process costing, the costs of direct materials and direct labor are charged directly to a. service departments b. processing departments c. customer accounts receivable d. job orders ANSWER: b 64. The three categories of manufacturing costs comprising the total cost of work in process are direct labor, direct materials, and a. selling expenses Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing b. direct expenses c. accounting salaries expense d. factory overhead ANSWER: d 65. Process costing would be appropriate for a a. natural gas refinery b. jet airplane builder c. catering business d. custom cabinet builder ANSWER: a 66. Which of the following is uncharacteristic of process costing? a. Several work in process inventory accounts are used. b. Manufacturing costs are grouped by department rather than by job. c. Costs are accumulated by job. d. A perpetual inventory system is maintained for materials, work in process, and finished goods.

ANSWER: c 67. Which of the following would most likely use process costing? a. custom home builder b. custom helicopter manufacturer c. graduation photographer d. lumber mill ANSWER: d 68. Which of the following is uncharacteristic of process costing? a. Manufacturing costs are grouped by departments or by process. b. Process costing may use several work in process accounts. c. Process costing measures costs for each completed job. d. Process costing provides useful product cost information for decision making.

ANSWER: c 69. If a company uses process costing to account for the costs in its five production departments, how many work in process accounts will it use? a. 6 b. 5 c. 14 d. 2 ANSWER: b 70. In process costing, the amount of work in process inventory is valued by a. finding the sum of all open job costs b. allocating departmental costs between completed and partially completed units Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing c. multiplying units in ending inventory by the direct materials cost per unit d. finding the sum of all completed jobs ANSWER: b 71. The two categories of cost comprising conversion costs are a. direct labor and indirect labor b. direct labor and factory overhead c. factory overhead and direct materials d. direct labor and direct materials ANSWER: b 72. The four steps necessary to complete a cost of production report in process costing are as follows: 1.

2.

3.

4.

Allocate costs to units transferred out and partially completed units.

Determine the units to be assigned costs.

Determine the cost per equivalent unit.

Compute equivalent units of production.

The correct ordering of the steps is a. 2, 4, 3, 1 b. 4, 2, 3, 1 c. 2, 3, 4, 1 d. 2, 3, 1, 4 ANSWER: a 73. Which of the following costs incurred by a paper manufacturer would be included in the group of costs referred to as conversion costs? a. Accounting Department costs b. raw lumber c. assembly laborers’ wages d. administrative salaries ANSWER: c 74. Which of the following costs incurred by a tool manufacturer would be omitted from conversion costs? a. factory supervisor's salary b. machine operator's wages c. raw steel d. factory maintenance personnel supplies ANSWER: c 75. In the manufacture of 10,000 units of a product, direct materials cost incurred was $165,000, direct labor cost incurred was $105,000, and applied factory overhead was $53,000. The total conversion cost is a. $218,000 b. $158,000 c. $323,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing d. $53,000 ANSWER: b 76. Department M had 600 units 60% completed in process at the beginning of June, 6,000 units completed during June, and 700 units 30% completed at the end of June. Using the first-in, first-out method of inventory costing, the number of equivalent units of production for conversion costs for the period is a. 7,300 units b. 5,640 units c. 6,700 units d. 5,850 units ANSWER: d 77. Department M had 2,000 units 40% completed in process at the beginning of June, 12,000 units completed during June, and 1,200 units 25% completed at the end of June. The number of equivalent units of production for conversion costs for June if the first-in, first-out method is used to cost inventories is a. 11,500 units b. 11,200 units c. 15,200 units d. 10,000 units ANSWER: a Department G had 3,600 units 25% completed at the beginning of the period, 11,000 units were completed during the period; 3,000 units were 20% completed at the end of the period, and the following manufacturing costs were debited to the departmental work in process account during the period: Work in process, beginning of period Costs added during period: Direct materials (10,400 units at $8) Direct labor Factory overhead

$40,000 83,200 63,000 25,000

78. All direct materials are placed in process at the beginning of production and the first-in, first-out method of inventory costing is used. The total cost of the departmental work in process inventory at the end of the period (round unit cost calculations to four decimal places) is a. $16,163 b. $21,432 c. $35,670 d. $28,935 ANSWER: d 79. All direct materials are placed in process at the beginning of production and the first-in, first-out method of inventory costing is used. The total cost of 3,600 units of beginning inventory which were completed during the period (round unit cost calculations to four decimal places) is a. $62,206 b. $16,163 c. $40,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing d. $19,275 ANSWER: a 80. All direct materials are placed in process at the beginning of production and the first-in, first-out method of inventory costing is used. The total cost of the units started and completed during the period (round unit cost calculations to four decimal places) is a. $211,200 b. $120,060 c. $190,275 d. $20,934 ANSWER: b 81. Department R had 5,000 units in work in process that were 75% completed as to labor and overhead at the beginning of the period; 30,000 units of direct materials were added during the period; 32,000 units were completed during the period; and 3,000 units were 40% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. The first-in, first-out method is used to cost inventories. The number of equivalent units of production for conversion costs for the period was a. 32,450 b. 29,450 c. 31,950 d. 26,000 ANSWER: b Department S had no work in process at the beginning of the period. It added 12,000 units of direct materials during the period at a cost of $84,000; 9,000 units were completed during the period; and 3,000 units were 30% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. Direct labor was $49,500, and factory overhead was $9,900.

82. The total conversion costs for the period were a. $59,400 b. $49,500 c. $143,400 d. $9,900 ANSWER: a 83. The total cost of units completed during the period was a. $117,000 b. $143,400 c. $121,000 d. $127,450 ANSWER: a 84. The following production data were taken from the records of the Finishing Department for June: Inventory in process, June 1, 25% completed Transferred to finished goods during June Copyright Cengage Learning. Powered by Cognero.

1,500 units 5,000 units Page 12

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Chapter 3: Process Costing Equivalent units of production during June

5,200 units

Determine the number of equivalent units of production in the June 30 Finishing Department inventory, assuming that the first-in, first-out method is used to cost inventories. The completion percentage of 25% applies to both direct materials and conversion costs. a. 575 units b. 200 units c. 1,000 units d. 300 units ANSWER: a 85. The debits to Work in Process—Assembly Department for May, together with data concerning production, are as follows: May 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 66.7% completed Materials added during May, 10,000 units Conversion costs during May Goods finished during May, 11,500 units May 31 work in process, 1,500 units, 50% completed

$ 8,000 6,000 30,000 31,000 — —

All direct materials are placed in process at the beginning of the process and the first-in, first-out method is used to cost inventories. The materials cost per equivalent unit for May is a. $3.00 b. $3.80 c. $2.92 d. $2.31 ANSWER: a 86. Department E had 4,000 units in work in process that were 40% completed at the beginning of the period at a cost of $12,500. During the period, 14,000 units of direct materials were added at a cost of $28,700, and 15,000 units were completed. At the end of the period, 3,000 units were 75% completed. All materials are added at the beginning of the process. Direct labor was $32,450, and factory overhead was $18,710. The number of equivalent units of production for the period for conversion if the first-in, first-out method is used to cost inventories was a. 15,650 b. 14,850 c. 14,150 d. 14,650 ANSWER: a 87. Department A had 1,000 units in work in process that were 60% completed at the beginning of the period at a cost of $7,000. During the period, 4,000 units of direct materials were added at a cost of $8,200, and 4,500 units were completed.

At the end of the period, 500 units were 40% completed. All materials are added at the beginning of the process. Direct labor was $28,700, and factory overhead was $4,510. The cost of the 500 units in process at the end of the period if the first-in, first-out method is used to cost inventories was a. $3,240 b. $5,175 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing c. $2,569 d. $2,645 ANSWER: d 88. In the manufacture of 8,000 units of a product, direct materials cost incurred was $154,600, direct labor cost incurred was $84,000, and applied factory overhead was $45,500. The total conversion cost is a. $129,500 b. $154,600 c. $284,100 d. $238,600 ANSWER: a 89. Department S had 500 units 60% completed in process at the beginning of the period, 9,000 units completed during the period, and 600 units 30% completed at the end of the period. What was the number of equivalent units of production for the period for conversion if the first-in, first-out method is used to cost inventories? Assume the completion percentage applies to both direct materials and conversion cost. a. 8,880 b. 9,300 c. 8,700 d. 9,000 ANSWER: a 90. Department K had 3,000 units 45% completed in process at the beginning of the period, 17,000 units completed during the period, and 1,200 units 40% completed at the end of the period. What was the number of equivalent units of production for the period for conversion if the first-in, first-out method is used to cost inventories? Assume the completion percentage applies to both direct materials and conversion cost. a. 18,350 b. 16,310 c. 15,650 d. 16,130 ANSWER: d Department A had 5,000 units in work in process that were 60% completed as to labor and overhead at the beginning of the period, 34,000 units of direct materials were added during the period, 31,000 units were completed during the period, and 2,000 units were 80% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. The first-in, first-out method is used to cost inventories.

91. The number of equivalent units of production for conversion costs for the period was a. 29,600 b. 32,000 c. 32,400 d. 34,000 ANSWER: a 92. The number of equivalent units of production for material costs for the period was Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing a. 34,000 b. 29,800 c. 29,000 d. 32,000 ANSWER: a The following production data were taken from the records of the Finishing Department for June: Inventory in process, June 1, 30% completed Completed units during June Ending inventory, 60% completed

4,000 units 65,000 units 7,000 units

93. The number of conversion equivalent units of production in the June 30 Finishing Department inventory, assuming that the first-in, first-out method is used to cost inventories, is a. 68,000 b. 70,400 c. 66,200 d. 4,200 ANSWER: d 94. The number of materials equivalent units of production in the June 30 Finishing Department inventory, assuming that the first-in, first-out method is used to cost inventories and materials were added at the beginning of the process, is a. 7,000 b. 68,000 c. 72,000 d. 76,000 ANSWER: a 95. The debits to Work in Process—Assembly Department for April, together with data concerning production, are as follows: April 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 60% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 12,000 units April 30 work in process, 1,000 units, 40% completed

$ 7,200 6,000 25,000 35,750 — —

All direct materials are added at the beginning of the process, and the first-in, first-out method is used to cost inventories.

The materials cost per equivalent unit for April is a. $2.48 b. $2.08 c. $2.50 d. $5.25 ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing 96. The debits to Work in Process—Assembly Department for April, together with data concerning production, are as follows: April 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 40% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 12,000 units April 30 work in process, 1,000 units, 40% completed

$ 7,200 6,000 25,000 30,800 — —

All direct materials are added at the beginning of the process, and the first-in, first-out method is used to cost inventories.

The conversion cost per equivalent unit for April is a. $2.48 b. $2.75 c. $2.50 d. $5.25 ANSWER: b Department B had 3,000 units in work in process that were 25% completed at the beginning of the period at a cost of $12,500, 13,700 units of direct materials were added during the period at a cost of $28,700, 15,000 units were completed during the period, and 1,700 units were 95% completed at the end of the period. All materials are added at the beginning of the process. Direct labor was $32,450, and factory overhead was $18,710.

97. The number of equivalent units of production for the period for conversion, if the first-in, first-out method is used to cost inventories, was a. 14,365 b. 13,615 c. 12,000 d. 15,865 ANSWER: d 98. The number of equivalent units of production for the period for materials, if the first-in, first-out method is used to cost inventories, was a. 16,700 b. 12,000 c. 1,700 d. 13,700 ANSWER: d The following unit data were assembled for the assembly process of Super Co. for the month of April. Direct materials are added at the beginning of the process. Conversion costs are added uniformly over the production process. The company uses the FIFO method.

Beginning work in process, 60% completed Units started in April Ending work in process, 30% completed Copyright Cengage Learning. Powered by Cognero.

Units 5,000 48,000 4,000 Page 16

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Chapter 3: Process Costing 99. The number of equivalent units produced with respect to conversion costs is a. 50,200 b. 48,000 c. 53,000 d. 46,200 ANSWER: d 100. The number of equivalent units produced with respect to direct materials costs is a. 48,000 b. 49,000 c. 43,000 d. 53,000 ANSWER: a Carmelita, Inc., has the following information available:

Direct materials Conversion costs

Costs from Beginning Inventory $2,000 6,200

Costs from Current Period $ 22,252 150,536

101. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. The company uses the FIFO process costing method.

The equivalent units of production for direct materials and conversion costs, respectively, were a. 5,340 for direct materials and 4,902 for conversion costs b. 4,840 for direct materials and 4,802 for conversion costs c. 4,602 for direct materials and 4,802 for conversion costs d. 4,902 for direct materials and 4,802 for conversion costs ANSWER: b 102. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. The company uses the FIFO process costing method.

The cost of completing a unit during the current period (rounded to the nearest cent) was a. $36.19 b. $34.88 c. $35.95 d. $35.89 ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing 103. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. Assume that the company uses the FIFO process costing method. Round cost per unit figure to the nearest cent when calculating total costs.

The total costs that will be transferred to Finished Goods for units started and completed were a. $161,775 b. $156,960 c. $162,855 d. $161,505 ANSWER: a 104. In process costing, equivalent production units are generally determined for a. direct materials and conversion costs b. direct materials only c. conversion costs only d. direct materials and direct labor costs ANSWER: a 105. The portion of whole units that were completed with respect to either materials or conversion costs within a given accounting period is the definition of a. units started and completed b. equivalent units c. conversion costs d. ending work in process ANSWER: b 106. Which of the following is omitted from conversion costs? a. direct labor b. factory overhead c. indirect labor d. direct materials ANSWER: d 107. A report prepared periodically by a processing department, summarizing (1) the units for which the department is accountable and the disposition of those units and (2) the product costs incurred by the department and the allocation of those costs between completed and incomplete production, is termed a a. factory overhead production report b. manufacturing cost report c. process costing report d. cost of production report ANSWER: d Department G had 3,600 units, 40% completed at the beginning of the period, 12,000 units were completed during the period, 2,000 units were 20% completed at the end of the period, and the following manufacturing costs were debited to Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing the departmental work in process account during the period: Work in process, beginning of period Costs added during period: Direct materials (10,400 at $9.8365) Direct labor Factory overhead

$ 60,000 102,300 79,800 25,200

108. Assuming that all direct materials are placed in process at the beginning of production and that the first-in, first-out method of inventory costing is used, the equivalent units for materials and conversion costs, respectively, are a. 14,000 and 12,160 b. 10,400 and 10,960 c. 14,000 and 13,600 d. 10,400 and 10,240 ANSWER: b 109. Assuming that all direct materials are placed in process at the beginning of production and that the first-in, first-out method of inventory costing is used, the materials and conversion cost per unit (rounded to the nearest cent), respectively, are a. $5.94 and $5.86 b. $5.94 and $6.38 c. $8.00 and $8.68 d. $9.84 and $9.58 ANSWER: d Department W had 2,400 units, one-third completed at the beginning of the period; 16,000 units were transferred to Department X from Department W during the period; and 1,800 units were one-half completed at the end of the period.

Assume the completion ratios apply to direct materials and conversion costs.

110. The total number of units to be assigned cost on the cost of production report for Department W is a. 12,000 b. 13,600 c. 18,500 d. 17,800 ANSWER: d 111. The equivalent units of production used to compute unit conversion cost on the cost of production report for Department W, assuming the company uses FIFO, are a. 16,100 b. 13,600 c. 15,000 d. 18,500 ANSWER: a 112. Carolwood Company manufactures widgets and uses process costing. The status of the beginning and ending inventory is: Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing Beginning inventory Ending inventory

30% of the manufacturing process is complete 55% of the manufacturing process is complete

Direct materials are added to the manufacturing process in stages. None are added when production begins.

Approximately half of the materials are added when the product is 25% complete. The other half are added when the product is 50% complete.

The percentages complete of beginning inventory and ending inventory with respect to direct materials (DM) and conversion costs (CC), respectively, are a. beginning inventory: DM–50%; CC–30% ending inventory: DM–100%; CC–55% b. beginning inventory: DM–50%; CC–30% ending inventory: DM–55%; CC–55% c. beginning inventory: DM–30%; CC–30% ending inventory: DM–55%; CC–55% d. beginning inventory: DM–50%; CC–70% ending inventory: DM–100%; CC–45% ANSWER: a 113. Blue Lake Water Company has two departments, Purifying and Bottling. The Bottling Department received 76,000 liters from the Purifying Department. During the period, the Bottling Department completed 74,000 liters, including 3,000 liters of work in process at the beginning of the period. The ending work in process was 5,000 liters. The number of liters started and completed during the period is a. 71,000 b. 69,000 c. 73,000 d. 79,000 ANSWER: a Penny Inc. uses process costing. All direct materials are added at the beginning of the process. Information about July’s activities is as follows: On July 1: Beginning inventories Direct materials cost Conversion costs

850 units, 60% complete $5,000 $4,000

During July: Number of units started Direct materials added Conversion costs added

15,000 $155,000 $83,520

On July 31: Ending inventories

1,600 units, 40% complete

114. Using the FIFO method, the number of units started and completed in July was a. 14,250 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing b. 15,000 c. 13,400 d. 15,740 ANSWER: c 115. Using the FIFO method, the number of equivalent units for conversion costs was a. 14,400 b. 14,380 c. 14,550 d. 15,850 ANSWER: b 116. Using the FIFO method and rounding cost per unit to four decimal places, the cost of goods completed and transferred out during July was a. $227,270 b. $225,060 c. $236,905 d. $228,200 ANSWER: a 117. Using the FIFO method, the cost per equivalent unit for materials used during July (rounded to the nearest cent) was a. $10.78 b. $10.33 c. $9.78 d. $10.65 ANSWER: b Department J had no work in process at the beginning of the period, 18,000 units were completed during the period, and 2,000 units were 30% completed at the end of the period. The following manufacturing costs were debited to the departmental work in process account during the period. Assume the company uses FIFO and rounds cost per unit to two decimal places.

Direct materials (20,000 at $5) Direct labor Factory overhead

$100,000 142,300 57,200

118. Assuming that all direct materials are placed in process at the beginning of production, the total cost of the 18,000 units completed during the period is a. $256,500 b. $199,500 c. $299,500 d. $269,550 ANSWER: d 119. Assuming that all direct materials are placed in process at the beginning of production, the total cost of the Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing departmental work in process inventory at the end of the period is a. $90,000 b. $283,140 c. $199,500 d. $16,438 ANSWER: d 120. In process costing, the cost of completed production in Department A is transferred to Department B by which of the following journal entries? a. debit Work in Process—Department B and credit Work in Process—Department A b. debit Work in Process—Department B and credit Finished Goods—Department A c. debit Work in Process—Department B and credit Cost of Goods Sold—Department A d. debit Finished Goods—Department A and credit Work in Process—Department B ANSWER: a Mocha Company manufactures a single product by a continuous process, involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $55,000, $65,000, and $80,000, respectively. In addition, work in process at the beginning of the period for Department 1 totaled $75,000, and work in process at the end of the period totaled $60,000.

121. The entry to journalize the flow of costs into Department 1 during the period for direct materials is a. Work in Process—Department 1 100,000 Materials 100,000 b. Work in Process—Department 1 55,000 Materials 55,000 c. Materials 100,000 Work in Process—Department 1 100,000 d. Materials 55,000 Work in Process—Department 1 55,000 ANSWER: a 122. The entry to journalize the flow of costs into Department 2 during the period for direct materials is a. Work in Process—Department 2 100,000 Materials 100,000 b. Work in Process—Department 2 55,000 Materials 55,000 c. Work in Process—Department 2 150,000 Materials 150,000 d. Materials 55,000 Work in Process—Department 2 55,000 ANSWER: b 123. The entry to journalize the flow of costs into Department 1 for direct labor is a. Work in Process—Department 1 65,000 Wages Payable 65,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing b. Wages Payable Work in Process—Department 1 c. Work in Process—Department 1 Wages Payable d. Wages Payable Work in Process—Department 1 ANSWER: c

125,000 125,000 125,000 125,000 65,000 65,000

124. The entry to journalize the flow of costs into Department 2 for direct labor is a. Work in Process—Department 2 65,000 Wages Payable 65,000 b. Wages Payable 65,000 Work in Process—Department 2 65,000 c. Work in Process—Department 2 125,000 Wages Payable 125,000 d. Work in Process—Department 2 185,000 Wages Payable 185,000 ANSWER: a 125. The entry to journalize the flow of costs into Department 1 during the period for applied overhead is a. Factory Overhead—Department 1 150,000 Work in Process—Department 1 150,000 b. Work in Process—Department 1 125,000 Factory Overhead—Department 1 125,000 c. Work in Process—Department 1 80,000 Factory Overhead—Department 1 80,000 d. Work in Process—Department 1 150,000 Factory Overhead—Department 1 150,000 ANSWER: d 126. The entry to journalize the flow of costs into Department 2 for applied overhead is a. Factory Overhead—Department 2 80,000 Work in Process—Department 2 80,000 b. Work in Process—Department 2 230,000 Factory Overhead—Department 2 230,000 c. Work in Process—Department 2 80,000 Factory Overhead—Department 2 80,000 d. Work in Process—Department 2 150,000 Factory Overhead—Department 2 150,000 ANSWER: c 127. The entry to journalize the flow of costs from Department 1 into Department 2 is a. Work in Process—Department 2 390,000 Work in Process—Department 1 390,000 b. Work in Process—Department 2 330,000 Work in Process—Department 1 330,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing c. Work in Process—Department 2 Work in Process—Department 1 d. Work in Process—Department 2 Work in Process—Department 1 ANSWER: a

215,000 215,000 375,000 375,000

128. Mocha Company manufactures a single product by a continuous process, involving three production departments.

The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. Work in process at the beginning of the period for Department 1 was $75,000, and work in process at the end of the period totaled $60,000. The records indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $50,000, $60,000, and $70,000, respectively. In addition, work in process at the beginning of the period for Department 2 totaled $75,000, and work in process at the end of the period totaled $60,000. The entry to journalize the flow of costs into Department 3 during the period is a. Work in Process—Department 3 585,000 Work in Process—Department 2 585,000 b. Work in Process—Department 3 570,000 Work in Process—Department 2 570,000 c. Work in Process—Department 3 555,000 Work in Process—Department 2 555,000 d. Work in Process—Department 3 165,000 Work in Process—Department 2 165,000 ANSWER: a 129. Mocha Company manufactures a single product by a continuous process, involving three production departments.

The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $50,000, $60,000, and $70,000, respectively. Department 2 has transferred-in costs of $390,000 for the current period. In addition, work in process at the beginning of the period for Department 2 totaled $75,000, and work in process at the end of the period totaled $90,000. The entry to journalize the flow of costs into Department 3 during the period is a. Work in Process—Department 3 375,000 Work in Process—Department 2 375,000 b. Work in Process—Department 3 570,000 Work in Process—Department 2 570,000 c. Work in Process—Department 3 490,000 Work in Process—Department 2 490,000 d. Work in Process—Department 3 555,000 Work in Process—Department 2 555,000 ANSWER: d 130. Mocha Company manufactures a single product by a continuous process, involving three production departments.

The records indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 3 were $50,000, $60,000, and $70,000, respectively. In addition, work in process at the beginning of the period for Department 3 totaled $75,000, and work in process at the end of the period totaled $60,000.

The entry to journalize the flow of costs into Department 3 during the period for direct materials is a. Work in Process—Department 3 100,000 Materials 100,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing b. Work in Process—Department 3 Materials c. Work in Process—Department 3 Materials d. Work in Process—Department 3 Materials ANSWER: c

125,000 125,000 50,000 50,000 70,000 70,000

131. Which of the following is a use of the cost of production report? a. to help managers control operations b. to help managers isolate problems c. all of these choices d. to help managers improve operations ANSWER: c 132. The cost of production report for August shows conversion costs for 5,000 gallons, 70% complete, to be $2,450. The conversion cost per equivalent unit in July was $0.75. Which of the following best describes the change in the conversion costs between the two months? a. The conversion costs increased by $0.05 per unit, indicating an improvement. b. The conversion costs increased by $160 overall, indicating an unfavorable change. c. The conversion costs decreased by $0.05 per unit, indicating an improvement. d. The conversion costs decreased by $0.05 per unit, indicating an unfavorable change.

ANSWER: c 133. The cost of materials consumed in producing good units in the production department of Jacobs Company was $38,000 and $39,125 for June and July, respectively. The number of equivalent units produced in June and July was 4,000 and 4,250, respectively. Which of the following best describes the change in the cost of materials (rounded to two decimal places) between the two months? a. The cost of materials decreased by $0.29 per unit, indicating an improvement. b. The cost of materials increased by $1,125, indicating an unfavorable change. c. The cost of materials increased by $0.28 per unit, indicating an unfavorable change d. The cost of materials increased by $0.88 per unit, indicating an unfavorable change.

ANSWER: a 134. Which of the following measures would help managers to control and improve operations? a. units produced per time period b. cost trends of a product c. yield trends d. all of these choices ANSWER: d 135. Gallons of output for October and November were 45,000 and 56,000, respectively. Gallons of input for October and November were 46,000 and 64,000, respectively. Which of the following statements is true? a. The yield for October was 0.98 (rounded). b. The yield for November was 0.88 (rounded).

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Chapter 3: Process Costing c. The yield is deteriorating, and the cause of the loss should be investigated. d. all of these choices ANSWER: d The manufacturing data for the Assembly Department for April are as follows: April 1, balance, 3,000 units, 80% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 11,500 units April 30, work in process, 1,500 units, 60% completed

$12,000 29,000 35,000 — —

All direct materials are placed in process during production, and the weighted average method is used to cost inventories.

136. The cost per equivalent unit (to the nearest cent) for April is a. $4.75 b. $5.85 c. $5.94 d. $6.13 ANSWER: d 137. The cost allocated to the units in ending work in process (with interim computations to rounded nearest cent) is a. $5,265 b. $5,517 c. $8,760 d. $9,915 ANSWER: b 138. The cost allocated to the units transferred out (with interim computations rounded to nearest cent) is a. $54,625 b. $67,275 c. $68,310 d. $70,495 ANSWER: d Department F had 4,000 units in work in process that were 40% completed at the beginning of the period at a cost of $12,500. During the period, direct materials were added at a cost of $28,700, and 15,000 units of product were completed.

Direct labor was $32,450, and factory overhead was $18,710. At the end of the period, 3,000 units that were 75% completed remained in work in process inventory. Assume that both direct materials and conversion costs are added evenly throughout the process.

139. If process costing with the weighted average method is used, the cost per equivalent unit (rounded to the nearest cent) would be a. $4.63 b. $5.13 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing c. $5.35 d. $5.56 ANSWER: c 140. If process costing with the weighted average method is used, the cost assigned to the units transferred out (with interim computations rounded to the nearest cent) would be a. $76,950 b. $80,250 c. $83,400 d. $92,288 ANSWER: b 141. Which of the following businesses would most likely use job order costing? a. movie studio b. paper manufacturer c. flour mill d. gasoline refinery ANSWER: a 142. Which of the following businesses would most likely use process costing? a. movie studio b. home construction c. flour mill d. website designer ANSWER: c 143. The inventory cost flow assumption used with process costing because it is often the same as the physical flow of units is a. LIFO b. weighted average c. FIFO d. job order ANSWER: c 144. Measure of the work done during a production period, expressed in terms of fully complete units of output, is called a. transferred-in costs b. conversion costs c. FIFO costs d. equivalent units ANSWER: d 145. Costs incurred in a previous process that are carried forward as part of the product’s cost when it moves to the next department are called a. transferred-in costs Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing b. conversion costs c. FIFO costs d. equivalent units ANSWER: a 146. Yield is computed by which of the following formulas? a. Yield = Output Quantity ÷ Input Quantity b. Yield = Total Sales ÷ Total Costs c. Yield = (Output Quantity × Unit Costs) ÷ Input Quantity d. Yield = Input Quantity ÷ Output Quantity ANSWER: a Subjective Short Answer 147. Job order costing and process costing are two major cost systems used in manufacturing. Briefly contrast the characteristics of these two systems.

ANSWER: Job Order Costing Process Costing Custom orders Repetitive production Heterogeneous product Homogeneous product Low production volume High production volume Low to medium standardization High standardization 148. Describe the flow of costs in process costing.

ANSWER: a. The cost of materials purchased is recorded in the materials account. b. The cost of direct materials used by the processing departments is recorded in the work in process accounts for each department. c. The cost of direct labor used by the processing departments is recorded in the work in process accounts for each department. d. The cost of factory overhead incurred for indirect materials and other factory overhead such as depreciation is recorded in the factory overhead accounts for each department. e. The factory overhead incurred in the processing departments is applied to the work in process accounts for each department. f. The cost of units completed in the first processing department is transferred to the work in process account of the next processing department. g. The cost of units completed in the last processing department is transferred to Finished Goods. h. The cost of units sold is transferred from Finished Goods to Cost of Goods Sold.

149. Explain the concept of equivalent units. Give an example to validate your explanation.

ANSWER: Equivalent units are a measure of the amount of work done during a production period, expressed in terms of fully completed units of output. If 40,000 units were started and completed, then the equivalent units would equal 40,000 units. However, if those same 40,000 units were started and only 50% complete, then the equivalent units would be 40,000 × 50% = 20,000 units.

150. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department received 67,000 liters from the Purifying Department. During the period, the Bottling Department completed 65,000 liters, including 3,000 liters of work in process at the beginning of the period. The ending work in process was 5,000 liters. How many liters were started and completed during the period?

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Chapter 3: Process Costing ANSWER: 62,000 liters started and completed (65,000 completed – 3,000 beginning WIP) 151. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department received 58,000 liters from the Purifying Department. During the period, the Bottling Department completed 56,000 liters, including 4,000 liters of work in process at the beginning of the period. The ending work in process was 6,000 liters. How many liters were started and completed during the period?

ANSWER: 52,000 liters started and completed (56,000 completed – 4,000 beginning WIP) 152. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department had 3,000 liters in beginning work in process inventory (30% complete). During the period, 71,000 liters were completed. The ending work in process was 5,000 liters (70% completed). What is the total equivalent units for direct materials (using the FIFO method) if materials were added at the beginning of the process?

ANSWER: Whole Equivalent Units Units Inventory in process, beginning of 3,000 × 0% 0 period Started and completed during the 68,000 × 100% 68,000 period Transferred out of Bottling 71,000 68,000 (completed) Inventory in process, end of period 5,000 × 100% 5,000 76,000 73,000 Total units to be assigned costs 153. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department had 8,000 liters in beginning work in process inventory (60% complete). During the period 70,000 liters were completed. The ending work in process was 3,000 liters (60% completed). What are the total equivalent units for direct materials under the FIFO method if materials were added at the beginning of the process?

ANSWER: Whole Equivalent Units Units Inventory in process, beginning of period 8,000 × 0% 0 Started and completed during the period 62,000 × 100% 62,000 Transferred out of Bottling (completed) 70,000 62,000 Inventory in process, end of period 3,000 × 100% 3,000 73,000 65,000 Total units to be assigned costs 154. The Bottling Department of Mountain Springs Water Company had 5,000 liters in beginning work in process inventory (20% complete). During the period, 58,000 liters were completed. The ending work in process inventory was 3,000 liters (90% complete). What are the equivalent units for conversion costs under the FIFO method?

ANSWER: Whole Equivalent Units Units Inventory in process, beginning of period 5,000 × 80% 4,000 Started and completed during the period 53,000 × 100% 53,000 Transferred out of Bottling (completed) 58,000 57,000 Inventory in process, end of period 3,000 × 90% 2,700 61,000 59,700 Total units to be assigned costs 155. The Bottling Department of Mountain Springs Water Company had 4,000 liters in beginning work in process Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing inventory (40% complete). During the period, 66,000 liters were completed. The ending work in process inventory was 3,000 liters (70% complete). Using the FIFO method, what are the equivalent units for conversion costs?

ANSWER: Whole Equivalent Units Units Inventory in process, beginning of period 4,000 × 60% 2,400 Started and completed during the period 62,000 × 100% 62,000 Transferred out of Bottling (completed) 66,000 64,400 Inventory in process, end of period 3,000 × 70% 2,100 69,000 66,500 Total units to be assigned costs 156. The cost of direct materials transferred into the Bottling Department of Mountain Springs Water Company is $27,225. The conversion cost for the period in the Bottling Department is $7,596. The total equivalent units for direct materials and conversion are 60,500 liters and 63,300 liters, respectively. Determine the direct materials and conversion cost per equivalent unit. Round answers to the nearest cent.

ANSWER: Cost per Equivalent Unit of Materials = $27,225 ÷ 60,500 liters = $0.45 Cost per Equivalent Unit of Conversion = $7,596 ÷ 63,300 liters = $0.12 157. The cost of direct materials transferred into the Bottling Department of Mountain Springs Water Company is $28,072. The conversion cost for the period in the Bottling Department is $10,275. The total equivalent units for direct materials and conversion are 63,800 and 68,500, respectively. Determine the direct materials and conversion cost per equivalent unit. Round answers to the nearest cent.

ANSWER: Cost per Equivalent Unit of Materials = $28,072 ÷ 63,800 liters = $0.44 Cost per Equivalent Unit of Conversion = $10,275 ÷ 68,500 liters = $0.15 158. The cost per equivalent unit of direct materials and conversion in the Bottling Department of Mountain Springs Water Company is $0.45 and $0.12, respectively. The equivalent units to be assigned costs are as follows: Direct Materials Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period Total units and costs to be assigned

0 57,000 57,000 3,500 60,500

Conversion 3,500 57,000 60,500 1,800 62,300

The beginning work in process inventory had a cost of $2,200. Determine the cost of completed and transferred-out production, and the ending work in process inventory.

ANSWER:

Direct Materials Inventory in process, beginning balance Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed)

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Conversion

Total $ 2,200

0 57,000 × $0.45

3,500 × $0.12 57,000 × $0.12

420 32,490 $35,110 Page 30

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Chapter 3: Process Costing Inventory in process, end of period

3,500 × $0.45

1,800 × $0.12

1,791

Total costs assigned by the Bottling Department

$36,901

Completed and transferred-out production: Inventory in process, ending:

$35,110 $1,791

159. The cost per equivalent unit of direct materials and conversion in the Bottling Department of Jolt Beverages Company is $0.47 and $0.15, respectively. The equivalent units to be assigned costs are as follows: Direct Materials Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period Total units to be assigned costs

0 52,000 52,000 3,500 55,500

Conversion 3,000 52,000 55,000 2,100 57,100

The beginning work in process inventory had a cost of $3,500. Determine the cost of completed and transferred-out production, and the ending work in process inventory.

ANSWER:

Direct Materials Conversion Inventory in process, balance Inventory in process, beginning 3,000 × 0 of period $0.15 Started and completed during the 52,000 × 52,000 × period $0.47 $0.15 Transferred out of Bottling (completed) Inventory in process, end of 3,500 × 2,100 × period $0.47 $0.15 Total costs assigned by the Bottling Department Completed and transferred-out production: Inventory in process, ending:

Total $ 3,500 450 32,240 $36,190 1,960 $38,150 $36,190 $1,960

160. Alexandra Company’s Molding Department opened on July 1. During July, 70,000 units were completed and transferred out to the next department. On July 31, the 10,000 units that remained in inventory were 40% complete with respect to conversion costs and 100% complete with respect to materials.

How many equivalent units of work did the Molding Department complete during July for materials and conversion costs?

ANSWER: Materials: 70,000 + (10,000 × 100%) = 80,000 Conversion costs: 70,000 + (10,000 × 40%) = 74,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing 161. Kramer Company started its production operations on August 1. During August, the Printing Department completed 17,600 units. There were 4,400 units in ending inventory which were 80% complete with respect to materials and 10% complete with respect to conversion costs. During August, the department accumulated materials costs of $45,408 and conversion costs of $76,670.

Required: a. Determine the cost of the goods transferred out. b. What is the value of the ending inventory?

ANSWER: Cost per Equivalent Unit for Materials = $45,408 ÷ [17,600 + (80% × 4,400)] = $2.15 Cost per Equivalent Unit for Conversion Costs = $76,670 ÷ [17,600 + (10% × 4,400)] = $4.25 a. ($2.15 + $4.25) × 17,600 = $112,640 b. ($2.15 × 80% × 4,400) + ($4.25 × 10% × 4,400) = $9,438 162. The inventory at June 1 and costs charged to Work in Process—Department 60 during June are as follows: 3,800 units, 60% completed Direct materials, 32,000 units Direct labor Factory overhead Total cost to be accounted for

$ 60,400 378,000 274,000 168,000 $880,400

During June, 32,000 units were placed into production and 31,200 units were completed, including those in inventory on June 1. On June 30, the inventory of work in process consisted of 4,600 units that were 85% completed. Inventories are costed by the first-in, first-out method, and all materials are added at the beginning of the process.

Determine the following (round unit cost data to four decimal places, i.e., $4.4444, to minimize rounding differences): a.

Equivalent units of production for conversion cost b.

Conversion cost per equivalent unit c.

Total and unit cost of finished goods started in prior period and completed in the current period d.

Total and unit cost of finished goods started and completed in the current period e.

Total cost of work in process inventory, June 30 ANSWER: a. Equivalent units of production: To process units in inventory on June 1: 3,800 × 40% 1,520 To process units started and completed in June: 31,200 – 3,800 27,400 To process units in inventory on June 30: 4,600 × 85% 3,910 Equivalent units of production for conversion cost 32,830 b.

Conversion cost per equivalent unit of production: Conversion costs: Direct labor Factory overhead Total cost Unit conversion cost, $442,000 ÷ 32,830

$274,000 168,000 $442,000 $13.4633

c. Cost of finished goods started in the prior period and completed in current period: Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing Work in process inventory on June 1 Conversion costs in current period: 3,800 × 40% = 1,520 units at $13.4633 Total cost Beginning inventory unit cost: $80,864 ÷ 3,800 d.

e.

$60,400 20,464 $80,864 $21.2800

Cost of finished goods started and completed in current period: Direct materials: 27,400 units at $11.8125* Conversion costs: 27,400 units at $13.4633 Total cost Unit cost: $692,557 ÷ 27,400 *$378,000 ÷ 32,000

$323,663 368,894 $692,557 $25.2758

Cost of work in process inventory at June 30: Direct materials: 4,600 units at $11.8125 Conversion costs: 3,910 units at $13.4633 Total cost

$ 54,338 52,642 $106,980

Total cost accounted for: $80,864 + $692,557 + $106,980

$880,401

163. Stevens Company's inventory on March 1 and the costs charged to Work in Process—Department B during March are as follows: Beginning work in process, 12,000 units, 60% completed From Department A, 55,000 units started this period Direct materials added Direct labor incurred Factory overhead incurred

$ 62,400 115,500 384,915 138,000

During March, all direct materials were transferred from Department A, the units in process at March 1 were completed, and of the 55,000 units entering the department, all were completed except 6,000 units that were 70% completed.

Inventories are costed by the first-in, first-out method.

Prepare a cost of production report for March. Round unit cost data to four decimal places and total cost to the nearest cent.

ANSWER: Stevens Company Cost of Production Report—Department B For the Month Ended March 31

UNITS Units charged to production: Inventory in process, March 1 Received from Dept. A Total units accounted for by Dept. B Copyright Cengage Learning. Powered by Cognero.

Equivalent Units Whole Direct Units Materials Conversion 12,000 55,000 67,000 Page 33

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Chapter 3: Process Costing Units to be assigned costs: Inventory in process, March 1 (60% completed) Started and completed in March Transferred to finished goods in March Inventory in process, March 31 (70% completed) Total units to be assigned costs

12,000 49,000 61,000

0 49,000 49,000

4,800 49,000 53,800

6,000 67,000

6,000 55,000

4,200 58,000

Costs COSTS

Direct MaterialsConversion

Total Costs

Costs per equivalent unit: Total costs for March in Dept. B $115,500 $522,915 Total equivalent units ÷ 55,000 ÷ 58,000 Cost per equivalent unit $ 2.1000 $ 9.0158 Costs assigned to production: Inventory in process, March 1 Costs incurred in March Total costs accounted for by Dept. B

$ 62,400 638,415 $700,815

Costs allocated to completed and partially completed units: Inventory in process, March 1, balance To complete inventory in $ 0 $ 43,276 process, March 1 Started and completed in March 102,900 441,774 Transferred to finished goods in March Inventory in process, March 31 12,600 37,866 Total costs assigned by Dept. B

$ 62,400 43,276 544,674 $650,350 50,466 $700,816*

*$1 difference due to rounding

164. Austin Company manufactures a product called Aster in a three-process series. All materials are introduced at the beginning of the first process. Austin uses the first-in, first-out method of inventory costing. Unit and cost data for the first process (Department A) for the month of December follow: Work in process inventory: December 1 December 31 Started in December: Direct materials cost Conversion cost Completed in December Copyright Cengage Learning. Powered by Cognero.

Units

Completion

Cost

12,000 5,000 14,000

60% 40%

$140,400 ?

21,000

106,400 70,310 ?

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Chapter 3: Process Costing Prepare Austin's Department A cost of production report for December.

ANSWER: Austin Company Cost of Production Report—Department A For the Month Ended December 31 Equivalent Units UNITS Units charged to production: Inventory in process, December 1 Received from materials storeroom Total units accounted for by Dept. A Units to be assigned costs: Inventory in process, Dec. 1 (60% completed) Started and completed in December Transferred to Dept. B in December Inventory in process, Dec. 31 (40% complete) Total units to be assigned costs

Whole Units

Direct Materials

Conversion

12,000 14,000 26,000

12,000 9,000 21,000

0 9,000 9,000

4,800 9,000 13,800

5,000 26,000

5,000 14,000

2,000 15,800 Costs

COSTS

Direct Materials Conversion

Costs per equivalent unit: Total costs for December in Dept. A $106,400 Total equivalent units ÷ 14,000 Cost per equivalent unit $ 7.60 Costs assigned to production: Inventory in process, Dec. 1 Costs incurred in December Total costs accounted for by Dept. A Costs allocated to completed and partially completed units: Inventory in process, Dec. 1, balance To complete inventory in process, $ 0 December 1 Cost of completed Dec. 1 work in process Started and completed in December 68,400 Transferred to finished goods in December Inventory in process, Dec. 31 38,000 Total costs assigned by Dept. A

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Total Costs

$ 70,310 ÷ 15,800 $ 4.45

$140,400 176,710 $317,110

$140,400 $21,360

21,360

40,050

$161,760 108,450

8,900

$270,210 46,900 $317,110

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Chapter 3: Process Costing 165. Erin Company's inventory at December 1 and the costs charged to Work in Process—Department B during December are as follows: 1,200 units, 40% completed From Department A, 26,000 units Direct labor Factory overhead

$ 47,800 845,000 312,000 176,770

During December, all direct materials are transferred from Department A, the units in process at December 1 were completed, and of the 26,000 units entering the department, all were completed except 1,000 units that were 70% completed as to conversion costs. Inventories are costed by the first-in, first-out method.

Prepare a cost of production report for December.

ANSWER: Erin Company Cost of Production Report—Department B For the Month Ended December 31 Equivalent Units Whole Units Direct Conversion UNITS Materials Units charged to production: Inventory in process, December 1 1,200 Received from Department A 26,000 Total units accounted for by 27,200 Department B Units to be assigned costs: Inventory in process, Dec. 1 (40% completed) Started and completed in December Transferred to finished goods in December Inventory in process, Dec. 31 (70% complete) Total units to be assigned costs COSTS Cost per equivalent unit: Total costs for December in Dept. B Total equivalent units Cost per equivalent unit Costs assigned to production: Inventory in process, December 1 Costs incurred in December Total costs accounted for by Dept. B Copyright Cengage Learning. Powered by Cognero.

1,200

0

720

25,000

25,000

25,000

26,200

25,000

25,720

1,000 27,200

1,000 26,000

700 26,420

Costs Materials Conversion Total Costs $845,000 $488,770 ÷ 26,000 ÷ 26,420 $ 32.50 $ 18.50

$

47,800 1,333,770

$1,381,570 Page 36

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Chapter 3: Process Costing Costs allocated to completed and partially completed units: Inventory in process, Dec. 1, balance To complete inventory in process, Dec. 1 $ 0 $ 13,320 Cost of completed Dec. 1 work in process Started and completed in 812,500 462,500 December Transferred to finished goods in December Inventory in process, Dec. 31 32,500 12,950 Total costs assigned by Dept. B

$

47,800 13,320

$

61,120 1,275,000

$1,336,120 45,450 $1,381,570

166. Everett Company's inventory at December 31 and the costs charged to Work in Process—Department B during December are as follows: 500 units, 60% completed From Department A, 10,000 units Direct labor Factory overhead

$ 3,460 36,300 7,960 12,500

During December, all direct materials are transferred from Department A, and the units in process at December 1 were completed. Of the 10,000 units entering the department, all were completed except 1,200 units that were 25% completed as to conversion costs. Inventories are costed by the first-in, first-out method.

Prepare a cost of production report for December.

ANSWER: Everett Company Cost of Production Report—Department B For the Month Ended December 31 Equivalent Units Whole Direct UNITS Units Materials Conversion Units charged to production: Inventory in process, December 1 500 Received from Dept. A 10,000 Total units accounted for by Dept. B Units to be assigned costs: Inventory in process, Dec. 1 (60% completed) Started and completed in December Transferred to finished goods in December Inventory in process, Dec. 31 (25% completed) Copyright Cengage Learning. Powered by Cognero.

10,500

500 8,800

0 8,800

200 8,800

9,300

8,800

9,000

1,200

1,200

300 Page 37

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Chapter 3: Process Costing Total units to be assigned costs

10,500

10,000

9,300

Costs Direct Materials Conversion

COSTS Cost per equivalent unit: Total costs for December, Dept. B Total equivalent units Cost per equivalent unit Costs assigned to production:

$36,300 ÷10,000 $ 3.63

Total Costs

$20,460 ÷ 9,300 $ 2.20

Inventory in process, Dec. 1

$ 3,460

Costs incurred in December

56,760

Total costs accounted for by Dept. B Costs allocated to completed and partially completed units: Inventory in process, Dec. 1, balance To complete inventory process, Dec. 1 Cost of completed Dec. 1 work in process Started and completed in December Transferred to finished goods in December Inventory in process, Dec. 31 Total costs assigned by Dept. B

$60,220

$ 3,460 $

0

$

440

440 $ 3,900

31,944

19,360

51,304 $55,204

4,356

660

5,016 $60,220

167. Information for Nichols Manufacturing Company for the month of May is as follows: Beginning work in process:

Cost of inventory in process, May 1

$5,010

Units, 800 Direct materials, 100% completed Conversion costs, 70% completed Units started in May, 14,000 Costs charged to Work in Process during May : Ending work in process inventory: Direct materials costs, $57,400 Units, 1,500 Direct labor costs, $20,049 Direct materials, 100% completed Factory overhead costs, $30,073 Conversion costs, 30% completed Prepare a cost of production report for the month of May, using the FIFO method.

ANSWER:

Nichols Manufacturing Company Cost of Production Report For the Month Ended May 31

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Chapter 3: Process Costing Equivalent Units Whole Direct Conversion Units Materials – 800 14,000 14,800

UNITS Units charged to production: Inventory in process, May 1 Received from materials storeroom Total units accounted for Units to be assigned costs: Beginning work in process, May 1, (70% completed) Units started and completed in May (14,000 beginning – 1,500 ending) Ending work in process, May 31, (30% completed) Total units to be assigned costs

800

0

240

12,500

12,500

12,500

1,500 14,800

1,500 14,000

450 13,190

Costs COSTS

Direct Materials Conversion

Cost per equivalent unit: Total cost for May Total equivalent units Cost per equivalent unit Costs assigned to production: Inventory in process, May 1 Costs incurred in May Total costs accounted for in May *($20,049 + $30,073) Costs allocated to completed and partially completed units: Inventory in process, May 1, balance To complete inventory in process, May 1 Cost of completed May 1 work in process Started and completed in May Transferred to finished goods in May Inventory in process, May 31 Total costs accounted for in May

$57,400 14,000 $ 4.10

Total

$50,122* 13,190 $ 3.80

$

5,010 107,522 $112,532

$ $

0

$

912(a)

912 $

51,250(b)

6,150(d)

47,500(c)

1,710(e)

5,010

5,922 98,750

$104,672 7,860 $112,532

(a) 240 × $3.80 (b) 12,500 × $4.10 (c) 12,500 × $3.80 (d) 1,500 × $4.10 (e) 450 × $3.80 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing

168. Eagle Co. manufactures bentwood chairs and tables. Wood for both products is steam-bent in the same process, but different types of wood are used for each product. Thus, materials cost is identified separately for each product. One production cycle uses 20 board feet. Labor cost is identified to the process as a whole, as is overhead cost. Data for the month of July follow:

Direct material cost per board foot Number of parts formed per production cycle (20 board feet) Actual operating hours in July Parts produced during July Budgeted annual conversion cost: Labor Utilities Depreciation Other overhead Total Budgeted annual operating hours for steam-bending

Chairs $3.60

Tables $4.20

10 120 4,000

8 380 9,000

$150,000 125,000 65,000 50,000 $390,000 5,200

a. b. c. d.

Compute July's predetermined rate for the steam-bending process.

Compute July's direct material costs for chairs and tables.

Compute conversion costs to be applied to chairs and tables in July.

Journalize the following entries: 1.

Assignment of direct materials to chairs and tables 2.

Application of conversion costs to chairs and tables 3.

The transfer of completed chairs and tables to the Finishing Department. All of July's production was completed in July.

ANSWER: a. Steam-Bending Conversion Cost per Hour = $390,000 ÷ 5,200 hrs. = $75 per hour b.

Direct material cost per unit: ($3.60/ft. × 20 ft. per cycle) 10 parts per cycle

Chairs $7.20

($4.20/ft. × 20 ft. per cycle) 8 parts per cycle Total direct materials cost: (4,000 units × $7.20/unit) (9,000 units × $10.50/unit) c.

Conversion cost per unit: ($75/hr. × 120 hrs./month) 4,000 units

Tables

$10.50

$28,800 $94,500

$2.25

($75/hr. × 380 hrs./month) Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing 9,000 units Total conversion cost: (4,000 units × $2.25/unit) (9,000 units × $3.17/unit) d.

1.

2.

3.

$3.17 (rounded) $9,000 $28,530

Work in Process—Chairs Work in Process—Tables Materials

28,800 94,500

Work in Process—Chairs Work in Process—Tables Factory Overhead—Chairs Factory Overhead—Tables

9,000 28,530

Finished Goods—Chairs Finished Goods—Tables Work in Process—Chairs Work in Process—Tables

37,800 123,030

123,300

9,000 28,530

37,800 123,030

169. The Brass Works is in the process of determining manufacturing overhead. Journalize the entries for the following events to Factory Overhead, Administrative Expenses, and Selling Expenses, or allocate between the three as appropriate.

All items were paid in cash at the time of acquisition. Next, compute the overhead application rate and journalize the entry to apply overhead to Work in Process. a.

Brass Works purchases an insurance policy for $4,000. It is computed that 80% of the value of the policy protects production, and the balance protects the administrative offices. Brass Works charges insurance initially to expense.

b.

The electric bill shows an amount due of $1,200. This meter is utilized only by production, as the office spaces have their own meters.

c.

Payroll reports that the sales manager’s salary for the period is $3,500 and that production supervisors' wages for the period are $5,500.

d.

The stockroom reports that $2,575 of materials were purchased for the production Maintenance Department.

e.

If the driver for the application of overhead is drop-forge strokes and there are expected to be 1,000 strokes in this period, what is the rate per stroke? Do not round answer.

f.

Assuming that there are 1,150 drop-forge strokes in this period, apply factory overhead to Work in Process. Round answers to the nearest dollar.

Round overhead rate to three decimal places and total cost to nearest dollar.

ANSWER: a. Factory Overhead ($4,000 × 80%) Administrative Expenses ($4,000 × 20%) Cash Copyright Cengage Learning. Powered by Cognero.

3,200 800 4,000 Page 41

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Chapter 3: Process Costing b. Factory Overhead Cash

1,200

c. Selling Expenses Factory Overhead Wages Payable

3,500 5,500

d. Factory Overhead Accounts Payable

2,575

1,200

9,000

2,575

e. Factory Overhead $ 3,200 Factory Overhead 1,200 Factory Overhead 5.500 Factory Overhead 2,575 Total $12,475 Drop-Forge Stroke Rate = $12,475 ÷ 1,000 strokes = $12,475 per stroke f. Work in Process Factory Overhead

14,346 14,346

170. The cost of materials transferred into the Bottling Department of Mountain Springs Water Company is $32,400, with $26,000 from the Purifying Department, plus an additional $6,400 from the materials storeroom. The conversion cost for the period in the Bottling Department is $8,750 ($3,750 factory applied and $5,000 direct labor). The total cost transferred to finished goods for the period was $31,980. The Bottling Department had a beginning inventory of $1,860. a. b.

Journalize the entries for the cost of transferred-in materials, conversion costs, and the cost transferred out to finished goods.

Determine the balance of Work in Process—Bottling at the end of the period.

ANSWER: a.

Work in Process—Bottling Work in Process—Purifying Materials

32,400

Work in Process—Bottling Factory Overhead—Bottling Wages Payable

8,750

Finished Goods Work in Process—Bottling

31,980

26,000 6,400 3,750 5,000 31,980

b. $11,030 ($1,860 + $32,400 + $8,750 – $31,980) 171. The estimated total factory overhead cost and total machine hours for Department 40 for the current year are $250,000 and 56,250, respectively. During January, the first month of the current year, actual machine hours used totaled 5,100 and factory overhead cost incurred totaled $22,000. a.

Determine the factory overhead rate based on machine hours.

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Chapter 3: Process Costing b. c. d.

Journalize the entry to apply factory overhead to production in Department 40 for January.

What is the balance of Factory Overhead—Department 40 at January 31?

Does the balance of Factory Overhead—Department 40 at January 31 represent over- or underapplied factory overhead?

Round total cost to the nearest dollar.

ANSWER: a. $250,000 ÷ 56,250 = $4.44 per machine hour b.

Work in Process—Department 40 Factory Overhead—Department 40 (5,100 × $4.44)

c.

$644 credit ($22,644 credit – $22,000 debit)

d.

overapplied factory overhead

22,644 22,644

172. A firm produces its products by a continuous process involving three production departments, 1 through 3. Journalize the entries for the following selected transactions related to production during August: a. b. c. d. e. f. g. h.

Materials purchased on account, $120,000 Material requisitioned for use in Department 1, $125,700, of which $124,200 entered directly into the product Labor cost incurred in Department 1, $195,400, of which $174,000 was used directly in the manufacture of the product Factory overhead costs for Department 1 incurred on account, $54,700 Depreciation on machinery in Department 1, $29,200 Expiration of prepaid insurance chargeable to Department 1, $7,000 Factory overhead applied to production in Department 1, $106,300 Output of Department 1 transferred to Department 2, $362,700

ANSWER: a.

b.

c.

d.

e.

f.

g.

Materials Accounts Payable

120,000

Factory Overhead—Department 1 Work in Process—Department 1 Materials

1,500 124,200

Factory Overhead—Department 1 Work in Process—Department 1 Wages Payable

21,400 174,000

Factory Overhead—Department 1 Accounts Payable

54,700

Factory Overhead—Department 1 Accumulated Depreciation— Machinery

29,200

Factory Overhead—Department 1 Prepaid Insurance

7,000

Work in Process—Department 1

106,300

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120,000

125,700

195,400

54,700

29,200

7,000

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Chapter 3: Process Costing Factory Overhead—Department 1 h.

Work in Process—Department 2 Work in Process—Department 1

106,300 362,700 362,700

173. Fast-Flow Paints produces mixer base paint through a two-stage process, Mixing and Packaging. The following events depict the movement of value into and out of production. Journalize the entry for each event if appropriate; if not, provide a short narrative reason as to why you choose not to journalize the action. Nelson, the production manager, accepts an order to continue processing the current run of mixer base paint. a.

Materials worth $27,000 are withdrawn from raw materials inventory. Of this amount, $25,500 will be issued to the Mixing Department and the balance will be issued to the Maintenance Department to be used on production line machines.

b.

Nelson determines that labor for the period is $12,500. Of this amount, $1,750 is for maintenance and indirect labor. The remainder is directly associated with mixing.

c.

Nelson, who is paid a salary but earns about $35/hour, spends one hour inspecting the production line.

d.

The manufacturing overhead drivers for mixing are hours of mixer time at $575 per hour and material movements from materials at $125 per movement. An inspection of the machine timers reveals that a total of eight hours has been consumed in making this product. An inspection of "stocking orders" indicates that only one material movement was utilized to load the raw materials. (Note: All values have been journalized to Factory Overhead so you need only apply them to the production run.)

e.

Within Fast-Flow, items are transferred between departments at a standard cost. This production run has created 4,015 gallons of mixer base paint. This paint is transferred to Packaging at a standard cost of $10.05 per gallon. Round calculation to the nearest whole dollar.

f.

Packaging draws $755 of materials for packaging of this production run.

g.

Packaging documents that 12 hours of direct labor at $10.25 per hour were consumed in the packaging of this production run.

h.

Packaging uses a cost driver of direct labor hours to allocate manufacturing overhead at the rate of $25 per hour.

i.

Packaging transfers 4,015 gallons of packaged goods to Finished Goods Inventory at a standard cost of $10.34 per gallon. Round calculation to the nearest whole dollar.

ANSWER: a. Work in Process—Mixing 25,500 Factory Overhead—Mixing 1,500 Materials 27,000 b. Work in Process—Mixing Factory Overhead—Mixing Wages Payable

10,750 1,750 12,500

c. Nelson’s inspection of the assembly line is not directly chargeable to production.

As a manager of a production unit, it will be incorporated in the cost of production Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing through the allocation of overhead. d. Work in Process—Mixing Factory Overhead—Mixing

4,725

e. Work in Process—Packaging Work in Process—Mixing

40,351

f. Work in Process—Packaging Materials

755

g. Work in Process—Packaging Wages Payable

123

h. Work in Process—Packaging Factory Overhead—Mixing

300

i. Finished Goods Inventory Work in Process—Packaging

41,515

4,725 40,351 755 123 300 41,515

174. Zang Co. manufacturers its products in a continuous process involving two departments, Machining and Assembly.

Journalize the entries for the following transactions related to production during June: a. b. c. d. e. f. g.

Materials purchased on account, $180,000 Materials requisitioned by: Machining, $73,000 direct and $9,000 indirect materials; Assembly, $4,900 indirect materials Direct labor used by Machining, $23,000; Assembly, $47,000 Depreciation expenses: Machining, $4,500; Assembly, $7,800 Factory overhead applied: Machining, $9,700; Assembly, $11,300 Machining Department transferred $98,300 to Assembly Department; Assembly Department transferred $83,400 to finished goods Sold goods on account, $100,000; cost of goods sold, $68,000

ANSWER: a.

b.

c.

d.

e.

Materials Accounts Payable

180,000

Work in Process—Machining Factory Overhead—Machining Factory Overhead—Assembly Materials

73,000 9,000 4,900

Work in Process—Machining Work in Process—Assembly Wages Payable

23,000 47,000

Factory Overhead—Machining Factory Overhead—Assembly Accumulated Depreciation

4,500 7,800

Work in Process—Machining Work in Process—Assembly Factory Overhead—Machining Factory Overhead—Assembly

9,700 11,300

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180,000

86,900

70,000

12,300

9,700 11,300 Page 45

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Chapter 3: Process Costing f.

g.

Work in Process—Assembly Work in Process—Machining

98,300

Finished Goods Work in Process—Assembly

83,400

Accounts Receivable Sales

100,000

Cost of Goods Sold Finished Goods

68,000

98,300

83,400

100,000

68,000

175. The cost of energy consumed in producing units in the Bottling Department of Mountain Springs Water Company was $36,850 and $39,060 for June and July, respectively. The number of equivalent units produced in June and July was 55,000 and 62,000 liters, respectively. Evaluate the change in the cost of energy between the two months.

ANSWER: Energy costs per liter, June: $36,850 = $0.67 55,000 liters Energy costs per liter, July:

$39,060 = $0.63 62,000 liters

The cost of energy has decreased by $0.04 ($0.67 – $0.63).

176. The inventory at June 1 and costs charged to Work in Process—Department 60 during June are as follows: 3,800 units, 80% completed Direct materials, 32,000 units Direct labor Factory overhead Total cost to be accounted for

$ 59,040 368,000 244,000 188,000 $859,040

During June, 32,000 units were placed into production and 31,200 units were completed, including those in inventory on June 1. On June 30, the inventory of work in process consisted of 4,600 units that were 40% completed. Inventories are costed by the weighted average method and materials are added throughout the process.

Determine the following, presenting your computations: a. b. c. d.

Equivalent units of production Cost per equivalent unit Cost assigned to finished goods completed in the current period Cost assigned to ending work in process inventory at June 30

ANSWER: a.

b.

Equivalent units of production: Transferred out To process units in inventory on June 30 (4,600 × 40%) Equivalent units of production

31,200 1,840 33,040

Cost per equivalent unit:

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Chapter 3: Process Costing $859,040 ÷ 33,040 = $26 c.

Cost assigned to finished goods completed in the current period: 31,200 × $26 = $811,200

d. Cost assigned to ending work in process inventory at June 30: 4,600 × 40% × $26 = $47,840

177. On March 1, Upton Company’s Packaging Department had work in process inventory of 8,820 units, which had been transferred in from the Finishing Department. These units had accumulated costs of $301,060 in previous departments During March, 30,000 units were transferred into the department. These units had accumulated costs of $770,000 in the previous departments. The Packaging Department incurred $70,000 in materials and conversion costs during the month.

On March 31, 700 units remained in ending inventory. These units were 80% complete.

Compute the cost per equivalent unit for the Packaging Department using the weighted average method.

ANSWER: Units transferred out (8,820 + 30,000 – 700) 38,120 Equivalent units in ending inventory (700 × 80%) 560 Total equivalent units 38,680 Total costs: $301,060 + $770,000 + $70,000 = $1,141,060 Cost per equivalent unit: $1,141,060 ÷ 38,680 = $29.50 178. On August 1, Jones Corporation’s Packaging Department had work in process inventory of 8,000 units that were 75% complete. The cost of these units was $99,525. During August, 125,000 units were transferred into the department.

These units had accumulated costs in previous departments of $1,418,560. The Packaging Department incurred costs of $795,505 for materials and $498,010 for conversion costs in August and transferred 131,000 units out of the department.

The 2,000 units remaining in ending inventory are 50% complete. Jones uses process costing with the weighted average method to cost its inventories. Assume all costs are added evenly throughout the process. a. Compute the cost per equivalent unit for the Packaging Department. b. Determine the cost assigned to the units transferred out of the department. c. Determine the cost assigned to the ending inventory.

ANSWER: a.

Units transferred out 131,000 Equivalent units in ending inventory (2,000 × 50%) 1,000 Total equivalent units 132,000 Total costs: $99,525 + $1,418,560 + $795,505 + $498,010 = $2,811,600 Cost per equivalent unit: $2,811,600 ÷ 132,000 = $21.30 b. Units transferred out: 131,000 × $21.30 = $2,790,300 c. Ending inventory: 2,000 × 50% × $21.30 = $21,300 179. Discuss how equivalent units are computed under the weighted average method.

ANSWER: Under the weighted average method, equivalent units equal: a. all work done to date on units transferred out regardless of whether work was completed in prior period or current period and b. work done to start ending inventory Copyright Cengage Learning. Powered by Cognero.

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Chapter 3: Process Costing 180. Kamin Company’s Mixing Department had a beginning inventory of 4,000 units that had accumulated costs of $55,000. During the period, the Mixing Department accumulated costs of $92,000 and started 8,000 new units. Ending inventory was 2,500 units that were 40% complete. Kamin uses process costing with the weighted average method to cost inventories, and all costs are assumed to be added evenly throughout the process.

Compute the cost per equivalent unit.

ANSWER: Units Transferred Out = 4,000 + 8,000 – 2,500 = 9,500 units Equivalent Units = 9,500 + (2,500 × 40%) = 10,500 Cost per Equivalent Unit = ($55,000 + $92,000) ÷ 10,500 = $14

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Chapter 4: Activity-Based Costing 1. Product costs consist of only direct materials and direct labor. a. True b. False ANSWER: False 2. The selection of the factory overhead allocation method is important because the method selected determines the accuracy of the product cost. a. True b. False ANSWER: True 3. Managers depend on accurate factory overhead allocation to make decisions regarding product mix and product price. a. True b. False ANSWER: True 4. Managers depend on the accuracy of product costing to make decisions regarding continuing operations and product mix. a. True b. False ANSWER: True 5. A single plantwide factory overhead rate is computed by dividing total budgeted factory overhead by the total budgeted plantwide allocation base. a. True b. False ANSWER: True 6. Zorn Co. budgeted $600,000 of factory overhead cost for the coming year. Its plantwide allocation base, machine hours, is budgeted at 100,000 hours. Budgeted units to be produced are 200,000 units. Zorn's plantwide factory overhead rate is $3 per hour. a. True b. False ANSWER: False 7. Bob's Biscuit Corporation budgeted $1,200,000 of factory overhead cost for the coming year. Its plantwide allocation base, machine hours, is budgeted at 100,000 hours. Budgeted units to be produced are 200,000 units. Bob's plantwide factory overhead rate is $12 per machine hour. a. True b. False ANSWER: True 8. When a single plantwide factory overhead rate is used, the amount of overhead costs allocated to the different products is the same regardless of the direct labor hours used to produce them. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing ANSWER: False 9. The use of a single plantwide factory overhead rate assumes that the activities causing overhead costs are the same across all departments and products. a. True b. False ANSWER: True 10. The use of a single plantwide factory overhead rate assumes that the activities causing overhead costs are different across different departments and products. a. True b. False ANSWER: False 11. If the activities causing overhead costs are different across different departments and products, use of a single plantwide factory overhead rate will cause distorted product costs. a. True b. False ANSWER: True 12. If the budgeted factory overhead cost is $460,000, the budgeted direct labor hours are 80,000, and the actual direct labor hours are 6,700 for the month, the amount of factory overhead to be allocated is $38,525 (if the allocation is based on direct labor hours using a single plantwide rate). a. True b. False ANSWER: True 13. If the budgeted factory overhead cost is $460,000, the budgeted direct labor hours are 80,000, and the actual direct labor hours are 6,700 for the month, the single plantwide factory overhead rate for the month is $68.65 (if the allocation is based on direct labor hours). a. True b. False ANSWER: False 14. The single plantwide factory overhead rate method is very expensive to apply. a. True b. False ANSWER: False 15. A single plantwide factory overhead rate assumes that all overhead is directly related to one activity representing the entire plant. a. True b. False ANSWER: True 16. Multiple production department factory overhead rates are most useful when production departments significantly Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing differ in their manufacturing processes. a. True b. False ANSWER: True 17. Multiple production department factory overhead rates are most useful when production departments are very similar in their manufacturing processes. a. True b. False ANSWER: False 18. Multiple production department factory overhead rates are more accurate than are plantwide factory overhead rates. a. True b. False ANSWER: True 19. Multiple production department factory overhead rates are less accurate than are plantwide factory overhead rates. a. True b. False ANSWER: False 20. The use of a single plantwide factory overhead rate prevents product cost distortions when there are differences in the factory overhead rates across different production departments. a. True b. False ANSWER: False 21. The use of a single plantwide factory overhead rate prevents product cost distortions when there are differences among products in the ratios of allocation base usage. a. True b. False ANSWER: False 22. Use of a single plantwide factory overhead rate distorts product costs when there are differences in the factory overhead rates across different production departments and when there are differences among products in the ratios of allocation base usage. a. True b. False ANSWER: True 23. When production departments differ significantly in their manufacturing processes, it is recommended that the single plantwide rate method be used for allocating factory overhead. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing 24. In an effort to simplify the multiple production department factory overhead rate method, the same rate can be used for all departments. a. True b. False ANSWER: False 25. Activity cost pools are factory overhead costs initially budgeted for activities, such as machine usage, inspections, moving, production setups, and engineering activities. a. True b. False ANSWER: True 26. Activity cost pools are assigned to products, using factory overhead rates for each activity. a. True b. False ANSWER: True 27. Activity rates are computed by dividing the cost budgeted for each activity pool by the estimated activity base for that pool. a. True b. False ANSWER: True 28. When activity-based costing is used, the number of activities will generally be the same as the number of production departments. a. True b. False ANSWER: False 29. When activity-based costing is used, the estimated total factory overhead cost for a product is the sum of the product’s individual activity allocations. a. True b. False ANSWER: True 30. Activity-based costing is much easier to apply than single plantwide factory overhead allocation. a. True b. False ANSWER: False 31. ABC is used to allocate selling and administrative expenses to each product based on the product’s individual differences in consuming these activities. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing 32. Activity-based costing can be used to allocate period costs to various products that the company sells. a. True b. False ANSWER: True 33. Activity-based costing can only be used to allocate manufacturing factory overhead. a. True b. False ANSWER: False 34. Service organizations can use activity-based costing to allocate selling and administrative costs to services provided. a. True b. False ANSWER: True 35. In a service organization, the multiple department overhead rate method is the most effective in providing accurate information about the cost of services. a. True b. False ANSWER: False 36. When applied by service companies, the use of the single and multiple department overhead rate methods may lead to the same kinds of cost distortions often faced by manufacturing companies with those methods. a. True b. False ANSWER: True 37. Service companies can effectively use activity-based costing to compute product (service) costs. a. True b. False ANSWER: True 38. The activity information from an ABC product costing system can be used to isolate cost improvement opportunities. a. True b. False ANSWER: True 39. Which of the following are actual factory overhead allocation methods? a. single plantwide rate, multiple production department rates, and activity-based costing methods b. multiple production department rates, activity-based costing, and factory costing methods c. factory costing, single plantwide rate, and activity-based costing methods d. factory costing, single plantwide rate, and multiple production department rate methods ANSWER: a 40. Which of the following managerial decisions relies on accurate product costing?

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Chapter 4: Activity-Based Costing a. set product sales price b. discontinue a product line c. establish a product mix d. all of these choices ANSWER: d 41. Pinnacle Corp. budgeted $700,000 of overhead cost for the current year. Actual overhead costs for the year were $650,000. Pinnacle's plantwide allocation base, machine hours, was budgeted at 100,000 hours. Actual machine hours were 80,000. A total of 100,000 units was budgeted to be produced and 98,000 units were actually produced. Pinnacle's plantwide factory overhead rate for the current year is a. $8.13 per machine hour b. $7.00 per machine hour c. $6.50 per machine hour d. $8.75 per machine hour ANSWER: b 42. Everest Co. uses a single plantwide factory overhead rate based on direct labor hours. Overhead costs would be overcharged to which of the following departments? a. a labor-intensive department b. a capital-intensive department c. a materials-intensive department d. all of these choices ANSWER: a Adirondack Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plantwide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead.

Painting Dept.

Finishing Dept.

Totals

Overhead $250,000 75,000 $325,000

Total Direct Labor Hours 10,000 12,000 22,000

DLH per Product A 16 4 20

B 4 16 20

43. The single plantwide factory overhead rate (rounded to the nearest cent) for Adirondack Marketing Inc. is a. $25.00 per dlh b. $0.07 per dlh c. $14.77 per dlh d. $6.25 per dlh ANSWER: c 44. Using a single plantwide rate (rounded to the nearest cent), the factory overhead allocated per unit of Product A in the Painting Department is a. $236.32 per unit Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing b. $325.00 per unit c. $147.70 per unit d. $161.00 per unit ANSWER: a Ramapo Company produces two products, Blinks and Dinks. They are manufactured in two departments, Fabrication and Assembly. Data for the products and departments are as follows: Product Blinks Dinks

Number of Units 1,000 2,000

Direct Labor Hours per Unit 4 2

Machine Hours per Unit 5 8

All of the machine hours take place in the Fabrication Department, which has an estimated overhead of $84,000. All of the labor hours take place in the Assembly Department, which has an estimated total overhead of $72,000.

45. Ramapo Company uses a single plantwide overhead rate (rounded to the nearest cent) to apply all factory overhead costs based on direct labor hours. The factory overhead allocated per unit of Blinks is a. $78.00 b. $19.50 c. $37.45 d. $56.00 ANSWER: a 46. Ramapo Company uses a single plantwide overhead rate (rounded to the nearest cent) to apply all factory overhead costs based on direct labor hours. The factory overhead allocated per unit of Dinks is a. $77.00 b. $39.00 c. $19.50 d. $59.92 ANSWER: b 47. Ramapo Company uses a single plantwide overhead rate to apply all factory overhead costs. The single plantwide rate (rounded to the nearest cent), if it is based on machine hours instead of labor hours, is a. $9.00 per machine hour b. $19.50 per machine hour c. $7.43 per machine hour d. $4.00 per machine hour ANSWER: c 48. Common allocation bases for factory overhead costs are a. direct labor dollars, direct labor hours, and direct materials dollars b. direct labor dollars, direct labor hours, and machine hours c. direct labor dollars, direct labor hours, and machine dollars d. machine dollars, direct labor dollars, and direct labor hours Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing ANSWER: b 49. Roget Factory has budgeted factory overhead for the year at $15,500,000. It plans to produce 2,000,000 units of product. Budgeted direct labor hours are 1,050,000, and budgeted machine hours are 750,000. Using a single plantwide factory overhead rate based on direct labor hours, the factory overhead rate (rounded to the nearest cent) for the year is a. $14.76 b. $20.67 c. $7.75 d. $77.50 ANSWER: a 50. Botosan Factory has budgeted factory overhead for the year at $13,500,000, and budgeted direct labor hours for the year are 10,000,000. If the actual direct labor hours for the month of May are 350,000, the overhead allocated for May is a. $675,000 b. $470,630 c. $472,500 d. $236,250 ANSWER: c Blackwelder Factory produces two similar products: small table lamps and desk lamps. The total factory overhead budget is $640,000 with 400,000 estimated direct labor hours. It is further estimated that small table lamp production will require 275,000 direct labor hours, and desk lamp production will need 125,000 direct labor hours.

51. Using a single plantwide factory overhead rate with an allocation base of direct labor hours, the factory overhead that Blackwelder Factory will allocate to small table lamp production if actual direct labor hours for the period for small table lamp production is 285,000 would be a. $275,000 b. $285,000 c. $440,000 d. $456,000 ANSWER: d 52. Using a single plantwide factory overhead rate with an allocation base of direct labor hours, the factory overhead that Blackwelder Factory will allocate to desk lamp production if actual direct labor hours for the period for desk lamps is 118,000 would be a. $118,000 b. $200,000 c. $188,800 d. $125,000 ANSWER: c Challenger Factory produces two similar products: regular widgets and deluxe widgets. The total factory overhead budget is $675,000 with 300,000 estimated direct labor hours. Deluxe widget production requires 3 direct labor hours for each unit, and regular widget production requires 2 direct labor hours for each unit.

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Chapter 4: Activity-Based Costing 53. Using a single plantwide factory overhead rate (rounded to the nearest cent) with an allocation base of direct labor hours, the factory overhead that Challenger Factory will allocate to regular widget production if budgeted production of regular widgets for the period is 75,000 units and actual production of regular widgets for the period is 72,000 units would be a. $168,750 b. $324,000 c. $162,000 d. $337,500 ANSWER: b 54. Using a single plantwide factory overhead rate (rounded to the nearest cent) with an allocation base of direct labor hours, the factory overhead that Challenger Factory will allocate to deluxe widget production if budgeted production for the period for deluxe widgets is 50,000 units and actual production of deluxe widgets for the period is 58,000 units would be a. $391,500 b. $225,000 c. $261,000 d. $337,500 ANSWER: a Blue Ridge Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plantwide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. The following table presents information about estimated overhead and direct labor hours.

Painting Dept.

Finishing Dept.

Totals

Overhead $248,000 72,000 $320,000

Direct Labor Hours (dlh) 10,000 dlh 10,000 20,000 dlh

Product A 16 dlh 4 20 dlh

B 4 dlh 16 20 dlh

55. Using a single plantwide rate, the factory overhead allocated per unit of Product B is a. $496 b. $144 c. $640 d. $320 ANSWER: d 56. The factory overhead allocated per unit of Product B in the Painting Department if Blue Ridge Marketing Inc. uses the multiple production department factory overhead rate method is a. $49.60 per unit b. $99.20 per unit c. $28.80 per unit d. $64.00 per unit ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing 57. The factory overhead allocated per unit of Product A in the Finishing Department if Blue Ridge Marketing Inc. uses the multiple production department factory overhead rate method is a. $99.20 per unit b. $49.60 per unit c. $64.00 per unit d. $28.80 per unit ANSWER: d 58. The overhead from both production departments allocated to each unit of Product A if Blue Ridge Marketing Inc. uses the multiple production department factory overhead rate method is a. $396.80 per unit b. $425.60 per unit c. $320.00 per unit d. $214.40 per unit ANSWER: b 59. The overhead from both production departments allocated to each unit of Product B if Blue Ridge Marketing Inc. uses the multiple production department factory overhead rate method is a. $425.60 per unit b. $115.20 per unit c. $214.40 per unit d. $320.00 per unit ANSWER: c Kaumajet Factory produces two products: table lamps and desk lamps. It has two separate departments: Fabrication and Assembly. The factory overhead budget for the Fabrication Department is $550,000, using 500,000 direct labor hours.

The factory overhead budget for the Assembly Department is $400,000, using 80,000 direct labor hours.

60. If a table lamp requires 2 hours of fabrication and 1 hour of assembly, the amount of factory overhead that Kaumajet Factory will allocate to each unit of table lamp using the multiple production department factory overhead rate method with an allocation base of direct labor hours is a. $6.33 b. $4.91 c. $5.00 d. $7.20 ANSWER: d 61. If a desk lamp requires 1 hour of fabrication and 2 hours of assembly, the amount of factory overhead that Kaumajet Factory will allocate to each unit of desk lamp using the multiple production department factory overhead rate method with an allocation base of direct labor hours is a. $11.10 b. $4.91 c. $5.00 d. $7.20 Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing ANSWER: a 62. If a table lamp requires 2 hours of fabrication and 1 hour of assembly, the total amount of factory overhead that Kaumajet Factory will allocate to table lamps using the multiple production department factory overhead rate method with an allocation base of direct labor hours if 75,000 units are produced is a. $368,250 b. $540,000 c. $832,500 d. $475,000 ANSWER: b 63. If a desk lamp requires 1 hour of fabrication and 2 hours of assembly, the total amount of factory overhead that Kaumajet Factory will allocate to desk lamps using the multiple production department factory overhead rate method with an allocation base of direct labor hours if 26,000 units are produced is a. $540,000 b. $187,200 c. $475,000 d. $288,600 ANSWER: d 64. Using multiple department factory overhead rates instead of a single plantwide factory overhead rate a. results in more accurate product costs b. results in distorted product costs c. is simpler and less expensive to compute than a plantwide rate d. applies overhead costs to all departments equally ANSWER: a 65. Scoresby Co. uses 6 machine hours and 2 direct labor hours to produce Product X. It uses 8 machine hours and 16 direct labor hours to produce Product Y. Scoresby's Assembly and Finishing departments have factory overhead rates of $240 per machine hour and $160 per direct labor hour, respectively. How much total factory overhead will be allocated to a unit of each of the two products? a. Product X, $3,200; Product Y, $9,600 b. Product X, $800; Product Y, $800 c. Product X, $1,760; Product Y, $4,480 d. Product X, $1,440; Product Y, $2,560 ANSWER: c Aleutian Company produces two products: Rings and Dings. They are manufactured in two departments: Fabrication and Assembly. Data for the products and departments are listed below.

Product Rings Dings

Number of Units 1,000 2,000

Direct Labor Hours per Unit 4 3

Machine Hours per Unit 6 9

All of the machine hours take place in the Fabrication Department, which has estimated total factory overhead of $90,000.

All of the labor hours take place in the Assembly Department, which has estimated total factory overhead of $105,000.

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Chapter 4: Activity-Based Costing Aleutian Company uses the multiple production department factory overhead rate method. The Fabrication Department uses machine hours as an allocation base, and the Assembly Department uses direct labor hours.

66. The Assembly Department’s factory overhead rate (rounded to the nearest cent) is a. $10.50 per direct labor hour b. $19.50 per direct labor hour c. $3.75 per machine hour d. $4.38 per machine hour ANSWER: a 67. The total factory overhead allocated per unit of Rings is a. $65.25 b. $23.25 c. $44.10 d. $64.50 ANSWER: d 68. The total factory overhead allocated per unit of Dings is a. $65.25 b. $56.75 c. $23.25 d. $64.50 ANSWER: a 69. The Fabrication Department’s factory overhead rate (rounded to the nearest cent) is a. $10.50 per direct labor hour b. $9.00 per direct labor hour c. $8.12 per machine hour d. $3.75 per machine hour ANSWER: d 70. Which of the following would be inappropriate as an allocation base for calculating factory overhead rates? a. direct labor dollars b. direct labor hours c. machine hours d. total units produced ANSWER: d Panamint Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to five separate activity pools. The budgeted activity cost and activity base data by product are as follows: Activity Cost Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing Procurement Scheduling Materials handling Product development Production

Disk drives Tape drives Wire drives

$ 370,000 250,000 500,000 730,000 1,500,000

Number Number of of Purchase Production Orders Orders 4,000 300

Number of Moves 1,400

Number of purchase orders Number of production orders Number of moves Number of engineering changes Machine hours Number of Engineering Machine Hours Changes 10 2,000

Number of Units 2,000

4,000

150

800

10

8,000

4,000

12,000

800

4,000

25

10,000

2,500

71. The activity rate (rounded to the nearest cent) for the procurement activity cost pool is a. $43.53 per purchase order b. $18.50 per purchase order c. $15.42 per purchase order d. $37.00 per purchase order ANSWER: b 72. The activity rate (rounded to the nearest cent) for the scheduling activity cost pool is a. $200.00 per production order b. $20.00 per production order c. $29.41 per production order d. $10.42 per production order ANSWER: a 73. The activity rate (rounded to the nearest cent) for the materials handling cost pool is a. $58.82 per move b. $50.00 per move c. $20.83 per move d. $80.65 per move ANSWER: d 74. The activity rate (rounded to the nearest dollar) for the product development cost pool is a. $73,000 per engineering change b. $8,588 per engineering change c. $30,417 per engineering change d. $16,222 per engineering change ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing 75. The activity rate (rounded to the nearest cent) for the production cost pool is a. $62.50 per machine hour b. $150.00 per machine hour c. $75.00 per machine hour d. $176.47 per machine hour ANSWER: c 76. The activity-based cost (rounded to the nearest cent) for each disk drive unit is a. $92.25 b. $130.69 c. $394.12 d. $279.57 ANSWER: d 77. The activity-based cost (rounded to the nearest cent) for each wire drive unit is a. $204.13 b. $173.51 c. $744.06 d. $394.12 ANSWER: c 78. The activity-based cost (rounded to the nearest cent) for each tape drive unit is a. $97.73 b. $232.69 c. $394.12 d. $103.84 ANSWER: b 79. Which of the following is a cost pool used with the activity-based costing method? a. total selling and administrative expenses b. direct materials dollars c. total factory overhead d. production setups ANSWER: d 80. Activity rates are determined by a. dividing the actual cost for each activity pool by the actual activity base for that pool b. dividing the cost budgeted for each activity pool by the estimated activity base for that pool c. dividing the actual cost for each activity pool by the estimated activity base for that pool d. dividing the cost budgeted for each activity pool by the actual activity base for that pool ANSWER: b 81. Shubelik Company is changing to an activity-based costing method. It has determined that it will use three cost pools: setups, inspections, and assembly. Which of the following would be an inappropriate activity base for any of these three Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing activities? a. number of units to be produced b. number of setups c. number of inspections d. number of direct labor hours ANSWER: a 82. Given the following information, determine the activity rate (rounded to the nearest cent) for setups.

Activity Setups Inspections Assembly (dlh) a. $58.00 b. $18.00 c. $0.75 d. $5.09 ANSWER: b

Total Activity-Base Usage Budgeted Activity Cost 10,000 $180,000 24,000 120,000 80,000 400,000

Skagit Company manufactures Hooks and Nooks. The following shows the activities per product and total activity information: Hooks Nooks Activity Setups Inspections Assembly (dlh)

Units 4,000 8,000

Setups 1 2

Inspections 3 2

Assembly (dlh) 1 3

Total Activity-Base Usage Budgeted Activity Cost 20,000 $ 60,000 24,000 120,000 28,000 420,000

83. The total factory overhead to be allocated to each unit of Hooks is a. $33 b. $50 c. $11 d. $61 ANSWER: a 84. The total factory overhead to be allocated to Nooks is a. $300,000 b. $400,000 c. $488,000 d. $600,000 ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing Dawson Company manufactures small table lamps and desk lamps. The following shows the activities per product and the total overhead information:

Small table lamps Desk lamps Activity Setups Inspections Assembly (dlh)

Units 3,000 6,000

Setups 8,000 16,000

Inspections 9,000 15,000

Assembly (dlh) 16,000 12,000

Total Activity-Base Usage Budgeted Activity Cost 24,000 $ 60,000 24,000 120,000 28,000 280,000

85. The total factory overhead to be allocated to desk lamps is a. $306,667 b. $235,000 c. $230,000 d. $225,000 ANSWER: b 86. The total factory overhead (rounded to the nearest cent) to be allocated to each unit of small table lamps is a. $75.00 b. $39.17 c. $38.33 d. $17.50 ANSWER: a 87. Bonnington Company manufactures small table lamps and desk lamps. The following table shows the activities per product:

Small table lamps Desk lamps

Units 4,000 8,000

Setups 4,000 16,000

Inspections 15,000 7,000

Assembly (dlh) 6,000 20,000

Using the following information prepared by Bonnington Company, the total factory overhead to be allocated to small table lamps is Activity Setups Inspections Assembly (dlh) a. $314,000 b. $209,333 c. $202,000

Total Activity-Base Usage Budgeted Activity Cost 20,000 $ 80,000 22,000 132,000 26,000 416,000

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Chapter 4: Activity-Based Costing d. $104,000 ANSWER: c 88. If selling and administrative expenses are allocated to different products for decision making, they should be reported in the financial statements as a. part of cost of goods manufactured b. a factory overhead cost c. a period cost d. part of cost of goods sold ANSWER: c 89. Activity-based costing can be beneficial in allocating selling and administrative expenses to various products for managerial decision making. Which of the following would be the best allocation base for help desk costs? a. number of calls b. square footage of the help desk office c. number of products sold d. number of sales employees ANSWER: a 90. Which of the following is a reason for banks to use activity-based costing? a. to determine the amounts to charge customers for services provided b. to determine service quality c. to determine profitability of services provided d. to determine both amounts to charge and the profitability of services provided ANSWER: d Beauty Beyond Words Salon uses an activity-based costing system to determine the cost of services. The salon has determined the costs of services by activity and activity usage as follows: Activity Hair washing Conditioning Chemical treatment Styling

Activity Rate $ 4.00 3.50 25.00 10.00 Hair Washing Conditioning

Haircut Complete style Perm Highlights

1 1 2 3

1 1 3 4

Chemical Treatment 0 0 1 2

Styling 0 1 1 1

91. The cost of services (rounded to the nearest cent) for a haircut is a. $4.00 b. $7.50 c. $3.50 Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing d. $11.50 ANSWER: b 92. Determine the cost of services for a highlight.

ANSWER: Hair washing 3 Conditioning 4 Chemical treatment 2 Styling 1

× × × ×

$4.00 $3.50 $25.00 $10.00

Total

= = = =

$12.00 14.00 50.00 10.00 $86.00

93. Which of the following is a way to accomplish an activity cost reduction? a. improve operations so that the activity-base usage per unit is reduced b. change the classification of employees doing an activity so as to increase the activity rate c. use lower-cost materials d. none of these choices ANSWER: a 94. WeeBee Company has three assembly labor classifications: S-1, S-2, and S-3. The three classifications are paid $16, $19, and $22 per hour, respectively. The assembly activity for a product uses an S-2 employee who performs that task in 24 minutes. To reduce the activity cost per unit, a product engineer proposes using a higher-rated employee who can perform the assembly in 21 minutes. A manager proposes using a lower-rated employee who can perform the assembly in 30 minutes. Which of the following provides the most cost-effective solution? a. use the S-1 employee b. use the S-2 employee c. use the S-3 employee d. use either the S-1 or S-3 employee ANSWER: b 95. Graham Company wants to reduce activity costs by $0.30 per unit. The setup activity for a batch of 100 units of Part RR110 currently costs $80 per setup. A process engineer proposes reengineering the setup activity so that it takes 60% of the original cost per setup. By how much will this reduce activity costs per unit? Will more cost savings need to be found? a. $0.53; no b. $0.48; no c. $0.32; no d. $0.22; yes ANSWER: c 96. The total factory overhead for Big Light Company is budgeted for the year at $807,500. Big Light manufactures two different products: night lights and desk lamps. Night lights are budgeted for 60,000 units. Each night light requires 1/2 hour of direct labor. Desk lamps are budgeted for 80,000 units. Each desk lamp requires 2 hours of direct labor.

Determine (a) the total number of budgeted direct labor hours for the year, (b) the single plantwide factory overhead rate using direct labor hours as the allocation base, and (c) the factory overhead allocated per unit for each product using the single plantwide factory overhead rate determined in (b). Round dollar amounts to the nearest cent.

ANSWER: a. (60,000 × ½) + (80,000 × 2) = 190,000 direct labor hours b. $807,500 ÷ 190,000 = $4.25 per direct labor hour Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing c. Night lights: $4.25 × ½ = $2.13 per unit Deck lamps: $4.25 × 2 = $8.50 per unit

97. Sawtooth Leather Company manufactures leather handbags and moccasins. Total factory overhead is budgeted for $360,000. For simplicity, the company has decided to use a single plantwide factory overhead rate to allocate factory overhead based on direct labor hours. Handbags are budgeted for 60,000 units. Each handbag requires 2 hours of direct labor. Moccasins are budgeted for 40,000 pairs. Each pair of moccasins requires 3 hours of direct labor. Determine the amount of factory overhead to be allocated per unit(pair) for each product. Round dollar amounts to the nearest cent.

ANSWER: Handbags: 60,000 units × 2 direct labor hours = 120,000 direct labor hours Moccasins: 40,000 pairs × 3 direct labor hours = 120,000 direct labor hours Total 240,000 direct labor hours Single Plantwide Factory Overhead Rate = $360,000 ÷ 240,000 direct labor hours = $1.50 per direct labor hour Handbags: $1.50 × 2 = $3.00 per unit Moccasins: $1.50 × 3 = $4.50 per unit 98. Bugaboo Co. manufactures three types of cookies: Fluffs, Crinkles, and Snaps. The production process is relatively simple, and factory overhead costs are allocated to products using a single plantwide factory overhead rate based on direct labor hours. Information for the month of May, Bugaboo's first month of operations, follows: Budgeted Unit Volume 80,000 boxes 60,000 boxes 20,000 boxes

Fluffs Crinkles Snaps

Direct Labor Hours per Unit 0.10 0.20 0.50

Bugaboo has budgeted direct labor costs for May at $8.50 per hour. Budgeted direct materials costs for May are: Fluffs, $0.75/unit; Crinkles $0.40/unit; and Snaps $0.30/unit.

Bugaboo's budgeted overhead costs for May are calculated as follows: Indirect labor Utilities Supplies Depreciation Total

$280,000 65,000 45,000 30,000 $420,000

a.

Compute Bugaboo's plantwide factory overhead rate for May.

b.

Compute the product cost in May for each type of cookie.

c.

Does Bugaboo's use of a plantwide factory overhead rate in any way distort the product costs for May?

ANSWER: a.

Fluffs Crinkles Snaps Total

80,000 × 0.10 = 60,000 × 0.20 = 20,000 × 0.50 =

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Chapter 4: Activity-Based Costing Single Plantwide Factory Overhead Rate = Total Budgeted Factory Overhead ÷ Total Budgeted Plantwide Allocation Base = $420,000 ÷ 30,000 dlh = $14.00 per direct labor hour b.

Cost per box: Direct materials Direct labor Factory overhead Total manufacturing cost

Fluffs $0.75 0.85 1.40 $3.00

Crinkles $0.40 1.70 2.80 $4.90

Snaps $ 0.30 4.25 7.00 $11.55

c.

A much higher overhead rate per box is being charged to the product that uses the highest amount of the single allocation base. This may be an incorrect allocation of factory overhead costs.

99. Kettle Factory produces two similar products: gloves and mittens. The total factory overhead budget is $1,050,000 with 600,000 estimated direct labor hours. It is further estimated that glove production will require 375,000 direct labor hours and mitten production will require 225,000 direct labor hours. a.

Determine the single plantwide factory overhead rate based on direct labor hours. b.

How much is the factory overhead cost per pair of gloves (rounded to the nearest cent) if each pair requires 2 hours to produce? c.

How much is the factory overhead cost per pair of mittens (rounded to the nearest cent) if each pair takes 1.5 hours to produce? d.

How much total factory overhead will be allocated to glove production if 187,500 pairs are budgeted and 190,000 pairs are actually produced during the period? e.

How much total factory overhead will be allocated to mitten production if 150,000 pairs are budgeted and 140,000 pairs are actually produced during the period?

ANSWER: a. $1,050,000 ÷ 600,000 = $1.75 per direct labor hour b. 2 hours × $1.75 = $3.50 c. 1.5 hours × $1.75 = $2.63 d. $3.50 × 190,000 = $665,000 e. $2.63 × 140,000 = $368,000 100. Explain why it is imperative that proper factory overhead be allocated in factories that produce multiple products.

ANSWER: Proper allocation of factory overhead avoids "bad pricing." If too much overhead is allocated to a unit, then overpricing could be the outcome. On the other hand, if a product is not charged enough overhead, then underpricing could occur. Both situations can be very detrimental to the company's profits.

101. Condoleezza Co. manufactures two products, A and B, in two production departments, Assembly and Finishing.

Condoleezza Co. expects to produce 10,000 units of Product A and 20,000 units of Product B in the coming year.

Budgeted factory overhead costs for the coming year are as follows: Assembly Finishing Total

$310,000 240,000 $550,000

The machine hours expected to be used in the coming year are as follows: Assembly Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing Department 15,100 4,900 20,000

Product A Product B Totals a. b. c. d.

Department 9,000 11,000 20,000

Compute the plantwide factory overhead rate, assuming the single plantwide factory overhead rate method is used . Round per-unit dollar amounts to the nearest cent.

Compute the production department factory overhead rates, assuming the multiple production department factory overhead rate method is used. Round per-unit dollar amounts to the nearest cent.

Compute the factory overhead allocated per unit for each product using (1) the single plantwide rate and (2) production department factory overhead rates. Round per-unit dollar amounts to the nearest cent.

Which method is better (single or multiple)? Why?

ANSWER: a. b.

= $550,000 ÷ 40,000 machine hours = $13.75 per machine hour Production department rates: = $310,000 ÷ 20,000 machine hours Assembly Dept. Rate = $15.50 per machine hour Single Plantwide Rate

Finishing Dept. Rate

= $240,000 ÷ 20,000 machine hours = $12.00 per machine hour

c. Factory overhead cost per unit: (1) Plantwide rate: Product A: $13.75 per mh × 24,100 hours Per unit: $331,375 ÷ 10,000

= =

$331,375 $33.14

= =

$218,625 $10.93

(2) Departmental rates: Product A: $15.50 per mh × 15,100 mh $12.00 per mh × 9,000 mh Total

= =

$234,050 108,000 $342,050

Per unit:

$342,050 ÷ 10,000

=

$34.21

Product B:

$15.50 per mh × 4,900 mh

= =

$ 75,950 132,000

Product B:

$13.75 per mh × 15,900 hours Per unit: $218,625 ÷ 20,000

$12.00 per mh × 11,000 mh Total Per unit:

$207,950 $207,950 ÷ 20,000

=

$10.40

d. The multiple production department factory overhead rate method is better. This method is more accurate. Using the single plantwide factory overhead rate method undercosts each unit of A and overcosts each unit of B.

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Chapter 4: Activity-Based Costing 102. Camper’s Edge Factory produces two products: canopies and tents. The total factory overhead is budgeted at $750,000 for the year, divided between two departments: Cutting, $350,000, and Sewing, $400,000. Each canopy requires 2 direct labor hours in Cutting and 1 direct labor hour in Sewing. Each tent requires 1 direct labor hour in Cutting and 6 direct labor hours in Sewing. Production for the year is budgeted for 20,000 canopies and 10,000 tents. Determine the: a. Total number of budgeted direct labor hours for the year in each department. b. Departmental factory overhead rate (rounded to the nearest cent) for each department. c. Factory overhead allocated per unit of each product, using the departmental factory overhead rates determined in (b).

ANSWER: a.

Cutting: (20,000 canopies × 2 dlh) + (10,000 tents × 1 dlh) = 50,000 direct labor hours Sewing: (20,000 canopies × 1 dlh) + (10,000 tents × 6 dlh) = 80,000 direct labor hours b.

Cutting: $350,000 ÷ 50,000 dlh = $7.00 Sewing: $400,000 ÷ 80,000 dlh = $5.00 c.

Canopy: Cutting: 2 dlh × $7.00 = Sewing: 1 dlh × $5.00 = Total FOH allocated per canopy

$14.00 5.00 $19.00

Tent: Cutting: 1 dlh × $7.00 = Sewing: 6 dlh × $5.00 = Total FOH allocated per tent

$ 7.00 30.00 $37.00

103. Ratchford Clocks manufactures alarm clocks and wall clocks and allocates overhead based on direct labor hours. The production process is set up in three departments: Assembly, Finishing, and Calibrating. The following is information regarding the direct labor used to produce one unit of the two clocks: Per-Unit Hours Alarm clocks Wall clocks Total direct labor hours

Assembly 3 2 5

Finishing 1 3 4

Calibrating 1 2 3

Factory overhead is budgeted for the year as follows: Assembly Department Finishing Department Calibrating Department Total factory overhead

$595,000 200,000 140,000 $935,000

Ratchford Clocks is planning to manufacture 50,000 alarm clocks and 10,000 wall clocks during the year. a. b. c. d.

Determine the total number of direct labor hours that will be needed by each department.

Determine the factory overhead rate by department using the multiple production department factory overhead rate method. Round to the nearest cent.

Determine the amount of factory overhead to be allocated to each unit of alarm clocks and wall clocks. Round to the nearest cent.

Determine the amount of total factory overhead to be allocated to the alarm clocks and wall clocks.

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Chapter 4: Activity-Based Costing ANSWER: a. Assembly: (3 dlh × 50,000) + (2 dlh × 10,000) = 170,000 dlh Finishing: ( 1 dlh × 50,000) + (3 dlh × 10,000) = 80,000 dlh Calibrating: ( 1 dlh × 50,000) + (2 dlh × 10,000) = 70,000 dlh b. Assembly: ($595,000 ÷ 170,000) = $3.50 per direct labor hour Finishing: ($200,000 ÷ 80,000) = $2.50 per direct labor hour Calibrating: ($140,000 ÷ 70,000) = $2.00 per direct labor hour c. Alarm clock: (3 dlh × $3.50) + (1 dlh × $2.50) + (1 dlh × $2.00) = $15.00 per unit Wall clock: (2 dlh × $3.50) + (3 dlh × $2.50) + (2 dlh × $2.00) = $18.50 per unit d. Alarm clock: (50,000 units × $15.00) = Wall clock: (10,000 units × $18.50) =

$750,000 185,000 $935,000

Total

104. Anazi Leather Company manufactures leather handbags and moccasins. The company has been using the single plantwide factory overhead rate method but has decided to evaluate the multiple production department factory overhead rate method to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices.

Handbags = 60,000 units, 3 hours of direct labor Moccasins= 40,000 units, 2 hours of direct labor Total budgeted factory overhead cost = $360,000 The company has two different production departments: Cutting and Sewing. The Cutting Department has a factory overhead budget of $80,000. Each unit will require 1 direct labor hour or a total of 100,000 direct labor hours.

The Sewing Department estimates factory overhead in the amount of $280,000. Handbags require 2 hours of sewing time, and Moccasins require 1 hour for a total of 160,000 direct labor hours.

Using the multiple production department factory overhead rate method, compute the total factory overhead to be allocated to each product using direct labor hours as the allocation base.

ANSWER: Cutting Department factory overhead rate: $80,000 ÷ 100,000 dlh = $0.80 per dlh Sewing Department factory overhead rate: $280,000 ÷ 160,000 dlh = $1.75 per dlh Moccasins: (1 dlh × $0.80 × 40,000 units) + (1 dlh × $1.75 × 40,000 units) = $102,000 Handbags: (1 dlh × $0.80 × 60,000 units) + (2 dlh × $1.75 × 60,000 units) = 258,000 Total factory overhead allocation $360,000 105. Tulip Company produces two products, T and U. The indirect labor costs include the following two items: Plant supervision Setup labor (indirect) Total indirect labor

$ 700,000 300,000 $1,000,000

The following activity-base usage and unit production information is available for the two products:

Product T Product U

Number of Setups 200 200

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Direct Labor Hours 20,000 30,000

Units 900 1,100 Page 23

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Chapter 4: Activity-Based Costing Totals a. b. c. d. e.

400

50,000

2,000

Determine the single plantwide factory overhead rate, using direct labor hours as the activity base.

Determine the factory overhead allocated per unit for Products T and U, using the single plantwide factory overhead rate. Round to the nearest cent.

Determine the activity rate for plant supervision and setup labor, assuming that the activity base for supervision is direct labor hours and the activity base for setup labor is number of setups.

Determine the factory overhead allocated per unit for Products T and U, using the activity-based costing method. Round to the nearest cent.

Why is the factory overhead allocated per unit different for the two products under the two methods?

ANSWER: a. Single plantwide factory overhead rate Direct Labor Hours

b.

Product T Product U

20,000 30,000

×

= $1,000,000 ÷ 50,000 dlh = $20 per dlh

Rate

= Overhead ÷

Units

Overhead per Unit

$20 20

$400,000 $600,000

900 1,100

$444.44 $545.45

c. Activity rates: Activity cost Activity base

Setup $300,000 ÷ 400 $ 750 per setup

Activity rate d.

Product T: Setup Production Total Units Factory overhead cost per unit

Product U: Setup Production Total Units Factory overhead cost per unit e.

ActivityBase Usage 200 20,000

×

Activity Rate $750 14

Supervision $700,000 ÷ 50,000 $ 14 per dlh

=

Cost $150,000 280,000 $430,000 ÷ 900 $ 477.78

ActivityBase Usage 200 30,000

×

Activity Rate $750 14

=

Activity Cost $150,000 420,000 $570,000 ÷ 1,100 $ 518.18

The factory overhead cost per unit under the single plantwide rate method is distorted because Product U consumes more setup-related activity relative to the amount of direct labor consumed than does Product T. Thus, the activity-based costing method, which separates setup according to its own activity base, provides a more accurate

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Chapter 4: Activity-Based Costing estimate of the factory overhead cost per unit.

106. Valhalla Company manufactures small table lamps and desk lamps. The following shows the activities per product: Small table lamps Desk lamps

Units 8,000 16,000

Setups Inspections Assembly (dlh) 10,000 32,000 8,000 30,000 14,000 46,000

Using the following information prepared by Valhalla Company, determine (a) the activity rates for each activity and (b) the activity-based factory overhead per unit (rounded to the nearest cent) for each product.

Total Activity-Base Usage Budgeted Activity Cost 40,000 $160,000 46,000 230,000 54,000 324,000

Activity Setups Inspections Assembly (dlh)

ANSWER: a. Setups: $160,000 ÷ 40,000 = $4 per setup Inspections: $230,000 ÷ 46,000 = $5 per inspection Assembly: $324,000 ÷ 54,000 = $6 per direct labor hour b. Small table lamp: (10,000 × $4) + (32,000 × $5) + (8,000 × $6) = $248,000 ÷ 8,000 = $31.00 Desk lamp: (30,000 × $4) + (14,000 × $5) + (46,000 × $6) = $466,000 ÷ 16,000 = $29.13 107. Klamath Corp. produces two products: saws and drills. Three activities are used in their manufacture. These activities and their associated costs and bases are as follows: Activity Stamping Assembly Setup

Budgeted Costs $200,000 400,000 30,000

Activity Base Machine hours Labor hours Number of setups

Saws 4,000 7,000 3

Drills 6,000 13,000 12

Units produced

500

600

Activity Base Machine hours Labor hours Number of setups Total 10,000 20,000 15

a. Determine the activity rate for each activity. b. Determine the factory overhead to be allocated to each unit of product. Round to the nearest cent.

ANSWER: a.

Stamping: $200,000 ÷ 10,000 = $20 per machine hour Assembly: $400,000 ÷ 20,000 = $20 per labor hour Setup: $30,000 ÷ 15 = $2,000 per setup b.

Saws: $452.00 per unit [(4,000 × $20) + (7,000 × $20) + (3 × 2,000)] ÷ 500 Drills: $673.33 per unit [(6,000 × $20) + (13,000 × $20) + (12 × 2,000)] ÷ 600 Copyright Cengage Learning. Powered by Cognero.

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Chapter 4: Activity-Based Costing 108. Pikes Peak Leather Company manufactures leather handbags and moccasins. The company has been using the single plantwide factory overhead rate method but has decided to evaluate the activity-based costing method to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices.

The total budgeted factory overhead cost is $360,000, broken down as follows: Cutting— Sewing— Direct Labor Direct Labor QC— Purchase Products Hours Hours Setups Inspections Orders Handbags 60,000 60,000 500 200 100 Moccasins 40,000 80,000 300 800 300 Total 100,000 140,000 800 1,000 400 Budget $40,000 $210,000 $80,000 $20,000 $10,000 Determine the amount of factory overhead to be allocated to each unit using activity-based costing. Round to the nearest cent. The company plans to produce 60,000 handbags and 40,000 moccasins.

ANSWER: Handbags: Cutting: $40,000 ÷ 100,000 × 60,000 = $24,000 Sewing: $210,000 ÷ 140,000 × 60,000 = 90,000 Setups: $80,000 ÷ 800 × 500 = 50,000 QC inspections: $20,000 ÷ 1,000 × 200 = 4,000 Purchase orders: $10,000 ÷ 400 × 100 = 2,500 Total allocation of factory overhead $170,500 ÷ 60,000 = $2.84 per unit Moccasins: Cutting: $40,000 ÷ 100,000 × 40,000 = Sewing: $210,000 ÷ 140,000 × 80,000 = Setups: $80,000 ÷ 800 × 300 = QC inspections: $20,000 ÷ 1,000 × 800 = Purchase orders: $10,000 ÷ 400 × 300 = Total allocation of factory overhead

$ 16,000 120,000 30,000 16,000 7,500 $189,500 ÷ 40,000 = $4.74 per unit

109. Shanghai Company sells glasses, fine china, and everyday dinnerware. It uses activity-based costing to determine the cost of the shipping and handling activity. The shipping and handling activity has an activity rate of $14 per pound. A box of glasses weighs 2 pounds, a box of fine china weighs 4 pounds, and a box of everyday dinnerware weighs 6 pounds. a. Determine the shipping and handling activity cost to be allocated to each unit of product. b. Determine the total shipping and receiving costs to be allocated to the fine china if 3,500 boxes are shipped.

ANSWER: a. Glasses: 2 lbs. × $14 = $28 Fine china: 4 lbs. × $14 = $56 Everyday dinnerware: 6 lbs. × $14 = $84 b. $56 × 3,500 = $196,000 110. Transformations Hair Salon uses an activity-based costing system to determine the cost of services. The salon has determined the costs of services by activity as follows: Activity Hair washing Copyright Cengage Learning. Powered by Cognero.

Activity Rate $ 1.50 Page 26

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Chapter 4: Activity-Based Costing Conditioning Chemical treatment Styling a.

Using the information provided, determine the cost of services for each of the following services provided by the salon:

Haircut Complete style Perm Highlights b..

2.00 20.00 10.00

Hair Washing Conditioning 1 1 1 1 2 3 3 4

Chemical Treatment 0 0 1 2

Styling 0 1 1 1

If the company budgets 10,000 haircuts, 4,000 complete styles, 3,500 perms, and 5,500 highlights, determine the budget for cost of services.

ANSWER: a. Haircut: $1.50 + $2.00 = $3.50 Complete style: $1.50 + $2.00 + $10.00 = $13.50 Perm: ($1.50 × 2) + ($2.00 × 3) + $20.00 + $10.00 = $39.00 Highlights: ($1.50 × 3) + ($2.00 × 4) + ($20.00 × 2) + $10.00 = $62.50 b.

Services Haircut Complete style Perm Highlights Total

Per-Unit Cost $ 3.50 13.50 39.00 62.50

× × × ×

Total Service Quantity 10,000 4,000 3,500 5,500

= = = =

Total Costs $ 35,000 54,000 136,500 343,750 $569,250

111. Troglodyte University uses activity-based costing to assign indirect costs to academic departments, using three activities. The activity base, budgeted activity cost, and estimated activity-base usage for each activity are identified as follows: Activity Facilities Instruction Student services

Activity Base Square feet Number of course sections Number of students

Budgeted Activity Activity-Base Cost Usage $ 800,000 80,000 square feet 1,200,000 600 sections 290,000

2,500 students

The activity-base usage associated with the Archaeology and Geology departments is as follows: Department Archaeology Geology

Facilities 8,000 square feet 5,200 square feet

Instruction 8 sections 15 sections

Student Services 150 students 200 students

Determine the: a. Activity rate for each activity.

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Chapter 4: Activity-Based Costing b. The total activity cost for the Archaeology Department.

ANSWER: a.

Budgeted ActivityActivity Activity Cost ÷ Base Usage Facilities $ 800,000 80,000 square ÷ feet Instruction 1,200,000 ÷ 600 sections Student services

290,000

÷

2,500 students

= = = =

Activity Rate $10 per sq. ft.

2,000 per section 116 per student

b. The total activity cost for the Archaeology Department is $113,400, determined as follows: ActivityActivity Activity Rate × Base Usage = Activity Cost Facilities $ 10 per sq. ft. × 8,000 square = $ 80,000 feet Instruction $2,000 per × 8 sections = 16,000 section Student services $116 per × 150 students = 17,400 student Total $113,400

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Chapter 5: Support Department and Joint Cost Allocation True / False 1. A support department provides a necessary service to produce a product. a. True b. False ANSWER: True 2. The Maintenance Department that services machines used in the production process is an example of a support department. a. True b. False ANSWER: True 3. Support departments are sometimes called production departments because the two terms mean the same thing. a. True b. False ANSWER: False 4. Support departments are sometimes called service departments because they provide services to other departments. a. True b. False ANSWER: True 5. Support departments are normally accounted for as an investment center. a. True b. False ANSWER: False 6. Because support department costs are directly related to production, they are easily applied to products. a. True b. False ANSWER: False 7. Support departments incur direct costs such as the cost of wages and salaries for employees who work in a machine maintenance department. a. True b. False ANSWER: True 8. If a company considers support department costs to be facility-level costs, product costs may be inaccurate because certain products use support department services more heavily than others. a. True b. False ANSWER: True 9. It is more accurate to ignore support department costs when determining product costs.

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Chapter 5: Support Department and Joint Cost Allocation a. True b. False ANSWER: False 10. It is sometimes difficult, if not impossible, to find an appropriate cost driver for applying support department costs. a. True b. False ANSWER: True 11. Because support department costs are directly related to production, they are applied to product costs as a part of direct labor. a. True b. False ANSWER: False 12. Because support department costs are indirectly related to production, they are applied to products as part of overhead. a. True b. False ANSWER: True 13. Overhead can be applied to products using one of three different methods: single plantwide rate, multiple production department rates, and activity-based costing. a. True b. False ANSWER: True 14. When using a single plantwide overhead rate, support department costs are separated from all other overhead costs in the application process. a. True b. False ANSWER: False 15. When a single plantwide overhead rate is used to apply overhead to products, support department costs are included with all other overhead costs and are applied using a single cost driver. a. True b. False ANSWER: True 16. A major drawback to using a single plantwide rate is that it is applied using a single driver for all overhead costs and it is unlikely that the driver is appropriate for every type of overhead. a. True b. False ANSWER: True 17. In the process of applying overhead using multiple production department rates, overhead costs are directly traced to support and production departments and are then allocated to production departments based on the amount of support Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation activity used by each department. a. True b. False ANSWER: True 18. When using multiple production department rates, all overhead costs are allocated to production departments and none of them are directly traced to support departments. a. True b. False ANSWER: False 19. When using multiple production department rates, there is a maximum of one support department per production process. a. True b. False ANSWER: False 20. The goal of using any overhead rate is to apply all production costs to the product. a. True b. False ANSWER: True 21. In activity-based costing, support department costs are referred to as support activity costs. a. True b. False ANSWER: True 22. The process for allocating support activity costs with activity-based costing is similar to that used with a single plantwide rate. a. True b. False ANSWER: False 23. The final step in using activity-based costing to apply overhead to products is applying production activity costs to products using cost drivers for each production activity. a. True b. False ANSWER: True 24. When using ABC to allocate overhead, there are only two commonly used methods: the direct method and the sequential method. a. True b. False ANSWER: False 25. The sequential method of allocating support department costs to production using the ABC method is the easiest and Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation most accurate. a. True b. False ANSWER: False 26. The direct method of allocating support department costs to production using the ABC method is the easiest and most accurate. a. True b. False ANSWER: False 27. The direct method of allocating support department costs to production using the ABC method is the easiest and least accurate. a. True b. False ANSWER: True 28. The reciprocal services method of allocating support department costs to production using the ABC method is the easiest and least accurate. a. True b. False ANSWER: False 29. The reciprocal services method of allocating support department costs to production using the ABC method is the most difficult and most accurate method. a. True b. False ANSWER: True 30. The direct, sequential, and reciprocal services methods of allocating support department costs to production departments using ABC require a three-step process. a. True b. False ANSWER: False 31. The direct, sequential, and reciprocal services methods of allocating support department costs to production departments using ABC require a five-step process before costs can be applied to products. a. True b. False ANSWER: True 32. Under the direct method of allocating support department costs to production departments using ABC, all support department costs are allocated directly to production departments. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation 33. Under the reciprocal services method of allocating support department costs to production departments using ABC, any inter-support-department usages are ignored. a. True b. False ANSWER: False 34. The sequential method of allocating support department costs to production departments using ABC ignores the reality that some support departments may also serve other support departments. a. True b. False ANSWER: False 35. The sequential method of allocating support department costs to production departments using ABC is also known as the step-down method. a. True b. False ANSWER: True 36. Under the sequential method of allocating support department costs to production departments using ABC, support department costs are allocated back to support departments from which costs have already been allocated. a. True b. False ANSWER: False 37. Under the reciprocal services method of allocating support department costs to production departments using ABC, all inter-support-department services are considered in the allocation process. a. True b. False ANSWER: True 38. When multiple manufacturing processes generate a single output, it is called a joint manufacturing process. a. True b. False ANSWER: False 39. Joint costs are inseparable after the split-off point. a. True b. False ANSWER: False 40. One of the reasons that James Company needs to estimate the costs of its joint products is to determine selling prices for them. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation 41. The outputs generated from a joint manufacturing process are called joint costs. a. True b. False ANSWER: False 42. The outputs generated from the joint manufacturing process are called joint products. a. True b. False ANSWER: True 43. Before the split-off point, costs are traced to the individual products that will result from the split. a. True b. False ANSWER: False 44. After the split-off point, new costs incurred are traced to the individual products resulting from the split. a. True b. False ANSWER: True 45. Because joint costs are by definition inseparable, managers must be careful when analyzing and interpreting product costs that include joint costs. a. True b. False ANSWER: True 46. The physical units and weighted average methods are the only two common methods for allocating joint costs. a. True b. False ANSWER: False 47. None of the four common methods for allocating joint costs will consistently allocate joint costs more accurately than another. a. True b. False ANSWER: True 48. While none of the four common methods for allocating joint costs will consistently allocate joint costs more accurately than another, one method may be more appropriate than another depending on the production process. a. True b. False ANSWER: True 49. The physical units method of joint cost allocation uses market values in the allocation process.

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Chapter 5: Support Department and Joint Cost Allocation a. True b. False ANSWER: False 50. The market value at split-off method of allocating joint costs is easy to apply because estimating market value at the split-off point is always possible and is very accurate. a. True b. False ANSWER: False 51. Falco Industries may want to use the net realizable value method of allocating joint costs because it manufactures many products that are processed further after the split-off point and will be sold for a much higher price after the additional processing. a. True b. False ANSWER: True 52. Managers will often find it necessary to use a subjective determination regarding the most appropriate method to use for allocating joint costs. a. True b. False ANSWER: True 53. Goods of low value that are produced from a joint production process are called waste. a. True b. False ANSWER: False 54. The revenues from by-products may be used to offset the costs of the joint production process or they may be reported as other revenue on the income statement (with no related cost of goods sold). a. True b. False ANSWER: True Multiple Choice 55. Which of the following terms is commonly used to describe the departments within a company that provide a necessary service to produce a product but are not directly involved in production? a. investment center departments b. expense departments c. costing departments d. support departments ANSWER: d 56. Support departments are sometimes called a. indirect departments Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation b. cost departments c. service departments d. activity-based departments ANSWER: c 57. Which of the following describes how support department costs are related to production? a. They are a part of direct labor cost. b. They are a part of direct materials cost. c. They are a part of both direct labor and direct materials costs. d. They are indirectly related to production.

ANSWER: d 58. Support department costs are normally accounted for as which of the following responsibility center classifications? a. profit center b. revenue center c. investment center d. cost center ANSWER: d 59. Which of the following is the type of work done in a production department as opposed to a support department? a. putting together the final product on an assembly line b. janitorial services provided for the production facility c. maintenance work done to keep production machines running smoothly d. safety and security services provided to keep the production facility safe ANSWER: a 60. Which of the following statements is false? a. All direct costs of the support department are accumulated in the department cost center. b. Support departments may incur both variable and fixed costs, such as salaries and wages. c. Support departments incur only variable factory overhead costs. d. General factory overhead, such as depreciation, may be assigned to a support department.

ANSWER: c 61. Airco Company is tempted to consider support department costs to be facility-level costs that do not need to be applied to products. Which of the following explains what is misguided about this approach? a. Product costs may be inaccurate because direct labor and direct materials are not correctly accounted for in the product costing system. b. Product costs may be inaccurate because incorrect cost drivers are used. c. Product costs may be inaccurate because support department services may be used more heavily by some products than others. d. Product costs may be inaccurate because straight-line depreciation on factory equipment is treated as a general and administrative expense on the income statement.

ANSWER: c 62. Which of the following statements is true?

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Chapter 5: Support Department and Joint Cost Allocation a. Support department cost allocations should be incorporated into a product costing system. b. Support department cost allocations should be incorporated into the general accounting system but do not need to be incorporated into a product costing system. c. Support department cost allocations can be ignored for more accurate product costing. d. Support department cost allocations should be rolled into the general and administrative costs associated with the corporate office expenses.

ANSWER: a 63. Which of the following explains why it is difficult to apply support department costs, such as janitorial services, to products? a. It is difficult to measure the costs. b. The costs cannot be quantified in the general ledger. c. Appropriate cost drivers are difficult, if not impossible, to determine. d. Support department activities are hard to define.

ANSWER: c 64. Which of the following is the main feature of support department costs? a. They are associated with sales commissions. b. They are office supply costs. c. They are direct costs. d. They are indirect costs.

ANSWER: d 65. Support department costs are applied to products as a part of a. fixed manufacturing costs b. variable cost of goods sold c. fixed selling and administrative expenses d. overhead ANSWER: d 66. Which of the following are methods used for applying overhead? a. single plantwide rate, multiple production department rates, and activity-based costing b. single investment application rate, multiple production department rates, and activity-based costing c. multiple production department rates, single plantwide rate, and weighted averaging d. activity-based costing, actual costing, and absorption costing ANSWER: a 67. Which of the following is a drawback in using a single plantwide rate to apply overhead to product costs? a. Support department costs are not combined with all other overhead costs. b. A single driver is used for all overhead costs and it is unlikely that the driver selected is appropriate for every type of overhead. c. Some overhead costs are missing from the application process. d. Too much emphasis is placed on the fact that manufacturing processes differ from one product to another.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation 68. A single plantwide overhead application rate a. focuses on identifying multiple drivers to apply to every single production department b. is likely to result in the most accurate product costs c. is likely to result in inaccurate product costs d. requires a multiple-step application process from support departments to production departments ANSWER: c 69. When multiple production department rates are used to apply overhead to products, a. all manufacturing costs are first directly traced to support and production departments and then support department costs are allocated to production departments b. only fixed overhead costs are first directly traced to support and production departments and then support department costs are allocated to production departments c. all overhead costs are first directly traced to support and production departments and then support department costs are allocated to production departments d. support department costs are allocated to production departments and then all overhead costs are directly traced to support and production departments ANSWER: c 70. Miller Safety Equipment uses multiple production department rates to apply overhead to products. The company will allocate support department costs to production departments based on the amount of support activity a. used by the department b. budgeted by the department c. used by the department in the prior month d. used by the entire production facility ANSWER: a 71. A key aspect to the multiple production department rate method for overhead application is a. choosing an appropriate cost driver for each product manufactured b. choosing an appropriate cost driver for each production department c. choosing an appropriate number of support departments to include in overhead d. determining the amount of support activity used by the entire production facility ANSWER: b 72. When activity-based costing is used to apply overhead to products, support department costs are referred to as a. support activity costs b. department activity costs c. multiple activity costs d. activity-based department costs ANSWER: a 73. A key difference between using multiple production department rates and activity-based costing is a. the multiple production department rate method is used to distribute overhead costs to production activities and activity-based costing is used to distribute overhead costs to production departments b. the multiple production department rate method is used to distribute overhead costs to production departments and activity-based costing is used to distribute overhead costs to production activities Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation c. the multiple production department rate method is used to distribute general and administrative costs to production departments and activity-based costing is used to distribute overhead costs to production activities d. the multiple production department rate method is used to distribute general and administrative costs to production departments and activity-based costing is used to distribute general and administrative costs to production activities ANSWER: b 74. Which of the following is a true statement with regard to the terms used when referring to manufacturing costs and the transfer of these costs to departments and products? a. Cost application refers to determining the number of cost drivers needed. b. Cost assignment refers to transferring overhead costs to support and production departments. c. Cost distribution refers to transferring overhead costs to support and production departments. d. Allocating costs refers to determining which general ledger accounts to use in the journal entry process.

ANSWER: c 75. Carolina, the accountant for Duke Manufacturing, tells her friend, Jacob, who works in customer service for Duke, that she is writing journal entries to transfer costs to products. Carolina is referring to the a. cost application process b. cost assignment process c. cost distribution process d. cost allocation process ANSWER: a 76. Juanita, a managerial accountant, notes to her colleague that she is reviewing spreadsheets to determine overhead costs that need to be transferred to support and production departments. Juanita is working on the process to a. apply overhead costs b. assign overhead costs c. distribute overhead costs d. allocate overhead costs ANSWER: c 77. Which of the following is the correct order for allocating overhead costs using activity-based costing? a. allocate support activity costs to production activities; determine overhead costs; directly trace and distribute overhead costs to support and production activities; apply production activity costs to products b. determine overhead costs; directly trace and distribute overhead costs to support and production activities; apply production activity costs to products; allocate support activity costs to production activities c. directly trace and distribute overhead costs to support and production activities; determine overhead costs; allocate support activity costs to production activities; apply production activity costs to products d. determine overhead costs; directly trace and distribute overhead costs to support and production activities; allocate support activity costs to production activities; apply production activity costs to products ANSWER: d 78. Which of the following are the three commonly used methods for allocating support department costs to production departments? a. direct method, indirect method, and sequential method Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation b. sequential method, indirect method, and nonreciprocal method c. reciprocal production method, direct method, and sequential method d. direct method, sequential method, and reciprocal services method ANSWER: d 79. Which of the following is the easiest but least accurate of the commonly used methods for allocating support department costs to production departments? a. direct method b. sequential method c. reciprocal services method d. reciprocal production method ANSWER: a 80. Which of the following is the most difficult but most accurate of the commonly used methods for allocating support department costs to production departments? a. direct method b. sequential method c. reciprocal services method d. nonreciprocal services method ANSWER: c 81. The following list includes descriptions of the steps in the five-step process to allocate support department costs to production departments. Which of the following descriptions is incorrectly paired to the step number? a. Step 1: Apply production department costs to products. b. Step 2: Select a cost driver for each department. c. Step 3: Determine the usage of the support department cost driver by each department. d. Step 4: Determine the percentage usage of support department cost drivers by each department.

ANSWER: a 82. Which of the following statements is true about the direct method of allocating support department costs to production departments? a. The direct method is more difficult to use than the sequential method. b. The direct method allocates only some of the support department costs directly to production departments and is more accurate than the reciprocal services method. c. The direct method requires that the same cost driver be used for each support department. d. The direct method allocates all support department costs directly to production departments thus ignoring the possibility that some support departments may also serve other support departments.

ANSWER: d 83. Using the direct method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced.

It allocates Cafeteria Department costs based on the number of employees served. It has the following information about its two service departments and two production departments, Cutting and Assembly:

Square Feet Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation Janitorial Department Cafeteria Department Cutting Department Assembly Department

100 10,000 2,000 8,000

20 10 60 20

The percentage (proportional) usage of the Janitorial Department by the Cutting Department is a. 20% b. 80% c. 10% d. 9% ANSWER: a 84. Using the direct method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced.

It allocates Cafeteria Department costs based on the number of employees served. It has the following information about its two service departments and two production departments, Cutting and Assembly:

Janitorial Department Cafeteria Department Cutting Department Assembly Department

Square Feet 100 10,000 2,000 8,000

Number of Employees 20 10 60 20

The percentage (proportional) usage of the Cafeteria Department by the Assembly Department is a. 75% b. 22% c. 25% d. 18% ANSWER: c 85. Using the direct method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced.

It allocates Cafeteria Department costs based on the number of employees served. It has the following information about its two service departments and two production departments, Cutting and Assembly:

Janitorial Department Cafeteria Department Cutting Department Assembly Department

Square Feet 100 10,000 2,000 8,000

Number of Employees 20 10 60 20

If the Janitorial Department incurs costs of $200,000, how much of that cost is allocated to the Cutting Department? a. $40,000 b. $160,000 c. $20,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation d. $19,800 ANSWER: a 86. Using the direct method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced.

It allocates Cafeteria Department costs based on the number of employees served. It has the following information about its two service departments and two production departments, Cutting and Assembly:

Janitorial Department Cafeteria Department Cutting Department Assembly Department

Square Feet 100 10,000 2,000 8,000

Number of Employees 20 10 60 20

If the Cafeteria Department incurs costs of $500,000, how much of that cost is allocated to the Assembly Department? a. $375,000 b. $111,000 c. $125,000 d. $91,000 ANSWER: c 87. Which of the following statements is true about the sequential method of allocating support department costs to production departments? a. The sequential method is also known as the step-up method. b. The sequential method captures some but not all the inter-support-department services by allocating support departments to other support departments and production departments in a series of steps. c. The sequential method requires that the same cost driver be used for each support department. d. The sequential method is less accurate than the direct method.

ANSWER: b 88. Which of the following statements is false about the order in which management determines the sequencing of support department allocations under the sequential method of allocating support department costs to production departments? a. Departments with more employees are allocated earlier. b. Departments with more accurate cost drivers are allocated earlier. c. Departments serving a large number of support departments are allocated earlier. d. Departments with higher costs are allocated earlier.

ANSWER: a 89. Using the appropriate rationale, which of the following scenarios represents the proper determination of the order in which management should sequence support department allocations under the sequential method of allocating support department costs to production departments? a. A Janitorial support department with 50 employees should be allocated earlier than a Cafeteria support department with 25 employees. b. A Maintenance department with a less accurate cost driver should be allocated earlier than a Cafeteria support department with an extremely accurate cost driver.

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Chapter 5: Support Department and Joint Cost Allocation c. A Purchasing support department that serves one production department should be allocated earlier than a Janitorial support department serving five production departments. d. A Janitorial support department with a cost of $500,000 should be allocated earlier than a Purchasing support department with a cost of $30,000.

ANSWER: d 90. Using the sequential method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced. It allocates Cafeteria Department costs based on the number of employees served. It has determined to allocate Janitorial costs before Cafeteria costs.

It has the following information about its two service departments and two production departments, Cutting and Assembly:

Janitorial Department Cafeteria Department Cutting Department Assembly Department

Costs $ 450,000 200,000 1,500,000 3,000,000

Square Feet 100 10,000 2,000 8,000

Number of Employees 20 10 60 20

The percentage (proportional) usage of the Janitorial Department by the Cutting Department is a. 20% b. 80% c. 10% d. 9% ANSWER: c 91. Using the sequential method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced. It allocates Cafeteria Department costs based on the number of employees served. It has determined to allocate Janitorial costs before Cafeteria costs.

It has the following information about its two service departments and two production departments, Cutting and Assembly:

Janitorial Department Cafeteria Department Cutting Department Assembly Department

Costs $ 450,000 200,000 1,500,000 3,000,000

Square Feet 100 10,000 2,000 8,000

Number of Employees 20 10 60 20

The percentage (proportional) usage of the Cafeteria Department by the Assembly Department is a. 75% b. 22% c. 25% d. 18% Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation ANSWER: c 92. Using the sequential method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced. It allocates Cafeteria Department costs based on the number of employees served. It has determined to allocate Janitorial costs before Cafeteria costs.

It has the following information about its two service departments and two production departments, Cutting and Assembly:

Janitorial Department Cafeteria Department Cutting Department Assembly Department

Costs $ 450,000 200,000 1,500,000 3,000,000

Square Feet 100 10,000 2,000 8,000

Number of Employees 20 10 60 20

How much of the Janitorial Department’s $450,000 costs is allocated to the Cutting Department? a. $90,000 b. $360,000 c. $45,000 d. $44,550 ANSWER: c 93. Which of the following statements explains the major difference between the sequential method and the direct method? a. Under the sequential method, the total support department costs to be allocated will also include any costs that were allocated to that support department from other support departments. b. Under the direct method, the total support department costs to be allocated will also include any costs that were allocated to that support department from other support departments. c. Under the sequential method, the total support department costs to be allocated will never include any costs that were allocated to that support department from other support departments. d. Under the sequential method, every support department receives costs allocated from every other support department.

ANSWER: a 94. Which of the following statements explains the major difference between the sequential method and the reciprocal services method? a. Under the reciprocal services method, some but not all inter-support-department services are allocated to support departments. b. Under the reciprocal services method, all inter-support-department services are allocated to support departments. c. The reciprocal services method is less accurate than the sequential method. d. The reciprocal services method is easier to implement than the sequential method.

ANSWER: b 95. Which of the following statements is false regarding the five-step process as it is utilized in the reciprocal services Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation method? a. Steps 1–3 of the reciprocal services method are the same as for the direct and sequential methods. b. In Step 4, the proportional usage of each support department’s cost driver by the other departments to which its costs are to be allocated is determined. c. In Step 5, support department costs are allocated sequentially among the departments by using a single algebraic equation. d. Once Steps 1–5 are complete, costs can be applied to products.

ANSWER: c 96. Using the reciprocal services method, which of the following equations represents the algebraic expression for the total costs of a Janitorial Department (J) that includes not only $350,000 of direct costs but also 30% of the Maintenance Department (M) cost? a. J = $350,000 + (0.30 ÷ M) b. J = ($350,000 × 0.30) + M c. J = $350,000 – (0.30 × M) d. J = $350,000 + (0.30 × M) ANSWER: d 97. Using the reciprocal services method, which of the following equations represents the algebraic expressions for the two equations needed to capture the total costs of a Janitorial Department (J) that includes not only $350,000 of direct costs but also 30% of the Maintenance Department (M) cost and the Maintenance Department that includes not only $50,000 of direct costs but also 50% of the Janitorial Department? a. J = $350,000 + (0.30 ÷ M) and M = $50,000 + (0.50 ÷ J) b. J = ($350,000 × 0.30) + M and M = ($50,000 × 0.50) + J c. J = $350,000 – (0.30 × M) and M = $50,000 – (0.50 × J) d. J = $350,000 + (0.30 × M) and M = $50,000 + (0.50 × J) ANSWER: d 98. Using the reciprocal services method, which of the following equations represents the algebraic expressions for the two equations needed to capture the total costs of a Janitorial Department (J) that includes not only $500,000 of direct costs but also 25% of the Maintenance Department (M) cost and the Maintenance Department that includes not only $450,000 of direct costs but also 30% of the Janitorial Department? a. J = $500,000 + (0.25 ÷ M) and M = $450,000 + (0.30 ÷ J) b. J = ($500,000 × 0.25) + M and M = ($450,000 × 0.20) + J c. J = $500,000 – (0.25 × M) and M = $450,000 – (0.20 × J) d. J = $500,000 + (0.25 × M) and M = $450,000 + (0.20 × J) ANSWER: d 99. Using the reciprocal services method, which of the following equations represents the correct algebraic expression needed to capture the total costs of a Janitorial Department (J) that includes $350,000 of direct costs and 30% of the Maintenance Department (M) cost and the Maintenance Department that includes $50,000 of direct costs and 50% of the Janitorial Department? (Hint: This equation is derived from the two separate equations representing each department’s costs.) a. J = $350,000 + (0.30 ÷ $50,000) + (0.50 ÷ J) b. J = ($350,000 × 0.30) + ($50,000 × 0.50) + J c. J = $350,000 – [(0.30 × $50,000) – (0.50 × J)] Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation d. J = $350,000 + {0.30 × [$50,000 + (0.50 × J)]} ANSWER: d 100. Using the reciprocal services method, which of the following equations represents the correct algebraic expression to determine Janitorial Department costs when the total costs of the Janitorial Department (J) include not only $500,000 of direct costs but also 25% of the Maintenance Department (M) cost and the Maintenance Department includes not only $450,000 of direct costs but also 30% of the Janitorial Department? (Hint: This equation is derived from the two separate equations representing each department’s costs.) a. J = $500,000 + [(0.25 ÷ $450,000) + (0.30 ÷ J)] b. J = ($500,000 × 0.25) + [($450,000 × 0.20) + J] c. J = $500,000 – (0.25 × $450,000) – (0.20 × J) d. J = $500,000 + {0.25 × [$450,000 + (0.20 × J)]} ANSWER: d 101. When a single manufacturing process generates multiple outputs, it is called a(n) a. multiple output manufacturing process b. activity-based manufacturing process c. joint manufacturing process d. joint activity manufacturing process ANSWER: c 102. Joint costs are inseparable a. before the split-off point b. after the split-off point c. before the joint manufacturing process begins d. after the joint products have been sold ANSWER: a 103. The point in the production process where joint products become separable is called the a. separation point b. split-off point c. joint cost point d. joint process point ANSWER: b 104. An example of the split-off point in a lumber mill that produces cut boards from raw timber is that point where a. logs brought in from timber stands are scaled and measured b. logs are debarked c. cut boards are separated into grades d. logs are squared away before being cut into boards ANSWER: c 105. An example of the split-off point in oil, gasoline, and kerosene production is that point where crude oil is a. drilled b. pumped from the ground Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation c. transported to the refinery d. distilled into gasoline and kerosene ANSWER: d 106. An example of the split-off point in dairy production is that point where raw milk is a. gathered b. stored to be processed c. pasteurized d. made into butter or cheese ANSWER: d 107. Which of the following statements is true about joint manufacturing processes? a. Joint costs are by definition inseparable. b. Companies producing joint products rarely allocate joint costs to individual products. c. Product costs are more accurate if joint costs are not allocated to individual products. d. Joint manufacturing processes are rare.

ANSWER: a 108. Which of the following statements is false about joint manufacturing processes? a. Joint costs are by definition inseparable. b. Companies producing joint products often allocate joint costs to individual products. c. Product costs are more accurate if joint costs are allocated to individual products. d. Joint manufacturing processes are simple and rarely require careful attention from managers when analyzing and interpreting product costs that include joint costs.

ANSWER: d 109. Johnson Lumber Mill produces various grades of cut boards from raw lumber. The costs incurred once the cut boards are separated and processed further are a. investment center costs b. joint costs that cannot be separated c. new costs that can be traced to the various grades of lumber being produced d. new costs that cannot be traced to the various grades of lumber being produced ANSWER: c 110. Johnson Lumber Mill produces various grades of cut boards from raw lumber. The costs incurred before the split-off point where the cut boards are separated and processed further are a. investment center costs b. joint costs that cannot be separated c. new costs that can be traced to the various grades of lumber being produced d. new costs that cannot be traced to the various grades of lumber being produced ANSWER: b 111. Which of the following are the four common methods for allocating joint costs? a. physical units method, joint costs method, weighted average method, and net realizable value method Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation b. joint costs method, physical units method, market value at split-off method, and net realizable value method c. market value at split-off method, physical units method, weighted average method, and net realizable value method d. net realizable value method, joint costs method, weighted average method, and market value at split-off method ANSWER: c 112. Which of the following statements is true about the four common methods for allocating joint costs? a. None of the methods will consistently allocate joint costs more accurately than another. b. It is impossible to determine whether one of the four methods may be more appropriate than another based on the production process. c. The market value at split-off method is always the least appropriate method for allocating joint costs. d. The net realizable value method is always the least reliable method for allocating joint costs.

ANSWER: a 113. Which of the following methods allocates joint costs using a measure such as pounds, gallons, or inches at the splitoff point? a. physical units method b. weighted average method c. market value at split-off method d. net realizable value method ANSWER: a 114. Which of the following methods allocates joint costs based on physical units that are weighted and then multiplied by actual physical units? a. physical units method b. weighted average method c. market value at split-off method d. net realizable value method ANSWER: b 115. Which of the following methods allocates joint costs based on measures estimated after the final products are fully processed and are ready to be sold? a. physical units method b. weighted average method c. market value at split-off method d. net realizable value method ANSWER: d 116. Which of the following methods allocates joint costs based on the potential market value at the point where the products will be separated to be processed further? a. physical units method b. weighted average method c. market value at split-off method d. net realizable value method Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation ANSWER: c 117. McBride’s Dairy has 200 gallons of cream and 600 gallons of skimmed milk and has incurred $1,000 of joint costs at the split-off point. The amount of this cost that will be allocated to cream using the physical units method is a. $1,000 b. $750 c. $250 d. $0 ANSWER: c 118. McBride’s Dairy has 200 gallons of cream and 600 gallons of skimmed milk and has incurred $1,000 of joint costs at the split-off point. The amount of this cost that will be allocated to skimmed milk using the physical units method is a. $1,000 b. $750 c. $250 d. $0 ANSWER: b 119. McBride’s Dairy has 200 gallons of cream and 600 gallons of skimmed milk and has incurred $1,000 of joint costs at the split-off point. It also incorporates a processing time weight factor of 1 for the cream and 3 for the skimmed milk. The amount of this cost that will be allocated to cream using the weighted average method is a. $1,000 b. $900 c. $100 d. $250 ANSWER: c 120. McBride’s Dairy has 200 gallons of cream and 600 gallons of skimmed milk and has incurred $1,000 of joint costs at the split-off point. It also incorporates a processing time weight factor of 1 for the cream and 3 for the skimmed milk. The amount of this cost that will be allocated to skimmed milk using the weighted average method is a. $1,000 b. $900 c. $100 d. $750 ANSWER: b 121. The weighted average method uses weight factors in conjunction with physical measures because a. physical units alone are sufficient to provide the most reasonable allocation method b. the market value of the joint process should be weighted more heavily toward one of the products c. the joint process includes a product that requires extra machine time and creates greater wear and tear on the processing machines d. the net realizable value of one product is greater than that of another product made with the same joint process ANSWER: c 122. When weight factors are used in the weighted average method, they are Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation a. multiplied by the actual physical units to arrive at weighted physical units b. divided by the actual physical units to arrive at weighted physical units c. added to the actual physical units to arrive at weighted physical units d. subtracted from the actual physical units to arrive at weighted physical units ANSWER: a 123. In which of the following scenarios would it be more appropriate to use the market value at split-off method of joint cost allocation? a. when the products are easily measured by physical units that represent the relative market values of the final products b. when products require extensive and complicated processing beyond the split-off point and none of the products are sold at split-off c. when one or more products are sold at split-off and the other products require little further processing beyond split-off d. when the process is simple and there is little difference between the market values of the joint products at split-off ANSWER: c 124. Under the market value at split-off method, if a product is sold at the split-off point, its a. estimated sales price is used b. actual sales price is used c. prior year sales price is used d. weighted average sales price is used ANSWER: b 125. McBride’s Dairy has 200 gallons of heavy cream and 600 gallons of skimmed milk and has incurred $1,000 of joint costs at the split-off point. It can sell each product at the split-off point or process it further in relatively similar processes, so management has decided that the most appropriate method for allocating joint costs is the market value at split-off point. One gallon of cream sells for $15, while one gallon of milk sells for $4. How much of the joint cost is allocated to cream? Round percentage calculations to the nearest whole percent. a. $1,000 b. $560 c. $440 d. $0 ANSWER: b 126. McBride’s Dairy has 200 gallons of heavy cream and 600 gallons of skimmed milk and has incurred $1,000 of joint costs at the split-off point. It can sell each product at the split-off point or process it further in relatively similar processes, so management has decided that the most appropriate method for allocating joint costs is the market value at split-off point. One gallon of cream sells for $15, while one gallon of milk sells for $4. How much of the joint cost is allocated to skimmed milk? Round percentage calculations to the nearest whole percent. a. $1,000 b. $560 c. $440 d. $0 ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation 127. The net realizable method of allocating joint costs is most suitable for processes where a. physical measures are the most accurate way to allocate joint costs b. some products can be processed beyond the split-off point and sold for much higher prices c. weighted physical measures are the most accurate way to allocate joint costs d. market values are hard, if not impossible, to estimate ANSWER: b 128. Under the net realizable method of allocating joint costs, which of the following equations is used to compute the value of products processed beyond the split-off point? a. Net Realizable Value = Selling Price at Split-Off × Quantity b. Net Realizable Value = (Final Selling Price × Quantity) + Additional Processing Costs c. Net Realizable Value = (Final Selling Price × Quantity) – Additional Processing Costs d. Net Realizable Value = (Final Selling Price × Quantity) ÷ Additional Processing Costs ANSWER: c 129. Under the net realizable method of allocating joint costs, which of the following equations is used to compute the value of products not processed beyond the split-off point? a. Net Realizable Value = Selling Price at Split-Off × Quantity b. Net Realizable Value = Selling Price at Split-Off ÷ Quantity c. Net Realizable Value = (Final Selling Price × Quantity) – Additional Processing Costs d. Net Realizable Value = (Final Selling Price × Quantity) ÷ Additional Processing Costs ANSWER: a 130. You are a manager at McBride’s Dairy where whey is a by-product of the production process. Thinking about the utility and usefulness of by-products in a joint production process, you may decide to take several courses of action. Which of the following actions would you find inappropriate? a. Because whey is a good of low value, it is not worth the effort to develop separate product costs for it. b. The net realizable value method should be used to allocate joint costs to the whey. c. Revenues from the whey should be used to offset the cost of the joint production process. d. The sale of whey should be reported as other revenue on the income statement with no related cost of goods sold.

ANSWER: b 131. Woodbridge, Incorporated, manufactures food-grade wax-lined paper take-out containers for the food service industry for many popular restaurants. Which of the following is mostly likely a support department within Woodbridge? a. Deli Container Department b. Janitorial Department c. Sandwich Container Department d. Salad Container Department ANSWER: b 132. Woodbridge, Incorporated, manufactures food-grade wax-lined paper take-out containers for the food service industry for many popular restaurants. Which of the following is mostly likely a production department within Woodbridge?

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Chapter 5: Support Department and Joint Cost Allocation a. receiving department b. cafeteria for employees c. Sandwich Container Department d. Human Resources Department ANSWER: c 133. Overhead costs are first directly traced or distributed to support and production departments; support department costs are then allocated to production departments based on the amount of support activity used by each production department. This process describes which method of applying overhead? a. single plantwide rate b. multiple production department rates c. activity-based costing d. absorption costing ANSWER: b 134. Support department costs are simply combined with all other overhead costs and total overhead is applied using one cost driver. This process describes which method of applying overhead? a. single plantwide rate b. multiple production department rates c. activity-based costing d. absorption costing ANSWER: a 135. Overhead costs are first directly traced or distributed to support and production activities, then support activity costs are allocated to production activities based on the amount of support activity used by each production activity; production activity costs are applied to the products using cost drivers for each production activity. This process describes which method of applying overhead? a. single plantwide rate b. multiple production department rates c. activity-based costing d. absorption costing ANSWER: c Objective Short Answer 136. The following departmental information is for the four departments at Samoa Industries.

Janitorial Cafeteria Cutting Assembly

Total Cost $ 150,000 50,000 1,125,000 1,100,000

Cost Driver Square Feet Number of Employees Square footage serviced 200 40 Number of employees 20,000 12 4,000 120 16,000 40

The Janitorial and Cafeteria departments are support departments. Determine the proportional (percentage) usage of the Janitorial Department by the (a) Cutting and (b) Assembly departments using the direct method.

ANSWER: a. 4,000 ÷ (4,000 + 16,000) = 20% Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation b. 16,000 ÷ (4,000 + 16,000) = 80% 137. The following departmental information is for the four departments at Samoa Industries.

Janitorial Cafeteria Cutting Assembly

Total Cost $ 150,000 50,000 1,125,000 1,100,000

Cost Driver Square Feet Number of Employees Square footage serviced 200 40 Number of employees 20,000 12 4,000 120 16,000 40

The Janitorial and Cafeteria departments are support departments. Determine the proportional (percentage) usage of the Cafeteria Department by the (a) Cutting and (b) Assembly departments using the direct method.

ANSWER: a. 120 ÷ (120 + 40) = 75% b. 40 ÷ (120 + 40) = 25% 138. The following departmental information is for the four departments at Samoa Industries.

Janitorial Cafeteria Cutting Assembly

Total Cost $ 150,000 50,000 1,125,000 1,100,000

Cost Driver Square Feet Number of Employees Square footage serviced 200 40 Number of employees 20,000 12 4,000 120 16,000 40

The Janitorial and Cafeteria departments are support departments. Determine the dollar amount of the Janitorial Department costs to be allocated to the (a) Cutting and (b) Assembly departments using the direct method.

ANSWER: a. 4,000 ÷ (4,000 + 16,000) = 20% 20% × $150,000 = $30,000 b. 16,000 ÷ (4,000 + 16,000) = 80% 80% × $150,000 = $120,000 139. The following departmental information is for the four departments at Samoa Industries.

Janitorial Cafeteria Cutting Assembly

Total Cost $ 150,000 50,000 1,125,000 1,100,000

Cost Driver Square Feet Number of Employees Square footage serviced 200 40 Number of employees 20,000 12 4,000 120 16,000 40

The Janitorial and Cafeteria departments are support departments. Determine the dollar amount of the Cafeteria Department costs to be allocated to the (a) Cutting and (b) Assembly departments using the direct method.

ANSWER: a. 120 ÷ (120 + 40) = 75% 75% × $50,000 = $37,500 b. 40 ÷ (120 + 40) = 25% 25% × $50,000 = $12,500 140. The following departmental information is for the four departments at Samoa Industries.

Total Cost

Cost Driver

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Square Feet Number of Employees Page 25

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Chapter 5: Support Department and Joint Cost Allocation Janitorial Cafeteria Cutting Assembly

$ 150,000 50,000 1,125,000 1,100,000

Square footage serviced Number of employees

200 20,000 4,000 16,000

40 12 120 40

The Janitorial and Cafeteria departments are support departments. Samoa uses the sequential method to allocate support department costs, first allocating the costs from the Janitorial Department to the Cafeteria, Cutting, and Assembly departments. Determine the proportional (percentage) usage of the Janitorial Department by the (a) Cafeteria, (b) Cutting, and (c) Assembly departments.

ANSWER: a. 20,000 ÷ (20,000 + 4,000 + 16,000) = 50% b. 4,000 ÷ (20,000 + 4,000 + 16,000) = 10% c. 16,000 ÷ (20,000 + 4,000 + 16,000) = 40% 141. The following departmental information is for the four departments at Samoa Industries.

Total Cost Cost Driver Square Feet Number of Employees Janitorial $ 150,000 Square footage serviced 200 40 Cafeteria 50,000 Number of employees 20,000 12 Cutting 1,125,000 4,000 120 Assembly 1,100,000 16,000 40 The Janitorial and Cafeteria departments are support departments. Samoa uses the sequential method to allocate support department costs, first allocating the costs from the Janitorial Department to the Cafeteria, Cutting, and Assembly departments. Determine the dollar amount of the Janitorial Department costs to be allocated to the (a) Cafeteria, (b) Cutting, and (c) Assembly departments.

ANSWER: a. 20,000 ÷ (20,000 + 4,000 + 16,000) = 50% 50% × $150,000 = $75,000 b. 4,000 ÷ (20,000 + 4,000 + 16,000) = 10% 10% × $150,000 = $15,000 c. 16,000 ÷ (20,000 + 4,000 + 16,000) = 40% 40% × $150,000 = $60,000 142. The following departmental information is for the four departments at Samoa Industries.

Janitorial Cafeteria Cutting Assembly

Total Cost $ 150,000 50,000 1,125,000 1,100,000

Cost Driver Square Feet Number of Employees Square footage serviced 200 40 Number of employees 20,000 12 4,000 120 16,000 40

The Janitorial and Cafeteria departments are support departments. Samoa uses the sequential method to allocate support department costs, first allocating the costs from the Janitorial Department to the Cafeteria, Cutting, and Assembly departments.

1. Determine the dollar amount of the Janitorial Department costs to be allocated to the (a) Cafeteria, (b) Cutting, and (c) Assembly departments.

2. Determine the dollar amount of the Cafeteria Department costs to be allocated to the (a) Cutting and (b) Assembly departments.

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Chapter 5: Support Department and Joint Cost Allocation ANSWER: 1. a. 20,000 ÷ (20,000 + 4,000 + 16,000) = 50% 50% × $150,000 = $75,000 b. 4,000 ÷ (20,000 + 4,000 + 16,000) = 10% 10% × $150,000 = $15,000 c. 16,000 ÷ (20,000 + 4,000 + 16,000) = 40% 40% × $150,000 = $60,000 2. a. 120 ÷ (120 + 40) = 75% 75% × ($50,000 + $75,000 from Janitorial) = $93,750 b. 40 ÷ (120 + 40) = 25% 25% × ($50,000 + $75,000 from Janitorial) = $31,250 143. Jamison Company uses the reciprocal services method to allocate support department costs and has gathered the following information: Janitorial Department Usage Cafeteria Cutting Assembly

50% 10% 40%

Cafeteria Department Usage Janitorial Cutting Assembly

20% 60% 20%

Janitorial Department costs are $450,000.

Cafeteria Department costs are $250,000.

What are the correct equations to represent (a) the total Janitorial (J) costs and (b) the total Cafeteria (C) costs?

ANSWER: a. J = $450,000 + (20% × C) b. C = $250,000 + (50% × J) 144. Jamison Company uses the reciprocal services method to allocate support department costs and has gathered the following information: Janitorial Department Usage Cafeteria Cutting Assembly

50% 10% 40%

Cafeteria Department Usage Janitorial Cutting Assembly

20% 60% 20%

Janitorial Department costs are $450,000.

Cafeteria Department costs are $250,000.

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Chapter 5: Support Department and Joint Cost Allocation What are the correct equations to represent (a) the total Janitorial (J) costs, (b) the total Cafeteria (C) costs, and (c) the rewritten equation substituting C into J? ANSWER: a. J = $450,000 + (20% × C) b. C = $250,000 + (50% × J) c. J = $450,000 + {20% × [$250,000 + (50% × J)]} 145. Jamison Company uses the reciprocal services method to allocate support department costs and has gathered the following information: Janitorial Department Usage Cafeteria Cutting Assembly

50% 10% 40%

Cafeteria Department Usage Janitorial Cutting Assembly

20% 60% 20%

Janitorial Department costs are $450,000.

Cafeteria Department costs are $250,000.

What is the total Janitorial Department cost (rounded to the nearest cent) using the reciprocal services method?

ANSWER: J = $450,000 + (20% × C) C = $250,000 + (50% × J) J = $450,000 + {20% × [$250,000 + (50% × J)]} J = $555,555.56 146. Scotland Beauty Products manufactures face cream, body lotion, and liquid soap in a joint manufacturing process. At the split-off point, the company has 300 pounds of face cream, 200 pounds of body lotion, and 300 pounds of liquid soap and has incurred $200,000 in joint costs.

Using the physical units method, allocate the joint costs to (a) face cream, (b) body lotion, and (c) liquid soap.

ANSWER: a. face cream: [300 ÷ (300 + 200 + 300)] × $200,000 = $75,000 b. body lotion: [200 ÷ (300 + 200 + 300)] × $200,000 = $50,000 c. liquid soap: [300 ÷ (300 + 200 + 300)] × $200,000 = $75,000 147. Scotland Beauty Products manufactures face cream, body lotion, and liquid soap in a joint manufacturing process. At the split-off point, the company has 300 pounds of face cream, 200 pounds of body lotion, and 300 pounds of liquid soap and has incurred $200,000 in joint costs.

Using the weighted average method, allocate the joint costs to (a) face cream with a weight factor of 1, (b) body lotion with a weight factor of 3, and (c) liquid soap with a weight factor of 1.

ANSWER: a. face cream: {(300 × 1) ÷ [(300 × 1) + (200 × 3) + (300 × 1)]} × $200,000 = $50,000 b. body lotion: {(200 × 3) ÷ [(300 × 1) + (200 × 3) + (300 × 1)]} × $200,000 = $100,000 c. liquid soap: {(300 × 1) ÷ [(300 × 1) + (200 × 3) + (300 × 1)]} × $200,000 = $50,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation 148. Scotland Beauty Products manufactures face cream, body lotion, and liquid soap in a joint manufacturing process. At the split-off point, the company has 300 pounds of face cream with a market value of $15 per pound, 200 pounds of body lotion with a market value of $13 per pound, and 300 pounds of liquid soap with a market value of $7 per pound and has incurred $200,000 in joint costs.

Using the market value at split-off method, allocate the joint costs to (a) face cream, (b) body lotion, and (c) liquid soap.

Round percentages in intermediate steps to the nearest whole percentage.

ANSWER: a. face cream: {(300 × $15) ÷ [(300 × $15) + (200 × $13) + (300 × $7)]} × $200,000 = $98,000 b. body lotion: {(200 × $13) ÷ [(300 × $15) + (200 × $13) + (300 × $7)]} × $200,000 = $56,000 c. liquid soap: {(300 × $7) ÷ [(300 × $15) + (200 × $13) + (300 × $7)]} × $200,000 = $46,000 149. Scotland Beauty Products manufactures face cream, body lotion, and liquid soap in a joint manufacturing process. At the split-off point, the company has 300 pounds of face cream with a market value of $15 per pound, 200 pounds of body lotion with a market value of $13 per pound, and 300 pounds of liquid soap with a market value of $7 per pound and has incurred $200,000 in joint costs. The net realizable value (NRV) of the face cream is $7,500, the NRV of the body lotion is $3,500, and the NRV of the liquid soap is $4,000.

Using the net realizable value method, allocate the joint costs to (a) face cream, (b) body lotion, and (c) liquid soap.

Round percentages in intermediate steps to the nearest whole percentage.

ANSWER: a. face cream: [$7,500 ÷ ($7,500 + $3,500 + $4,000)] × $200,000 = $100,000 b. body lotion: [$3,500 ÷ ($7,500 + $3,500 + $4,000)] × $200,000 = $46,000 c. liquid soap: [$4,000 ÷ ($7,500 + $3,500 + $4,000)] × $200,000 = $54,000 Scotland Beauty Products (SBP) manufactures face cream, body lotion, and liquid soap in a joint manufacturing process in one manufacturing facility. SBP has three general managers with each one in charge of a separate product line.

Michelle Tallerico oversees the face cream line, Becky Borger oversees the body lotion line, and Lorie Osho oversees the liquid soap line. Consider the following performance report for the three general managers and their product lines, where each line is assigned direct costs and allocated support costs and joint costs.

Michelle Tallerico Face Cream

Becky Borger Body Lotion

Lorie Osho Liquid Soap

Actual

Target

Over (Under) Target

Direct materials

$104,567

$107,000

$(2,433)

$ 178,748

$ 175,000

$ 3,748

Direct labor Allocated support costs Allocated joint costs

238,102

225,000

13,102

280,928

250,000

30,928

234,857

598,342

600,000

(1,658)

598,090

625,000

(26,910)

23,498

25,000

(1,502)

27,948

30,000

$964,509

$957,000

$ 7,509

$1,085,714

$1,080,000

Total production costs

Actual

Target

Over (Under) Target

Target

Over (Under) Target

Actual $ 146,792

$ 150,000

$(3,208)

244,000

(9,143)

605,342

600,000

5,342

(2,052)

25,873

20,000

5,873

$ 5,714

$1,012,864

$1,014,000

$(1,136)

150. Using the performance report for Scotland Beauty Products (including support department and joint cost allocations), evaluate the performance of the three production managers, specifically ranking them based on total costs.

ANSWER: a. Lorie Osho and the Liquid Soap Department came the closest to the target, staying under target by $1,136. b. Becky Borger and the Body Lotion Department were next, missing the target by $5,714 over.

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Chapter 5: Support Department and Joint Cost Allocation c. Michelle Tallerico and the Face Cream Department came in third, being over target by $7,509.

151. Using the performance report for Scotland Beauty Products (including support department and joint cost allocations), evaluate the performance of Michelle Tallerico, specifically noting the reasons she missed her target.

ANSWER: a. The direct labor costs in the Face Cream Department were $13,102 over target. This was the biggest culprit in missing the target. b. The direct materials costs in the Face Cream Department were $2,433 under target. This helped offset the overage in the direct labor but did not completely make up the difference. c. The allocated support costs and allocated joint costs in the Face Cream Department were also under target by $1,658 and $1,502, respectively, which helped offset the overage in the direct labor but did not completely make up the difference.

152. Using the performance report for Scotland Beauty Products (including support department and joint cost allocations), evaluate the performance of Michelle Tallerico compared to Lorie Osho. What important items stand out regarding the performance of the departments compared to each other?

ANSWER: a. Michelle Tallerico’s Face Cream Department was off target the most in total, but it was largely due to one item—direct labor. b. Lorie Osho’s Liquid Soap Department had larger discrepancies in each line item compared to face cream, but they offset each other and resulted in the total cost discrepancy being the lowest of the three. c. The allocated support costs and allocated joint costs in the Liquid Soap Department were over target by a combined total of $11,215, which is higher than the combined $3,160 under target in face cream.

153. Using the performance report for Scotland Beauty Products (including support department and joint cost allocations), evaluate the performance of Becky Borger. What two important items stand out regarding the performance of her department?

ANSWER: a. Becky Borger’s department has the biggest difference between target and actual direct labor at $30,928 over target. b. Becky’s department has the biggest difference between target and actual allocated support costs at $26,910 under target.

154. The following is a list of the steps for using multiple production department rates to apply overhead to products. Put them in the proper order by item letter. ____ a. Apply production department costs to products. ____ b. Determine overhead costs to be allocated. ____ c. Allocate support department costs to production departments. ____ d. Directly trace and distribute overhead costs to support and production departments.

ANSWER: b,d,c,a 155. The following is a list of the steps taken when using ABC to apply overhead to products. Put them in the proper order by item letter. ____ a. Directly trace and distribute overhead costs to support and production activities. ____ b. Determine overhead costs to be allocated. ____ c. Allocate support activity costs to production activities. ____ d. Apply production activity costs to products.

ANSWER: b,a,c,d Copyright Cengage Learning. Powered by Cognero.

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Chapter 5: Support Department and Joint Cost Allocation 156. The following list includes five steps used when allocating support activity costs to production activities when using ABC to allocate overhead, regardless of the method (i.e., direct method, sequential method, or reciprocal services method) chosen. Put them in the correct order by letter. ____ a. Allocate support department costs by multiplying the support department costs by the percentage usage of each department. ____ b. Determine the percentage usage of support department cost drivers by each department. ____ c. Determine the usage of the support department cost driver by each department. ____ d. Select a cost driver for each department. ____ e. Directly trace and distribute overhead costs to support and production departments.

ANSWER: e, d, c, b, a

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Chapter 6: Cost-Volume-Profit Analysis True / False 1. Cost behavior refers to the methods used to estimate costs for use in managerial decision making. a. True b. False ANSWER: False 2. Cost behavior refers to the manner in which a cost changes as a related activity changes. a. True b. False ANSWER: True 3. The fixed cost per unit varies with changes in the level of activity. a. True b. False ANSWER: True 4. A production supervisor's salary that varies with the number of units produced is an example of a fixed cost. a. True b. False ANSWER: False 5. Direct materials cost that varies with the number of units produced is an example of a fixed cost of production. a. True b. False ANSWER: False 6. In order to choose the proper activity base for a cost, managerial accountants must be familiar with the operations of the entity. a. True b. False ANSWER: True 7. The relevant range is useful for analyzing cost behavior for management decision-making purposes. a. True b. False ANSWER: True 8. The relevant activity base for a cost depends upon which base is most closely associated with the cost and the decisionmaking needs of management. a. True b. False ANSWER: True 9. The range of activity over which changes in cost are of interest to management is called the relevant range.

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Chapter 6: Cost-Volume-Profit Analysis a. True b. False ANSWER: True 10. Total fixed costs change as the level of activity changes. a. True b. False ANSWER: False 11. Because variable costs are assumed to change in direct proportion to changes in the activity level, the graph of the variable costs when plotted against the activity level appears as a circle. a. True b. False ANSWER: False 12. Variable costs are costs that remain constant in total dollar amount as the level of activity changes. a. True b. False ANSWER: False 13. Variable costs are costs that remain constant on a per-unit basis as the level of activity changes. a. True b. False ANSWER: True 14. Variable costs are costs that vary in total in direct proportion to changes in the activity level. a. True b. False ANSWER: True 15. Variable costs are costs that vary on a per-unit basis with changes in the activity level. a. True b. False ANSWER: False 16. Direct materials and direct labor costs are examples of variable costs of production. a. True b. False ANSWER: True 17. Total variable costs change as the level of activity changes. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis 18. Unit variable cost changes as the number of units of activity changes. a. True b. False ANSWER: False 19. A mixed cost has characteristics of both variable and fixed costs. a. True b. False ANSWER: True 20. A rental charge of $40,000 per year plus $3 for each machine hour over 18,000 hours is an example of a fixed cost. a. True b. False ANSWER: False 21. A rental cost of $20,000 plus $0.70 per machine hour of use is an example of a mixed cost. a. True b. False ANSWER: True 22. For purposes of analysis, mixed costs can generally be separated into their variable and fixed components. a. True b. False ANSWER: True 23. The contribution margin ratio is the same as the profit-volume ratio. a. True b. False ANSWER: True 24. Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio. a. True b. False ANSWER: True 25. The amount of dollars available from each unit of sales to cover fixed cost and profit is the unit variable cost. a. True b. False ANSWER: False 26. The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide operating income is termed the contribution margin ratio. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis 27. If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 60%. a. True b. False ANSWER: False 28. If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 40%. a. True b. False ANSWER: True 29. The data required for determining the break-even point for a business are the total estimated fixed costs for a period stated as a percentage of sales. a. True b. False ANSWER: False 30. If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is zero when sales revenue is $930,000. a. True b. False ANSWER: False 31. If fixed costs are $850,000 and the unit contribution margin is $50, profit is zero when 15,000 units are sold. a. True b. False ANSWER: False 32. The point in operations at which revenues and expenses are exactly equal is called the break-even point. a. True b. False ANSWER: True 33. Break-even analysis is one type of cost-volume-profit analysis. a. True b. False ANSWER: True 34. If the property tax rates are increased, this change in fixed costs will result in a decrease in the break-even point. a. True b. False ANSWER: False

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Chapter 6: Cost-Volume-Profit Analysis 35. If yearly insurance premiums are increased, this change in fixed costs will result in an increase in the break-even point. a. True b. False ANSWER: True 36. If employees accept a wage contract that increases the unit contribution margin, the break-even point will decrease. a. True b. False ANSWER: True 37. If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease. a. True b. False ANSWER: False 38. If direct materials cost per unit increases, the break-even point will decrease. a. True b. False ANSWER: False 39. If direct materials cost per unit increases, the break-even point will increase. a. True b. False ANSWER: True 40. If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease. a. True b. False ANSWER: True 41. If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $50,000 are 10,000 units. a. True b. False ANSWER: True 42. If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units. a. True b. False ANSWER: False 43. Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profitCopyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis volume chart. a. True b. False ANSWER: True 44. Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the costvolume-profit chart. a. True b. False ANSWER: False 45. Cost-volume-profit analysis can be presented in both equation form and graphic form. a. True b. False ANSWER: True 46. The reliability of cost-volume-profit analysis depends on the assumption that costs can be accurately divided into fixed and variable components. a. True b. False ANSWER: True 47. If a business sells two products, it is impossible to estimate the break-even point. a. True b. False ANSWER: False 48. If a business sells four products, it is impossible to estimate the break-even point. a. True b. False ANSWER: False 49. Even if a business sells six products, it is possible to estimate the break-even point. a. True b. False ANSWER: True 50. If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 11,500 units. a. True b. False ANSWER: False 51. If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units.

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Chapter 6: Cost-Volume-Profit Analysis a. True b. False ANSWER: False 52. If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 25%. a. True b. False ANSWER: False 53. If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%. a. True b. False ANSWER: False 54. Companies with large amounts of fixed costs will generally have a high operating leverage. a. True b. False ANSWER: True 55. A low operating leverage is normal for highly automated industries. a. True b. False ANSWER: False 56. Garmo Co. has an operating leverage of 5. Next year's sales are expected to increase by 10%. The company's operating income will increase by 50%. a. True b. False ANSWER: True 57. The break-even point is more relevant in a manufacturing company than it is in a service company. a. True b. False ANSWER: False 58. Cost-volume-profit relationships in a service company are measured with respect to customers and activities, rather than units of product. a. True b. False ANSWER: True 59. With respect to cost-volume-profit analysis for service companies, a cost may be defined as fixed or variable, depending on the unit of analysis.

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Chapter 6: Cost-Volume-Profit Analysis a. True b. False ANSWER: True Multiple Choice 60. Cost behavior refers to the manner in which a cost a. changes as a related activity changes b. is allocated to products c. is used in setting selling prices d. is estimated ANSWER: a 61. The three most common cost behavior classifications are a. variable costs, product costs, and sunk costs b. fixed costs, variable costs, and mixed costs c. variable costs, period costs, and differential costs d. variable costs, sunk costs, and opportunity costs ANSWER: b 62. Costs that remain constant in total dollar amount as the level of activity changes are called ________ costs. a. fixed b. mixed c. product d. variable ANSWER: a Figure 1

63. Which of the graphs in Figure 1 illustrates the behavior of a total fixed cost? a. Graph 2 b. Graph 3 c. Graph 4 Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis d. Graph 1 ANSWER: d 64. Which of the graphs in Figure 1 illustrates the behavior of a total variable cost? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 ANSWER: b 65. Which of the graphs in Figure 1 illustrates the nature of a mixed cost? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 ANSWER: a 66. Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes? a. direct labor b. salary of a factory supervisor c. units-of-production depreciation on factory equipment d. direct materials ANSWER: b 67. Which of the following describes the behavior of the fixed cost per unit? a. decreases with increasing production b. decreases with decreasing production c. remains constant with changes in production d. increases with increasing production ANSWER: a 68. Which of the following activity bases would be the most appropriate for food costs of a hospital? a. number of nurses scheduled to work b. how many MRIs are taken c. number of patients who stay in the hospital d. quantity of prescriptions filled ANSWER: c 69. Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service? a. number of truck drivers b. total miles driven c. number of trucks in service d. number of packages picked up Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis ANSWER: b 70. Most operating decisions of management focus on a narrow range of activity called the ______ of production. a. relevant range b. strategic level c. optimal level d. tactical operating level ANSWER: a 71. Costs that vary in total in direct proportion to changes in an activity level are called ______ costs. a. fixed b. sunk c. variable d. differential ANSWER: c 72. Which of the following is an example of a cost that varies in total as the number of units produced changes? a. salary of a production supervisor b. direct materials cost c. property taxes on factory buildings d. straight-line depreciation on factory equipment ANSWER: b 73. Which of the following is an example of a cost that stays the same in total as the number of units produced changes? a. electricity per KWH to operate factory equipment b. direct materials cost c. straight-line depreciation on factory equipment d. wages of assembly worker ANSWER: c 74. Which of the following is an example of a cost that stays the same in total as the number of units produced changes? a. electricity per KWH to operate factory equipment b. direct materials cost c. insurance premiums on factory building d. wages of assembly worker ANSWER: c 75. Which of the following describes the behavior of a variable cost per unit? a. It varies in increasing proportion with changes in the activity level. b. It varies in decreasing proportion with changes in the activity level. c. It remains constant with changes in the activity level. d. It varies in direct proportion with the activity level.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis 76. The graph of a variable cost when plotted against its related activity base appears as a a. circle b. rectangle c. straight line d. curved line ANSWER: c 77. A cost that has characteristics of both a variable cost and a fixed cost is called a a. variable/fixed cost b. mixed cost c. discretionary cost d. sunk cost ANSWER: b 78. Which of the following is an example of a mixed cost? a. salary of a factory supervisor b. electricity costs of $3 per kilowatt-hour c. rental costs of $10,000 per month plus $0.30 per machine hour of use d. straight-line depreciation on factory equipment ANSWER: c 79. For purposes of analysis, mixed costs are a. classified as fixed costs b. classified as variable costs c. classified as period costs d. separated into their variable and fixed cost components ANSWER: d 80. Strait Co. manufactures office furniture. During the most productive month of the year, 3,000 desks were manufactured at a total cost of $59,000. In the month of lowest production, the company made 1,125 desks at a cost of $38,000. Using the high-low method of cost estimation, total fixed costs are a. $21,000 b. $25,400 c. $42,000 d. $13,000 ANSWER: b 81. Given the following cost and activity observations for Bounty Company’s utilities, use the high-low method to determine Bounty’s variable utilities cost per machine hour. Round your answer to the nearest cent.

March April May June

Cost $3,100 2,700 2,900 3,600

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Machine Hours 15,000 10,000 12,000 18,000 Page 11

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Chapter 6: Cost-Volume-Profit Analysis a. $10.00 b. $0.67 c. $0.63 d. $0.11 ANSWER: d 82. Given the following cost and activity observations for Smithson Company’s utilities, use the high-low method to determine Smithson’s fixed costs per month. Do not round intermediate calculations.

January February March April

Cost $52,200 75,000 57,000 64,000

Machine Hours 20,000 29,000 22,000 24,500

a. $1,533 b. $2,530 c. $22,800 d. $50,600 ANSWER: a 83. Given the following cost and activity observations for George Company’s utilities, use the high-low method to determine George’s variable utilities cost per machine hour.

Cost May

$16,500

Machine Hours 105,000

June

18,000

120,000

July

16,000

100,000

August

17,500

117,000

a. $100.00 b. $1.00 c. $10.00 d. $0.10 ANSWER: d 84. Manley Co. manufactures office furniture. During the most productive month of the year, 4,500 desks were manufactured at a total cost of $86,625. In its slowest month, the company made 1,800 desks at a cost of $49,500. Using the high-low method of cost estimation, total fixed costs a. are $61,875 b. are $33,875 c. are $24,750 d. cannot be determined from the data given ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis 85. Which of the following statements is true regarding fixed and variable costs? a. Both costs are constant when considered on a per-unit basis. b. Both costs are constant when considered on a total basis. c. Fixed costs are constant in total, and variable costs are constant per unit. d. Variable costs are constant in total, and fixed costs vary in total.

ANSWER: c 86. As production increases, the fixed cost per unit a. increases b. decreases c. remains the same d. either increases or decreases, depending on the variable costs ANSWER: b 87. Understanding how costs behave is useful to management for a. analyzing the effects of changes made to the cost structure b. predicting profits as sales and production volumes change c. estimating costs d. all of these choices ANSWER: d 88. The manufacturing costs of Calico Industries for three months of the year are as follows:

April May June

Total Cost $120,000 74,000 90,900

Production (units) 280,000 165,000 230,000

Using the high-low method, the variable cost per unit and the total fixed costs, respectively, are a. $0.78 per unit and $4,000 b. $0.40 per unit and $8,000 c. $4.00 per unit and $800 d. $7.80 per unit and $4,000 ANSWER: b 89. As production increases, variable costs per unit a. stay the same b. increase c. decrease d. either increase or decrease, depending on the fixed costs ANSWER: a 90. Thompson Company manufactures and sells cookware. Because of current trends, it expects to increase sales by 15% next year. If this expected level of production and sales occurs and plant expansion is not needed, how should this increase affect next year’s total amounts for the following costs?

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Chapter 6: Cost-Volume-Profit Analysis Variable Costs a. increase b. increase c. no change d. decrease ANSWER: b

Fixed Costs increase no change no change increase

Mixed Costs increase increase increase increase

91. Given the following costs and activities for Dance Company’s electrical costs, use the high-low method to determine Dance’s variable electrical costs per machine hour.

August September October

Costs $11,700 13,200 11,400

Machine Hours 15,000 17,500 14,500

a. $2.08 b. $6.00 c. $0.60 d. $1.20 ANSWER: c 92. Which of the following types of cost is shown in this table of cost data?

Cost per Unit $6,000 3,000 2,000 1,500

Number of Units 1 2 3 4

a. mixed cost b. variable cost c. fixed cost d. period cost ANSWER: c 93. Which of the following types of cost is shown in this table of cost data?

Total Cost $8,000 8,500 9,000 9,500

Number of Units 1 2 3 4

a. mixed cost b. variable cost c. fixed cost d. period cost Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis ANSWER: a 94. Which of the following types of cost is shown in this table of cost data?

Total Cost $20 40 60 80

Number of Units 1 2 3 4

a. mixed cost b. variable cost c. fixed cost d. period cost ANSWER: b 95. The systematic examination of the relationships among selling prices, volume of sales and production, costs, and profits is termed _____ analysis. a. contribution margin b. cost-volume-profit c. budgetary d. gross profit ANSWER: b 96. In cost-volume-profit analysis, all costs are classified into which of the following two categories? a. mixed costs and variable costs b. sunk costs and fixed costs c. discretionary costs and sunk costs d. variable costs and fixed costs ANSWER: d 97. Contribution margin is a. the excess of sales revenue over variable cost b. another term for volume in cost-volume-profit analysis c. profit d. the same as sales revenue ANSWER: a 98. The contribution margin ratio is the a. same as the variable cost ratio b. same as profit c. portion of equity contributed by the stockholders d. same as the profit-volume ratio ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis 99. If sales are $820,000, variable costs are 55% of sales, and operating income is $260,000, the contribution margin ratio is a. 45% b. 55% c. 62% d. 32% ANSWER: a 100. Which of the following ratios indicates the percentage of each sales dollar that is available to cover fixed costs and to provide a profit? a. margin of safety ratio b. contribution margin ratio c. costs and expenses ratio d. profit ratio ANSWER: b 101. A firm operated at 90% of capacity for the past year, during which fixed costs were $420,000, variable costs were 40% of sales, and sales were $1,000,000. Operating income was a. $180,000 b. $420,000 c. $1,080,000 d. $980,000 ANSWER: a 102. If sales are $425,000, variable costs are 62% of sales, and operating income is $50,000, the contribution margin ratio is a. 38% b. 26% c. 11% d. 62% ANSWER: a 103. Variable costs as a percentage of sales for Lemon Inc. are 80%, current sales are $600,000, and fixed costs are $130,000. How much will operating income change if sales increase by $40,000? a. $8,000 increase b. $8,000 decrease c. $30,000 decrease d. $30,000 increase ANSWER: a 104. Spice Inc.'s unit selling price is $60, the unit variable costs are $35, fixed costs are $125,000, and current sales are 10,000 units. How much will operating income change if sales increase by 8,000 units? a. $150,000 decrease b. $175,000 increase c. $200,000 increase Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis d. $150,000 increase ANSWER: c 105. Bryce Co. sales are $914,000, variable costs are $498,130, and operating income is $196,000. The contribution margin ratio is a. 52.2% b. 28.4% c. 54.5% d. 45.5% ANSWER: d 106. A firm operated at 80% of capacity for the past year, during which fixed costs were $330,000, variable costs were 70% of sales, and sales were $1,000,000. Operating income (loss) was a. $140,000 b. $(30,000) c. $370,000 d. $670,000 ANSWER: b 107. Lee Company’s sales are $525,000, variable costs are 53% of sales, and operating income is $19,000. The contribution margin ratio is a. 47% b. 26% c. 9% d. 53% ANSWER: a 108. Zipee Inc.'s unit selling price is $90, the unit variable costs are $40.50, fixed costs are $170,000, and current sales are 12,000 units. How much will operating income change if sales increase by 5,000 units? a. $125,000 decrease b. $175,000 increase c. $75,000 increase d. $247,500 increase ANSWER: d 109. Zeke Company sells 25,000 units at $21 per unit. Variable costs are $10 per unit, and fixed costs are $75,000. The contribution margin ratio (rounded to the nearest whole percent) and the unit contribution margin, respectively, are a. 47% and $11 per unit b. 53% and $7 per unit c. 47% and $8 per unit d. 52% and $11 per unit ANSWER: d 110. If the contribution margin ratio for France Company is 45%, sales are $425,000, and fixed costs are $100,000, the operating income is Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis a. $233,750 b. $91,250 c. $191,250 d. $133,750 ANSWER: b 111. If fixed costs are $250,000, the unit selling price is $125, and the unit variable costs are $73, the break-even sales in units (rounded to the nearest whole unit) is a. 3,425 units b. 2,381 units c. 2,000 units d. 4,808 units ANSWER: d 112. If fixed costs are $750,000 and variable costs are 60% of sales, the break-even point in sales dollars is a. $1,250,000 b. $450,000 c. $1,875,000 d. $300,000 ANSWER: c 113. If fixed costs are $1,200,000, the unit selling price is $240, and the unit variable costs are $110, the amount of sales in units (rounded to the nearest whole unit) required to realize an operating income of $200,000 is a. 9,231 units b. 12,000 units c. 10,769 units d. 5,833 units ANSWER: c 114. If fixed costs are $300,000, the unit selling price is $31, and the unit variable costs are $22, the break-even sales (units) if fixed costs are reduced by $30,000 is a. 30,000 units b. 8,710 units c. 12,273 units d. 20,000 units ANSWER: a 115. If fixed costs are $500,000, the unit selling price is $55, and the unit variable costs are $30, the break-even sales (units) if fixed costs are increased by $80,000 is a. 10,545 units b. 19,333 units c. 23,200 units d. 25,000 units ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis 116. Reynold's Company has a product with fixed costs of $350,000, a unit selling price of $29, and unit variable costs of $20. The break-even sales in units (rounded to the nearest whole unit) if the variable costs are decreased by $4 is a. 26,923 units b. 12,069 units c. 21,875 units d. 38,889 units ANSWER: a 117. If fixed costs are $450,000, the unit selling price is $75, and the unit variable costs are $50, the old and new breakeven sales in units (rounded to the nearest whole unit), respectively, if the unit selling price increases by $10 are a. 6,000 units and 5,294 units b. 18,000 units and 6,000 units c. 18,000 units and 12,857 units d. 9,000 units and 15,000 units ANSWER: c 118. If fixed costs are $400,000 and the unit contribution margin is $20, the amount of units that must be sold in order to have a zero profit is a. 25,000 units b. 10,000 units c. 400,000 units d. 20,000 units ANSWER: d 119. If fixed costs are $700,000 and the unit contribution margin is $17, the amount of units (rounded to the nearest whole unit) that must be sold in order to realize an operating income of $100,000 is a. 5,000 units b. 41,176 units c. 47,059 units d. 58,882 units ANSWER: c 120. If fixed costs are $500,000 and the unit contribution margin is $20, the break-even point in units if fixed costs are reduced by $80,000 is a. 25,000 units b. 29,000 units c. 4,000 units d. 21,000 units ANSWER: d 121. If fixed costs are $600,000 and the unit contribution margin is $40, the break-even point if fixed costs are increased by $90,000 is a. 17,250 units b. 15,000 units Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis c. 8,333 units d. 9,667 units ANSWER: a 122. If fixed costs are $561,000 and the unit contribution margin is $8.00, the break-even point in units if variable costs are decreased by $0.50 per unit is a. 66,000 units b. 70,125 units c. 74,800 units d. 60,000 units ANSWER: a 123. If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would a. decrease b. increase c. remain the same d. increase or decrease, depending on the percentage increase in wage rates ANSWER: b 124. If variable costs per unit decreased because of a decrease in utility rates, the break-even point would a. decrease b. increase c. remain the same d. increase or decrease, depending on the percentage increase in utility rates ANSWER: a 125. If fixed costs increased and variable costs per unit decreased, the break-even point a. would increase b. would decrease c. would remain the same d. cannot be determined from the data given ANSWER: d 126. Which of the following conditions would cause the break-even point to decrease? a. total fixed costs increase b. unit selling price decreases c. unit variable cost decreases d. unit variable cost increases ANSWER: c 127. Which of the following conditions would cause the break-even point to increase? a. total fixed costs decrease b. unit selling price increases c. unit variable cost decreases Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis d. unit variable cost increases ANSWER: d 128. Which of the following conditions would cause the break-even point to increase? a. total fixed costs increase b. unit selling price increases c. unit variable cost decreases d. total fixed costs decrease ANSWER: a 129. Charlotte Co. has budgeted salary increases to factory supervisors totaling 9%. If selling prices and all other cost relationships are held constant, next year's break-even point a. will decrease by 9% b. will increase by 9% c. cannot be determined from the data given d. will increase at a rate greater than 9% ANSWER: c 130. Flying Cloud Co. has the following operating data for its manufacturing operations: Unit selling price Unit variable cost Total fixed costs

$

250 100 840,000

The company has decided to increase the wages of hourly workers which will increase the unit variable cost by 10%.

Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the next break-even point for Flying Cloud Co. will be a. increased by 640 units b. increased by 400 units c. decreased by 640 units d. increased by 800 units ANSWER: a 131. If fixed costs are $850,000 and variable costs are 60% of sales, the break-even point (dollars) is a. $2,125,000 b. $340,000 c. $3,400,000 d. $1,416,666 ANSWER: a 132. O'Boyle Co.'s fixed costs are $256,000, the unit selling price is $36, and the unit variable costs are $20, the breakeven sales (units) is a. 12,800 units b. 4,571 units c. 16,000 units d. 7,111 units Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis ANSWER: c 133. Piper Technology's fixed costs are $1,500,000, the unit selling price is $250, and the unit variable costs are $130. The amount of sales (rounded to the nearest whole unit) required to realize an operating income of $200,000 is a. 14,167 units b. 12,500 units c. 16,000 units d. 11,538 units ANSWER: a 134. Payton Industries has fixed costs of $490,000, the unit selling price is $35, and the unit variable costs are $20. The break-even sales (units) if fixed costs are reduced by $40,000 is a. 32,667 units b. 14,000 units c. 30,000 units d. 24,500 units ANSWER: c 135. Connor Company has fixed costs of $400,000, the unit selling price is $25, and the unit variable costs are $15. The break-even sales (units) if the variable costs are increased by $2 is a. 50,000 units b. 30,770 units c. 40,000 units d. 26,667 units ANSWER: a 136. Jacob Inc. has fixed costs of $240,000, the unit selling price is $32, and the unit variable costs are $20. The old and new break-even sales (units), respectively, if the unit selling price increases by $4 is a. 7,500 units and 6,667 units b. 20,000 units and 30,000 units c. 20,000 units and 15,000 units d. 12,000 units and 15,000 units ANSWER: c 137. When Isaiah Company has fixed costs of $120,000 and the contribution margin is $30, the break-even point is a. 16,000 units b. 8,000 units c. 6,000 units d. 4,000 units ANSWER: d 138. Kaden Company's fixed costs are $46,800, the unit selling price is $42, and the unit variable costs are $24. The break-even sales (units) is a. 2,400 units b. 1,950 units Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis c. 1,114 units d. 2,600 units ANSWER: d 139. If fixed costs are $46,800, the unit selling price is $42, and the unit variable costs are $24, the break-even sales (units) if the variable costs are decreased by $2 is a. 2,127 units b. 1,114 units c. 2,340 units d. 1,950 units ANSWER: c 140. The point where the sales line and the total costs line intersect on the cost-volume-profit chart represents the a. maximum possible operating loss b. maximum possible operating income c. total fixed costs d. break-even point ANSWER: d 141. The point where the profit line intersects the horizontal axis on the profit-volume chart represents the a. maximum possible operating loss b. maximum possible operating income c. total fixed costs d. break-even point ANSWER: d 142. With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume, and can immediately see the effects of each change on the break-even point and profit. This is called a. "what if" or sensitivity analysis b. vary the data analysis c. computer-aided analysis d. data gathering ANSWER: a 143. Which of the following is an assumption underlying cost-volume-profit analysis? a. The break-even point will be passed during the period. b. Total sales and total costs can be represented by curved lines. c. Costs can be accurately divided into product and period components. d. The sales mix is constant.

ANSWER: d 144. In a cost-volume-profit chart, the a. total cost line begins at zero b. slope of the total cost line is dependent on the fixed cost per unit Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis c. total cost line begins at the total fixed cost value on the vertical axis d. total cost line normally ends at the highest sales value ANSWER: c 145. The relative distribution of sales among the various products sold by a business is the a. business's basket of goods b. contribution margin mix c. sales mix d. product portfolio ANSWER: c 146. When a business sells more than one product at varying selling prices, the business's break-even point can be determined as long as a. the number of products does not exceed 2 b. the number of products does not exceed 3 c. the number of products does not exceed 15 d. there is no limit ANSWER: d Carter Co. sells two products: Arks and Bins. Last year, Carter sold 14,000 units of Arks and 56,000 units of Bins. Related data are as follows: Product Arks Bins

Unit Selling Price $120 80

Unit Variable Cost $80 60

Unit Contribution Margin $40 20

147. Carter Co.'s sales mix last year was a. 20% Arks; 80% Bins b. 12% Arks; 28% Bins c. 70% Arks; 30% Bins d. 40% Arks; 20% Bins ANSWER: a 148. Carter Co.'s unit selling price of M, with M representing one overall company product, was a. $200 b. $100 c. $80 d. $88 ANSWER: d 149. Carter Co.'s variable cost of M was a. $140 b. $70 c. $64 Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis d. $60 ANSWER: c 150. Carter Co.'s unit contribution margin of M was a. $24 b. $60 c. $92 d. $20 ANSWER: a 151. Assuming that last year's fixed costs totaled $960,000, Carter Co.'s break-even point in units was a. 40,000 units b. 12,000 units c. 35,000 units d. 28,000 units ANSWER: a 152. If a business had sales of $4,000,000 and a margin of safety of 25%, the break-even point was a. $5,000,000 b. $3,000,000 c. $12,000,000 d. $1,000,000 ANSWER: b 153. Forde Co. has an operating leverage of 4. Sales are expected to increase by 12% next year. Operating income is a. unaffected b. expected to increase by 3% c. expected to increase by 48% d. expected to increase by 4% ANSWER: c 154. If sales are $400,000, variable costs are 80% of sales, and operating income is $40,000, the operating leverage is a. 0.0 b. 7.5 c. 2.0 d. 1.3 ANSWER: c 155. The difference between the current sales revenue and the sales at the break-even point is called the a. contribution margin b. margin of safety c. price factor d. operating leverage ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis 156. Cost-volume-profit analysis cannot be used if which of the following occurs? a. Costs cannot be properly classified into fixed and variable costs. b. The total fixed costs change. c. The per-unit variable costs change. d. Per-unit sales prices change.

ANSWER: a 157. Assume that Corn Co. sold 8,000 units of Product A and 2,000 units of Product B during the past year. The unit contribution margins for Products A and B are $30 and $60, respectively. Corn has fixed costs of $378,000. The breakeven point in units is a. 8,000 units b. 6,300 units c. 12,600 units d. 10,500 units ANSWER: d 158. Harley Company has sales of $500,000, variable costs are 75% of sales, and operating income is $40,000. Harley's operating leverage (rounded to one decimal place) is a. 0.0 b. 1.2 c. 1.3 d. 3.1 ANSWER: d 159. Rocky Company reports the following data: Sales Variable costs Fixed costs

$800,000 300,000 120,000

Rocky Company’s operating leverage (rounded to one decimal place) is a. 6.7 b. 2.7 c. 1.0 d. 1.3 ANSWER: d Rusty Co. sells two products: X and Y. Last year, Rusty sold 5,000 units of X and 35,000 units of Y. Related data are as follows: Product X Y

Unit Selling Price $110 70

Unit Variable Cost $70 50

Unit Contribution Margin $40 20

160. For break-even analysis, the unit selling price of M was Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis a. $180 b. $75 c. $100 d. $110 ANSWER: b 161. Rusty Co.’s sales mix last year was a. 58% X; 42% Y b. 60% X; 40% Y c. 30% X; 70% Y d. 12.5% X; 87.5% Y ANSWER: d 162. For break-even analysis, the unit variable cost of M was a. $52.50 b. $70.00 c. $120.00 d. $50.00 ANSWER: a 163. For break-even analysis, the unit contribution margin of M was a. $60.00 b. $20.00 c. $40.00 d. $22.50 ANSWER: d 164. Assuming that last year’s fixed costs totaled $675,000, Rusty Co.’s break-even point in units was a. 16,875 units b. 30,100 units c. 30,000 units d. 11,250 units ANSWER: c 165. Beemer's sales are $400,000, variable costs are 75% of sales, and operating income is $50,000. The operating leverage is a. 2.5 b. 7.5 c. 2.0 d. 0 ANSWER: c 166. Xander Studios holds a sculpting class for which it charges students $250. The costs consist of the following: Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis Variable costs per student: Sculpting supplies Enrollment costs Fixed costs for the course: Instructor's salary Rental cost of the classroom

$ 100 50 $1,000 500

The break-even number of students is a. 2 b. 11 c. 12 d. 20 ANSWER: c 167. Kaiser Air is considering a new flight between Atlanta and Tampa. The average fare per seat is $400. The fixed costs for the flight, which include crew salaries, operating costs, and aircraft depreciation, total $32,000. Variable costs per passenger total $75. The break-even number of passengers per flight (rounded to the nearest whole number) is a. 5 b. 80 c. 98 d. 427 ANSWER: c 168. Which of the following would be classified as a variable cost for a T-shirt manufacturer? a. ink used for screen printing b. warehouse rent of $8,000 per month plus $0.50 per square foot of storage used c. janitorial costs of $4,000 per month d. advertising costs of $12,000 per month ANSWER: a 169. Which of the following would be classified as a mixed cost for a T-shirt manufacturer? a. ink used for screen printing b. warehouse rent of $8,000 per month plus $0.50 per square foot of storage used c. hourly wages of sewing machine operators d. advertising costs of $12,000 per month ANSWER: b 170. Which of the following would be classified as a fixed cost for a T-shirt manufacturer? a. salary of the production supervisor b. advertising costs of $12,000 per month c. straight-line depreciation on sewing machines d. all of these choices ANSWER: d 171. Which of the following would be classified as a fixed cost for a T-shirt manufacturer?

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Chapter 6: Cost-Volume-Profit Analysis a. electricity costs of $0.038 per kilowatt-hour b. hourly wages of sewing machine operators c. cotton and polyester cloth d. none of these choices ANSWER: d 172. Which of the following would be classified as a mixed cost for a T-shirt manufacturer? a. electricity costs of $0.038 per kilowatt-hour b. hourly wages of sewing machine operators c. maintenance costs with sewing machine company contracted at $2,000 per year plus $0.001 for each machine hour of use d. property taxes on factory, building, and equipment ANSWER: c The following graphs represent various types of cost behaviors:

173. Which graph depicts the behavior of total direct materials cost? a. Graph 1 b. Graph 2 c. Graph 3 d. Graph 4 ANSWER: a 174. Which graph depicts the behavior of unit variable costs and total fixed costs? a. Graph 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis b. Graph 2 c. Graph 3 d. Graph 4 ANSWER: c 175. Which graph depicts the behavior of unit fixed costs? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 5 ANSWER: c 176. Insurance costs of $2,500 per month would be represented by which graph? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 5 ANSWER: b 177. Sales salaries of $16,000 plus commissions of 10% for each item sold would be represented by which graph? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 5 ANSWER: a 178. Which of the following statements is true of operating leverage? a. It is used to measure the impact of changes in sales on operating income. b. It is computed as operating income divided by contribution margin. c. Ford Motor Company is an example of a company with low operating leverage. d. High operating leverage is normal for professional service companies.

ANSWER: a 179. Which of the following statements is true of the profit-volume chart? a. It plots both costs and revenues at various levels of sales units. b. The maximum operating loss plotted is equal to total fixed and variable costs. c. The profit line intersects the horizontal zero operating profit line at the break-even point. d. The maximum operating profit plotted is equal to 200% of fixed costs.

ANSWER: c 180. Which of the following shows the possible decrease in sales that may occur before operating loss results? a. contribution margin b. margin of safety c. price factor Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis d. operating leverage ANSWER: b Subjective Short Answer 181. The manufacturing costs of Mocha Industries for three months of the year are as follows: April May June

Total Cost $ 63,100 80,920 100,900

Production 1,100 units 1,800 2,600

Using the high-low method, determine the (a) variable cost per unit, and (b) the total fixed costs.

ANSWER: a. ($100,900 – $63,100) ÷ (2,600 – 1,100) = $25.20 per unit b. $100,900 – ($25.20 × 2,600) = $35,380 182. Blane Company has the following data: Total sales Total variable costs Fixed costs Units sold

$800,000 $300,000 $200,000 50,000 units

What will operating income be if units sold double to 100,000 units?

ANSWER: Total sales $1,600,000 Total variable costs (600,000) Contribution margin $1,000,000 Fixed costs (200,000) Operating income $ 800,000 183. Global Publishers has collected the following data for recent months: Month March April May June

Issues Published 20,500 21,800 17,750 21,200

Total Cost $20,960 22,464 18,495 21,395

a. Using the high-low method, find variable cost per unit and total fixed costs. b. What is the estimated cost for a month in which 19,000 issues are published?

ANSWER: a. Variable cost per unit: ($22,464 – $18,495) ÷ (21,800 – 17,750) = $0.98 per unit Total fixed costs: $18,495 – (17,750 × $0.98) = $1,100 b. Estimated total cost: $1,100 + ($0.98 × 19,000 issues published) = $19,720 184. Given the following information: Variable cost per unit = $5 July fixed cost per unit = $7 Units sold and produced in July = 28,000 What is the total estimated cost for August if 30,000 units are projected to be produced and sold?

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Chapter 6: Cost-Volume-Profit Analysis ANSWER: Total fixed costs: $7 × 28,000 = $196,000 Total cost at 30,000 units: $196,000 + ($5 × 30,000 units) = $346,000 185. Copper Hill Inc. manufactures laser printers within a relevant range of production of 70,000 to 100,000 printers per year. The following partially completed manufacturing cost schedule has been prepared: Number of Printers Produced 70,000 90,000 100,000 Total costs: Total variable costs Total fixed costs Total costs Cost per unit: Variable cost per unit Fixed cost per unit Total cost per unit

$350,000 630,000 $980,000

(d) (e) (f)

(j) (k) (l)

(a) (b) (c)

(g) (h) (i)

(m) (n) (o)

Complete the preceding cost schedule, identifying each cost by the appropriate letter (a) through (o).

ANSWER: a. $5.00 ($350,000 ÷ 70,000 printers) b. $9.00 ($630,000 ÷ 70,000 printers) c. $14.00 ($980,000 ÷ 70,000 printers) d. $450,000 ($5.00 × 90,000 printers) e. $630,000 f. $1,080,000 ($450,000 + $630,000) g. $5.00 h. $7.00 ($630,000 ÷ 90,000 printers) i. $12.00 ($1,080,000 ÷ 90,000 printers) j. $500,000 ($5.00 × 100,000 printers) k. $630,000 l. $1,130,000 ($500,000 + $630,000) m. $5.00 n. $6.30 ($630,000 ÷ 100,000 units) o. $11.30 ($1,130,000 ÷ 100,000 units) 186. The manufacturing costs of Carrie Industries for the first three months of the year are as follows: January February March

Total Cost $ 93,300 115,500 79,500

Production 2,300 units 3,100 1,900

Using the high-low method, determine the (a) variable cost per unit and (b) the total fixed cost.

ANSWER: a. ($115,500 – $79,500) ÷ (3,100 – 1,900) = $30 per unit b. $115,500 – ($30 × 3,100) = $22,500 187. Bluegill Company sells 45,000 units at $18 per unit. Fixed costs are $62,000, and operating income is $298,000.

Determine the (a) variable cost per unit, (b) unit contribution margin, and (c) contribution margin ratio (rounded to two decimal places).

ANSWER: a.

Sales $ 810,000 (45,000 units × $18) Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis Variable costs Contribution margin Fixed costs Operating income Variable cost per unit is $10 b. $18 – $10 = $8 per unit c. $8 ÷ $18 = 44.44%

(450,000) $ 360,000 62,000 $ 298,000

(45,000 units × $10) (45,000 units × $8)

188. a. If Swannanoa Company's budgeted sales are $1,000,000, fixed costs are $350,000, and variable costs are $600,000, what is the budgeted contribution margin ratio? b. If the contribution margin ratio is 30%, sales are $900,000, and fixed costs are $200,000, what is the operating income?

ANSWER: a. Contribution Margin Ratio = Contribution Margin ÷ Sales = ($1,000,000 – $600,000) ÷ $1,000,000 = 40% b. $900,000 × 30% = $270,000 total contribution margin $270,000 – $200,000 = $70,000 operating income 189. Penny Company sells 25,000 units at $59 per unit. Variable costs are $29 per unit, and operating loss is $(50,000).

Determine the (a) unit contribution margin, (b) contribution margin ratio (rounded to one decimal place), and (c) fixed costs per unit at production of 25,000 units.

ANSWER: a. $59 – $29 = $30 per unit b. $30 ÷ $59 = 50.8% c.

Sales $1,475,000 (25,000 units × $59) Variable costs (725,000) (25,000 units × $29) Contribution margin $ 750,000 (25,000 units × $30) Fixed costs (800,000) (plug) Operating loss $ (50,000) $800,000 ÷ 25,000 = $32 190. Given the following: Variable cost as a percentage of sales = 60% Unit variable cost = $30 Fixed costs = $200,000 What is the break-even point in units?

ANSWER: $30 ÷ 60% = $50 selling price If VC as a percentage of sales is 60%, then the contribution margin ratio is 40%.

Unit CM = 40% × $50 = $20 Break-Even Point (units) = $200,000 ÷ $20 = 10,000 units 191. Gladstorm Enterprises sells a product for $60 per unit. The variable cost is $20 per unit, while fixed costs are $85,000. Determine the (a) break-even point in sales units and (b) break-even point in sales units if the selling price increased to $80 per unit. Round to the nearest whole number of units.

ANSWER: a. SP $60 – VC $20 = CM $40 $85,000 ÷ $40 = 2,125 units b. SP $80 – VC $20 = CM $60 $85,000 ÷ $60 = 1,417 units

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Chapter 6: Cost-Volume-Profit Analysis 192. Mia Enterprises sells a product for $90 per unit. The variable cost is $40 per unit, while fixed costs are $75,000.

Determine the (a) break-even point in sales units and (b) break-even point in sales units if the selling price increased to $100 per unit.

ANSWER: a. SP $90 – VC $40 = CM $50 per unit $75,000 ÷ $50 = 1,500 units b. SP $100 – VC $40 = CM $60 per unit $75,000 ÷ $60 = 1,250 units 193. Atlantic Company sells a product with a break-even point of 3,000 sales units. The variable cost is $60 per unit, and fixed costs are $270,000.

Determine the (a) unit sales price and (b) the sales (units) necessary if the company desires a target profit of $36,000.

ANSWER: a. $270,000 ÷ ($X – $60) = 3,000 units X = $150 b. ($270,000 + $36,000) ÷ ($150 – $60) = 3,400 units 194. Douglas Company has a contribution margin ratio of 30%. If Douglas has $336,420 in fixed costs, what amount of sales will need to be generated in order for the company to break even?

ANSWER: $336,420 ÷ 0.30 = $1,121,400 195. Waterfall Company sells a product for $150 per unit. The variable cost is $80 per unit, and fixed costs are $270,000.

Determine the (a) break-even point in sales units and (b) the sales (units) necessary if the company desires a target profit of $36,000. Round to the nearest whole number of units.

ANSWER: a. $150 – $80 = $70 $270,000 ÷ $70 = 3,857 units b. ($270,000 + $36,000) ÷ $70 = 4,371 units 196. For the current year ending January 31, Harp Company expects fixed costs of $188,500 and a unit variable cost of $51.50. For the coming year, a new wage contract will increase the unit variable cost to $55.50. The selling price of $70.00 per unit is expected to remain the same. a. b.

Compute the break-even sales (units) for the current year. Round to the nearest whole number of units.

Compute the anticipated break-even sales (units) for the coming year, assuming the new wage contract is signed.

ANSWER: a. b.

$188,500 ÷ ($70.00 – $51.50) = 10,189 units $188,500 ÷ ($70.00 – $55.50) = 13,000 units

197. Carrolton, Inc., currently sells widgets for $80 per unit. The variable cost is $30 per unit, and total fixed costs equal $240,000 per year. Sales are currently 20,000 units annually.

The company is considering a 20% drop in selling price that it believes will raise units sold by 20%. Assuming all costs stay the same, what is the impact on income if this change is made?

ANSWER: Current scenario: SP $ 80 VC (30) CM $ 50 × 20,000 units = $1,000,000 total contribution margin Proposed change: Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis SP $80 × 80% = $ 64 VC (30) CM $ 34 × (20,000 × 1.2) = $816,000 total contribution margin Total CM (and income) drops by $184,000 ($1,000,000 – $816,000).

198. Louis Company sells a single product at a price of $65 per unit. Variable costs per unit are $45, and total fixed costs are $625,500. Louis is considering the purchase of a new piece of equipment that would increase the fixed costs to $800,000 but decrease the variable costs per unit to $42.

If Louis Company expects to sell 44,000 units next year, should it purchase this new equipment?

ANSWER: Under the current system, Louis’s profit when 44,000 units are sold is [($65 – $45) × 44,000] – $625,500 = $254,500.

If the new equipment is purchased, Louis’s profit when 44,000 units are sold is [($65 – $42) × 44,000] – $800,000 = $212,000.

Louis is better off not buying the new equipment.

199. For the current year ending April 30, Hal Company expects fixed costs of $60,000, a unit variable cost of $70, and an anticipated break-even point of 1,715 sales units. a.

Compute the unit sales price. Round to the nearest dollar. b.

Compute the sales (units) required to realize an operating profit of $8,000.

Round to the nearest whole number of units.

ANSWER: a. $60,000 ÷ ($X – $70) = 1,715 units X = $105 b. ($60,000 + $8,000) ÷ ($105 – $70) = 1,943 units 200. Currently, the unit selling price is $50, the variable cost is $34, and the total fixed costs are $108,000. A proposal is being evaluated to increase the selling price to $54. a. Compute the current break-even sales (units). b. Compute the anticipated break-even sales (units), assuming that the unit selling price is increased and all costs remain constant.

ANSWER: a. $108,000 ÷ ($50 – $34) = 6,750 units b. $108,000 ÷ ($54 – $34) = 5,400 units 201. Perfect Stampers makes and sells aftermarket hub caps. The variable cost for each hub cap is $4.75, and the hub cap sells for $9.95. Perfect Stampers has fixed costs per month of $3,120. Compute the contribution margin per unit and the break-even sales in units and in dollars for the month.

ANSWER: Contribution margin: $9.95 selling price – $4.75 variable cost = $5.20 Break-even sales in units: $3,120 ÷ $5.20 = 600 units Break-even sales in dollars: $9.95 selling price × 600 units = $5,970 202. For the past year, Iris Company had fixed costs of $6,708,000, a unit variable cost of $444, and a unit selling price of $600. For the coming year, no changes are expected in revenues and costs, except that a new wage contract will increase variable costs by $6 per unit. Determine the break-even sales (units) for (a) the past year and (b) the coming year.

ANSWER: a. $6,708,000 ÷ $156 = 43,000 units b. $6,708,000 ÷ $150 = 44,720 units

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Chapter 6: Cost-Volume-Profit Analysis 203. For the past year, Pedi Company had fixed costs of $70,000, unit variable costs of $32, and a unit selling price of $40. For the coming year, no changes are expected in revenues and costs, except that property taxes are expected to increase by $10,000. Determine the break-even sales (units) for (a) the past year and (b) the coming year.

ANSWER: a. $70,000 ÷ $8 = 8,750 units b. $80,000 ÷ $8 = 10,000 units 204. For the coming year, River Company estimates fixed costs at $109,000, the unit variable cost at $21, and the unit selling price at $85. Determine (a) the break-even point in units of sales, (b) the unit sales required to realize operating income of $150,000, and (c) the probable operating income if sales total $500,000.

Round units to the nearest whole number and percentage to one decimal place.

ANSWER: a. $109,000 ÷ ($85 – $21) = 1,703 units b. ($109,000 + $150,000) ÷ $64 = 4,047 units c.

CM ratio = $64 ÷ $85 =75.3% $500,000 × 75.3% = $376,500 contribution margin $376,500 – $109,000 fixed costs = $267,500 operating income

205. Racer Industries has fixed costs of $900,000. The selling price per unit is $250, and the variable cost per unit is $130. a. How many units must Racer sell in order to break even? b. How many units must Racer sell in order to earn a profit of $480,000? c. A new employee suggests that Racer Industries sponsor a 10K marathon as a form of advertising. The cost to sponsor the event is $7,200. How many more units must be sold to cover this cost?

ANSWER: a. $900,000 ÷ ($250 – $130) = 7,500 units b. ($900,000 + $480,000) ÷ ($250 – $130) = 11,500 units c. $7,200 ÷ ($250 – $130) = 60 units 206. A company with a break-even point at $900,000 in sales revenue had fixed costs of $225,000. When actual sales were $1,000,000, variable costs were $750,000. Determine (a) the margin of safety expressed in dollars, (b) the margin of safety expressed as a percentage of sales, (c) the contribution margin ratio, and (d) the operating income.

ANSWERa. $1,000,000 – $900,000 = $100,000 : b. $100,000 ÷ $1,000,000 = 10% c. ($1,000,000 – $750,000) ÷ $1,000,000 = 25% d. $1,000,000 – $225,000 – $750,000 = $25,000 or $100,000 × 25% = $25,000 207. A company has a margin of safety of 25%, a contribution margin ratio of 30%, and sales of $1,000,000. a. b. c.

What is the break-even point in sales dollars?

What is the operating income?

If neither the relationship between variable costs and sales nor the amount of fixed costs is expected to change in the next year, how much additional operating income can be earned by increasing sales by $110,000?

ANSWER: a.

Margin of safety: $1,000,000 × 25% = $250,000 Break-even point: $1,000,000 – $250,000 = $750,000 b. $250,000 (margin of safety) × 30% (contribution margin ratio) = $75,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis c.

$110,000 × 30% = $33,000

208. Bobby Company has fixed costs of $160,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company’s two products are as follows: Product X Y

Selling Price per Unit Variable Cost per Unit $180 $100 100 60

Contribution Margin per Unit $80 40

The sales mix for Products X and Y is 60% and 40%, respectively. Determine the break-even point in units of X and Y. ANSWER: (The overall company product is labeled "M" in the answer.)

Unit contribution margin of M: ($80 × 60%) + ($40 × 40%) = $64 Break-even sales (units) for M: $160,000 ÷ $64 = 2,500 units 2,500 × 60% = 1,500 units of X 2,500 × 40% = 1,000 units of Y 209. Steven Company has fixed costs of $160,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company’s two products are as follows: Product X Y

Selling Price per Unit Variable Cost per Unit $180 $80 100 50

Contribution Margin per Unit $100 50

The sales mix for Products X and Y is 60% and 40%, respectively. Determine the break-even point in units of X and Y. ANSWER: (The overall company product is labeled "M" in the answer.)

Unit selling price of M: ($180 × 60%) + ($100 × 40%) = $148 Unit variable cost of M: ($80 × 60%) + ($50 × 40%) = $68 Unit contribution margin of M: $148 – $68 = $80 Break-even sales (units) for E: $160,000 ÷ $80 = 2,000 units 2,000 × 60% = 1,200 units of X 2,000 × 40% = 800 units of Y 210. Klein Company reports the following data: Sales Variable costs Fixed costs

$980,000 500,000 350,000

Determine Klein Company’s operating leverage. Round to two decimal places.

ANSWER: ($980,000 – $500,000) ÷ ($980,000 – $500,000 – $350,000) = 3.69 211. Tom Company reports the following data: Sales $600,000 Variable costs 400,000 Fixed costs 100,000 Determine Tom Company’s operating leverage.

ANSWER: ($600,000 – $400,000) ÷ ($600,000 – $400,000 – $100,000) = 2.0 Copyright Cengage Learning. Powered by Cognero.

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Chapter 6: Cost-Volume-Profit Analysis 212. Dean Company has sales of $500,000, and the break-even point in sales dollars is $300,000. Determine the company’s margin of safety percentage.

ANSWER: 40% = ($500,000 – $300,000) ÷ $500,000 213. Grant Company has sales of $300,000, and the break-even point in sales dollars is $225,000. Determine the company’s margin of safety percentage.

ANSWER: 25% = ($300,000 – $225,000) ÷ $300,000 214. Trail Bikes, Inc. sells three Deluxe bikes for every seven Standard bikes. The Deluxe bike sells for $1,800 and has variable costs of $1,200. The Standard bike sells for $600 and has variable costs of $200. a. If Trail Bikes has fixed costs that total $1,702,000, how many bikes must be sold in order for the company to break even? b. How many of the bikes determined in (a) will be Deluxe bikes, and how many will be Standard bikes?

ANSWER: (The overall company product is labeled "M" in the answer.) a. Unit contribution margin of M: {[3 × ($1,800 – $1,200)] + [7 × ($600 – $200)]} ÷ 10 = $460 Break-even sales units for M: $1,702,000 ÷ $460 = 3,700 bikes b. Deluxe: 30% × 3,700 = 1,110 Standard: 70% × 3,700 = 2,590 215. If a business had a capacity of $10,000,000 of sales, actual sales of $6,000,000, break-even sales of $4,200,000, fixed costs of $1,800,000, and variable costs of 60% of sales, what is the margin of safety expressed as a percentage of sales?

ANSWER: Margin of Safety = (Sales – Sales at Break-Even) ÷ Sales = ($6,000,000 – $4,200,000) ÷ $6,000,000 = 30% 216. Safari Co. sells two products: Orks and Zins. Last year, Safari sold 21,000 units of Orks and 14,000 units of Zins.

Related data are as follows: Product Orks Zins

Unit Selling Price $120 80

Unit Variable Cost $80 60

Unit Contribution Margin $40 20

Determine the following: a. Safari Co.’s sales mix b. Safari Co.’s unit selling price of M c. Safari Co.’s unit contribution margin of M d. Safari Co.’s break-even sales in units of M assuming that last year’s fixed costs were $160,000 ANSWER: a. Orks: 21,000 ÷ (21,000 + 14,000) = 60% Zins: 14,000 ÷ (21,000 + 14,000) = 40% b. ($120 × 60%) + ($80 × 40%) = $104 c. [($120 – $80) × 60%] + [($80 – $60) × 40%] = $32 d. $160,000 ÷ $32 = 5,000 units of M 217. A business had a margin of safety ratio of 20%, variable costs of 75% of sales, fixed costs of $240,000, a break-even point of $960,000, and operating income of $60,000 for the current year. Compute the current year's sales.

ANSWER: $960,000 ÷ 80% = $1,200,000 218. Cordell, Inc., has an operating leverage of 3. Sales are expected to increase by 9% next year. What is the expected change in operating income next year?

ANSWER: Operating income is expected to increase by 27% (9% × 3).

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Chapter 6: Cost-Volume-Profit Analysis 219. Silver River Company sells Products S and T and has made the following estimates for the coming year: Product S T

Unit Selling Price $30 70

Unit Variable Cost $24 56

Sales Mix 60% 40

Fixed costs are estimated at $202,400. For the purposes of break-even analysis, determine the following: a. Break-even sales (units) for M b. Break-even sales (units) of S and T c. Sales units of M necessary to realize an operating income of $119,600 for the coming year ANSWER: a. Unit selling price of M: ($30 × 60%) + ($70 × 40%) = $46.00 Unit variable cost of M: ($24 × 60%) + ($56 × 40%) = $36.80 Unit contribution margin of M: $46.00 – $36.80 = $9.20 Break-even sales (units) for M: $202,400 ÷ $9.20 = 22,000 units b. S: 13,200 units (22,000 units × 60%) T: 8,800 units (22,000 units × 40%) c. Sales units of M: ($202,400 + $119,600) ÷ $9.20 = 35,000 units 220. Define operating leverage. Explain the relationship between a company’s operating leverage and how a change in sales is expected to impact profits.

ANSWER: Operating leverage is the relationship between a company’s contribution margin and its operating income.

Companies with a high level of fixed costs have a high operating leverage, and companies with low fixed costs have a low operating leverage.

To determine how a change in sales will impact operating income, you must multiply the anticipated percentage change in sales by the operating leverage. Thus, the higher a company’s operating leverage, the larger the anticipated increase in operating income from a change in sales.

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Chapter 7: Variable Costing for Management Analysis True / False 1. In determining cost of goods sold, two alternate costing concepts can be used: absorption costing and variable costing. a. True b. False ANSWER: True 2. In determining cost of goods sold, two alternate costing concepts can be used: direct costing and variable costing. a. True b. False ANSWER: False 3. Fixed factory overhead costs are included as part of the cost of products manufactured under the absorption costing concept. a. True b. False ANSWER: True 4. Under absorption costing, the cost of finished goods includes direct materials, direct labor, and all factory overhead. a. True b. False ANSWER: True 5. Under absorption costing, the cost of finished goods includes only direct materials, direct labor, and variable factory overhead. a. True b. False ANSWER: False 6. In variable costing, the cost of products manufactured is composed of only those manufacturing costs that increase or decrease as the volume of production rises or falls. a. True b. False ANSWER: True 7. In variable costing, variable factory overhead becomes part of the cost of goods manufactured, and fixed factory overhead is considered an expense of the period. a. True b. False ANSWER: True 8. Variable costing is also known as direct costing. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis 9. Property taxes on a factory building would be included as part of the cost of products manufactured under the absorption costing concept. a. True b. False ANSWER: True 10. The taxes on the factory superintendent's salary would be included as part of the cost of products manufactured under the variable costing concept. a. True b. False ANSWER: False 11. The factory superintendent's salary would be included as part of the cost of products manufactured under the absorption costing concept. a. True b. False ANSWER: True 12. Electricity purchased to operate factory machinery would be included as part of the cost of products manufactured under the absorption costing concept. a. True b. False ANSWER: True 13. The absorption costing income statement distinguishes between variable and fixed costs. a. True b. False ANSWER: False 14. On the absorption costing income statement, deduction of the cost of goods sold from sales yields gross profit. a. True b. False ANSWER: True 15. On the absorption costing income statement, deduction of the cost of goods sold from sales yields contribution margin. a. True b. False ANSWER: False 16. On the absorption costing income statement, deduction of the cost of goods sold from sales yields net profit. a. True b. False ANSWER: False 17. On the variable costing income statement, deduction of the variable cost of goods sold from sales yields gross profit.

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Chapter 7: Variable Costing for Management Analysis a. True b. False ANSWER: False 18. On the variable costing income statement, deduction of the variable cost of goods sold from sales yields manufacturing margin. a. True b. False ANSWER: True 19. On the variable costing income statement, all of the fixed costs are deducted from the contribution margin. a. True b. False ANSWER: True 20. On the variable costing income statement, variable selling and administrative expenses are deducted from manufacturing margin to yield contribution margin. a. True b. False ANSWER: True 21. On the variable costing income statement, variable costs are deducted from contribution margin to yield manufacturing margin. a. True b. False ANSWER: False 22. On the variable costing income statement, the amounts representing the difference between the contribution margin and operating income are the fixed manufacturing costs and fixed selling and administrative expenses. a. True b. False ANSWER: True 23. The contribution margin and the manufacturing margin are usually equal. a. True b. False ANSWER: False 24. For a period during which the quantity of inventory at the end is larger than that at the beginning, operating income reported under variable costing will be larger than operating income reported under absorption costing. a. True b. False ANSWER: False 25. For a period during which the quantity of inventory at the end is larger than that at the beginning, operating income Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis reported under variable costing will be smaller than operating income reported under absorption costing. a. True b. False ANSWER: True 26. For an accounting period during which the quantity of inventory at the end is smaller than the quantity at the beginning, operating income reported under variable costing will be larger than operating income reported under absorption costing. a. True b. False ANSWER: True 27. For a period during which the quantity of inventory at the end is smaller than that at the beginning, operating income reported under variable costing will be smaller than operating income reported under absorption costing. a. True b. False ANSWER: False 28. For a period during which the quantity of inventory at the end equals the inventory at the beginning, operating income reported under variable costing will be smaller than operating income reported under absorption costing. a. True b. False ANSWER: False 29. For a period during which the quantity of inventory at the end equals the inventory at the beginning, operating income reported under variable costing will equal operating income reported under absorption costing. a. True b. False ANSWER: True 30. For a period during which the quantity of product manufactured exceeds the quantity sold, operating income reported under absorption costing will be smaller than operating income reported under variable costing. a. True b. False ANSWER: False 31. For a period during which the quantity of product manufactured exceeds the quantity sold, operating income reported under absorption costing will be larger than operating income reported under variable costing. a. True b. False ANSWER: True 32. For a period during which the quantity of product manufactured is less than the quantity sold, operating income reported under absorption costing will be larger than operating income reported under variable costing. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis ANSWER: False 33. For a period during which the quantity of product manufactured is less than the quantity sold, operating income reported under absorption costing will be smaller than operating income reported under variable costing. a. True b. False ANSWER: True 34. For a period during which the quantity of product manufactured equals the quantity sold, operating income reported under absorption costing will equal the operating income reported under variable costing. a. True b. False ANSWER: True 35. For a period during which the quantity of product manufactured equals the quantity sold, operating income reported under absorption costing will be smaller than the operating income reported under variable costing. a. True b. False ANSWER: False 36. Changes in the quantity of finished goods inventory, caused by differences in the levels of sales and production, directly affect the amount of operating income reported under absorption costing. a. True b. False ANSWER: True 37. Under absorption costing, the amount of income reported from operations can be increased by producing more units than are sold. a. True b. False ANSWER: True 38. Under absorption costing, increases or decreases in operating income due to changes in inventory levels could be misinterpreted to be the result of operating efficiencies or inefficiencies. a. True b. False ANSWER: True 39. Management may use both absorption and variable costing methods for analyzing a particular product. a. True b. False ANSWER: True 40. Property tax expense is an example of a controllable cost for the supervisor of a manufacturing department. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis b. False ANSWER: False 41. Direct labor cost is an example of a controllable cost for the supervisor of a manufacturing department. a. True b. False ANSWER: True 42. In the short run, the selling price of a product should normally not be less than the variable costs and expenses of making and selling it. a. True b. False ANSWER: True 43. In the long run, for a business to remain in operation, the revenues from products sold should normally cover all costs and expenses and provide a reasonable income. a. True b. False ANSWER: True 44. For short-run production planning, information in the variable costing format is more useful to management than is information in the absorption costing concept format. a. True b. False ANSWER: True 45. For short-run production planning, information in the absorption costing format is more useful to management than is information in the variable costing format. a. True b. False ANSWER: False 46. Examples of market segments include sales territories, products, salespersons, and customers. a. True b. False ANSWER: True 47. If the ability to sell and the amount of production facilities devoted to each of two products are equal, it is profitable to increase the sales of that product with the lowest contribution margin. a. True b. False ANSWER: False 48. If the ability to sell and the amount of production facilities devoted to each of two products are equal, it is profitable to increase the sales of that product with the highest contribution margin.

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Chapter 7: Variable Costing for Management Analysis a. True b. False ANSWER: True 49. The contribution margin ratio is computed as contribution margin divided by sales. a. True b. False ANSWER: True 50. In evaluating the performance of market segments, the segment with the highest level of sales dollars should be evaluated as the best performer. a. True b. False ANSWER: False 51. Variable costing is appropriate only for manufacturing firms, not for service firms. a. True b. False ANSWER: False 52. Service firms can only have one activity base for analyzing changes in costs. a. True b. False ANSWER: False 53. In a service firm, it may be necessary to have several activity bases to properly match the change in costs with the changes in various activities. a. True b. False ANSWER: True 54. Managers in service firms find variable costing reports less useful than absorption costing reports because their firms do not sell inventory. a. True b. False ANSWER: False 55. EBITDA represents operating income after income tax, depreciation, and amortization have been deducted. a. True b. False ANSWER: False 56. EBITDA removes a significant fixed and noncash cost from the operating income number and may approximate the contribution margin. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis b. False ANSWER: True 57. For internal decision-making purposes, managers may use EBITDA as a substitute for the contribution margin. a. True b. False ANSWER: True Multiple Choice 58. Which of the following terms is commonly used to describe the concept whereby the cost of manufactured products is composed of direct materials cost, direct labor cost, and all factory overhead cost? a. standard costing b. variable costing c. absorption costing d. marginal costing ANSWER: c 59. Which of the following terms is commonly used to describe the concept whereby the cost of manufactured products is composed of direct materials cost, direct labor cost, and variable factory overhead cost? a. absorption costing b. differential costing c. standard costing d. variable costing ANSWER: d 60. Another name for variable costing is a. indirect costing b. process costing c. direct costing d. differential costing ANSWER: c 61. Under absorption costing, which of the following costs would be included in finished goods inventory? a. direct labor, direct materials, and all factory overhead costs b. direct materials cost and fixed administrative costs c. direct labor, direct materials, variable factory overhead, and variable selling costs d. direct materials, direct labor, and variable selling and administrative costs ANSWER: a 62. Under absorption costing, which of the following costs would be included in finished goods inventory? a. hourly wages of assembly worker b. straight-line depreciation on factory equipment c. overtime wages paid to factory workers Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis d. all of these choices ANSWER: d 63. Under variable costing, which of the following costs would be included in finished goods inventory? a. direct labor, direct materials, and all factory overhead costs b. direct materials, direct labor, and variable factory overhead costs c. direct labor, direct materials, variable factory overhead, and variable selling costs d. direct labor, direct materials, and fixed factory overhead costs ANSWER: b 64. Under variable costing, which of the following costs would be included in finished goods inventory? a. neither variable nor fixed factory overhead cost b. both variable and fixed factory overhead cost c. only variable factory overhead cost d. only fixed factory overhead cost ANSWER: c 65. Under variable costing, which of the following costs would be included in finished goods inventory? a. salary of salesperson b. salary of vice president of finance c. wages of carpenters in a furniture factory d. straight-line depreciation on factory equipment ANSWER: c 66. Under variable costing, which of the following costs would be included in finished goods inventory? a. wages of machine operator b. steel costs for a machine tool manufacturer c. electricity used by factory machinery d. all of these choices ANSWER: d 67. Which of the following would be included in the cost of a product manufactured according to absorption costing? a. advertising expense b. sales salaries c. depreciation expense on factory building d. office supplies costs ANSWER: c 68. Which of the following would be included in the cost of a product manufactured according to variable costing? a. sales commissions b. office supply costs c. interest expense d. direct materials ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis 69. On the variable costing income statement, the figure representing the difference between manufacturing margin and contribution margin is a. fixed manufacturing costs b. variable cost of goods sold c. fixed selling and administrative expenses d. variable selling and administrative expenses ANSWER: d 70. In the variable costing income statement, deduction of variable selling and administrative expenses from manufacturing margin yields a. differential margin b. contribution margin c. gross profit d. marginal expenses ANSWER: b 71. The amount of income under absorption costing will equal the amount of income under variable costing when units manufactured a. exceed units sold b. equal units sold c. are less than units sold d. are equal to or greater than units sold ANSWER: b 72. The amount of income under absorption costing will be less than the amount of income under variable costing when units manufactured a. exceed units sold b. equal units sold c. are less than units sold d. are equal to or greater than units sold ANSWER: c 73. Which of the following statements is correct using the direct costing concept? a. All manufacturing costs are included in the calculation of cost of goods manufactured. b. Only fixed costs are included in the calculation of cost of goods manufactured, while variable costs are considered period costs. c. Only variable manufacturing costs are included in the calculation of cost of goods manufactured, while fixed costs are considered period costs. d. All manufacturing costs are considered period costs.

ANSWER: c 74. The amount of income under absorption costing will be more than the amount of income under variable costing when units manufactured a. exceed units sold Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis b. equal units sold c. are less than units sold d. are equal to or greater than units sold ANSWER: a 75. The level of inventory of a manufactured product has increased by 7,000 units during a period. The following data are also available: Unit manufacturing costs of the period Unit operating expenses of the period

Variable $12.00 4.00

Fixed $6.00 1.50

The effect on operating income if absorption costing is used rather than variable costing would be a a. $42,000 decrease b. $42,000 increase c. $52,500 increase d. $52,500 decrease ANSWER: b 76. The level of inventory of a manufactured product has increased by 8,000 units during a period. The following data are also available: Unit manufacturing costs of the period Unit operating expenses of the period

Variable $24.00 8.00

Fixed $10.00 3.00

The effect on operating income if variable costing is used rather than absorption costing would be a(n) a. $80,000 decrease b. $80,000 increase c. $104,000 decrease d. $104,000 increase ANSWER: a 77. S&P Enterprises sold 10,000 units of inventory during a given period. The level of inventory of the manufactured product remained unchanged. The manufacturing costs were as follows: Unit manufacturing costs of the period Unit operating expenses of the period

Variable $11.00 3.00

Fixed $7.00 2.50

Which of the following statements is true? a. Net income will be the same under both variable and absorption costing. b. Net income under variable costing will be $45,000 less than net income under absorption costing. c. Net income under absorption costing will be $40,000 more than under variable costing. d. The difference in net income cannot be determined.

ANSWER: a 78. The level of inventory of a manufactured product has increased by 8,000 units during a period. The following data are Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis also available: Unit manufacturing costs of the period Unit operating expenses of the period

Variable $24.00 8.00

Fixed $10.00 3.00

The effect on operating income if absorption costing is used rather than variable costing would be a(n) a. $80,000 decrease b. $80,000 increase c. $104,000 increase d. $104,000 decrease ANSWER: b 79. The level of inventory of a manufactured product has increased by 5,000 units during a period. The following data are also available: Unit manufacturing costs of the period Unit operating expenses of the period

Variable $24.00 8.00

Fixed $10.00 3.00

The effect on operating income if variable costing is used rather than absorption costing would be a a. $50,000 decrease b. $50,000 increase c. $65,000 increase d. $65,000 decrease ANSWER: a 80. The level of inventory of a manufactured product has increased by 4,000 units during a period. The following data are also available: Unit manufacturing costs of the period Unit operating expenses of the period

Variable $22.00 7.00

Fixed $11.00 5.00

The effect on operating income if absorption costing is used rather than variable costing would be a a. $44,000 decrease b. $44,000 increase c. $64,000 increase d. $64,000 decrease ANSWER: b 81. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (20,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$180,000 240,000 280,000 100,000

$800,000

Operating expenses: Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis Variable operating expenses Fixed operating expenses

$130,000 50,000

180,000

If 1,600 units remain unsold at the end of the month, the amount of inventory that would be reported on the variable costing balance sheet is a. $64,000 b. $56,000 c. $66,400 d. $78,400 ANSWER: b 82. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (10,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead Operating expenses: Variable operating expenses Fixed operating expenses

$ 80,000 120,000 140,000 40,000

$380,000

$ 65,000 25,000

90,000

If 1,000 units remain unsold at the end of the month, the amount of inventory that would be reported on the absorption costing balance sheet is a. $38,000 b. $40,500 c. $34,000 d. $47,000 ANSWER: a 83. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (20,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$180,000 240,000 280,000 100,000

$800,000

Operating expenses: Variable operating expenses Fixed operating expenses

$130,000 50,000

180,000

If 1,500 units remain unsold at the end of the month, the amount of inventory that would be reported on the variable costing balance sheet is a. $62,500 b. $73,500 c. $60,000 d. $52,500 ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis 84. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (10,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead Operating expenses: Variable operating expenses Fixed operating expenses

$ 80,000 120,000 140,000 40,000

$380,000

$ 65,000 25,000

90,000

If 600 units remain unsold at the end of the month, the amount of inventory that would be reported on the absorption costing balance sheet is a. $24,300 b. $28,200 c. $22,800 d. $34,000 ANSWER: c 85. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (2,500 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$42,500 85,000 47,500 12,500

$187,500

Operating expenses: Variable operating expenses Fixed operating expenses

$15,000 4,500

19,500

If 75 units remain unsold at the end of the month, the amount of inventory that would be reported on the absorption costing balance sheet is a. $5,625 b. $5,250 c. $5,760 d. $6,210 ANSWER: a 86. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (10,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$170,000 360,000 190,000 50,000

Operating expenses: Variable operating expenses

$ 60,000

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$770,000

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Chapter 7: Variable Costing for Management Analysis Fixed operating expenses

18,000

78,000

If 500 units remain unsold at the end of the month, the amount of inventory that would be reported on the variable costing balance sheet is a. $41,500 b. $36,000 c. $42,800 d. $38,500 ANSWER: b 87. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (10,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$140,000 40,000 20,000 4,000

$204,000

Operating expenses: Variable operating expenses Fixed operating expenses

$ 34,000 2,000

36,000

If 2,000 units remain unsold at the end of the month and sales total $300,000 for the month, the amount of operating income reported on the variable costing income statement would be a. $100,800 b. $100,000 c. $114,800 d. $140,000 ANSWER: b 88. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (5,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$70,000 20,000 10,000 2,000

$102,000

Operating expenses: Variable operating expenses Fixed operating expenses

$17,000 1,000

18,000

If 1,000 units remain unsold at the end of the month and sales total $150,000 for the month, the amount of operating income reported on the absorption costing income statement would be a. $50,400 b. $70,000 c. $52,000 d. $68,400 ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis 89. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (10,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$140,000 40,000 20,000 4,000

$204,000

Operating expenses: Variable operating expenses Fixed operating expenses

$ 34,000 2,000

36,000

If 2,000 units remain unsold at the end of the month and sales total $300,000 for the month, the amount of manufacturing margin that would be reported on the variable costing income statement is a. $104,000 b. $106,000 c. $140,000 d. not reported ANSWER: c 90. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (5,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$70,000 20,000 10,000 2,000

$102,000

Operating expenses: Variable operating expenses Fixed operating expenses

$17,000 1,000

18,000

If 1,000 units remain unsold at the end of the month and sales total $150,000 for the month, the amount of manufacturing margin that would be reported on the absorption costing income statement is a. $50,000 b. $54,000 c. not reported d. $70,000 ANSWER: c 91. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (5,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$70,000 20,000 10,000 2,000

Operating expenses: Variable operating expenses

$17,000

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$102,000

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Chapter 7: Variable Costing for Management Analysis Fixed operating expenses

1,000

18,000

If 1,000 units remain unsold at the end of the month and sales total $150,000 for the month, the amount of contribution margin that would be reported on the variable costing income statement is a. $51,400 b. $52,000 c. $54,000 d. $53,000 ANSWER: d 92. A business operated at 100% of capacity during its first month, with the following results: Sales (160 units) Production costs (200 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$160,000 $100,000 20,000 10,000 4,000

134,000

Operating expenses: Variable operating expenses Fixed operating expenses

$ 12,000 2,000

14,000

The amount of manufacturing margin that would be reported on the variable costing income statement is a. $30,000 b. $38,000 c. $56,000 d. $44,000 ANSWER: c A business operated at 100% of capacity during its first month, with the following results: Sales (90 units) Production costs (100 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead

$90,000 $40,000 20,000 2,000 7,000

69,000

Operating expenses: Variable operating expenses Fixed operating expenses

$ 8,000 1,000

9,000

93. The amount of contribution margin that would be reported on the variable costing income statement is a. $34,200 b. $20,200 c. $29,700 d. $26,200 Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis ANSWER: d 94. The amount of operating income that would be reported on the variable costing income statement is a. $18,900 b. $18,200 c. $18,000 d. $21,000 ANSWER: b 95. The amount of operating income that would be reported on the absorption costing income statement is a. $21,000 b. $18,900 c. $18,200 d. $27,900 ANSWER: b 96. The amount of gross profit that would be reported on the absorption costing income statement is a. $21,000 b. $18,900 c. $27,900 d. $18,000 ANSWER: c 97. Accountants prefer the variable costing method over the absorption costing method for evaluating the performance of a company because a. by using the absorption costing method, income could appear to be higher by producing more inventory. b. by using the absorption costing method, income could appear to be lower by producing more inventory. c. by using the variable costing method, the cost of goods sold will be higher as more units are manufactured and sales remain the same. d. by using the variable costing method, all fixed and variable costs are included in the unit cost of the product manufactured.

ANSWER: a 98. Under which inventory costing method could increases or decreases in operating income be misinterpreted to be the result of operating efficiencies or inefficiencies? a. only variable costing b. only absorption costing c. both variable and absorption costing d. neither variable nor absorption costing ANSWER: b 99. It would be acceptable to have the selling price of a product just above the variable costs and expenses of making and selling it in a. the long run b. the short run Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis c. both the short and long run d. neither the short nor the long run ANSWER: b 100. Costs that can be influenced by management at a specific level of management are called a. direct costs b. variable costs c. noncontrollable costs d. controllable costs ANSWER: d 101. Which of the following is a reason for easy identification and control of variable manufacturing costs under the variable costing method? a. Variable and fixed costs are reported separately. b. Variable costs can be controlled by the operating management. c. Fixed costs, such as property insurance, are normally the responsibility of higher management not the operating management. d. all of these choices ANSWER: d 102. Which of the following is false when determining the selling price for a product? a. Absorption costing should be used to determine routine pricing which includes both fixed and variable costs. b. As long as the selling price is set above the variable costs, the company will make a profit in the short run. c. Variable costing is effective when determining short-run decisions, but absorption costing is only used for long-term pricing policies. d. Both variable and absorption pricing plans should be considered, to include several pricing alternatives.

ANSWER: c 103. Management will most likely use absorption costing over variable costing in which of the following activities? a. controlling costs b. product pricing in the short term c. production planning in the long term d. analyzing market segments in the short term ANSWER: c 104. For a supervisor of a manufacturing department, which of the following costs is controllable? a. direct materials b. insurance on factory building c. depreciation of factory building d. sales salaries ANSWER: a 105. A market segment has sales of $70,000, variable cost of goods sold of $10,000, variable selling expenses of $11,000, and total fixed expenses of $13,000. What is the segment’s contribution margin ratio?

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Chapter 7: Variable Costing for Management Analysis a. 86% b. 70% c. 51% d. 36% ANSWER: b 106. Management should focus its sales and production efforts on the product or products that will provide the a. highest sales revenue b. lowest product costs c. maximum contribution margin d. lowest direct labor hours ANSWER: c 107. The contribution margin ratio is computed as a. sales divided by contribution margin b. contribution margin divided by sales c. contribution margin divided by cost of sales d. contribution margin divided by variable cost of sales ANSWER: b 108. Contribution margin reporting can be beneficial for analyzing which of the following? a. sales personnel b. products c. sales territory d. all of these choices ANSWER: d 109. Which of the following would be an inappropriate activity base for cost analysis in a service firm? a. lawns mowed b. inventory produced c. customers served d. haircuts given ANSWER: b 110. Jake Entertainment Corporation has three segments with revenue, operating income, and depreciation and amortization information (in millions) as follows:

Segment Film Theme Park Video Game Totals

Revenue $5,000 1,000 500 $6,500

Operating Income $1,500 320 175 $1,995

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Depreciation and Amortization $525 112 53 $690 Page 20

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Chapter 7: Variable Costing for Management Analysis The EBITDA for the Film segment is a. $975 million b. $2,025 million c. $2,975 million d. $4,475 million ANSWER: b 111. Jake Entertainment Corporation has three segments with revenue, operating income, and depreciation and amortization information (in millions) as follows:

Segment Film Theme Park Video Game Totals

Revenue $5,000 1,000 500 $6,500

Operating Income $1,500 320 175 $1,995

Depreciation and Amortization $525 112 53 $690

The EBITDA for the Theme Park segment is a. $432 million b. $568 million c. $680 million d. $792 million ANSWER: a 112. Jake Entertainment Corporation has three segments with revenue, operating income, and depreciation and amortization information (in millions) as follows:

Segment Film Theme Park Video Game Totals

Revenue $5,000 1,000 500 $6,500

Operating Income $1,500 320 175 $1,995

Depreciation and Amortization $525 112 53 $690

The EBITDA as a percent of revenue for the Video Game segment is a. 4% b. 24% c. 46% d. 54% ANSWER: c 113. Jake Entertainment Corporation has three segments with revenue, operating income, and depreciation and amortization information (in millions) as follows: Segment

Revenue

Operating

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Depreciation Page 21

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Chapter 7: Variable Costing for Management Analysis Film Theme Park Video Game Totals

$5,000 1,000 500 $6,500

Income $1,500 320 175 $1,995

and Amortization $525 112 53 $690

The segment with the highest EBITDA as a percent of revenue is a. Film b. Theme Park c. Video Game d. The Theme Park and Video Game segments have equal EBITDA as a percent of revenue.

ANSWER: c 114. Which of the following treats fixed selling cost as a period cost? a. absorption costing only b. variable costing only c. both absorption and variable costing d. neither absorption nor variable costing ANSWER: c 115. Which of the following is required by generally accepted accounting principles? a. absorption costing only b. variable costing only c. both absorption and variable costing d. neither absorption nor variable costing ANSWER: a 116. Which of the following treats fixed manufacturing cost as a period cost? a. absorption costing only b. variable costing only c. both absorption and variable costing d. neither absorption nor variable costing ANSWER: b 117. In which of the following is operating income impacted by changes in inventory level? a. absorption costing only b. variable costing only c. both absorption and variable costing d. neither absorption nor variable costing ANSWER: a 118. Which of the following generally provides the most useful reports for controlling costs? a. absorption costing b. variable costing Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis c. Absorption and variable costing are equally useful for controlling costs. d. Neither absorption nor variable costing is useful for controlling costs.

ANSWER: b 119. Which of the following generally provides the most useful reports for setting long-term prices? a. absorption costing b. variable costing c. Absorption and variable costing are equally useful for controlling costs. d. Neither absorption nor variable costing is useful for controlling costs.

ANSWER: a 120. Which of the following may be used in a manufacturing company? a. absorption costing only b. variable costing only c. both absorption and variable costing d. neither absorption nor variable costing ANSWER: c 121. Which of the following includes gross profit on the income statement? a. absorption costing only b. variable costing only c. both absorption and variable costing d. neither absorption nor variable costing ANSWER: a Subjective Short Answer 122. Gyro Company manufactures Products T and W and is operating at full capacity. Manufacturing Product W requires three times the number of machine hours required for Product T. Market research indicates that 1,000 additional units of Product W could be sold. The contribution margin by unit of product is as follows: Sales price Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin

Product T $ 300 (235) $ 65 (25) $ 40

Product W $ 325 (250) $ 75 (10) $ 65

Determine the increase or decrease in total contribution margin if 1,000 additional units of Product W are produced and sold.

ANSWER: Additional contribution margin from sale of additional 1,000 units of Product W (1,000 × $65) Contribution margin from forgoing production and sale of 3,000 units of Product T (3,000 × $40) Decrease in total contribution margin Copyright Cengage Learning. Powered by Cognero.

$ 65,000 (120,000) $ (55,000) Page 23

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Chapter 7: Variable Costing for Management Analysis 123. Philadelphia Company has the following information for March: Sales Variable cost of goods sold Fixed manufacturing costs Variable selling and administrative expenses Fixed selling and administrative expenses

$450,000 240,000 70,000 52,000 35,000

Determine the March (a) manufacturing margin, (b) contribution margin, and (c) operating income for Philadelphia Company.

ANSWER: a. $210,000 ($450,000 – $240,000) b. $158,000 ($210,000 – $52,000) c. $53,000 ($158,000 – $70,000 – $35,000) 124. Tony's Company has the following information for March: Sales Variable cost of goods sold Fixed manufacturing costs Variable selling and administrative expenses Fixed selling and administrative expenses

$1,000,000 490,000 170,000 112,000 100,000

Determine the March (a) manufacturing margin, (b) contribution margin, and (c) operating income for Tony's Company.

ANSWER: a. $510,000 ($1,000,000 – $490,000) b. $398,000 ($510,000 – $112,000) c. $128,000 ($398,000 – $170,000 – $100,000) 125. On January 1 of the current year, Townsend Co. commenced operations. It operated its plant at 100% of capacity during January. The following data summarized the results for January: Production Sales ($18 per unit) Inventory, January 31

Units 50,000 (42,000) 8,000

Manufacturing costs: Variable Fixed Total

$575,000 80,000 $655,000

Selling and administrative expenses: Variable Fixed Total a. b.

$ 35,000 10,500 $ 45,500

Prepare an income statement using absorption costing.

Prepare an income statement using variable costing.

ANSWER: a.

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Chapter 7: Variable Costing for Management Analysis Townsend Co. Absorption Costing Income Statement For the Month Ended January 31 Sales Cost of goods sold: Cost of goods $ manufactured 655,000 Ending inventory (104,800) Total cost of goods sold Gross profit Selling and administrative expenses Operating income

$ 756,000

(550,200) $ 205,800 (45,500) $ 160,300

b.

Townsend Co. Variable Costing Income Statement For the Month Ended January 31 Sales Variable cost of goods sold: Variable cost of goods $575,000 manufactured Ending inventory, January 31 (92,000) Total variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed manufacturing costs $ 80,000 Fixed selling and 10,500 administrative expenses Total fixed costs Operating income

$ 756,000

(483,000) $ 273,000 (35,000)

$ 238,000

(90,500) $ 147,500

126. On October 31, the end of the first month of operations, Morristown & Co. prepared the following income statement based on absorption costing: Morristown & Co. Absorption Costing Income Statement For the Month Ended October 31 Sales (2,600 units) Cost of goods sold: Cost of goods manufactured Ending inventory (400 units) Total cost of goods sold Gross profit Copyright Cengage Learning. Powered by Cognero.

$117,000 $ 85,500 (11,400) (74,100) $ 42,900 Page 25

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Chapter 7: Variable Costing for Management Analysis Selling and administrative expenses Operating income

(21,500) $ 21,400

If the fixed manufacturing costs were $42,900 and the variable selling and administrative expenses were $14,600, prepare an income statement using variable costing.

ANSWER:

Morristown & Co. Variable Costing Income Statement For the Month Ended October 31 Sales Variable cost of goods sold: Variable cost of goods manufactured Ending inventory (400 units × $14.20) Total variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Total fixed costs Operating income

$117,000 $42,600 (5,680) (36,920) $ 80,080 (14,600) $ 65,480 $42,900 6,900 (49,800) $ 15,680

Computations: Variable cost of goods manufactured: $85,500 – $42,900 = $42,600 Unit cost of ending inventory: $42,600 variable cost of goods manufactured 3,000 units manufactured

= $14.20

Fixed selling and admin. expenses: $21,500 – $14,600 = $6,900 127. Fixed costs are $10 per unit, and variable costs are $25 per unit. Production was 13,000 units, while sales were 12,000 units. Determine (a) whether variable costing operating income is less than or greater than absorption costing operating income and (b) the difference in variable costing and absorption costing operating income.

ANSWER: a.

Variable costing operating income is less than absorption costing operating income. b. $10,000 ($10 per unit × 1,000 units) 128. Fixed costs are $50 per unit, and variable costs are $125 per unit. Production was 130,000 units, while sales were 125,000 units. Determine (a) whether variable costing operating income is less than or greater than absorption costing operating income and (b) the difference in variable costing and absorption costing operating income.

ANSWER: a.

Variable costing operating income is less than absorption costing operating income. b. $250,000 ($50 per unit × 5,000 units) 129. At EOM Inc., the beginning inventory is 20,000 units. All of the units manufactured during the period and 16,000 units of the beginning inventory were sold. The beginning inventory fixed costs are $50 per unit, and variable costs are $300 per unit. Determine (a) whether variable costing operating income is less than or greater than absorption costing Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis operating income and (b) the difference in variable costing and absorption operating income.

ANSWER: a.

Variable costing operating income is greater than absorption costing operating income. b. $800,000 ($50 per unit × 16,000 units) 130. The beginning inventory is 5,000 units. All of the units manufactured during the period and 3,000 units of the beginning inventory were sold. The beginning inventory fixed costs are $25 per unit, and variable costs are $55 per unit.

Determine (a) whether variable costing operating income is less than or greater than absorption costing operating income and (b) the difference in variable costing and absorption operating income.

ANSWER: a.

Variable costing operating income is greater than absorption costing operating income. b. $75,000 ($25 per unit × 3,000 units) 131. The major categories or captions that would appear on an income statement prepared in the variable costing format are as follows: Contribution margin Fixed costs Manufacturing margin Operating income Sales Variable cost of goods sold Variable selling and administrative expenses a.

Arrange these captions in the proper order in accordance with the variable costing concept. b.

Which of the captions represents (1) the difference between sales and the total of all the variable costs and expenses and (2) the remaining amount of revenue available for fixed manufacturing costs, fixed expenses, and net income?

ANSWER: a.

Sales Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs Operating income b.

1.

Contribution margin 2.

Contribution margin 132. At XLT Inc., variable costs are $80 per unit, and fixed costs are $40,000. Sales are estimated to be 4,000 units. a. How much would absorption costing operating income differ between a plan to produce 8,000 units and a plan to produce 10,000 units? b. How much would variable costing operating income differ between the two production plans?

ANSWER: a. $8,000 greater. 8,000 units × ($5.00 – $4.00), or ($2,000 units × $4.00 b.

There would be no difference in variable costing operating income between the two plans.

133. If variable manufacturing costs are $15 per unit and total fixed manufacturing costs are $200,000, what is the manufacturing cost per unit if: Copyright Cengage Learning. Powered by Cognero.

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Chapter 7: Variable Costing for Management Analysis a. 20,000 units are manufactured and the company uses the variable costing concept? b. 25,000 units are manufactured and the company uses the variable costing concept? c. 20,000 units are manufactured and the company uses the absorption costing concept? d. 25,000 units are manufactured and the company uses the absorption costing concept?

ANSWER: a. $15 (variable cost only) b. $15 (variable cost only) c. $25 [variable cost ($15) + fixed costs ($200,000 ÷ 20,000)] d. $23 [variable cost ($15) + fixed costs ($200,000 ÷ 25,000)] 134. During the first year of operations, 18,000 units were manufactured and 13,500 units were sold. On August 31, Olympic Inc. prepared the following income statement based on the variable costing concept: Olympic Inc. Variable Costing Income Statement For the Year Ended August 31 Sales Variable cost of goods sold: Variable cost of goods manufactured Ending inventory Total variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Total fixed costs Operating income

$ 297,000 $288,000 (72,000) (216,000) $ 81,000 (40,500) $ 40,500 $ 12,000 10,800 (22,800) $ 17,700

Determine the unit cost of goods manufactured, based on (a) the variable costing concept and (b) the absorption costing concept.

ANSWER: a.

b.

$16.00 ($288,000 total variable cost of goods manufactured ÷ 18,000 units manufactured) Unit variable cost of goods manufactured (a) Unit fixed cost of goods manufactured ($12,000 ÷ 18,000 units manufactured) Unit cost

$16.00 0.67 $16.67

135. The following data are for Trendy Fashion Apparel: Sales volume (units): Blouses Skirts Sales price per unit: Copyright Cengage Learning. Powered by Cognero.

North

South

5,000 4,000

5,000 8,000 Page 28

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Chapter 7: Variable Costing for Management Analysis Blouses Skirts Variable cost per unit Blouses Skirts

$20 $18

$22 $20

$ 7 $ 9

$ 9 $11

Determine the contribution margin for (a) Skirts and (b) the South Region.

ANSWER: a. b.

$108,000 [4,000 units × ($18 – $9)] + [8,000 units × ($20 – $11)] $137,000 [5,000 units × ($22 – $9)] + [8,000 units × ($20 – $11)]

136. Excelsior Company has three salespersons. Average sales price per unit sold, average variable manufacturing costs per unit, and number of units sold for each salesperson follow.

Commissions are earned according to the following schedule: Total Sales $0 to $49,999 $50,000 to $52,999 Over $53,000

Percentage 6% 7% 8%

Salesperson Avg. selling price per unit Avg. var. mfg. costs per unit Number of units sold

Mary Q. $50.00 $25.00 1,000

Prepare a contribution margin by salesperson report.

ANSWER: Salesperson Mary Q. Total sales $ 50,000 Variable mfg. cost (25,000) Manufacturing margin $ 25,000 Commissions (3,500) Contribution margin per salesperson $ 21,500

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John A. $65.00 $30.00 750 John A. $ 48,750 (22,500) $ 26,250 (2,925) $ 23,325

Susan B. $45.00 $35.00 1,200 Susan B. $ 54,000 (42,000) $ 12,000 (4,320) $ 7,680

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Chapter 8: Budgeting 1. The task of preparing a budget should be the sole task of the most important department in an organization. a. True b. False ANSWER: False 2. A formal written statement of management's plans for the future, expressed in financial terms, is called a budget. a. True b. False ANSWER: True 3. Budgets are normally used only by profit-making businesses. a. True b. False ANSWER: False 4. Budgeting involves (1) establishing specific goals, (2) executing plans to achieve the goals, and (3) periodically comparing actual results with the goals. a. True b. False ANSWER: True 5. When budget goals are set too tight, the budget becomes less effective as a tool for planning and controlling operations. a. True b. False ANSWER: True 6. Employees view budgeting more positively when goals are established for them by senior management. a. True b. False ANSWER: False 7. Slack budgets may lead to increased efficiency and reduced spending. a. True b. False ANSWER: False 8. Goal conflict can be avoided if budget goals are carefully designed for consistency across all areas of the organization. a. True b. False ANSWER: True 9. Involving the employees affected by a budget when it is prepared can provide them with a sense of control and invoke greater commitment to achieving budgeted goals. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting ANSWER: True 10. The managerial function of measurement involves monitoring operations and comparing actual and expected results. a. True b. False ANSWER: False 11. The managerial function of control involves taking actions to encourage specific behaviors. a. True b. False ANSWER: True 12. A capital expenditures budget is prepared before the operating budgets. a. True b. False ANSWER: False 13. The responsibility for coordinating the preparation of the annual budget should be assigned to the CEO of a firm. a. True b. False ANSWER: False 14. A budget procedure that starts with last year’s budget and revises for actual results and expected changes for the coming year is called incremental budgeting. a. True b. False ANSWER: True 15. A budget procedure that provides for the maintenance at all times of a 12-month projection into the future is called master budgeting. a. True b. False ANSWER: False 16. The budget procedure that requires managers to estimate sales, production, and other operating data as though operations were being started for the first time is called zero-based budgeting. a. True b. False ANSWER: True 17. The budget procedure that requires managers to estimate sales, production, and other operating data as though operations were being started for the first time is called continuous budgeting. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting 18. Budgets are prepared in the Accounting Department and monitored by various department managers. a. True b. False ANSWER: False 19. Once a static budget has been determined, it is changed regularly as the underlying activity changes. a. True b. False ANSWER: False 20. The flexible budget is, in effect, a series of static budgets for different levels of activity. a. True b. False ANSWER: True 21. Flexible budgeting requires managers to estimate sales, production, and other operating data as though operations were being started for the first time. a. True b. False ANSWER: False 22. Flexible budgeting builds the effect of changes in level of activity into the budget system. a. True b. False ANSWER: True 23. In preparing flexible budgets, the first step is to identify the fixed and variable components of the various costs and expenses being budgeted. a. True b. False ANSWER: False 24. A process whereby the effect of fluctuations in the level of activity is built into the budgeting system is referred to as flexible budgeting. a. True b. False ANSWER: True 25. The financial budgets of a business include the cash budget, the capital expenditures budget, and the budgeted balance sheet. a. True b. False ANSWER: False

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Chapter 8: Budgeting 26. Most companies prepare a master budget on a yearly basis. a. True b. False ANSWER: True 27. The financial budgets are prepared before the operating budgets. a. True b. False ANSWER: False 28. The operating budgets are used to prepare the budgeted income statement. a. True b. False ANSWER: True 29. The master budget is an integrated set of budgets that tie together a company’s operating, financing, and investing activities into an integrated plan for the coming year. a. True b. False ANSWER: True 30. The sales budget is derived from the production budget. a. True b. False ANSWER: False 31. The first budget to be prepared is usually the sales budget. a. True b. False ANSWER: True 32. The first budget to be prepared is usually the production budget. a. True b. False ANSWER: False 33. After the sales budget is prepared, the production budget is normally prepared next. a. True b. False ANSWER: True 34. After the sales budget is prepared, the capital expenditures budget is normally prepared next. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting 35. The budgeted volume of production is based on the sum of (1) the expected sales volume and (2) the desired ending inventory, less (3) the estimated beginning inventory. a. True b. False ANSWER: True 36. The budgeted volume of production is normally computed as the sum of (1) the expected sales volume and (2) the desired ending inventory. a. True b. False ANSWER: False 37. If Division Inc. expects to sell 200,000 units in the current year, desires ending inventory of 24,000 units, and has 22,000 units on hand as of the beginning of the year, the budgeted volume of production for the year is 202,000 units. a. True b. False ANSWER: True 38. If Division Inc. expects to sell 200,000 units in the current year, desires ending inventory of 24,000 units, and has 22,000 units on hand as of the beginning of the year, the budgeted volume of production for the year is 198,000 units. a. True b. False ANSWER: False 39. The budgeted direct materials purchases is based on the sum of (1) the materials needed for production and (2) the desired ending materials inventory, less (3) the estimated beginning materials inventory. a. True b. False ANSWER: True 40. The budgeted direct materials purchases is normally computed as the sum of (1) the materials needed for production and (2) the desired ending inventory. a. True b. False ANSWER: False 41. The production budget is the starting point for the preparation of the direct labor cost budget. a. True b. False ANSWER: True 42. The sales budget is the starting point for the preparation of the direct labor cost budget. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting ANSWER: False 43. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the factory overhead cost budget. a. True b. False ANSWER: True 44. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the selling and administrative expenses budget. a. True b. False ANSWER: False 45. Supervisor salaries and indirect factory wages would normally appear in the direct labor cost budget. a. True b. False ANSWER: False 46. Detailed supplemental schedules based on department responsibility are often prepared for major items in the operating expenses budget. a. True b. False ANSWER: True 47. A budgeted income statement integrates the sales budget, cost of goods sold budget, and selling and administrative expenses budget, but excludes estimates of other revenue, other expense, and income tax. a. True b. False ANSWER: False 48. Part of the cash budget is based on information drawn from the capital expenditures budget. a. True b. False ANSWER: True 49. The capital expenditures budget summarizes plans for acquiring fixed assets. a. True b. False ANSWER: True 50. The cash budget summarizes future plans for the acquisition of fixed assets. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting 51. The cash budget is affected by the sales budget, the various budgets for manufacturing costs and operating expenses, and the capital expenditures budget. a. True b. False ANSWER: True 52. The cash budget presents the expected inflows and outflows of cash for a specified period of time. a. True b. False ANSWER: True 53. The budgeted balance sheet assumes that all operating and financial plans are met. a. True b. False ANSWER: True 54. The capital expenditures budget is part of the planned investing activities of a company. a. True b. False ANSWER: True 55. The budgeted balance sheet is also called a pro forma balance sheet. a. True b. False ANSWER: True 56. The primary budget in nonmanufacturing businesses is the staffing budget. a. True b. False ANSWER: True 57. The staffing budget in a nonmanufacturing business is highly inflexible to service demands. a. True b. False ANSWER: False 58. An accounting device used to plan and control the financial resources of a company is called a a. gross profit report b. responsibility report c. budget d. performance report ANSWER: c 59. Budgeting involves which of the following activities? a. establishing specific goals Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting b. executing plans to achieve the goals c. periodically comparing actual results with the goals d. all of these choices ANSWER: d 60. The budgetary unit of an organization that is led by a manager who has the authority and responsibility for achieving the unit's goals is known as a a. control center b. budgetary area c. responsibility center d. managerial department ANSWER: c 61. When a manager seeks to achieve personal departmental objectives that may work to the detriment of the overall firm’s objectives and goals, the manager is experiencing a. budgetary slack b. padding c. goal conflict d. cushions ANSWER: c 62. Budgeting affects which of the following management process functions? a. strategic planning and measurement only b. measurement and evaluation only c. strategic planning and control only d. strategic planning, measurement, evaluation, and control ANSWER: d 63. Budgets need to be fair and attainable for employees to consider the budget important in their normal daily activities.

Which of the following situations will likely lead to human behavior problems? a. setting goals that are reasonable and attainable b. setting goals that are consistent across the firm c. allowing employees the opportunity to be a part of the budget process d. setting goals too loosely, creating a budgetary slack ANSWER: d 64. Which of the following budgets allows for adjustments in activity levels? a. static budget b. continuous budget c. zero-based budget d. flexible budget ANSWER: d 65. The process of developing budget estimates by requiring managers to estimate sales, production, and other operating Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting data as though operations were being initiated for the first time is referred to as _____ budgeting. a. flexible b. continuous c. zero-based d. incremental ANSWER: c 66. A variant of fiscal-year budgeting whereby a 12-month projection into the future is maintained at all times is termed _____ budgeting. a. flexible b. continuous c. zero-based d. incremental ANSWER: b 67. Jase Manufacturing Co.'s static budget at 10,000 units of production includes $40,000 for direct labor and $4,000 for electric power. Total fixed costs are $24,000. At 12,000 units of production, a flexible budget would show a. variable costs of $52,800 and $29,000 of fixed costs b. variable costs of $44,000 and $24,000 of fixed costs c. variable costs of $52,800 and $24,000 of fixed costs d. variable and fixed costs totaling $68,000 ANSWER: c 68. Miller and Sons' static budget for 10,000 units of production includes $50,000 for direct materials, $44,000 for direct labor, variable utilities of $5,000, and supervisor salaries of $24,000. A flexible budget for 12,000 units of production would show a. the same cost structure in total b. direct materials of $60,000, direct labor of $52,800, utilities of $6,000, and supervisor salaries of $29,000 c. total variable costs of $148,000 d. direct materials of $60,000, direct labor of $52,800, utilities of $6,000, and supervisor salaries of $24,000 ANSWER: d 69. A disadvantage of static budgets is that they a. are dependent on the previous year's actual results b. cannot be used by service companies c. do not allow for possible changes in activity levels d. show the expected results of a responsibility center for several levels of activity ANSWER: c 70. A series of budgets for varying levels of activity is termed a(n) _____ budget. a. flexible b. variable c. master d. activity Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting ANSWER: a 71. Chelsa Manufacturing Co.'s static budget at 5,000 units of production includes $40,000 for direct labor and $5,000 for variable electric power. Total fixed costs are $23,000. At 8,000 units of production, a flexible budget would show a. variable costs of $64,000 and $28,000 of fixed costs b. variable costs of $64,000 and $23,000 of fixed costs c. variable costs of $72,000 and $23,000 of fixed costs d. variable and fixed costs totaling $107,000 ANSWER: c 72. Laurie Inc.’s static budget for 10,000 units of production includes $60,000 for direct materials, $44,000 for direct labor, fixed utilities costs of $5,000, and supervisor salaries of $25,000. A flexible budget for 12,000 units of production would show a. the same cost structure in total b. direct materials of $72,000, direct labor of $52,800, fixed utilities of $5,000, and supervisor salaries of $25,000 c. total variable costs of $159,800 d. direct materials of $60,000, direct labor of $52,800, fixed utilities of $6,000, and supervisor salaries of $25,000 ANSWER: b 73. The primary difference between a static budget and a flexible budget is that a static budget a. is suitable in a volatile demand situation while a flexible budget is suitable in a stable demand situation b. is concerned only with future acquisitions of fixed assets, whereas a flexible budget is concerned with expenses that vary with sales c. includes only fixed costs, whereas a flexible budget includes only variable costs d. is a plan for a single level of activity, whereas a flexible budget adjusts for changes in the activity level ANSWER: d 74. At the beginning of the period, the Cutting Department budgeted direct labor of $155,000, direct materials of $165,000, and fixed factory overhead of $15,000 for 9,000 hours of production. The department actually completed 10,000 hours of production. The appropriate total budget for the department, assuming it uses flexible budgeting, is a. $416,000 b. $370,500 c. $368,889 d. $335,000 ANSWER: b 75. At the beginning of the period, the Assembly Department budgeted direct labor of $110,000, direct materials of $170,000, and fixed factory overhead of $28,000 for 8,000 hours of production. The department actually completed 10,000 hours of production. The appropriate total budget for the department, assuming it uses flexible budgeting, is a. $288,000 b. $305,000 c. $350,000 d. $378,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting ANSWER: d 76. Principal components of a master budget include a. the production budget b. the sales budget c. the capital expenditures budget d. all of these choices ANSWER: d 77. The operating budgets of a company include the a. cash budget b. capital expenditures budget c. financial budgets d. production budget ANSWER: d 78. Which of the following budgets is directly associated with the production budget? a. direct materials purchases budget b. sales budget c. direct labor cost budget d. all of these choices ANSWER: d 79. If budgeted beginning finished goods inventory is $8,000, budgeted ending finished goods inventory is $9,400, and budgeted cost of goods sold is $10,260, budgeted cost of goods manufactured should be a. $1,400 b. $9,600 c. $11,660 d. $11,550 ANSWER: c 80. The production budget is used to prepare which of the following budgets? a. operating expenses b. direct materials purchases, direct labor cost, and factory overhead cost c. sales in dollars d. sales in units ANSWER: b 81. The first budget customarily prepared as part of an entity's master budget is the _____ budget. a. production b. cash c. sales d. direct materials purchases ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting 82. Motorcycle Manufacturers, Inc., projected sales of 78,000 machines for the year. The estimated January 1 inventory is 6,500 units, and the desired December 31 inventory is 6,000 units. The budgeted production for the year is a. 78,500 units b. 70,000 units c. 77,500 units d. 70,500 units ANSWER: c The following budgeted production and sales information is for Flushing Company for the month of December: Estimated beginning inventory Desired ending inventory Region I, anticipated sales Region II, anticipated sales

Product XXX 32,000 units 34,000 units 320,000 units 180,000 units

Product ZZZ 20,000 units 17,000 units 260,000 units 140,000 units

The unit selling price for Product XXX is $5 and for Product ZZZ is $15.

83. Budgeted sales for the month is a. $3,180,000 b. $5,820,000 c. $1,800,000 d. $8,500,000 ANSWER: d 84. Budgeted production for Product XXX during the month is a. 498,000 units b. 502,000 units c. 534,000 units d. 566,000 units ANSWER: b 85. Budgeted production for Product ZZZ during the month is a. 403,000 units b. 380,000 units c. 397,000 units d. 417,000 units ANSWER: c 86. For February, sales revenue is $700,000, sales commissions are 5% of sales, the sales manager's salary is $96,000, advertising expenses are $90,000, shipping expenses total 2% of sales, and miscellaneous selling expenses are $2,500 plus 1/2 of 1% of sales. Total selling expenses for the month of February are a. $161,000 b. $237,500 c. $235,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting d. $241,000 ANSWER: d 87. For April, sales revenue is $700,000, sales commissions are 5% of sales, the sales manager's salary is $98,000, advertising expenses are $90,000, shipping expenses total 2% of sales, and miscellaneous selling expenses are $2,100 plus 1/2 of 1% of sales. Total selling expenses for the month of April are a. $159,100 b. $242,600 c. $186,000 d. $182,100 ANSWER: b 88. Stephanie Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units, estimated beginning inventory is 108,000 units, and desired ending inventory is 90,000 units. The quantities of direct materials expected to be used for each unit of finished product are as follows: Material A 0.5 lb. per unit @ $0.70 per pound Material B 1.0 lb. per unit @ $1.70 per pound Material C 1.2 lbs. per unit @ $1.00 per pound The dollar amount of Material A used in production during the year is a. $217,700 b. $528,700 c. $311,000 d. $224,600 ANSWER: a 89. For March, sales revenue is $1,000,000, sales commissions are 5% of sales, the sales manager's salary is $80,000, advertising expenses are $65,000, shipping expenses total 1% of sales, and miscellaneous selling expenses are $2,100 plus 1% of sales. Total selling expenses for the month of March are a. $217,100 b. $205,000 c. $207,100 d. $142,100 ANSWER: a Mandy Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units, estimated beginning inventory is 98,000 units, and desired ending inventory is 80,000 units. The quantities of direct materials expected to be used for each unit of finished product are as follows: Material A: 0.5 lb. per unit @ $0.60 per pound Material B: 1.0 lb. per unit @ $1.70 per pound Material C: 1.2 lbs. per unit @ $1.00 per pound 90. The dollar amount of Material B used in production during the year is a. $1,057,400 b. $1,193,400 c. $1,026,800 Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting d. $1,224,000 ANSWER: a 91. The dollar amount of Material C used in production during the year is a. $746,400 b. $724,800 c. $824,400 d. $758,160 ANSWER: a 92. Production and sales estimates for March for Robin Co. are as follows: Estimated inventory (units), March 1 Desired inventory (units), March 31 Expected sales volume (units): Territory M Territory L Territory O Unit sales price

18,000 21,600 7,000 8,000 9,000 $15

The number of units expected to be manufactured in March is a. 24,000 units b. 27,000 units c. 27,600 units d. 21,600 units ANSWER: c 93. Production and sales estimates for May for Cardinal Co. are as follows: Estimated inventory (units), May 1 Desired inventory (units), May 31 Expected sales volume (units): Territory W Territory X Territory Y Unit sales price

19,500 19,300 6,000 7,000 8,000 $20

The number of units expected to be sold in May is a. 21,000 units b. 3,700 units c. 22,800 units d. 18,300 units ANSWER: a 94. Production and sales estimates for June for Cardinal Co. are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting Territory X Territory Y Territory Z Unit sales price

7,000 4,000 5,500 $20

The number of units expected to be manufactured in June is a. 11,000 units b. 12,500 units c. 15,500 units d. 13,500 units ANSWER: c 95. Production and sales estimates for June for Robin Co. are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Territory X Territory Y Territory Z Unit sales price

8,000 9,000 4,000 10,000 6,000 $25

The budgeted total sales for June is a. $225,000 b. $500,000 c. $525,000 d. $200,000 ANSWER: b 96. If the expected sales volume for the current period is 8,000 units, the desired ending inventory is 1,400 units, and the beginning inventory is 1,200 units, the number of units set forth in the production budget, representing total production for the current period, is a. 10,600 units b. 8,200 units c. 66,000 units d. 6,800 units ANSWER: b Production estimates for August for Jay Company are as follows: Estimated inventory (units), August 1 Desired inventory (units), August 31 Expected sales volume (units), August

12,000 9,000 75,000

For each unit produced, the direct materials requirements are as follows: Material A ($5 per lb.)

Material B ($18 per lb.)

3.0 lbs.

0.5 lb.

97. The number of pounds of Materials A and B required for August production is Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting a. 216,000 lbs. of A; 72,000 lbs. of B b. 216,000 lbs. of A; 36,000 lbs. of B c. 225,000 lbs. of A; 37,500 lbs. of B d. 234,000 lbs. of A; 39,000 lbs. of B ANSWER: b 98. The total direct materials purchases (assuming no beginning or ending inventory of material) of Materials A and B required for August production is a. $1,080,000 for A; $1,296,000 for B b. $1,080,000 for A; $648,000 for B c. $1,125,000 for A; $675,000 for B d. $1,170,000 for A; $702,000 for B ANSWER: b 99. Based on the following production and sales estimates for May for Heron Company, determine the number of units expected to be manufactured in May. Estimated inventory (units), May 1 Desired inventory (units), May 31 Expected sales volume (units): South region West region North region Unit sales price

30,000 25,000 20,000 40,000 20,000 $10

a. 85,000 units b. 80,000 units c. 75,000 units d. 105,000 units ANSWER: c 100. Which of the following budgets provides the starting point for the preparation of the direct labor cost budget? a. direct materials purchases budget b. cash budget c. production budget d. sales budget ANSWER: c 101. Production and sales estimates for April for Crane Co. are as follows: Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Territory A Territory B Territory C Unit sales price Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting The number of units expected to be manufactured in April is a. 11,000 units b. 9,500 units c. 12,000 units d. 13,000 units ANSWER: a 102. Production and sales estimates for April for Ibis Co. are as follows: Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Territory A Territory B Territory C Unit sales price

9,000 8,000 3,500 4,750 4,250 $20

The budgeted total sales for April is a. $200,000 b. $230,000 c. $270,000 d. $250,000 ANSWER: d 103. If the expected sales volume for the current period is 7,000 units, the desired ending inventory is 400 units, and the beginning inventory is 400 units, the number of units set forth in the production budget, representing total production for the current period, is a. 6,700 units b. 7,400 units c. 7,100 units d. 7,000 units ANSWER: d Production estimates for July for Starling Co. are as follows: Estimated inventory (units), July 1 Desired inventory (units), July 31 Expected sales volume (units), July

8,500 10,500 76,000

For each unit produced, the direct materials requirements are as follows: Material A ($5 per lb.)

Material B ($18 per lb.)

3.0 lbs.

0.5 lb.

104. The number of pounds of Materials A and B required for July production is a. 216,000 lbs. of A; 36,000 lbs. of B b. 216,000 lbs. of A; 72,000 lbs. of B c. 234,000 lbs. of A; 39,000 lbs. of B Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting d. 225,000 lbs. of A; 37,500 lbs. of B ANSWER: c 105. The total direct materials purchases of Materials A and B (assuming no beginning or ending materials inventory) required for July production is a. $1,080,000 for A; $648,000 for B b. $1,080,000 for A; $1,296,000 for B c. $1,170,000 for A; $702,000 for B d. $1,125,000 for A; $675,000 for B ANSWER: c Cardinal Company has finished goods inventory of 55,000 units on January 1. Its projected sales for the next four months are: January, 200,000 units; February, 180,000 units; March, 210,000 units; and April, 230,000 units. Cardinal Company wishes to maintain a desired ending finished goods inventory of 20% of the following month’s sales.

106. The budgeted units of production for January would be a. 236,000 units b. 181,000 units c. 200,000 units d. 219,000 units ANSWER: b 107. The budgeted units of production for February would be a. 186,000 units b. 181,000 units c. 222,000 units d. 174,000 units ANSWER: a 108. The budgeted units of production for March would be a. 256,000 units b. 206,000 units c. 214,000 units d. 298,000 units ANSWER: c 109. The budgeted units of inventory for March 31 a. would be 46,000 units b. would be 36,000 units c. cannot be determined from the data given d. would be 42,000 units ANSWER: a 110. Willow Valley’s April sales forecast projects that 7,000 units will sell at a price of $10.50 per unit. The desired Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting ending inventory is 30% higher than the beginning inventory, which was 1,000 units. Budgeted production in April would be a. 8,000 units b. 7,000 units c. 7,300 units d. 6,300 units ANSWER: c The following budgeted production and sales information is for Bluebird Company for the month of December: Product XXX 30,000 units 32,000 units 520,000 units

Estimated beginning inventory Desired ending inventory Anticipated sales

Product ZZZ 18,000 units 15,000 units 460,000 units

The unit selling price for Product XXX is $5 and for Product ZZZ is $14.

111. Budgeted production for Product XXX during the month is a. 522,000 units b. 552,000 units c. 518,000 units d. 520,000 units ANSWER: a 112. Budgeted production for Product ZZZ during the month is a. 460,000 units b. 475,000 units c. 457,000 units d. 463,000 units ANSWER: c 113. Truliant Co. sells a product called Withitall and has predicted the following sales for the first four months of the current year: Sales in units

January 1,700

February 1,900

March 2,100

April 1,600

Ending inventory for each month should be 20% of next month’s sales. The number of units produced in February should be a. 1,940 units b. 1,800 units c. 1,900 units d. 1,850 units ANSWER: a 114. An October sales forecast projects 7,000 units are going to be sold at a price of $11.50 per unit. The desired ending inventory in units is 15% higher than the beginning inventory of 1,000 units. Total October sales are anticipated to be Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting a. $69,000 b. $80,500 c. $70,000 d. $92,000 ANSWER: b 115. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Territory X Territory Y Territory Z Unit sales price

16,000 18,000 4,000 6,000 5,500 $20

The number of units expected to be manufactured in June is a. 15,500 units b. 17,500 units c. 16,500 units d. 13,500 units ANSWER: b Next year’s sales forecast shows that 20,000 units of Product A and 22,000 units of Product B are going to be sold for prices of $10 and $12 per unit, respectively. The desired ending inventory of Product A is 20% higher than its beginning inventory of 2,000 units. The beginning inventory of Product B is 2,500 units. The desired ending inventory of Product B is 3,000 units.

116. Total budgeted sales of both products for the year would be a. $42,000 b. $200,000 c. $264,000 d. $464,000 ANSWER: d 117. If the expected sales volume for the current period is 9,000 units, the desired ending inventory is 200 units, and the beginning inventory is 300 units, the number of units set forth in the production budget, representing total production for the current period, is a. 9,000 units b. 8,900 units c. 8,700 units d. 9,100 units ANSWER: b Next year’s sales forecast shows that 20,000 units of Product A and 22,000 units of Product B are going to be sold for prices of $10 and $12 per unit, respectively. The desired ending inventory of Product A is 20% higher than its beginning Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting inventory of 2,000 units. The beginning inventory of Product B is 2,500 units. The desired ending inventory of Product B is 3,000 units.

118. Budgeted production of Product A for the year would be a. 22,400 units b. 20,400 units c. 20,000 units d. 12,200 units ANSWER: b 119. Consider Derek's budget information: Materials to be used total $64,750; direct labor totals $198,400; factory overhead totals $394,800; work in process inventory on January 1 is $189,100; and work in progress inventory on December 31 is $197,600. The budgeted cost of goods manufactured for the year is a. $649,450 b. $657,950 c. $197,600 d. $1,044,650 ANSWER: a 120. The budgeted finished goods inventory and cost of goods sold for a manufacturing company for the year are as follows: January 1 finished goods, $765,000; December 31 finished goods, $540,000; and cost of goods sold for the year, $2,560,000. The budgeted cost of goods manufactured for the year is a. $1,255,000 b. $2,335,000 c. $2,785,000 d. $3,100,000 ANSWER: b 121. Heedy Company is trying to decide how many units of merchandise to produce each month. The company policy is to have 20% of the next month’s sales in inventory at the end of each month. Projected sales for August, September, and October are 30,000 units, 20,000 units, and 40,000 units, respectively. The number of units that must be produced in September is a. 24,000 units b. 18,000 units c. 28,000 units d. 22,000 units ANSWER: a Next year’s sales forecast shows that 20,000 units of Product A and 22,000 units of Product B are going to be sold for prices of $10 and $12 per unit, respectively. The desired ending inventory of Product A is 20% higher than its beginning inventory of 2,000 units. The beginning inventory of Product B is 2,500 units. The desired ending inventory of Product B is 3,000 units.

122. Budgeted production of Product B for the year would be a. 24,500 units Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting b. 22,500 units c. 26,500 units d. 23,200 units ANSWER: b 123. Gilbert’s expects its September sales to be 20% higher than its August sales of $150,000. Manufacturing costs were $100,000 in August and are expected to be $120,000 in September. All sales are on credit and are collected as follows: 30% in the month of the sale and 70% in the following month. Payments of manufacturing costs are as follows: 25% in the month of production and 75% in the following month. The beginning cash balance on September 1 is $7,500. The ending balance on September 30 would be a. $61,500 b. $75,000 c. $72,300 d. $71,500 ANSWER: a 124. The budgeted finished goods inventory and cost of goods sold for a manufacturing company for the year are as follows: January 1 finished goods, $765,000; December 31 finished goods, $640,000; and cost of goods sold, $2,560,000.

The budgeted cost of goods manufactured is a. $1,405,000 b. $2,560,000 c. $2,435,000 d. $3,965,000 ANSWER: c 125. Woodpecker Co. has $296,000 in accounts receivable on January 1. Budgeted sales for January are $860,000.

Woodpecker Co. expects to sell 20% of its merchandise for cash. Of the remaining 80% of sales on account, 75% are expected to be collected in the month of sale and the remainder the following month. The January cash collections from sales are a. $812,000 b. $688,000 c. $468,000 d. $984,000 ANSWER: d 126. The budget that summarizes future plans for the acquisition of fixed assets is the _____ budget. a. direct materials purchases b. production c. sales d. capital expenditures ANSWER: d 127. Estimated cash receipts include planned increases in cash from which of the following? a. manufacturing and operating expenses b. capital expenditures Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting c. notes and accounts receivable collections d. payments for interest or dividends ANSWER: c Nuthatch Corporation began its operations on September 1 of the current year. Budgeted sales for the first three months of business—September, October, and November—are $260,000, $375,000, and $400,000, respectively. The company expects to sell 30% of its merchandise for cash. Of sales on account, 80% are expected to be collected in the month of the sale and 20% in the month following the sale.

128. The cash collections expected in September from accounts receivable are estimated to be a. $223,600 b. $145,600 c. $182,000 d. $168,000 ANSWER: b 129. The cash collections expected in October from accounts receivable are estimated to be a. $246,400 b. $262,500 c. $210,000 d. $294,500 ANSWER: a 130. The cash collections expected in November from accounts receivable are projected to be a. $280,000 b. $316,400 c. $295,200 d. $276,500 ANSWER: d Finch Company began its operations on March 31 of the current year. Finch has the following projected costs: April Manufacturing costs* Insurance expense** Depreciation expense Property tax expense***

May $156,800 1,000 2,000 500

June $195,200 1,000 2,000 500

$217,600 1,000 2,000 500

*Of the manufacturing costs, three-fourths is paid for in the month they are incurred; one-fourth is paid in the following month. **Insurance expense is $1,000 a month; however, the insurance is paid four times yearly in the first month of the quarter (i.e., January, April, July, and October). ***Property tax is paid once a year in November.

131. The cash payments expected for Finch Company in the month of April are a. $122,600 Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting b. $120,600 c. $123,100 d. $121,100 ANSWER: b 132. The cash payments expected for Finch Company in the month of May are a. $185,600 b. $149,900 c. $187,600 d. $189,100 ANSWER: a 133. The cash payments for Finch Company expected in the month of June are a. $215,500 b. $188,800 c. $214,000 d. $212,000 ANSWER: d 134. Planning for capital expenditures is necessary for which of the following reasons? a. Machinery and other fixed assets wear out. b. Expansion may be necessary to meet increased demand. c. Fixed assets may fall below minimum standards of efficiency. d. all of these choices ANSWER: d 135. As of January 1 of the current year, Grayson Company had accounts receivable of $40,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. The total cash collected (both from accounts receivable and for cash sales) in the month of January is a. $64,000 b. $107,000 c. $61,600 d. $121,600 ANSWER: d 136. As of January 1 of the current year, Grackle Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. The total cash collected (both from accounts receivable and cash sales) in the month of February is a. $129,600 b. $62,400 c. $133,600 d. $91,200 Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting ANSWER: c 137. As of January 1 of the current year, Grackle Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. The total cash collected (both from accounts receivable and cash sales) in the month of March is a. $74,800 b. $146,800 c. $102,000 d. $116,800 ANSWER: b 138. As of January 1 of the current year, Gunner Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. The accounts receivable balance as of March 31 is a. $72,000 b. $48,000 c. $58,720 d. $60,000 ANSWER: b Dove Corporation began its operations on September 1 of the current year. Budgeted sales for the first three months of business are $250,000, $320,000, and $410,000, respectively, for September, October, and November. The company expects to sell 25% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month of the sale and 30% in the month following the sale.

139. The cash collections expected in October are a. $320,000 b. $248,000 c. $304,250 d. $382,500 ANSWER: c 140. The cash collections in November are a. $317,750 b. $389,750 c. $490,000 d. $410,000 ANSWER: b 141. Fashion Jeans, Inc., sells two lines of jeans: Simple Life and Fancy Life. Simple Life sells for $85, and Fancy Life sells for $100. The company sells all of its jeans on credit and estimates that 60% is collected in the month of the sale, 35% is collected in the following month, and the rest is considered to be uncollectible. The estimated sales for Simple are: January, 20,000 pairs of jeans; February, 27,500 pairs of jeans; and March, 25,000 pairs of jeans. The estimated sales for Fancy are: January, 18,000 pairs of jeans; February, 19,000 pairs of jeans; and March, 20,500 pairs of jeans. The expected Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting cash receipts for the month of March is a. $3,988,125 b. $2,505,000 c. $2,125,000 d. $4,175,000 ANSWER: a A company is preparing its cash budget. Its cash balance on January 1 is $290,000, and it has a minimum cash requirement of $340,000. The following data have been provided: Cash receipts Cash payments

January $1,061,200 984,500

February $1,182,400 1,210,000

March $1,091,700 1,075,000

142. The amount of the deficiency or excess cash (after considering the minimum cash balance required) for January is a(n) a. excess of $26,700 b. deficiency of $136,700 c. excess of $356,700 d. excess of $60,000 ANSWER: a 143. The amount of cash excess or deficiency (after considering the minimum cash balance required) for February is a(n) a. deficiency of $109,100 b. excess of $10,900 c. deficiency of $900 d. excess of $109,100 ANSWER: c 144. The amount of cash excess or deficiency (after considering the minimum cash balance required) for March is a(n) a. excess of $214,200 b. excess of $15,800 c. deficiency of $60,000 d. excess of $25,300 ANSWER: b 145. Which of the following should be ignored when preparing the cash budget? a. cash receipts from customers b. depreciation expense c. cash payments to suppliers d. cash payments for equipment ANSWER: b 146. Which of the following would be used in preparing a cash budget for October? a. beginning cash balance on October 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting b. budgeted salaries expense for October c. budgeted sales and collections for October d. all of these choices ANSWER: d 147. Southern Company is preparing a cash budget for April. The company has $12,000 cash at the beginning of April and anticipates $30,000 in cash receipts and $34,500 in cash disbursements during April. Southern Company has an agreement with its bank to maintain a minimum cash balance of $10,000. To maintain the required balance during April, the company must a. borrow $4,500 b. borrow $2,500 c. borrow $7,500 d. borrow $5,000 ANSWER: b 148. Tara Company’s budget shows the following credit sales for the current year: September, $25,000; October, $36,000; November, $30,000; December, $32,000. Experience has shown that payment for credit sales is received as follows: 15% in the month of sale, 60% in the first month after sale, 20% in the second month after sale, and 5% is uncollectible. The amount of cash Tara Company will expect to collect in November as a result of current and past credit sales is a. $19,700 b. $28,400 c. $30,000 d. $31,100 ANSWER: d 149. A company’s history indicates that 20% of its sales are for cash and the rest are on credit. Collections on credit sales are 20% in the month of the sale, 50% in the next month, 25% the following month, and 5% is uncollectible. Projected sales for December, January, and February are $60,000, $85,000, and $95,000, respectively. The February expected cash receipts from all current and prior credit sales are a. $61,200 b. $57,000 c. $66,400 d. $90,250 ANSWER: a 150. The primary budget in a nonmanufacturing business is the _____ budget. a. capital expenditures b. selling and administrative expenses c. cash d. staffing ANSWER: d 151. Carillon's Department Stores is planning its staffing for the upcoming holiday season. From past history, the store determines that it needs one additional sales clerk for each $15,000 in daily sales. The average daily sales is anticipated to increase by $135,000 from Black Friday until Christmas Eve, or 27 shopping days. Each additional sales clerk will work a six-hour shift and will be paid $16 per hour. The amount to budget for additional sales clerks for the holiday season is Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting a. $14,580 b. $23,328 c. $31,104 d. $209,952 ANSWER: b 152. Pelican Roost Hotel has 100 rooms. For a normal February, it averages 60% capacity. However, there are three 3-day events scheduled for February in which the hotel expects to be completely booked. Of the additional guests coming for the events, one-half will likely attach an extra day before or after the event to enjoy the beach and/or other local sights. You have determined that the housekeeping staff requires 30 minutes to clean each occupied room. The housekeeping staff is paid $14 per hour. The housekeeping labor cost is fully variable to the number of occupied rooms. Assuming it is not a leap year, the total housekeeping budget for February is a. $14,420 b. $14,700 c. $28,840 d. $29,400 ANSWER: b 153. Which of the following is an integrated set of operating and financial budgets for a period of time? a. master budget b. cash budget c. production budget d. sales budget ANSWER: a 154. Which of the following begins by estimating the quantity of sales? a. master budget b. cash budget c. production budget d. sales budget ANSWER: d 155. Which of the following estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels? a. master budget b. cash budget c. production budget d. sales budget ANSWER: c 156. Which of the following is an accounting report that presents predicted amounts of the company’s assets, liabilities, and equity as of the end of the budget period? a. pro forma balance sheet b. master budget c. pro forma income statement Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting d. capital expenditures budget ANSWER: a 157. Which of the following is a plan that shows the expected cash receipts (inflows) and payments (outflows) during the budget period, including receipts from loans needed to maintain a minimum cash balance and repayments of such loans? a. master budget b. cash budget c. production budget d. sales budget ANSWER: b 158. Describe a master budget and the sequence in which the individual budgets within the master budget are prepared.

ANSWER: The master budget is an integrated set of operating and financial budgets for a period of time. The master budget usually begins with an estimation of the quantity of sales and the sales budget. Using the sales projections, the remaining operating budgets are prepared, including a budgeted income statement. Using the information from the operating budgets, the financial budgets can then be prepared, including the cash budget, capital expenditures budget, and budgeted balance sheet.

159. At the beginning of the period, the Cutting Department budgeted direct labor of $30,000 and supervisor salaries of $20,000 for 3,000 hours of production. The department actually completed 5,000 hours of production. Determine the direct labor budget for the department assuming that it uses flexible budgeting.

ANSWER: Variable cost: Direct labor (5,000 × $10* per hour) $50,000 Fixed cost: Supervisor salaries 20,000 Total department cost $70,000 *$30,000 ÷ 3,000 hours 160. Doran Technologies produces a single product. Expected manufacturing costs are as follows: Variable costs Direct materials Direct labor Manufacturing overhead Fixed costs per month Depreciation Supervisory salaries Other fixed costs

$4.00 per unit $1.20 per unit $0.95 per unit $ 6,000 13,500 3,850

Estimate manufacturing costs for production levels of 25,000 units, 30,000 units, and 35,000 units per month.

ANSWER: At 25,000 units = [25,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $177,100 At 30,000 units = [30,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $207,850 At 35,000 units = [35,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $238,600 161. Rodger's Cabinet Manufacturers uses flexible budgets that are based on the following manufacturing data for the Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting month of July: Direct materials Direct labor Electric power (variable) Electric power (fixed) Supervisor salaries Property taxes on factory Straight-line depreciation

$8 per unit $5 per unit $0.30 per unit $4,000 per month $25,000 per month $4,000 per month $2,900 per month

Prepare a flexible budget for Rodger's based on production of 10,000, 15,000, and 20,000 units.

ANSWER: Rodger's Cabinet Manufacturers Flexible Manufacturing Budget For the Month Ending July 31 Units of production 10,000 15,000 20,000 Variable costs: Direct materials ($8 per unit) $ 80,000 $120,000 $160,000 Direct labor ($5 per unit) 50,000 75,000 100,000 Electric power ($0.30 per unit) 3,000 4,500 6,000 Total variable costs $133,000 $199,500 $266,000 Fixed costs: Electric power Supervisor salaries Property taxes Depreciation expense Total fixed costs Total manufacturing costs

$

4,000 $ 4,000 $ 4,000 25,000 25,000 25,000 4,000 4,000 4,000 2,900 2,900 2,900 $ 35,900 $ 35,900 $ 35,900 $168,900 $235,400 $301,900

162. Prepare a flexible production budget for the year ending December 31 for Cedar Jeans Company using production levels of 16,000, 18,000, and 20,000 units produced. The following additional information is necessary to complete the budget: Variable costs: Direct labor ($6.00 per unit) Direct materials ($8.00 per unit) Variable manufacturing costs ($2.50 per unit) Fixed costs: Supervisor’s salaries Rent Depreciation on equipment ANSWER:

$80,000 12,000 24,000 Cedar Jeans Company Flexible Production Budget For the Year Ending December 31 16,000

18,000

20,000

$ 96,000 128,000 40,000

$108,000 144,000 45,000

$120,000 160,000 50,000

Units of production Variable costs: Direct labor ($6.00 per unit) Direct materials ($8.00 per unit) Variable manufacturing costs ($2.50 per Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting unit) Total variable costs Fixed costs: Supervisor’s salaries Rent Depreciation on equipment Total fixed costs Total costs

$264,000

$297,000

$330,000

$ 80,000 12,000 24,000 $116,000 $380,000

$ 80,000 12,000 24,000 $116,000 $413,000

$ 80,000 12,000 24,000 $116,000 $446,000

163. At the beginning of the period, the Molding Department budgeted direct labor of $33,000 and supervisor salaries of $24,000 for 3,000 hours of production. The department actually completed 2,500 hours of production. Determine the direct labor budget for the department assuming that it uses flexible budgeting.

ANSWER: Variable cost: Direct labor (2,500 × $11* per hour) $27,500 Fixed cost: Supervisor salaries 24,000 $51,500 Total department cost *$33,000 ÷ 3,000 hours 164. Why is the sales budget usually prepared first?

ANSWER: The sales budget is normally prepared first because the other operating budgets and financial budgets depend on information provided by the sales budget. The plans of most departments are related to expected sales units and dollars.

165. Osprey Cycles, Inc., projected sales of 75,000 bicycles for the year. The estimated January 1 inventory is 5,000 units, and the desired December 31 inventory is 8,000 units. What is the budgeted production (in units) for the year?

ANSWER: Expected units to be sold 75,000 Desired ending inventory, December 31 8,000 Total units available 83,000 Estimated beginning inventory, January 1 (5,000) Total units to be produced 78,000 166. To meet projected annual sales, Bluegill Manufacturers, Inc., needs to produce 75,000 machines for the year. The estimated January 1 inventory is 7,000 units, and the desired December 31 inventory is 12,000 units. What are projected sales units for the year?

ANSWER: Total units to be produced 75,000 Estimated beginning inventory, January 1 7,000 Total units available 82,000 Desired ending inventory, December 31 (12,000) Projected sales 70,000 167. Magnolia, Inc., manufactures bedding sets. The budgeted production is for 55,000 comforters this year. Each comforter requires 7 yards of material. The estimated January 1 beginning inventory is 31,000 yards with the desired ending balance of 30,000 yards of material. If the material costs $4 per yard, determine the materials budget for the year.

ANSWER: Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting Yards of material required for production (55,000 × 7 yards) Desired ending inventory, December 31 Total Estimated beginning inventory, January 1 Total yards to purchase Unit price (per yard) Total direct materials to be purchased

385,000 30,000 415,000 (31,000) 384,000 × $4 $1,536,000

168. Sleep Tight, Inc., manufactures bedding sets. The budgeted production is for 52,000 comforters this year. Each comforter requires 1.5 hours to cut and sew the material. The cost of cutting and sewing labor is $12.50 per hour.

Determine the direct labor budget for this year.

ANSWER: Hours required for cutting and sewing (52,000 × 1.5 hours) 78,000 hrs.

Hourly rate × $12.50 Total direct labor cost $975,000 169. Good Night, Inc., manufactures comforters. The estimated inventories on January 1 for finished goods, work in process, and materials were $51,000, $28,000, and $33,000, respectively. The desired inventories on December 31 for finished goods, work in process, and materials were $48,000, $35,000, and $29,000, respectively. Direct materials purchases were $555,000. Direct labor was $252,000 for the year. Factory overhead was $176,000. Prepare a cost of goods sold budget for Good Night, Inc. ANSWER: Good Night, Inc. Cost of Goods Sold Budget For the Year Ending December 31 Finished goods inventory, January 1 $ 51,000 Work in process inventory, January 1 $ 28,000 Direct materials: Direct materials inventory, January 1 $ 33,000 Direct materials purchases 555,000 Cost of direct materials available for use $588,000 Direct materials inventory, December 31 (29,000) Cost of direct materials placed in production $559,000 Direct labor 252,000 Factory overhead 176,000 Total manufacturing costs 987,000 Total work in process during period $1,015,000 Work in process inventory, December 31 (35,000) Costs of good manufactured 980,000 Cost of finished goods available for sale $1,031,000 Finished goods inventory, December 31 (48,000) Costs of goods sold $ 983,000

170. Sleep Tight, Inc., manufactures comforters. The estimated inventories on January 1 for finished goods, work in process, and materials were $39,000, $33,000, and $27,000, respectively. The desired inventories on December 31 for Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting finished goods, work in process, and materials were $42,000, $35,000, and $21,000, respectively. Direct materials purchases were $575,000, direct labor was $212,000 for the year, and factory overhead was $156,000. Prepare a cost of goods sold budget for Sleep Tight, Inc. ANSWER: Sleep Tight, Inc. Cost of Goods Sold Budget For the Year Ending December 31 Finished goods inventory, January 1 $ 39,000 Work in process inventory, January 1 $ 33,000 Direct materials: Direct materials, January 1 $ 27,000 Direct materials purchases 575,000 Cost of direct materials available for use $602,000 Direct materials inventory, December 31 (21,000) Cost of direct materials placed in production $581,000 Direct labor 212,000 Factory overhead 156,000 Total manufacturing costs 949,000 Total work in process during period $982,000 Work in process inventory, December 31 (35,000) Costs of good manufactured 947,000 Cost of finished goods available for sale $986,000 Finished goods inventory, December 31 (42,000) Costs of goods sold $944,000 171. Kid's World Industries has projected sales of 67,000 machines for the current year. The estimated January 1 inventory is 6,000 units, and the desired December 31 inventory is 15,000 units. What is the budgeted production (in units) for the year?

ANSWER: Expected units to be sold 67,000 Desired ending inventory, December 31 15,000 Total units available 82,000 Estimated beginning inventory, January 1 (6,000) Total units to be produced 76,000 172. Future Technologies projected sales of 35,000 computers for this year. The estimated January 1 inventory is 3,000 units, and the desired December 31 inventory is 9,000 units. What is the budgeted production (in units) for the year?

ANSWER: Expected units to be sold 35,000 Desired ending inventory, December 31 9,000 Total units available 44,000 Estimated beginning inventory, January 1 (3,000) Total units to be produced 41,000 173. Prepare a monthly flexible selling expenses budget for Cottonwood Company for sales volumes of $300,000, $350,000, and $400,000, based on the following data: Sales commissions Sales manager's salary Advertising expense

6% of sales $120,000 per month $90,000 per month

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Chapter 8: Budgeting Shipping expense Miscellaneous selling expense ANSWER:

1% of sales $6,000 per month plus 1.5% of sales

Cottonwood Company Monthly Selling Expenses Budget Sales volume $300,000 $350,000 $400,000 Variable expenses: Sales commissions $ 18,000 $ 21,000 $ 24,000 Shipping expense 3,000 3,500 4,000 Misc. selling expense 4,500 5,250 6,000 Total variable expenses $ 25,500 $ 29,750 $ 34,000 Fixed expenses: Sales manager's salary $120,000 $120,000 $120,000 Advertising expense 90,000 90,000 90,000 Misc. selling expense 6,000 6,000 6,000 Total fixed expenses $216,000 $216,000 $216,000 Total selling expenses $241,500 $245,750 $250,000

174. Based on the following production and sales data of Frixion Co. for March of the current year, prepare (a) a sales budget and (b) a production budget.

Estimated inventory, March 1 Desired inventory, March 31 Expected sales volume: Territory I Territory II Unit sales price ANSWER: a.

Product T 28,000 units 32,000 units

Product X 20,000 units 15,000 units

320,000 units 190,000 units $6

260,000 units 130,000 units $14

Frixion Co. Sales Budget For the Month Ending March 31 Unit Unit Sales Selling Product and Territory Volume Price Product T: Territory I 320,000 $6 Territory II 190,000 6 Total 510,000 Product X: Territory I 260,000 $14 Territory II 130,000 14 Total 390,000 Total revenue from sales

Total Sales $1,920,000 1,140,000 $3,060,000 $3,640,000 1,820,000 $5,460,000 $8,520,000

b.

Frixion Co. Production Budget For the Month Ending March 31 Product T Sales (units) 510,000 Desired ending inventory, Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting March 31 Total (units) available Estimated beginning inventory, March 1 Total units to be produced

32,000 542,000

15,000 405,000

(28,000) 514,000

(20,000) 385,000

175. Tough Jeans Company produces two different styles of jeans: Working Life and Social Life. The company sales budget estimates that 400,000 of the Working Life jeans and 250,000 of the Social Life jeans will be sold during the year.

The company begins with 9,000 pairs of Working Life and 18,000 pairs of Social Life. The company desires ending inventory of 7,500 of Working Life and 10,000 Social Life. Prepare a production budget for the year.

ANSWER: Tough Jeans Company Production Budget For the Year Ending December 31 Working Social Life Life Expected units to be sold (as per sales 400,000 250,000 budget) Desired ending inventory 7,500 10,000 Total units available 407,500 260,000 Estimated beginning inventory (9,000) (18,000) Total units to be produced 398,500 242,000

176. Diamond Company manufactures two models of cassette recorders: VCH and MTV. Based on the following production data for April, prepare a production budget.

Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Eastern zone Midwest zone Western zone ANSWER:

VCH 2,900 6,900

MTV 4,000 5,250

12,500 19,000 14,500

12,960 19,800 9,840

Diamond Company Production Budget For the Month Ending April 30 VCH MTV Expected units to be sold 46,000 42,600 Desired ending inventory, 6,900 5,250 April 30 Total units available 52,900 47,850 Estimated beginning (2,900) (4,000)

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Chapter 8: Budgeting inventory, April 1 Total units to be produced

50,000

43,850

177. Purple Co.'s production budget for Product X for the year ending December 31 is as follows: Product X 640,000 85,000 725,000 (90,000) 635,000

Expected units to be sold Desired ending inventory, December 31 Total units available Estimated beginning inventory, January 1 Total units to be produced

In Purple's production operations, Materials A, B, and C are required to make Product X. The quantities of direct materials expected to be used for each unit of product are as follows: Product X Material A Material B Material C

0.50 lb. per unit 1.00 lb. per unit 1.20 lbs. per unit

The prices of direct materials are as follows: Material A $0.60 per pound Material B $1.70 per pound Material C $1.00 per pound Prepare a direct materials purchases budget for Product X, assuming that there are no beginning or ending inventories for direct materials (all units purchased are used in production).

ANSWER: Purple Co. Direct Materials Purchases Budget For the Year Ending December 31 Direct Materials

A

B

C

Units required for production of Product X (Note A)

317,500 lbs.

635,000 lbs.

762,000 lbs.

Unit price

× $0.60

×

$1.70

× $1.00

Total direct materials purchases

$190,500

$1,079,500

$762,000

Note A:

Material A Material B Material C

Total

$2,032,000

635,000 × 0.50 lb. per unit = 317,500 lbs.

635,000 × 1.00 lb. per unit = 635,000 lbs.

635,000 × 1.20 lbs. per unit = 762,000 lbs.

178. Ruff Jeans Company produces two different types of jeans: Simple Life and Fancy Life. The company sales budget estimates that 350,000 of the Simple Life jeans and 200,000 of the Fancy Life jeans will be sold during the current year.

The production budget requires 353,500 units of Simple Life and 196,000 units of Fancy Life to be manufactured. The Simple Life jeans require 3 yards of denim material, a zipper, and 25 yards of thread. The Fancy Life jeans require 4.5 yards of denim material, a zipper, and 40 yards of thread. Each yard of denim material costs $3.25, the zippers cost $0.75 Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting each, and the thread is $0.02 per yard. There is enough material to make 2,000 jeans of each type at the beginning of the year. The desired ending inventory is to have enough materials to manufacture 3,500 jeans of each type. Prepare a direct materials purchases budget.

ANSWER: Ruff Jeans Company Direct Materials Purchases Budget For the Year Ending December 31 Denim Zippers Thread Total Materials required for production: Simple (353,500 units × 3 1,060,500 yards material) 353,500 (353,500 units × 1 8,837,500 zipper)(353,500 units × 25 yards thread) Fancy (196,000 units × 4.5 882,000 yards) 196,000 (196,000 units × 1 zipper) 7,840,000 (196,000 units × 40 yards) Desired inventory, December 31: Simple: (3,500 units × 3 yards 10,500 material) (3,500 units × 1 zipper) 3,500 87,500 (3,500 units × 25 yards thread) Fancy (3,500 units × 4.5 yards material) 15,750 3,500 (3,500 units × 1 zipper) 140,000 (3,500 units × 40 yards thread) Total materials available 1,968,750 556,500 16,905,000 Estimated inventory, January 1: Simple (2,000 units × 3 yards (6,000) material) (2,000) (50,000) (2,000 units × 1 zipper) (2,000 units × 25 yards) Fancy (2,000 units × 4.5 yards (9,000) material) (2,000) (2,000 units × 1 zipper) (80,000) (2,000 units × 40 yards thread) Total units to be purchased 1,953,750 552,500 16,775,000 Unit price × $3.25 × $0.75 × $0.02 Total direct materials to be Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting purchased

$6,349,688 $414,375 $ 335,500 $7,099,563

179. Good Eats Inc. manufactures flatware sets. The budgeted production is for 80,000 sets this year. Each set requires 2.5 hours to polish the material. If polishing labor costs $15 per hour, determine the direct labor cost budget for polishing for the year.

ANSWER: Hours required (80,000 × 2.5 hours) 200,000 Hourly rate × $15 Total direct labor cost $3,000,000 180. Big Wheel, Inc., collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. Sales on account are budgeted to be $225,000 for March and $250,000 for April. What are the budgeted cash receipts from sales on account for April?

ANSWER: April Collections from March sales (75% × $225,000) $168,750 Collections from April sales (25% × $250,000) 62,500 $231,250 Total receipts from sales on account 181. Big Wheel, Inc., collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. Sales on account are budgeted to be $150,000 for March and receipts from sales on account total $162,500 in April.

What are the budgeted sales on account for April?

ANSWER: April Collections from March sales (75% × $150,000) $112,500 Collections from April sales (25% × X) 50,000 $162,500 Total receipts from sales on account X = $200,000 182. Flanders Industries collects 35% of its sales on account in the month of the sale and 65% in the month following the sale. Sales on account are budgeted to be $175,000 for May and $225,000 for June. What are the budgeted cash receipts from sales on account for June?

ANSWER: June Collections from May sales (65% × $175,000) $113,750 Collections from June sales (35% × $225,000) 78,750 $192,500 Total receipts from sales on account 183. The treasurer of Calico Dreams Company has accumulated the following budget information for the first two months of the coming fiscal year: Sales.

Manufacturing costs Selling and administrative expenses Capital additions

March $450,000 290,000 41,400 250,000

April $520,000 350,000 46,400 —

The company expects to sell about 35% of its merchandise for cash. Of sales on account, 80% are collected in full in the month of the sale, and the remainder in the month following the sale. One-fourth of the manufacturing costs are paid in the month in which they are incurred, and the other three-fourths in the following month. Depreciation, insurance, and Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting property taxes represent $6,400 of the monthly selling and administrative expenses. Insurance is paid in February, and property taxes are paid yearly in September. A $40,000 installment on income taxes is to be paid in April. Of the remainder of the selling and administrative expenses, one-half are to be paid in the month in which they are incurred and the balance in the following month. Capital additions of $250,000 are paid in March.

Current assets as of March 1 are composed of cash of $45,000 and accounts receivable of $51,000. Current liabilities as of March 1 are accounts payable of $121,500 ($102,000 for materials purchases and $19,500 for operating expenses).

Management desires to maintain a minimum cash balance of $25,000.

Prepare a monthly cash budget for March and April.

ANSWER: Calico Dreams Company Cash Budget For the Two Months Ending April 30 March April Estimated cash receipts from: Cash sales* $ 157,500 $ 182,000 Collections of accounts receivable** 285,000 328,900 Total cash receipts $ 442,500 $ 510,900 Estimated cash payments for: Manufacturing costs $(174,500) $(305,000) Selling and administrative expenses (37,000) (37,500) Capital additions (250,000) Income taxes (40,000) Total cash payments $(461,500) $(382,500) Cash increase (decrease) $ (19,000) $ 128,400 Cash balance at beginning of month 45,000 26,000 Cash balance at end of month $ 26,000 $ 154,400 Minimum cash balance (25,000) (25,000) Excess (deficiency) $ 1,000 $ 129,400 *$450,000 × 0.35 = $157,500 $520,000 × 0.35 = $182,000 **($450,000 × 0.65 × 0.80) + $51,000 = $285,000 ($520,000 × 0.65 × 0.80) + ($450,000 × 0.65 × 0.20) = $328,900

184. Star Co. was organized on August 1 of the current year. Projected sales for the next three months are as follows: August September October

$250,000 200,000 275,000

The company expects to sell 50% of its merchandise for cash. Of the sales on account, 30% are expected to be collected in the month of the sale and the remainder in the following month.

Prepare a schedule indicating cash collections for August, September, and October.

ANSWER: Star Co. Schedule of Collections from Sales For the Three Months Ending October 31 August September October Copyright Cengage Learning. Powered by Cognero.

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Chapter 8: Budgeting Sales Cash sales Credit sales

$ 250,000 $ 200,000 (125,000) (100,000) $ 125,000 $ 100,000

Collections of accounts receivable: August credit sales September credit sales October credit sales Cash sales Total collections

$ 37,500 $ 87,500 30,000 125,000 100,000 $162,500 $217,500

$ 275,000 (137,500) $137,500

$ 70,000 41,250 137,500 $248,750

185. What is a capital expenditures budget?

ANSWER: The capital expenditures budget lists the amounts to be spent to purchase additional fixed assets to carry out the budgeted business activities.

186. What is a cash budget? How does management use a cash budget?

ANSWER: A cash budget estimates the expected receipts (inflows) and payments (outflows) of cash for a period of time.

Management can arrange loans to cover anticipated cash shortages before they are needed. The cash budget also helps avoid a cash balance that is too large. An excess in cash could be invested in temporary incomeproducing securities such as U.S. Treasury bills or notes.

187. For most companies, the budgeting process normally encompasses one period—the year. a. True b. False ANSWER: False The following are the estimated monthly sales and desired ending finished goods inventories for Blushing Company for the fourth quarter ending December 31, as well as the month immediately before and after: September October November December January

Sales 30,000 units 40,000 units 50,000 units 60,000 units 20,000 units

Ending Inventory 8,000 units 20% of next month’s sales 20% of next month’s sales 20% of next month’s sales 10% of next month’s sales

The unit selling price is $25. Materials cost per unit is $5. Direct labor required per unit is 0.1 hour. The direct labor rate is $20.

188. If the desired ending inventory is 20% of next month’s sales, the correct formula for determining total units to be produced on the multiperiod production budget is a. Estimated Sales Units for Period + (20% × Estimated Sales Units for Period) – (20% × Estimated Sales Units of Next Period) b. Estimated Sales Units for Period + (20% × Estimated Sales Units of Next Period) – (20% × Estimated Sales Units of Current Period) c. Estimated Sales Units for Period + (20% × Estimated Sales Units of Next Period) d. (20% × Estimated Sales Units of Next Period) + (80% × Estimated Sales Units of Current Period) ANSWER: b

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Chapter 8: Budgeting 189. The multiperiod sales budget should show total budgeted sales in dollars for the fourth quarter to be a. $3,000,000 b. $3,750,000 c. $4,250,000 d. $5,000,000 ANSWER: b 190. The multiperiod production budget for the fourth quarter should show desired ending finished goods inventory at December 31 to be a. 2,000 units b. 4,000 units c. 12,000 units d. 16,000 units ANSWER: b 191. The multiperiod production budget should show total units to be produced in November to be a. 38,000 units b. 50,000 units c. 52,000 units d. 62,000 units ANSWER: c 192. The multiperiod direct materials purchases budget for the fourth quarter should show the cost of materials to be purchased for November to be a. $190,000 b. $250,000 c. $260,000 d. $310,000 ANSWER: c 193. The multiperiod direct labor cost budget for the fourth quarter should show the total direct labor cost for the quarter to be a. $355,000 b. $365,000 c. $375,000 d. $3,650,000 ANSWER: b

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Chapter 9: Evaluating Variances from Standard Costs 1. Accounting systems that use standards for product costs are called variable cost systems. a. True b. False ANSWER: False 2. Standard costs serve as a device for measuring efficiency. a. True b. False ANSWER: True 3. The standard cost is how much a product should cost to manufacture. a. True b. False ANSWER: True 4. Accounting systems that use standards for product costs are called standard cost systems. a. True b. False ANSWER: True 5. Accounting systems that use standards for product costs are called budgeted cost systems. a. True b. False ANSWER: False 6. Normally, standard costs should be revised when labor rates change to incorporate new union contracts. a. True b. False ANSWER: True 7. Standard costs should always be revised when they differ from actual costs. a. True b. False ANSWER: False 8. Financial reporting systems that are guided by the principle of exceptions focus attention on variances from standard costs. a. True b. False ANSWER: True 9. In most businesses, cost standards are established principally by accountants. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs 10. Ideal standards are developed under conditions that assume no idle time, no machine breakdowns, and no materials spoilage. a. True b. False ANSWER: True 11. Currently attainable standards allow for normal production difficulties and mistakes. a. True b. False ANSWER: True 12. If employees are given bonuses for exceeding normal standards, the standards may be very effective in motivating employees. a. True b. False ANSWER: True 13. The fact that workers are unable to meet a properly determined direct labor standard is sufficient cause to change the standard. a. True b. False ANSWER: False 14. Standards are performance goals used to evaluate and control operations. a. True b. False ANSWER: True 15. Standards are set for only direct labor and direct materials. a. True b. False ANSWER: False 16. The principle of exceptions allows managers to focus on correcting variances between standard costs and actual costs. a. True b. False ANSWER: True 17. Because accountants have financial expertise, they are the only ones that are able to set standard costs for the production area. a. True b. False ANSWER: False

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Chapter 9: Evaluating Variances from Standard Costs 18. While setting standards, managers should never allow for spoilage or machine breakdowns in their calculations. a. True b. False ANSWER: False 19. The difference between the standard cost of a product and its actual cost is called a cost variance. a. True b. False ANSWER: True 20. A budget performance report compares actual costs with the standard costs and reports differences for possible investigation. a. True b. False ANSWER: True 21. A favorable cost variance occurs when the actual cost is less than the standard cost. a. True b. False ANSWER: True 22. An unfavorable cost variance occurs when the standard cost exceeds the actual cost. a. True b. False ANSWER: False 23. Standards are designed to evaluate price and quantity variances separately. a. True b. False ANSWER: True 24. If the standard to produce a given amount of product is 2,000 units of direct materials at $12 and the actual direct materials used are 1,600 units at $13, the direct materials quantity variance is $5,200 favorable. a. True b. False ANSWER: False 25. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual direct materials used are 800 units at $12, the direct materials quantity variance is $2,200 unfavorable. a. True b. False ANSWER: False 26. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual direct materials used are 800 units at $12, the direct materials price variance is $800 unfavorable.

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Chapter 9: Evaluating Variances from Standard Costs a. True b. False ANSWER: True 27. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual direct materials used are 800 units at $12, the direct materials price variance is $800 favorable. a. True b. False ANSWER: False 28. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual direct materials used are 800 units at $12, the direct materials quantity variance is $1,000 unfavorable. a. True b. False ANSWER: False 29. If the standard to produce a given amount of product is 600 direct labor hours at $17 and the actual direct labor incurred is 500 hours at $15, the direct labor time variance is $1,500 unfavorable. a. True b. False ANSWER: False 30. If the standard to produce a given amount of product is 600 direct labor hours at $15 and the actual direct labor incurred is 500 hours at $17, the direct labor time variance is $1,700 unfavorable. a. True b. False ANSWER: False 31. If the standard to produce a given amount of product is 600 direct labor hours at $15 and the actual direct labor incurred is 600 hours at $17, the direct labor rate variance is $1,200 unfavorable. a. True b. False ANSWER: True 32. If the standard to produce a given amount of product is 500 direct labor hours at $15 and the actual direct labor incurred is 600 hours at $17, the direct labor rate variance is $1,200 favorable. a. True b. False ANSWER: False 33. Standard direct materials costs are determined by multiplying the standard price by the standard quantity. a. True b. False ANSWER: True

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Chapter 9: Evaluating Variances from Standard Costs 34. The direct labor time variance measures the efficiency of the direct labor force. a. True b. False ANSWER: True 35. The variance from standard for factory overhead cost resulting from operating at a level above or below 100% of normal capacity is termed volume variance. a. True b. False ANSWER: True 36. The variance from standard for factory overhead resulting from incurring a total amount of factory overhead cost that is greater or less than the amount budgeted for the level of operations achieved is termed the variable factory overhead controllable variance. a. True b. False ANSWER: True 37. The most effective means of presenting factory overhead cost variance data is through a flexible factory overhead budget. a. True b. False ANSWER: False 38. Since the variable factory overhead controllable variance measures the efficiency of using variable overhead resources, if budgeted variable overhead exceeds actual results, the variance is favorable. a. True b. False ANSWER: True 39. An unfavorable fixed factory overhead volume variance may be due to a failure of supervisors to maintain an even flow of work. a. True b. False ANSWER: True 40. Favorable fixed factory overhead volume variances are never harmful, since achieving them encourages managers to run the factory above normal capacity. a. True b. False ANSWER: False 41. The volume variance measures the use of fixed factory overhead resources. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs 42. Although favorable fixed factory overhead volume variances are usually good news, if inventory levels are too high, additional production could be harmful. a. True b. False ANSWER: True 43. Standard costs are a useful management tool that can be used solely as a statistical device apart from the ledger or they can be incorporated in the accounts. a. True b. False ANSWER: True 44. At the end of the fiscal year, the variances from standard are usually transferred to the finished goods account. a. True b. False ANSWER: False 45. Variances from standard costs are usually included in reports to stockholders. a. True b. False ANSWER: False 46. Standards can be used in nonmanufacturing settings where the tasks are nonrepetitive in nature. a. True b. False ANSWER: False 47. Subtracting actual revenues from planned revenues provides the revenue price variance. a. True b. False ANSWER: False 48. Which of the following conditions normally would indicate that standard costs should be revised? a. The Engineering Department has revised product specifications in responding to customer suggestions. b. The company has signed a new union contract that increases the factory wages on average by $3.50 an hour. c. The average price of raw materials increased from $4.68 per pound to $4.82 per pound. d. all of these choices ANSWER: d 49. Standards that represent levels of operation that can be attained with reasonable effort are called _____ standards. a. theoretical b. ideal c. variable d. normal Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs ANSWER: d 50. Standard costs are used in companies for a variety of reasons. Which of the following is a benefit of using standard costs? a. They are used to control costs. b. They are used to estimate the cost of inventory. c. They are used to plan direct materials, direct labor, and variable factory overhead. d. all of these choices ANSWER: d 51. The principle of exceptions allows managers to focus on correcting variances between a. standard costs and actual costs b. variable costs and actual costs c. competitor’s costs and actual costs d. competitor’s costs and standard costs ANSWER: a 52. A report that summarizes actual costs, standard costs, and the differences for the units produced is called a a. zero-based budget report b. budget performance report c. master budget d. budget ANSWER: b 53. The standard price and quantity of direct materials are separated because a. GAAP and IFRS reporting requires separation b. direct materials prices are controlled by the purchasing department and quantity used is controlled by the production department c. standard prices are more difficult to estimate than standard quantities d. standard quantities change more frequently than standard prices ANSWER: b 54. Standard costs are divided into which of the following components? a. variance standard and quantity standard b. materials standard and labor standard c. standard quality and standard quantity d. standard price and standard quantity ANSWER: d 55. A favorable cost variance occurs when a. actual costs are more than standard costs b. standard costs are more than actual costs c. standard costs are less than actual costs d. actual costs are the same as standard costs Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs ANSWER: b 56. The total manufacturing cost variance consists of a. direct materials price variance, direct labor cost variance, and fixed factory overhead volume variance b. direct materials cost variance, direct labor rate variance, and factory overhead cost variance c. direct materials cost variance, direct labor cost variance, and variable factory overhead controllable variance d. direct materials cost variance, direct labor cost variance, and factory overhead cost variance ANSWER: d 57. The total manufacturing cost variance is a. the difference between total actual costs and total standard costs for the units produced b. the flexible budget variance plus the time variance c. the difference between planned costs and standard costs for the units produced d. none of these choices ANSWER: a 58. Which of the following is a reason standard costs are separated into two components? a. The price and quantity variances need to be identified separately to correct the actual major differences. b. Identifying variances determines which manager must find a solution to major discrepancies. c. If a negative variance is overshadowed by a favorable variance, managers may overlook potential corrections. d. all of these choices ANSWER: d 59. Myers Corporation has the following data related to direct materials costs for November: actual cost for 5,000 pounds of material at $4.50 per pound and standard cost for 4,800 pounds of material at $5.10 per pound.

The direct materials price variance is a. $3,000 favorable b. $3,000 unfavorable c. $2,880 favorable d. $2,880 unfavorable ANSWER: a 60. Jaxson Corporation has the following data related to direct labor costs for September: actual costs for 10,200 hours at $15.75 per hour and standard costs for 10,800 hours at $15.50 per hour.

The direct labor time variance is a. $9,300 favorable b. $9,300 unfavorable c. $9,450 favorable d. $9,450 unfavorable ANSWER: a 61. Myers Corporation has the following data related to direct materials costs for November: actual costs for 5,000 pounds of material at $4.50 and standard costs for 4,800 pounds of material at $5.10 per pound.

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Chapter 9: Evaluating Variances from Standard Costs The direct materials quantity variance is a. $1,020 favorable b. $1,020 unfavorable c. $900 favorable d. $900 unfavorable ANSWER: b 62. The following data relate to direct labor costs for August: actual costs for 5,500 hours at $24.00 per hour and standard costs for 5,000 hours at $23.70 per hour.

The direct labor rate variance is a. $1,650 favorable b. $1,650 unfavorable c. $1,500 favorable d. $1,500 unfavorable ANSWER: b 63. The standard costs and actual costs for direct materials for the manufacture of 3,000 actual units of product are as follows: Standard Costs Direct materials

1,040 kilograms at $8.75 Actual Costs

Direct materials

2,000 kilograms at $8.00

The direct materials price variance is a. $2,750 unfavorable b. $2,750 favorable c. $1,500 favorable d. $1,500 unfavorable ANSWER: c 64. The standard costs and actual costs for direct materials for the manufacture of 2,500 actual units of product are as follows: Standard Costs Direct materials

2,500 kilograms at $8.50 Actual Costs

Direct materials

2,600 kilograms at $8.75

The direct materials quantity variance is a. $875 favorable b. $850 unfavorable c. $850 favorable d. $875 unfavorable ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs 65. If the actual quantity of direct materials used in producing a commodity differs from the standard quantity, the variance is a _____ variance. a. controllable b. price c. quantity d. rate ANSWER: c 66. If the price paid per unit differs from the standard price per unit for direct materials, the variance is a _____ variance. a. variable b. controllable c. price d. volume ANSWER: c The following data are given for Stringer Company: Budgeted production Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs

26,000 units 27,500 units $6.50 8 228,000 $1,504,800 $22 per hour 6.6 183,000 $4,020,000 $1,029,600 $24.50 per standard labor hour $4,520,000

Overhead is applied on standard labor hours.

67. The direct materials price variance is a. $22,800 unfavorable b. $22,800 favorable c. $52,000 unfavorable d. $52,000 favorable ANSWER: a 68. The direct materials quantity variance is a. $22,800 favorable b. $22,800 unfavorable c. $52,000 favorable Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs d. $52,000 unfavorable ANSWER: d Lucy Corporation purchased and used 129,000 board feet of lumber in production at a total cost of $1,548,000. Original production had been budgeted for 22,000 units with a standard materials quantity of 5.7 board feet per unit and a standard price of $12 per board foot. Actual production was 23,500 units.

69. The direct materials price variance is a. $0 b. $59,400 unfavorable c. $59,400 favorable d. $6,000 unfavorable ANSWER: a 70. The direct materials quantity variance is a. $63,000 favorable b. $63,000 unfavorable c. $59,400 favorable d. $59,400 unfavorable ANSWER: c 71. If the wage rate paid per hour differs from the standard wage rate per hour for direct labor, the variance is a _____ variance. a. variable b. rate c. quantity d. volume ANSWER: b 72. If the actual direct labor hours spent producing a commodity differ from the standard hours, the variance is a _____ variance. a. time b. price c. quantity d. rate ANSWER: a 73. The following data relate to direct labor costs for the current period: Standard costs Actual costs

7,500 hours at $11.70 6,000 hours at $12.00

The direct labor time variance is a. $18,000 favorable b. $18,000 unfavorable Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs c. $17,550 unfavorable d. $17,550 favorable ANSWER: d 74. The following data relate to direct labor costs for the current period: Standard costs Actual costs

6,000 hours at $12.00 7,500 hours at $11.40

The direct labor rate variance is a. $18,000 unfavorable b. $4,500 favorable c. $17,100 unfavorable d. $3,600 favorable ANSWER: b 75. The following data relate to direct labor costs for the current period: Standard costs Actual costs

9,000 hours at $5.50 8,500 hours at $5.75

The direct labor rate variance is a. $2,250 unfavorable b. $2,125 unfavorable c. $2,250 favorable d. $2,125 favorable ANSWER: b 76. The following data relate to direct labor costs for the current period: Standard costs Actual costs

36,000 hours at $22.00 35,000 hours at $23.00

The direct labor time variance is a. $36,000 unfavorable b. $35,000 unfavorable c. $23,000 favorable d. $22,000 favorable ANSWER: d 77. The standard costs and actual costs for direct labor for the manufacture of 2,500 actual units of product are as follows: Standard Costs Direct labor 7,500 hours at $11.80 Actual Costs Direct labor 7,400 hours at $11.40 The direct labor rate variance is a. $2,960 unfavorable b. $4,500 favorable Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs c. $2,960 favorable d. $4,500 unfavorable ANSWER: c 78. The standard costs and actual costs for direct labor in the manufacture of 2,500 units of product are as follows: Standard Costs Direct labor 7,500 hours at $11.80 Actual Costs Direct labor 7,400 hours at $11.40 The direct labor time variance is a. $1,180 favorable b. $1,140 unfavorable c. $1,180 unfavorable d. $1,140 favorable ANSWER: a The following data relate to direct labor costs for February: Actual costs Standard costs

7,700 hours at $14.00 7,000 hours at $16.00

79. The direct labor time variance is a. $7,700 favorable b. $7,700 unfavorable c. $11,200 unfavorable d. $11,200 favorable ANSWER: c 80. The direct labor rate variance is a. $14,000 favorable b. $14,000 unfavorable c. $15,400 favorable d. $15,400 unfavorable ANSWER: c The following data are given for Harry Company: Budgeted production Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual price paid for materials Labor: Copyright Cengage Learning. Powered by Cognero.

26,000 units 27,500 units $6.50 8 228,000 $1,504,800 Page 13

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Chapter 9: Evaluating Variances from Standard Costs Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs

$22.00 per hour 6.6 183,000 $4,020,000 $1,029,600 $24.50 per standard labor hour $4,520,000

Overhead is applied on standard labor hours. (Round interim calculations to the nearest cent.)

81. The direct labor rate variance is a. $5,490 unfavorable b. $5,490 favorable c. $33,000 favorable d. $33,000 unfavorable ANSWER: b 82. The direct labor time variance is a. $6,000 favorable b. $6,000 unfavorable c. $33,000 unfavorable d. $33,000 favorable ANSWER: c Flapjack Corporation had 8,200 actual direct labor hours at an actual rate of $12.40 per hour. Original production had been budgeted for 1,100 units, but only 1,000 units were actually produced. Labor standards were 7.6 hours per completed unit at a standard rate of $13.00 per hour.

83. The direct labor rate variance is a. $4,920 unfavorable b. $4,920 favorable c. $4,560 favorable d. $4,560 unfavorable ANSWER: b 84. The direct labor time variance is a. $9,880 favorable b. $9,880 unfavorable c. $7,800 unfavorable d. $7,800 favorable ANSWER: c The following data relate to direct materials costs for February: Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs Materials cost per yard: standard, $2.00; actual, $2.10 Yards per unit: standard, 4.5 yards; actual, 4.75 yards Units of production: 9,500 85. The total direct materials cost variance is a. $9,262.50 unfavorable b. $9,262.50 favorable c. $3,780.00 unfavorable d. $3,562.50 favorable ANSWER: a 86. The direct materials price variance is a. $1,795.50 favorable b. $378.00 favorable c. $4,512.50 unfavorable d. $378.00 unfavorable ANSWER: c 87. The direct materials quantity variance is a. $4,512.50 unfavorable b. $4,512.50 favorable c. $4,750.00 unfavorable d. $4,750.00 favorable ANSWER: c The following data relate to direct labor costs for March: Rate: standard, $12.00; actual, $12.25 Hours: standard, 18,500; actual, 17,955 Units of production: 9,450 88. The total direct labor variance is a. $2,051.25 favorable b. $2,051.25 unfavorable c. $2,362.50 unfavorable d. $2,362.50 favorable ANSWER: a 89. The direct labor time variance is a. $2,362.50 favorable b. $2,362.50 unfavorable c. $6,540.00 favorable d. $6,540.00 unfavorable ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs 90. The direct labor rate variance is a. $4,488.75 unfavorable b. $6,851.25 favorable c. $4,488.75 favorable d. $6,851.25 unfavorable ANSWER: a 91. Which of the following is reason for a direct materials quantity variance? a. malfunctioning equipment b. purchasing of inferior raw materials c. spoilage of materials d. all of these choices ANSWER: d 92. The direct labor rate variance is the difference between the a. actual rate and the standard rate b. actual costs and the standard costs c. actual hours at the standard rate and the standard costs d. actual costs and the actual hours at the standard rate ANSWER: d 93. The direct labor time variance is the difference between the a. actual labor rate and the standard labor rate b. actual costs and the standard costs c. actual hours at the standard rate and the standard costs d. actual costs and the actual hours at the standard rate ANSWER: c 94. The direct materials price variance is the difference between the a. actual costs and the actual quantity at the standard price b. actual costs and the standard costs c. actual price and the standard price d. actual quantity at the standard price and the standard costs ANSWER: a 95. The direct materials quantity variance is the difference between the a. actual costs and the standard costs b. standard quantity and the actual quantity c. actual quantity at the standard price and the standard costs d. actual costs and the standard price at the standard quantity ANSWER: c 96. For which of the following would applying direct labor variances be inappropriate? a. help desk assistant Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs b. research and development scientist c. customer service personnel d. telemarketer ANSWER: b The standard costs and actual costs for factory overhead for the manufacture of 2,500 units of actual production are as follows: Standard Costs Fixed overhead (based on 10,000 hours) 3 hours per unit at $0.80 per hour Variable overhead 3 hours per unit at $2.00 per hour Actual Costs Total variable cost, $18,000 Total fixed cost, $8,000 97. The fixed factory overhead volume variance is a. $2,000 favorable b. $2,000 unfavorable c. $2,500 unfavorable d. $0 ANSWER: b 98. The total factory overhead cost variance is a. $2,000 favorable b. $5,000 unfavorable c. $2,500 unfavorable d. $5,000 favorable ANSWER: b 99. The variable factory overhead controllable variance is a. $2,000 unfavorable b. $3,000 favorable c. $0 d. $3,000 unfavorable ANSWER: d The standard factory overhead rate is $10 per direct labor hour ($8 for variable factory overhead and $2 for fixed factory overhead) based on 100% of normal capacity of 30,000 direct labor hours. The standard cost and the actual cost of factory overhead for the production of 5,000 units during May were as follows: Standard:

25,000 hours at $10

$250,000

Actual:

Variable factory overhead Fixed factory overhead

$202,500 60,000

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Chapter 9: Evaluating Variances from Standard Costs 100. The fixed factory overhead volume variance is a. $12,500 favorable b. $10,000 unfavorable c. $12,500 unfavorable d. $10,000 favorable ANSWER: b 101. The variable factory overhead controllable variance is a. $10,000 favorable b. $2,500 unfavorable c. $10,000 unfavorable d. $2,500 favorable ANSWER: b 102. Assuming that the standard fixed overhead rate is based on full capacity, the cost of available but unused productive capacity is indicated by the a. fixed factory overhead volume variance b. direct labor time variance c. direct labor rate variance d. variable factory overhead controllable variance ANSWER: a The standard factory overhead rate is $7.50 per machine hour ($6.20 for variable factory overhead and $1.30 for fixed factory overhead) based on 100% of normal capacity of 80,000 machine hours. The standard cost and the actual cost of factory overhead for the production of 15,000 units during August were as follows: Actual:

Variable factory overhead Fixed factory overhead

Standard hours allowed for units produced:

60,000 hours

$360,000 104,000

103. The fixed factory overhead volume variance is a. $12,000 unfavorable b. $12,000 favorable c. $14,000 unfavorable d. $26,000 unfavorable ANSWER: d 104. The variable factory overhead controllable variance is a. $12,000 unfavorable b. $12,000 favorable c. $14,000 unfavorable d. $26,000 unfavorable ANSWER: b

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Chapter 9: Evaluating Variances from Standard Costs 105. Incurring actual indirect factory wages in excess of budgeted amounts for actual production results in a _____ variance. a. quantity b. controllable c. volume d. rate ANSWER: b 106. The controllable variance measures a. operating results at less than normal capacity b. the efficiency of using variable overhead resources c. operating results at more than normal capacity d. control over fixed overhead costs ANSWER: b 107. An unfavorable factory overhead controllable variance may be due to which of the following factors? a. failure to maintain an even flow of work b. machine breakdowns c. unexpected increases in the cost of utilities d. failure to obtain enough sales orders ANSWER: c 108. Favorable volume variances may be harmful when a. machine repairs cause work stoppages b. supervisors fail to maintain an even flow of work c. production in excess of normal capacity cannot be sold d. all of these choices ANSWER: c 109. The following data are given for Bahia Company: Budgeted production Actual production Materials: Standard price per pound Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Copyright Cengage Learning. Powered by Cognero.

1,000 units 980 units $2.00 12 11,800 $23,000 $14.00 per hour 4.5 4,560 $62,928 $27,000 $3.50 per standard direct labor hour Page 19

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Chapter 9: Evaluating Variances from Standard Costs Actual variable overhead costs

$15,500

Overhead is applied on standard labor hours.

The variable factory overhead controllable variance is a. $65 unfavorable b. $65 favorable c. $540 unfavorable d. $540 favorable ANSWER: a 110. The following data are given for Bahia Company: Budgeted production (at 100% of normal capacity) Actual production Materials: Standard price per pound Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs

1,000 units 980 units $2.00 12 11,800 $23,000 $14.00 per hour 4.5 4,560 $62,928 $27,000 $3.50 per standard labor hour $15,500

Overhead is applied on standard labor hours.

The fixed factory overhead volume variance is a. $65 unfavorable b. $65 favorable c. $540 unfavorable d. $540 favorable ANSWER: c The following data are given for Zoyza Company: Budgeted production (at 100% of normal capacity) Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual price paid for materials Labor: Copyright Cengage Learning. Powered by Cognero.

26,000 units 27,500 units $6.50 8 228,000 $1,504,800 Page 20

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Chapter 9: Evaluating Variances from Standard Costs Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead

$22.00 per hour 6.6 183,000 $4,020,000 $1,029,600 $24.50 per standard labor hour $4,520,000

Standard variable overhead rate Actual variable overhead costs Overhead is applied on standard labor hours.

111. The variable factory overhead controllable variance is a. $73,250 favorable b. $73,250 unfavorable c. $59,400 favorable d. $59,400 unfavorable ANSWER: b 112. The fixed factory overhead volume variance is a. $73,250 unfavorable b. $73,250 favorable c. $59,400 favorable d. $59,400 unfavorable ANSWER: c

St. Augustine Corporation originally budgeted for $360,000 of fixed overhead at 100% of normal production capacity.

Production was budgeted to be 12,000 units. The standard hours for production were 5 hours per unit. The variable overhead rate was $3 per hour. Actual fixed overhead was $360,000, and actual variable overhead was $170,000. Actual production was 11,700 units.

113. The variable factory overhead controllable variance is a. $9,000 favorable b. $9,000 unfavorable c. $5,500 favorable d. $5,500 unfavorable ANSWER: c 114. The fixed factory overhead volume variance is a. $9,000 favorable b. $9,000 unfavorable c. $5,500 favorable d. $5,500 unfavorable ANSWER: b Standard Copyright Cengage Learning. Powered by Cognero.

Actual Page 21

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Chapter 9: Evaluating Variances from Standard Costs Variable overhead rate Fixed overhead rate Hours Fixed overhead Actual variable overhead Total factory overhead

$3.35 $1.80 18,900 $46,000

17,955* $67,430 $101,450

*Actual hours are equal to standard hours for units produced.

115. The total factory overhead cost variance is a. $4,866.75 unfavorable b. $4,866.75 favorable c. $8,981.75 favorable d. $8,981.75 unfavorable ANSWER: d 116. The fixed factory overhead volume variance is a. $1,701.00 favorable b. $4,866.75 unfavorable c. $1,701.00 unfavorable d. $4,866.75 favorable ANSWER: c 117. The variable factory overhead controllable variance is a. $8,981.75 favorable b. $7,280.75 unfavorable c. $8,981.75 unfavorable d. $7,280.75 favorable ANSWER: b 118. An unfavorable fixed factory overhead volume variance may be due to which of the following factors? a. sales orders at a low level b. machine breakdowns c. employee inexperience d. all of these choices ANSWER: d 119. At the end of the fiscal year, variances from standard costs are usually transferred to the _____ account. a. direct labor b. factory overhead c. cost of goods sold d. direct materials ANSWER: c 120. Variances from standard costs are included in reports to Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs a. suppliers and creditors b. stockholders c. management d. suppliers and creditors, stockholders, and management ANSWER: c 121. If at the end of the fiscal year, the variances from standard are significant, the variances should be transferred to the a. work in process account b. cost of goods sold account c. finished goods account d. work in process, cost of goods sold, and finished goods accounts ANSWER: d 122. Morocco Desk Co. purchases 6,000 feet of lumber at $6 per foot. The standard price for direct materials is $5. The entry to journalize the purchase and unfavorable direct materials price variance is a. Direct Materials Direct Materials Price Variance Accounts Payable b. Direct Materials Accounts Payable c. Direct Materials Direct Materials Price Variance Accounts Payable d. Work in Process Direct Materials Price Variance Accounts Payable ANSWER: a

30,000 6,000 36,000 30,000 30,000 36,000 6,000 30,000 36,000 6,000 30,000

123. A company records its inventory purchases at standard cost but also records purchase price variances. The company purchased 5,000 widgets at $8.00 each, and the standard cost for the widgets is $7.60. Which of the following would be included in the journal entry? a. debit Accounts Payable, $38,000 b. credit Direct Materials Price Variance, $2,000 c. debit Accounts Payable, $2,000 d. debit Direct Materials Price Variance, $2,000 ANSWER: d 124. An unfavorable staff time variance may be the result of a. overscheduling staff b. insufficient staff training c. difficult room cleaning situations d. all of these choices ANSWER: d 125. Which of the following is the correct formula for the direct labor time variance in a service business?

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Chapter 9: Evaluating Variances from Standard Costs a. Planned Staff Hours – Actual Staff Hours b. (Actual Staff Hours – Standard Staff Hours) × Actual Rate per Hour c. (Actual Staff Hours – Standard Staff Hours) × Standard Rate per Hour d. (Actual Staff – Planned Staff) × Actual Rate per Hour × Standard Shift Hours ANSWER: c 126. SeaSpray Resort pays housekeeping staff $15 per hour (standard) and expects its 1,000 rooms to be cleaned in 750 hours (standard). If staff logged 800 hours to clean the rooms, the direct labor time variance is a. $750 favorable b. 50 hours unfavorable c. 50 hours favorable d. $750 unfavorable ANSWER: d 127. Which of the following is the correct formula for the revenue volume variance? a. Planned Revenues – Actual Revenues b. (Planned Selling Price per Unit – Actual Selling Price per Unit) × Actual Units Sold c. (Planned Units Sold – Actual Units Sold) × Actual Sales Price d. (Planned Units Sold – Actual Units Sold) × Planned Sales Price ANSWER: d 128. If the total revenue variance is favorable and the revenue price variance is unfavorable, then the revenue volume variance must a. exceed the revenue price variance and be favorable b. be less than the revenue price variance and be unfavorable c. be less than the revenue price variance and be favorable d. be equal to the revenue price variance and be favorable ANSWER: a 129. Planned sales are 10,000 units at $7.00 per unit. Actual sales are 11,000 units at $6.50 per unit. Which of the following statements is false? a. The revenue price variance is unfavorable. b. The revenue volume variance is favorable. c. The total revenue variance is unfavorable. d. The revenue volume variance is $7,000.

ANSWER: c 130. Which of the following represents an unfavorable cost variance? a. Actual cost > Standard cost at actual volumes b. Actual cost < Standard cost at actual volumes c. Actual cost < Standard cost at normal capacity d. Actual cost > Standard cost at normal capacity ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs 131. Which of the following represents a favorable cost variance? a. Actual cost > Standard cost at actual volumes b. Actual cost < Standard cost at actual volumes c. Actual cost < Standard cost at normal capacity d. Actual cost > Standard cost at normal capacity ANSWER: b 132. Which of the following is sometimes called a currently attainable standard? a. ideal standard b. theoretical standard c. normal standard d. par ANSWER: c 133. Which of the following is the correct formula for the direct materials quantity variance? a. (Actual Quantity × Actual Price) – (Standard Quantity × Standard Price) b. (Actual Quantity – Standard Quantity) × Actual Price c. (Actual Quantity – Standard Quantity) × Standard Price d. (Actual Price – Standard Price) × Actual Quantity ANSWER: c 134. Which of the following is the correct formula for the direct labor rate variance? a. (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour b. (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours c. (Actual Quantity – Standard Quantity) × Standard Price d. (Actual Price – Standard Price) × Actual Quantity ANSWER: b 135. Which of the following is the correct formula for the direct labor time variance? a. (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour b. (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours c. (Actual Hours × Actual Rate) – (Standard Hours × Standard Rate) d. (Actual Direct Labor Hours – Standard Direct Labor Hours) × Actual Rate per Hour ANSWER: a 136. Which of the following is the correct formula for the direct materials price variance? a. (Actual Quantity × Actual Price) – (Standard Quantity × Standard Price) b. (Actual Price – Standard Price) × Standard Quantity c. (Actual Quantity – Standard Quantity) × Standard Price d. (Actual Price – Standard Price) × Actual Quantity ANSWER: d 137. Define ideal and normal standards. Which type of standard should be used and why?

ANSWER: Ideal standards are standards that are only achievable under perfect operating conditions. Normal standards Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs (also called currently attainable standards) allow for normal difficulties and mistakes. They can be attained with reasonable effort.

Companies should use normal standards because employees are more likely to put forth their best efforts when standards are reasonable. The use of ideal standards may have a negative impact on performance because they are likely to be viewed by employees as unrealistic.

138. Compute the standard cost for one pair of boots, based on the following standards for each pair of boots: Standard materials quantity: Standard labor: Factory overhead: ANSWER: Standard material: Standard labor: Factory overhead: Total standard cost

1.25 yards of leather at $35.00 per yard 9 hours at $25.75 per hour $1.75 per direct labor hour 1.25 yards at $35.00 per yard 9 hours at $25.75 per hour 9 hours at $1.75 per hour

$ 43.75 231.75 15.75 $291.25

139. Compute the standard cost for one hat, based on the following standards for each hat: Standard materials quantity: Standard labor: Factory overhead: ANSWER: Standard material: Standard labor: Factory overhead: Total standard cost

3/4 yard of fabric at $5.00 per yard 2 hours at $5.75 per hour $3.20 per direct labor hour 3/4 yard at $5.00 per yard $ 3.75 2 hours at $5.75 per hour 11.50 2 hours at $3.20 per hour 6.40 $21.65

140. Sally’s Chocolate Company makes gourmet cupcakes which are sold by the dozen. Compute the standard cost for one dozen cupcakes, based on the following standards: Standard materials quantity: 4.25 cups of ingredients at $0.56 per cup Standard labor: 1.10 hours at $8.30 per hour Factory overhead: $3.80 per direct labor hour ANSWER: Standard materials: 4.25 cups at $0.56 per cup $ 2.38 Standard labor: 1.10 hours at $8.30 per hour 9.13 Factory overhead: 1.10 hours at $3.80 per hour 4.18 Total standard cost $15.69 141. Ruby Company produces a chair for which the standard specifies 5 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,500 chairs were manufactured, using 43,600 yards at a cost of $7.55 per yard.

Determine the (a) direct materials price variance, (b) direct materials quantity variance, and (c) total direct materials cost variance.

ANSWER: a. Direct materials price variance [($7.50 – $7.55) × 43,600] $ 2,180 unfavorable b. Direct materials quantity variance {[43,600 – (5 × 8,500)] × $7.50} 8,250 unfavorable c. Total direct materials cost variance $10,430 unfavorable Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs 142. Ruby Company produces a chair for which the standard specifies 5 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,400 chairs were manufactured, using 43,700 yards at a cost of $7.30 per yard.

Determine the (a) direct materials price variance, (b) direct materials quantity variance, and (c) total direct materials cost variance.

ANSWER: a. Direct materials price variance [($7.30 – $7.50) × 43,700] $ (8,740) favorable b. Direct materials quantity variance {[43,700 – (5 × 8,400)] × $7.50} 12,750 unfavorable c. Total direct materials cost variance $ 4,010 unfavorable

143. Ruby Company produces a chair for which the standard specifies 5 yards of material per unit. The standard price of one yard of material is $7.60. During the month, 8,500 chairs were manufactured, using 40,000 yards at a cost of $7.50.

Determine the (a) direct materials price variance, (b) direct materials quantity variance, and (c) total direct materials cost variance.

ANSWER: a. Direct materials price variance [($7.50 – $7.60) × 40,000] $ (4,000) favorable b. Direct materials quantity variance {[40,000 – (8,500 × 5)] × $7.60} (19,000) favorable c. Total direct materials cost variance $(23,000) favorable

144. Japan Company produces lamps that require 2.25 standard hours per unit at a standard hourly rate of $15.00 per hour.

Production of 7,700 units required 19,250 hours at an hourly rate of $14.90 per hour.

What is the direct labor (a) rate variance, (b) time variance, and (c) total cost variance?

ANSWER: a. Direct labor rate variance [($14.90 – $15.00) × 19,250] $ (1,925) favorable b. Direct labor time variance {[19,250 – (7,700 × 2.25)] × $15.00} 28,875 unfavorable c. Total direct labor cost variance $26,950 unfavorable 145. Tippi Company produces lamps that require 2.25 standard hours per unit at a standard hourly rate of $15.00 per hour.

Production of 7,700 units required 17,550 hours at an hourly rate of $15.20 per hour.

What is the direct labor (a) rate variance, (b) time variance, and (c) total cost variance?

ANSWER: a. Direct labor rate variance [($15.20 – $15.00) × 17,550] $3,510 unfavorable b. Direct labor time variance {[17,550 – (2.25 × 7,700)] × $15.00} 3,375 unfavorable c. Total direct labor cost variance $6,885 unfavorable 146. Hsu Company produces a part with a standard of 5 yards of material per unit. The standard price of one yard of material is $8.50. During the month, 8,800 parts were manufactured, using 45,700 yards of material at a cost of $8.30.

Determine the direct materials (a) price variance, (b) quantity variance, and (c) total cost variance.

ANSWER: a. Direct materials price variance [($8.30 – $8.50) × 45,700] $ (9,140) favorable b. Direct materials quantity variance {[45,700 – (5 × 8,800)] × $8.50} 14,450 unfavorable c. Total direct materials cost variance $ 5,310 unfavorable

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Chapter 9: Evaluating Variances from Standard Costs 147. Aquatic Corp.’s standard material requirement to produce one Model 2000 is 15 pounds of material at $110 per pound. Last month, Aquatic purchased 170,000 pounds of material at a total cost of $17,850,000. It used 162,000 pounds to produce 10,000 units of Model 2000.

Determine the direct materials price variance and direct materials quantity variance, and indicate whether each variance is favorable or unfavorable.

ANSWER: Actual Cost = $17,850,000 ÷ 170,000 pounds = $105 per pound Direct Materials Price Variance = ($105 – $110) × 170,000 = $(850,000) favorable Direct Materials Quantity Variance = [162,000 – (15 × 10,000)] × $110 = $1,320,000 unfavorable The following data are given for Taylor Company: Budgeted production Actual production Materials: Standard price per pound Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs

1,000 units 980 units $2.00 12 11,800 $23,000 $14.00 per hour 4.5 4,560 $62,928 $27,000 $3.50 per standard labor hour $15,500

Overhead is applied based on standard labor hours.

148. Compute the direct materials price and quantity variances for Taylor Company.

ANSWER: Direct materials price variance: $23,000 – ($2.00 × 11,800) = $(600) favorable Direct materials quantity variance: [11,800 – (980 × 12)] × $2.00 = $80 unfavorable 149. Compute the direct labor rate and time variances for Taylor Company.

ANSWER: Direct labor rate variance: $62,928 – ($14.00 × 4,560) = $(912) favorable Direct labor time variance: [4,560 – (980 × 4.5)] × $14.00 = $2,100 unfavorable 150. Standard and actual costs for direct materials for the manufacture of 1,000 units of product were as follows: Actual costs Standard costs

1,550 lbs. at $9.10 1,600 lbs. at $9.00

Determine the direct materials (a) quantity variance, (b) price variance, and (c) total cost variance.

ANSWER: a.

Actual direct materials quantity 1,550 lbs.

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Chapter 9: Evaluating Variances from Standard Costs Standard direct materials quantity Direct materials quantity variance × Standard direct materials price Direct materials quantity variance b.

Actual direct materials price Standard direct materials price Direct materials price variance × Actual direct materials quantity Direct materials price variance c.

Direct materials quantity variance Direct materials price variance Total direct materials cost variance

1,600 lbs.

(50) lbs. × $9.00 $ (450) favorable $

9.10 per lb.

9.00 per lb. $ 0.10 per lb. × 1,550 $ 155 unfavorable $(450) favorable 155 unfavorable $(295) favorable

151. Standard and actual costs for direct labor for the manufacture of 300 units of product were as follows: Actual costs Standard costs

125 hours at $54 131 hours at $53

Determine the direct labor (a) time variance, (b) rate variance, and (c) total cost variance.

ANSWER: a.

Actual direct labor time 125 hours Standard direct labor time 131 hours Direct labor time variance (6) hours × Standard direct labor rate × $53 Direct labor time variance $(318) favorable b.

Actual direct labor rate Standard direct labor rate Direct labor rate variance × Actual direct labor time Direct labor rate variance

$ 54 per hour 53 per hour $ 1 per hour ×125 $125 unfavorable

c.

Direct labor time variance Direct labor rate variance Total direct labor cost variance

$(318) favorable 125 unfavorable $(193) favorable

Direct labor time variance Direct labor rate variance Total direct labor cost variance

$(318) favorable 125 unfavorable $(193) favorable

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Chapter 9: Evaluating Variances from Standard Costs 152. Standard and actual costs for direct labor for the manufacture of 1,000 units of product were as follows: Actual costs Standard costs

950 hours at $37 975 hours at $36

Determine the direct labor (a) time variance, (b) rate variance, and (c) total cost variance.

ANSWER: a.

Actual time 950 hours Standard time 975 hours (25) hours × Standard rate × $36 Direct labor time variance $(900) favorable b.

Actual rate Standard rate × Actual time Direct labor rate variance

$ 37 per hour 36 per hour $1 per hour ×950 $950 unfavorable

c.

Direct labor time variance $(900) favorable Direct labor rate variance 950 unfavorable Total direct labor cost variance $ 50 unfavorable

153. The following information is for the standard and actual costs for Happy Corporation: Standard Costs: Budgeted units of production 16,000 [80% (or normal) capacity] Standard labor hours per unit 4 Standard labor rate $26 per hour Standard material per unit 8 lbs.

Standard material cost $12 per pound Standard variable overhead rate $15 per labor hour Budgeted fixed overhead $640,000 Fixed overhead rate is based on budgeted labor hours at 80% (or normal) capacity.

Actual Costs: Actual production 16,500 units Actual material purchased and used 130,000 pounds Actual total material cost $1,600,000 Actual labor 65,000 hours Actual total labor costs $1,700,000 Actual variable overhead $1,000,000 Actual fixed overhead $640,000 Determine (a) the direct materials quantity variance, price variance, and total cost variance; (b) the direct labor time variance, rate variance, and total cost variance; and (c) the factory overhead volume variance, controllable variance, and total factory overhead cost variance.

(Note: Do not round interim calculations.)

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Chapter 9: Evaluating Variances from Standard Costs ANSWER: a. Direct materials: Quantity variance: Actual Quantity × Standard Price (130,000 lbs. × $12) Standard Quantity × Standard Price (16,500 units × 8 lbs. × $12) Quantity variance (favorable)

$ 1,560,000 (1,584,000) $ (24,000)

Price variance: Actual total price Actual Quantity × Standard Price (130,000 lbs. × $12) Price variance (unfavorable)

$ 1,600,000 (1,560,000) $ 40,000

Total direct materials cost variance: Price variance (unfavorable) Quantity variance (favorable) Total (unfavorable) b. Direct labor: Time variance: Actual Hours × Standard Rate (65,000 hrs. × $26) Standard Hours × Standard Rate (16,500 units × 4 hr. per unit × $26) Time variance (favorable)

$ 40,000 (24,000) $ 16,000

$ 1,690,000 (1,716,000) $

(26,000)

Rate variance: Actual labor costs Actual Hours × Standard Rate (65,000 hrs. × $26) Rate variance (unfavorable)

$1,700,000 (1,690,000) $ 10,000

Total direct labor cost variance: Time variance (favorable) Rate variance (unfavorable) Total (favorable)

$(26,000) 10,000 $(16,000)

c. Factory overhead: Volume variance: Actual fixed overhead Applied fixed overhead [(16,500 units × 4 hrs. per unit ) × ($640,000 ÷ 64,000)] Volume variance (favorable)

$ 640,000 (660,000) $ (20,000)

Controllable variance: Actual variable overhead $1,000,000 Applied variable overhead [(16,500 units × 4 hrs. per unit) × $15] (990,000) Controllable variance (unfavorable) $ 10,000 Total factory overhead cost variance: Volume variance (favorable) Controllable variance (unfavorable) Total (favorable)

$(20,000) 10,000 $(10,000)

154. The Finishing Department of Pinnacle Manufacturing Co. prepared the following factory overhead cost budget for October of the current year, during which it expected to operate at a 100% capacity of 10,000 machine hours.

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Chapter 9: Evaluating Variances from Standard Costs Variable costs: Indirect factory wages Power and light Indirect materials Total variable cost Fixed costs: Supervisory salaries Depreciation of plant and equipment Insurance and property taxes Total fixed cost Total factory overhead

$18,000 12,000 4,000 $34,000 $12,000 8,800 3,200 24,000 $58,000

During October, the plant was operated for 9,000 machine hours and the factory overhead costs incurred were as follows: indirect factory wages, $16,400; power and light, $10,000; indirect materials, $3,000; supervisory salaries, $12,000; depreciation of plant and equipment, $8,800; and insurance and property taxes, $3,200.

Prepare a factory overhead cost variance report for October. (The budgeted amounts for actual amount produced should be based on 9,000 machine hours.)

ANSWER: Pinnacle Manufacturing Co.—Finishing Department Factory Overhead Cost Variance Report For the Month Ending October 31 Productive capacity for the month (100% of normal)

10,000 hours 9,000 hours

Actual production for the month

Actual Cost Variable factory overhead costs: Indirect factory wages $16,400 Power and light 10,000 Indirect materials 3,000 Total variable factory $29,400 overhead cost Fixed factory overhead costs: Supervisory salaries $12,000 Depreciation of plant and equipment 8,800 Insurance and property taxes 3,200 Total fixed factory overhead cost $24,000 Total factory overhead cost $53,400 Total controllable Copyright Cengage Learning. Powered by Cognero.

Variances Budget (at Actual Production) Unfavorable (Favorable)

$16,200 10,800 3,600

$200 $ (800) (600)

$30,600

$12,000 8,800 3,200 $24,000 $54,600 $200

$(1,400) Page 32

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Chapter 9: Evaluating Variances from Standard Costs variances Net controllable variance —favorable Volume variance— unfavorable: Capacity not used at the standard rate for fixed factory overhead (1,000 × $2.40) Total factory overhead cost variance—unfavorable

$(1,200)

2,400 $ 1,200

155. Tucker Company produced 8,900 units of product that required 3.25 standard hours per unit. The standard variable overhead cost per unit is $4.00 per hour. The actual variable factory overhead was $111,000.

Determine the variable factory overhead controllable variance.

ANSWER: The variable factory overhead controllable variance is $(4,700) favorable. [$111,000 – (8,900 × 3.25 × $4.00)] 156. Titus Company produced 8,900 units of a product that required 3.25 standard hours per unit. The standard fixed overhead cost per unit is $1.20 per hour at 29,000 hours, which is 100% of normal capacity.

Determine the fixed factory overhead volume variance.

ANSWER: The fixed factory overhead volume variance is $90 unfavorable. {[29,000 hours – (8,900 units × 3.25 hours)] × $1.20}.

157. Greyson Company produced 8,300 units of product that required 4.25 standard hours per unit. Determine the standard fixed overhead cost per unit at 27,000 hours, which is 100% of normal capacity, if the favorable fixed factory overhead volume variance is $14,895.

ANSWER: [27,000 – (8,300 × 4.25)] × X = $(14,895) favorable X = $1.80 158. The following information relates to manufacturing overhead for Chapman Company: Standards: Total fixed factory overhead $450,000 Estimated production 25,000 units (100% of normal capacity) Overhead rates are based on machine hours.

Standard hours allowed per unit produced 2 Fixed overhead rate $9.00 per machine hour Variable overhead rate $3.50 per hour Actual: Fixed factory overhead $450,000 Production 24,000 units Variable overhead $170,000 Compute (a) the fixed factory overhead volume variance, (b) the variable factory overhead controllable variance, and (c) the total factory overhead cost variance.

ANSWER: a.

Productive capacity of 25,000 units 50,000 hours Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs Standard for product produced (24,000 units) Productive capacity not used Standard fixed factory overhead cost rate Fixed FOH volume variance (unfavorable) b.

Actual variable overhead incurred Budgeted factory overhead for standard units produced (applied) (24,000 × 2 × $3.50) Variable FOH controllable variance (unfavorable) c.

Volume variance (unfavorable) Controllable variance (unfavorable) Total cost variance (unfavorable)

(48,000) hours 2,000 hours × $9.00 per hour $18,000 $ 170,000

(168,000) $ 2,000 $18,000 2,000 $20,000

159. Using the following information, prepare a factory overhead cost budget for Andover Company where the total factory overhead cost is $75,500 at normal capacity (100%). Include capacity at 75%, 90%, 100%, and 110%. Total variable cost is $6.25 per unit and total fixed costs are $38,000. The information is for the month ending August 31. (Hint: Determine units produced at normal capacity.)

ANSWER: Andover Company Factory Overhead Cost Budget For the Month Ending August 31 Percent of normal capacity 75% 90% 100% 110% Units produced 4,500 5,400 X 6,600 Variable costs ($6.25 per unit) Fixed costs Total factory overhead cost

$28,125 $33,750 $37,500 $41,250 38,000 38,000 38,000 38,000 $66,125 $71,750 $75,500 $79,250

X = $37,500 ÷ $6.25 X = 6,000 units 160. Using the following information, prepare a factory overhead cost budget for Jacob Company where the total factory overhead cost is $206,500 at normal capacity (100%). Include capacity at 60%, 80%, 100%, and 120%. Total variable cost is $15.25 per unit and total fixed costs are $54,000. The information is for the month ending October 31. (Hint: Determine units produced at normal capacity.)

ANSWER: Jacob Company Factory Overhead Cost Budget For the Month Ending October 31 Percent of normal 60% 80% 100% 120% capacity Units produced 6,000 8,000 X 12,000 Variable costs ($15.25 per unit Fixed costs

$ 91,500 $122,000 $152,500 $183,000 54,000

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54,000

54,000

54,000 Page 34

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Chapter 9: Evaluating Variances from Standard Costs Total factory overhead cost

$145,500 $176,000 $206,500 $237,000

X = $152,500 ÷ $15.25 X = 10,000 units

161. Prepare an income statement (through operating income) that includes variances for presentation to management, using the following data from the records of Greenway Manufacturing Company for November of the current year: Administrative expenses $ 73,500 Cost of goods sold (at standard) 470,000 Direct materials quantity variance—favorable 1,200 Direct materials price variance—favorable 2,400 Direct labor time variance—unfavorable 900 Direct labor rate variance—favorable 500 Factory overhead volume variance—unfavorable 10,000 Factory overhead controllable variance—favorable 1,500 Sales 950,000 Selling expenses 165,800 ANSWER: Greenway Manufacturing Company Income Statement For the Month Ending November 30 Sales $ 950,000 Cost of goods sold—at standard (470,000) Gross profit—at standard $ 480,000 Unfavorable Favorable Less variances from standard cost: Direct materials price $(2,400) Direct materials quantity (1,200) Direct labor rate (500) Direct labor time $ 900 Factory overhead controllable (1,500) Factory overhead volume 10,000 Net variance from standard cost— unfavorable (5,300) Gross profit—actual $ 474,700 Operating expenses: Selling expenses $165,800 Administrative expenses 73,500 Total operating expenses (239,300) Operating income $ 235,400 162. Oak Company produces a chair for which the standard is 6 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,500 chairs were manufactured, using 48,875 yards.

Journalize the entry to record the direct materials used in production.

ANSWER: Work in Process (8,500 × 6 × $7.50) 382,500.00 Direct Materials Quantity Variance 15,937.50 [(48,875 – 51,000) × $7.50] Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs Materials (48,875 × $7.50)

366,562.50

163. Prepare an income statement that includes variances for the year ending December 31 through gross profit for Baxter Company using the following information. Baxter Company sold 8,600 units at $125 per unit. Normal production is 9,000 units. (Do not round fixed overhead rate calculation when determining fixed factory overhead volume variance.)

Standard: 5 yards per unit at $6.30 per yard Standard: 2.25 hours per unit at $15.00

Actual yards used: 43,240 yards at $6.25 per yard Actual hours worked: 19,100 at $14.90 per hour

Standard: Variable overhead at $1.05 per unit Standard: Fixed overhead $211,500 Actual total factory overhead: (budgeted and actual amount) $235,500 ANSWER: Baxter Company Income Statement Through Gross Profit For the Year Ending December 31 Sales Cost of goods sold—at standard* Gross profit—at standard

$1,075,000 (772,280) $ 302,720 Unfavorable Favorable

Less variances from standard cost: Direct materials price Direct materials quantity Direct labor rate Direct labor time Factory overhead controllable Factory overhead volume Net variance from standard cost—unfavorable Gross profit—actual

$(2,162) $ 1,512 (1,910) (3,750) 14,970 9,400 (18,060) $ 284,660

*(5 × $6.30) + (2.25 × $15.00) + $1.05 + ($211,500 ÷ 9,000) = $89.80; $89.80 × 8,600 units = $772,280 164. Ajay Company records standard costs and variances in its accounts. Journalize the entry to record the purchase of 6,000 widgets at $8.00 per unit, assuming widgets have a standard cost of $8.15 per unit.

ANSWER: Materials (6,000 × $8.15) 48,900 Direct Materials Price Variance 900 Accounts Payable (6,000 × $8.00) 48,000 165. Ashlee Company records standard costs and variances in its accounts. Journalize the entry to record the purchase of 4,500 widgets at $7.45 per unit, assuming widgets have a standard cost of $7.15 per unit.

ANSWER: Materials (4,500 × $7.15) 32,175 Direct Materials Price Variance 1,350 Accounts Payable (4,500 × $7.45) 33,525 166. Robin Company records standard costs and variances in its accounts. Robin purchased and used 520 pounds of direct Copyright Cengage Learning. Powered by Cognero.

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Chapter 9: Evaluating Variances from Standard Costs materials to produce a product with a 510 pound standard direct materials requirement. The standard price is $2.10 per pound. The actual materials price was $2.00 per pound.

Journalize the entries to record (a) the purchase of the materials and (b) the materials used in production.

ANSWER: a.

Materials (520 × $2.10) 1,092 Direct Materials Price Variance 52 Accounts Payable (520 × $2.00) 1,040 b.

Work in Process (510 × $2.10) Direct Materials Quantity Variance Materials (520 × $2.10)

1,071 21 1,092

167. Titus Company purchased and used 650 pounds of tomatoes (direct materials) to produce a taco sauce with a 635 pound standard direct materials requirement. The standard materials price is $22.40 per pound. The actual price of the tomatoes was $22.20 per pound.

Journalize the entries to record (a) the purchase of the tomatoes and (b) the tomatoes used in production. Titus records standard costs and variances in its accounts.

ANSWER: a.

Materials (650 × $22.40) 14,560 Direct Materials Price Variance 130 Accounts Payable (650 × $22.20) 14,430 b.

Work in Process (635 × $22.40) Direct Materials Quantity Variance Materials (650 × $22.40)

14,224 336 14,560

168. Rosser Company records standard costs and variances in its accounts. Rosser Company produces a container that requires 4 yards of material per unit. The standard price of one yard of material is $4.50. During the month, 9,500 chairs were manufactured using 37,300 yards of material.

Journalize the entry to record the direct materials used in production.

ANSWER: Work in Process (9,500 × 4 × $4.50) 171,000 Direct Materials Quantity Variance Materials (37,300 × $4.50)

3,150 167,850

169. Robin Company records standard costs and variances in its accounts. Robin Company purchased and used 500 pounds of direct materials to produce a product with a 520-pound standard direct materials requirement. The standard materials price is $1.90 per pound. The actual materials price was $2.00 per pound.

Journalize the entries to record (a) the purchase of the materials and (b) the materials used in production.

ANSWER: a.

Materials (500 × $1.90) 950 Direct Materials Price Variance 50 (500 × $0.10) Accounts Payable (500 × $2.00) 1,000 b.

Work in Process (520 × $1.90) Direct Materials Quantity Variance Materials (500 × $1.90)

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Chapter 9: Evaluating Variances from Standard Costs

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Chapter 10: Evaluating Decentralized Operations True / False 1. Separation of businesses into more manageable operating units is termed decentralization. a. True b. False ANSWER: True 2. The process of measuring and reporting operating data by responsibility centers is termed responsibility accounting. a. True b. False ANSWER: True 3. A decentralized business organization is one in which all major planning and operating decisions are made by top management. a. True b. False ANSWER: False 4. A centralized business organization is one in which all major planning and operating decisions are made by top management. a. True b. False ANSWER: True 5. The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer. a. True b. False ANSWER: True 6. The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers. a. True b. False ANSWER: True 7. One of the advantages of decentralization is that delegating authority to managers closest to the operation always results in better decisions. a. True b. False ANSWER: False 8. Developing and retaining quality managers are advantages of decentralization. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 9. A responsibility center in which the department manager has responsibility for and authority over costs, revenues, and assets invested in the department is termed a cost center. a. True b. False ANSWER: False 10. A responsibility center in which the authority over and responsibility for costs and revenues is vested in the department manager is termed a profit center. a. True b. False ANSWER: True 11. In an investment center, the manager has the responsibility and the authority to make decisions that affect not only costs and revenues, but also the plant assets invested in the center. a. True b. False ANSWER: True 12. Budget performance reports prepared for the vice president of production would generally contain less detail than reports prepared for the various plant managers. a. True b. False ANSWER: True 13. The amount of detail presented in a budget performance report for a cost center depends upon the level of management to which the report is directed. a. True b. False ANSWER: True 14. The primary accounting tool for controlling and reporting for cost centers is a budget performance report. a. True b. False ANSWER: True 15. Responsibility accounting reports that are given to lower-level managers are usually very detailed, while higher-level managers will be given a summary report. a. True b. False ANSWER: True 16. A manager in a cost center also has responsibility and authority over the revenues. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 17. The plant managers in a cost center can be held responsible for major differences between budgeted and actual costs in their plants. a. True b. False ANSWER: True 18. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed direct operating expenses. a. True b. False ANSWER: True 19. Operating expenses incurred by support departments are indirect expenses to a profit center. a. True b. False ANSWER: True 20. The Human Resources Department in a department store is an example of a support department. a. True b. False ANSWER: True 21. The underlying principle of allocating indirect operating expenses to departments is to assign to each department an amount of expense proportional to the revenues of that department. a. True b. False ANSWER: False 22. Responsibility accounting reports for profit centers are normally in the form of income statements. a. True b. False ANSWER: True 23. The manager of a profit center makes decisions concerning the fixed assets invested in the center. a. True b. False ANSWER: False 24. The profit center income statement should include only revenues and expenses that are controlled by the manager. a. True b. False ANSWER: True 25. The manager of the Furniture Department (profit center) of a leading retailer controls the salaries of departmental personnel.

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Chapter 10: Evaluating Decentralized Operations a. True b. False ANSWER: True 26. Support department allocations are similar to the expenses of a profit center that purchases services from a source outside the company. a. True b. False ANSWER: True 27. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of cost drivers. a. True b. False ANSWER: True 28. The rates at which centralized services are charged to each division are called support department allocation rates. a. True b. False ANSWER: True 29. The profit center income statement should include only controllable revenues and expenses. a. True b. False ANSWER: True 30. Controllable expenses are those that can be influenced by the decisions of the profit center manager. a. True b. False ANSWER: True 31. Three measures of investment center performance are operating income, return on investment, and residual income. a. True b. False ANSWER: True 32. The major shortcoming of operating income as an investment center performance measure is that it ignores the amount of assets invested in the center. a. True b. False ANSWER: True 33. If Division Q's yearly operating income was $30,000 on invested assets of $200,000, the return on investment is 15%. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations ANSWER: True 34. The return on investment may be computed by multiplying investment turnover by the profit margin. a. True b. False ANSWER: True 35. If the profit margin for a division is 8% and the investment turnover is 1.2, the return on investment is 9.6%. a. True b. False ANSWER: True 36. If the profit margin for a division is 11% and the investment turnover is 1.5, the return on investment is 7.3%. a. True b. False ANSWER: False 37. Investment turnover (as used in determining the return on investment) focuses on the rate of profit earned on each sales dollar. a. True b. False ANSWER: False 38. The ratio of sales to investment is termed the return on investment. a. True b. False ANSWER: False 39. The major advantage of the return on investment over operating income as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated. a. True b. False ANSWER: True 40. By using the return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals that will increase the overall return on investment for the company. a. True b. False ANSWER: False 41. The excess of divisional operating income over a minimum acceptable operating income is termed the residual income. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 42. The minimum accepted divisional operating income is set by top management by establishing a maximum return considered acceptable on invested assets. a. True b. False ANSWER: False 43. The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum return on investment but also to the total magnitude of operating income earned by each division. a. True b. False ANSWER: True 44. The ratio of operating income to sales is termed the profit margin component of the return on investment. a. True b. False ANSWER: True 45. The ratio of sales to invested assets is termed the investment turnover component of the return on investment. a. True b. False ANSWER: True 46. If operating income for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%. a. True b. False ANSWER: False 47. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%. a. True b. False ANSWER: True 48. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2. a. True b. False ANSWER: True 49. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 5. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 50. If operating income for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3. a. True b. False ANSWER: False 51. If operating income for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3. a. True b. False ANSWER: True 52. If divisional operating income is $75,000, invested assets are $737,500, and the minimum return on invested assets is 6%, the residual income is $36,750. a. True b. False ANSWER: False 53. If divisional operating income is $100,000, invested assets are $850,000, and the minimum return on invested assets is 8%, the residual income is $68,000. a. True b. False ANSWER: False 54. The profit margin component of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar. a. True b. False ANSWER: True 55. In return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and indicates the rate at which sales are being generated for each dollar of invested assets. a. True b. False ANSWER: True 56. The minimum acceptable divisional operating income is set by top management by establishing a minimum return considered acceptable on invested assets. a. True b. False ANSWER: True 57. A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable return on assets set by upper management. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations ANSWER: False 58. The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so. a. True b. False ANSWER: True 59. Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers. a. True b. False ANSWER: True 60. Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. a. True b. False ANSWER: False 61. Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. a. True b. False ANSWER: False 62. The negotiated price approach allows the managers of decentralized units to agree on the transfer price. a. True b. False ANSWER: True 63. It is beneficial for divisions in a company to negotiate a transfer price when the supplying division has unused capacity in its plant. a. True b. False ANSWER: True 64. The cost price approach for transfer pricing is most often used between responsibility centers organized as cost centers that are not concerned with the revenue. a. True b. False ANSWER: True 65. The right or license granted to an individual or group to market another company's goods or services is called a patent. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations ANSWER: False 66. The right or license granted to an individual or group to market another company's goods or services is called a franchise. a. True b. False ANSWER: True 67. The entity that provides a franchise is called the franchisee. a. True b. False ANSWER: False 68. A franchise fee is often expressed as a percent of revenues earned by the franchisee. a. True b. False ANSWER: True Multiple Choice 69. Which of the following would be most effective in a small owner/manager-operated business? a. profit centers b. centralization c. investment centers d. cost centers ANSWER: b 70. Businesses that are separated into two or more manageable units in which managers have authority and responsibility for operations are said to be a. decentralized b. consolidated c. diversified d. centralized ANSWER: a 71. Which of the following is an advantage of decentralized operations? a. competition among managers b. duplication of operations c. price cutting by departments that are competing in the same product market d. managers closest to operations make decisions ANSWER: d 72. Which of the following statements best describes a decentralized company? a. One owner prepares plans and makes decisions for the entire company. b. Each of many units is responsible for its own operations and decision making.

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Chapter 10: Evaluating Decentralized Operations c. For a major company, operating decisions are made by top management. d. None of these choices ANSWER: b 73. Which of the following is a disadvantage of decentralization? a. Managers make better decisions when closer to the operations of the company. b. Expertise in all areas of the business is difficult; decentralization makes it better to delegate certain responsibilities. c. Each decentralized operation purchases its own assets and pays for operating costs. d. Decentralized managers can respond quickly to customer needs.

ANSWER: c 74. Which of the following are the three common types of responsibility centers? a. cost center, profit center, and investment center b. profit center, investment center, and revenue center c. investment center, revenue center, and cost center d. revenue center, profit center, and cost center ANSWER: a 75. Which of the following is a disadvantage of decentralization? a. Decisions made by one manager may negatively affect the profitability of the entire company. b. Decentralization helps retain quality managers. c. Managers closest to the operations make decisions. d. Managers are able to acquire expertise in their areas of responsibility.

ANSWER: a 76. A manager is responsible for costs but not revenues in a(n) _____ center. a. profit b. investment c. volume d. cost ANSWER: d 77. In a cost center, the manager has responsibility and authority for making decisions that affect a. revenues b. investments in assets c. both costs and revenues d. costs ANSWER: d 78. A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n) _____ center. a. profit b. investment Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations c. volume d. cost ANSWER: a 79. For higher levels of management, responsibility accounting reports a. are more detailed than for lower levels of management b. are more summarized than for lower levels of management c. contain about the same level of detail as reports for lower levels of management d. are rarely provided or reviewed ANSWER: b 80. Most manufacturing plants are considered cost centers because they have control over a. sales and costs b. fixed assets and costs c. costs only d. fixed assets and sales ANSWER: c 81. Which of the following is a measure of a cost center manager’s performance? a. budget performance report b. return on investment and residual income measures c. divisional income statements d. balance sheet ANSWER: a 82. In a profit center, the department manager has responsibility for and the authority to make decisions that affect a. not only costs and revenues, but also assets invested in the center b. the assets invested in the center, but not costs and revenues c. both costs and revenues for the department or division d. costs and assets invested in the center, but not revenues ANSWER: c 83. Which of the following expenses incurred by a department store would be a direct expense of the Sporting Goods Department? a. depreciation expense—office equipment b. commissions earned by Sporting Goods Department sales clerks c. uncollectible accounts expense d. office salaries ANSWER: b 84. In a profit center, the manager has responsibility and authority for making decisions that affect a. long-term liabilities b. assets c. investments Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations d. revenues ANSWER: d 85. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are _____ expenses. a. miscellaneous administrative b. direct operating c. indirect d. fixed ANSWER: b 86. In evaluating the profit center manager, the operating income should be compared a. across profit centers b. to a budget c. to the competitor's net income d. to the total company earnings per share ANSWER: b 87. Operating income of the Pierce Automobile Division is $2,225,000. If operating income before support department allocations is $3,250,000, a. operating expenses are $1,025,000 b. total support department allocations are $1,025,000 c. noncontrollable charges are $1,025,000 d. direct manufacturing charges are $1,025,000 ANSWER: b 88. The costs of services charged to a profit center on the basis of its use of those services are a. operating expenses b. noncontrollable charges c. support department allocations d. activity charges ANSWER: c 89. Division A reported operating income of $975,000 and total support department allocations of $675,000. As a result, a. net income was $300,000 b. the gross profit was $300,000 c. operating income before support department allocations was $1,650,000 d. consolidated net income was $300,000 ANSWER: c 90. To compute operating income, total support department allocations are a. added to operating income before support department allocations b. subtracted from operating expenses c. subtracted from operating income before support department allocations Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations d. subtracted from gross profit ANSWER: c 91. Operating income for Division L is $250,000, total support department allocations are $400,000, and operating expenses are $2,750,000. The revenues for Division L are a. $650,000 b. $3,000,000 c. $3,400,000 d. $2,750,000 ANSWER: c 92. Operating income for Division H is $220,000, and operating income before support department allocations is $975,000. As a result, a. total operating expenses are $565,000 b. total manufacturing expenses are $565,000 c. direct materials, direct labor, and factory overhead total $565,000 d. total support department allocations are $755,000 ANSWER: d 93. The following data are taken from the management accounting reports of Dulcimer Co.: Operating income Total support department allocations

Division A $1,900,000 1,700,000

Division B $1,450,000 1,050,000

Division C $1,450,000 1,100,000

If an incentive bonus is paid to the manager who achieved the highest operating income before support department allocations, it follows that a. Division A's manager is given the bonus b. Division B's manager is given the bonus c. Division C's manager is given the bonus d. Divisions B and C's managers divide the bonus ANSWER: a 94. The term used to describe expenses that are incurred by a specific department is _____ expenses. a. indirect b. margin c. departmental d. direct operating ANSWER: d 95. Responsibility accounting reports for profit centers will include a. costs only b. revenues only c. expenses and fixed assets d. revenues, expenses, and operating income or loss ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 96. Some organizations use internal support departments to provide like services to several divisions or departments within an organization. Which of the following would probably lend itself as a support department? a. Human Resources Department b. Payroll Accounting Department c. Information Systems Department d. All of these choices ANSWER: d 97. Which of the following is a measure of a manager’s performance working in a profit center? a. a balance sheet b. the return on investment and residual income measures c. a budget performance report d. the divisional income statements ANSWER: d 98. Which of the following would be considered an internal centralized support department? a. Purchasing Department b. Manufacturing Department c. Inventory Control Department d. None of these choices ANSWER: a ABC Corporation has three support departments with the following costs and cost drivers: Support Department Graphics Production Accounting

Cost $200,000 500,000

Personnel

400,000

Cost Driver Number of copies made Number of invoices processed Number of employees

ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information is as follows: Revenues Direct operating expenses Number of copies made Number of invoices processed Number of employees

Micro $700,000 50,000 20,000 700 130

Macro $850,000 70,000 30,000 800 145

Super $650,000 100,000 50,000 500 125

99. The support department allocation rate for Graphics Production is a. $2.00 b. $10.00 c. $6.66 d. $0.50 ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 100. The support department allocation rate for the Accounting Department is a. $714 b. $250 c. $625 d. $0.004 ANSWER: b 101. The support department allocation rate for the Personnel Department is a. $2,758 b. $3,200 c. $3,077 d. $1,000 ANSWER: d 102. The support department cost that will be allocated to the Micro Division is a. $200,000 b. $145,000 c. $60,000 d. $345,000 ANSWER: d 103. The support department cost that will be allocated to the Macro Division is a. $405,000 b. $175,000 c. $130,000 d. $305,000 ANSWER: a 104. The operating income of the Micro Division after all support department allocations will be a. $305,000 b. $650,000 c. $345,000 d. $610,000 ANSWER: a 105. The support department cost that will be allocated to the Super Division is a. $350,000 b. $100,000 c. $125,000 d. $550,000 ANSWER: a 106. The operating income of the Macro Division after all support department allocations will be Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations a. $780,000 b. $375,000 c. $575,000 d. $435,000 ANSWER: b 107. The operating income of the Super Division after all support department allocations will be a. $300,000 b. $325,000 c. $550,000 d. $200,000 ANSWER: d 108. Blaser Corporation had $275,000 in invested assets, sales of $330,000, operating income amounting to $33,000, and a desired minimum return on investment of 7.5%. The return on investment (rounded to one decimal place) for Blaser Corporation is a. 8.3% b. 10.0% c. 12.0% d. 7.5% ANSWER: c Mason Corporation had $650,000 in invested assets, sales of $700,000, operating income amounting to $99,000, and a desired minimum return on investment of 15%.

109. The profit margin (rounded to one decimal place) for Mason Corporation is a. 7.1% b. 20.0% c. 15.2% d. 14.1% ANSWER: d 110. The investment turnover (rounded to two decimal places) for Mason Corporation is a. 1.08 b. 0.93 c. 6.57 d. 7.07 ANSWER: a 111. The residual income for Mason Corporation is a. $0 b. $84,150 c. $(6,000) d. $1,500 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations ANSWER: d 112. Marshall Corporation had $220,000 in invested assets, sales of $242,000, operating income of $66,000, and a desired minimum return on investment of 3%. The return on investment (rounded to one decimal place) for Marshall Corporation is a. 9.1% b. 30.0% c. 3.0% d. 27.3% ANSWER: b Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, operating income amounting to $302,500, and a desired minimum return on investment of 15%.

113. The profit margin for Chicks Corporation is a. 25% b. 22% c. 15% d. 27% ANSWER: a 114. The investment turnover (rounded to one decimal place) for Chicks Corporation is a. 1.3 b. 1.5 c. 1.0 d. 1.1 ANSWER: d 115. The residual income for Chicks Corporation is a. $165,000 b. $302,500 c. $137,500 d. $191,500 ANSWER: c Clydesdale Company has sales of $4,500,000, invested assets of $2,000,000, and operating expenses of $3,600,000. The company has established a minimum return on investment of 7%.

116. Clydesdale Company's profit margin is a. 20% b. 80% c. 44% d. 18% ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 117. Clydesdale Company's investment turnover (rounded to two decimal places) is a. 1.80 b. 2.25 c. 1.25 d. 1.40 ANSWER: b 118. Clydesdale Company's return on investment is a. 56% b. 20% c. 45% d. 25% ANSWER: c 119. Clydesdale Company's residual income is a. $252,000 b. $900,000 c. $1,400,000 d. $760,000 ANSWER: d 120. Managers of what type of decentralized units have authority and responsibility for revenues, costs, and assets invested in the unit? a. profit center b. investment center c. production center d. cost center ANSWER: b 121. A responsibility center in which the department manager is responsible for costs, revenues, and assets for a department is called a(n) _____ center. a. cost b. profit c. operating d. investment ANSWER: d 122. In an investment center, the manager has the responsibility for and the authority to make decisions that affect a. the assets invested in the center, but not costs and revenues b. costs and assets invested in the center, but not revenues c. both costs and revenues for the department or division d. costs, revenues, and assets invested in the center ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 123. In an investment center, the manager has responsibility and authority for making decisions that affect a. costs only b. revenues only c. assets only d. costs, revenues, and assets ANSWER: d 124. The profit margin is the ratio of a. operating income to sales b. operating income to invested assets c. assets to liabilities d. sales to invested assets ANSWER: a 125. The investment turnover is the ratio of a. operating income to sales b. operating income to invested assets c. assets to liabilities d. sales to invested assets ANSWER: d 126. The formula for the return on investment (ROI) is a. Invested Assets ÷ Operating Income b. Sales ÷ Invested Assets c. Operating Income ÷ Sales d. Operating Income ÷ Invested Assets ANSWER: d 127. Which of the following expressions is termed the profit margin factor as used in the DuPont formula for determining the return on investment (ROI)? a. Sales ÷ Operating Income b. Operating Income ÷ Sales c. Invested Assets ÷ Sales d. Sales ÷ Invested Assets ANSWER: b 128. Which of the following formulas is the investment turnover factor as used in the DuPont formula for determining the return on investment (ROI)? a. Invested Assets ÷ Sales b. Operating Income ÷ Invested Assets c. Operating Income ÷ Sales d. Sales ÷ Invested Assets ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations 129. The profit margin for the Central Division is 20%, and the investment turnover is 2.8. The return on investment (ROI) for the Central Division is a. 20% b. 7% c. 14% d. 56% ANSWER: d 130. The Central Division for Chemical Company has a return on investment of 22% and an investment turnover of 1.4.

The profit margin (rounded to one decimal place) is a. 20.5% b. 15.7% c. 14.7% d. 6.4% ANSWER: b 131. The Central Division of Nebraska Company has a return on investment of 28% and a profit margin of 14%. The investment turnover (rounded to one decimal place) is a. 0.2 b. 2.0 c. 5.0 d. 0.5 ANSWER: b 132. What additional information is needed to determine the return on investment if operating income is known? a. invested assets b. residual income c. direct expenses d. sales ANSWER: a 133. The Southern Division of Knucklehead Company has a return on investment of 15% and an investment turnover of 1.2. What is the profit margin (rounded to one decimal place)? a. 1.5% b. 12.5% c. 0.7% d. 6.7% ANSWER: b 134. The best measure of managerial efficiency in the use of investments in assets is a. return on stockholders' equity b. investment turnover c. operating income d. inventory turnover Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations ANSWER: b 135. Two divisions of Oregano Company (Divisions TX and OY) have the same profit margins. Division TX's investment turnover is larger than that of Division OY (1.2 to 1.0). Operating income for Division TX is $55,000, and operating income for Division OY is $43,000. Division TX has a higher return on investment than Division OY by a. using operating income as a performance measure b. comparing the profit margins c. applying a negotiated price measure d. using its assets more efficiently in generating sales ANSWER: d 136. The profit margin for Division C is 6%, and the investment turnover is 1.2. The return on investment (rounded to one decimal place) for Division C is a. 20.0% b. 6.7% c. 7.3% d. 7.2% ANSWER: d 137. The excess of divisional operating income over a minimum acceptable amount of divisional operating income is a. profit margin b. residual income c. return on investment (ROI) d. gross profit ANSWER: b 138. Assume that divisional operating income amounts to $215,000 and top management has established 15% as the minimum return on divisional assets totaling $1,000,000. The residual income for the division is a. $65,000 b. $215,000 c. $635,000 d. $150,000 ANSWER: a 139. Which of the following are measures that management can use in evaluating and controlling investment center performance? a. return on investment (ROI), invested assets, and operating income b. negotiated price, residual income, and operating income c. residual income, return on investment (ROI), and operating income d. operating income, negotiated price, and return on investment (ROI) ANSWER: c 140. The ratio of operating income to sales, which is also a factor in the DuPont formula for determining the return on investment (ROI), is called a. profit margin Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations b. indirect expenses c. investment turnover d. cost ANSWER: a 141. The ratio of sales to invested assets, which is also a factor in the DuPont formula for determining the return on investment (ROI), is called a. profit margin b. indirect margin c. investment turnover d. cost ratio ANSWER: c 142. Assume that Division Blue has achieved a yearly operating income of $110,000 using $900,000 of invested assets. If management has set a minimum acceptable return on investment of 11%, the residual income is a. $99,000 b. $691,000 c. $209,000 d. $11,000 ANSWER: d Division A of Chacha Company has sales of $140,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000.

143. The return on investment (ROI) (rounded to one decimal place) for Division A is a. 9.3% b. 99.3% c. 74.6% d. 4.6% ANSWER: a 144. The profit margin (rounded to one decimal place) for Division A is a. 11.1% b. 10.0% c. 9.0% d. 0.90% ANSWER: b 145. The investment turnover (rounded to two decimal places) for Division A is a. 0.93 b. 9.30 c. 1.07 d. 10.70 ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations Division D of Saunders Company has sales of $350,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000.

146. The return on investment (ROI) (rounded to one decimal place) for Division D is a. 153.3% b. 114.7% c. 87.2% d. 233.3% ANSWER: b 147. The profit margin (rounded to one decimal place) for Division D is a. 42.9% b. 83.4% c. 49.1% d. 65.7% ANSWER: c 148. Investment centers differ from profit centers in that they a. are responsible for net income only b. are able to invest in assets c. have less responsibilities than cost centers and profit centers d. are only responsible for revenues ANSWER: b 149. Tom's Tool Factory is an investment center and is responsible for all of its net income and the use of its assets. This year, the invested assets totaled $475,000, and net income was $275,000. The return on investment (ROI) (rounded to one decimal place) is a. 57.9% b. 172.3% c. 5.0% d. 115.0% ANSWER: a 150. Which of the following is a measure of performance for the manager of an investment center? a. return on investment (ROI) b. residual income c. divisional income statements d. all of these choices ANSWER: d International Boot Company has operating income of $80,000, invested assets of $500,000, and sales of $1,525,000.

151. The profit margin (rounded to one decimal place) for International Boot Company is Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations a. 33.3% b. 5.2% c. 16.0% d. 19.1% ANSWER: b 152. The investment turnover (rounded to two decimal places) for International Boot Company is a. 16.05 b. 3.05 c. 0.33 d. 27.50 ANSWER: b 153. Which of the following are commonly used approaches to setting transfer prices? a. market price approach, revenue price approach, and cost price approach b. revenue price approach, negotiated price approach, and cost price approach c. negotiated price approach, cost price approach, and market price approach d. profit margin approach, revenue price approach, and negotiated price approach ANSWER: c 154. Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers is known as the a. cost price approach b. negotiated price approach c. revenue price approach d. market price approach ANSWER: d Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3.00 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales.

155. Division 3's operating income will increase by a. $150,000 b. $50,000 c. $32,000 d. $72,000 ANSWER: d 156. Division 6's operating income will increase by a. $8,000 b. $15,000 c. $80,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations d. $150,000 ANSWER: a 157. Square Yard Products Inc.'s total operating income will increase by a. $32,000 b. $112,000 c. $80,000 d. $150,000 ANSWER: c Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10.00 per unit. However, the same materials are available from Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales.

158. Division C's operating income will increase by a. $0 b. $75,000 c. $12,500 d. $50,000 ANSWER: c 159. Division A's operating income will increase by a. $0 b. $75,000 c. $25,000 d. $50,000 ANSWER: c 160. Jefferson Company's total operating income will increase by a. $37,500 b. $100,000 c. $62,500 d. $150,000 ANSWER: a 161. Which of the following transfer price approaches is used when the transfer price is set at the amount sold to outside buyers? a. market price b. cost price c. negotiated price d. variable price ANSWER: a 162. Nelson Company's Radio Division currently is purchasing transistors from Charlotte Co. for $3.50 each. The total Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations number of transistors needed is 8,000 per month. Nelson Company's Electronics Division can produce the transistors for a cost of $4.00 each, and it has plenty of capacity to manufacture the units. The $4.00 is made up of $3.25 in variable costs and $0.75 in allocated fixed costs. The range of a possible transfer price should be a. $3.26 to $3.49 b. $3.51 to $3.99 c. $3.26 to $3.99 d. $3.25 to $3.50 ANSWER: d 163. The approach that requires the transfer price to be less than the market price but greater than the supplying division’s variable costs per unit is called the _____ approach. a. cost price b. negotiated cost c. standard cost d. market price ANSWER: b 164. Heart Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is available for Division B to produce these units. The per-unit market price is $30 per unit, with a variable cost of $25. The manager of Division A has offered to purchase the units at $22 per unit. In an effort to make this transfer price beneficial for the company as a whole, the range of prices that should be used during negotiations between the two divisions is a. $22 to $30 b. $22 to $25 c. over $30 d. $25 to $30 ANSWER: d 165. The entity that pays for the right or license to market another company's goods or services is called the a. investee b. franchise c. franchisee d. franchisor ANSWER: c 166. The entity that grants the right or license to another company to market its goods or services is called the a. investor b. franchise c. franchisee d. franchisor ANSWER: d 167. A franchisor may provide support to the franchisee in which of the following ways? a. advertising b. management development c. supplier relationships Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations d. all of these choices ANSWER: d 168. Which of the following would be the most appropriate cost driver allocating the service department costs of the Maintenance Department? a. number of purchase requisitions b. equal allocation among divisions c. number of employees d. number of work orders ANSWER: d 169. Which of the following would be the most appropriate cost driver allocating the service department costs of the Marketing Department? a. number of purchase requisitions b. equal allocation among divisions c. number of employees d. number of advertising campaigns ANSWER: d 170. Which of the following would be the most appropriate cost driver allocating the service department costs of the Payroll Accounting Department? a. number of purchase requisitions b. equal allocation among divisions c. number of employees d. number of payroll checks ANSWER: d 171. Which of the following would be the most appropriate cost driver allocating the service department costs of the Information Systems Department? a. number of computers b. equal allocation among divisions c. number of employees d. number of payroll checks ANSWER: a Objective Short Answer 172. Miller's Quarter Horse Company has sales of $4,500,000. It also has invested assets of $2,500,000 and operating expenses of $3,800,000. The company has established a minimum return of 7%. Round percentages and investment turnover to one decimal place. a. What is Miller's profit margin? b. What is the investment turnover? c. What is the rate of return on investment? d. What is Miller's residual income?

ANSWER: a. $4,500,000 – $3,800,000 = $700,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations $700,000 ÷ $4,500,000 = 15.6% b. $4,500,000 ÷ $2,500,000 = 1.8 c. $700,000 ÷ $2,500,000 = 28.0% d. 7% × $2,500,000 = $175,000 $700,000 – $175,000 = $525,000 173. Division G of Elephant Preservation Inc. has sales of $895,000, cost of goods sold of $475,000, operating expenses of $79,500, and invested assets of $750,000. Round percentages to one decimal place and investment turnover to two decimal places.

Compute: a. The return on investment for Division G. b. The profit margin for Division G. c. The investment turnover for Division G. ANSWER: a. Return on investment: ($895,000 – $475,000 – $79,500) ÷ $750,000 = $340,500 ÷ $750,000 = 45.4% b. Profit margin: $340,500 ÷ $895,000 = 38.0% c. Investment turnover: $895,000 ÷ $750,000 = 1.19 174. Peppy Portraits specializes in pet photography and has both franchised and company-operated studios. Profit margin and investment turnover for both segments are as follows:

Company-operated studios Franchised studios

Profit Margin 70% 40%

Investment Turnover 0.50 2.25

Peppy Portraits is expanding. Based on the return on investment (ROI), would you advise a new location to be a company-operated or franchised studio?

ANSWER: Return on Investment (ROI) = Profit Margin × Investment Turnover Company-operated studios: 70% × 0.50 = 35% Franchised studios: 40% × 2.25 = 90% Based on ROI, the new location should be a franchised studio.

Subjective Short Answer 175. The budget for Department 6 of Cardinal Company for the current month ending March 31 is as follows: Materials Factory wages Supervisory salaries Depreciation of plant and equipment Power and light Copyright Cengage Learning. Powered by Cognero.

$208,000 265,000 67,800 35,000 22,500 Page 28

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Chapter 10: Evaluating Decentralized Operations Insurance and property taxes Maintenance

15,500 9,700

During March, the costs incurred in Department 6 of Cardinal Company were materials, $204,000; factory wages, $285,000; supervisory salaries, $63,600; depreciation of plant and equipment, $35,000; power and light, $21,360; insurance and property taxes, $14,400; and maintenance, $9,456. a.

Prepare a budget performance report for the supervisor of Department 6 of Cardinal Company for the month of March. b.

Are there any significant variances (5% or greater) of the budgeted amounts that should be examined by the supervisor?

ANSWER: a.

Budget Performance Report Supervisor, Department 6—Cardinal Company For the Month Ended March 31 Over (Under) Actual Budget Budget Budget Materials $204,000 $208,000 $ (4,000) Factory wages 285,000 265,000 $20,000 Supervisory salaries 63,600 67,800 (4,200) Depreciation of plant and equipment 35,000 35,000 Power and light 21,360 22,500 (1,140) Insurance and property taxes 14,400 15,500 (1,100) Maintenance 9,456 9,700 (244) $632,816 $623,500 $20,000 $(10,684) b.

The factory wages, supervisory salaries, power and light, and insurance and property taxes should be examined by the supervisor.

176. Using the following data for Ace Guitar Company, determine the divisional operating income for the A and B regions.

Sales Cost of goods sold Selling expenses

A Region $500,000 200,000 150,000

Support department expenses: Purchasing Payroll accounting

B Region $900,000 300,000 275,000

$90,000 30,000

Allocate support department expenses proportional to the sales of each region. Round percentage of sales allocations to one decimal place.

ANSWER: Percentage of sales allocations: A Region = $500,000 ÷ $1,400,000 = 35.7% B Region = $900,000 ÷ $1,400,000 = 64.3% A Region = 35.7% × $120,000 = $42,840 allocation of support department expenses A Region Operating Income = $500,000 – $200,000 – $150,000 – $42,840 = $107,160 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations B Region = 64.3% × $120,000 = $77,160 allocation of support department expenses B Region Operating Income = $900,000 – $300,000 – $275,000 – $77,160 = $247,840 177. Piano Company’s costs were over budget by $47,000. Piano Company is divided into two regions. The first region’s costs were over budget by $5,000. Determine the amount that the second region’s cost was over or under budget.

ANSWER: $47,000 – $5,000 = $42,000 over budget 178. Xang Company’s costs were over budget by $46,000. Xang Company is divided into two regions. The first region’s costs were over budget by $7,000.

Determine the amount that the second region’s cost was over or under budget.

ANSWER: $46,000 – $7,000 = $39,000 over budget 179. Using these data from Terrace Industries, determine the divisional operating income for Districts 1 and 2.

Sales Cost of goods sold Selling expenses

District 1 $300,000 120,000 55,000

District 2 $600,000 150,000 75,000

Support department expenses: Purchasing Payroll accounting

$70,000 80,000

Allocate support department expenses proportional to the sales of each district.

ANSWER: Percentage of sales allocation: District 1 = $300,000 ÷ $900,000 = 33.3% District 2 = $600,000 ÷ $900,000 = 66.7% District 1 = 33.3% × $150,000 = $50,000 allocation of support department expenses District 1 Operating Income = $300,000 – $120,000 – $55,000 – $50,000 = $75,000 District 2 = 66.7% × $150,000 = $100,000 allocation of support department expenses District 2 Operating Income = $600,000 – $150,000 – $75,000 – $100,000 = $275,000 180. A department store allocates payroll costs on the basis of the number of payroll checks issued. Accounting costs are allocated on the basis of the number of reports. The payroll costs for the year were $231,000, and the accounting costs for the year totaled $75,500. The departments and the number of payroll checks and accounting reports for each are as follows:

Department R Department S Department T

Number of Payroll Checks 483 1,470 147

Number of Reports 70 85 345

Determine the amount of (a) payroll costs and (b) accounting costs to be allocated to each department.

ANSWER: Department a.

Total R S T Number of payroll checks 2,100 483 1,470 147 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations Percent Payroll costs

100% 23% 70% 7% $231,000 $53,130 $161,700 $16,170

b.

Number of reports Percent Accounting costs

500 70 85 345 100% 14% 17% 69% $75,500 $10,570 $12,835 $52,095

181. Using the data below for Coffee & Cocoa Company, determine the divisional operating income for the three regions by allocating the support department expenses proportional to the sales of the regions. Round final allocation amounts to the nearest whole dollar.

Sales Cost of goods sold Selling expenses Support department expenses: Purchasing Payroll accounting ANSWER: Sales Cost of goods sold Selling expenses Support department allocations* Operating income

A Region $600,000 200,000 150,000

B Region $900,000 350,000 275,000

C Region $300,000 190,000 100,000

120,000 80,000 A B C Total Region Region Region $ 600,000 $ 900,000 $ 300,000 $1,800,000 (200,000) (350,000) (190,000) (740,000) (150,000) (275,000) (100,000) (525,000) (66,667) (100,000) (33,333) (200,000) $ 183,333 $ 175,000 $ (23,333) $ 335,000

*A Region: $600,000 ÷ $1,800,000 × ($120,000 + $80,000) = $66,667 B Region: $900,000 ÷ $1,800,000 × ($120,000 + $80,000) = $100,000 C Region: $300,000 ÷ $1,800,000 × ($120,000 + $80,000) = $33,333 182. Bentz Co. has two divisions, A and B. Invested assets and condensed income statement data for each division for the year ended December 31 are as follows: Revenues Operating expenses Support department allocations Invested assets a. b.

Division A $190,000 112,500 29,500 225,000

Division B $125,500 92,750 12,625 99,000

Prepare condensed income statements for the past year for each division.

Using the DuPont formula, determine the profit margin, investment turnover, and return on investment (ROI) for each division. Round the profit margin percentage to two decimal places, the investment turnover to four decimal places, and the return on investment to one decimal place.

ANSWER: a.

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Chapter 10: Evaluating Decentralized Operations Bentz Co. Divisional Income Statements For the Year Ended December 31 Revenues Operating expenses Operating income before support department allocations Support department allocations Operating income

Division A Division B $ 190,000 $125,500 (112,500) (92,750) $ 77,500 $ 32,750 (29,500) (12,625) $ 48,000 $ 20,125

b. Return on Investment (ROI) = Profit Margin × Investment Turnover ROI = Operating Income × Sales Sales Invested Assets Division A: ROI = $48,000 × $190,000 $190,000 $225,000 = 25.26% × 0.8444 = 21.3% Division B: ROI = $20,125 × $125,500 $125,500 $99,000 = 16.04% × 1.2677 = 20.3% 183. Magnolia Company's Division A has operating income of $80,000 and assets of $400,000. The minimum acceptable return on investment is 12%. What is the residual income for the division?

ANSWER: Operating income $ 80,000 Minimum acceptable operating income as a percent of invested assets ($400,000 × 12%) (48,000) Residual income $ 32,000 184. Ralston Company has operating income of $75,000, invested assets of $360,000, and sales of $790,000.

Use the DuPont formula to compute the return on investment (ROI), and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment. Round the profit margin percentage to two decimal places, the investment turnover to three decimal places, and the return on investment to two decimal places.

ANSWER: a. Profit Margin = $75,000 ÷ $790,000 = 9.49% b. Investment Turnover = $790,000 ÷ $360,000 = 2.194 c. Return on Investment (ROI) = 9.49% × 2.194 = 20.82% 185. The Creative Division of Barry Company reported the following results for December: Invested assets Profit margin Return on investment

$1,200,000 25% 30%

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Chapter 10: Evaluating Decentralized Operations Based on this information, what were sales?

ANSWER: $1,200,000 × 30% = $360,000 $360,000 ÷ 25% = $1,440,000 186. Data for Divisions A, B, C, D, and E are as follows: Div. A B C D E

Sales (a) $455,000 $525,000 $800,000 (m)

Operating Income $35,000 (d) $73,500 (j) (n)

Inv. Assets $200,000 $284,375 (g) (k) $250,000

Return on Inv. (b) 16.0% (h) (l) (o)

Profit Margin (c) (e) (i) 13.0% 16.0%

Invest.

Turnover 1.6 (f) 1.2 2.5 2.0

a.

Determine the missing items, identifying each by letter (a–o).

Round percentage and turnover values to one decimal place. b.

Which division is most profitable in terms of operating income? c.

Which division is most profitable in terms of return on investment?

ANSWER: a. (a) $320,000 ($200,000 × 1.6) (b) 17.5% ($35,000 ÷ $200,000) (c) 10.9% ($35,000 ÷ $320,000) (d) $45,500 ($284,375 × 16.0%) (e) 10.0% ($45,500 ÷ $455,000) (f) 1.6 ($455,000 ÷ $284,375) (g) $437,500 ($525,000 ÷ 1.2) (h) 16.8% ($73,500 ÷ $437,500) (i) 14.0% ($73,500 ÷ $525,000) (j) $104,000 ($800,000 × 13.0%) (k) $320,000 ($800,000 ÷ 2.5) (l) 32.5% ($104,000 ÷ $320,000) (m) $500,000 ($250,000 × 2.0) (n) $80,000 ($500,000 × 16.0%) (o) 32.0% (16.0% × 2.0) b.

Division D

c.

Division D

187. Several items are missing from the following table of return on investment and residual income. Determine the missing items, identifying each item by the appropriate letter (a–l). Round percentages to one decimal place.

Min. Amt. Invested Operating Return of Operating Residual Division Assets Income on Inv. Min. ROI Income Income East (a) (b) (c) 16.0% $128,000 $10,000 West $850,000 $153,000 (d) 12.0% (e) (f) North $825,000 (g) 20.0% (h) (i) $24,000 South (j) $129,000 24.0% (k) $60,000 (l) ANSWER: (a) $800,000 ($128,000 ÷ 16.0%) (b) $138,000 ($128,000 + $10,000) (c) 17.3% ($138,000 ÷ $800,000) Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations (d) (e) (f) (g) (h) (i) (j) (k) (l)

18.0% ($153,000 ÷ $850,000) $102,000 ($850,000 × 12.0%) $51,000 ($153,000 – $102,000) $165,000 ($825,000 × 20.0%) 17.1% ($141,000 ÷ $825,000) $141,000 ($165,000 – $24,000) $537,500 ($129,000 ÷ 24.0%) 11.2% ($60,000 ÷ $537,500) $69,000 ($129,000 – $60,000)

188. The sales, operating income, and invested assets for each division of Grosbeak Company are as follows: Sales $5,000,000 4,800,000 7,000,000

Division E Division F Division G a.

b.

Operating Income $550,000 860,000 860,000

Invested Assets $2,400,000 2,500,000 2,900,000

Using the DuPont formula, determine the profit margin, investment turnover, and return on investment for each division. Round profit margin percentage to two decimal places, investment turnover to four decimal places, and return on investment to one decimal place.

Which division is the most profitable per dollar invested?

ANSWER: a. Return on investment: ROI = Profit Margin × Investment Turnover ROI = Operating Income × Sales Sales Invested Assets Division E: ROI = $550,000 × $5,000,000 $5,000,000 $2,400,000 ROI = 11.00% × 2.0833 ROI = 22.9% Division F: ROI = $860,000 × $4,800,000 $4,800,000 $2,500,000 ROI = 17.92% × 1.9200 ROI = 34.4% Division G: ROI = $860,000 × $7,000,000 $7,000,000 $2,900,000 ROI = 12.29% × 2.4138 ROI = 29.7% b.

Division F is the most profitable.

189. The sales, operating income, and invested assets for each division of Wren Company are as follows: Sales Copyright Cengage Learning. Powered by Cognero.

Operating Income

Invested Assets Page 34

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Chapter 10: Evaluating Decentralized Operations Division C Division D Division E

$5,000,000 6,800,000 3,750,000

$630,000 760,000 750,000

$4,000,000 3,900,000 7,500,000

Management has established a minimum acceptable return on investment of 8%. a.

Determine the residual income for each division.

b.

Based on residual income, which division is the most profitable?

ANSWER: a.

Division C: $630,000 – ($4,000,000 × 8%) = $310,000 Division D: $760,000 – ($3,900,000 × 8%) = $448,000 Division E: $750,000 – ($7,500,000 × 8%) = $150,000 b.

Division D

190. Paduka Industries has several divisions. The Eastern Division has $350,000 of invested assets, operating income of $200,000, and residual income of $151,000. Determine the minimum acceptable return on investment.

ANSWER: $200,000 – ($350,000 × X%) = $151,000 X = 14% 191. Bottlebrush Company has operating income of $60,000, invested assets of $345,000, and sales of $786,000. Use the DuPont formula to compute the return on investment, and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment. Round the profit margin percentage and the return on investment to two decimal places and the investment turnover to three decimal places.

ANSWER: a. Profit Margin = $60,000 ÷ $786,000 = 7.63% b. Investment Turnover = $786,000 ÷ $345,000 = 2.278 c. Return on Investment = 7.63% × 2.278 = 17.38% 192. The sales, operating income, invested assets, and residual income for each division of Marcus Company are as follows:

Division X Division Y Division Z

Sales $5,000,000 6,800,000 3,750,000

Operating Income $645,000 777,000 760,000

Invested Assets $4,100,000 4,000,000 7,600,000

Residual Income $235,000 377,000 0

Determine the minimum return on invested assets ANSWER: Division X: $645,000 – ($4,100,000 × X%) = $235,000 Division Y: $777,000 – ($4,000,000 × X%) = $377,000 Division Z: $760,000 – ($7,600,000 × X%) = $0 X = 10% 193. Materials used by Best Bread Company in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $20 per unit. a.

If a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would Best Bread Company's total operating income increase?

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Chapter 10: Evaluating Decentralized Operations b.

Assuming a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the operating income of Division A increase?

c.

Assuming a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the operating income of Division B increase?

d.

If the negotiated price approach is used, what would be the range of acceptable transfer prices?

ANSWER: a. $600,000 Increase in Division A's operating income: (Market Price – Transfer Price) × Units Transferred = ($30 – $25) × 60,000 = $300,000 Increase in Division B's operating income: (Transfer Price – Variable Cost per Unit) × Units Transferred = ($25 – $20) × 60,000 = $300,000 Increase in Best Bread Company's operating income: $300,000 + $300,000 = $600,000 b.

Division A would save $5 per unit on 60,000 units or $300,000.

Increase in Division A's operating income: (Market Price – Transfer Price) × Units Transferred = ($30 – $25) × 60,000 = $300,000 c.

Division B would earn an additional $300,000 by selling 60,000 units at $5 above the variable cost.

Increase in Division B's operating income: (Transfer Price – Variable Cost per Unit) × Units Transferred = ($25 – $20) × 60,000 = $300,000 d. $20 to $30 194. The materials used by Hibiscus Company's Division A are currently purchased from an outside supplier at $55 per unit. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The two divisions have recently negotiated a transfer price of $48 per unit for the 20,000 units. a. By how much will each division’s income increase as a result of this transfer? b. What is the total increase in income for Hibiscus Company?

ANSWER: a.

Division A Change in sales $ 0 Decrease in variable costs [20,000 × ($55 – $48)] 140,000 Increase in income $ 140,000 Division B Increase in sales (20,000 × $48) Increase in variable costs (20,000 × $42) Increase in income

$ 960,000 (840,000) $ 120,000

b.

Total increase in income for Hibiscus Company

$ 260,000

195. The materials used by Holly Company's Division A are currently purchased from an outside supplier. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. Division B normally sells its units for $53 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Evaluating Decentralized Operations per unit. What is the range of transfer prices within which the two division managers should negotiate?

ANSWER: $42 to $53 per unit 196. Materials used by Layton Company's Division 1 are currently purchased from an outside supplier at $58 per unit.

Division 2 is able to supply Division 1 with 20,000 units at a variable cost of $46 per unit. The two divisions have recently negotiated a transfer price of $50 per unit for the 20,000 units. a. By how much will each division’s income increase as a result of this transfer? b. What is the total increase in income for Layton Company?

ANSWER: a.

Division 1 Change in sales $ 0 Decrease in variable costs [20,000 × ($58 – $50)] 160,000 Increase in income $160,000 Division 2 Increase in sales (20,000 × $50) Increase in variable cost (20,000 × $46)

$1,000,000 (920,000)

Increase in income

$

b.

Total increase in income for Layton Company

$ 240,000

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80,000

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Chapter 11: Differential Analysis and Product Pricing 1. Differential revenue is the amount of profit that would result from the best available alternative proposed use of cash. a. True b. False ANSWER: False 2. Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative. a. True b. False ANSWER: True 3. If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $48. a. True b. False ANSWER: False 4. If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $12. a. True b. False ANSWER: True Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce.

5. The differential revenue of producing Product P is $82 per pound. a. True b. False ANSWER: False 6. The differential revenue of producing Product P is $22 per pound. a. True b. False ANSWER: True 7. The differential cost of producing Product P is $13 per pound. a. True b. False ANSWER: True 8. The differential cost of producing Product P is $55 per pound. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing ANSWER: False 9. Opportunity cost is the amount of increase or decrease in cost that would result from the best available alternative to the proposed use of cash or its equivalent. a. True b. False ANSWER: False 10. Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace usable plant assets. a. True b. False ANSWER: True 11. A cost that will be unaffected by later decisions is termed a sunk cost. a. True b. False ANSWER: True 12. A cost that will be unaffected by later decisions is termed an opportunity cost. a. True b. False ANSWER: False 13. The revenue that is forgone from an alternative use of an asset, such as cash, is called opportunity cost. a. True b. False ANSWER: True 14. Since the costs of producing an intermediate product remain the same regardless of whether the intermediate product is sold or processed further, these costs are ignored when deciding whether to further process the product. a. True b. False ANSWER: True 15. The costs of initially producing an intermediate product should be considered in deciding whether to further process a product, even though the costs will remain the same regardless of the decision. a. True b. False ANSWER: False 16. In deciding whether to accept business at a special price, the short-run price should be set high enough to cover all variable costs and expenses. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing ANSWER: True 17. Differential analysis only considers the short-term (one-year) effects of discontinuing a product. a. True b. False ANSWER: True 18. Make-or-buy options often arise when a manufacturer has excess productive capacity in the form of unused equipment, space, and labor. a. True b. False ANSWER: True 19. In addition to the differential costs in an equipment-replacement decision, the remaining useful life of the old equipment and the estimated life of the new equipment are important considerations. a. True b. False ANSWER: True 20. Manufacturers must conform to the Robinson-Patman Act, which prohibits price discrimination within the United States unless differences in prices can be justified by different costs of serving different customers. a. True b. False ANSWER: True 21. When a segment of a company is showing a net loss, it is always best to discontinue the segment. a. True b. False ANSWER: False 22. Continuing a segment or product may be the best choice when the segment is contributing to fixed expenses a. True b. False ANSWER: True 23. The product cost method includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price. a. True b. False ANSWER: False 24. The product cost method includes all manufacturing costs in the cost amount to which the markup is added to determine product price. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing ANSWER: True 25. In using the product cost method of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup. a. True b. False ANSWER: True 26. When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on normal levels of performance. a. True b. False ANSWER: True 27. When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on ideal levels of performance. a. True b. False ANSWER: False 28. Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup. a. True b. False ANSWER: True 29. A bottleneck begins when demand for the company’s product exceeds the ability to produce the product. a. True b. False ANSWER: True 30. A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and demand for the product supports a production rate of 1,200 units per hour. a. True b. False ANSWER: True 31. When a bottleneck occurs in a process used in the production of multiple products, the company must determine the contribution margin for each product and give priority to the product that has the lowest contribution margin per bottleneck hour. a. True b. False ANSWER: False 32. The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing b. False ANSWER: True 33. In a production bottleneck situation, the product with the highest contribution margin per unit should be given priority over a product that has the highest contribution margin per bottleneck hour. a. True b. False ANSWER: False 34. Yield pricing practices are common in low-fixed-cost service businesses. a. True b. False ANSWER: False 35. Yield pricing is a type of “accepting business at a special price” differential analysis. a. True b. False ANSWER: True 36. Businesses with fixed capacity will charge higher prices when demand is low in an effort to cover fixed costs. a. True b. False ANSWER: False 37. In using the variable cost method of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup. a. True b. False ANSWER: True 38. In using the variable cost method of applying the cost-plus approach to product pricing, fixed manufacturing costs and both fixed and variable selling and administrative expenses must be covered by the markup. a. True b. False ANSWER: False 39. In using the total cost method of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup. a. True b. False ANSWER: False 40. Under the total cost method, manufacturing cost plus desired profit is included in the total cost per unit. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing ANSWER: False 41. The total cost method includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price. a. True b. False ANSWER: True 42. Under the variable cost method, only variable costs are included in the cost amount per unit to which the markup is added. a. True b. False ANSWER: True 43. The desired selling price for a product will be the same under both the variable and total cost methods. a. True b. False ANSWER: True 44. The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is a. manufacturing margin b. contribution margin c. differential cost d. differential revenue ANSWER: d 45. The amount of increase or decrease in cost that is expected from a particular course of action as compared with an alternative is a. period cost b. product cost c. differential cost d. discretionary cost ANSWER: c 46. A cost that has been incurred in the past, cannot be recouped, and is irrelevant to future decisions is termed a a. period cost b. differential cost c. sunk cost d. replacement cost ANSWER: c 47. The condensed income statement for Fletcher Inc. for the past year is as follows: Product Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing Sales Costs: Variable costs Fixed costs Total costs Income (loss)

F $ 300,000

G $ 210,000

$(180,000) $(180,000) (50,000) (50,000) $(230,000) $(230,000) $ 70,000 $ (20,000)

H $ 340,000

Total $ 850,000

$(220,000) $(580,000) (40,000) (140,000) $(260,000) $(720,000) $ 80,000 $ 130,000

Management is considering the discontinuance of the manufacture and sale of Product G at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Products F and H. The amount of change in profit for the current year that will result from the discontinuance of Product G is a a. $20,000 increase b. $30,000 increase c. $20,000 decrease d. $30,000 decrease ANSWER: d 48. The condensed income statement for Hayden Corp. for the past year is as follows:

Sales Costs: Variable costs Fixed costs Total costs Income (loss)

Product T U $ 680,000 $ 320,000 $(540,000) $(220,000) (145,000) (40,000) $(685,000) $(260,000) $ (5,000) $ 60,000

Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U. The amount of change in profit for the current year that will result from the discontinuance of Product T is a a. $140,000 increase b. $5,000 increase c. $5,000 decrease d. $140,000 decrease ANSWER: d 49. Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20, including fixed costs, and $11, not including fixed costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, the amount of differential cost increase or decrease from making the part rather than purchasing it would be a a. $150,000 cost increase b. $120,000 cost decrease c. $150,000 cost decrease d. $120,000 cost increase ANSWER: b 50. Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing $24 per unit. The unit cost for the business to make the part is $36, including fixed costs, and $26, not including fixed costs. If 15,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, the amount of differential cost increase or decrease from making the part rather than purchasing it would be a a. $30,000 cost decrease b. $180,000 cost increase c. $30,000 cost increase d. $180,000 cost decrease ANSWER: c 51. The revenue that is forgone from an alternative use of an asset, such as cash, is called a. differential profit b. sunk cost c. differential revenue d. opportunity cost ANSWER: d 52. Yasmin Co. can further process Product B to produce Product C. Product B is currently selling for $30 per pound and costs $28 per pound to produce. Product C would sell for $55 per pound and would require an additional cost of $31 per pound to produce. The differential cost of producing Product C is a. $30 per pound b. $31 per pound c. $28 per pound d. $55 per pound ANSWER: b Carmen Co. can further process Product J to produce Product D. Product J is currently selling for $20.00 per pound and costs $15.75 per pound to produce. Product D would sell for $38.00 per pound and would require an additional cost of $8.55 per pound to produce.

53. The differential cost of producing Product D is a. $6.50 per pound b. $8.55 per pound c. $17.00 per pound d. $5.25 per pound ANSWER: b 54. The differential revenue of producing Product D is a. $6.75 per pound b. $22.25 per pound c. $18.00 per pound d. $6.25 per pound ANSWER: c 55. Grace Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and costs $38 per pound to produce. Product C would sell for $95 per pound and would require an additional cost of $13 per Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing pound to produce. The differential revenue of producing and selling Product C is a. $35 per pound b. $38 per pound c. $95 per pound d. $60 per pound ANSWER: a 56. Delaney Company is considering replacing equipment that originally cost $600,000 and has accumulated depreciation of $420,000 to date. A new machine will cost $790,000. The sunk cost in this situation is a. $370,000 b. $790,000 c. $180,000 d. $190,000 ANSWER: c 57. Delaney Company is considering replacing equipment that originally cost $600,000 and has accumulated depreciation of $420,000 to date. A new machine will cost $790,000 and the old equipment can be sold for $8,000. The sunk cost in this situation is a. $172,000 b. $180,000 c. $188,000 d. $290,000 ANSWER: b 58. Lara Technologies is considering a total cash outlay of $250,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the purchase of the land is a. $35,000 b. $30,000 c. $250,000 d. $4,200 ANSWER: b 59. Jarrett Company is considering a cash outlay of $300,000 for the purchase of land, which it could lease for $36,000 per year. If alternative investments are available that yield a 9% return, the opportunity cost of the purchase of the land is a. $27,000 b. $36,000 c. $9,000 d. $72,000 ANSWER: a 60. Farris Company is considering a cash outlay of $500,000 for the purchase of land, which it could lease for $40,000 per year. If alternative investments are available that yield a 15% return, the opportunity cost of the purchase of the land is a. $75,000 b. $40,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing c. $44,000 d. $7,500 ANSWER: a 61. Jacoby Company received an offer from an exporter for 30,000 units of product at $15 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$21 12 5

The differential revenue from the acceptance of the offer is a. $450,000 b. $630,000 c. $510,000 d. $120,000 ANSWER: a Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$20 11 1

62. The differential revenue from the acceptance of the offer is a. $300,000 b. $262,500 c. $52,500 d. $250,000 ANSWER: b 63. The differential cost from the acceptance of the offer is a. $200,000 b. $262,500 c. $85,500 d. $165,000 ANSWER: d 64. The amount of profit or loss from acceptance of the offer is a a. $97,500 profit b. $94,500 loss c. $37,500 profit d. $37,500 loss Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing ANSWER: a Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$22 11 6

65. The differential cost from the acceptance of the offer is a. $150,000 b. $275,000 c. $550,000 d. $125,000 ANSWER: b 66. The amount of the profit or loss from acceptance of the offer is a a. $125,000 loss b. $25,000 profit c. $125,000 profit d. $25,000 loss ANSWER: c 67. Keating Co. is considering disposing of equipment that cost $50,000 and has $40,000 of accumulated depreciation to date. Keating Co. can sell the equipment through a broker for $25,000 less a 5% commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $48,750. Keating will incur repair, insurance, and property tax expenses estimated at $8,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential profit or loss from the sell alternative is a a. $17,000 loss b. $7,000 profit c. $27,000 loss d. $14,500 profit ANSWER: a 68. Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The five-year differential effect on profit from replacing the machine is a(n) a. decrease of $11,000 b. decrease of $15,000 c. increase of $11,000 d. increase of $15,000 ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing 69. Nighthawk Inc. is considering disposing of an old machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The three-year differential effect on profit from replacing the machine is a(n) a. $8,750 increase b. $31,250 decrease c. $8,750 decrease d. $2,925 decrease ANSWER: a 70. Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20.00 per unit.

Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1.00 per unit would be eliminated. If the order is accepted, the differential effect on profit would be a(n) a. decrease of $750 b. decrease of $4,500 c. increase of $3,000 d. increase of $1,500 ANSWER: c 71. Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc., at a price of $65 per board.

Mighty Safe is considering making its own boards. The costs to make the board are as follows: direct materials, $32 per unit; direct labor, $10 per unit; and variable factory overhead, $16 per unit. Fixed costs for the plant would increase by $75,000. Which option should be selected and why? a. buy, $75,000 increase in profits b. make, $275,000 increase in profits c. buy, $275,000 increase in profits d. make, $350,000 increase in profits ANSWER: b 72. Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and compute the savings assuming fixed costs are unaffected by the decision. a. $5 savings per unit if manufactured b. $5 savings per unit if purchased c. $10 savings per unit if manufactured d. $15 savings per unit if purchased ANSWER: a 73. Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason to continue an operation? a. Losses are minimal. b. Variable costs are less than revenues.

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Chapter 11: Differential Analysis and Product Pricing c. Variable costs are more than revenues. d. Allocated fixed costs are more than revenues.

ANSWER: b 74. Which of the following would be considered a sunk cost? a. purchase price of new equipment b. equipment rental for the production area c. net book value of equipment that has no market value d. warehouse lease expense ANSWER: c 75. Which of the following should be ignored in a make-or-buy decision? a. cost savings b. quality issues with the supplier c. future growth in the plant and other production opportunities d. whether the supplier will make a profit that would no longer belong to the business ANSWER: d 76. Which of the following reasons would cause a company to reject an offer to accept business at a special price? a. The additional sale will not conflict with regular sales. b. The additional sales will increase differential profit. c. The additional sales will not increase fixed expenses. d. The additional sales will increase fixed expenses.

ANSWER: d 77. Which of the following is a method commonly used in applying the cost-plus approach to product pricing? a. total cost method b. product cost method c. variable cost method d. all of these choices ANSWER: d 78. When using the product cost method of applying the cost-plus approach to product pricing, which of the following is included in the markup? a. desired profit b. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit c. total costs plus desired profit d. total selling and administrative expenses plus desired profit ANSWER: d 79. Which of the following methods of applying the cost-plus approach to product pricing includes selling expenses, administrative expenses, and desired profit in the markup? a. total cost method b. product cost method Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing c. variable cost method d. demand-based method ANSWER: b 80. Which of the following methods of applying the cost-plus approach to product pricing includes only total manufacturing costs in the cost amount to which the markup is added? a. variable cost method b. total cost method c. product cost method d. all of these choices ANSWER: c 81. The target costing method assumes that a. markup is added to total cost b. the selling price is set by the marketplace c. markup is added to variable cost d. markup is added to product cost ANSWER: b Mallard Corporation uses the product cost method of product pricing. Below is cost information for the production and sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% return on invested assets of $800,000.

Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

$82,000 45,000 5.50 7.65 2.25 0.90

82. The dollar amount of desired profit from the production and sale of the company's product is a. $105,840 b. $225,000 c. $96,000 d. $220,500 ANSWER: c 83. The cost per unit for the production of the company's product is a. $13.15 b. $17.22 c. $15.40 d. $15.75 ANSWER: b 84. The markup percentage on product cost for the company's product is a. 23.4% Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing b. 10.9% c. 26.1% d. 18.0% ANSWER: a 85. The unit selling price for the company's product is a. $19.35 b. $15.75 c. $22.05 d. $21.25 ANSWER: d 86. Which of the following price-setting methods considers the price that other providers charge for the same product? a. demand-based method b. total cost method c. cost-plus method d. competition-based method ANSWER: d Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer’s current full cost for the product is $44 per unit.

87. The desired profit per unit is a. $6 b. $8 c. $5 d. $4 ANSWER: a 88. Which of the following equations best describes target costing? a. Selling Price – Desired Profit = Target Cost b. Selling Price + Profit = Target Cost c. Target Variable Cost + Contribution Margin = Selling Price d. Selling Price = Profit – Target Variable Cost ANSWER: a Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer’s current full cost for the product is $44 per unit.

89. In order to meet the new target cost, how much will the company have to cut costs per unit, if any? a. $1 b. $3 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing c. $2 d. $0 ANSWER: c 90. Using the variable cost method, the markup per unit for 30,000 units (rounded to the nearest dollar) using the following data is Variable cost per unit Total fixed costs Desired profit a. $10 b. $15 c. $8 d. $23 ANSWER: c

$15 $90,000 $150,000

Swan Company produces its product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit.

91. The markup percentage on product cost is a. 80% b. 47% c. 70% d. 110% ANSWER: a Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer’s current full cost for the product is $44 per unit.

92. The target cost of the company’s product is a. $44 b. $42 c. $43 d. $40 ANSWER: b 93. Using the variable cost method, determine the selling price (rounded to the nearest dollar) for 30,000 units using the following data: Variable cost per unit Total fixed costs Desired profit a. $10 b. $15 c. $8

$15 $90,000 $150,000

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Chapter 11: Differential Analysis and Product Pricing d. $23 ANSWER: d Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer’s current full cost for the product is $44 per unit.

94. If the company cannot cut costs any lower than they already are, the profit margin on sales to meet the market selling price would be a. 9.3% b. 7.3% c. 10.3% d. 8.3% ANSWER: d 95. The target cost is determined by taking the a. expected selling price and subtracting the desired profit b. expected selling price and adding desired profit c. expected selling price and subtracting the budgeted standard cost d. budgeted standard cost and reducing it by 10% ANSWER: a 96. Peyton Company manufactures Phone X and Phone Y. Peyton can sell all it can make of either phone. Based on the following data and assuming the number of hours is a constraint, which of the following statements is true?

Sales price Variable cost Time needed to process

X $48 38

Y $44 28

5 hours

8 hours

a. X is more profitable than Y. b. Y is more profitable than X. c. Neither X nor Y is profitable. d. X and Y are equally profitable.

ANSWER: d Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32, respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and Wales 1 hour.

97. The product with the highest contribution margin per machine hour is a. Bales b. Tales c. Wales Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing d. Bales and Tales have the same contribution margin.

ANSWER: c 98. The contribution margin per machine hour for Bales is a. $5 b. $7 c. $35 d. $28 ANSWER: b 99. The contribution margin per machine hour for Tales is a. $4 b. $7 c. $28 d. $35 ANSWER: a 100. The contribution per machine hour for Wales is a. $35 b. $28 c. $17 d. $7 ANSWER: c 101. Assuming that Widgeon Co. can sell all of the products it can make, the maximum contribution margin it can earn per month is a. $49,000 b. $70,000 c. $56,000 d. $34,000 ANSWER: d 102. Assume that Widgeon Co. produced enough product with the highest contribution margin per unit to use 1,000 hours of machine time. Product demand does not warrant any more production of that product. The maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with the second highest contribution margin per hour is a. $35,000 b. $7,000 c. $4,000 d. $28,000 ANSWER: b 103. Lofty Airlines has a flight for which the regular ticket price is $200 and the variable costs per passenger are $50.

Fixed costs assigned to each flight are $12,000. Each flight has a capacity of 125 seats, with an average of 95 seats sold at the regular price. To attract customers to the last 30 unsold seats, Lofty discounts the tickets by 50% for standby Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing passengers. The contribution margin per standby passenger is a. $25 b. $50 c. $100 d. $150 ANSWER: b 104. Lofty Airlines has a flight for which the regular ticket price is $200 and the variable costs per passenger are $50.

Fixed costs assigned to each flight are $12,000. Each flight has a capacity of 125 seats, with an average of 95 seats sold at the regular price. To attract customers to the last 30 unsold seats, Lofty discounts the tickets by 50% for standby passengers. The break-even number of regular-priced seats per flight is a. 50 b. 80 c. 95 d. 120 ANSWER: b Magpie Corporation uses the total cost method of product pricing. Below is cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% return on invested assets of $700,000.

Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

$38,700 7,500 4.60 1.88 1.13 4.50

105. The dollar amount of desired profit from the production and sale of Magpie's product is a. $175,000 b. $67,200 c. $73,500 d. $96,000 ANSWER: a 106. The cost per unit for the production and sale of Magpie's product is a. $12.11 b. $12.88 c. $15.00 d. $13.50 ANSWER: b 107. The unit selling price for Magpie's product is a. $15.00 b. $13.82 c. $15.79 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing d. $14.76 ANSWER: c 108. The markup percentage on total cost for Magpie's product is a. 21.0% b. 22.6% c. 15.8% d. 24.0% ANSWER: b 109. Contractors that sell to government agencies would be most likely to use which of the following cost methods in pricing their products? a. variable cost method b. product cost method c. total cost method d. fixed cost method ANSWER: c Dotterel Corporation uses the variable cost method of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% return on invested assets of $350,000.

Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

$105,000 35,000 4.34 5.18 0.98 0.70

110. The variable cost per unit for the production and sale of Dotterel's product is a. $14.00 b. $12.60 c. $9.80 d. $11.20 ANSWER: d 111. The unit selling price for Dotterel's product is a. $16.32 b. $13.44 c. $12.10 d. $13.72 ANSWER: a 112. The markup percentage for the sale of Dotterel's product is a. 14.0% b. 5.6% Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing c. 45.7% d. 11.2% ANSWER: c 113. The dollar amount of desired profit from the production and sale of Dotterel's product is a. $89,600 b. $39,200 c. $70,000 d. $84,000 ANSWER: b 114. Which of the following methods used in applying the cost-plus approach to product pricing includes only desired profit in the markup? a. product cost method b. variable cost method c. sunk cost method d. total cost method ANSWER: d 115. When using the total cost method of applying the cost-plus approach to product pricing, which of the following is included in the markup? a. total selling and administrative expenses plus desired profit b. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit c. total costs plus desired profit d. desired profit ANSWER: d 116. When using the variable cost method of applying the cost-plus approach to product pricing, which of the following is included in the markup? a. total costs plus desired profit b. desired profit c. total selling and administrative expenses plus desired profit d. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit ANSWER: d Swan Company produces its product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit.

117. The markup percentage on total cost is a. 100.0% b. 110.0% c. 80.0% d. 46.5% ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing 118. The markup percentage on variable cost is a. 100.0% b. 110.0% c. 80.0% d. 46.5% ANSWER: b 119. A point in the manufacturing process where the demand for the company’s product exceeds the ability to produce the product is called a. a production bottleneck b. a constraint c. both a production bottleneck and a constraint d. neither a production bottleneck nor a constraint ANSWER: c 120. Which of the following combines market-based pricing with a cost-reduction emphasis? a. demand-based method b. product cost method c. target costing d. competition-based method ANSWER: c 121. Which of the following methods of determining product price sets the price high when demand is high? a. demand-based method b. product cost method c. target costing d. competition-based method ANSWER: a 122. Which of the following is a manufacturing strategy that focuses on reducing the influence of bottlenecks on production processes? a. theory of constraints b. differential analysis c. target costing d. product cost method ANSWER: a 123. Which of the following is a tool used to determine the differential impact on profit of two alternative courses of action? a. theory of constraints b. differential analysis c. incremental analysis d. both differential analysis and incremental analysis Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing ANSWER: d 124. Which of the following is a type of “accepting business at a special price” differential analysis used by service businesses? a. theory of constraints b. yield pricing c. incremental analysis d. total cost method ANSWER: b 125. An employee of Morgan Corporation found some partially completed units of Model X in a dusty corner of the warehouse. A job ticket attached to the units indicates that a total of $750 in manufacturing costs have been used to bring the materials to this point in the manufacturing process. The units can be sold in their current condition for $275 to a scrap metal dealer. If Morgan spends $250 to complete the units, they could be sold for $600. a. What should Morgan do? Why? b. Identify the sunk cost, if any.

ANSWER: a. Morgan should finish the units because the incremental revenue of $325 ($600 – $275) is greater than the incremental cost of $250. b. The $750 in manufacturing costs that have already been incurred is sunk and not relevant.

126. Oficina Bonita Company manufactures office furniture. An unfinished desk is produced for $36.00 and sold for $65.00. A finished desk can be sold for $75.00. The additional processing cost to complete the finished desk is $5.95.

Should the company sell unfinished desks or process further and sell finished desks? Prepare a differential analysis to support your answer.

ANSWER: Differential Analysis Sell Unfinished (Alternative 1) or Process Further into Finished (Alternative 2) Desks Sell Unfinished Process Further into Desks Finished Desks Differential Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues per desk $65.00 $75.00 $10.00 * Costs per desk (36.00) (5.95) (41.95) Profit (loss) per desk

$29.00

$33.05

$ 4.05

*$36.00 + $5.95 Oficina Bonita Company should process further and sell finished desks.

127. Finch, Inc., has purchased a new server and must decide what to do with the old one. The cost of the old server was originally $60,000 and has been depreciated $45,000. The company has received two offers. One offer was to lease the equipment for $7,000 for the next five years, but the company will be required to provide maintenance and insurance totaling $3,000 per year. The other offer was made to purchase the equipment outright for $18,500 less a 5% sales commission. Which offer should Finch, Inc., accept? Prepare a differential analysis report to support your answer.

ANSWER: Finch should accept the lease offer.

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Chapter 11: Differential Analysis and Product Pricing Differential Analysis Lease (Alternative 1) or Sell (Alternative 2) Server Lease Server Sell Server Differential Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues $35,000* $18,500 $(16,500) Costs (15,000)** (925)*** 14,075 Profit (loss) $20,000 $17,575 $ (2,425) *$7,000 × 5 years **$3,000 × 5 years ***$18,500 × 5%

128. Diamond Boot Factory normally sells its specialty boots for $375 a pair. An offer to buy 100 boots for $275 per pair was made by an organization hosting a national event in Norfolk. The variable cost per boot is $250, and special stitching will add another $20 per pair to the cost. Determine the differential income or loss per pair of boots from selling to the organization. Should Diamond Boot Factory accept or reject the special offer? Show computations, but a formal differential analysis report is not required.

ANSWER: Differential revenue: Revenue per pair of boots $275 Differential costs: Variable manufacturing costs $(250) Additional decoration (20) (270) $ 5 Differential profit from accepting special order Diamond Boot Factory should accept the special order.

129. Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000, and its remaining useful life is five years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of five years.

Should the machine be replaced? Prepare a differential analysis report to support your answer.

ANSWER: The machine should not be replaced.

Differential Analysis Continue with (Alternative 1) or Replace (Alternative 2) Old Machine Continue with Replace Old Differential Effects Old Machine Machine (Alternative 2) (Alternative 1) (Alternative 2) Revenues: Proceeds from sale of $ 0 $ 2,000 $ 2,000 old machine Costs: Purchase price 0 (18,000) (18,000) Variable manufacturing costs (20,000)* (7,500)** 12,500 (5 years) Profit (loss) $(20,000) $(23,500) $ (3,500) *$4,000 × 5 years Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing **$1,500 × 5 years

130. Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by product line for the past year indicated a net profit for Product J of $2,750. This net profit resulted from sales of $275,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued.

Should the company continue or discontinue producing Product J? Prepare a differential analysis report to support your answer.

ANSWER: The company should continue producing Product J. Differential Analysis Continue (Alternative 1) or Discontinue (Alternative 2) Product J February 8 Continue Discontinue Differential Product J Product J Effects (Alternative (Alternative (Alternative 2) 1) 2) $ 275,000 $ 0 $(275,000)

Revenues Costs: Variable CGS (70% × $186,500) Variable op. exp. (60% × $85,750) Fixed CGS (30% × $186,500) Fixed op. exp. (40% × $85,750) Profit (loss)

(130,550)

0

130,550

(51,450)

0

51,450

(55,950)

(55,950)

0

(34,300)

(34,300)

0

2,750

$(90,250)

$ (93,000)

$

131. Snipe Company has been purchasing a component, Part Q, for $19.20 per unit. Snipe is currently operating at 70% of capacity, and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Part Q is estimated as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total

$11.50 4.50 1.12 3.15 $20.27

Should the company make or buy the component? Prepare a differential analysis report dated March 12 of the current year to support your answer.

ANSWER: The company should make the component.

Differential Analysis Make (Alternative 1) or Buy (Alternative 2) Part Q March 12 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing Make Buy Part Q Part Q (Alternative (Alternative 1) 2) Unit costs: Purchase price Direct materials Direct labor Variable factory overhead Fixed factory overhead Total unit costs

$ 0.00 11.50 4.50 1.12 3.15 $20.27

$19.20 0.00 0.00 0.00 3.15 $22.35

Differential Effects (Alternative 2)

$(19.20) 11.50 4.50 1.12 0.00 $ (2.08)

132. MZE Manufacturing Company has a normal plant capacity of 37,500 units per month. Because of an extra-large quantity of inventory on hand, it expects to produce only 30,000 units in May. Monthly fixed costs and expenses are $112,500 ($3.00 per unit at normal plant capacity) and variable costs and expenses are $8.25 per unit. The present selling price is $13.50 per unit. The company has an opportunity to sell 7,500 additional units at $9.90 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of MZE Manufacturing Company.

Should MZE reject or accept the special order? Prepare a differential analysis report dated April 21 of the current year to support your answer.

ANSWER: Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2) April 21 Reject Order Accept Order Differential Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues $0 $74,250* $74,250 Costs: Variable manufacturing 0 (61,875)** (61,875) costs Profit (loss) $0 $12,375 $12,375 *7,500 × $9.90 **7,500 × $8.25

133. Piper Rose Boutique has been approached by the community college to make special polo shirts for the faculty and staff. The college is willing to buy 4,000 polos with its own design for $6.00 each. The company normally sells its shirts for $12.00 each. The company has enough excess capacity to make this order. A breakdown of the costs is as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total cost per unit

$2.00 0.50 1.50 _2.50 $6.50

Should Piper Rose Boutique accept the special order made by the college? Show computations, but a formal differential analysis report is not required.

ANSWER: Yes, Piper Rose Boutique should accept the special order, determined as follows: Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing Differential revenue from accepting offer (4,000 × $6.00) Differential variable costs of additional units (4,000 × $4.00) Differential profit from accepting offer

$24,000 (16,000) $ 8,000

134. Airflow Company sells a product in a competitive marketplace. Market analysis indicates that the product would probably sell at $28.00 per unit. Airflow management desires a profit equal to a 20% return on invested assets of $1,400,000. Airflow anticipates selling 50,000 units. The current full cost per unit for the product is $25.00 per unit. a. What is the amount of profit per unit? b. What is the target cost per unit if Airflow meets the market dictated price and management’s desired profit?

ANSWER: a. $28.00 – $25.00 = $3.00 b. ($1,400,000 × 20%) ÷ 50,000 = $5.60 per unit $28.00 – $5.60 = $22.40 per unit 135. Hummingbird Company uses the product cost method of applying the cost-plus approach to product pricing. The costs and expenses of producing 25,000 units of Product K are as follows: Variable costs per unit: Direct materials Direct labor Factory overhead Selling and administrative expenses Total

$2.50 4.25 1.25 0.50 $8.50

Fixed costs: Factory overhead Selling and administrative expenses

$25,000 17,000

Hummingbird desires a profit equal to a 5% return on invested assets of $642,500. a. b. c. d.

Determine the amount of desired profit from the production and sale of Product K. Determine the total manufacturing costs and the cost amount per unit for the production of 25,000 units of Product K. Determine the markup percentage for Product K. Determine the selling price of Product K.

Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal places.

ANSWER: a. $32,125 ($642,500 × 5%) b. Total manufacturing costs: Variable ($8.00 × 25,000 units) Fixed factory overhead Total Cost amount per unit: $225,000 ÷ 25,000 units

$200,000 25,000 $225,000 $ 9.00

c. Markup Percentage = Desired Profit + Total Selling and Admin. Exp. Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing Total Manufacturing Costs = $32,125 + $17,000 + ($0.50 × 25,000 units) $225,000 = $32,125 + $17,000 + $12,500 $225,000 = $ 61,625 = 27.4% $225,000 d. Cost amount per unit Markup ($9.00 × 27.4%) Selling price

$ 9.00 2.47 $11.47

136. Mallory Company uses the product cost method of applying the cost-plus approach to product pricing. It produces and sells Product X at a total cost of $35 per unit, of which $28 is product cost and $7 is selling and administrative expenses. In addition, the total cost of $35 is made up of $24 variable cost and $11 fixed cost. The desired profit is $8 per unit. Determine the markup percentage on product cost. Round to one decimal place.

ANSWER: Markup percentage: ($8 + $7) ÷ $28 = 53.6% 137. Goshawks Co. produces an automotive product and incurs total manufacturing costs of $2,600,000 in the production of 80,000 units. The company desires to earn a profit equal to a 12% return on assets of $960,000. Total selling and administrative expenses are $105,000. a.

Determine the markup percentage, using the product cost method. b.

Compute the selling price per unit of the automotive product.

Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal places.

ANSWER: a. Markup Percentage = Desired Profit + Total Selling & Admin. Exp. Total Manufacturing Costs = ($960,000 × 12%) + $105,000 $2,600,000 =

$220,200 $2,600,000

= 8.5% b.

Manufacturing cost amount per unit ($2,600,000 ÷ 80,000 units) Markup ($32.50 × 8.5%) Selling price

$32.50 2.76 $35.26

138. Sensational Soft Drinks makes three products: iced tea, soda, and lemonade. The following data are available: Sales price per unit Variable cost per unit Contribution margin per unit Copyright Cengage Learning. Powered by Cognero.

Iced Tea $0.90 (0.30) $0.60

Soda $0.60 (0.15) $0.45

Lemonade $0.50 (0.10) $0.40 Page 28

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Chapter 11: Differential Analysis and Product Pricing Sensational is experiencing a bottleneck in one of its processes that affects each product as follows: Iced Tea 3

Bottleneck process hours per unit

Soda 3

Lemonade 4

a. b.

Using a theory of constraints (TOC) approach, rank the products in terms of profitability.

What price for lemonade would equate its profitability (contribution margin per bottleneck hour) to that of soda?

ANSWER: a.

Contribution Margin per Unit = CM per Bottleneck Hour Bottleneck Hours per Unit Rank 1.

Iced tea:

$0.60 = $0.20 CM per bottleneck hour 3

2.

Soda:

$0.45 = $0.15 CM per bottleneck hour 3

3.

Lemonade:

$0.40 = $0.10 CM per bottleneck hour 4

b.

Contribution Margin per Bottleneck Hour of Soda

Revised Price Variable Cost = of – of Lemonade Lemonade (L) Bottleneck Hours per Unit of Lemonade

$0.15

=

L – $0.10 4

$0.60

=

L – $0.10

$0.60 + $0.10

=

L

$0.70

=

L

139. Ptarmigan Company produces two products. Product A has a contribution margin of $20 and requires 4 machine hours. Product B has a contribution margin of $18 and requires 3 machine hours. Determine the most profitable product assuming the machine hours are the constraint.

ANSWER: Product Product A B Contribution margin per unit $20 $18 Machine hours 4 3 Contribution margin per bottleneck hour $ 5 $ 6 Product B is the most profitable.

140. Eastwood Cake Factory sells chocolate cakes, birthday cakes, and specialty cakes. The factory is experiencing a bottleneck and is trying to determine which cake is most profitable. Even though Eastwood may have to limit its orders, it Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Differential Analysis and Product Pricing is concerned about customer service and satisfaction.

Sales price Variable cost per cake Hours needed to bake, frost, and decorate

Chocolate Cake $20.00 $5.00

Birthday Cake

Specialty Cake

$45.00 $12.00

$60.00 $20.00

2.5 hours

2 hours

1 hour

a. Compute the contribution margin per hour per cake. b. Determine which cakes the company should try to sell more of first, second, and then last.

ANSWER: a. Chocolate $15.00, birthday $13.20, specialty $20.00 b. Specialty, chocolate, birthday

Sales price Variable cost per cake Contribution margin per cake Hours needed to bake, frost, and decorate Contribution margin per hour per cake

Chocolate Birthday Cake Cake $20.00 $ 45.00 (5.00) (12.00)

Specialty Cake $ 60.00 (20.00)

$15.00

$33.00

$ 40.00

÷ 1 hr.

÷ 2.5 hrs.

÷ 2 hrs.

$15.00

$13.20

$ 20.00

141. Olsen Company produces two products. Product A has a contribution margin of $30 and requires 10 machine hours.

Product B has a contribution margin of $24 and requires 4 machine hours. Determine the more profitable product assuming the machine hours are the constraint.

ANSWER: Product Product A B Unit contribution margin $30 $24 Machine hours per unit ÷10 ÷ 4 Unit contribution margin per bottleneck hour $ 3 $ 6 Product B is more profitable.

142. Sierra Company produces its product at a total cost of $89 per unit. Of this amount, $14 per unit is selling and administrative costs. The total variable cost is $58 per unit, and the desired profit is $28 per unit.

Determine the markup percentage using the (a) total cost, (b) product cost, and (c) variable cost methods. Round all percentages to one decimal place.

ANSWER: a. Total Cost = $28 ÷ $89 = 31.5% b. Product Cost = ($28 + $14) ÷ $75 = 56.0% c. Variable Cost = ($28 + $31) ÷ $58 = 101.7% 143. Yakking Co. manufactures mobile cellular equipment and uses the variable cost method of applying the cost-plus approach to product pricing. Yakking incurs variable costs of $1,900,000 in the production of 100,000 units, while fixed costs total $50,000. The company employs $4,725,000 of assets and wishes to earn a profit equal to a 10% return on invested assets.

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Chapter 11: Differential Analysis and Product Pricing a.

Compute a markup percentage based on variable cost. b.

Determine a selling price.

Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal places.

ANSWER: a.

Markup Percentage = Desired Profit + Total Fixed Costs Total Variable Costs = (10% × $4,725,000) + $50,000 $1,900,000 =

$522,500 $1,900,000

= 27.5% b.

Cost amount per unit Markup ($19 × 27.5%) Selling price

$19.00 5.23 $24.23

144. Jamison Company uses the total cost method of applying the cost-plus approach to product pricing. Jamison produces and sells Product X at a total cost of $25 per unit, of which $15 is product cost and $10 is selling and administrative expenses. In addition, the total cost of $25 is made up of $14 variable cost and $11 fixed cost. The desired profit is $5 per unit. Determine the markup percentage on total cost.

ANSWER: Markup percentage: $5 ÷ $25 = 20% 145. Using the variable cost method of applying the cost-plus approach to product pricing, determine the selling price for 30,000 units using the following data: variable cost per unit, $15.00; total fixed costs, $90,000; and desired profit, $150,000. Do not round intermediate percentage.

ANSWER: Markup Percentage = Desired Profit + Total Fixed Costs Total Variable Costs = $150,000 + $90,000 = 53.3% $450,000 Markup = $15.00 × 53.3% = $8.00 Selling Price = $15.00 + $8.00 = $23.00 146. Jay Company uses the total cost method of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 38,400 units of Product E are as follows: Variable costs per unit: Direct materials Direct labor Factory overhead Selling and administrative expenses Total Fixed costs: Factory overhead Selling and administrative expenses Copyright Cengage Learning. Powered by Cognero.

$ 4.70 2.50 1.90 2.60 $11.70 $80,000 14,000 Page 31

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Chapter 11: Differential Analysis and Product Pricing Jay desires a profit equal to a 14% return on invested assets of $640,000. a.

Determine the amount of desired profit from the production and sale of Product E. b.

Determine the total costs and the cost amount per unit for the production and sale of 38,400 units of Product E. c.

Determine the markup percentage for Product E. d.

Determine the selling price of Product E. Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal places.

ANSWER: a. $89,600 ($640,000 × 14%) b. Total costs: Variable ($11.70 × 38,400 units) Fixed ($80,000 + $14,000) Total Cost amount per unit: $543,280 ÷ 38,400 units c.

Markup Percentage

d. Cost amount per unit Markup ($14.15 × 16.5%) Selling price

$449,280 94,000 $543,280 $14.15 =

Desired Profit Total Costs

=

$89,600 $543,280

=

16.5% $14.15 2.33 $16.48

147. Moon Company uses the variable cost method of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 75,000 units of Product T are as follows: Variable costs per unit: Direct materials Direct labor Factory overhead Selling and administrative expenses Total Fixed costs: Factory overhead Selling and administrative expenses

$ 7.00 3.50 1.50 3.00 $15.00 $45,000 20,000

Moon desires a profit equal to an 18% return on invested assets of $1,440,000. a.

Determine the amount of desired profit from the production and sale of Product T. b.

Determine the total variable costs for the production and sale of 75,000 units of Product T. c.

Determine the markup percentage for Product T. d.

Determine the unit selling price of Product T. Round the markup percentage to one decimal place and other intermediate computations and final answer to two decimal places.

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Chapter 11: Differential Analysis and Product Pricing ANSWER: a.

$259,200 ($1,440,000 × 18%)

b.

Total variable costs: $15.00 × 75,000 units = $1,125,000

c.

Markup Percentage = Desired Profit + Total Fixed Costs Total Variable Costs = $259,200 + $45,000 + $20,000 $1,125,000 =

$324,200 $1,125,000

= 28.8% d. Cost amount per unit Markup ($15.00 × 28.8%) Selling price

$15.00 4.32 $19.32

148. Falcon Inc. manufactures Product B, incurring variable costs of $15 per unit and fixed costs of $70,000. Falcon desires a profit equal to a 12% return on invested assets, $785,000 of assets are devoted to producing Product B, and 100,000 units are expected to be produced and sold. a.

Compute the markup percentage, using the total cost method of applying the costplus approach to product pricing. b.

Compute the selling price of Product B. Round the intermediate computations and final answer to two decimal places.

ANSWER: a.

Markup Percentage = Desired Profit Total Costs =

$785,000 × 12% ($15 × 100,000) + $70,000

=

$94,200 $1,570,000

= 6% b.

Cost amount per unit ($1,570,000 ÷ 100,000) Markup ($15.70 × 6%) Selling price of Product B

Copyright Cengage Learning. Powered by Cognero.

$15.70 0.94 $16.64

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Chapter 12: Capital Investment Analysis 1. The process by which management plans, evaluates, and controls investments in fixed assets is called capital investment analysis. a. True b. False ANSWER: True 2. Care must be taken when making capital investment decisions, since a long-term commitment of funds is involved and operations could be affected for many years. a. True b. False ANSWER: True 3. Methods that ignore present value in capital investment analysis include the cash payback method. a. True b. False ANSWER: True 4. Methods that ignore present value in capital investment analysis include the average rate of return method. a. True b. False ANSWER: True 5. The cash payback method of capital investment analysis is one of the methods referred to as a present value method. a. True b. False ANSWER: False 6. The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows. a. True b. False ANSWER: False 7. The methods of evaluating capital investment proposals can be grouped into two general categories referred to as (1) the average rate of return and (2) the cash payback methods. a. True b. False ANSWER: False 8. The methods of evaluating capital investment proposals can be grouped into two general categories referred to as (1) methods that do not use present values and (2) methods that use present values. a. True b. False ANSWER: True

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Chapter 12: Capital Investment Analysis 9. Methods that ignore present value in capital investment analysis include the internal rate of return method. a. True b. False ANSWER: False 10. Average rate of return equals average investment divided by estimated average annual income. a. True b. False ANSWER: False 11. Average rate of return equals average annual income divided by average investment. a. True b. False ANSWER: True 12. The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method. a. True b. False ANSWER: True 13. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. a. True b. False ANSWER: True 14. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow. a. True b. False ANSWER: False 15. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 over the 5 years. The expected average rate of return is 30%. a. True b. False ANSWER: True 16. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 over the 5 years. The expected average rate of return is 37.5%. a. True b. False ANSWER: False 17. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis to yield total net income of $200,000 over the 5 years. The expected average rate of return is 50%. a. True b. False ANSWER: False 18. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 over the 5 years. The expected average rate of return is 25%. a. True b. False ANSWER: False 19. The expected period of time between the date of an investment and the recovery in cash of the amount invested is called the discount period. a. True b. False ANSWER: False 20. The expected period of time between the date of an investment and the recovery in cash of the amount invested is called the cash payback period. a. True b. False ANSWER: True 21. If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash inflow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years. a. True b. False ANSWER: False 22. If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash inflow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years. a. True b. False ANSWER: False 23. The cash payback method can be used only when net cash inflows are the same for each period. a. True b. False ANSWER: False 24. For Years 1–5, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash inflows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis 25. The average rate of return method of analyzing capital investment decisions measures the average rate of return from using the asset over its entire life. a. True b. False ANSWER: True 26. The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset. a. True b. False ANSWER: False 27. The time expected to pass before the net cash inflows from an investment would return its initial cost is called the amortization period. a. True b. False ANSWER: False 28. A company is considering purchasing a machine for $21,000. The machine will generate operating income of $2,000; annual net cash inflows from the machine will be $3,500. The cash payback period for the new machine is 10.5 years. a. True b. False ANSWER: False 29. A company is considering purchasing a machine for $21,000. The machine will generate operating income of $2,000; annual net cash inflows from the machine will be $3,500. The cash payback period for the new machine is 6 years. a. True b. False ANSWER: True 30. A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000 (Year 1), $30,000 (Year 2), $18,000 (Year 3), $12,000 (Year 4), and $6,000 (Year 5).

The average operating income generated from the investment over its 5-year life is $20,400. The cash payback period is 3.5 years. a. True b. False ANSWER: True 31. For Years 1–5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life is expected to generate operating income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash inflows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis 32. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.

The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The average rate of return for the machine is 16.7%. a. True b. False ANSWER: True 33. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.

The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The payback period for the machine is 12 years. a. True b. False ANSWER: False 34. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years. a. True b. False ANSWER: False 35. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.

The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The payback period for the machine is 4 years. a. True b. False ANSWER: True 36. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 6 years. a. True b. False ANSWER: True 37. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.

The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The average rate of return for the machine is 50%. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis 38. The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method. a. True b. False ANSWER: False 39. The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method. a. True b. False ANSWER: True 40. In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values. a. True b. False ANSWER: False 41. In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values. a. True b. False ANSWER: True 42. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected. a. True b. False ANSWER: True 43. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted. a. True b. False ANSWER: False 44. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis. a. True b. False ANSWER: True 45. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis b. False ANSWER: False 46. A present value index can be used to rank competing capital investment proposals when the net present value method is used. a. True b. False ANSWER: True 47. The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a rate of return expected from the proposals. a. True b. False ANSWER: True 48. Net present value and the payback period are examples of discounted cash flow methods used in capital investment decisions. a. True b. False ANSWER: False 49. In computing the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows. a. True b. False ANSWER: False 50. In computing the present value of an investment in equipment, the present value of the residual value should be added to the cash inflows a. True b. False ANSWER: True 51. A series of equal cash flows at fixed intervals is termed an annuity. a. True b. False ANSWER: True 52. A qualitative characteristic that may influence capital investment analysis is the investment proposal’s impact on product quality. a. True b. False ANSWER: True 53. A qualitative characteristic that may influence capital investment analysis is the investment proposal’s impact on manufacturing flexibility.

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Chapter 12: Capital Investment Analysis a. True b. False ANSWER: True 54. A qualitative characteristic that may influence capital investment analysis is the investment proposal’s impact on employee morale. a. True b. False ANSWER: True 55. A qualitative characteristic that may influence capital investment analysis is the investment proposal’s impact on manufacturing productivity. a. True b. False ANSWER: True 56. A qualitative characteristic that may influence capital investment analysis is the investment proposal’s impact on market opportunities. a. True b. False ANSWER: True 57. The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis. a. True b. False ANSWER: False 58. The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing. a. True b. False ANSWER: True 59. Sensitivity analysis assigns likelihoods (probabilities) to various inputs, thus incorporating uncertainty directly into the output (answer). a. True b. False ANSWER: False 60. With expected value analysis, incorporating the probabilities of various outcomes allows uncertainty to be completely eliminated. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis 61. With sensitivity analysis, at least one input must be a known (not estimated) value. a. True b. False ANSWER: False 62. The process by which management plans, evaluates, and controls investments in fixed assets is called _____ analysis. a. absorption cost b. variable cost c. capital investment d. cost-volume-profit ANSWER: c 63. Which of the following are two methods of analyzing capital investment proposals that both ignore present value? a. internal rate of return and average rate of return b. net present value and average rate of return c. internal rate of return and net present value d. average rate of return and cash payback ANSWER: d 64. Which of the following is a method of analyzing capital investment proposals that ignores present value? a. internal rate of return b. net present value c. discounted cash flow d. average rate of return ANSWER: d 65. Which of the following are present value methods of analyzing capital investment proposals? a. internal rate of return and average rate of return b. average rate of return and net present value c. net present value and internal rate of return d. net present value and cash payback ANSWER: c 66. Which of the following methods of evaluating capital investment proposals uses the concept of present value to compute a rate of return? a. average rate of return b. accounting rate of return c. cash payback period d. internal rate of return ANSWER: d 67. Which of the following capital investment analysis methods ignore present value considerations? a. average rate of return method and cash payback method b. cash payback method and net present value method Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis c. net present value method and internal rate of return method d. internal rate of return method and average rate of return method ANSWER: a 68. The _____ method of analyzing capital investment proposals divides the estimated average annual income by the average investment. a. cash payback b. net present value c. internal rate of return d. average rate of return ANSWER: d 69. The primary advantages of the average rate of return method are its ease of computation and the fact that a. it is especially useful to managers whose primary concern is liquidity b. there is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short term c. it emphasizes the amount of income earned over the life of the proposal d. rankings of proposals are necessary ANSWER: c 70. The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total income of $360,000 for the 4 years is a. 45% b. 22.5% c. 11.3% d. 5.5% ANSWER: b 71. The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total income of $21,600 for the 4 years is a. $30,000 b. $21,600 c. $5,400 d. $60,000 ANSWER: d 72. The amount of the estimated average annual income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of 4 years, no residual value, and an expected total income yield of $25,300, is a. $12,650 b. $25,300 c. $6,325 d. $45,000 ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis 73. An anticipated purchase of equipment for $490,000 with a useful life of 8 years and no residual value is expected to yield the following annual incomes and net cash flows: Year 1 2 3 4 5 6 7 8

Income $60,000 50,000 50,000 40,000 40,000 40,000 40,000 40,000

Net Cash Flow $110,000 100,000 100,000 90,000 90,000 90,000 90,000 90,000

The cash payback period for the equipment is a. 5 years b. 4 years c. 6 years d. 3 years ANSWER: a 74. Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $150,000, and annual operating income of $87,500. The estimated cash payback period for the machine is a. 3.5 years b. 4 years c. 4.5 years d. 5 years ANSWER: c 75. The expected average rate of return for a proposed investment of $6,000,000 in a fixed asset, using straight-line depreciation, a useful life of 20 years, no residual value, and an expected total income of $12,000,000 over the 20 years, is a. 20% b. 10% c. 40% d. 5% ANSWER: a The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability: Year 1 2 3 4 5

Operating Income $100,000 40,000 40,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 120,000

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Chapter 12: Capital Investment Analysis 76. The cash payback period for this investment is a. 5 years b. 4 years c. 2 years d. 3 years ANSWER: b 77. The average rate of return (rounded to the nearest whole percent) for this investment is a. 18% b. 16% c. 58% d. 10% ANSWER: b The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212.

In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5

Operating Income $18,750 18,750 18,750 18,750 18,750

Net Cash Flow $93,750 93,750 93,750 93,750 93,750

78. The average rate of return for this investment is a. 5% b. 10% c. 25% d. 15% ANSWER: b 79. The cash payback period for this investment is a. 4 years b. 5 years c. 20 years d. 3 years ANSWER: a 80. The expected average rate of return (rounded to one decimal place) for a proposed investment of $650,000 in a fixed asset, with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is a. 13.9% Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis b. 36.9% c. 18.5% d. 9.25% ANSWER: c 81. Which of the following is a disadvantage of the average rate of return method? a. difficult to use b. fails to consider the time value of money c. includes the amount of income earned over the entire life of the proposal d. emphasizes accounting income ANSWER: b 82. Which of the following is an advantage of the cash payback method? a. easy to use b. takes into consideration the time value of money c. includes the cash flow over the entire life of the proposal d. emphasizes accounting income ANSWER: a 83. An anticipated purchase of equipment for $520,000, with a useful life of 8 years and no residual value, is expected to yield the following annual incomes and net cash flows: Year 1 2 3 4 5 6 7 8

Income $60,000 50,000 50,000 40,000 40,000 40,000 40,000 40,000

Net Cash Flow $120,000 110,000 110,000 100,000 80,000 80,000 60,000 60,000

The cash payback period for this equipment is a. 5 years b. 4 years c. 6 years d. 3 years ANSWER: a 84. Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $120,000, and annual operating income of $83,721. The estimated cash payback period for the machine is a. 3.5 years b. 5 years c. 5.1 years d. 4 years Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis ANSWER: a 85. The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 over the 20 years, is a. 24% b. 22% c. 45% d. 10% ANSWER: b 86. The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year 1 2 3 4 5

Operating Income $100,000 40,000 20,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The cash payback period for this investment is a. 5 years b. 4 years c. 2 years d. 3 years ANSWER: d 87. The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5

Operating Income $100,000 60,000 30,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The average rate of return for this investment is a. 18% b. 21% c. 53% d. 10% Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis ANSWER: b 88. The management of Charlton Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212.

In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5

Operating Income $20,000 20,000 20,000 20,000 20,000

Net Cash Flow $95,000 95,000 95,000 95,000 95,000

The cash payback period for this investment is a. 4 years b. 5 years c. 19 years d. 3.3 years ANSWER: a 89. Which of the following statements regarding the cash payback period is true? a. The longer the payback, the longer the estimated life of the asset will be. b. The longer the payback, the sooner the cash spent on the investment will be recovered. c. The shorter the payback, the less likely the possibility of obsolescence will be. d. all of these choices ANSWER: c 90. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which one has the best cash payback. Round the payback period to one decimal place.

Machine A Machine B Annual cash flow $ 40,000 $ 50,000 Average investment 300,000 250,000 a. Machine A b. Machine C c. Machine B d. Machines B and C have the same preferred payback period.

ANSWER: c

Machine C $ 75,000 500,000

91. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which one has the best average rate of return. Round the average rate of return to one decimal place.

Estimated average income Average investment

Machine A $ 40,000 300,000

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Machine B $ 50,000 250,000

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Chapter 12: Capital Investment Analysis a. Machine B b. Machine C c. Machines B and C have the same preferred average rate of return. d. Machine A ANSWER: a The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5

Operating Income $20,000 20,000 20,000 20,000 20,000

Net Cash Flow $95,000 95,000 95,000 95,000 95,000

92. The cash payback period for this investment is a. 4 years b. 5 years c. 20 years d. 3 years ANSWER: a 93. The average rate of return (rounded to one decimal place) for this investment is a. 5.5% b. 10.5% c. 25.5% d. 15.5% ANSWER: b 94. The net present value for this investment is a. $20,140 b. $(20,140) c. $19,875 d. $(19,875) ANSWER: a 95. Which of the following methods of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows? a. internal rate of return method b. cash payback method c. net present value method d. average rate of return method Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis ANSWER: a 96. When several alternative investment proposals of the same amount are being considered, the one with the largest net present value is the most desirable. If the alternative proposals involve different amounts of investment, it is useful to prepare a relative ranking of the proposals by using a(n) _____ index. a. average rate of return b. consumer price c. present value d. price-level ANSWER: c 97. A series of equal cash flows at fixed intervals is termed a(n) a. present value index b. price-level index c. net cash flow d. annuity ANSWER: d 98. Using the following partial table of present value of $1 at compound interest, the present value of $15,000 to be received 3 years hence with earnings at the rate of 6% a year is Year 1 2 3 4 a. $12,600 b. $11,880 c. $13,350 d. $11,265 ANSWER: a

6% 0.943 0.890 0.840 0.792

10% 0.909 0.826 0.751 0.683

12% 0.893 0.797 0.712 0.636

99. Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis? a. price-level index b. future value index c. rate of investment index d. present value index ANSWER: d 100. The rate of earnings is 6% and the cash to be received in 4 years is $20,000. The present value amount, using the following partial table of present value of $1 at compound interest is Year 1 2 3

6% 0.943 0.890 0.840

10% 0.909 0.826 0.751

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Chapter 12: Capital Investment Analysis 4 a. $13,660 b. $12,720 c. $15,840 d. $16,800 ANSWER: c

0.792

0.683

0.636

101. The present value index is computed using which of the following formulas? a. Amount to Be Invested ÷ Average Rate of Return b. Total Present Value of Net Cash Flow ÷ Amount to Be Invested c. Total Present Value of Net Cash Flow ÷ Average Rate of Return d. Amount to Be Invested ÷ Total Present Value of Net Cash Flow ANSWER: b 102. An analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? a. The proposal is desirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. b. The proposal is desirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. c. The proposal is undesirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. d. The proposal is undesirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis.

ANSWER: a 103. The formula for determining the present value factor for an annuity of $1 is a. Amount to Be Invested ÷ Annual Average Net Income b. Annual Net Cash Flow ÷ Amount to Be Invested c. Annual Average Net Income ÷ Amount to Be Invested d. Amount to Be Invested ÷ Equal Annual Net Cash Flows ANSWER: d 104. Which of the following methods for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value? a. net present value b. average rate of return c. internal rate of return d. cash payback ANSWER: a 105. The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis Year 1 2 3 4 5

Operating Income $100,000 40,000 40,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 120,000

The net present value for this investment is a. $36,400 b. $55,200 c. $(16,170) d. $(126,800) ANSWER: c 106. The management of California Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5

Operating Income $100,000 40,000 20,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The present value index (rounded to two decimal places) for this investment is a. 0.88 b. 1.45 c. 1.14 d. 0.70 ANSWER: c The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212.

In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5

Operating Income $18,750 18,750 18,750 18,750 18,750

Net Cash Flow $93,750 93,750 93,750 93,750 93,750

107. The present value index (rounded to two decimal places) for this investment is a. 1.00 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis b. 0.95 c. 1.25 d. 1.05 ANSWER: d 108. The net present value for this investment is a. $(118,145) b. $118,145 c. $19,875 d. $(19,875) ANSWER: c 109. Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for 7 years. The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is a. 10% b. 6% c. 12% d. 8% ANSWER: d 110. By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money a. has an international rate of exchange b. is the language of business c. is the measure of assets, liabilities, and stockholders' equity on financial statements d. has a time value ANSWER: d Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Following is a table for the present value of an annuity of $1 at compound interest: Year 1 2 3 4 5

6% 0.943 1.833 2.673 3.465 4.212

10% 0.909 1.736 2.487 3.170 3.791

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Chapter 12: Capital Investment Analysis 111. Using the tables provided, the present value of $25,000 (rounded to the nearest dollar) to be received 4 years from today, assuming an earnings rate of 10%, is a. $19,800 b. $17,075 c. $79,250 d. $15,525 ANSWER: b 112. Using the tables provided, the present value of $30,000 to be received 3 years from today, assuming an earnings rate of 6%, is a. $25,200 b. $26,700 c. $23,760 d. $80,190 ANSWER: a 113. Using the tables provided, the present value of $3,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 12%, is a. $10,815 b. $7,206 c. $9,111 d. $1,908 ANSWER: c 114. Using the tables provided, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years, the net present value of the investment, assuming an earnings rate of 10%, is a. $23,500 b. $16,050 c. $25,360 d. $1,860 ANSWER: d 115. Using the tables provided, the internal rate of return of an investment of $227,460 that would generate an annual cash inflow of $60,000 for the next 5 years a. is 6% b. is 10% c. is 12% d. cannot be determined from the data given ANSWER: b 116. Using the tables provided, the internal rate of return of an investment of $210,600 that would generate an annual cash inflow of $50,000 for the next 5 years is a. 6% b. 10% Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis c. 12% d. 14% ANSWER: a 117. Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for 4 years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is a. 9% b. 10% c. 12% d. 3% ANSWER: c 118. Using the following partial table of present value of $1 at compound interest, determine the present value of $50,000 to be received 3 years hence with earnings at the rate of 12% a year.

Year 1 2 3 4

6% 0.943 0.890 0.840 0.792

10% 0.909 0.826 0.751 0.683

12% 0.893 0.797 0.712 0.636

a. $37,550 b. $31,800 c. $35,600 d. $39,850 ANSWER: c 119. The rate of earnings is 12% and the cash to be received in 2 years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest.

Year 1 2 3 4

6% 0.943 0.890 0.840 0.792

10% 0.909 0.826 0.751 0.683

12% 0.893 0.797 0.712 0.636

a. $8,930 b. $7,120 c. $7,970 d. $8,260 ANSWER: c 120. The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis Year 1 2 3 4 5

Operating Income $100,000 40,000 20,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The net present value for this investment is a. $16,400 b. $25,200 c. $(99,600) d. $(126,800) ANSWER: b 121. The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5

Operating Income $100,000 40,000 20,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The present value index (rounded to two decimal places) for this investment is a. 1.08 b. 1.45 c. 1.14 d. 0.70 ANSWER: a Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Following is a table for the present value of an annuity of $1 at compound interest: Year 1 2 3

6% 0.943 1.833 2.673

10% 0.909 1.736 2.487

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Chapter 12: Capital Investment Analysis 4 5

3.465 4.212

3.170 3.791

3.037 3.605

122. Using the tables provided, the present value of $15,000 to be received at the end of each of the next 2 years, assuming an earnings rate of 6%, is a. $27,495 b. $26,040 c. $30,000 d. $25,350 ANSWER: a 123. Using the tables provided, the present value of $8,000 to be received 1 year from today, assuming an earnings rate of 12%, is a. $7,544 b. $7,120 c. $7,272 d. $7,144 ANSWER: d 124. Using the tables provided, the present value of $6,000 to be received at the end of each of the next 4 years, assuming an earnings rate of 10%, is a. $20,790 b. $19,020 c. $14,412 d. $25,272 ANSWER: b 125. Using the tables provided, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, the present value of the investment cash inflows, assuming an earnings rate of 12%, is a. $20,352 b. $3,969 c. $22,190 d. $21,259 ANSWER: d 126. The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines and has asked the accountant to analyze them to determine which of the proposals (if any) meet or exceed the company’s policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has an estimated useful life of 10 years. The accountant has identified the following data: Present value of future cash flows computed using 10% rate of return Amount of initial investment

Machine A

Machine B

Machine C

$305,000 300,000

$295,000 300,000

$300,000 300,000

Which of the investments are acceptable?

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Chapter 12: Capital Investment Analysis a. Machines A and C b. Machines B and C c. Machine B only d. Machine A only ANSWER: a 127. The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return?

Annual net cash flows Average investment

Machine A $ 50,000 250,000

Machine B $ 40,000 300,000

Machine C $ 75,000 500,000

a. Machine B only b. Machine C only c. Machines A and B d. Machine A only ANSWER: a 128. T-Bone Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project? a. yes, because net present value is $9,000 b. yes, because net present value is $(9,000) c. no, because net present value is $9,000 d. no, because net present value is $(9,000) ANSWER: d 129. Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $180,000. The present value of the future cash flows generated by the project is $163,000. Should the company invest in this project? a. yes, because the rate of return on the project exceeds the desired rate of return used to compute the present value of the future cash flows b. no, because the rate of return on the project is less than the desired rate of return used to compute the present value of the future cash flows c. no, because the net present value is $17,000 d. yes, because the rate of return on the project is equal to the desired rate of return used to compute the present value of the future cash flows ANSWER: b 130. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $210,000. The present value of the future cash flows is $225,000. The company’s desired rate of return used in the present value computations was 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The internal rate of return on the project is less than 12%. c. The internal rate of return on the project is more than 12%. d. The internal rate of return on the project is equal to 12%.

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Chapter 12: Capital Investment Analysis ANSWER: c 131. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company’s desired rate of return is $105,000. The IRR on the project is 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The desired rate of return used to compute the present value of the future cash flows is less than 12%. c. The desired rate of return used to compute the present value of the future cash flows is more than 12%. d. The desired rate of return used to compute the present value of the future cash flows is equal to 12%.

ANSWER: b 132. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company’s desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The desired rate of return used to compute the present value of the future cash flows is less than 12%. c. The desired rate of return used to compute the present value of the future cash flows is more than 12%. d. The desired rate of return used to compute the present value of the future cash flows is equal to 12%.

ANSWER: d 133. Which of the following is a qualitative consideration that may influence a capital investment decision? a. the investment proposal’s impact on manufacturing productivity b. the investment proposal’s impact on market (strategic) opportunities c. the investment proposal’s impact on product quality d. all of these choices ANSWER: d 134. Which of the following is a qualitative consideration that may influence a capital investment decision? a. the time value of money b. the investment proposal’s impact on employee morale c. changes in price levels d. all of these choices ANSWER: b 135. Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years. What is one widely used method to make the net present values of the proposals comparable? a. Ignore the fact that Proposal F has a useful life of 6 years and treat it as if it has a useful life of 9 years. b. Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at the end of Year 6. c. Ignore the useful lives of 6 and 9 years and find an average (7 1/2 years). d. Ignore the useful lives of 6 and 9 years and compute the average rate of return.

ANSWER: b 136. Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

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Chapter 12: Capital Investment Analysis a. deductions for individuals b. depreciation deduction c. minimum tax provision d. charitable contributions ANSWER: b 137. Which of the following is considered a noncomplicating factor in capital investment decisions? a. income tax b. lease versus purchasing options c. equal proposal lives d. qualitative factors ANSWER: c 138. Periods in time that experience increasing price levels are known as periods of a. inflation b. recession c. depression d. deflation ANSWER: a 139. Which of the following is a factor that may complicate capital investment analysis? a. possible leasing alternatives b. changes in price levels c. federal income tax ramifications d. all of these choices ANSWER: d 140. The process by which management allocates available investment funds among competing investment proposals is called a. investment capital b. investment rationing c. cost-volume-profit analysis d. capital rationing ANSWER: d 141. In capital rationing, alternative proposals are initially screened for minimum standards using which of the following two evaluation methods? a. cash payback method and average rate of return method b. average rate of return method and net present value method c. net present value method and cash payback method d. internal rate of return method and net present value method ANSWER: a 142. In capital rationing, alternative proposals that survive initial and secondary screenings are normally evaluated in Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis terms of a. present value b. qualitative factors c. maximum cost d. net cash flow ANSWER: b 143. Two managerial accounting tools useful in considering the uncertainty of estimates are a. sensitivity analysis and expected value analysis b. sensitivity analysis and capital rationing c. net present value method and expected value analysis d. capital rationing and expected value analysis ANSWER: b 144. Given the following sensitivity analysis, which of the following statements is true?

Estimated Annual Net Cash Flow $ 500,000 $ 600,000 $ 700,000 Present value of annual net cash flows (× 4.487) $ 2,243,500 $ 2,692,200 $ 3,140,900 Present value of residual value 50,000 50,000 50,000 Total present value $ 2,293,500 $ 2,742,200 $ 3,190,900 Amount to be invested (3,000,000) (3,000,000) (3,000,000) Net present value $ (706,500) $ (257,800) $ 190,900 a. Only an annual net cash flow of $700,000 will allow for a positive residual value. b. The total amount to be invested is $3,050,000. c. The annual net cash flow necessary to generate a positive net present value is above $700,000. d. The investment is not justified if the annual net cash flow will be $500,000 or $600,000.

ANSWER: d 145. Xander Inc. has prepared the following sensitivity analysis: Estimated Annual Net Cash Flow $ 500,000 $ 600,000 $ 700,000 Present value of annual net cash flows (× 4.487) $ 2,243,500 $ 2,692,200 $ 3,140,900 Present value of residual value 50,000 50,000 50,000 Total present value $ 2,293,500 $ 2,742,200 $ 3,190,900 Amount to be invested (3,000,000) (3,000,000) (3,000,000) Net present value $ (706,500) $ (257,800) $ 190,900 In addition, it has assigned the following likelihoods to the three possible annual net cash flows: $500,000, 70%; $600,000, 20%; and $700,000, 10%. Based on an expected value analysis, which of the following statements is accurate? a. The expected value of the annual net cash flow is $540,000, and the project should be rejected.

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Chapter 12: Capital Investment Analysis b. The expected value of the annual net cash flow is $540,000, and the project should be accepted. c. The expected value of the annual net cash flow is $660,000, and the project should be rejected. d. The expected value of the annual net cash flow is $660,000, and the project should be accepted.

ANSWER: a 146. Which of the following recognizes that a dollar today is worth more than a dollar tomorrow? a. time period assumption b. revenue recognition principle c. time value of money concept d. monetary unit assumption ANSWER: c 147. Which of the following is often referred to as the discounted cash flow method? a. net present value method b. average rate of return method c. cash payback method d. internal rate of return method ANSWER: a 148. Which of the following is often referred to as capital budgeting? a. sensitivity analysis b. capital rationing c. expected value analysis d. capital investment analysis ANSWER: d 149. Which of the following can be determined by dividing the initial cost by the annual net cash inflow of an investment? a. average rate of return b. cash payback period c. internal rate of return d. net present value ANSWER: b 150. Which of the following is sometimes called the accounting rate of return? a. average rate of return b. cash payback period c. internal rate of return d. net present value ANSWER: a 151. The length of time it will take to recover through cash inflows the dollars of a capital outlay is referred to as the a. average rate of return b. cash payback period Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis c. internal rate of return d. net present value ANSWER: b 152. What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

ANSWER: Capital investment analysis is the process of analyzing alternative long-term investments and deciding which assets to acquire and/or sell. Capital investment analysis decisions are difficult because they are usually based on predictions about an uncertain future. These decisions involve large sums of money committed for long periods of time and may be irreversible.

153. Determine the average rate of return for a project that is estimated to yield total income of $600,000 over 4 years, costs $840,000, and has an $80,000 residual value. Round percentage answer to one decimal place.

ANSWER: Average annual income: $150,000 ($600,000 ÷ 4 years) Average investment: $460,000 [($840,000 + $80,000) ÷ 2] Average rate of return: 32.6% ($150,000 ÷ $460,000) 154. Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash inflows of $720,000. Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$250,000 200,000 100,000 50,000 100,000 20,000 $720,000

Determine the cash payback period for each proposal. Round answers to two decimal places.

ANSWER: Proposal L: $600,000 ÷ $170,000 = 3.53 years Proposal K: $250,000 + $200,000 + $100,000 + $50,000 = $600,000 = 4.00 years 155. Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy Co. seeks to earn an average rate of return of 18% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Jimmy Co. ANSWER: Average Annual Income = Average Rate of Return Average Investment X ($1,050,000 + $0) ÷ 2 X $525,000 X

= 0.18

= 0.18

= $94,500

156. Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years, costs $480,000, and has a $20,000 residual value.

ANSWER: Average annual income: $62,500 ($250,000 ÷ 4 years) Average investment: $250,000 [($480,000 + $20,000) ÷ 2] Average rate of return: 25% ($62,500 ÷ $250,000) Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis 157. An 8-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 5%, determine the average annual income.

ANSWER: Average Annual Income = X = 5% Average Investment ($400,000 + $0) ÷ 2 X = 0.05 × $200,000 X = $10,000 158. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4

Operating Income $ 75,000 100,000 109,000 36,000 $320,000

Net Cash Flow $285,000 290,000 190,000 125,000 $890,000

The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.

Determine the average rate of return on investment (rounded to one decimal place).

ANSWER: $320,000 ÷ 4 = $80,000 = 19.8% ($810,000 + $0) ÷ 2 $405,000 159. Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$250,000 200,000 150,000 75,000 50,000 25,000 $750,000

Determine the cash payback period for each proposal.

ANSWER: Proposal M: $550,000 ÷ $125,000 = 4.4 years Proposal N: $250,000 + $200,000 + 2/3($150,000) = $550,000 = 2 2/3 years 160. A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the average annual income.

ANSWER: Average Annual Income = X = 12% Average Investment ($350,000 + $0) ÷ 2 X = 0.12 × $175,000 X = $21,000 161. A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash payback period.

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Chapter 12: Capital Investment Analysis ANSWER: 7.5 years ($600,000 ÷ $80,000) 162. Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Tipper Co. ANSWER: Average Annual Income = Average Rate of Return Average Investment X ($700,000 + $0) ÷ 2 X $350,000

= 0.15

= 0.15

X

= $52,500

163. Proposals A and B each cost $600,000 and have 5-year lives. Proposal A is expected to provide equal annual net cash flows of $159,000, while the net cash flows for Proposal B are as follows: Year 1 Year 2 Year 3 Year 4 Year 5

$150,000 140,000 110,000 150,000 50,000 $600,000

Determine the cash payback period for each proposal. Round answers to two decimal places.

ANSWER: Proposal A: $600,000 ÷ $159,000 = 3.77 years Proposal B: $150,000 + $140,000 + $110,000 + $150,000 + $50,000 = $600,000 = 5.00 years 164. A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash payback period.

ANSWER: 4 years ($240,000 ÷ $60,000) 165. Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and weaknesses of each method.

ANSWER: The four capital investment models discussed in the chapter are the cash payback method, the average rate of return method, the net present value method, and the internal rate of return method.

The cash payback method is easy to use and understand and is based on cash flows, which are of primary concern to many businesses. However, it ignores profitability and the time value of money.

The average rate of return method is easy to use, considers the entire amount of income earned over the life of the proposal, and emphasizes accounting income, which is often used by investors and creditors to evaluate management performance. However, it does not directly consider the expected cash flows from the proposal or the timing of the expected cash flows.

The net present value method and the internal rate of return method are both based on cash flows, profitability, and the time value of money. The disadvantages of these two methods are that they have more complex computations and they assume the cash flows can be reinvested at the minimum desired rate of return.

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Chapter 12: Capital Investment Analysis 166. Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4

Net Income $ 90,000 80,000 40,000 30,000 $240,000

Net Cash Flow $210,000 200,000 160,000 150,000 $720,000

The company's minimum desired rate of return for net present value analysis is 15%. The factors for the present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years are 0.870, 0.756, 0.658, and 0.572, respectively.

Determine (a) the average rate of return on investment and (b) the net present value for the project.

ANSWER: a. $240,000 ÷ 4 = $60,000 = 25% ($480,000 + $0) ÷ 2 $240,000 b.

Present Value Year of $1 at 15% 1 0.870 2 0.756 3 0.658 4 0.572 Total Amount to be invested Net present value

Net Present Value of Cash Flow Net Cash Flow $210,000 $182,700 200,000 151,200 160,000 105,280 150,000 85,800 $720,000 $524,980 (480,000) $ 44,980

167. BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4

Net Income $ 75,000 102,000 109,500 36,000 $322,500

Net Cash Flow $285,000 290,000 190,000 125,000 $890,000

The company's minimum desired rate of return is 12%. The factors for the present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years are 0.893, 0.797, 0.712, and 0.636, respectively.

Determine (a) the average rate of return on investment and (b) the net present value.

ANSWER: a. $322,500 ÷ 4 = $80,625 = 20% ($806,250 + $0) ÷ 2 $403,125 b.

Year 1 2

Present Value of $1 at 12% 0.893 0.797

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Net Cash Flow $285,000 290,000

Present Value of Net Cash Flow $ 254,505 231,130 Page 33

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Chapter 12: Capital Investment Analysis 3 0.712 4 0.636 Total Amount to be invested Net present value

190,000 125,000 $890,000

135,280 79,500 $ 700,415 (806,250) $(105,835)

168. A project has estimated annual cash flows of $95,000 for 4 years and is estimated to cost $260,000. Assume a minimum acceptable rate of return of 10%. Using the following tables, determine (a) the net present value of the project and (b) the present value index, rounded to two decimal places.

Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Following is a table for the present value of an annuity of $1 at compound interest: Year 6% 10% 12% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 ANSWER: a. $41,150 [($95,000 × 3.170) – $260,000] b. 1.16 ($301,150 ÷ $260,000) 169. A project has estimated annual cash flows of $90,000 for 3 years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables, determine (a) the net present value of the project and (b) the present value index, rounded to two decimal places.

Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Following is a table for the present value of an annuity of $1 at compound interest: Year 6% 10% 12% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 ANSWER: a. $(26,170) [($90,000 × 2.487) – $250,000] Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis b. 0.90 ($223,830 ÷ $250,000) 170. A project is estimated to cost $273,840 and provide annual net cash inflows of $60,000 for 7 years. Determine the internal rate of return for this project, using the following present value of an annuity table.

Year 6% 10% 12% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 6 4.917 4.355 4.111 7 5.582 4.868 4.564 8 6.210 5.335 4.968 9 6.802 5.759 5.328 10 7.360 6.145 5.650 ANSWER: 12% [($273,840 ÷ $60,000) = 4.564, the present value of an annuity factor for 7 years at 12%] 171. A project is estimated to cost $248,400 and provide annual net cash inflows of $50,000 for 8 years. Determine the internal rate of return for this project, using the following present value of an annuity table.

Year 6% 10% 12% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 6 4.917 4.355 4.111 7 5.582 4.868 4.564 8 6.210 5.335 4.968 9 6.802 5.759 5.328 10 7.360 6.145 5.650 ANSWER: 12% [($248,400 ÷ $50,000) = 4.968, the present value of an annuity factor for 8 years at 12%] 172. What is the present value of $8,000 to be received at the end of 6 years if the required rate of return is 15%?

Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 5

15% 0.870 0.756 0.658 0.572 0.497

Year 6 7 8 9 10

15% 0.432 0.376 0.327 0.284 0.247

Following is a table for the present value of an annuity of $1 at compound interest: Year 1 2 3 4

15% 0.870 1.626 2.283 2.855

Year 6 7 8 9

15% 3.785 4.160 4.487 4.772

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Chapter 12: Capital Investment Analysis 5 3.353 10 5.019 ANSWER: $8,000 × 0.432 = $3,456 173. Norton Company is considering a project that will require an initial investment of $750,000 and will return $200,000 each year for 5 years. a. If taxes are ignored and the required rate of return is 9%, what is the project’s net present value? b. Based on this analysis, should Norton Company proceed with the project?

Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 5

9% 0.917 0.842 0.772 0.708 0.650

Year 6 7 8 9 10

9% 0.596 0.547 0.502 0.460 0.422

Following is a table for the present value of an annuity of $1 at compound interest: Year 9% Year 9% 1 0.917 6 4.486 2 1.759 7 5.033 3 2.531 8 5.535 4 3.240 9 5.995 5 3.890 10 6.418 ANSWER: a. ($200,000 × 3.890) – $750,000 = $28,000 b. Yes, since the net present value is greater than zero, Norton Company should proceed with the project.

174. An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next 4 years. What is the investment’s internal rate of return?

Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

15% 0.870 0.756 0.658 0.572 0.497

Following is a table for the present value of an annuity of $1 at compound interest: Year 6% 10% 12% 15% 1 0.943 0.909 0.893 0.870 2 1.833 1.736 1.690 1.626 3 2.673 2.487 2.402 2.283 4 3.465 3.170 3.037 2.855 5 4.212 3.791 3.605 3.353 ANSWER: $185,575 ÷ $65,000 = 2.855 at 4 years = 15% 175. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4

Net Income $ 75,000 100,000 109,000 36,000 $320,000

Net Cash Flow $280,000 300,000 200,000 120,000 $900,000

The company's minimum desired rate of return is 12%. The factors for the present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years are 0.893, 0.797, 0.712, and 0.636, respectively.

Determine the net present value.

ANSWER: Present Value Year of $1 at 12% 1 0.893 2 0.797 3 0.712 4 0.636 Total Amount to be invested Net present value

Present Value of Net Cash Flow Net Cash Flow $280,000 $ 250,040 300,000 239,100 200,000 142,400 120,000 76,320 $900,000 $ 707,860 (810,000) $(102,140)

176. A $550,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: Year 1 2 3 4

Net Cash Flow $300,000 280,000 208,000 180,000

The minimum desired rate of return for net present value analysis is 12%. The factors for the present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years are 0.893, 0.797, 0.712, and 0.636, respectively.

Determine the net present value.

ANSWER: Present Value Year of $1 at 12% 1 0.893 2 0.797 3 0.712 4 0.636 Total Amount to be invested Net present value

Net Present Value of Cash Flow Net Cash Flow $300,000 $ 267,900 280,000 223,160 208,000 148,096 180,000 114,480 $968,000 $ 753,636 (550,000) $ 203,636

177. Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: Year 1

Net Cash Flow $97,500

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Chapter 12: Capital Investment Analysis 2 3 4

80,000 60,000 40,000

The minimum desired rate of return for net present value analysis is 10%. The factors for the present value of $1 at the compound interest rate of 10% for 1, 2, 3, and 4 years are 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present value. Round interim answers to the nearest dollar.

ANSWER: Present Value Present Value of Year of $1 at 10% Net Cash Flow Net Cash Flows 1 0.909 $ 97,500 $ 88,628 2 0.826 80,000 66,080 3 0.751 60,000 45,060 4 0.683 40,000 27,320 Total $277,500 $ 227,088 Amount to be invested (227,500) Net present value $ (412) 178. The net present value has been computed for Proposals P and Q. Relevant data are as follows: Amount to be invested Total present value of net cash flow

Proposal P $245,000 296,500

Proposal Q $460,000 425,000

Determine the present value index for each proposal. Round answers to two decimal places.

ANSWER: Proposal P: $296,500 = 1.21 $245,000 Proposal Q: $425,000 = 0.92 $460,000 179. A $400,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: Year 1 2 3 4

Net Cash Flow $200,000 150,000 90,000 80,000

The minimum desired rate of return for net present value analysis is 12%. The factors for the present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years are 0.893, 0.797, 0.712, and 0.636, respectively.

Determine the net present value.

ANSWER: Present Value Year of $1 at 12% 1 0.893 2 0.797 3 0.712 4 0.636 Total Copyright Cengage Learning. Powered by Cognero.

Net Present Value of Cash Flow Net Cash Flow $200,000 $ 178,600 150,000 119,550 90,000 64,080 80,000 50,880 $520,000 $ 413,110 Page 38

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Chapter 12: Capital Investment Analysis Amount to be invested Net present value

(400,000) $ 13,110

180. Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?

ANSWER: The time value of money means that a dollar today is worth more than a dollar in the future. Since capital investment analysis decisions are often based on cash flows that will be received in the future, managers often use a process called discounting in order to measure future cash flows in the value of today’s dollar.

181. Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for 7 years. Project B has a computed net present value of $13,500 over a 4-year life. Project A could be sold at the end of 4 years for $25,000. (a) Using the present value tables that follow, determine the net present value of Project A over a 4year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value?

Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Following is a table for the present value of an annuity of $1 at compound interest: Year 6% 10% 12% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 ANSWER: a.

Present value of a $15,000, 4-year annuity at 12% Present value of $25,000, 4 years at 12% Total present value of Project A Total cost of Project A Net present value of Project A

$ 45,555* 15,900** $ 61,455 (50,000) $ 11,455

*$15,000 × 3.037 (present value of an annuity of $1 at 12% for 4 years) **$25,000 × 0.636 (present value of $1 at 12% for 4 years) b. Project B’s present value of $13,500 is greater than the net present value of Project A of $11,455.

182. Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for 7 years. Project B has a computed net present value of $5,500 over a 5-year life. Project A could be sold at the end of 5 years for a price of $30,000. (a) Using the present value tables that follow, determine the net present value of Project A over a 5-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value?

Following is a table for the present value of $1 at compound interest: Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Capital Investment Analysis Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Following is a table for the present value of an annuity of $1 at compound interest: Year 6% 10% 12% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 ANSWER: a.

Present value of a $15,000, 5-year annuity at 12% Present value of $30,000, 5 years at 12% Total present value of Project A Total cost of Project A Net present value of Project A

$ 54,075* 17,010** $ 71,085 (65,000) $ 6,085

*$15,000 × 3.605 (present value of an annuity of $1) **$30,000 × 0.567 (present value of $1) b. Project A’s net present value of $6,085 is greater than the net present value of Project B, $5,500.

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Chapter 13: Lean Manufacturing and Activity Analysis 1. Lean manufacturing focuses on reducing time, cost, and poor quality in processes. a. True b. False ANSWER: True 2. The lean philosophy views inventory as a necessary buffer to protect against process problems. a. True b. False ANSWER: False 3. The lean manufacturing philosophy views inventory as an unnecessary waste of resources. a. True b. False ANSWER: True 4. In the lean principles philosophy, unexpected downtime is the result of unreliable processes. a. True b. False ANSWER: True 5. Lead time is the elapsed time between starting a unit of product into the beginning of a process and its completion. a. True b. False ANSWER: True 6. All lead times are considered to be value-added. a. True b. False ANSWER: False 7. Lead time includes both value-added time and non-value-added time. a. True b. False ANSWER: True 8. Lead time reduction can be a cost-saving goal for any processed item. a. True b. False ANSWER: True 9. Increasing wait time is linked to reducing inventory. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis 10. Reducing wait time is directly linked to reducing inventory. a. True b. False ANSWER: True 11. Lean manufacturing favors organizing work around products rather than around processes. a. True b. False ANSWER: True 12. Lean manufacturing favors organizing work around processes rather than around products. a. True b. False ANSWER: False 13. Lean manufacturing values labor for contributions beyond labor tasks, using employee involvement that grants employees the responsibility and authority to make decisions about operations. a. True b. False ANSWER: True 14. A setup is the effort spent preparing an operation or process for production. a. True b. False ANSWER: True 15. Long setups and large batch sizes result in smaller inventories and reduced lead times. a. True b. False ANSWER: False 16. Within-batch wait time increases total lead time. a. True b. False ANSWER: True 17. Large batch sizes increase lead time. a. True b. False ANSWER: True 18. Lean manufacturing is also called make to stock manufacturing. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis 19. Pull manufacturing is also called make to order manufacturing. a. True b. False ANSWER: True 20. A pull manufacturing company matches its production schedules to actual customer orders. a. True b. False ANSWER: True 21. Pull manufacturing companies produce mainly to stock inventory. a. True b. False ANSWER: False 22. Pull manufacturing companies typically produce in small batch sizes. a. True b. False ANSWER: True 23. In a push manufacturing system, production is based on estimated customer demand. a. True b. False ANSWER: True 24. In a push manufacturing system, production is based on actual customer orders. a. True b. False ANSWER: False 25. In a pull manufacturing system, production is based on actual customer orders. a. True b. False ANSWER: True 26. In a pull manufacturing system, production is based on estimated customer demand. a. True b. False ANSWER: False 27. Setups are a significant time-consuming activity in traditional production environments. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis 28. In a lean environment, raw materials are delivered less frequently than in a traditional environment. a. True b. False ANSWER: False 29. In a lean environment, raw materials are delivered more frequently than in a traditional environment. a. True b. False ANSWER: True 30. In a lean environment, process problems are more visible than they are in a traditional environment. a. True b. False ANSWER: True 31. With lean manufacturing, employees are trained to be experts in one operation. a. True b. False ANSWER: False 32. One inherent risk to using lean principles is that companies are at higher risk of inventory shortages during volatile times caused by strikes, adverse weather, etc., than when using traditional manufacturing principles. a. True b. False ANSWER: True 33. In a lean environment, process problems are less visible than they are in a traditional environment. a. True b. False ANSWER: False 34. In lean manufacturing, both direct and indirect labor may be included in an account titled Conversion Costs. a. True b. False ANSWER: True 35. Push manufacturing is also referred to as “make to order” processing. a. True b. False ANSWER: False 36. Push manufacturing (or make to stock) is a traditional approach to manufacturing. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis ANSWER: True 37. In a lean environment, operations only respond to customer orders. a. True b. False ANSWER: True 38. In a lean accounting system, the work in process and raw materials inventory accounts are combined. a. True b. False ANSWER: True 39. In a lean accounting system, there are more transactions to record than there are in a traditional accounting system. a. True b. False ANSWER: False 40. In a lean accounting system, there are fewer transactions to record than there are in a traditional accounting system. a. True b. False ANSWER: True 41. In a lean accounting system, the costs of direct labor are recorded in the conversion costs account. a. True b. False ANSWER: True 42. In a lean accounting system, indirect labor is traced directly to product cells. a. True b. False ANSWER: True 43. A backflush accounting system uses work in process inventories as control points between each process step. a. True b. False ANSWER: False 44. With lean manufacturing, financial accounting information is used more often for long-term operating decisions and nonfinancial measures are used more often for day-to-day decisions. a. True b. False ANSWER: True 45. With lean manufacturing, nonfinancial measures are used more often for long-term operating decisions than are financial accounting measures.

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Chapter 13: Lean Manufacturing and Activity Analysis a. True b. False ANSWER: False 46. A nonfinancial measure is operating information that is stated in terms other than dollars. a. True b. False ANSWER: True 47. In a lean environment, the journal entry to record raw materials purchases would include a credit to the raw materials inventory account. a. True b. False ANSWER: False 48. In a lean environment, the journal entry to record raw materials purchases would include a debit to the raw and in process inventory account. a. True b. False ANSWER: True 49. In a lean environment, the journal entry to record conversion costs would include a debit to the raw and in process inventory account. a. True b. False ANSWER: True 50. In a lean environment, the journal entry to record conversion costs would include a debit to the manufacturing overhead control account. a. True b. False ANSWER: False 51. The cell conversion cost rate is very similar to the predetermined factory overhead rate because both include only factory overhead costs. a. True b. False ANSWER: False 52. Costs of controlling quality include prevention costs and internal failure costs. a. True b. False ANSWER: False 53. Prevention costs and appraisal costs are considered costs of controlling quality.

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Chapter 13: Lean Manufacturing and Activity Analysis a. True b. False ANSWER: True 54. Costs of failing to control quality include prevention costs and external failure costs. a. True b. False ANSWER: False 55. It is easier to quantify costs of controlling quality than the costs of failing to control quality. a. True b. False ANSWER: True 56. By spending more in costs of controlling quality, the costs of failing to control quality will decrease. a. True b. False ANSWER: True 57. Lean practices and activity analyses are unsuitable for adaptation to service businesses or administrative processes. a. True b. False ANSWER: False 58. When performing activity analysis on administrative processes, the “product” is often information. a. True b. False ANSWER: True 59. Which of the following is an example of value-added time? a. processing time b. wait time during inspection c. wait time in inventory d. none of these choices ANSWER: a 60. Which of the following is related to long lead times? a. long setup times b. large batch sizes c. large inventories d. all of these choices ANSWER: d 61. The lean philosophy attempts to reduce setup times, which will Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis a. increase batch sizes b. leave batch sizes unaffected c. increase within-batch wait time d. decrease within-batch wait time ANSWER: d 62. What do lean manufacturers demand from their vendors? a. high-quality materials b. low-cost materials c. on-time deliveries d. all of these choices ANSWER: d 63. How are the objectives of lean manufacturing achieved? a. product-oriented production layout b. employee involvement c. supplier partnering d. all of these choices ANSWER: d 64. Which of the following is an objective of lean manufacturing? a. eliminating waste b. increasing inventory levels c. increasing lead time d. all of these choices ANSWER: a 65. Inventory reduction is a(n) _____ principle. a. lean b. traditional processing c. economic d. wait time ANSWER: a 66. Setup time is disregarded as an improvement priority under _____ manufacturing principles. a. traditional b. lean c. total quality management d. product cost ANSWER: a 67. _____ manufacturing principles emphasize quality and zero defects. a. Traditional b. Lean Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis c. Zero-based d. Chinese ANSWER: b 68. _____ manufacturing treats suppliers and customers as “arm’s-length” independent entities. a. Traditional b. Lean c. Economic d. Productivity improvement ANSWER: a 69. Lean manufacturing philosophy reduces which of the following? a. inventory, lead time, and conversion costs b. inventory, setup time, and lead time c. lead time, setup time, and conversion costs d. conversion costs, inventory, and setup time ANSWER: b 70. Lean manufacturing emphasizes which of the following? a. team-oriented employee involvement b. process-oriented layout c. push manufacturing d. cost accumulation by department ANSWER: a 71. Which of the following is considered non-value-added lead time? a. packing b. moving from process to process c. converting raw materials to finished product d. all of these choices ANSWER: b 72. Under a lean environment, employees have the responsibility and authority to a. purchase inventory b. determine output amounts c. make decisions about operations, rather than waiting for management d. make engineering changes ANSWER: c 73. Which of the following underlying problems may be hidden by high raw materials, work in process, and finished goods inventory levels? a. machine breakdowns b. poor quality c. unreliable suppliers Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis d. all of these choices ANSWER: d 74. Which of the following is characteristic of a lean production layout? a. decentralized maintenance and small production batches b. decentralized maintenance and organization around processes c. organization around processes and small production batches d. large production batches and organization around processes ANSWER: a 75. In a lean environment, process problems are more visible than they are in a traditional environment because a. inventories are maintained at higher levels b. process problems cause production to shut down immediately c. the push manufacturing system leads to increased inventory levels d. the lack of work in process inventory creates problems ANSWER: b 76. Actions that transform a traditional manufacturing environment to a lean environment include which of the following? a. form partnerships with reliable suppliers b. reorganize manufacturing around products rather than processes c. train employees to perform various operations d. all of these choices ANSWER: d 77. Which of the following is a characteristic of a lean accounting system? a. fewer work in process account transactions b. work in process and raw materials accounts combined c. elimination of the direct labor account d. all of these choices ANSWER: d 78. Which of the following is an example of a nonfinancial measure of performance used in lean manufacturing? a. lead time b. setup time c. number of units scrapped d. all of these choices ANSWER: d 79. Which of the following is best suited to providing timely and focused performance information? a. nonfinancial information b. financial accounting information c. cost accounting information d. variance analysis ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis 80. Squirrel Co. operates in a lean manufacturing environment. For June production, Squirrel purchased 6,000 units of raw materials at $6.00 per unit on account. The journal entry required to record this transaction is a. Raw and In Process Inventory 36,000 Accounts Payable 36,000 b. Cost of Goods Manufactured 36,000 Accounts Payable 36,000 c. Finished Goods 36,000 Accounts Payable 36,000 d. Raw Materials Inventory 36,000 Accounts Payable 36,000 ANSWER: a 81. Kilbuck Company operates in a lean manufacturing environment. Kilbuck applies conversion costs at a rate of $25 per unit. Kilbuck produced 12,000 units during May. Kilbuck’s actual conversion costs for the month of May were: Direct and indirect labor Machine depreciation Maintenance and supplies Total conversion costs

$150,000 85,000 60,000 $295,000

The journal entry to record applied conversion costs for May will include a a. credit to Work in Process Inventory for $300,000 b. debit to Conversion Costs for $300,000 c. credit to Raw and In Process Inventory for $295,000 d. debit to Raw and In Process Inventory for $300,000 ANSWER: d 82. Conan Electronics Corporation manufactures and assembles electronic motor drives for video cameras. The company assembles the motor drives for several accounts. The process consists of a lean cell for each customer. The following information relates to only one customer's lean cell. For the year, planned labor and overhead was $80,000,000 and materials costs were $25 per unit. Planned production included 9,600 hours to produce 76,800 motor drives. Actual production for the month of August was 5,200 units, and motor drives shipped amounted to 5,040 units. From the foregoing information, determine the cell conversion cost rate (rounded to the nearest dollar) for applying conversion costs. a. $8,025 per hour b. $800 per hour c. $7,200 per hour d. $8,333 per hour ANSWER: d Sifton Electronics Corporation manufactures and assembles electronic motor drives for video cameras. The company assembles the motor drives for several accounts. The process consists of a lean cell for each customer. The following information relates to only one customer's lean cell for the coming year. For the year, projected labor and overhead was $7,370,000 and materials costs were $28 per unit. Planned production included 4,000 hours to produce 27,500 motor drives. Actual production for August was 1,600 units, and motor drives shipped amounted to 1,380 units. Conversion costs are applied based on units of production Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis 83. From the foregoing information, determine the cell conversion cost rate. a. $240.00 per unit b. $268.00 per unit c. $296.00 per unit d. $1,842.50 per unit ANSWER: b 84. From the foregoing information, determine the manufacturing cost per unit. a. $240.00 b. $268.00 c. $296.00 d. $1,870.50 ANSWER: c 85. From the foregoing information, determine the amount of the conversion costs charged to Raw and In Process Inventory during August. a. $369,840 b. $408,480 c. $428,800 d. $473,600 ANSWER: c 86. From the foregoing information, determine the production costs transferred to Finished Goods during August. a. $369,840 b. $408,480 c. $428,800 d. $473,600 ANSWER: d 87. From the foregoing information, determine the production costs transferred to Cost of Goods Sold during August. a. $369,840 b. $408,480 c. $428,800 d. $473,600 ANSWER: b 88. Accounting for lean operations requires fewer transactions because a. large batches of inventory are combined into a smaller number of transactions b. costs are accumulated in one department and then transferred to the next department c. combined materials and conversion costs are transferred to finished goods d. costs are transferred from department to department allowing for better control of costs ANSWER: c 89. Which of the following results in fewer transactions in lean accounting?

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Chapter 13: Lean Manufacturing and Activity Analysis a. All manufacturing costs are combined into one account called Raw and In Process Inventory. b. The distinction between direct and indirect costs is eliminated. c. There is less movement of inventory between departments. d. all of these choices ANSWER: d 90. The cell conversion cost rate includes which of the following? a. only factory overhead b. only direct labor and direct materials c. direct labor, direct materials, and factory overhead d. only direct labor and factory overhead ANSWER: d Schedule of Activity Costs Quality Control Activities Process audits Training of machine operators Processing returned products Scrap processing (disposal) Rework Preventive maintenance Product design Warranty work Finished goods inspection

Activity Cost $50,000 28,000 19,000 25,000 8,000 30,000 46,000 12,000 23,000

91. From the provided schedule of activity costs, determine the total activity cost. a. $62,000 b. $179,000 c. $94,000 d. $241,000 ANSWER: d 92. From the provided schedule of activity costs, determine the non-value-added costs. a. $30,000 b. $50,000 c. $64,000 d. $85,000 ANSWER: c 93. From the provided schedule of activity costs, determine the value-added costs. a. $177,000 b. $191,000 c. $156,000 d. $104,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis ANSWER: a 94. From the provided schedule of activity costs, determine the internal failure costs. a. $37,000 b. $25,000 c. $8,000 d. $33,000 ANSWER: d 95. From the provided schedule of activity costs, determine the external failure costs. a. $39,000 b. $19,000 c. $12,000 d. $31,000 ANSWER: d 96. From the provided schedule of activity costs, determine the appraisal costs. a. $50,000 b. $23,000 c. $73,000 d. $104,000 ANSWER: c 97. From the provided schedule of activity costs, determine the prevention costs. a. $30,000 b. $74,000 c. $76,000 d. $104,000 ANSWER: d 98. Which of the following sets of activities are both prevention costs? a. preventive maintenance and operator training b. operator training and testing finished products c. design engineering and inspecting finished products d. testing finished products and reworking defective products ANSWER: a 99. Which of the following sets of activities are both external failure costs? a. cost of warranty work and recalls b. processing returned merchandise and inspecting finished products c. cost of scrap and rework d. correcting invoice errors and testing products ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis 100. Which of the following statements best describes the relationship among the costs of quality? a. Spending more on prevention and appraisal costs will reduce the total overall costs of quality. b. Spending more on prevention and appraisal costs will increase the total overall costs of quality. c. Adequate spending on prevention and appraisal costs will eliminate all internal and external failure costs. d. The amount spent on prevention and appraisal costs has no impact on the amount spent on internal and external failure costs.

ANSWER: a 101. Which of the following is a value-added activity? a. scrap processing b. rework c. preventive maintenance d. warranty work ANSWER: c 102. When using lean principles and activity analyses with service businesses, the “product” is normally a. an employee b. information c. the customer d. the supplies used in providing the service ANSWER: c 103. A customer service department has the following resolution response time data: Average Response Time First contact 0.25 hr.

Service scheduling 0.50 hr.

Wait for service 24.00 hrs.

Service 1.50 hrs.

Total resolution time 26.25 hrs.

What is the value-added ratio (rounded to one decimal place) in this process? a. 5.7% b. 8.6% c. 28.6% d. 91.4% ANSWER: b 104. Which of the following is a value-added quality control activity? a. disposing of scrap material b. processing returned materials c. reworking defective product d. inspecting finished goods ANSWER: d 105. Which of the following is a non-value-added quality control activity?

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Chapter 13: Lean Manufacturing and Activity Analysis a. maintaining equipment b. providing service calls c. design engineering d. inspecting materials ANSWER: b 106. Christmas Express makes wreaths in batch sizes of 12. The cutting and assembly process takes 8 minutes per wreath, and the decorating process time is 10 minutes per wreath. It takes 12 minutes to move the wreaths from the cutting and assembly process to the decorating process. a. Compute the value-added, non-value-added, and total lead times of the wreath process. b. Compute the value-added ratio. Round to one decimal place.

ANSWER: a.

Value-added lead time (8 + 10) 18 Non-value-added lead time: Move time 12 Within-batch wait time [18 × (12 – 1)] 198 228 Total lead time b. Value-added ratio = 18 ÷ 228 = 7.9% 107. Which of the following are features of lean manufacturing? a. Maintaining excess inventory to ensure that products will always be available b. Cross-training of employees c. Giving employees additional authority and responsibility d. Product-oriented layout e. Increased setup time ANSWER: b, c, d 108. Extreme Wreaths, Inc., makes wreaths in batch sizes of 15 at a time. The cutting and assembly process takes 10 minutes per wreath, and the decorating process time is 7 minutes per wreath. It takes 5 minutes to move the wreaths from the cutting and assembly process to the decorating process.

In an effort to improve the lead time, the company has tried reducing the batch size to 10 units. The new process is as follows: cutting and assembly process—8 minutes. The decorating process is still 7 minutes per wreath. It takes 5 minutes to move the wreaths from the cutting and assembly process to the decorating process. a. Compute the value-added, non-value-added, and total lead times of the wreath process for both the old and new manufacturing processes. b. Compute the value-added ratio for both the old and new processes. Round to one decimal place.

ANSWER: a. Old: Value-added lead time (10 + 7) 17 Non-value-added lead time: Move time 5 Within-batch wait time [17 min. × (15 – 1)] 238 260 Total lead time New: Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis Value-added lead time (8 + 7) Non-value-added lead time: Move time Within-batch wait time [15 min. × (10 – 1)] Total lead time b.

15 5 135 155

Value-Added Ratio (old process) = 17 ÷ 260 = 6.5% Value-Added Ratio (new process) = 15 ÷ 155 = 9.7%

109. Bright Lamp Company has budgeted its conversion cost for small lamp production as $85,000 for 1,300 production hours. Each unit produced by the cell requires 15 minutes of process time. During the month, 3,800 units are manufactured in the cell. The estimated materials cost is $18 per unit. Journalize entries for the following: a. Materials are purchased to produce 4,000 units. b. Conversion costs are applied to 3,800 units of production. Round intermediate calculation to the nearest cent. c. The cell completes 3,650 units, which are placed into finished goods. Round to the nearest dollar.

ANSWER: a.

72,000 Raw and In Process Inventory Accounts Payable 72,000 ($18 per unit × 4,000 units) b.

Raw and In Process Inventory Conversion Costs [($85,000 ÷ 1,300 hours) × (15 min. ÷ 60 min.)] = $16.35 $16.35 × 3,800 = $62,130 c.

Finished Goods Inventory Raw and In Process Inventory ($18 + $16.35) × 3,650 units = $125,378

62,130 62,130

125,378 125,378

110. Axelgold Company produces parts for the auto industry. Part X2 is machined in Department 1, which has the following budgeted conversion costs: Labor Depreciation Maintenance Supplies Total

$330,000 32,000 12,000 26,000 $400,000

All costs are driven by machine hours. Total planned hours for the year are 2,800. It takes 0.03 hour to machine one unit of Part X2. a. b.

Compute Department 1's budgeted cell conversion cost rate for the current year.

Round to the nearest cent.

Compute Part X2's budgeted cell conversion cost per unit. Round to the nearest cent.

ANSWER: a. Cell Conversion Cost Rate Copyright Cengage Learning. Powered by Cognero.

= Budgeted Conversion Cost ÷ Page 17

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Chapter 13: Lean Manufacturing and Activity Analysis Planned Machine Hours = $400,000 ÷ 2,800 hours = $142.86 per machine hour b. Part X2 machine hours Conversion cost rate Cell conversion cost per unit

0.03 hr. per unit × $142.86 per hour $ 4.29 per unit

111. Alaskan Pattern Company makes dressmakers' patterns using a machine that stamps the pattern outline onto tissue paper. The stamping center produced 40,000 patterns in August, with a machine time per pattern of 20 seconds. Annual budgeted cell conversion costs were as follows: Maintenance and supplies Depreciation Supporting labor Total

$1,650,000 700,000 825,000 $3,175,000

Alaskan planned 2,500 total machine hours for the year.

Compute Alaskan's budgeted cell conversion cost rate for the year.

ANSWER: Cell Conversion Cost Rate = Budgeted Conversion Cost ÷ Planned Machine Hours = $3,175,000 ÷ 2,500 hours = $1,270 per machine hour 112. Peters Manufacturing Co. operates in a lean manufacturing environment. The company had scheduled production of 95,000 units during February in its Y12 cell. Actual February production totaled 88,200 units. Peters had budgeted conversion costs for February totaling $900,000 and budgeted production hours totaling 2,000. Conversion costs are applied based on units of production.

Compute Peters' cell conversion cost rate for Cell Y12. Round to the nearest cent.

ANSWER: Cell Conversion Cost Rate = Budgeted Conversion Cost ÷ Planned Units of Production = $900,000 ÷ 95,000 units = $9.47 per unit 113. Kwanika Co. operates in a lean manufacturing environment. During its first year of operations, Kwanika budgeted for 40,000 hours in the production of 100,000 units in its Cell X-22. Materials costs were $7.00 per unit. Cell X-22 conversion costs were budgeted for the year as follows: Direct and indirect labor Machine depreciation Maintenance and supplies Utilities Total

$ 900,000 125,000 375,000 225,000 $1,625,000

During January, materials for 8,400 units were purchased on account. There were 8,200 units manufactured and 8,000 were sold and shipped to customers for $35 each. Conversion costs are applied based on units of production. Journalize (a) the materials purchases, (b) the application of conversion costs, (c) the transfer from work in process to finished goods, and (d) the sales (all made on account) and associated cost of goods sold for the month of January.

ANSWER: a.

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Chapter 13: Lean Manufacturing and Activity Analysis Raw and In Process Inventory (8,400 × $7.00) Accounts Payable b.

Raw and In Process Inventory (8,200 × $16.25*) Conversion Costs *$1,625,000 ÷ 100,000 units c.

Finished Goods Inventory (8,200 × $23.25**) Raw and In Process Inventory **$16.25 + $7.00 d.

Accounts Receivable (8,000 × $35.00) Sales Cost of Goods Sold (8,000 × $23.25) Finished Goods Inventory

58,800 58,800 133,250 133,250

190,650 190,650

280,000 280,000 186,000 186,000

Schedule of Activity Costs Quality Control Activities Product testing Assessing vendor quality Recalls Rework Scrap disposal Product design Training machine operators Warranty work Process audits

Activity Cost $55,000 26,000 18,000 29,000 8,000 30,000 46,000 12,000 22,000

114. From the provided schedule of activity costs, determine the (a) value-added and (b) non-value-added costs.

ANSWER: a. $179,000 = $55,000 + $26,000 + $30,000 + $46,000 + $22,000 b. $67,000 = $18,000 + $29,000 + $8,000 + $12,000 115. From the provided schedule of activity costs, determine the (a) prevention and (b) appraisal costs.

ANSWER: a. $102,000 = $26,000 + $30,000 + $46,000 b. $77,000 = $55,000 + $22,000 116. From the provided schedule of activity costs, determine the internal failure costs.

ANSWER: $37,000 = $29,000 + $8,000 117. From the provided schedule of activity costs, determine the external failure costs.

ANSWER: $30,000 = $18,000 + $12,000 118. From the provided schedule of activity costs, compute the percentage of non-value-added activities. Round to one decimal place.

ANSWER: Non-Value-Added Costs ÷ Total Costs 27.2% = ($18,000 + $29,000 + $8,000 + $12,000) ÷ $246,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Lean Manufacturing and Activity Analysis 119. Connally Company’s Payroll Department required that every time card be checked twice to ensure pay accuracy. The company has 1,000 employees and has determined that the checks cost the company $8,000 per year. It has decided to change this policy and only check those names that appear on the exceptions report and a random check on the entire payroll. Currently, only 15% of the payroll is evaluated each payroll. Determine the inspection activity cost per employee on the 1,000 employees both before and after the improvement.

ANSWER: Inspection activity before improvement: $8,000 ÷ 1,000 employees = $8 per employee Inspection activity after improvement: ($8,000 × 15%) ÷ 1,000 employees = $1.20 per employee 120. A quality control activity analysis indicated the following four activity costs of a hotel.

Verifying credit card information Customer service training Discounting room rates due to poor customer service Correcting charges to customer invoices Total Sales are $750,000 for the year. Prepare a cost of quality report.

ANSWER: Cost of Quality Report Quality Cost Percent of Total Quality Cost Classification Quality Cost Prevention $20,000 23.8% Appraisal 40,000 47.6% Internal failure 16,000 19.1% External failure 8,000 9.5% $84,000 100.0% Totals

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$40,000 20,000 16,000 8,000 $84,000

Percent of Total Sales 2.7% 5.3% 2.1% 1.1% 11.2%

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility True / False 1. James, an accountant at Forta Company, is preparing a report showing the production shift data for the previous day’s production. This report will be shared with the production manager, Julia. This is an example of the role of managerial accounting at work. a. True b. False ANSWER: True 2. James, an accountant at Forta Company, is preparing an income statement at the end of the year. It will be included in the company’s annual report to be released to the public. This is an example of the managerial accounting function at Forta. a. True b. False ANSWER: False 3. Evaluating employee performance and making strategic decisions are two examples of how managerial accounting information is used. a. True b. False ANSWER: True 4. Performance measurement systems are used to assess how well a company is performing relative to the goals the FASB sets for the company. a. True b. False ANSWER: False 5. Performance measurement systems are used to prepare tax information needed by the IRS to assess a company’s taxable income. a. True b. False ANSWER: False 6. Performance measurement systems are used to assess how well a company is meeting its own goals and objectives. a. True b. False ANSWER: True 7. Performance measurement systems use externally imposed benchmarks of the competitive landscape to assess internal performance. a. True b. False ANSWER: False 8. Performance measurement systems use measures of current performance to assess how well a company is performing Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility toward meeting its goals and objectives. a. True b. False ANSWER: True 9. It is important to gather as many accounting metrics as possible because they have intrinsic value and do not need a context in which to be understood. a. True b. False ANSWER: False 10. It is important to gather meaningful accounting metrics to assess how well employees or units within a company meet the company’s goals and objectives. a. True b. False ANSWER: True 11. Operating income and cash flow are examples of metrics used to assess quality control. a. True b. False ANSWER: False 12. Operating income and cash flow are examples of metrics used to assess a company’s financial condition. a. True b. False ANSWER: True 13. Accounting metrics, such as operating income, make business decision-making processes more complex. a. True b. False ANSWER: False 14. Accounting metrics, such as cash flow, are often used to simplify the business decision-making process. a. True b. False ANSWER: True 15. Materials price variances are examples of metrics used for measuring a sales department’s performance. a. True b. False ANSWER: False 16. Materials price variances are examples of metrics used for measuring a purchasing department’s performance. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility ANSWER: True 17. Strategic performance measurement systems define and link strategic objectives to the performance metrics of a company. a. True b. False ANSWER: True 18. Strategic performance measurement systems define and link strategic objectives to the external financial reports of a company. a. True b. False ANSWER: False 19. Strategic performance measurement systems are commonly used by large companies around the world. a. True b. False ANSWER: True 20. The balanced scorecard is a marginally effective strategic performance management system. a. True b. False ANSWER: False 21. The balanced scorecard is named for its view of company performance focusing only on financial measures. a. True b. False ANSWER: False 22. The balanced scorecard focuses on lagging indicators such as actual sales volume rather than including leading indicators such as customer satisfaction. a. True b. False ANSWER: False 23. The balanced scorecard has five performance perspectives: financial, learning and growth, internal processes, customer, and supply chain. a. True b. False ANSWER: False 24. The balanced scorecard has four performance perspectives: financial, customer, learning and growth, and strategic. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility 25. The balanced scorecard incorporates only qualitative performance metrics. a. True b. False ANSWER: False 26. One of the objectives of the four balanced scorecard performance perspectives is to help management focus on looking beyond typical financial measures of performance. a. True b. False ANSWER: True 27. Performance in the financial perspective of the balanced scorecard focuses on satisfying customers. a. True b. False ANSWER: False 28. Performance in the customer perspective of the balanced scorecard often focuses on the ability to obtain customers. a. True b. False ANSWER: True 29. Mason works at LoftCo, Inc., studying and improving operational efficiencies. The performance measures he gathers include determining the number of defective units produced in a week. Mason is focused on the internal processes perspective of the balanced scorecard performance management system. a. True b. False ANSWER: True 30. Cassie works at LoftCo, Inc., studying effective ways to retain the company’s current customers. The performance measures she gathers include determining the number of repeat customers each week. Cassie is focused on the internal processes perspective of the balanced scorecard performance management system. a. True b. False ANSWER: False 31. Jerome works at LoftCo, Inc., in research and development. The performance measures he gathers include assessing progress toward developing a better form of biodegradable plastic packaging. Jerome is focused on the internal processes perspective of the balanced scorecard performance management system. a. True b. False ANSWER: False 32. Mason works at LoftCo, Inc., in an operations department focused on the internal processes perspective of the balanced scorecard performance management system. It is critical that the work in this performance area is linked to at least one strategic objective within the company. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility b. False ANSWER: True 33. Cassie works at LoftCo, Inc., in the Employee Training Department where her work is focused on the learning and growth perspective of the balanced scorecard performance management system. While it is critical that the work in her performance area is linked to at least one strategic objective within the company, it is not necessary for performance metrics to be tied to the strategic objective. a. True b. False ANSWER: False 34. Miguel works at LoftCo, Inc., and has been asked to help lead the development of the company’s new balanced scorecard. He and his multifunctional team developed strategic objectives and performance metrics for each of the four perspectives. This work constitutes the complete set of steps in developing a BSC performance management system. a. True b. False ANSWER: False 35. Performance targets may be linked to employee incentives such as bonuses and additional days off. a. True b. False ANSWER: True 36. Mila is helping to set performance targets for her company, Urban Supply. The target of increasing the company’s online customer satisfaction rate by 1% in the next quarter is an example of a performance target focused on the customer perspective of the balance scorecard. a. True b. False ANSWER: True 37. Sometimes a strategy map is referred to as a supply chain map. a. True b. False ANSWER: False 38. Sometimes a strategy map is referred to as a value chain. a. True b. False ANSWER: True 39. Strategic initiatives are interchangeable with strategic objectives. a. True b. False ANSWER: False 40. A strategy map links the four perspectives of the BSC with strategic objectives, strategic initiatives, performance Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility metrics, and performance targets. a. True b. False ANSWER: True 41. The budgeted income statement and balance sheet are the most important components of a company’s strategy map. a. True b. False ANSWER: False 42. Sometimes a strategy map is referred to as a measure map. a. True b. False ANSWER: False 43. A measure map is different from a strategy map because it shows the expected relationships among performance metrics based on the strategy map. a. True b. False ANSWER: True 44. A measure map is different from a strategy map because it shows which metrics are leading indicators and which metrics are lagging indicators. a. True b. False ANSWER: True 45. Cody is a manager at Valvco and is creating a measure map with his supervisor. Cody can be confident in telling his boss that if customer satisfaction ratings predict sales, then customer satisfaction is the lagging indicator and sales is the leading indicator. a. True b. False ANSWER: False 46. Cody is a manager at Valvco and is creating a measure map. Cody is correct in assessing that if median training hours per employee predict the improvement of delivery times to the customer, then delivery times is the lagging indicator and median training hours per employee is the leading indicator. a. True b. False ANSWER: True 47. Cody is a manager at Valvco and is leading a team to create the measure map in the company’s new BSC initiative.

Cody is correct in sharing with his colleagues that a measure map provides a means for verifying the expectations of how strategic objectives affect one another. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility ANSWER: True 48. Carli is a manager at PetsCo and is leading the development of the BSC for the company. She is correct in explaining to her development team that management may need to adjust its strategic objectives if their expectations regarding relationships between several strategic objectives are not supported by statistical analysis. a. True b. False ANSWER: True 49. In the strategic learning process, Carli is trying to understand why the increase in the customer satisfaction rating at her company did not generate the expected increase in sales for the last quarter. It would be logical for her simply to conclude that customer satisfaction has nothing to do with increased sales. a. True b. False ANSWER: False 50. Jace is an executive at a large but decentralized corporation that uses the balanced scorecard. It would be reasonable for her to suggest using scorecard cascading to help her large company more effectively ensure that individuals throughout the company support its overriding strategy. a. True b. False ANSWER: True 51. Falco Industries is adopting a balanced scorecard. It would be a positive outcome of the process if Falco’s employees fully embraced surrogation of the metrics. a. True b. False ANSWER: False 52. Corporate social responsibility is best described as the efforts a company takes to increase corporate profits. a. True b. False ANSWER: False 53. Corporate social responsibility focuses not only on the impact of a company’s operations on society but also on improving social well-being within and outside of the firm. a. True b. False ANSWER: True 54. Corporate social responsibility activities focus only on local issues. a. True b. False ANSWER: False 55. Certain corporate social responsibility efforts, such as protecting the environment for future generations, are also Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility referred to as sustainability efforts. a. True b. False ANSWER: True 56. Corporate social responsibility efforts may be linked to the four perspectives of the balanced scorecard in a sustainability balanced scorecard. a. True b. False ANSWER: True 57. Corporate social responsibility efforts may require significant capital investments. a. True b. False ANSWER: True 58. The beauty of corporate social responsibility efforts is that they require little if any capital investments. a. True b. False ANSWER: False 59. Ben-Hal Mining, a coal mining company, invests significant funds in land, soil, and water reclamation and conservation projects in every community impacted by its operations. This is an example of a corporate social responsibility objective requiring an extensive capital investment by Ben-Hal Mining. a. True b. False ANSWER: True 60. Corporate social responsibility capital investment proposals can be analyzed using a variety of managerial accounting methods. a. True b. False ANSWER: True Multiple Choice 61. Waterfield Company is looking for a way to help its executive managers assess how the three divisions within the company are meeting the company’s overall goals and objectives. The company is looking for a(n) a. activity-based accounting system b. product costing system c. performance measurement system d. standard cost system ANSWER: c 62. Waterfield Company is looking for a way to help its executive managers assess how its three divisions are meeting the company’s goals and objectives for financial performance. Which of the following metrics might be used for this Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility purpose? a. operating income and cash flows b. customer satisfaction rating and the number of customer returns c. the amount of time employees spend in training and the number of training sessions provided d. the materials price variance and the materials quantity variance ANSWER: a 63. Waterfield Company is looking for a way to help its executive managers assess the performance of its purchasing department. Which of the following metrics might be used for this purpose? a. operating income b. customer satisfaction rating c. the amount of time employees spend in training d. the materials price variance ANSWER: d 64. Waterfield Company has three decentralized segments. Its executive managers are looking for a way to measure the performance of each segment. Which of the following metrics might be used for this purpose? a. operating cash flows for the entire company b. return on investment of each segment c. number of training sessions provided to employees in each segment d. materials quantity variance in each segment ANSWER: b 65. Waterfield Company has three decentralized segments. Its executive managers are looking for a way to measure the performance of each segment. Which of the following metrics might be used for this purpose? a. operating cash flows for the entire company b. residual income of each segment c. number of training sessions provided to employees in each segment d. materials quantity variance in each segment ANSWER: b 66. Which of the following best describes a strategic performance measurement system? a. A strategic performance measurement system defines and links strategic objectives to the stock price of a company. b. A strategic performance measurement system defines and links strategic objectives to the performance metrics of a company. c. A strategic performance measurement system defines and links strategic objectives to the standard cost system of a company. d. A strategic performance measurement system defines and links strategic objectives to the bond rating of the company.

ANSWER: b 67. Which of the following is an example of a strategic performance measurement system? a. product costing system b. lean management system Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility c. standard cost system d. balanced scorecard ANSWER: d 68. Which of the following is the best-known strategic performance measurement system? a. product costing system b. lean management system c. standard cost system d. balanced scorecard ANSWER: d 69. A company’s balanced scorecard may include a. only nonfinancial metrics b. only financial metrics c. both nonfinancial and financial metrics d. neither nonfinancial nor financial metrics ANSWER: c 70. A company’s balanced scorecard may include a. only leading indicators b. only lagging indicators c. both leading and lagging indicators d. neither leading nor lagging indicators ANSWER: c 71. Which of the following is one of the elements of the balanced scorecard? a. strategic plan b. research and development c. cost system d. performance metrics ANSWER: d 72. Which of the following is one of the elements of the balanced scorecard? a. strategic initiatives b. strategy maps c. performance targets d. all of these choices ANSWER: d 73. Nonfinancial performance measures in the balanced scorecard such as customer satisfaction are often _____ of future financial performance. a. leading indicators b. lagging indicators c. poor indicators Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility d. not considered an indicator ANSWER: a 74. Which of the following are the four performance perspectives included in the balanced scorecard? a. financial, internal processes, research and development, and customer b. internal processes, cost system, customer, and learning and growth c. research and development, cost system, customer, and internal processes d. financial, internal processes, learning and growth, and customer ANSWER: d 75. Carolina, the accountant for Duke Manufacturing, tells Jacob, who works in customer service for Duke, that their company’s customer satisfaction rating predicts sales revenue in dollars. Carolina’s comment indicates that sales revenue is a. a leading indicator b. a lagging indicator c. both a leading and a lagging indicator d. a nonfinancial metric ANSWER: b 76. Carolina, the accountant for Duke Manufacturing, tells Jacob, who works in customer service for Duke, that their company’s customer satisfaction rating predicts sales revenue in dollars. Carolina’s comment indicates that the customer satisfaction rating is a. a leading indicator b. a lagging indicator c. both a leading and a lagging indicator d. a nonfinancial metric ANSWER: a 77. AnaCarolina and Jaco, accountants for Duke Manufacturing, are tasked with determining appropriate performance metrics for the financial perspective of Duke's balanced scorecard. Which of the following is the best metric for this situation? a. return on investment b. operating throughout c. materials price variance d. customer satisfaction rating ANSWER: a 78. AnaCarolina and Jaco, executive managers at Duke Manufacturing, are tasked with determining appropriate performance metrics for the customer perspective of Duke's balanced scorecard. Which of the following is the best metric for this situation? a. return on investment b. operating throughout c. materials price variance d. number of repeat customers ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility 79. AnaCarolina and Jaco work at Duke Manufacturing, and they are tasked with determining appropriate performance metrics for the internal processes perspective of Duke's balanced scorecard. Which of the following is the best metric for this situation? a. operating income b. defective units produced c. sales revenue d. customer satisfaction rating ANSWER: b 80. Bekah and Rafael, supervisors in the Human Resources Department at James Manufacturing, are tasked with determining appropriate performance metrics for the learning and growth perspective of their company's balanced scorecard. Which of the following is the best metric for this situation? a. return on investment b. operating throughout c. materials price variance d. hours of employee training provided each quarter ANSWER: d 81. Which of the following statements regarding strategic objectives in the balanced scorecard is false? a. Strategic objectives define the purpose of an action taken within a company. b. Another name for the overall mission statement of a company is the company’s strategic objective. c. Each strategic objective is a subcomponent of the company’s mission statement. d. Each of the four performance perspectives in the balanced scorecard should be linked to at least one strategic objective.

ANSWER: b 82. Juanita and Carl are reviewing their company’s balanced scorecard strategic objectives when they discover a problem.

Which of the following is an inappropriate matching of a strategic objective to its performance perspective in their company’s BSC? a. The strategic objective in the learning and growth perspective is to reduce the number of employees who chose to leave the company for jobs elsewhere. b. The strategic objective in the customer perspective is to make the customer happy. c. The strategic objective in the financial perspective is to reduce shipping errors. d. The strategic objective in the internal processes perspective is to improve delivery times of products shipping to customers.

ANSWER: c 83. Which of the following statements about performance metrics is false? a. Performance metrics are used to assess performance in achieving the strategic objectives. b. Performance metrics are needed for 80% of the strategic objectives. c. Each strategic objective needs at least one performance metric. d. Performance metrics may be financial or nonfinancial in nature.

ANSWER: b

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility 84. Juanita and Carl are implementing a balanced scorecard for their company, DoItRight Manufacturing. They are considering various performance metrics for assessing progress toward strategic objectives. Which of the following would be a good choice of performance metric for the strategic objective listed? a. The strategic objective of delighting the customer is measured by the number of repeat customers. b. The strategic objective of delighting the customer is measured by the average employee tenure. c. The strategic objective of increasing profits is measured by the number of hours provided for employee training. d. The strategic objective of increasing profits is measured by the customer satisfaction rating.

ANSWER: a 85. Ken and Laura are working toward implementing a balanced scorecard for their company. They ask their production and warehouse teams to provide several options regarding strategic initiatives for the internal processes perspective of the balanced scorecard. Which of the following suggestions made by the employees would be a good choice of a strategic initiative for this purpose? a. increase profits b. increase the average employee's tenure c. tie pay raises to training objectives d. automate the warehouse ANSWER: d 86. Which of the following statements about performance targets is true? a. Performance targets are the same thing as performance metrics. b. Performance targets are the same thing as strategic initiatives. c. Performance targets are levels of improvement that management wants to achieve for performance metrics. d. Performance targets have nothing to do with performance metrics.

ANSWER: c 87. Which of the following is a poor example of a performance target? a. Achieve 50 hours of training time per production employee per year. b. Reduce employee turnover by 25% in the next 12 months. c. Increase on-time deliveries to customers by 75% in the next quarter. d. Include the internal processes component in the balanced scorecard.

ANSWER: d 88. Performance targets a. provide goals for employees b. are never linked to incentive compensation c. are always linked to employee quarterly bonuses d. are an optional part of the balanced scorecard ANSWER: a 89. The balanced scorecard elements are linked together by a a. strategic objective b. standard cost card c. strategic initiative Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility d. strategy map ANSWER: d 90. A strategy map plays an important role for a company using the balanced scorecard approach to its performance measurement system. Which of the following is a function of the strategy map? a. A strategy map shows cause-and-effect relationships among strategic objectives. b. A strategy map shows how each strategic objective contributes to the overall mission of the company. c. A strategy map links all elements of the balanced scorecard together. d. all of these choices ANSWER: d 91. A measure map is an important aspect of the balanced scorecard performance measurement system. Which of the following describes the role of the measure map? a. The measure map shows the expected relationships among the mission and strategic objectives of the organization. b. The measure map provides the production departments with the metrics and measurements needed to build the products. c. The measure map shows the expected relationships among the performance metrics chosen by the organization. d. The measure map is representative of the value chain of the organization.

ANSWER: c 92. An important consideration in establishing a measure map includes determining the a. leading and lagging indicators b. mission of the organization c. standard costs of the products being manufactured d. net income of the company ANSWER: a 93. The expected relationships among performance metrics in the measure map are based on a. performance perspectives b. standard costs c. the strategy map d. the financial budget ANSWER: c 94. Metrics that are early in the value chain are normally considered to be _____ indicators. a. value chain b. leading c. lagging d. reciprocal ANSWER: b 95. Metrics that are later in the value chain are normally considered to be _____ indicators. a. value chain Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility b. leading c. lagging d. balanced ANSWER: c 96. Strategic learning results a. not only by verifying strategic objective expectations but also by adjusting them when expected relationships are not supported by statistical analysis b. from confirming that a balanced scorecard is no longer necessary for the organization c. from verifying strategic objective expectations with statistical analysis d. from using only nonfinancial performance metrics ANSWER: a 97. Alexander and Kristin are reviewing the statistical analysis for the performance metrics at their company, SafeChild Toys. Unfortunately, there is a lack of evidence that automating the warehouse has led to better inventory controls thereby providing better customer service. Alexander and Kristin should a. automatically revise all strategic objectives because they are flawed b. review the performance metrics to make sure they are accurately measuring the strategic objectives c. implement a completely new balanced scorecard for SafeChild d. revoke performance bonuses and terminate the employees responsible for poor performance ANSWER: b 98. Alexander and Kristin are executive managers at Safety First Fall Safety Equipment Co. They decide to discontinue gathering data and calculating performance metrics within their organization because the company’s balanced scorecard performance metrics have produced several quarters in a row of good news. They assume the positive results will continue. Alexander and Kristin have made this decision as a result of a cognitive bias known as a. uncommon measures bias b. common measures bias c. surrogation d. motivated reasoning ANSWER: d 99. Alexander and Kristin are executive managers at Safety First Fall Safety Equipment Co. They realize that within the last several quarters, they have been heavily focused on the online customer satisfaction rating as though it is the strategic objective rather than focusing on the customers as the company’s real goal. Alexander and Kristin realize they have fallen prey to a cognitive bias known as a. uncommon measures bias b. common measures bias c. surrogation d. motivated reasoning ANSWER: c 100. Alexander and Kristin are executive managers at Safety First Fall Safety Equipment Co. They realize that within the last several quarters, they have been treating the performance metrics from the company’s two very distinct divisions the same rather than focusing on the unique aspects of each division. They have inaccurately assessed divisional performance as a result. Alexander and Kristin realize they have fallen prey to a cognitive bias known as Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility a. uncommon measures bias b. common measures bias c. surrogation d. motivated reasoning ANSWER: b 101. Motivated reasoning, surrogation, and common measures bias are three terms describing a. strategic initiatives within the balanced scorecard framework b. three perspectives of the balanced scorecard c. cognitive or psychological biases that may impact decision making with the balanced scorecard d. mission-focused metrics commonly used in the implementation of the balanced scorecard ANSWER: c 102. The tendency for managers to see what they want to see in data is known as a. motivated reasoning b. surrogation c. common measures bias d. data subrogation ANSWER: a 103. The signs that a manager is subject to motivated reasoning include a. the manager ignores bad news b. the manager stops gathering information when results look good c. the manager relies too heavily on good news d. all of these choices ANSWER: d 104. The tendency for managers to behave like the performance metrics are the strategic objectives is known as a. metrics errors b. motivated reasoning c. surrogation d. common measures bias ANSWER: c 105. The tendency for managers to compare the performance of divisions within a company to each other using the same metrics regardless of each division’s unique characteristics is known as _____ bias. a. metrics b. division c. surrogation d. common measures ANSWER: d 106. Julia and Jaime manage a glass-making company. Their company includes a manufacturing division, a warehouse and logistics division, and a customer care division. To avoid common measures bias when analyzing the performance of Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility each of these unique divisions, Julia and Jaime should a. choose performance metrics that will be applied equally to all three divisions regardless of the division’s unique characteristics b. not use the balanced scorecard performance measuring system because it cannot be applied to unique circumstances c. not include the learning and growth perspective of the balanced scorecard under these circumstances d. create a unique divisional scorecard for each separate division ANSWER: d 107. To minimize common measures bias when developing divisional balanced scorecards for unique divisions within a corporation, a. one division may focus more heavily on a subset of the four perspectives, for example on learning and growth and internal processes, while other divisions focus on different perspectives, such as customer and financial b. each division must focus equally on all four perspectives of the balanced scorecard c. the performance metrics should be treated as strategic objectives in and of themselves within each division d. it is important to stop gathering information when the results for the division look good ANSWER: a 108. Which of the following statements about corporate social responsibility (CSR) is false? a. CSR describes the efforts of companies to take responsibility for the impact their operations have on society. b. CSR describes the efforts of companies to take responsibility for improving social well-being within and outside of the firm. c. Companies are taking a more active role in recent years in focusing and reporting on their own CSR initiatives. d. CSR activities may include waste and pollution minimization but do not include agricultural initiatives within farming and ranching.

ANSWER: d 109. Johnson Lumber Mill produces various grades of cut boards from raw lumber. Which of the following may be considered an initiative undertaken as a part of the company’s CSR efforts? a. planting trees to replace those used by the mill b. donating lumber to the local community to construct a community center c. investing funds in wind turbines to provide energy to run the sawmill d. all of these choices ANSWER: d 110. Omega Energy Incorporated serves rural communities across the northeast with gas and home heating fuel. Which of the following initiatives may be considered a part of the company’s CSR efforts? a. pursuing new product lines to expand the customer base b. building new corporate headquarters in order to downsize several regional offices and reduce overhead costs c. using biofuel-powered vehicles in its transportation fleet d. none of these choices ANSWER: c 111. Horizon Engineering and Construction incorporates various CSR initiatives into the designs and construction projects Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility provided for its customers. Which of the following can be considered a CSR initiative for the company? a. constructing buildings with renewable energy generation capabilities, such as solar panels b. designing layouts with intelligent traffic flow c. constructing buildings with cutting-edge technology interfaces in the entry and security systems d. none of these choices ANSWER: a 112. Which of the following statements about CSR efforts and initiatives is true? a. CSR efforts must be focused locally to be considered a CSR initiative. b. CSR efforts must be focused globally to be considered a CSR initiative. c. CSR efforts must be focused on employees and their working conditions to be considered a CSR initiative. d. CSR efforts must be focused on responsibly impacting society and/or the improvement of the social wellbeing within and outside the firm to be considered a CSR initiative.

ANSWER: d 113. When CSR initiatives include the added dimension of ensuring the ability to meet current needs without compromising the ability of future generations to meet their needs, the CSR activities are referred to as a. sustainability efforts b. the sustainability balanced scorecard c. substantial efforts d. substantial initiatives ANSWER: a 114. Which of the following suggested that management efforts not directly related to increasing profits are similar to “stealing” from a company’s shareholders? a. FASB b. Milton Friedman c. SEC d. various accounting firms ANSWER: b 115. The form of CSR information that helps managers evaluate the savings generated by using fewer natural resources in a company’s operations is known as a. physical resource sufficiency metrics b. resource sufficiency measures c. eco-sufficiency measures d. eco-efficiency measures ANSWER: d 116. Which of the following is an eco-efficiency measure? a. energy efficiency b. fuel efficiency c. waste efficiency d. all of these choices Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility ANSWER: d 117. Which of the following is an international organization that develops and encourages the use of sustainability reporting standards? a. International Accounting Standards Board (IASB) b. Financial Accounting Standards Board (FASB) c. Global Reporting Initiative d. United Nations ANSWER: c 118. The triple bottom line approach to sustainability includes which of the following reporting categories? a. financial performance, social performance, and international performance b. international performance, environmental performance, and social performance c. social performance, global performance, and financial performance d. environmental performance, financial performance, and social performance ANSWER: d 119. Harrison Company uses a balanced scorecard approach to performance measurement, and company executives would like to integrate CSR activities into the company's core strategy. Which of the following statements regarding the appropriate way to make this integration work for Harrison is false? a. Harrison may include CSR activities in a separate corporate social responsibility performance perspective. b. Harrison may integrate CSR strategic objectives into the four original perspectives of the BSC. c. Harrison will have to remove one of the original four perspectives from its BSC and include CSR activities in a separate performance perspective because the BSC can have a maximum of four perspectives. d. Integrating CSR activities into the BSC creates a sustainability balanced scorecard for Harrison.

ANSWER: c 120. An example of a CSR initiative focused on the social performance aspect of the triple bottom line might include which of the following? a. developing a CSR initiative tackling human rights issues in countries where raw materials are sourced b. developing a CSR initiative tackling environmental concerns in countries where raw materials are sourced c. developing a CSR initiative tackling improving profitability of the company by expanding its customer base in countries where it sources its raw materials d. developing a CSR initiative tackling improving return on investment for divisions of the company located in countries where raw materials are sourced ANSWER: a 121. In general, corporate social responsibility activities and reporting efforts within the Fortune 500 group of companies have _____ since 2011. a. decreased b. remained consistent c. increased d. been ignored completely ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility 122. The index developed to help assess a company’s sustainability efforts is the a. Dow Jones Sustainability Index b. United Nations Sustainability and Human Development Index c. SEC Sustainability Index d. World Bank Index ANSWER: a 123. Which of the following statements regarding CSR reporting is true? a. CSR reporting rarely provides feedback that is helpful in guiding a company’s strategic and operational decision making. b. CSR reporting and feedback may help a company increase revenues and control costs but it rarely helps with efficient allocation of scarce resources. c. CSR and sustainability information provides important feedback to guide a company’s strategic and operational goals regarding eco-efficiency measures. d. CSR and sustainability reporting are helpful only to small companies with relatively simple operating structures and processes.

ANSWER: c 124. Cody Paper Mill produces various grades of paper sheeting for industrial uses. Which of the following would be considered an initiative undertaken as a part of the company’s CSR efforts? a. planting trees to replace those used by the paper-making process b. improving worker health and safety efforts to reduce injuries in the workplace c. investing funds in equipment to reduce greenhouse gas emissions from its production facilities d. all of these choices ANSWER: d 125. Beaver Valley Oil Refinery produces various grades of petroleum products at its refinery operations. Which of the following would be considered an initiative undertaken as a part of the company’s CSR efforts? a. pursuing new product lines to expand the customer base b. donating heating fuel to the local community center so that it can host more community events and expand its outreach to the rural populations outside the city limits c. providing training to the accounting staff so they better understand FASB requirements for applying accounting standards for financial reporting d. investing funds in automated equipment to decrease the need for manual labor ANSWER: b 126. Johnson Lumber Mill produces various grades of cut boards from raw lumber. Which of the following would be considered an initiative undertaken as a part of the company’s CSR efforts? a. assessing its application of the latest tax reform laws to determine if the company can pursue new avenues of tax savings b. training employees in the use of the latest technology c. recycling by-products and waste d. none of these choices ANSWER: c

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility 127. Ivell Packaging Company produces paper and plastic packaging products. Which of the following would be considered an initiative undertaken as a part of the company’s CSR efforts? a. hosting a health and wellness fair for the employees and the community b. investing funds in equipment to reduce the amount of plastic waste generated by the production process c. installing a cafeteria and coffee shop in response to an employee questionnaire about workplace well-being d. all of these choices ANSWER: d 128. Sometimes the term “corporate social responsibility” is used interchangeably with the term a. corporate outreach b. corporate efforts c. sustainability efforts d. sustainability outreach ANSWER: c 129. Managers can use CSR and sustainability information as important feedback to guide decision making in a variety of areas. Which of the following areas is least likely to be impacted by this feedback? a. strategic and operational areas b. FASB compliance with U.S. GAAP c. cost control decisions d. resource allocation decisions ANSWER: b 130. A form of CSR information that helps managers evaluate the savings generated by using fewer natural resources in a company’s operations is known as a(n) _____ measure. a. corporate efficiency b. eco-efficiency c. sustainability d. responsibility ANSWER: b 131. Which of the following statements regarding CSR and sustainability reporting is false? a. Generally accepted accounting principles require firms to report CSR and sustainability efforts. b. The Global Reporting Initiative is an international organization that develops the use of sustainability reporting standards. c. Many corporations use a triple bottom line approach to sustainability reporting. d. The triple bottom line approach includes financial, social, and environmental performance components.

ANSWER: a 132. Which of the following statements regarding CSR and sustainability reporting is false? a. Generally accepted accounting principles do not require firms to report CSR and sustainability efforts. b. The Global Reporting Initiative is an international organization that develops the use of sustainability reporting standards. c. Many corporations use a triple bottom line approach to sustainability reporting. d. The triple bottom line approach includes financial, social, and entrepreneurial performance components.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility ANSWER: d 133. Which of the following is an example of a capital investment project that focuses on minimizing resource waste and environmental degradation as a CSR objective? a. Iron Mills Event Planning invests in an employee wellness and fitness center. b. Foxburg Manufacturing installs a cafeteria and coffee shop in response to an employee questionnaire about workplace well-being. c. Parker Mining invests in planting more trees and vegetation than required by the local laws on fields created by its strip mining efforts. d. all of these choices ANSWER: d 134. The benefits of CSR investments a. are always easy to measure quantitatively b. cannot be evaluated qualitatively c. must be evaluated qualitatively for the projects that cannot be evaluated quantitatively d. must be evaluated using all three aspects of the triple bottom line ANSWER: c 135. Which of the following statements is false when evaluating capital investments tied to a CSR objective? a. CSR investment proposals cannot be analyzed with the typical managerial accounting methods used for other types of capital projects. b. Companies may evaluate an investment using a qualitative approach rather than a traditional quantitative approach. c. Companies may evaluate an investment considering the reduction of potential litigation risks. d. Companies may evaluate an investment considering the possibility of opening new consumer markets with a sustainable product desired by consumers.

ANSWER: a 136. Which of the following performance perspectives focuses on research and development initiatives and employee training, retention, and satisfaction efforts? a. financial b. internal processes c. learning and growth d. customer ANSWER: c 137. Which of the following performance perspectives focuses on operational efficiencies and issues like improving manufacturing performance? a. financial b. internal processes c. learning and growth d. customer ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility 138. Which of the following performance perspectives focuses on traditional accounting measures of performance, such as net income and cash flow? a. financial b. internal processes c. learning and growth d. customer ANSWER: a 139. Which of the following performance perspectives focuses on obtaining and retaining customers and customer base? a. financial b. internal processes c. learning and growth d. customer ANSWER: d 140. Which of the following elements of the balanced scorecard are levels or rates of improvement that management wants to achieve for performance metrics? a. strategic initiatives b. strategic objectives c. performance targets d. strategy maps ANSWER: c 141. Which of the following elements of the balanced scorecard defines the purpose of an action taken within a company? a. performance metrics b. strategic objectives c. performance targets d. strategic initiatives ANSWER: b 142. Which of the following elements of the balanced scorecard are action plans that management implements to achieve the strategic objectives? a. performance metrics b. strategy maps c. performance targets d. strategic initiatives ANSWER: d 143. Which of the following elements of the balanced scorecard are used to assess performance in achieving the strategic objectives? a. performance metrics b. strategy maps c. performance targets d. strategic initiatives Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility ANSWER: a 144. Which of the following elements of the balanced scorecard shows the expected relationships among performance metrics? a. measure maps b. strategy maps c. performance targets d. strategic initiatives ANSWER: a 145. Which of the following elements of the balanced scorecard shows the expected cause-and-effect relationships among strategic objectives? a. measure maps b. strategy maps c. performance targets d. strategic initiatives ANSWER: b Essay 146. Briefly describe the concept of a performance measurement system.

ANSWER: Performance measurement systems are used by management to assess how well employees or company units meet the company's goals and objectives. A performance measurement system uses metrics of current conditions or performance.

147. List the seven elements that make up a complete balanced scorecard.

ANSWER: Performance perspectives, strategic objectives, performance metrics, strategic initiatives, performance targets, strategy maps, and measure maps 148. List the four basic performance perspectives used in the balanced scorecard.

ANSWER: Financial, internal processes, learning and growth, and customer 149. Briefly explain the role of the strategic objective as an element of the balanced scorecard.

ANSWER: Strategic objectives are the element of the balanced scorecard that defines the purpose of an action taken within a company.

150. Briefly explain the role of performance metrics as an element of the balanced scorecard.

ANSWER: Performance metrics are used to assess performance in achieving the strategic objectives as determined in the balanced scorecard.

151. Differentiate between strategic objectives and strategic initiatives as used in the balanced scorecard.

ANSWER: Strategic objectives in the balanced scorecard define the purpose of an action taken within a company. They do not specify the actions necessary to achieve the objectives. Strategic initiatives detail the action plans that management will implement to achieve the strategic objectives.

152. Briefly explain the role of performance targets in the balanced scorecard.

ANSWER: Performance targets indicate the levels or rates of improvement that management wants to achieve for Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility performance metrics.

153. Briefly explain the role of a strategy map in the balanced scorecard.

ANSWER: Strategy maps show the expected cause-and-effect relationships among strategic objectives in the balanced scorecard.

154. Briefly explain the role of a measure map as an element of the balanced scorecard. How is it different from a strategy map?

ANSWER: Measure maps show the expected relationships among performance metrics. They are different from strategy maps, which show the expected cause-and-effect relationships among strategic objectives in the balanced scorecard.

155. Explain the process of strategic learning.

ANSWER: Strategic learning is the process of using performance metrics to verify the expectations of strategic objectives and, if necessary, adjusting them. It occurs if the expected relationships in a balanced scorecard are not supported by statistical analyses and, as a result, managers need to consider adjusting strategic objectives.

156. Describe scorecard cascading and when it is used.

ANSWER: Scorecard cascading is when multiple balanced scorecards are used with scorecards being divided up into smaller, division- and job-specific scorecards. It is used when a company is large or has many divisions or operating units and segments that need individual attention.

157. List the three types of cognitive or psychological bias to which decision making with the balanced scorecard may be subject.

ANSWER: Motivated reasoning, surrogation, and common measures bias 158. Provide a succinct definition of corporate social responsibility.

ANSWER: Corporate social responsibility is a phrase used to describe the efforts of companies to take responsibility for the impact their operations have on society and to improve social well-being within and outside the firm.

159. What is a sustainability balanced scorecard? What are two ways it is created?

ANSWER: A sustainability balanced scorecard is a balanced scorecard that includes CSR activities. This may be done either by creating a separate corporate social responsibility perspective or integrating CSR objectives into strategic objectives within the four perspectives.

160. Describe how sustainability efforts relate to CSR activities.

ANSWER: When CSR activities involve ensuring the ability to meet current needs without compromising the ability of future generations to meet their needs, the CSR activities are referred to as sustainability efforts.

161. How does the Dow Jones Sustainability Index define sustainability?

ANSWER: The Dow Jones Sustainability Index defines sustainability as “a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.”

162. What are eco-efficiency measures?

ANSWER: Eco-efficiency measures are the form of CSR information that helps managers evaluate the savings generated by using fewer natural resources in a company’s operations.

163. List the three components of the triple bottom line.

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Chapter 14: The Balanced Scorecard and Corporate Social Responsibility ANSWER: Financial performance, social performance, and environmental performance 164. What is the Global Reporting Initiative?

ANSWER: The Global Reporting Initiative is the international organization that develops and encourages the use of sustainability reporting standards.

165. Describe a reason why a CSR capital investment would be measured qualitatively.

ANSWER: The benefits of some CSR investments may be difficult to measure quantitatively and, thus, must be evaluated qualitatively. For example, the benefits of a wellness and fitness center for employees would be difficult to evaluate quantitatively. In addition, CSR investments may be legally mandated and, thus, are justified more by the requirements of the law than by their immediate economic benefits.

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