Introduction to Management Accounting Global Edition, 16E Charles T. Horngren Test Bank

Type:

Test Bank

Resource:

Introduction to Management Accounting

Edition:

16th Edition

Author(s):

Charles T. Horngren Gary L. Sundem William O. Stratton Dave Burgstahler Jeff O. Schatzberg

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 1 Managerial Accounting, the Business Organization, and Professional Ethics 1.1 Questions 1) Which credential is associated with management accountants?

A) CPA B) CMA C) CFP D) IMA Answer: B Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 2) The largest U.S. association of professional accountants whose major interest is management accounting is the ________.

A) American Institute of Certified Public Accountants B) American Institute of Certified Management Accountants C) Institute of Management Accountants D) American Institute of Management Accountants Answer: C Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 3) ________ is the field that produces information used primarily by managers within an organization.

A) Financial accounting B) Management accounting C) Internal auditing D) External auditing Answer: B Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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4) The primary users of management accounting information are ________.

A) bankers B) governmental regulatory bodies C) managers in organizations D) managerial accountants Answer: C Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 5) ________ is the field of accounting that develops information for external parties such as stockholders, suppliers, banks and governmental regulatory bodies.

A) Auditing B) Internal auditing C) Management accounting D) Financial accounting Answer: D Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 6) Which of the following statements about management accounting is FALSE? A) Management accounting is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting and communicating information.

B) Management accounting helps managers fulfill organizational objectives.

C) Management accounting is used by managerial accountants to make strategic and operational decisions.

D) Management accounting produces information for managers in an organization.

Answer: C Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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7) When comparing management accounting and financial accounting, which of the following statements is FALSE? A) Management accounting has a future orientation whereas financial accounting has a past orientation.

B) Management accounting prepares detailed reports whereas financial accounting prepares summary reports.

C) Management accountants are constrained by the principles of reporting promulgated by the Institute of Management Accountants whereas financial accountants are constrained by Generally Accepted Accounting Principles.

D) Behavioral considerations are of primary importance in management accounting, but not in financial accounting.

Answer: C Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 8) Generally Accepted Accounting Principles are most closely connected to ________.

A) management accounting B) financial accounting C) internal auditing D) management auditing Answer: B Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 9) Who provides assurance to external users about the reliability of a company's financial statements?

A) Certified Management Accountants and Certified Public Accountants B) Chartered Management Accountants and Certified Management Accountants C) Certified Public Accountants and Chartered Management Accountants D) Certified Public Accountants and Chartered Accountants Answer: D Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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10) Financial reports prepared by financial accountants focus on ________. Financial reports prepared by management accountants focus on ________.

A) segments of the organization such as departments and divisions; segments of the organization such as departments and divisions B) the organization as a whole; the organization as a whole C) the organization as a whole; segments of the organization such as departments and divisions D) segments of the organization such as departments and divisions; the organization as a whole Answer: C Diff: 2 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 11) Which of the following organizations oversees the CMA Exam?

A) American Institute of Certified Public Accountants B) Chartered Accountants Institute C) Institute of Management Accountants D) American Institute of Certified Management Accountants Answer: C Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 12) Generally Accepted Accounting Principles play an important role in management accounting.

Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 13) Behavioral considerations are of primary importance in financial accounting.

Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 14) Financial accounting reports are usually prepared for a period of one year or less.

Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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15) Reports prepared by managerial accountants have a past orientation.

Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 16) In some countries outside the United States, independent auditors are called chartered accountants.

Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 1.2 Questions 1) ________ information helps managers focus on operating problems, imperfections, inefficiencies and opportunities.

A) Scorekeeping B) Attention directing C) Problem solving D) Performance Answer: B Diff: 1 LO: 1-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 2) Problem solving information would NOT be used in which of the following situations?

A) decision to make or buy parts for a manufactured product B) decision to replace equipment C) decision to add or drop a division D) evaluating the operating performance of a segment in the current year Answer: D Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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3) Investigating the reasons for the variances on a department's performance report is an example of ________.

A) scorekeeping B) attention directing C) problem solving D) auditing Answer: B Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4) ________ is the classification, accumulation, and reporting of data that help users understand and evaluate organizational performance.

A) Scorekeeping B) Attention directing C) Problem solving D) Cost accounting Answer: A Diff: 1 LO: 1-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 5) What type of information is used in making nonroutine decisions, such as the decision to replace a traditional assembly line with fully automated robots?

A) scorekeeping information B) attention directing information C) problem solving information D) auditing information Answer: C Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 6) How is accounting information prepared by management accountants used within an organization?

A) to help operating managers make decisions B) to plan an organization's operations C) to control an organization's operations D) all of the above Answer: D Diff: 1 LO: 1-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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7) What are accounting systems?

A) The process used to streamline production processes B) The process used to generate performance measures C) Formal mechanisms for gathering, organizing and communicating information about an organization's activities D) none of the above Answer: C Diff: 1 LO: 1-2 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 8) ________ involves an analysis of alternative courses of action and the identification of the best course of action to follow.

A) Scorekeeping B) Attention directing C) Problem-solving D) Internal auditing Answer: C Diff: 1 LO: 1-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 9) Starbucks generates many financial reports to evaluate the operating performance of each store at the end of each quarter. The financial reports are an example of ________.

A) scorekeeping B) attention directing C) problem-solving D) management auditing Answer: A Diff: 1 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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10) Starbucks experiments with adding ice cream sundaes to its menu at several stores in the state of Washington Financial reports are prepared showing revenues and costs for the new menu item. Based on the reports, management at the corporate office will then decide whether to permanently add or remove the new menu item. The financial reports are an example of ________ information.

A) scorekeeping B) attention directing C) problem-solving D) management auditing Answer: C Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 11) Companies produce most ________ and ________ information on a routine basis such as every day, every month or every quarter.

A) scorekeeping; problem-solving B) scorekeeping; attention directing C) problem-solving; attention directing D) interim reports; problem-solving Answer: B Diff: 1 LO: 1-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 12) A company is setting the price on a special order of a manufactured product routinely made. What type of information is needed to set the price?

A) scorekeeping B) attention directing C) problem-solving D) interim reports Answer: C Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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13) A company is unsure whether it is more cost efficient to make or buy a component used in a manufactured product that is mass produced. What type of information is needed to make this decision?

A) scorekeeping B) attention directing C) problem-solving D) management auditing Answer: C Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 14) A company is considering whether to change the mix of products sold. They think it would be more profitable to emphasize the products with the highest profit per unit. What type of information is needed to answer this question?

A) scorekeeping B) attention directing C) problem-solving D) internal auditing Answer: C Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 15) Planning refers to ________.

A) the implementation of organizational plans B) the use of performance reports to evaluate the attainment of organizational objectives C) setting organizational objectives and establishing the path to attain them D) an analysis of alternative courses of action Answer: C Diff: 1 LO: 1-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 16) Taco Bell wants to increase profitability of stores in the Midwest by adding new menu items and increasing advertising. This is an experiment and the company is unsure if these actions will be fruitful.

On the part of management, this is an example of ________.

A) control B) scorekeeping C) feedback D) planning Answer: D Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 9 .

17) Southern Chicken is expanding the menu items offered in order to increase profitability. Management will evaluate the profitability of each new menu item after six months. Menu items that are profitable will be retained and the others will be discontinued. On the part of management, the evaluation and subsequent actions after six months is an example of ________.

A) management auditing B) internal auditing C) planning D) control Answer: D Diff: 1 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 18) A manager using information to decide whether to add or drop a product is an example of problem solving.

Answer: TRUE Diff: 2 LO: 1-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 19) Most scorecard and attention-directing information is produced on a nonroutine basis.

Answer: FALSE Diff: 2 LO: 1-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 1.3 Questions 1) A(n) ________ is a review to determine whether the policies and procedures specified by top management have been implemented by lower managers.

A) management audit B) internal audit C) internal control D) internal accounting control Answer: A Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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2) The Foreign Corrupt Practices Act requires ________.

A) companies to cease conducting business with companies in some foreign countries B) companies to reject bribes from companies in foreign countries C) companies to have an appropriate system of internal controls D) companies to prepare a separate report on their accounting information system Answer: C Diff: 2 LO: 1-3 AACSB: Dynamics of the global economy Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 3) Performance reports compare actual results to ________. Performance reports also report ________.

A) budgeted results; bonuses awarded B) objectives; variances C) planned results; variances D) projected results; stock options granted Answer: C Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4) To evaluate managers' decisions and the productivity of organizational units, organizations use ________.

A) annual financial statements B) quarterly financial statements C) bimonthly financial statements D) performance reports Answer: D Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 5) An unfavorable variance occurs on a performance report when ________.

A) the actual cost is less than the budgeted cost B) the actual revenue is greater than the budgeted revenue C) the actual profit is greater than the budgeted profit D) the actual revenue is less than the budgeted revenue Answer: D Diff: 2 LO: 1-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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6) A favorable variance occurs on a performance report when ________.

A) the actual cost is greater than the budgeted cost B) the actual revenue is less than the budgeted revenue C) the actual profit is less than the budgeted profit D) the actual profit is greater than the budgeted profit Answer: D Diff: 2 LO: 1-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 7) Who is the primary user of performance reports used to plan and control operations?

A) management accountants B) CPAs C) operating managers D) chartered accountants Answer: C Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 8) When designing an accounting information system for management, which governmental regulations are NOT important?

A) Sarbanes-Oxley Act B) Foreign Corrupt Practices Act C) Tax rules promulgated by Internal Revenue Service D) Six Sigma Act Answer: D Diff: 1 LO: 1-3 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 9) What types of variances should be investigated when looking at performance reports?

A) all variances B) only favorable and unfavorable variances that are large in size C) only unfavorable variances that are large in size D) only favorable variances that are large in size Answer: B Diff: 2 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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10) A budget ________.

A) is a quantitative expression of a plan of action B) provides feedback by comparing actual results with planned results C) includes deviations from planned results D) ignores areas that are presumed to be running smoothly Answer: A Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 11) Management-by-exception means that managers should ________.

A) concentrate on areas that deviate from the plan B) in the absence of other evidence, presume that areas that conform with plans are running smoothly C) A and B D) none of the above Answer: C Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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12) The Helium Company held a Christmas party. The company expected attendance of 100 people and prepared the following budget: Hotel room rental Food Entertainment Decorations Total Costs

$500 500 800 300 $2,100

One hundred people attended the party. The following costs were incurred: Hotel room rental Food Entertainment Decorations Total Costs

$575 640 750 350 $2,315

What is the variance for total costs?

A) $215 Unfavorable B) $215 Favorable C) $25 Favorable D) $140 Unfavorable Answer: A Diff: 2 LO: 1-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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13) The Hermanski Company held a Christmas party. The company expected attendance of 100 people and prepared the following budget: Hotel room rental Food Entertainment Decorations Total Costs

$600 500 800 300 $2,200

One hundred people attended the party. The costs incurred were: Hotel room rental Food Entertainment Decorations Total Costs

$575 640 750 350 $2,315

What is the primary reason for the variance in total costs?

A) Hotel room rent cost more than expected.

B) Food cost more than expected.

C) Entertainment cost more than expected.

D) Decorations cost less than expected.

Answer: B Diff: 2 LO: 1-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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14) USA Bank held a party. USA Bank expected attendance of 100 people and prepared the following budget: Hotel room rental Food Entertainment Decorations Total Costs

$600 500 800 300 $2,200

One hundred people attended the party. The following costs were incurred: Hotel room rental Food Entertainment Decorations Total Costs

$575 640 750 350 $2,315

What is the variance for the cost of food?

A) $115 Unfavorable B) $140 Favorable C) $115 Favorable D) $140 Unfavorable Answer: D Diff: 2 LO: 1-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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15) A fraternity held a party. The fraternity prepared the following budget for 25 expected attendees: Room rental Food Entertainment Decorations Total Costs

$150 250 150 75 $625

Twenty-five people attended the party. The following costs were incurred: Room rental Food Entertainment Decorations Total Costs

$240 320 125 75 $760

What is the variance for total costs?

A) $90 Unfavorable B) $135 Unfavorable C) $135 Favorable D) $70 Unfavorable Answer: B Diff: 2 LO: 1-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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16) A sorority held a party. The sorority prepared the following budget for 25 expected attendees: Room rental Food Entertainment Decorations Total Costs

$270 250 150 75 $745

Twenty-five people attended the party. The costs incurred were: Room rental Food Entertainment Decorations Total Costs

$140 320 125 75 $660

What is the variance for the room rental cost?

A) $85 Unfavorable B) $85 Favorable C) $130 Favorable D) $130 Unfavorable Answer: C Diff: 2 LO: 1-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 17) Variances are deviations from planned results.

Answer: TRUE Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 18) Management by exception is the practice of ignoring areas that deviate from the plan.

Answer: FALSE Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 19) A budget is a qualitative expression of a plan of action.

Answer: FALSE Diff: 1 LO: 1-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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20) The management accountant prepares the following performance report for a company's first year of operations: Budget Actual Variance Sales $100,000 $110,000 ?

Cost of Goods Sold 50,000 45,000 ?

Selling Expenses 20,000 19,000 ?

Administrative Expenses 10,000 11,000 ?

Operating Income $20,000 $35,000 ?

Required: A) Compute variances for each line item on the income statement. Also indicate if the variances are favorable or unfavorable.

Answer: A) Budget Actual Variance Sales $100,000 $110,000 $10,000 F Cost of Goods Sold 50,000 45,000 5,000 F Selling Expenses 20,000 19,000 1,000 F Administrative Expenses 10,000 11,000 1,000 U Operating Income $20,000 $35,000 $15,000 F Diff: 2 LO: 1-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 1.4 Questions 1) Which of the following items should be considered by managers when designing accounting systems?

A) cost-benefit balances B) behavioral implications C) cost-benefit balances and behavioral implications D) none of the above Answer: C Diff: 1 LO: 1-4 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 2) ________ is (are) the primary consideration in choosing among accounting systems.

A) Simplicity B) Behavioral implications C) The cost-benefit balance D) Simplicity and behavioral implications Answer: C Diff: 1 LO: 1-4 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 19 .

3) ________ is (are) the accounting system's effect on the behavior and the decisions of managers.

A) Simplicity B) Behavioral implications C) The cost-benefit balance D) The code of ethics Answer: B Diff: 1 LO: 1-4 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4) When designing an accounting information system, the cost to acquire additional information should be incurred ________.

A) at all times so the operating manager has more information to make decisions B) when information overload does not occur C) at all times because the benefit cannot be quantified D) when the expected benefit of an improved decision exceeds the cost of the information Answer: D Diff: 2 LO: 1-4 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 5) When developing a price for a new product, the price must cover ________.

A) costs in phase-out and product development cycles only B) costs in mature market and introduction to market cycles only C) costs in product development and phase-out cycles plus direct production costs D) costs incurred in all stages of the product life cycle Answer: D Diff: 2 LO: 1-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 6) During the product development stage of the product life cycle, companies typically experience ________.

A) revenues and no costs B) costs and no revenues C) both costs and revenues D) neither costs nor revenues Answer: B Diff: 2 LO: 1-4 AACSB: Analytic skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

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7) When does a company earn the majority of revenue for a product that goes through the product life cycle?

A) phase-out of product and introduction to market stages B) introduction to market and mature market stages C) product development and mature market stages D) mature market and phase-out of product stages Answer: B Diff: 2 LO: 1-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 8) Which stage of the product life cycle has a stable sales level?

A) product development stage B) introduction to market stage C) mature market stage D) phase-out of product stage Answer: C Diff: 2 LO: 1-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 9) The various stages through which a product passes are called the ________.

A) value chain B) product life cycle C) performance plan D) product performance plan Answer: B Diff: 1 LO: 1-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 10) Product life cycles may range from a few months to many years.

Answer: TRUE Diff: 1 LO: 1-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 11) The product life cycle for an automobile is usually a few months.

Answer: FALSE Diff: 1 LO: 1-4 AACSB: Analytic skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

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12) The cost-benefit balance is the primary consideration in choosing among accounting systems.

Answer: TRUE Diff: 1 LO: 1-4 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 13) The behavioral implications of an accounting system refer to the system's effects on the firm's customers.

Answer: FALSE Diff: 1 LO: 1-4 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 14) Additional costly information should be acquired when the expected benefit of an improved decision exceeds the cost of the information.

Answer: TRUE Diff: 1 LO: 1-4 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Describe the basics of managerial accounting and its function within an organization 1.5 Questions 1) Marketing is the function of the value chain that involves ________.

A) the mechanism by which a company delivers products or services to the customer B) the manner by which individuals or groups learn about the value and features of products or services C) selling activities and delivery activities D) selling activities and customer service Answer: B Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 2) Distribution is the function of the value chain that involves ________.

A) the mechanism by which a company delivers products or services to the customer B) the manner by which individuals or groups learn about the value and features of products or services C) the support activities provided to the customer D) none of the above Answer: A Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

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3) Research and development is the function of a value chain that involves ________.

A) the detailed design and engineering of products, services or processes B) the generation of ideas related to new products, services or processes C) the generation of ideas related to new products only D) the detailed design and engineering of new processes Answer: B Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 4) The detailed design and engineering of products, services or processes is called the ________ function in the value chain.

A) research and development B) design C) engineering D) production Answer: B Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 5) The function of the value chain that provides support activities to the customer is called ________.

A) marketing B) distribution C) customer service D) consumer relations Answer: C Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 6) Advertising is an example of the ________ function of the value chain.

A) distribution B) selling C) marketing D) promotion Answer: C Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

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7) A telephone hotline is established for customers to call with questions about a new electronic device.

This is an example of the ________ function in the ________.

A) marketing; value chain B) distribution; value chain C) customer service; value chain D) marketing; product life cycle Answer: C Diff: 2 LO: 1-5 AACSB: Analytic skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 8) An example of a staff department at a clothing manufacturer is the ________.

A) pressing department B) cutting department C) sewing department D) maintenance department Answer: D Diff: 2 LO: 1-5 AACSB: Analytic skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 9) According to the Financial Executives Institute, a function of the controller is ________.

A) investments B) short-term financing C) provision of capital D) reporting and interpreting Answer: D Diff: 2 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 10) According to the Financial Executives Institute, a function of the treasurer is ________.

A) reporting and interpreting B) short-term financing C) protection of assets D) government reporting Answer: B Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

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11) The ________ is mainly concerned with the company's operating matters whereas the ________ is mainly concerned with the company's financial matters.

A) treasurer; controller B) controller; treasurer C) managerial accountant; financial accountant D) chief executive officer; chief financial officer Answer: B Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 12) Accountants play a role in supporting ________ of the value-chain functions.

A) some B) none C) about half D) all Answer: D Diff: 2 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 13) A new weight loss product is sold by a mail-order system. The mail-order system is an example of the ________ function in the value chain.

A) marketing B) production C) customer service D) distribution Answer: D Diff: 2 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 14) Each value chain function should focus on activities that ________.

A) create profits for the seller B) create bonuses for top management C) create higher stock prices for the company's stock D) create value for the customer Answer: D Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

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15) What type of managers is directly involved with making and selling an organization's products?

A) staff managers B) line managers C) management accountants D) accounting managers Answer: B Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 16) What type of managers supports line managers by providing information and advice?

A) staff managers B) operating managers C) assembly room managers D) welding room managers Answer: A Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 17) In a typical manufacturing factory, staff functions do NOT include ________.

A) inspection B) storeroom C) maintenance D) welding Answer: D Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 18) In a typical manufacturing factory, line functions do NOT include ________.

A) purchasing B) stamping C) welding D) assembly Answer: A Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

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19) The value chain refers to the various stages through which a product passes.

Answer: FALSE Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 20) Accountants support only some of the value-chain functions.

Answer: FALSE Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 21) Line managers are directly involved with making and selling the organization's products or services.

Answer: TRUE Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 22) Staff managers give advice to line managers and have authority over line managers.

Answer: FALSE Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 23) The maintenance department provides line support to the welding department in a factory.

Answer: FALSE Diff: 2 LO: 1-5 AACSB: Analytic skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 24) Specialization by individuals in organizations is being replaced by decision-making by crossfunctional teams.

Answer: TRUE Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

27 .

25) One of a controller's responsibilities is risk management.

Answer: FALSE Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 26) One of a treasurer's responsibilities is tax administration.

Answer: FALSE Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 27) The controller is primarily concerned with a company's financial matters and the treasurer is concerned with a company's operating matters.

Answer: FALSE Diff: 1 LO: 1-5 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 1.6 Questions 1) Which of the following is a major factor causing changes in management accounting today?

A) additional value chain functions B) small advances in technology C) shift to manufacturing-based economy D) increased global competition Answer: D Diff: 1 LO: 1-6 AACSB: Dynamics of the global economy, Use of information technology Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 2) Which company is NOT a service organization?

A) Affiliated Dermatologists B) Michael Flynn Dentistry C) Lowe's Home Improvement Store D) United Internists Answer: C Diff: 1 LO: 1-6 AACSB: Analytic skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

28 .

3) All service organizations are similar in that ________.

A) they are labor intensive B) output is easy to measure C) major inputs and outputs can be stored D) they are capital intensive Answer: A Diff: 1 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 4) Wal-Mart buys Halloween candy from a candy company in Hershey, Pennsylvania. This is an example of a(n) ________.

A) A2B transaction B) B2B transaction C) B2C transaction D) C2B transaction Answer: B Diff: 1 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 5) Which statement is FALSE concerning Enterprise Resource Planning (ERP) systems?

A) Accounting is one part of an ERP system.

B) Accountants must work with operating managers throughout the organization to ensure that the ERP system provides the financial information that managers need.

C) ERP systems support all functional areas of a company.

D) SAP is not a provider of ERP systems.

Answer: D Diff: 1 LO: 1-6 AACSB: Use of information technology Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 6) Which of the following is NOT a new direction in business process management?

A) JIT philosophy B) XBRL C) Six Sigma D) TQM Answer: B Diff: 1 LO: 1-6 AACSB: Use of information technology Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

29 .

7) Which statement about service organizations is FALSE? A) Service organizations include law firms, banks, insurance companies and hospitals.

B) Service organizations do not make or sell tangible goods.

C) The service sector accounts for the majority of the employment in the United States.

D) Managers in service organizations do not need as much accounting information as their counterparts in other types of organizations.

Answer: D Diff: 2 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 8) Examples of business process reengineering do NOT include ________.

A) computer-aided design B) computer-aided manufacturing C) robots D) labor-intensive machines Answer: D Diff: 2 LO: 1-6 AACSB: Reflective thinking skills, Use of information technology Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 9) What is lean manufacturing?

A) eliminating the time products spend in activities that do not add value B) reducing the time products spend in the production process C) reducing the amount of inventories by ordering raw materials only when needed and making products only when ordered by customers D) continuous process improvements to eliminate waste from the entire enterprise Answer: D Diff: 2 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 10) Which statement about TQM is FALSE? A) TQM focuses on product quality.

B) TQM minimizes costs by maximizing quality.

C) TQM focuses on the prevention of defects and on customer satisfaction D) Management accountants have no role in the application of TQM. Answer: D Diff: 1 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

30 .

11) What is Six Sigma?

A) a process improvement to eliminate waste from the entire enterprise B) a process improvement to reduce the time products spend in the production process C) a process improvement to reduce the time products spend in activities that do not add value D) a data-driven approach to eliminate defects in any process Answer: D Diff: 2 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 12) Why do changes in business process management affect management accounting?

A) Management accountants are experts in designing plant layout changes.

B) Management accountants specialize in designing manufacturing cells to streamline production processes.

C) They all affect product costs and management accountants measure product costs.

D) They all affect the number of workers employed and management accountants are involved in human resources.

Answer: C Diff: 1 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 13) Which statement about JIT is FALSE? A) JIT minimizes inventories of raw materials, work in process and finished goods.

B) JIT eliminates non-value-added activities such as inspection.

C) JIT decreases the amount of time products spend in the production process.

D) JIT focuses on customer satisfaction and the prevention of defects.

Answer: D Diff: 2 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 14) A chemical plant has changed the production process for several chemicals. Computers now run the new equipment and robots have replaced most of the workers. What new activities should the accounting system undertake now?

A) Develop new product costs using new equipment and robots.

B) Develop fringe benefit packages for remaining workers.

C) Develop schedules for production setups and runs.

D) Develop uses for idle plant capacity.

Answer: A Diff: 2 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

31 .

15) The essence of the just-in-time philosophy is to eliminate waste.

Answer: TRUE Diff: 1 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 16) Computer-integrated manufacturing systems do not use robots.

Answer: FALSE Diff: 1 LO: 1-6 AACSB: Use of information technology, Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 17) XBRL is an integrated information system that supports all functional areas of a business.

Answer: FALSE Diff: 1 LO: 1-6 AACSB: Use of information technology, Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 18) Many companies derive their competitive advantage from their information, not their physical facilities.

Answer: TRUE Diff: 1 LO: 1-6 AACSB: Reflective thinking skills Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 1.7 Questions 1) Here is a statement from the Statement of Ethical Professional Practice drafted by the Institute of Management Accountants: "Each member has a responsibility to perform professional duties in accordance with relevant laws, regulations and technical standards." This statement comes from the ________ standard.

A) credibility B) confidentiality C) competence D) professional responsibility Answer: C Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

32 .

2) According to the Statement of Ethical Professional Practice drafted by the IMA, the standard of integrity states that each member has a responsibility to ________.

A) communicate information fairly and objectively B) mitigate actual conflicts of interest C) recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity D) disclose delays or deficiencies in information Answer: B Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 3) This is a statement from the IMA's Statement of Ethical Professional Practice: "Each member has a responsibility to communicate information fairly and objectively." This statement comes from the ________ standard.

A) competence B) confidentiality C) integrity D) credibility Answer: D Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 4) According to the IMA's Statement of Ethical Professional Practice, the standard of credibility includes ________.

A) continually developing the accountant's knowledge and skills B) mitigating actual conflicts of interest C) disclosing all relevant information that could reasonably be expected to influence an intended user's understanding of the reports D) refraining from engaging in any conduct that would prejudice carrying out duties ethically Answer: C Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

33 .

5) Susanna is the management accountant at Slow Company. Her close friend, Leslie, is a shareholder in Slow Company. Leslie asks Susanna for information about Slow Company that is typically available only to executive officers in the company. If Susanna shares this information with Leslie, Susanna violates the IMA's ethical standard of ________.

A) competence B) confidentiality C) integrity D) objectivity Answer: B Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 6) Jennifer is the management accountant in Beck Company. A supplier to Beck Company offers Jennifer free tickets to several NASCAR races. If Jennifer accepts the supplier's offer, she violates the IMA's ethical standard of ________.

A) competence B) confidentiality C) credibility D) integrity Answer: D Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 7) The IMA's ethical standard of confidentiality does NOT require each member to ________.

A) keep information confidential except when disclosure is authorized or legally required B) inform all relevant parties regarding appropriate use of confidential information C) refrain from using confidential information for unethical or illegal advantage D) provide confidential decision support information and recommendations that are accurate, clear, concise and timely Answer: D Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

34 .

8) The IMA's ethical standard for integrity includes all of the following EXCEPT ________.

A) each member has a responsibility to mitigate actual conflicts of interest B) each member has a responsibility to refrain from engaging in any conduct that would prejudice carrying out duties ethically C) each member has a responsibility to abstain from engaging in or supporting any activity that would discredit the profession D) each member has a responsibility to monitor subordinates' activities to ensure compliance with the ethical standard Answer: D Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 9) According to the IMA's Statement of Ethical Professional Practice, the standard of credibility requires ________.

A) mitigating actual conflicts of interest B) maintaining an appropriate level of professional expertise by continually developing knowledge and skills C) communicating information fairly and objectively D) performing professional duties in accordance with relevant laws, regulations and technical standards Answer: C Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 10) The Institute of Management Accountants has adopted a set of standards for ethical conduct which includes ________.

A) competence, integrity, confidentiality and objectivity B) competence, confidentiality, credibility and objectivity C) competence, confidentiality, credibility and integrity D) competence, integrity, morality and confidentiality Answer: C Diff: 1 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

35 .

11) You are a management accountant in a large company. You have observed unethical behavior by your immediate supervisor. In accordance with the guidelines offered by the IMA, which of the following courses of action should NOT be taken?

A) Follow the organization's established policies on the resolution of ethical conflict.

B) Discuss the issue with your immediate supervisor.

C) Consult your own attorney.

D) Initiate a confidential discussion with an IMA Ethics Counselor.

Answer: B Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 12) Scott is a management accountant in a large company. Scott observed unethical behavior by a coworker who is also a management accountant. The coworker is a relative of the company's president and he always receives preferential treatment. Scott observed the coworker putting office supplies and small pieces of electronic equipment in his briefcase. The company does not have a code of ethics or a set of policies for ethical problems. According to the IMA, what course of action should Scott take?

A) He should report the observation to the police. The coworker is stealing from the company.

B) He should report the observation to his immediate supervisor.

C) He should report the observation to the Securities and Exchange Commission.

D) He should do nothing.

Answer: B Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities, Reflective Thinking Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 13) According to the Financial Executive, which of the following situations create pressures for unethical behavior?

A) emphasis on long-term results B) upward trends in the economy C) ignoring small lapses in ethical behavior D) rising stock prices Answer: C Diff: 1 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

36 .

14) John is a management accountant at DAP Inc. John has reason to believe that his immediate supervisor (the controller), the chief financial officer and the company president are engaged in accounting fraud that involves overstating assets and understating liabilities. The company does not have a code of ethics or a set of policies for ethical problems. According to the guidelines offered by the IMA, what should John do?

A) Report the suspected wrongdoings to the local police.

B) Discuss the suspected wrongdoings with his immediate supervisor.

C) Discuss the suspected wrongdoings with the company president.

D) Report the suspected wrongdoings to the audit committee or the board of directors.

Answer: D Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities, Reflective Thinking Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 15) According to the Institute of Management Accountants, management accountants should follow several ethical principles that include ________.

A) honesty, fairness, respect and compassion B) honesty, fairness, responsibility and objectivity C) honesty, competence, confidentiality and integrity D) competence, confidentiality, integrity and honesty Answer: B Diff: 1 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 16) The IMA's ethical standard for confidentiality includes all of the following EXCEPT ________.

A) keep information confidential except when disclosure is authorized or legally required B) inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates' activities to ensure compliance C) refrain from using confidential information for unethical or illegal advantage D) refrain from engaging in any conduct that would prejudice carrying out duties ethically Answer: D Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

37 .

17) An IMA ethical standard states, "Each member has a responsibility to disclose delays or deficiencies in information, timeliness, processing or internal controls in conformance with organizational policy and or applicable law." This statement comes from the ________ standard.

A) integrity B) confidentiality C) competence D) credibility Answer: D Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 18) If an employee observes unethical behavior in an organization, the employee is first obligated to ________.

A) report the behavior to the police B) report the behavior to his or her supervisor C) report the behavior to the Securities and Exchange Commission D) follow the company's policies for unethical behavior Answer: D Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 19) A code of conduct is a document specifying the ethical standards of an organization.

Answer: TRUE Diff: 1 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 20) The Sarbanes-Oxley Act requires companies to disclose whether the company has adopted a code of ethics for senior financial officers.

Answer: TRUE Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 21) The corporate culture is a larger influence on the ethical climate of an organization than a code of ethics.

Answer: TRUE Diff: 1 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

38 .

22) In the IMA's Statement of Ethical Professional Practice, integrity is one of the standards explained.

Answer: TRUE Diff: 1 LO: 1-7 AACSB: Ethical understanding and reasoning abilities Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting 23) Paul Satorius is the controller at ANEW Corporation. The company is not publicly traded. ANEW Corporation just received a patent on a new product that is supposed to revolutionize the music industry.

As the moment, however, ANEW Corporation is experiencing financial difficulties and is on the verge of defaulting on a note held by the bank.

At the end of the most recent fiscal year, the company's president instructed Paul to ignore recording some invoices. Paul objected because the invoices represented true liabilities at fiscal year end. However, the president insisted that the invoices should be recorded next year so that current liabilities reported on the balance sheet at the end of the current year are lower. The bank is closely following the amount of current liabilities reported by ANEW Corporation as an indicator of solvency.

Required: What should Paul do? Follow the guidelines offered by the IMA. Answer: Paul should follow the company's policies on resolving an ethical conflict. If these policies do not resolve the conflict, then Paul should: 1. report the ethical conflict to the audit committee, executive committee, board of directors, board of trustees or owners of the company 2. have a confidential discussion with an IMA Ethics Counselor or other impartial advisor 3. consult his own attorney as to legal obligations and rights concerning the ethical conflict.

In the end, Paul may have to consider ending his employment with ANEW Corporation.

Diff: 2 LO: 1-7 AACSB: Ethical understanding and reasoning abilities, Reflective Thinking Learning Outcome: Discuss the legal, ethical and business concepts that affect managerial accounting

39 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 2 Introduction to Cost Behavior and Cost-Volume-Profit Relationships 2.1 Questions 1) Why is it important to identify the most appropriate cost drivers for a particular product?

A) so managers can identify the activities necessary to manufacture a product B) so managers can control product costs better C) so managers can predict product costs better and make better decisions D) B and C Answer: D Diff: 1 LO: 2-1 AACSB: Reflective thinking skills Learning Outcome: None 2) A brainstorming group in the Research and Development area is charged with developing new product ideas for the company. What is a good cost driver of the cost of this activity?

A) number of parts in new products proposed B) number of new product proposals C) number of workers D) number of engineering hours Answer: B Diff: 1 LO: 2-1 AACSB: Reflective thinking skills Learning Outcome: None 3) Janitors clean the factory at the end of each workday. The wages of the janitors are used to determine the cost of the only manufactured product in the factory. What is a good cost driver for the wages of the janitors?

A) number of janitors B) number of kilowatt hours used C) number of machine hours on cleaning machines D) number of labor hours worked by janitors Answer: D Diff: 1 LO: 2-1 AACSB: Reflective thinking skills Learning Outcome: None

1 .

4) Janitors clean the factory with scrubbing machines and polishing machines. Scrubbing machines scrub the factory floor and polishing machines polish the floor. The cost associated with cleaning the factory is treated as a product cost. What is a good cost driver for the Depreciation Expense associated with the scrubbing and polishing machines?

A) number of janitors operating machines B) number of labor hours put in by janitors C) number of kilowatt hours used D) number of machine hours used Answer: D Diff: 1 LO: 2-1 AACSB: Reflective thinking skills Learning Outcome: None 5) Cost drivers are ________.

A) the different functions in the value chain B) different types of functional areas in the firm C) measures of activities that require the use of resources and thereby cause costs D) different types of cost calculations Answer: C Diff: 2 LO: 2-1 AACSB: Reflective thinking skills Learning Outcome: None 6) Consider the following activity: The installation of seats by an airplane manufacturer in a commercial airplane. What is an appropriate cost driver for the labor resources used for this activity?

A) number of service center hours B) number of labor hours used to install seats C) number of mechanic hours D) number of engineering hours Answer: B Diff: 2 LO: 2-1 AACSB: Analytic skills Learning Outcome: None 7) Consider the following activity: The manufacturer in a commercial airplane. What is an appropriate cost driver for the cost of the seats?

A) number of seats installed B) number of labor hours used to install seats C) number of mechanic hours D) number of engineering hours Answer: A Diff: 2 LO: 2-1 AACSB: Analytic skills Learning Outcome: None 2 .

2.2 Questions 1) Within the relevant range, the total amount of ________ cost changes in direct proportion to changes in the cost driver. Within the relevant range, the total amount of ________ cost does not change in direct proportion to changes in the cost driver.

A) fixed; variable B) variable; fixed C) step; mixed D) mixed; step Answer: B Diff: 2 LO: 2-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 2) As cost-driver level decreases in the relevant range, fixed costs per unit of cost driver ________, but total fixed costs ________.

A) increase; do not change B) decrease: do not change C) do not change; increase D) do not change; decrease Answer: A Diff: 2 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3) As cost-driver level increases in the relevant range, a fixed cost does not change ________, but the fixed cost ________ becomes progressively smaller.

A) per unit of cost driver; total B) in total; per unit of cost driver C) per-unit; per unit of cost driver D) in total; per year Answer: B Diff: 1 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

3 .

4) As the cost-driver level increases in the relevant range, variable costs per unit of cost driver ________ but total variable costs ________.

A) do not change; increase in direct proportion to the cost-driver activity level B) do not change; decrease in direct proportion to the cost-driver activity level C) increase; do not change D) decrease; do not change Answer: A Diff: 1 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 5) Which of the following costs is a variable cost?

A) rental expense for factory building for manufacturer of electronics B) lease cost for factory machine for manufacturer of electronics C) fuel for airplane for airline D) depreciation expense of airplane for airline Answer: C Diff: 1 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 6) What happens when the cost-driver level increases within the relevant range?

A) Total fixed costs remain unchanged.

B) Fixed costs per unit of cost driver increase.

C) Total variable costs decrease.

D) Variable costs per unit of cost driver increase.

Answer: A Diff: 2 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 7) What happens when the cost-driver activity level increases within the relevant range?

A) Total fixed costs increase.

B) Fixed costs per unit of cost driver decrease.

C) Total variable costs decrease.

D) Variable costs per unit of cost driver decrease.

Answer: B Diff: 2 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

4 .

8) What happens when the cost-driver activity level decreases within the relevant range?

A) Total fixed costs increase.

B) Fixed costs per unit of cost driver decrease.

C) Total variable costs decrease.

D) Variable costs per unit of cost driver decrease.

Answer: C Diff: 2 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 9) What happens when the cost-driver activity level decreases within the relevant range?

A) Total fixed costs increase.

B) Fixed costs per unit of cost driver decrease.

C) Total variable costs increase.

D) Variable costs per unit of cost driver are unchanged.

Answer: D Diff: 2 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 10) Which of the following costs is a fixed cost?

A) cost of dairy ingredients used to produce ice cream B) depreciation expense on factory building C) fuel used by delivery trucks D) labor wages of workers who mix dairy ingredients to make ice cream Answer: B Diff: 2 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 11) An increase in total variable costs usually indicates that ________.

A) the cost-driver activity level is decreasing B) the cost-driver activity level is increasing C) variable costs per unit is decreasing D) fixed costs per unit is increasing Answer: B Diff: 2 LO: 2-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

5 .

12) The relevant range applies to ________.

A) variable costs only B) fixed costs only C) fixed costs and variable costs D) none of the above Answer: C Diff: 2 LO: 2-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 13) Total fixed costs increase when the cost-driver level increases in the relevant range.

Answer: FALSE Diff: 1 LO: 2-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 14) The relevant range is the limit of cost-driver level within which a specific relationship between costs and the cost driver is valid.

Answer: TRUE Diff: 1 LO: 2-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 15) Total variable costs increase when the cost-driver level increases in the relevant range.

Answer: TRUE Diff: 2 LO: 2-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 16) Variable costs per unit of the cost driver increase when the cost-driver level increases in the relevant range.

Answer: FALSE Diff: 2 LO: 2-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

6 .

2.3 Questions 1) Two types of costs that each combine fixed cost and variable cost behaviors are ________ and ________.

A) capacity costs; incremental costs B) semi-fixed costs; semivariable costs C) composite costs; average costs D) step costs; mixed costs Answer: D Diff: 2 LO: 2-3 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 2) If an individual chunk of step costs applies to a large range of cost-driver activity, the step costs are treated as ________ within that range.

A) variable costs B) mixed costs C) fixed costs D) semivariable costs Answer: C Diff: 2 LO: 2-3 AACSB: Reflective thinking skills Learning Outcome: None 3) If individual cost steps are uniform and the decision being made spans a number of steps, the step costs are treated as a ________.

A) fixed cost B) mixed cost C) incremental cost D) variable cost Answer: D Diff: 2 LO: 2-3 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 4) With mixed costs, the ________ element is unchanged over the relevant range and the ________ element varies proportionately with cost-driver activity.

A) variable cost; fixed cost B) fixed cost; variable cost C) fixed cost; step cost D) step cost; variable cost Answer: B Diff: 2 LO: 2-3 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 7 .

5) With mixed costs, the fixed cost element is viewed as the ________ and the variable cost element is viewed as the ________.

A) step cost; cost of capacity B) cost of capacity; incremental cost of using capacity C) variable cost; cost of capacity D) step cost; mixed cost Answer: B Diff: 2 LO: 2-3 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 6) Costs that change abruptly at different levels of activity because the resources are available only in indivisible chunks are called ________.

A) mixed costs B) variable costs C) fixed costs D) step costs Answer: D Diff: 1 LO: 2-3 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 7) In a small construction firm, a crew supervisor is added for every ten workers employed. The salaries of the crew supervisors are a ________.

A) variable cost B) mixed cost C) step cost D) fixed cost Answer: C Diff: 2 LO: 2-3 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

8 .

8) Which example is NOT a step cost?

A) When oil and gas exploration activity reaches a certain level in a given area, a company leases an additional rig. The lease cost of the rigs is a step cost.

B) When ten nurses are added to a shift, a nursing supervisor is also added to the shift. The salaries of the nursing supervisors are a step cost.

C) When a telemarketing company adds ten workers to a shift, a supervisor is also added to the shift. The salaries of the supervisors are a step cost.

D) When a manufacturing company ceases production, a skeleton crew of maintenance workers continues to work, but the rest are terminated. When production resumes, maintenance workers are rehired in direct proportion to the amount of production. The wages of the maintenance workers are a step cost.

Answer: D Diff: 2 LO: 2-3 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 9) A compensation plan where the sales force is paid salary plus commission is a ________.

A) purely variable cost B) mixed cost C) step cost D) fixed cost Answer: B Diff: 1 LO: 2-3 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 10) Step costs change abruptly at different levels of cost-driver activity.

Answer: TRUE Diff: 1 LO: 2-3 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 11) Mixed costs are composed of only fixed costs.

Answer: FALSE Diff: 1 LO: 2-3 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

9 .

2.4 Questions 1) A cost-volume-profit graph has a line for ________ and a line for ________.

A) revenues; variable costs only B) revenues; fixed costs only C) revenues; total costs D) net profit; net loss Answer: C Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 2) The break-even point on the cost-volume-profit graph is where the ________.

A) total cost line intersects the net profit line B) total cost line intersects the net loss line C) revenue line intersects the total cost line D) revenue line intersects the variable cost line Answer: C Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 3) On a cost-volume-profit graph, the vertical distance between the Revenue line and the Total Cost line represents ________ or ________.

A) mixed cost; step cost B) variable cost; fixed cost C) net profit; net loss D) step cost; fixed cost Answer: C Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 4) To construct the Total Cost line on a cost-volume-profit graph, plot ________ and then plot ________.

A) mixed costs; step costs B) step costs; mixed costs C) fixed costs; variable costs D) fixed costs; fixed costs plus variable costs Answer: D Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None

10 .

5) On a cost-volume-profit graph, when the Total Cost line is higher than the Total Revenue line, the difference represents ________.

A) net income B) a positive return on the investment C) a net loss D) not enough information is presented Answer: C Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 6) It is misleading to call a cost-volume-profit graph a break-even graph. Why? A) The graph reveals more information than the break-even point.

B) The graph does not show the break-even point.

C) The main purpose of the graph is to show the cost drivers for different activity levels.

D) The main purpose of the graph is to show the margin of safety.

Answer: A Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 7) If a company faces declining sales over time, it must restructure its costs to break-even at a lower volume. In order to carry this out, what costs can be reduced?

A) variable costs only B) fixed costs only C) variable and fixed costs D) step costs only Answer: C Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 8) On a cost-volume-profit graph, the net profit area is found ________.

A) at the break-even point B) to the right of the break-even point C) to the left of the break-even point D) to the right of the intersection of the y-axis and x-axis Answer: B Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None

11 .

9) On a cost-volume-profit graph, at the point where the Total Revenue line intersects the Total Cost line, ________.

A) net income is positive B) net income is negative C) net income is zero D) not enough information is given Answer: C Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 10) The horizontal axis on the cost-volume-profit graph is the ________.

A) dollars of cost B) sales volume in units C) dollars of revenue D) net income Answer: B Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 11) The vertical axis on the cost-volume-profit graph is the ________.

A) dollars of net profit B) sales volume in units C) margin of safety D) dollars of cost and revenue Answer: D Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 12) Which of the following is NOT an underlying assumption of cost-volume-profit analysis?

A) We can classify expenses into fixed and variable categories.

B) In multiproduct companies, sales mix will be constant.

C) Revenues and expenses are linear over the relevant range.

D) The inventory level changes significantly during the period.

Answer: D Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None

12 .

13) The break-even point is located at the intersection of the total revenue line and the total costs line on a cost-volume-profit graph.

Answer: TRUE Diff: 2 LO: 2-4 AACSB: Analytic skills Learning Outcome: None 14) The CVP graph shows how costs behave over different relevant ranges.

Answer: FALSE Diff: 2 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 15) The horizontal axis on the CVP graph is the dollars of cost and revenue.

Answer: FALSE Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 16) The CVP graph uses the assumption that costs are linear over the relevant range.

Answer: TRUE Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 17) An assumption of the CVP analysis is that changes in efficiency are expected.

Answer: FALSE Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 18) The sales mix is the relative proportions or combinations of quantities of different products that constitute total sales.

Answer: TRUE Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None

13 .

19) An assumption of the CVP analysis is that the sales mix can fluctuate.

Answer: FALSE Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: None 20) The break-even point is the level of revenue at which revenue equals fixed costs.

Answer: FALSE Diff: 1 LO: 2-4 AACSB: Reflective thinking skills Learning Outcome: Perform fundamental CVP calculations 2.5 Questions 1) Herman Loebl Company, a producer of salsa, has the following information: Income tax rate Selling price per unit Variable cost per unit Total fixed costs

30% $8.00 $3.00 $90,000.00

The contribution margin per unit is ________.

A) $2.00 B) $3.00 C) $5.00 D) $8.00 Answer: C Diff: 1 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 2) Kaprelian Company sells desks at $480 per desk. The variable costs are $300 per desk. Total fixed costs for the period are $400,000. The contribution margin ratio is ________.

A) 22.5% B) 37.5% C) 40.6% D) 62.5% Answer: B Diff: 1 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

14 .

3) Gnat Company, a producer of electronic devices, has the following information: Selling price per unit Variable cost per unit Total fixed costs

$5.00 $3.00 $90,000.00

The contribution-margin ratio is ________.

A) 30% B) 40% C) 60% D) 100% Answer: B Diff: 1 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 4) Suppose a hotel has annual fixed costs applicable to its rooms of $2.0 million for its 300-room hotel.

Average daily room rents are $50 per room and average variable costs are $10 for each room rented. It operates 365 days per year. If the hotel is completely full throughout the year, what is net income for one year?

A) $1,280,000 B) $2,380,000 C) $3,180,000 D) $4,380,000 Answer: B Diff: 3 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 5) Beckham Company has the following information available: Selling price per unit Variable cost per unit Fixed costs per year Expected sales per year

$100 $55 $400,000 20,000 units

What is the expected operating income for a year?

A) $480,000 B) $500,000 C) $680,000 D) $700,000 Answer: B Diff: 1 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 15 .

6) Suppose a Super 9 Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300-room hotel. Average daily room rents are $60 per room and average variable costs are $10 for each room rented. It operates 365 days per year. If the hotel is one-half full throughout the entire year, what is the amount of net income for one year?

A) $1,737,500 B) $4,475,000 C) $5,475,000 D) $5,570,000 Answer: A Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 7) Step Company has total variable costs of 80% of total revenues and fixed costs of $20 million per year.

What is the break-even point expressed in total revenue dollars?

A) $10 million B) $12.5 million C) $20 million D) $100 million Answer: D Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 8) Cornwell Company, a producer of electronic components, has the following information: Income tax rate Selling price per unit Variable cost per unit Total fixed costs

30% $8.00 $3.00 $120,000.00

The break-even point in dollars is ________.

A) $150,000 B) $180,000 C) $192,000 D) $320,000 Answer: C Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

16 .

9) Christian Corporation sells desks at $480 per desk. The variable costs are $300 per desk. Total fixed costs for the period are $540,000. The break-even point in desks is ________.

A) 1,125 B) 1,800 C) 3,000 D) 4,230 Answer: C Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 10) Abbott Company sells desks at $480 per desk. The variable costs are $372 per desk. Total fixed costs for the period are $456,840. The break-even volume in dollars is ________.

A) $456,840 B) $589,471 C) $1,573,560 D) $2,030,400 Answer: D Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 11) Murphy Company produces dolls. Each doll sells for $20.00. Variable costs per unit are $14.00 and total fixed costs for the period are $435,000. What is the break-even point in units?

A) 21,750 B) 31,071 C) 51,176 D) 72,500 Answer: D Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 12) Johnson Company produces dolls. Each doll sells for $20.00. Variable costs per unit are $14.00 and total fixed costs for the period are $300,000. What is the break-even volume in dollars?

A) $50,000 B) $621,429 C) $1,000,000 D) $1,450,000 Answer: C Diff: 1 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

17 .

13) Jensen Company produces dolls. Each doll sells for $20.00. Variable costs are $14.00 per unit. If the break-even volume in dollars is $1,446,000, then the total fixed costs for the period are ________.

A) $361,500 B) $433,800 C) $516,425 D) $1,446,000 Answer: B Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 14) Assume the sales price is $34 per unit and the variable cost is $19 per unit. The break-even point is 12,000 units. What are total fixed costs?

A) $180,000 B) $190,000 C) $340,000 D) $530,000 Answer: A Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 15) Assume the sales price is $100 per unit and the variable cost is $75 per unit. Total fixed costs are $150,000. Then the break-even volume in dollar sales is ________.

A) $1,500 B) $150,000 C) $200,000 D) $600,000 Answer: D Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 16) Assume the sales price is $100 per unit and the total fixed costs are $75,000. The break-even volume in dollar sales is $250,000. What is the variable cost per unit?

A) $30 B) $70 C) $100 D) $125 Answer: B Diff: 3 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

18 .

17) Suppose Sunnyside Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300room hotel. Average daily room rents are $60 per room, and average variable costs are $10 for each room rented. It operates 365 days per year. What is the break-even point in number of rooms rented?

A) 20,000 B) 30,000 C) 100,000 D) 120,000 Answer: A Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 18) Suppose Shady Lane Hotel has annual fixed costs applicable to its rooms of $1.0 million for its 300room hotel. Average daily room rents are $60 per room and average variable costs are $10 for each room rented. It operates 365 days per year. What percent of occupancy is needed to breakeven?

A) 3.65% B) 18.3% C) 27.4% D) 34.3% Answer: B Diff: 3 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 19) Sharpie Company has variable costs of 75% of total revenues and fixed costs of $40 million per year.

What is the break-even point in dollars?

A) $40 million B) $53.33 million C) $100 million D) $160 million Answer: D Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

19 .

20) The sales price is $30 per unit, the contribution margin is $8 per unit and total fixed costs are $32,000.

What is the break-even point in units?

A) 857 B) 1,200 C) 2,000 D) 4,000 Answer: D Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 21) If the total amount of fixed costs increases, what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

Answer: A Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 22) If the variable cost per unit increases, what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

Answer: A Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits

20 .

23) If the selling price per unit increases, what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

Answer: B Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 24) Which action will decrease a company's break-even point?

A) reducing total fixed costs B) decreasing contribution margin per unit C) increasing variable cost per unit D) decreasing the selling price per unit Answer: A Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 25) Assume Mussa Company has the following information available: Selling price per unit Variable cost per unit Fixed costs per year Expected sales per year (units)

$100 $45 $420,000 20,000

If fixed costs increase by $200,000, what is the expected operating income?

A) $280,000 B) $480,000 C) $680,000 D) $1,380,000 Answer: B Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits

21 .

26) Assume Hull Company has the following information available: Selling price per unit Variable cost per unit Fixed costs per year Expected sales per year (units)

$100 $40 $400,000 20,000

If fixed costs increase by $200,000, what is the break-even point in units?

A) 6,667 B) 10,000 C) 12,000 D) 13,000 Answer: B Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 27) The following information is available for Trump Corporation: Total fixed costs Variable costs per unit Selling price per unit

$300,000 $100 $200

If total fixed costs increased to $600,000, then the break-even volume in dollars would increase by ________.

A) 10.0% B) 50.0% C) 100% D) 200% Answer: C Diff: 3 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits

22 .

28) Assume Unicorn Company has the following information available: Selling price per unit Variable cost per unit Fixed costs per year Expected sales per year

$100 $45 $420,000 20,000 units

If variable costs increase to $65 per unit, what is the expected net income for one year?

A) $280,000 B) $700,000 C) $880,000 D) $1,580,000 Answer: A Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 29) Assume fixed costs are constant and contribution margin per unit is reduced by 50 percent. What will happen to the break-even point in units?

A) It will decrease 50 percent.

B) It will increase 100 percent.

C) It will be the same.

D) It will increase 50 percent.

Answer: B Diff: 3 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 30) If the contribution margin per unit increases, what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point will be zero.

Answer: B Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits

23 .

31) Xerox Company has the following information available: Selling price per unit Variable cost per unit Fixed costs per year Expected sales per year (units)

$100 $45 $420,000 20,000

If variable costs increase to $65 per unit, what is the break-even point in units?

A) 12,000 B) 13,000 C) 20,000 D) none of the above Answer: A Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 32) The break-even point may be reduced by reducing total fixed costs and holding everything else constant.

Answer: TRUE Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 33) The break-even point may be reduced by increasing the per unit variable cost.

Answer: FALSE Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 34) An increase in the sales price per unit will cause a decrease in the break-even point.

Answer: TRUE Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits

24 .

35) The break-even point is when enough units are sold that total contribution margin equals total variable costs.

Answer: FALSE Diff: 1 LO: 2-5 AACSB: Reflective thinking skills Learning Outcome: Perform fundamental CVP calculations 36) Wehr Corporation produces one product. Total fixed costs are $600,000.

The unit selling price is $60.00 and the unit variable cost is $45.00.

Required: A) Compute the contribution margin per unit.

B) Compute the contribution-margin ratio.

C) Compute the break-even point in units.

D) Compute the break-even point in dollars.

Answer: A) $60.00 - $45.00 = $15.00 B) $15.00/$60.00 = 0.25 C) $600,000/$15.00 = 40,000 units D) 40,000 × $60 = $2,400,000 Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

25 .

37) Stefanko Manufacturing has prepared the following income statement: Sales Cost of goods sold Gross margin Operating expenses Operating income

$450,000 200,000 250,000 196,000 $54,000

According to company records, $100,000 of Cost of Goods Sold and $100,000 of Operating Expenses are fixed.

Required: A) Compute the contribution margin.

B) Compute the contribution margin ratio.

C) Compute the break-even point in sales dollars.

Answer: A) Fixed costs = $100,000 + $100,000 = $200,000 Variable costs = $100,000 + $96,000 = $196,000 Contribution Margin = $450,000 - $196,000 = $254,000 B) $254,000/$450,000 = 56.44% C) $200,000/0.5644 = $354,359 Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 38) Bruder Company produces one type of product. Total fixed costs are $100,000. Unit variable costs are $6.00. The break-even point is 25,000 units. Planned unit sales are 30,000.

Required: A) Compute the selling price per unit.

B) Compute the contribution-margin ratio.

C) Compute the break-even point in dollars.

Answer: A)

= 25,000

(X - 6)25,000 = 100,000 X = $10 B) ($10 - $6)/$10 = 0.40 C) 25,000 × $10 = $250,000 Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

26 .

39) Franklin Company produces only one product. The selling price is $100 per unit and the variable cost is $60 per unit. Total fixed costs are $120,000.

Required: A) Compute break-even point in units.

B) Compute break-even point in dollars.

Answer: A) $120,000/($100 - $60) = 3,000 units B) 3,000 units × $100 = $300,000 Diff: 2 LO: 2-5 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 2.6 Questions 1) What is the margin of safety in dollars?

A) planned net income minus actual net income B) planned revenue minus actual expenses C) actual revenue in dollars minus planned revenue in dollars D) planned sales in dollars minus break-even sales in dollars Answer: D Diff: 2 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: None 2) The county government released $100,000 as an appropriation for a counseling program for at-risk teenagers. The program should run one year and the variable costs for the program are $400 per teenager per year. Within the relevant range of 50 to 150 teenagers, the fixed costs for the program are $60,000.

How many teenagers can the program serve?

A) 50 B) 100 C) 150 D) 250 Answer: B Diff: 3 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: Perform fundamental CVP calculations

27 .

3) Assume the following information for Janice Company: Selling price per unit Variable costs per unit Total fixed costs

$100 $80 $80,000

If fixed costs increased by 10% and management wanted to maintain the original break-even point, then the selling price per unit would have to be increased to ________.

A) $101.00 B) $102.40 C) $102.00 D) $103.00 Answer: C Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 4) What does the margin of safety in units measure?

A) how far fixed costs can rise before an operating loss occurs B) how far variable costs can rise before an operating loss occurs C) how far total costs can rise before an operating loss occurs D) how far sales can fall before an operating loss occurs Answer: D Diff: 3 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: None 5) Falls Company has budgeted sales of $120,000 based on 80,000 units. The margin of safety is $1,000.

What is the break-even point in dollars?

A) $81,000 B) $119,000 C) $120,000 D) $121,000 Answer: B Diff: 3 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: None

28 .

6) Winston Company has variable costs of $5 per unit and a selling price of $10 per unit. Fixed costs are $100,000. Planned unit sales for 2015 are 25,000 units. Actual unit sales for 2014 were 22,000 units. What is the margin of safety in units for 2015?

A) 2,000 units B) 3,000 units C) 5,000 units D) 7,000 units Answer: C Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: None 7) Worbel Company has variable costs of $5 per unit and a selling price of $10 per unit. Fixed costs are $100,000. Planned unit sales for 2015 are 25,000 units. Actual unit sales for 2014 were 22,000. What is the margin of safety in dollars for 2015?

A) $5,000 B) $20,000 C) $30,000 D) $50,000 Answer: D Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: None 8) Wetzel Company has variable costs of $5 per unit and a selling price of $10 per unit. Fixed costs are $200,000. Planned unit sales for 2015 are 45,000 units. Actual unit sales for 2014 were 42,000. What is the margin of safety in units for 2015?

A) 2,000 units B) 3,000 units C) 5,000 units D) 7,000 units Answer: C Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: None

29 .

9) Operating leverage is the sensitivity of a firm's ________ to changes in ________.

A) sales volume; the cost structure B) margin of safety; ratio of fixed costs to variable costs C) sales volume; the cost driver levels D) net income; sales volume Answer: D Diff: 2 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: None 10) The degree of operating leverage for a firm equals the ratio of ________ to ________.

A) fixed costs; variable costs B) variable costs; fixed costs C) fixed costs: operating profit D) contribution margin; net income Answer: D Diff: 2 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: None 11) The degree of operating leverage for Geesling Company is 8.0 at 80,000 units of sales. At 80,000 units of sales, the net profit is $10,000. If the sales volume increases to 90,000 units, what is the net profit?

A) $12,000 B) $20,000 C) $22,222 D) $80,000 Answer: B Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: None 12) The degree of operating leverage for Murphy Company is 8.0 at 80,000 units of sales. At 80,000 units of sales, the net profit is $10,000. If the sales volume decreases to 72,000 units, what is the net profit?

A) $2,000 B) $8,000 C) $10,000 D) $18,000 Answer: A Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: None

30 .

13) Gokey Company has a contribution-margin ratio of 0.30. Targeted net income is $76,800 and targeted sales volume in dollars is $480,000. What are total fixed costs?

A) $23,000 B) $44,160 C) $67,200 D) $144,000 Answer: C Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 14) Key Company has a targeted sales volume of 62,300 units. Total fixed costs are $31,200. The contribution margin per unit is $1.20. What is targeted net income?

A) $31,200 B) $37,440 C) $43,560 D) $74,760 Answer: C Diff: 2 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 15) Goy Company has a break-even point of 88,000 units. The contribution margin per unit is $9.60. The desired target profit is $18,096. How many units must be sold to achieve the desired profit?

A) 1,885 units B) 88,000 units C) 89,885 units D) 106,096 units Answer: C Diff: 2 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

31 .

16) Assume the following facts: Sales price Variable cost Total fixed costs Targeted net income

$180 per unit $100 per unit $39,600 $52,800

How many units must be sold to achieve the targeted net income?

A) 513 B) 629 C) 963 D) 1,155 Answer: D Diff: 2 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 17) Helium Company has the following information available: Selling price per unit Variable cost per unit Total fixed costs Targeted net income

$5.00 $3.50 $90,000.00 $30,000.00

How many units must be sold to achieve the targeted net income?

A) 10,000 units B) 27,000 units C) 45,000 units D) 80,000 units Answer: D Diff: 2 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

32 .

18) The following information is available for Kinsner Corporation: Total fixed costs Variable costs per unit Selling price per unit

$313,500 $99 $154

If management has a targeted net income of $46,200, then the number of units that must be sold is ________.

A) 2,036 units B) 2,336 units C) 5,700 units D) 6,540 units Answer: D Diff: 2 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 19) The following information is available for Kismer Corporation: Total fixed costs Variable costs per unit Selling price per unit

$313,500 $90 $150

If management has a targeted net income of $59,400, then sales revenue should be ________.

A) $239,721 B) $580,067 C) $671,220 D) $932,250 Answer: D Diff: 2 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 20) Berea Company expects to sell 19,000 units. Total fixed costs are $84,000 and the contribution margin per unit is $6.00. Berea's tax rate is 40%. What is the margin of safety in units?

A) 3,000 units B) 5,000 units C) 7,500 units D) 14,000 units Answer: B Diff: 2 LO: 2-6 AACSB: Analytic skills Learning Outcome: None

33 .

21) Yemen Company has the following information available: Selling price per unit Variable cost per unit Fixed costs per year Expected sales per year (units)

$100 $45 $420,000 20,000

If variable costs increase to $65 per unit and fixed costs increase by $200,000, what is the break-even point in units?

A) 11,273 B) 12,000 C) 20,000 D) 17,714 Answer: D Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits 22) In companies with high operating leverage, small changes in sales volume result in large changes in net income.

Answer: TRUE Diff: 2 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: None 23) Companies with high levels of operating leverage are less risky than companies with low levels of operating leverage.

Answer: FALSE Diff: 2 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: None 24) A small margin of safety may indicate a risky situation.

Answer: TRUE Diff: 2 LO: 2-6 AACSB: Reflective thinking skills Learning Outcome: None

34 .

25) The Eastman Family Restaurant is open 24 hours per day. Fixed costs are $24,000 per month. Variable costs are estimated at $9.60 per meal. The average revenue is $12 per meal. The restaurant wished to earn a profit before taxes of $6,000 per month.

Required: A) Compute the number of meals that must be served to earn a profit before taxes of $6,000 per month.

B) Assume that fixed costs increase to $30,000 per month. How many additional meals must be served to earn a profit before taxes of $6,000 per month?

Answer: A) ($24,000 + $6,000)/($12.00 - $9.60) = 12,500 meals B) ($30,000 - $24,000)/($12.00 - $9.60) = 2,500 meals Diff: 3 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations 26) Sole Company manufactures running shoes. The selling price is $80 per pair (unit) and variable costs are $60 per pair (unit). The sales volume of $776,000 generates $100,750 of net income before taxes.

Required: A) Compute total fixed costs.

B) Compute total variable costs.

C) Compute the break-even point in units.

D) Compute the quantity of units above the break-even point to reach targeted net income before taxes.

Answer: A) $776,000/$80= 9,700 units Variable costs= $60 × 9,700 = $582,000 Fixed costs= $776,000 - $582,000 - $100,750 = $93,250 B) 9,700 × $60 = $582,000 C) $93,250/ ($80 - $60) = 4,662.5 = 4,663 units D) 9,700 - 4,663 = 5,038 units Diff: 2 LO: 2-6 AACSB: Analytic skills Learning Outcome: Perform fundamental CVP calculations

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2.7 Questions 1) Nealy Company has the following information available: Revenue Variable production costs Fixed production costs Variable selling costs Fixed selling costs

$500,000 $100,000 $100,000 $50,000 $50,000

What is the contribution margin?

A) $300,000 B) $350,000 C) $400,000 D) $450,000 Answer: B Diff: 2 LO: 2-7 AACSB: Analytic skills Learning Outcome: None 2) Henricks Company has the following information available: Revenue Variable production costs Fixed production costs Variable selling costs Fixed selling costs

$500,000 $100,000 $100,000 $50,000 $50,000

What is the gross margin and net income?

A) $200,000; $200,000 B) $250,000; $150,000 C) $300,000; $200,000 D) $400,000: $200,000 Answer: C Diff: 2 LO: 2-7 AACSB: Analytic skills Learning Outcome: None

36 .

3) ________ is the excess of sales over the cost of goods sold.

A) Gross margin B) Contribution-margin ratio C) Variable-cost ratio D) Contribution margin Answer: A Diff: 1 LO: 2-7 AACSB: Reflective thinking skills Learning Outcome: None 4) Contribution margin is equal to ________.

A) sales minus variable costs B) sales minus fixed costs C) sales minus variable production costs D) sales minus production costs Answer: A Diff: 1 LO: 2-7 AACSB: Reflective thinking skills Learning Outcome: None 5) The following information is available for a company: Sales Variable Selling Expenses Fixed Selling Expenses Variable Administrative Expenses Fixed Administrative Expenses Variable Cost of Goods Sold Fixed Cost of Goods Sold

$1,000,000 23,000 33,000 39,000 10,000 300,000 100,000

What is the contribution margin for this company?

A) $500,000 B) $600,000 C) $638,000 D) $700,000 Answer: C Diff: 2 LO: 2-7 AACSB: Analytic skills Learning Outcome: None

37 .

6) The following information for Zippy Company is: Sales Variable Selling Expenses Fixed Selling Expenses Variable Administrative Expenses Fixed Administrative Expenses Variable Cost of Goods Sold Fixed Cost of Goods Sold

$1,000,000 23,000 33,000 39,000 10,000 300,000 100,000

What is the gross margin for this company?

A) $500,000 B) $548,000 C) $578,000 D) $600,000 Answer: D Diff: 2 LO: 2-7 AACSB: Analytic skills Learning Outcome: None 7) The following information is available for Company ZZ: Sales Variable Selling Expenses Fixed Selling Expenses Variable Administrative Expenses Fixed Administrative Expenses Variable Cost of Goods Sold Fixed Cost of Goods Sold

$1,000,000 22,000 33,000 30,000 10,000 400,000 100,000

If sales increase to $1,500,000, what is operating income?

A) $405,000 B) $500,000 C) $548,000 D) $679,000 Answer: D Diff: 3 LO: 2-7 AACSB: Analytic skills Learning Outcome: None 8) Gross margin is the same as contribution margin for most companies.

Answer: FALSE Diff: 2 LO: 2-7 AACSB: Reflective thinking skills Learning Outcome: None 38 .

9) Gross margin focuses on sales in relation to variable costs.

Answer: FALSE Diff: 1 LO: 2-7 AACSB: Reflective thinking skills Learning Outcome: None 10) Cost of goods sold is the cost of the merchandise that a company acquires or produces and then sells.

Answer: TRUE Diff: 1 LO: 2-7 AACSB: Reflective thinking skills Learning Outcome: None 11) Selling expenses are found in the cost of goods sold.

Answer: FALSE Diff: 1 LO: 2-7 AACSB: Reflective thinking skills Learning Outcome: None 2.8 Questions 1) Which statement is FALSE? A) Each different sales-mix of products has a different break-even point.

B) Changes in the sales-mix of products sold affects a company's net operating profit.

C) Changes in the sales-mix of products sold affects a company's contribution margin.

D) If the sales-mix of products sold changes, the break-even point does not change.

Answer: D Diff: 2 LO: 2-8 AACSB: Reflective thinking skills Learning Outcome: None 2) ________ is the relative proportions or combinations of quantities of different products that comprise total sales.

A) Sales mix B) Constant mix C) Fluctuating mix D) Variable cost ratio Answer: A Diff: 1 LO: 2-8 AACSB: Reflective thinking skills Learning Outcome: None

39 .

3) Assume the following facts for two products, Zip and Zap:

Sales mix Selling price per unit Variable costs per unit

Zip 3 units $21.00 $14.00

Zap 1 unit $28.00 $16.00

If total fixed costs are $132,000, the break-even point in units would be ________.

A) 4,000 units of Zip and 12,000 units of Zap B) 1,200 units of Zip and 400 units of Zap C) 12,000 units of Zip and 4,000 units of Zap D) 8,400 units of Zip and 2,800 units of Zap Answer: C Diff: 3 LO: 2-8 AACSB: Analytic skills Learning Outcome: None 4) Assume the following information for two products, Hawaii Fantasy and Hawaii Joy.

Sales mix Selling price per unit Variable cost per unit

Hawaii Fantasy 2 units $15 $10

Hawaii Joy 1 unit $100 $40

Fixed expenses total $490,000 per year. What is the breakeven point in units for each product?

A) 4,575 units of Hawaii Fantasy and 18,300 units of Hawaii Joy B) 7,000 units of Hawaii Fantasy and 14,000 units of Hawaii Joy C) 18,300 units of Hawaii Fantasy and 4,575 units of Hawaii Joy D) 14,000 units of Hawaii Fantasy and 7,000 units of Hawaii Joy Answer: D Diff: 3 LO: 2-8 AACSB: Analytic skills Learning Outcome: None 5) If the proportions of different products sold in a sales mix change, the ________.

A) contribution margin per unit for each product increases B) break-even point will change C) contribution margin per unit for each product decreases D) net income will not change Answer: B Diff: 2 LO: 2-8 AACSB: Reflective thinking skills Learning Outcome: None

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6) Nearly all companies sell more than one product, and thus, they must be concerned with sales mix.

Answer: TRUE Diff: 1 LO: 2-8 AACSB: Reflective thinking skills Learning Outcome: None 7) The contribution margin per unit of a given product guides managers when deciding which product to emphasize in a sales mix.

Answer: TRUE Diff: 2 LO: 2-8 AACSB: Reflective thinking skills Learning Outcome: None

41 .

8) Lakers Company produces two products. The following information is available:

Selling price per unit Variable cost per unit

Product X $46 $38

Product Y $36 $24

Total fixed costs are $234,000. Lakers plans to sell 21,000 units of Product X and 7,000 units of Product Y. Required: A) Compute the contribution margin for each product.

B) What is the expected net income?

C) Assume the sales mix is 3 units of Product X for every 1 unit of Product Y. What is the break-even point in units for each product?

D) Assume the sales mix is 3 units of Product X for every 2 units of Product Y. What is the break-even point in units for each product?

Answer: A) Product X: Contribution margin = $46 - $38 = $8 Product Y: Contribution margin = $36 - $24 = $12 B) Contribution margin ($8 × 21,000) + ($12 × 7,000) = $252,000 Net income = $252,000 - $234,000 = $18,000 C) ($8 × 3)Z + ($12 × 1)Z - $234,000 = 0 $24Z + $12Z = $234,000 Z = 6,500 units Product X: 6,500 × 3 = 19,500 units Product Y: 6,500 units D) ($8 × 3)Z + ($12 × 2)Z - $234,000 = 0 $24Z + $24Z = $234,000 Z = 4,875 units Product X: 4,875 × 3 = 14,625 units Product Y: 4,875 × 2 = 9,750 units Diff: 3 LO: 2-8 AACSB: Analytic skills Learning Outcome: None

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2.9 Questions 1) Seidner Company has the following information available: Total fixed costs Targeted after-tax net income Contribution margin per unit Tax rate

$80,000 $18,000 $2.00 40%

How many units must be sold to achieve the targeted after-tax net income?

A) 45,400 B) 49,000 C) 55,000 D) 62,500 Answer: C Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None 2) The Todd Dolhun Company has the following information available: Targeted after-tax net income Total fixed costs Contribution margin per unit Tax rate

$120,000 $300,000 $2 40%

How many units should be sold to achieve the targeted after-tax net income?

A) 180,000 B) 210,000 C) 250,000 D) 300,000 Answer: C Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None

43 .

3) The Troy Company has the following information available: Total fixed costs Expected sales (units) Contribution margin per unit Tax rate

$400,000 100,000 $7.50 30%

What is the after-tax net income?

A) $245,000 B) $280,000 C) $350,000 D) $400,000 Answer: A Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None 4) Assume the following information for Rodney Company: Selling price per unit Variable cost per unit Total fixed costs After-tax net income Tax rate

$100 $80 $80,000 $24,000 40%

To achieve the targeted after-tax net income, what amount of sales in dollars is necessary?

A) $400,000 B) $520,000 C) $600,000 D) $660,000 Answer: C Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None

44 .

5) Assume the following information for Richard Company: Selling price per unit Variable cost per unit Total fixed costs After-tax net income Tax rate

$100 $80 $80,000 $40,800 40%

How many units must be sold to achieve the after-tax net income?

A) 6,040 B) 7,400 C) 7,770 D) 7,800 Answer: B Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None 6) Benjamin Company has the following information available: Income tax rate Selling price per unit Variable cost per unit Total fixed costs

30% $5.00 $3.00 $90,000.00

If Benjamin Company wants a targeted after-tax net income of $14,000, how many units must be sold?

A) 45,000 B) 52,000 C) 55,000 D) 60,000 Answer: C Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None

45 .

7) John Company has the following information: Income tax rate Selling price per unit Variable cost per unit Total fixed costs Target after-tax net income

40% $7.50 $2.50 $100,000 $42,000

Assume the tax rate decreases to 30%. How many fewer units can be sold to retain the same after-tax net income of $42,000?

A) 1,000 B) 2,000 C) 32,000 D) 34,000 Answer: B Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None 8) Atkinson Company wishes to earn after-tax net income of $18,000. Total fixed costs are $84,000 and the contribution margin is $6.00 per unit. Atkinson's tax rate is 40%. The number of units that must be sold to earn the targeted net income is ________.

A) 14,000 B) 17,000 C) 19,000 D) 21,500 Answer: C Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None 9) A change in the tax rate will not affect the break-even point.

Answer: TRUE Diff: 2 LO: 2-9 AACSB: Analytic skills Learning Outcome: None

46 .

10) The Wolter Company has provided the following information: Income tax rate Selling price per unit Variable cost per unit Total fixed costs

50% $6.60 $5.00 $46,000.00

Required: A) Compute the break-even point in units.

B) Compute the sales volume in units necessary to generate an after-tax net income of $10,000.

C) Compute the sales volume in units necessary to generate an after-tax net income of $20,000.

Answer: A) $46,000 / ($6.60 - $5.00) = 28,750 units B) $10,000/ 0.50 = $20,000 ($20,000 + $46,000) / ($1.60) = 41,250 units C) $20,000/ 0.50 = $40,000 ($40,000 + $46,000)/($1.60) = 53,750 units Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None 11) Lorna Corporation has determined the contribution margin ratio is 35% and the income tax rate is 40%.

Required: A) Assume break-even volume in dollars is $1,500,000. What are total fixed costs?

B) Assume Lorna Corporation wants after-tax net income of $300,000. What volume of sales in dollars is necessary to achieve this net income?

Answer: A) $1,500,000 × 0.35 = $525,000 B) $300,000/ 0.6= $500,000 ($500,000 + $525,000)/0.35 = $2,928,571.4 Diff: 3 LO: 2-9 AACSB: Analytic skills Learning Outcome: None

47 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 3 Measurement of Cost Behavior 3.1 Questions 1) Managers can influence the amount of fixed and variable costs in a firm through decisions about ________.

A) product attributes B) capacity level C) amount of high technology equipment used for manufacturing products D) all of the above Answer: D Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 2) The use of high technology equipment to manufacture products instead of highly skilled labor usually results in ________.

A) higher discretionary fixed costs B) higher discretionary variable costs C) lower risk D) higher operating leverage Answer: D Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3) Which of the following costs can be canceled in the short run?

A) salary of CEO of company B) mortgage payment on factory building C) lease payments on two-year lease for leased equipment in factory D) management consulting services engaged to change company logo Answer: D Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

1 .

4) A hospital adds a new addition and needs to acquire some new equipment for the addition. The cost driver for the equipment is patient-days per month. The new addition increases the patient-days per month outside the relevant range. What type of equipment costs will change as a result of the addition?

A) discretionary fixed costs B) discretionary variable costs C) committed fixed costs D) committed variable costs Answer: C Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 5) Managers can eliminate ________ costs entirely for a given year in dire times such as a major recession.

However, managers cannot eliminate ________ costs.

A) discretionary variable costs; committed variable costs B) discretionary fixed costs; committed fixed costs C) discretionary variable costs; committed fixed costs D) committed fixed costs; committed variable costs Answer: B Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 6) If a company eliminates all discretionary costs due to a severe recession, this could ________.

A) ensure that the company reports a net loss B) ensure that the company reports a net profit C) reestablish a company's competitive position in an industry D) impair a company's competitive position in an industry Answer: D Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 7) Many organizations use a linear relationship with a single cost driver to describe a cost even though the cost may have multiple cost drivers. Why? A) This approach is easier and less expensive.

B) The cost of developing a more complex function is greater than the benefit.

C) Cost estimates from the simple function are accurate enough for most decisions.

D) All of the above Answer: D Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

2 .

8) It may be difficult to trace costs to products or services if the costs are ________.

A) volume-driven B) driven by activities directly related to volume C) driven by multiple cost drivers D) none of the above Answer: C Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 9) Simon Inc. currently produces 110,000 units at a cost of $440,000. The cost is variable. Next year Simon Inc. expects to produce 115,000 units. Simon's relevant range for production is 100,000 to 120,000 units. If 115,000 units are produced next year, what is the expected variable cost?

A) $420,000 B) $430,000 C) $440,000 D) $460,000 Answer: D Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 10) Donahue currently produces 120,000 units at a cost of $400,000. Of the $400,000 cost, $200,000 is a fixed cost. Next year Donahue expects to produce 145,000 units. Donahue's relevant range for production activities is 100,000 to 150,000 units. If 145,000 units are produced next year, what is the expected fixed cost for next year?

A) $200,000 B) $241,667 C) $441,667 D) $483,333 Answer: A Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

3 .

11) The following data points are available. This is an example of a ________ cost.

Units Costs 600 $560 650 $565 800 $580 900 $590 A) variable B) fixed C) mixed D) none of the above Answer: C Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 12) A car lease payment is computed based solely on the number of miles driven. This is an example of a ________.

A) variable cost B) mixed cost C) step cost D) stair cost Answer: A Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 13) Knowledge about the behavior of different costs in a service department such as maintenance can be used to ________.

A) plan costs B) provide feedback to managers C) make decisions about the most efficient use of resources D) all of the above Answer: D Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

4 .

14) The fixed costs required to achieve a desired level of production or to provide a desired level of service, while maintaining product or service attributes, are ________.

A) discretionary fixed costs B) committed fixed costs C) capacity costs D) step costs Answer: C Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 15) ________ arise as a result of strategic decisions about the scale and scope of an organization's activities.

A) Capacity costs B) Discretionary fixed costs C) Mixed costs D) Committed fixed costs Answer: A Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 16) In a corporate setting, property taxes are an example of a(n) ________.

A) mixed cost B) committed fixed cost C) discretionary fixed cost D) engineering cost Answer: B Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 17) Costs arising from the possession of facilities, equipment and a basic organizational structure are ________.

A) capacity costs B) discretionary costs C) committed fixed costs D) engineered costs Answer: C Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

5 .

18) ________ have no obvious relationship to levels of output activity, but are determined as part of the periodic planning process.

A) Discretionary fixed costs B) Committed fixed costs C) Capacity costs D) Engineered costs Answer: A Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 19) Due to the economic downturn, a company has reduced charitable donations to community groups.

This is an example of a ________.

A) variable cost B) committed fixed cost C) capacity cost D) discretionary fixed cost Answer: D Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 20) In an economic downturn, a company could temporarily reduce or eliminate a(n) ________.

A) lease payment B) salaries of key personnel C) employee training program D) insurance on corporate offices Answer: C Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 21) In an economic downturn, a company could temporarily reduce or eliminate a(n) ________.

A) property taxes on factory building B) insurance on factory building C) lease payments on computers in corporate headquarters D) public relations department Answer: D Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

6 .

22) Only major changes in the scale or scope of operations can change ________ in future periods.

Managers can vary spending levels for ________ in the short run.

A) committed fixed costs; capacity costs B) committed fixed costs; discretionary fixed costs C) discretionary fixed costs; capacity costs D) capacity costs; committed fixed costs Answer: B Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 23) Costs that may be essential to the long-run achievement of the organization's goals, but that managers can almost reduce to zero in the short-run, are called ________.

A) capacity costs B) committed fixed costs C) discretionary fixed costs D) mixed costs Answer: C Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 24) In a corporate setting, a mortgage payment would be identified as a ________.

A) purely variable cost B) discretionary fixed cost C) committed fixed cost D) mixed cost Answer: C Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 25) In an economic downturn, a company could temporarily reduce or eliminate ________.

A) depreciation expense on corporate building B) bond interest payment C) property taxes on corporate building D) advertising and promotion Answer: D Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

7 .

26) In an economic recession, a company could NOT eliminate ________.

A) employee training program B) research and development projects C) public relations department D) depreciation expense on factory machines Answer: D Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 27) Which statement regarding fixed costs is TRUE? A) Discretionary fixed costs preserve management's flexibility.

B) Committed fixed costs preserve management's flexibility.

C) Both discretionary and committed fixed costs preserve management's flexibility.

D) Discretionary fixed costs limit management's flexibility.

Answer: A Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 28) Most companies make capacity decisions frequently.

Answer: FALSE Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 29) Capacity costs are variable costs related to a desired level of production or service.

Answer: FALSE Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 30) Committed fixed costs usually arise from the possession of facilities, equipment and a basic organizational structure.

Answer: TRUE Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

8 .

31) Companies can reduce or eliminate committed fixed costs when demand falls during an economic downturn.

Answer: FALSE Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 32) Volume-driven costs can be easily traced to products or services.

Answer: TRUE Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 33) Managers cannot eliminate discretionary fixed costs.

Answer: FALSE Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 34) The use of high-technology methods rather than labor in manufacturing products usually means a much greater fixed-cost component to total costs.

Answer: TRUE Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3.2 Questions 1) A mixed-cost function is graphed as a ________.

A) nonlinear line B) curved line C) line with a break for fixed costs D) straight-line Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

9 .

2) In a linear cost function, the slope measures the ________.

A) total fixed cost B) total variable cost C) variable cost per unit of cost driver D) fixed cost per unit of cost driver Answer: C Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3) In a graph of a mixed cost function, the y-axis is ________ and the x-axis is ________.

A) fixed cost; cost driver activity B) fixed cost; variable cost per unit C) mixed cost; volume in units D) cost; cost driver activity Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 4) When estimating the cost of the maintenance department in a hospital for a month, what cost driver should be used?

A) number of patients per month B) number of nurses working per month C) number of operations per month D) number of patients per month times the length of stay per patient Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 5) When estimating the total cost of a one-way flight from New York to Los Angeles, what cost driver should be used?

A) number of miles on flight B) number of passengers on flight C) number of pounds of baggage on flight D) number of passengers on flight times the number of miles on flight Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

10 .

6) In a linear cost function, the fixed cost is ________.

A) dependent on the cost driver B) dependent on the independent variable C) independent of the cost driver D) independent of the intercept Answer: C Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 7) When estimating a cost function, we assess reliability using ________.

A) visual inspection B) plausible relationships C) goodness of fit D) intuition Answer: C Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 8) A linear cost function is estimated over the relevant range of 0 to 1,000 orders. The equation estimated is: Y = $25,000 + $89X where Y equals the total order-processing cost and X equals the number of orders. If the number of orders increases to 1,800, what is the predicted total order-processing cost?

A) $25,000 B) $160,200 C) $185,200 D) cannot be determined Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 9) When estimating the cost of the laundry department in a hospital, which of the following cost drivers should be used?

A) number of patients B) number of patients times the length of stay per patient C) number of patients in intensive care and critical care D) number of pounds of laundry Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

11 .

10) When managers graph a linear cost function with one cost driver, the intercept represents the ________ cost and the slope represents the ________ cost.

A) variable; fixed B) fixed; variable C) fixed; mixed D) variable; mixed Answer: B Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 11) A cause and effect relationship between a ________ and a ________ is desirable in order to obtain accurate and useful cost functions.

A) cost driver; cost function B) cost function; resource cost C) cost driver; resource cost D) step cost; capacity cost Answer: C Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 12) When developing cost functions, which of the following statements is FALSE? A) The cost function must be believable.

B) The cost function should explain past cost behavior.

C) Personal observations of costs and activities provide the best evidence of a plausible relationship between a cost and its cost driver.

D) The cost function does not have to be plausible.

Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

12 .

13) Sunrise Motel's cost function is given as: Y = $75,000 + $9.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Sunrise Motel has 8,000 guest days. In the next year, Sunrise Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected fixed custodial cost for next year?

A) $7.50 B) $50,000 C) $62,500 D) $75,000 Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 14) Sunset Motel's cost function is given as: Y = $75,000 + $9.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Sunset Motel has 8,000 guest days. In the next year, Sunset Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected total variable custodial cost for next year?

A) $60,000 B) $75,000 C) $95,000 D) $170,000 Answer: C Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

13 .

15) Sheboygan Motel's cost function is given as: Y = $120,000 + $2.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Sheboygan Motel has 8,000 guest days. In the next year, Sheboygan Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected total custodial cost for next year?

A) $37,000 B) $120,000 C) $125,000 D) $145,000 Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 16) In a mixed-cost linear function with one cost driver, the intercept is the ________ and the slope is the ________.

A) fixed cost; step cost B) fixed cost; variable cost C) variable cost; fixed cost D) variable cost; step cost Answer: B Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 17) Consider the following linear mixed-cost function: Y = $120,000 + $2.70X Where: Y = total annual maintenance cost X = number of patient-days What does the $120,000 represent?

A) variable cost per patient-day B) total variable cost C) fixed cost per patient-day D) total fixed cost Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 14 .

18) Consider the following linear mixed-cost function: Y = $110,000 + $5.50X Where: Y = total annual custodial cost X = number of patient-days What does the $5.50 represent?

A) total fixed cost B) total variable cost C) fixed cost per patient-day D) variable cost per patient-day Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 19) Managers apply two criteria to obtain accurate and useful cost functions. These criteria are ________.

A) plausibility and believability B) plausibility and reliability C) reliability and validity D) validity and plausibility Answer: B Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 20) In relation to a cost function, the term reliability means ________.

A) whether the costs and activities can be easily observed B) whether the cost function conforms to a given mathematical model C) how well the cost function predicts future costs D) how well the cost function explains past cost behavior Answer: D Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 21) A cost function is an algebraic equation used to describe the relationship between a cost and its cost driver(s).

Answer: TRUE Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

15 .

22) Managers should apply plausibility and reliability to obtain accurate and useful cost functions.

Answer: TRUE Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 23) When referring to a cost function, plausibility refers to whether you can rely upon the cost function for predicting the future.

Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 24) In a linear mixed cost function, the slope of the function is the fixed cost per unit of the cost driver.

Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 25) Goodness of fit pertains to how well a cost function predicts cost behavior.

Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs

16 .

26) Atlanta Senior Center is planning its annual fundraiser. The event committee has developed the following budget for the event.

Ballroom rental Entertainment Printing Food Decorations

$3,000 $2,500 $600 plus $9 per person $30 per person $700 plus $5 per person

Required: A) Determine the cost function.

B) If Atlanta Senior Center charges $100 per person, and 1,000 people attend, how much profit will be derived by this event?

Answer: A) Fixed cost = $3,000 + $2,500 + $600 + $700 = $6,800 Variable cost = $9 + $30 + $5 = $44 per person Y = $6,800 + $44X Where: Y = Total cost of fundraiser X = Number of attendees B) ($100 × 1,000) - [$6,800 + ($44 × 1,000)] = $49,200 Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3.3 Questions 1) An activity analysis has shown that the number of components added to Product X and Product Y is the cost driver for support costs. Support costs are $20 per component. Product X has 4 components and Product Y has 8 components. What amounts of support costs should be assigned to Product X and Product Y? Product X Product Y A) $6.67 $13.33 B) $20 $20 C) $80 $160 D) $80 $320 Answer: C Diff: 2 LO: 3-3 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

17 .

2) Direct labor cost is the primary cost driver of support costs for two products. Product One has direct labor costs of $8.50 per unit and Product Two has direct labor costs of $130 per unit. The support costs assigned to each product is the direct labor cost times five. What is the support cost assigned to Product One and Product Two? Product One Product Two A) $8.50 $130 B) $5.00 $76.47 C) $42.50 $650 D) $5.00 $26.00 Answer: C Diff: 2 LO: 3-3 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 3) The greatest benefit of activity analysis is that it directs management accountants to the ________.

A) relevant costs for decision making B) most accurate product cost C) appropriate cost driver for each cost D) most accurate product price Answer: C Diff: 1 LO: 3-3 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 4) The process of identifying appropriate cost drivers and their effects on the costs of making a product or providing a service is called ________.

A) account analysis B) activity analysis C) cost analysis D) product analysis Answer: B Diff: 1 LO: 3-3 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

18 .

5) Account analysis is used to identify appropriate cost drivers and their effects on the costs of making a product or providing a service.

Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 6) The cost of the Maintenance Department at Forest Manufacturing has always been charged to the production departments based on the number of employees. Recently, an activity analysis of possible cost drivers was performed which indicated that the square feet of space may also be a predictor of costs to be assigned to each production department. The Maintenance Department cost is $500,000. The following data is available: Production Departments Dept. A Dept. B Dept. C Number of Employees 300 25 50 Square Feet of Space 5,000 10,000 25,000 Required: 1. Determine the amount of the maintenance department cost that should be allocated to Department A and Department B if the cost driver used is: (A) number of employees and (B) square feet of space.

2. Does the choice of the cost driver affect the costs assigned to each department?

Answer: 1. Department A: A) 300/375 × $500,000 = $400,000 B) 5/40 × $500,000 = $62,500 Department B: A) 25/375 × $500,000 = $33,333 B) 10/40 × $500,000 = $125,000 2. Yes, the cost driver does change the cost assigned to each department.

Diff: 2 LO: 3-3 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

19 .

3.4 Questions 1) When estimating cost functions, engineering analysis based on observations of employee behavior has the following disadvantage: ________.

A) the employees may have altered their normal work habits because they are being observed B) it is less expensive than account analysis C) it does not use all of the data points D) the coefficient of determination is not reliable Answer: A Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 2) To approximate cost functions for a particular manufacturing process, engineering analysis relies on ________.

A) statistical analysis B) mathematical analysis C) graphs D) actual observations of the ongoing process Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 3) To estimate cost functions using account analysis, each account is classified as a ________ cost or ________ cost with respect to ________.

A) mixed; fixed; sales volume in units B) mixed; variable: sales volume in units C) variable; fixed; a cost driver D) mixed; fixed; production in units Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

20 .

4) To estimate the monthly maintenance cost for the maintenance department in a hospital, the following monthly costs are available: Monthly Expense Supervisor Salary Expense Depreciation Expense—Maintenance Equipment Repairs Expense—Maintenance Equipment Supplies Expense Wages Expense—Maintenance Workers

Costs $3,000 $5,000 $5,000 $7,000 $10,000

The Supervisor Salary Expense and the Depreciation Expense are fixed costs. The remaining expenses are variable costs. There are 1,000 patient days in a month, which is the cost driver for maintenance costs.

Estimate the cost function where Y is the monthly maintenance cost and X is the variable cost per patient day.

A) Y = $8 + $22X B) Y = $8,000 + $22,000X C) Y = $8,000 + $22X D) Y = $30,000 + $22,000X Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 5) Three cost drivers are used to estimate the cost of processing insurance claims. The cost drivers are: (1) claim amount, (2) age of vehicle in accident and (3) age of driver in accident. The percentages attributable to the cost drivers are 50% for claim amount, and 15% for each of the other two cost drivers. What is the cost to process Claim #101? The claim amount is $1,000. The age of the vehicle is 5 years. The age of the driver is 20 years.

A) $3.00 B) $3.75 C) $500 D) $503.75 Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

21 .

6) The high-low, visual-fit and least squares regression methods are more objective methods to estimate cost functions than ________ and ________.

A) activity analysis; account analysis B) activity analysis; engineering analysis C) account analysis; engineering analysis D) capacity analysis; activity analysis Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 7) Companies may be forced to use engineering analysis or account analysis to estimate cost functions because ________.

A) engineering analysis is the least costly method B) historical data are too subjective C) the other estimation methods are too difficult to use D) historical data are not available Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 8) A disadvantage of the high-low method to estimate a cost function is ________.

A) historical data may hide past inefficiencies B) historical data may be obsolete C) historical data may not reflect changes made in the organization D) all of the above Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

22 .

9) With the high-low method, the most accurate way to measure the intercept and slope for a cost function is to ________.

A) plot the data points and draw a line B) plot the data points, identify the high and low points and draw a line between the high and low points C) plot the data points and draw a straight line through the points as close as possible to all the points D) use algebra using the two data points with the highest and lowest activity levels Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 10) When using the visual-fit method to estimate a cost function, we can estimate the fixed cost by ________.

A) the point where the sketched line (through all or most of the data points) intersects the x-axis B) the point where the sketched line (through all or most of the data points) intersects the y-axis C) calculating the variable cost per unit of the cost driver D) subtracting the variable cost at any cost driver level from the total cost Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 11) When using the visual-fit method to estimate a cost function, the variable cost per unit of the cost driver is equal to the ________.

A) the point where the sketched line (through all or most of the data points) intersects the x-axis B) the point where the sketched line (through all or most of the data points) intersects the y-axis C) slope of the sketched line (through all or most of the data points) D) any point on the sketched line divided by the fixed cost Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

23 .

12) Due to the use of statistics, least squares regression analysis estimates a cost function more ________ than other cost measurement methods.

A) easily B) rapidly C) reliably D) subjectively Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 13) When examining the output from regression analysis, the fixed cost measure is labeled the ________ by most computer programs.

A) coefficient of determination B) X coefficient C) standard error of estimate D) constant or intercept Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 14) When examining the output from regression analysis, with one independent variable, the variable cost measure is labeled the ________ by most computer programs.

A) coefficient of determination B) X coefficient C) standard error of estimate D) constant or intercept Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

24 .

15) When examining the output from regression analysis, the goodness of fit measure is labeled ________ by most computer programs.

A) X coefficient B) constant C) standard error of estimate D) R2 Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 16) To assess the ________ of estimates from regression analysis, we use the ________.

A) plausibility; standard error of coefficient B) objectivity; standard error of coefficient C) reliability; coefficient of determination D) plausibility; coefficient of determination Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 17) To assess the ________ of estimates from regression analysis, we use the ________.

A) objectivity; coefficient of determination B) plausibility; sign on the intercept C) reliability; sign on the coefficient of determination D) plausibility; sign of the variable cost estimate Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

25 .

18) A cost function estimated with least squares regression has a coefficient of determination of 0.95. This statistic indicates that the cost function is ________.

A) highly plausible B) highly reliable C) not predictable D) not accurate Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 19) A cost function with one independent variable is estimated with least squares regression. The coefficient of determination for the equation is 0.50. This statistic indicates that ________.

A) the independent variable does not explain changes in the dependent variable very well B) the dependent variable does not explain changes in the independent variable very well C) the cost estimates are correct 50 percent of the time D) the cost estimates are not correct 50 percent of the time Answer: A Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 20) A company has identified the appropriate cost driver for a resource cost. To estimate or approximate the cost function, the company manager has a broad selection of methods that will NOT include ________.

A) least squares regression analysis B) activity analysis C) high-low method D) engineering method Answer: B Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

26 .

21) Which methods to approximate cost functions rely on a logical analysis of the cost environment instead of an explicit analysis of prior cost data?

A) engineering analysis; account analysis B) activity analysis; account analysis C) visual fit method; high low method D) least-squares regression analysis; activity analysis Answer: A Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 22) The methods to approximate cost functions are not ________; managers frequently use two or more together to avoid ________ in measuring cost behavior.

A) the same; duplication B) mutually exclusive; errors C) complementary; errors D) similar; duplication Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 23) In engineering analysis, cost analysts estimate cost functions using ________.

A) past experience and experiments with prototypes B) accounting and industrial engineering literature C) advice of management consultants D) all of the above Answer: D Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

27 .

24) A disadvantage of engineering analysis which is used to estimate cost functions is ________.

A) it fails to produce a cost function B) it is a costly process C) it is not acceptable under Generally Accepted Accounting Principles D) it cannot be used with mixed costs Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 25) In order to estimate cost functions using account analysis, users rely on the ________ for information about cost behavior.

A) management audit B) performance report C) value chain D) accounting system Answer: D Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 26) Account analysis ________.

A) is less expensive than engineering analysis B) is more expensive than engineering analysis C) cannot be used for mixed costs D) does not require accounts from the accounting system Answer: A Diff: 1 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 27) Engineering analysis and account analysis are similar because ________.

A) both provide timely results B) both do not develop a cost function C) both provide more objective results than the high-low method D) both require the subjective judgment of the analyst Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 28 .

28) Account analysis and engineering analysis will remain the ________ methods of measuring cost behavior because the other methods ________.

A) unused; are more objective B) unused; are more accurate C) popular; require more past cost data D) popular; are too difficult to work with Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 29) Which statement is TRUE regarding the high-low method to approximate a linear cost function?

A) The second step in the high-low method is to plot the historical data points on a graph.

B) Outliers should not be removed from the analysis.

C) Draw a line through all the data points using judgment to fit the line as close as possible to all the plotted points.

D) The point at which the line intersects the Y-axis is the estimate of fixed costs.

Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

29 .

30) Presented below is the production data for the first six months of the year showing the mixed costs incurred by Eunice Company.

Month January February March April May June

Cost $7,500 13,000 11,500 11,700 13,500 11,850

Units 4,000 7,500 9,000 11,500 12,000 6,000

Eunice Company uses the high-low method to analyze mixed costs. The variable cost per unit is ________.

A) $0.625 B) $0.75 C) $1.25 D) $1.31 Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 31) The following data has been assembled for Mildred Company. Use the high-low method.

Month January February March April May

Cost $18,000 $39,000 $39,280 $43,400 $40,000

Hours 2,000 3,500 3,450 3,200 4,000

The variable cost per hour is ________.

A) $9.00 B) $10.00 C) $10.40 D) $11.00 Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

30 .

32) Presented below is the production data for six months of the year showing the mixed costs incurred

by Kennedy Company.

Month July August September October November December

Cost $6,000 $10,250 $10,500 $12,700 $14,000 $10,850

Units 4,000 6,500 8,000 10,500 12,000 9,000

Kennedy Company uses the high-low method to analyze mixed costs. The total fixed cost is ________.

A) $2,000 B) $4,500 C) $10,417 D) $10,500 Answer: A Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 33) The following data has been assembled for Arnold Company. Use the high-low method.

Month January February March April May

Cost $24,000 $39,000 $35,280 $36,400 $40,000

Hours 2,000 2,200 2,750 3,500 4,000

The total fixed cost is ________.

A) $3,600 B) $8,000 C) $21,360 D) $26,672 Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

31 .

34) The following data has been assembled for Robert Company. Use the high-low method.

Month January February March April May

Cost $24,400 $39,000 $35,280 $36,400 $40,000

Hours 2,000 2,200 2,750 3,500 4,000

The cost function is ________ where Y = Total cost and X = Number of hours.

A) Y = $3,600 + $10.40X B) Y = $8,800 + $7.80X C) Y = $21,360 + $1.52X D) Y = $26,672 + $1.84X Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 35) The following data has been assembled for John Company. Use the high-low method.

Month January February March April May

Cost $24,400 $39,000 $35,280 $36,400 $40,000

Hours 2,000 2,200 2,750 3,500 4,000

The expected total cost at an operating level of 1,900 hours is ________.

A) $23,180 B) $23,620 C) $24,000 D) $24,400 Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

32 .

36) Presented below is the production data for six months showing the mixed costs incurred by Anderson Company.

Month July August September October November December

Cost $5,890 $4,012 $7,480 $9,000 $5,800 $7,336

Units 4,100 3,200 6,300 7,500 5,800 6,600

Anderson Company uses the high-low method to analyze mixed costs. The cost function is ________ where Y= Total Cost and X= Number of units.

A) Y = $440 + $1.12X B) Y = $300 + $1.16X C) Y = $440 + $1.20X D) Y = $7,850 + $0.132X Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 37) Presented below is the production data for six months of the year showing the mixed costs incurred

by Madeline Company.

Month July August September October November December

Cost $6,000 $11,250 $11,500 $11,700 $14,000 $12,850

Units 4,000 9,500 9,000 10,500 12,000 10,000

Madeline Company uses the high-low method to analyze mixed costs. The predicted total cost at an operating level of 10,000 units is ________.

A) $11,725 B) $11,800 C) $12,000 D) $12,850 Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

33 .

38) The high-low method can be used to approximate a cost function. A disadvantage of this method is ________.

A) it is difficult to apply due to rigorous calculations B) it is very costly to use C) it takes a long time to measure a cost function D) it makes inefficient use of information because it does not use all the available data Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 39) A disadvantage of the visual-fit method to approximate a cost function is ________.

A) it does not use all the available data B) it is costly to apply C) it does not capture the general tendency of the data D) the placement of the line is subjective Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 40) The least-squares regression method can be used to approximate a cost function. A disadvantage of this method is ________.

A) it does not use all the available data points B) it requires a lot of prior cost data C) it requires subjective placement of the line D) it is more subjective than engineering analysis Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

34 .

41) A measure of how much of the fluctuation of a cost is explained by changes in the cost driver is ________.

A) least squares regression analysis B) standard error of coefficient C) standard error of constant D) coefficient of determination Answer: D Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 42) Regression analysis uses ________ to fit a cost function to all the historical data.

A) visual placement B) engineering analysis C) statistical analysis D) activity analysis Answer: C Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 43) The first step in regression analysis is to plot the cost data against each potential cost driver because the plots may show ________.

A) nonlinear trends in the data only B) outliers only C) nonlinear trends in the data and outliers D) missing cost data Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

35 .

44) In the linear cost function derived from regression analysis, the cost driver is the ________ variable and the cost to be explained is the ________ variable.

A) dependent; independent B) independent; dependent C) intercept; dependent D) constant; independent Answer: B Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 45) The Rumler Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 4,500 Standard error of Y estimate 595 R-Squared 0.87 No. of observations 30 Degrees of freedom 28 X Coefficient 5.04 Standard error of coefficient 0.92 The total fixed cost is ________.

A) $5.04 times number of direct labor hours B) $595 C) $4,500 D) none of the above Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

36 .

46) The Anthony Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 4,500 Standard error of Y estimate 595 R-Squared 0.87 No. of observations 30 Degrees of freedom 28 X Coefficient 5.02 Standard error of coefficient 0.92 The variable cost per direct labor hour is ________.

A) $0.87 B) $0.92 C) $5.02 D) $4,500 Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 47) The Lindsey Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 5,000 Standard error of Y estimate 595 R-Squared 0.87 No. of observations 30 Degrees of freedom 28 X Coefficient 4.02 Standard error of coefficient 0.81 The linear cost function is ________ where Y = Total utilities cost and X = Number of direct labor hours.

A) Y = $5,000 + $0.87X B) Y = $5,000 + $0.81X C) Y = $595 + $0.81X D) Y = $5,000 + $4.02X Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

37 .

48) The Joseph Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 2,500 Standard error of Y estimate 0.7 R-Squared 0.85 No. of observations 30 Degrees of freedom 28 X Coefficient 0.84 Standard error of coefficient 0.92 The coefficient of determination is ________.

A) 0.70 B) 0.84 C) 0.85 D) 0.92 Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 49) The Dorkin Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 4,200 Standard error of Y estimate 2,300 R-Squared 0.78 No. of observations 22 Degrees of freedom 20 X Coefficient 250.25 Standard error of coefficient 22.25 The total fixed cost is ________.

A) $22.25 B) $250.25 C) $2,300 D) $4,200 Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

38 .

50) Noonan Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 4,200 Standard error of Y estimate 2,300 R-Squared 0.84 No. of observations 22 Degrees of freedom 20 X Coefficient 2.30 Standard error of coefficient 2.70 The variable cost per unit of product is ________.

A) $0.84 B) $1.00 C) $2.30 D) $2.70 Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 51) Leno Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 14,885 Standard error of Y estimate 9,960 R-Squared 0.7832 No. of observations 22 Degrees of freedom 20 X Coefficient 11.75 Standard error of coefficient 2.1876 The linear cost function is ________ where Y = Total indirect materials cost and X = Number of units produced.

A) Y = $2.1876 + $9,960X B) Y = $11.75 + $14,885X C) Y= $9,960 + $14,885X D) Y = $14,885 + 11.75X Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 39 .

52) Jayson Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 14,885 Standard error of Y estimate 0.90 R-Squared 0.60 No. of observations 22 Degrees of freedom 20 X Coefficient 0.70 Standard error of coefficient 2.1876 The coefficient of determination is ________.

A) 0.60 B) 0.70 C) 0.90 D) 1.10 Answer: A Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 53) When evaluating a cost function estimated by least squares regression, it is important to see if the estimated cost function makes economic sense. This is assessed by ________.

A) examining the sign of the coefficient of determination B) examining the sign of the fixed cost estimate C) examining the sign of the variable cost estimate D) examining the standard deviation of the cost driver Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

40 .

54) Sandler Company manufactures electronic devices. The company is considering three cost drivers for measuring maintenance costs in the factory. The following cost functions have been estimated using each cost driver:

2. X = number of labor hours

R2 2 Y = $20,000 + $5X R = 0.40 Y = $13,000 + $10X R2 = 0.95

3. X = number of machine hours

Y = $15,000 + $7X

Cost Driver 1. X = number of parts

Cost Function

R2 = 0.30

Which cost driver should be chosen?

A) number of parts B) number of labor hours C) number of machine hours D) none of the above Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 55) Biden Company manufactures small jewelry boxes. The company is considering three cost drivers for measuring support costs in the factory. The following cost functions have been estimated using each cost driver: Cost Driver

Cost Function

1. X = gluing time in hours

Y = $20,000 + $5X

2. X = labor hours

Y = $13,000 + $10X

3. X = machine hours

Y = $15,000 + $7X

R2 R2 = 0.20 R2 = 0.55 R2 = 0.90

Which cost driver should be chosen?

A) gluing time in hours B) labor hours C) machine hours D) labor hours x gluing time in hours Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

41 .

56) An engineering analysis is often not timely in measuring the cost function.

Answer: TRUE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 57) During an engineering analysis, knowledge about new costs may be obtained from experiments with prototypes.

Answer: TRUE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 58) Account analysis is one method of approximating cost functions.

Answer: TRUE Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 59) When performing an engineering analysis, one must consider that the observed time period may be abnormal.

Answer: TRUE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 60) The account analysis method of measuring cost behavior does not rely on subjective assessments.

Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

42 .

61) The high-low method uses estimated cost data to approximate the cost function.

Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 62) Least-squares regression provides statistical information about the reliability of its cost estimates.

Answer: TRUE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 63) In a regression analysis, the constant from the linear cost function is a measure of reliability.

Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 64) If regression analysis is used when measuring cost behavior, plotting the cost against each of the potential cost drivers is not necessary.

Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 65) In a linear cost function estimated by regression analysis, the constant or intercept measures variable cost per unit of the cost driver.

Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

43 .

66) In regression analysis, a lower coefficient of determination is better than a higher one.

Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 67) The Penquin Company has obtained the following data: Month July August September October November December

Indirect Production Costs $92,095 $105,056 $80,000 $99,400 $110,000 $97,404

Direct Labor Hours 4,900 5,480 3,000 4,400 6,000 3,900

Required: A) Using the high-low method, determine the cost function for the above data. Round to two decimal places.

B) If direct labor hours equal 10,000, what are the total expected indirect production costs?

Answer: A) ($110,000 - $80,000) / (6,000 - 3,000) = $10.00 = Variable cost Fixed cost = $110,000 - ($10.00 × 6,000) = $50,000 Cost Function: Y = $50,000 + $10.00X Where: Y= Total indirect production cost and X = Number of direct labor hours B) Y = $50,000 + $10.00(10,000) = $150,000 Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

44 .

68) Jorgensen Company used least squares regression analysis to obtain the following output: Maintenance Department Cost Explained by Number of Labor Hours Constant Standard error of Y estimate R2 No. of observations Degrees of freedom X coefficient Standard error of coefficient

8,200 630 0.94 20 18 2.21 0.0966

Required: A) What is the total fixed cost of the maintenance department?

B) What is the variable cost per labor hour for the maintenance department?

C) What is the linear cost function?

D) What is the coefficient of determination? Comment on the goodness of fit.

Answer: A) $8,200 B) $2.21 C) Y = $8,200 + $2.21X Where: Y = Total Maintenance Department Cost and X = Number of labor hours D) The coefficient of determination is 0.94. This is very close to one and indicates that 94% of the fluctuation in the maintenance department cost can be explained by changes in the number of labor hours. The cost estimates in the linear function are very reliable.

Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

45 .

69) Using activity analysis, Arnoldson Company has identified the appropriate cost driver for maintenance costs in a factory as the number of machine hours. The maintenance costs have been observed as follows within the relevant range of 5,000 to 8,000 machine-hours.

Month January February March April May June July

Maintenance Cost $7,900 $8,500 $7,400 $8,200 $9,100 $9,800 $7,800

Machine Hours 5,600 7,100 5,000 6,500 7,300 8,000 6,200

Required: 1. Estimate the cost function using the high-low method.

2. If you were going to use the visual-fit method to estimate the cost function, what steps will you take?

Answer: 1. Variable cost per machine hour = ($9,800 - $7,400) / (8,000 - 5,000) = $0.80 per machine hour Fixed cost = $9,800 - ($0.80 × 8,000) = $3,400 Y = $3,400 + $0.80X Where: Y = Total maintenance cost for a month X = number of machine hours 2. We plot all the data points on a graph. The y-axis is cost and the x-axis is number of machine hours. We then draw a line through all the points, using judgment to fit the line as close as possible to all the plotted points. We extend the line until it intersects the y-axis of the graph. The monthly fixed cost is equal to the point where the line intersects the y-axis or cost axis. To find the variable cost per machine hour, select any activity level and find the total cost at that activity level from the line. Then, subtract the fixed cost from the total cost, to yield variable cost. Finally, divide the variable cost by the units of activity to get the variable cost per unit of cost driver.

Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

46 .

70) The facilities housekeeping department at St. Luke's Hospital has determined that the appropriate cost driver for housekeeping costs is patient-days. There are 10,000 patient-days per month. The department has collected the following accounts for the past month: Monthly Housekeeping Expenses Supervisors' Salaries Expense Depreciation Expense—Scrubbing Machines Cleaning Supplies Expense Hourly Workers' Wages Expense Insurance Expense—Scrubbing Machines

Amount $10,000 $5,000 $7,000 $100,000 $2,000

Required: Estimate the cost function using the account analysis method.

Answer: Fixed Costs: Supervisors' Salaries Expense $10,000 Depreciation Expense—Scrubbing Machines $5,000 Insurance Expense—Scrubbing Machines $2,000 Total Fixed Costs $17,000 Variable Costs: Cleaning Supplies Expense Hourly Workers' Wages Expense Total Variable Costs

$7,000 $100,000 $107,000

Variable Cost per Patient-day is $107,000 / 10,000 = $10.70 per patient day Cost function: Y = $17,000 + $10.70X Where: Y= Total monthly housekeeping cost X = Number of patient-days Diff: 3 LO: 3-4 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost

47 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 4 Cost Management Systems and Activity-Based Costing 4.1 Questions 1) To support managers' decisions, accountants develop cost management systems that are ________.

A) also used by external users such as investors and lenders B) computer programs with specialized accounting language C) a collection of tools and techniques that identify how decisions affect costs D) composed of at least 400 cost pools Answer: C Diff: 1 LO: 4-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 2) External users of financial reports need ________ measures of inventory and cost of goods sold.

Internal users of financial reports need ________ cost information about products.

A) strategic; operational B) operational; strategic C) aggregate; detailed D) detailed; aggregate Answer: C Diff: 1 LO: 4-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 3) What is an example of a tool or technique that is used in a cost management system?

A) retail method B) lower of cost or market rule C) conservatism principle D) cost-volume-profit analysis Answer: D Diff: 1 LO: 4-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

1 .

4) A cost management system provides ________.

A) measures of inventory value and cost of goods sold for financial reporting B) cost information for strategic management decisions C) cost information for operational control D) all of the above Answer: D Diff: 1 LO: 4-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 5) Which of the following is an example of a strategic management decision that uses cost information?

A) determining the ending balance of Merchandise Inventory for financial reporting to external users B) determining the product mix C) assessing a cost control program in a factory D) determining the amount of Cost of Goods Sold for financial reporting to external users Answer: B Diff: 1 LO: 4-1 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 6) Which of the following is an example of using cost information for operational control?

A) determination of Cost of Goods Sold for the income statement B) identification of capital assets to acquire for expansion purposes C) selection of value-chain function to emphasize in corporate mission D) evaluation of process improvement efforts in a manufacturing process Answer: D Diff: 2 LO: 4-1 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 7) Which of the following is an example of a strategic management decision that uses cost information?

A) determination of Cost of Goods Sold for the income statement B) identification of value-chain function to outsource C) evaluation of operational cost control program D) assessment of process improvement efforts in quality control Answer: B Diff: 2 LO: 4-1 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

2 .

8) A cost management system provides information for strategic management decisions and financial reporting.

Answer: TRUE Diff: 1 LO: 4-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 9) An example of a strategic management decision is the decision to outsource a particular value-chain function.

Answer: TRUE Diff: 1 LO: 4-1 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 10) An example of a strategic management decision is the selection of the product mix that maximizes profits.

Answer: TRUE Diff: 1 LO: 4-1 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 11) Investors need more detailed information about products or services than managers.

Answer: FALSE Diff: 1 LO: 4-1 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 12) An example of a strategic management decision is the establishment of a pricing policy for a new product.

Answer: TRUE Diff: 1 LO: 4-1 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

3 .

4.2 Questions 1) A product such as Sure-Fine Graham Crackers, and a customer such as an Internet customer, are both examples of ________.

A) cost accounting B) cost management system C) cost assignment D) cost objects Answer: D Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 2) To determine the cost of a product, which of the following are followed?

A) first step, cost assignment and second step, cost allocation B) first step, cost accumulation and second step, cost assignment C) first step, cost allocation and second step, cost apportionment D) first step, cost absorption and second step, cost attribution Answer: B Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 3) To determine the cost of serving a specific type of customer, such as the retail customer, which of the following are followed?

A) first step, cost assignment and second step, cost allocation B) first step, cost accumulation and second step, cost assignment C) first step, cost allocation and second step, cost apportionment D) first step, cost absorption and second step, cost attribution Answer: B Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4) If the Machining Department is the cost object, attaching costs to the Machining Department is called ________.

A) cost pooling B) cost accumulation C) cost assignment D) applying a cost driver Answer: C Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4 .

5) Which of the following types of organizations need cost accounting?

A) manufacturing firms and service organizations only B) service organizations and nonprofit organizations only C) manufacturing firms and nonprofit organizations only D) all types of organizations Answer: D Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 6) Which of the following statements is FALSE? A) A cost may be defined as a sacrifice or giving up of resources for a particular purpose.

B) Costs are frequently measured by the monetary units that must be paid for goods and services.

C) Only manufacturing firms need some form of cost accounting.

D) A cost accounting system typically has two processes that include cost accumulation and cost assignment.

Answer: C Diff: 2 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 7) Which of the following statements about cost accounting systems is FALSE? A) The cost accounting system provides the cost data that managers use for decision making.

B) The cost accounting system is the most fundamental component of a cost management system.

C) A cost accounting system that provides accurate information is a key success factor for all types of organizations.

D) Some types of organizations do not need cost accounting systems.

Answer: D Diff: 2 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 8) The process of collecting costs by some natural classification is called ________.

A) cost accounting B) cost allocation C) cost accumulation D) cost assignment Answer: C Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

5 .

9) Cost accounting is that part of the cost management system that measures costs for the sole purpose of financial reporting.

Answer: FALSE Diff: 1 LO: 4-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 10) A cost is a sacrifice of resources for a particular purpose.

Answer: TRUE Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 11) A cost object is anything for which a separate measurement of costs is desired.

Answer: TRUE Diff: 1 LO: 4-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 12) Customers, departments and territories are examples of cost objects.

Answer: TRUE Diff: 1 LO: 4-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 13) Company activities such as processing orders, billing customers, and moving materials can be cost objects.

Answer: TRUE Diff: 2 LO: 4-2 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 14) A cost accounting system typically includes two processes: cost allocation and cost determination.

Answer: FALSE Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

6 .

15) Cost assignment is attaching costs to one or more cost objects, such as activities and departments.

Answer: TRUE Diff: 2 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 16) Accountants initially collect costs by some natural classification such as activities performed.

Answer: TRUE Diff: 1 LO: 4-2 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4.3 Questions 1) Which of the following types of costs cannot be specifically and exclusively identified with a cost object in an economically feasible manner?

A) variable costs B) fixed costs C) direct costs D) indirect costs Answer: D Diff: 1 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 2) The cost object is an upholstered chair made by craftsmen in a factory. An accountant can identify the amount and cost of fabric used to manufacture the chair. This is called ________ a ________ to a cost object.

A) assigning; indirect cost B) allocating; indirect cost C) allocating; direct cost D) tracing; direct cost Answer: D Diff: 1 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

7 .

3) Today, in most manufacturing companies, workers oversee automated production processes that produce many different products. With respect to the products manufactured, the labor costs are considered to be ________.

A) direct labor costs B) indirect production costs C) direct production costs D) period costs Answer: B Diff: 2 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4) To assign indirect costs to cost objects, which of the following methods is used?

A) cost pooling B) cost accumulation C) cost allocation D) cost tracing Answer: C Diff: 1 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 5) When allocating indirect production costs to cost objects, which of the following is/are a cost-allocation base(s)?

A) some measure of input or output that determines the amount of cost to be allocated to a cost object B) a measure used to assign indirect costs to cost objects C) a measure used to assign direct costs to cost objects D) A and B Answer: D Diff: 2 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 6) When allocating indirect production costs to cost objects, most cost-allocation bases are ________.

A) assigned to a cost object B) accumulated for a cost object C) traced to the cost object D) cost drivers Answer: D Diff: 2 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

8 .

7) When assigning indirect costs to a cost object, an ideal cost-allocation base measures ________.

A) the proportion of indirect costs to direct costs B) the extent a particular cost is caused by a cost object C) multiple cost drivers D) the proportion of direct costs to indirect costs Answer: B Diff: 2 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 8) An allocated cost is a(n) ________ assigned to a cost object using a ________.

A) direct cost; cost-allocation base B) indirect cost; cost-allocation base C) direct cost; cost pool D) indirect cost; cost pool Answer: B Diff: 1 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 9) How do we assign indirect costs to cost objects?

A) based on the proportion of indirect costs to total costs B) based on the proportion of indirect costs to direct costs C) in proportion to the cost object's use of a cost-allocation base D) based on the amount of direct cost used by the cost object Answer: C Diff: 2 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 10) The monthly indirect production cost is Depreciation Expense on Assembly Equipment of $100,000.

The cost allocation base is number of machine hours. The expected level of production in a month is 10,000 machine hours. What is the amount of indirect production cost per unit assigned to Product 1 and Product 2. Product 1 requires 10 machine hours per unit. Product 2 requires 20 machine hours per unit.

Product 1 Product 2 A) $1 $2 B) $10 $20 C) $100 $200 D) none of the above Answer: C Diff: 2 LO: 4-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

9 .

11) Which of these costs is a direct cost for a manufactured wood chair?

A) Rent Expense for factory building B) Depreciation Expense on factory equipment C) Wood used to manufacture chair D) Salary Expense of factory supervisor Answer: C Diff: 2 LO: 4-3 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 12) Which of the following costs is a direct cost for a manufactured product?

A) Depreciation Expense on factory equipment used for several products B) Wages Expense of an assembly worker who works specifically on the product C) Accountants who determine the product costs for all the products manufactured D) Factory Supervisor Salary Expense where the supervisor oversees the production of several different types of products Answer: B Diff: 2 LO: 4-3 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 13) When a laptop computer is the cost object, the keyboard would be classified as a(n) ________.

A) direct cost B) allocated cost C) indirect cost D) unallocated cost Answer: A Diff: 2 LO: 4-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 14) When an automobile made in a Toyota factory is the cost object, the wages of the security guard in the factory would probably be classified as a(n) ________.

A) direct production cost B) indirect production cost C) direct nonproduction cost D) indirect nonproduction cost Answer: B Diff: 2 LO: 4-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

10 .

15) When an upholstered chair is the cost object, minor materials, such as tacks and nails, used to manufacture the chair would probably be classified as a(n) ________.

A) direct production cost B) direct nonproduction cost C) indirect production cost D) indirect nonproduction cost Answer: C Diff: 2 LO: 4-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 16) Indirect production costs can be ignored because they do not affect the cost of a product.

Answer: FALSE Diff: 1 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 17) Costs can be classified as direct or indirect with respect to a particular cost object.

Answer: TRUE Diff: 1 LO: 4-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 18) The wages of the janitor in the factory are direct costs for a manufactured product.

Answer: FALSE Diff: 1 LO: 4-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 19) Depreciation expense on assembly equipment used for several products is an example of a direct cost for a manufactured product.

Answer: FALSE Diff: 2 LO: 4-3 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 20) Costs that can be allocated to a cost object are called direct costs.

Answer: FALSE Diff: 1 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

11 .

21) A century ago, a large proportion of labor costs were direct costs.

Answer: TRUE Diff: 1 LO: 4-3 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4.4 Questions 1) Which of the following purposes of cost allocation provides information for operational control in an organization?

A) to compute income and asset valuations for financial reports B) to compute Cost of Goods Sold for financial reports C) to determine the number of cost drivers for a product D) to provide the desired motivation and to give feedback for performance evaluation Answer: D Diff: 2 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 2) If fixed production costs are not allocated to manufactured products, this conveys the idea that ________.

A) fixed costs are not necessary to manufacture a product.

B) fixed costs are necessary to manufacture a product.

C) variable costs are less important than fixed costs to manufacture a product.

D) fixed costs are more important than variable costs to manufacture a product.

Answer: A Diff: 1 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 3) When companies develop cost management systems, which of the following purposes of cost allocation usually dominates?

A) to predict the economic effects of strategic and operational control decisions B) to provide the desired motivation and to give feedback for performance evaluation C) to compute income and asset valuations for financial reporting D) to justify costs or obtain reimbursement Answer: C Diff: 1 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

12 .

4) Monthly indirect production costs are $400,000. The cost-allocation base for indirect costs is machine hours. The budgeted capacity for the month is 40,000 machine hours. Product X used 5,000 machine hours, Product Y used 15,000 machine hours and Product Z used 20,000 machine hours. How much of the indirect costs are allocated to Products X and Y? Product X Product Y A) $2,500 $7,500 B) $5,000 $15,000 C) $50,000 $150,000 D) none of the above Answer: C Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 5) Rent Expense on the Factory Building of $100,000 is allocated to three departments. The cost-allocation base for this expense is number of square feet, which equals 50,000 square feet. Information for the three departments housed in the factory building are as follows: Department Department A Department B Department C

Square Feet 15,000 5,000 30,000

Cubic Feet 15,000 5,000 20,000

How much Rent Expense is allocated to the three departments?

Department A Department B Department C A) $15,000 $5,000 $30,000 B) $37,500 $12,500 $50,000 C) $30,000 $10,000 $60,000 D) none of the above Answer: C Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 6) When determining the cost of a product, which of the following costs is often not allocated?

A) Customer Service Expense B) Research and Development Expense C) Marketing Expense D) Administrative Salaries Expense Answer: D Diff: 2 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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7) Depreciation Expense on the Heating and Air Conditioning Equipment for the factory of $50,000 is allocated to five departments. The cost-allocation base for this expense is the number of cubic feet, which equals 100,000 cubic feet. Information for five departments is below: Department Department A Department B Department C Department D Department E

Square Feet 15,000 5,000 30,000 20,000 10,000

Cubic Feet 15,000 5,000 20,000 35,000 25,000

How much Depreciation Expense is allocated to Department A? A) $2,500 B) $7,500 C) $15,000 D) $18,750 Answer: B Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 8) If the Production Department is the cost object, the salary of the factory supervisor is a(n) ________ cost for the department. If the product made in the factory is the cost object, the salary of the factory supervisor is a(n) ________ cost for the product.

A) direct; indirect B) indirect; direct C) direct; direct D) indirect, indirect Answer: A Diff: 2 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 9) In general, many more costs are direct costs instead of indirect costs when the cost object is a ________ instead of a(n) ________.

A) product; department B) product; activity C) product; resource D) department; product Answer: D Diff: 2 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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10) Which of the following is NOT a stated purpose of cost allocation?

A) Predict the economic effects of strategic and operational control decisions.

B) Obtain reimbursement.

C) Provide motivation to managers.

D) Determine product cost.

Answer: D Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 11) What is the final step in the four-step process to allocate indirect costs to cost objects?

A) Accumulate indirect costs for a period of time in a cost pool.

B) Select an allocation base for each cost pool.

C) Multiply the percentage of total cost-allocation units used for each cost object by the total costs in the cost pool to determine the cost allocated to each cost object.

D) Measure the units of the cost-allocation base used for each cost object and compute the total units used for all cost objects.

Answer: C Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 12) Unallocated costs ________.

A) are not recorded in the cost accounting system B) do not have cost drivers that can be used to relate the costs to cost objects C) have a direct relationship to a cost object D) have an identifiable relationship with a cost object Answer: B Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 13) Companies must assign all nonproduction costs to cost objects for internal management purposes.

Answer: FALSE Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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14) Companies must assign all production-related costs to cost objects for external financial reporting purposes.

Answer: TRUE Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 15) A cost pool is a group of individual costs that is allocated to cost objects.

Answer: TRUE Diff: 1 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 16) Due to the decline in indirect costs in most companies, allocating indirect costs is no longer necessary to determine accurate product costs.

Answer: FALSE Diff: 1 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 17) An unallocated cost in one company may be an allocated cost in another company.

Answer: TRUE Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 18) The number of cubic feet is a logical cost driver for allocating depreciation expense of heating equipment to cost objects.

Answer: TRUE Diff: 3 LO: 4-4 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 19) Allocation of costs to cost objects may be described as absorb or apply.

Answer: TRUE Diff: 1 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

16 .

20) Indirect manufacturing costs are the same as manufacturing overhead costs.

Answer: TRUE Diff: 1 LO: 4-4 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 21) In general, more costs are direct when a department is the cost object than when a product or service is the cost object.

Answer: TRUE Diff: 2 LO: 4-4 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4.5 Questions 1) Merchandising and manufacturing companies account for ________ in the same way.

A) design expenses B) customer service expenses C) selling expenses D) all of the above Answer: D Diff: 2 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 2) A merchandising firm has ________ inventory account(s). A manufacturing firm has ________ inventory account(s).

A) one; three B) three; one C) two; three D) three; three Answer: A Diff: 2 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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3) Factory overhead does NOT include ________.

A) electricity bill in factory B) insurance Expense on factory building C) supplies used in factory D) wages of janitors in corporate headquarters Answer: D Diff: 2 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 4) Indirect production costs do NOT include ________.

A) property taxes on factory building B) rent expense on factory building C) wages of security guards at corporate headquarters D) wages of forklift truck operators in assembly area Answer: C Diff: 2 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 5) In a merchandising company, ________.

A) selling and administrative costs are period costs B) insurance expense on the corporate building is a product cost C) Work-In-Process Inventory may be present D) Finished Goods Inventory may be present Answer: A Diff: 2 LO: 4-5 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 6) In a manufacturing company, ________.

A) inventoriable costs only become an expense when the company sells the inventory B) inventoriable costs become an expense as soon as the company finishes manufacturing the product C) there is only one inventory account D) period expenses are reported as expenses in a future period Answer: A Diff: 2 LO: 4-5 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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7) When looking at a manufactured product, an example of an inventoriable cost is ________.

A) depreciation expense on office equipment in corporate office B) insurance expense on vehicles used by sales staff C) wages of plant security guard D) clerical salaries in corporate office Answer: C Diff: 2 LO: 4-5 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 8) For manufacturing companies, an example of a period cost is ________.

A) direct materials B) research and development expense C) direct labor D) factory overhead Answer: B Diff: 2 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 9) Goods undergoing the production process but not fully complete are called ________.

A) Merchandise Inventory B) Raw Materials Inventory C) Finished Goods Inventory D) Work-in-Process Inventory Answer: D Diff: 1 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 10) Which of the following is NOT an example of indirect production costs?

A) factory supplies B) depreciation expense on factory building C) depreciation expense on office equipment in corporate headquarters D) wages of material handlers in factory Answer: C Diff: 2 LO: 4-5 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

19 .

11) Which of the following is NOT a period expense in a merchandising firm?

A) Selling Expense B) Administrative Expenses C) R&D Expenses D) Cost of Goods Sold Answer: D Diff: 2 LO: 4-5 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 12) Period costs include selling and administrative expenses.

Answer: TRUE Diff: 1 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 13) In a manufacturing company, unsold, fully complete products are called Work-In-Process Inventory.

Answer: FALSE Diff: 1 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 14) Period costs become expenses during a future period.

Answer: FALSE Diff: 1 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 15) A merchandising company has Raw Materials Inventory.

Answer: FALSE Diff: 1 LO: 4-5 AACSB: Reflective thinking skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization 16) For both merchandising and manufacturing firms, selling and administrative costs are period costs.

Answer: TRUE Diff: 2 LO: 4-5 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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17) A manufacturing company has identified several costs. Indicate whether each of the following costs is an Inventoriable cost(I) or a Period cost(P): _____ 1. Rent Expense on factory equipment _____ 2. Cost of subassemblies used in producing product _____ 3. Wages of machine operators in factory _____ 4. Rent Expense on computers at corporate office _____ 5. Wage Expense for janitors in factory _____ 6. Repairs Expense for factory equipment _____ 7. Office Supplies Expense at corporate office _____ 8. Wage Expense for janitors at corporate office _____ 9. Wages of security guards at corporate office _____ 10. Property taxes on factory building and land _____ 11. Wages of security guards at factory _____ 12. Wages of forklift driver in factory _____ 13. Supplies Expense for factory _____ 14. Wages of forklift operators in factory _____ 15. Distribution Expenses Answer: 1. I 2. I 3. I 4. P 5. I 6. I 7. P 8. P 9. P 10. I 11. I 12. I 13. I 14. I 15. P Diff: 2 LO: 4-5 AACSB: Analytic skills Learning Outcome: Describe the basics of managerial accounting and its function within an organization

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4.6 Questions 1) In a manufacturing company, product costs used for external reporting include ________.

A) direct material costs plus direct labor cost only B) indirect production costs only C) direct material costs plus direct labor cost plus indirect production costs D) direct material costs plus nonproduction costs Answer: C Diff: 2 LO: 4-6 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 2) Which of the following statements about period costs is FALSE? A) Period costs refer to distribution costs and design costs.

B) Period costs include R&D expenses, marketing costs and customer service costs.

C) Merchandising and manufacturing firms treat period costs differently.

D) For merchandising firms, Cost of Goods Sold is not a period cost.

Answer: C Diff: 2 LO: 4-6 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 3) A merchandising firm reports ________ as a current asset on the balance sheet.

A) Raw Materials Inventory B) Finished Goods Inventory C) Work-in-Process Inventory D) Merchandise Inventory Answer: D Diff: 2 LO: 4-6 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

22 .

4) The computation for Cost of Goods Manufactured on the income statement is ________. (Assume there are no Work-In-Process Inventories.)

A) direct materials used plus direct production costs B) direct materials used plus direct labor plus indirect production costs C) direct materials used plus direct labor D) direct materials used plus direct labor minus indirect production costs Answer: B Diff: 2 LO: 4-6 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 5) ________ would appear on an income statement of both a retailer and a manufacturer.

A) Direct materials used B) Ending balance in Finished Goods Inventory C) Selling expenses D) Ending balance in Merchandise Inventory Answer: C Diff: 2 LO: 4-6 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 6) In a manufacturing firm, which inventory account is NOT used?

A) Raw Materials Inventory B) Work-In-Process Inventory C) Finished Goods Inventory D) Merchandise Inventory Answer: D Diff: 1 LO: 4-6 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

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7) The following information was taken from the accounting records of Henry Manufacturing Company: Direct materials purchased Direct materials used Direct manufacturing labor costs Indirect manufacturing labor costs Sales Salaries Expense Miscellaneous Factory Expenses Administrative Expenses Finished Goods Inventory, beginning Finished Goods Inventory, end Work-In-Process Inventory, beginning Work-In-Process Inventory, end

$75,000 $56,000 $20,000 $10,000 $35,000 $5,000 $40,000 $10,000 $12,000 0 0

What is Cost of Goods Manufactured?

A) $86,000 B) $89,000 C) $91,000 D) $96,000 Answer: C Diff: 2 LO: 4-6 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

24 .

8) The following information was obtained from the accounting records of Stevenson Incorporated: Direct materials purchased Direct materials used Direct manufacturing labor costs Indirect manufacturing labor costs Selling expenses Administrative expenses Factory utilities costs Rental cost of factory machines Work in process inventory, beginning Work in process inventory, end Finished goods inventory, beginning Finished goods inventory, end

$80,000 $54,000 $12,000 $11,000 $16,000 $22,000 $20,000 $50,000 0 0 $10,000 $30,000

What is Cost of Goods Sold?

A) $57,000 B) $77,000 C) $127,000 D) $147,000 Answer: C Diff: 2 LO: 4-6 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 9) In a merchandising firm, the computation of Cost of Goods Sold does NOT use ________.

A) Merchandise Inventory, beginning balance B) Merchandise Inventory, ending balance C) purchases of raw materials D) purchases of merchandise inventory Answer: C Diff: 1 LO: 4-6 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

25 .

10) In a manufacturing firm, the computation of Cost of Goods Manufactured does NOT use ________.

A) Finished Goods Inventory, ending balance B) indirect production costs C) direct labor costs D) direct materials used Answer: A Diff: 2 LO: 4-6 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 11) Which of the following costs is NOT an inventoriable cost for a manufacturing firm?

A) Marketing Expense B) Factory Supervisor's Salary Expense C) Wages Expense for security guard in factory D) Wages Expense for forklift operator in factory Answer: A Diff: 2 LO: 4-6 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 12) In a manufacturing firm, the Finished Goods Inventory account is only found on the balance sheet.

Answer: FALSE Diff: 2 LO: 4-6 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 13) A manufacturer has three types of inventory that include Raw Materials Inventory, Work-In-Process Inventory and Merchandise Inventory.

Answer: FALSE Diff: 1 LO: 4-6 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

26 .

14) The McCain Company manufactures several products. The McCain Company has gathered the following information for the year ended December 31, 2015: Sales Direct materials used Fixed indirect production costs Variable indirect production costs Fixed direct labor Variable direct labor Fixed selling expenses Variable selling expenses Finished Goods Inventory, January 1, 2015 Finished Goods Inventory, December 31, 2015 Work-In-Process Inventory, January 1, 2015 Work-In-Process Inventory, December 31, 2015

$110,000 $10,700 $10,900 $7,900 $10,300 $12,300 $33,040 $3,440 $24,000 $22,000 0 0

Requirements: A) Compute the Cost of Goods Manufactured for the year ended December 31, 2015.

B) Compute the Cost of Goods Sold for the year ended December 31, 2015.

C) Compute the Net Income for the year ended December 31, 2015.

Answer: A) $52,100($10,700 + $10,900 + $7,900 + $10,300 + $12,300) B) $54,100($52,100 + $24,000 - $22,000) C) Net Income = $19,420 = $110,000 - $54,100 - $33,040 - $3,440 Diff: 2 LO: 4-6 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

27 .

15) Donahoo Manufacturing Company had the following information available for the year: Direct materials used Direct labor costs incurred Indirect labor costs incurred Depreciation Expense on factory building Depreciation Expense on factory machines Insurance Expense on factory building Depreciation Expense on office equipment Insurance expense on corporate office Supplies Expense for factory Utilities Expense for factory Wages Expense for factory janitors Lease Expense for factory computers Finished Goods Inventory, end of year Finished Goods Inventory, beginning of year

$44,000 $7,700 $3,030 $19,000 $100,000 $1,200 $12,000 $1,300 $5,000 $2,000 $5,000 $10,000 $32,000 $12,000

Work-In-Process Inventories and Raw Materials Inventories were negligible at the beginning and end of the year.

Required: A) Compute the Cost of Goods Manufactured for the year.

B) Compute the Cost of Goods Sold for the year.

Answer: A) $196,930 ($44,000 + $7,700 + $3,030 + $100,000 + $19,000 + $1,200 + $5,000 + $2,000 + $5,000 + $10,000) B) $176,930 ($196,930 + $12,000 - $32,000) Diff: 2 LO: 4-6 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

28 .

16) Gollerowski Company has determined the following information for the year ended December 31, 2015: Direct labor used Direct material used General and administrative expenses Indirect production costs Selling expenses Work-In-Process Inventory, January 1, 2015 Work-In-Process Inventory, December 31, 2015 Finished Goods Inventory, January 1, 2015 Finished Goods Inventory, December 31, 2015 Cost of Goods Sold

$16,840 $26,300 $14,240 $56,780 $13,599 0 0 0 ? $80,000

Requirements: A) What is the Cost of Goods Manufactured for the year ended December 31, 2015?

B) What is Finished Goods Inventory at December 31, 2015?

Answer: A) $99,920 ($26,300 + $16,840 + $56,780) B) $19,920 ($99,920 - $80,000) Diff: 2 LO: 4-6 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

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4.7 Questions 1) Swanson Company has identified the following activities related to indirect production costs: Activity Machine Setup Materials Handling Electric Power

Activity Costs $180,000 $50,000 $20,000

Cost Drivers 1,500 setup hours 12,500 pounds of materials 20,000 kilowatt hours

Swanson Company has obtained the following data concerning two products:

Number of units produced Direct materials cost Direct labor cost Number of setup hours Pounds of materials used Kilowatt-hours

Product 1 4,000 $20,000 $12,000 100 500 1,000

Product 2 20,000 $25,000 $20,000 120 1,500 2,000

Using activity-based costing, what amount of machine setup cost is assigned to Products 1 and 2?

Product 1 Product 2 A) $12,000 $14,400 B) $30,000 $150,000 C) $50,000 $130,000 D) $81,818 $98,182 Answer: A Diff: 3 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

30 .

2) Stanley Company has identified the following activities related to indirect production costs: Activity Machine Setup Materials Handling Electric Power

Activity Costs $180,000 $50,000 $20,000

Cost Drivers 1,500 setup hours 12,500 pounds of materials 20,000 kilowatt hours

Stanley Company has obtained the following data concerning two products:

Number of units produced Direct materials cost Direct labor cost Number of setup hours Pounds of materials used Kilowatt-hours

Product 1 4,000 $20,000 $12,000 100 500 1,000

Product 2 20,000 $25,000 $20,000 120 1,500 2,000

Using an activity-based costing system, what amount of materials handling cost is assigned to Products 1 and 2?

Product 1 Product 2 A) $2,000 $6,000 B) $8,333 $41,667 C) $12,500 $37,500 D) $20,000 $30,000 Answer: A Diff: 3 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

31 .

3) Sandler Company has identified the following activities related to indirect production costs: Activity Machine Setup Materials Handling Electric Power

Activity Costs $180,000 $50,000 $20,000

Cost Drivers 1,500 setup hours 12,500 pounds of materials 20,000 kilowatt hours

Sandler Company has obtained the following data concerning two products:

Number of units produced Direct materials cost Direct labor cost Number of setup hours Pounds of materials used Kilowatt-hours

Product A 4,000 $20,000 $12,000 100 120 500 1,500 1,000

Product B 20,000 $25,000 $20,000

2,000

Using activity-based costing, what amount of electric power cost is assigned to Product A and Product B? Product A Product B A) $1,000 $2,000 B) $3,333 $16,667 C) $5,000 $15,000 D) $6,667 $13,333 Answer: A Diff: 3 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

32 .

4) Goldman Company has identified the following activities related to indirect production costs: Activity Machine Setup Materials Handling Electric Power

Activity Costs $180,000 $50,000 $20,000

Cost Drivers 1,500 setup hours 12,500 pounds of materials 20,000 kilowatt hours

Goldman Company has obtained the following data concerning two products:

Number of units produced Direct materials cost Direct labor cost Number of setup hours Pounds of materials used Kilowatt-hours

Product A 4,000 $20,000 $12,000 100 500 1,000

Product B 20,000 $25,000 $20,000 120 1,500 2,000

Using activity-based costing, what is the total production cost per unit for Product A? A) $8.00 per unit B) $10.25 per unit C) $11.75 per unit D) $70.50 per unit Answer: C Diff: 3 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

33 .

5) Godwin Company has identified the following activities related to indirect production costs: Activity Machine Setup Materials Handling Electric Power

Activity Costs $180,000 $50,000 $20,000

Cost Drivers 1,500 setup hours 12,500 pounds of materials 20,000 kilowatt hours

Godwin Company has obtained the following data concerning two products:

Number of units produced Direct materials cost Direct labor cost Number of setup hours Pounds of materials used Kilowatt-hours

Product A 4,000 $20,000 $12,000 100 500 1,000

Product B 20,000 $25,000 $20,000 120 1,500 2,000

Using activity-based costing, what is the total production cost per unit for Product B? A) $1.12 per unit B) $2.25 per unit C) $3.00 per unit D) $3.37 per unit Answer: D Diff: 3 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 6) In activity-based costing systems, the system first accumulates indirect costs for ________, and then assigns these costs to ________.

A) products; departments B) products; territories C) cost objects; types of customers D) activities; cost objects Answer: D Diff: 2 LO: 4-7 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

34 .

7) Activity-based costing systems should be used instead of traditional costing systems if ________.

A) indirect production costs are a large percentage of production costs B) different products consume resources at different rates C) only one product is produced D) A and B Answer: D Diff: 2 LO: 4-7 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 8) In two-stage activity-based costing systems, the cost objects in the first stage are ________ and the cost objects in the second stage are ________.

A) departments; products or services B) departments; territories C) resources; departments D) activities; products or services Answer: D Diff: 2 LO: 4-7 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 9) When using a two stage activity-based costing system, which of the following is NOT a legitimate step?

A) Identify a cost pool for each significant activity.

B) Assign the indirect resource cost to the appropriate cost pool.

C) Allocate the costs in each pool to products or services using multiple cost drivers.

D) Select an allocation base for each cost pool.

Answer: D Diff: 2 LO: 4-7 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 10) ________ is a name for a system that first accumulates indirect resource costs for each of the activities of an organization and then assigns the cost of each activity to the cost objects that require that activity.

A) Activity-based management B) Activity-based costing C) Cost accounting D) Activity-based cost allocation Answer: B Diff: 1 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

35 .

11) Which of the following statements is FALSE? A) Traditional costing systems generally assign only production costs to products.

B) Traditional costing systems use a single cost pool for all indirect production costs.

C) Traditional cost systems work well with simple production processes.

D) Traditional cost systems allocate a cost pool to cost objects using multiple cost drivers.

Answer: D Diff: 2 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 12) Activity-based costing systems should be adopted when ________.

A) indirect costs represent a small proportion of a product's total costs B) indirect costs represent a large proportion of a product's total costs C) a company makes one simple product D) a company has a simple manufacturing process Answer: B Diff: 2 LO: 4-7 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 13) Process maps are used ________.

A) to make investment decisions regarding capital assets B) as a guide for strategic decisions C) as a tool for managers to understand operations D) for operational control Answer: C Diff: 1 LO: 4-7 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

36 .

14) Slocum Company has determined the following information about a new product. The manufacturing process used for the product is very complex and it has a higher proportion of indirect costs than direct costs. The company wants a 100% markup on cost. The following data is available: Product cost according to traditional costing system Product cost according to activity-based costing system

$4.00 per unit $7.00 per unit

What price per unit should Slocum Company use for this new product?

A) $4.00 B) $7.00 C) $8.00 D) $14.00 Answer: D Diff: 2 LO: 4-7 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 15) Fandry Company has obtained the following data concerning a new product: Production Costs, Using traditional costing method Production Costs, Using activity-based costing method Nonproduction Costs, Using activity-based costing method

$3.00 per unit $5.00 per unit $2.50 per unit

Fandry Company wants the price of the new product to cover all costs plus a 100% markup. The production process used for the low volume product is very complicated and it has a higher proportion of indirect costs than direct costs.

What price per unit should Fandry Company charge for the new product?

A) $6.00 B) $10.00 C) $11.00 D) $15.00 Answer: D Diff: 2 LO: 4-7 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 16) Traditional costing systems generally assign only production costs to products.

Answer: TRUE Diff: 1 LO: 4-7 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

37 .

17) Traditional costing systems generally allocate nonproduction value-chain costs to products.

Answer: FALSE Diff: 1 LO: 4-7 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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18) Sealing Company manufactures only one product that is available in both a Deluxe model and a Regular model. The company has manufactured the Regular model for years and the Deluxe model was recently introduced. The company is concerned about the accuracy of its costing system because profits are declining since the Deluxe model was introduced.

Indirect production costs are assigned to the products using direct labor hours. For the current year, the company estimates $2,000,000 of indirect production costs and 40,000 direct labor hours. They expect to produce 5,000 units of the Deluxe model and 40,000 units of the Regular model. The Deluxe model requires 1.6 hours of direct labor time per unit and the Regular model requires 0.8 hours. Other costs are as follows: Costs Direct materials Direct labor

Deluxe Model $150 $16

Regular Model $112 $8

Assume the company's indirect production costs can be traced to four activities with the following cost drivers: Activity (Cost Driver) Purchase orders (number of purchase orders) Rework orders (number of rework orders) Product testing (number of tests) Machining (number of machine hours)

Cost Drivers Number of purchase orders Number of rework orders Number of tests Number of machine hours

Costs $84,000 $216,000 $450,000 $1,250,000

Deluxe Model 400 200 4,000 20,000

Regular Model 600 600 6,000 30,000

Required: A) Assume direct labor hours are the only cost-allocation base. What is the cost to manufacture one unit of each model?

B) Assume the activity-based costing method is used. What is the cost to manufacture one unit of each model?

C) Based on the results obtained from the activity-based costing method, what are the implications for pricing policy for the two models?

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Answer: A) Costs Direct materials Direct labor Indirect production costs Total costs B) Costs Direct materials Direct labor Indirect production costs Total cost

Deluxe Model $150 $16

Regular Model $112 $8

$80 $246

$40 $160

Deluxe Model $150.00 $16.00

Regular Model $112.00 $8.00

$153.52 $319.52

$30.81 $150.81

Deluxe Regular Activity (Cost Driver) Costs Model Model Purchase orders (number of orders) $84,000 $33,600 $50,400 Rework orders (number of orders) $216,000 $54,000 $162,000 Product testing (number of tests) $450,000 $180,000 $270,000 Machining (number of machine hours) $1,250,000 $500,000 $750,000 Total cost $767,600 $1,232,400 Cost per unit ($767,600/ 5,000; $1,232,400/40,000) $153.52 $30.81 C) Under activity-based costing, the Deluxe model is more costly to produce than under the traditional costing method. As a result, the selling price of the Deluxe model should be increased to cover the production costs. This will increase profitability of the company.

Diff: 3 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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19) Pilot Bank uses activity-based costing. Pilot Bank has the following activities, traceable costs, and cost drivers: Activities Open new accounts Process deposits Process withdrawals

Traceable Costs $40,000 $72,000 $100,000

Cost Drivers 1,000 accounts 360,000 deposits 200,000 withdrawals

The above activities are used by Downtown branch and North branch as follows: Activities Open new accounts Process deposits Process withdrawals

Downtown 200 40,000 15,000

North 400 20,000 18,000

Required: A) Compute the new account cost assigned to the North branch.

B) Compute the deposit processing cost assigned to the Downtown branch.

C) Compute the withdrawal processing cost assigned to the Downtown branch.

Answer: A) $16,000 = ($40,000/1,000) × 400 accounts B) $8,000 = ($72,000/360,000) × 40,000 C) $7,500 = ($100,000/200,000) × 15,000 Diff: 2 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

41 .

20) The manufacturing division of an electronics company uses activity-based costing. The company has identified three activities and the related cost drivers for indirect production costs.

Activity Activity 1 Activity 2 Activity 3

Cost Driver Direct materials cost Direct labor cost Kilowatt hours

Three types of products are produced. Direct costs and cost-driver activity for each product for a month are as follows:

Direct materials cost Direct labor cost Direct labor hours Kilowatt hours

Product A $75,000 $6,000 2,000 150,000

Product B $50,000 $1,000 1,000 200,000

Product C $125,000 $3,000 2,000 150,000

Indirect production costs for the month are as follows: Activity 1 Activity 2 Activity 3 Total

$30,000 20,000 16,000 $66,000

Required: A) Compute the indirect production costs allocated to each product using the ABC system.

B) Compute the indirect production costs allocated to each product using a traditional costing system.

Assume indirect production costs are allocated to each product using the cost driver: direct labor hours.

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Answer: A) Product A: Activity 1: ($75,000/$250,000) × $30,000 = Activity 2: ($6,000/$10,000) × $20,000 = Activity 3: (150,000/500,000) × $16,000 = Total

$9,000 $12,000 $4,800 $25,800

Product B: Activity 1: ($50,000/$250,000) × $30,000 = Activity 2: ($1,000/$10,000) × $20,000 = Activity 3: (200,000/500,000) × $16,000 = Total

$6,000 $2,000 $6,400 $14,400

Product C: Activity 1: ($125,000/$250,000) × $30,000 = Activity 2: ($3,000/$10,000) × $20,000 = Activity 3: (150,000/500,000) × $16,000 = Total

$15,000 $6,000 $4,800 $25,800

B) Product A: (2,000/5,000) × $66,000 = $26,400 Product B: (1,000/5,000) × $66,000 = $13,200 Product C: (2,000/5000) × $66,000 = $26,400 Diff: 2 LO: 4-7 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 4.8 Questions 1) ________ costs can be eliminated from a product. ________ costs cannot be eliminated from a product but can be reduced.

A) Value-added; Non-value-added B) Non-value-added; Value-added C) Resource; Activity D) Activity; Resource Answer: B Diff: 2 LO: 4-8 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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2) All of the following are differences between GPK and activity-based costing systems EXCEPT for ________.

A) GPK applies only variable costs to products. Activity-based costing systems apply fixed and variable costs to products.

B) GPK focuses on cost centers. Activity-based costing systems focus on activities.

C) GPK may have thousands of cost centers. Activity-based costing systems may have only a few activities.

D) GPK uses many cost pools. Activity-based costing systems use one cost pool.

Answer: D Diff: 3 LO: 4-8 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 3) A cost accounting system called GPK uses ________ cost pools to allocate ________.

A) 10-20; indirect manufacturing costs B) 1-10; direct manufacturing costs C) 400 to 2000; indirect manufacturing costs D) 1-20; direct manufacturing costs Answer: C Diff: 2 LO: 4-8 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 4) ________ use(s) the output of an activity-based cost accounting system to improve the operational control of an organization.

A) Cost accounting B) Cost-volume-profit models C) Activity-based management D) Traditional costing system Answer: C Diff: 2 LO: 4-8 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 5) Which of the following is an example of a value-added cost to a manufactured product?

A) the cost of handling inventory B) the cost of storing inventory C) changing the setup of production-line operations D) the depreciation expense of robots that assemble the product Answer: D Diff: 2 LO: 4-8 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

44 .

6) All of the following can be sources of benchmarks EXCEPT for ________.

A) competitors B) organization itself C) organizations with dissimilar processes D) organizations with similar processes Answer: C Diff: 1 LO: 4-8 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 7) A hospital radiology department has the following activities: Activity Number 1 2 3 4

Activity Description Repair X-ray equipment Taking X-ray with X-ray equipment Wait time between patients Repeating an X-ray because the X-ray technician forgot to load the film in the X-ray equipment

Which activity is a value-added activity?

A) Activity 1 B) Activity 2 C) Activity 3 D) Activity 4 Answer: B Diff: 2 LO: 4-8 AACSB: Analytic skills, Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 8) Why are more organizations adopting activity-based costing systems?

A) Computer technology has increased the costs of developing and operating ABC systems.

B) Indirect costs are more important in automated manufacturing environments.

C) Less competition.

D) Less diversity in product mix offered to customers.

Answer: B Diff: 2 LO: 4-8 AACSB: Analytic skills, Use of information technology Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

45 .

9) A value-added cost is the cost of an activity that a company can eliminate without affecting the product's value to the customer.

Answer: FALSE Diff: 1 LO: 4-8 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 10) Value-added costs are not necessary for most products.

Answer: FALSE Diff: 1 LO: 4-8 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 11) Storing inventories and transporting incomplete products in a plant are examples of non-value-added activities.

Answer: TRUE Diff: 1 LO: 4-8 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

46 .

12) Classify each step below as a value-added activity or a non-value-added activity. Use V for valueadded activity and N for non-value-added activity. _____ 1. Raw materials are transferred to a storage area pending use in production. _____ 2. Raw materials are transferred to the production area for use in products. _____ 3. Partially complete products are waiting to be worked on because equipment failed. _____ 4. Raw materials are placed on pallets before they are used in production. _____ 5. Finished products are transferred to the warehouse awaiting sale. _____ 6. Finished products are checked for defects by Quality Control Department. _____ 7. Partially complete products are transferred to the Finishing Department. _____ 8. Completed products are transported to another building that has the Packaging Department. _____ 9. Partially complete products are checked for defects by the supervisor. _____ 10. Units of partially complete products are assembled by union workers.

Answer: 1. N 2. N 3. N 4. N 5. N 6. N 7. N 8. N 9. N 10. V Diff: 2 LO: 4-8 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 13) List and explain five reasons why more firms are adopting activity-based costing systems.

Answer: 1. Fierce competitive pressure has resulted in shrinking profit margins.

2. Greater diversity in the types of products and services as well as customer classes results in greater operating complexity.

3. Indirect costs are more important in today's automated, world-class manufacturing environment than they were in the past.

4. The rapid pace of technological change has shortened product life cycles.

5. The costs associated with bad decisions that result from inaccurate cost estimates are substantial.

6. Computer technology has reduced the costs of developing and operating ABC systems.

Diff: 2 LO: 4-8 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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4.9 Questions 1) In designing an activity-based cost accounting system, what is the first step?

A) Collect data about costs and the physical flow of the cost-driver units.

B) Determine the relationships among cost objects, activities, and resources.

C) Determine the key components of the activity-based cost accounting system.

D) Calculate and interpret the new activity-based cost information.

Answer: C Diff: 2 LO: 4-9 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 2) Which of the following is NOT a valid step when designing an activity-based cost accounting system?

A) Determine the key components of the system.

B) Determine the relationships between cost objects, activities, and resources.

C) Collect relevant data concerning costs and cost drivers.

D) Use a process map to identify areas for operational improvement.

Answer: D Diff: 2 LO: 4-9 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 3) Examples using activity-based costing generally show that traditional costing systems ________ highvolume, simple products and ________ low-volume, complex products.

A) undercost; overcost B) overcost; undercost C) undercost; undercost D) overcost; overcost Answer: B Diff: 2 LO: 4-9 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 4) When comparing traditional costing systems to activity-based costing systems, the analysis reveals that ________.

A) high volume products are undercosted with traditional costing systems B) high volume products are overcosted with traditional costing systems C) low volume products are overcosted with traditional costing systems D) both high volume and low volume products are undercosted with traditional costing systems Answer: B Diff: 2 LO: 4-9 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

48 .

5) Determining the key components of an Activity-Based Costing (ABC) system is the first step in the design of an ABC system.

Answer: TRUE Diff: 1 LO: 4-9 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 6) Determining the relationships among cost objects, activities, and resources is the second step in the design of an ABC system.

Answer: TRUE Diff: 1 LO: 4-9 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 7) Collecting cost and operational data is the first step in the design of an Activity-Based Costing system.

Answer: FALSE Diff: 1 LO: 4-9 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

49 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 5 Relevant Information for Decision Making with a Focus on Pricing Decisions 5.1 Questions 1) Historical or past information has no ________ bearing on a decision made by management. Historical or past information can have a(n) ________ bearing on a decision made by management.

A) indirect; direct B) direct; indirect C) measurable; material D) material; significant Answer: B Diff: 1 LO: 5-1 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 2) Relevant information refers to ________ that will differ among the alternative courses of action.

A) future costs only B) future revenues only C) past costs and revenues D) future costs and revenues Answer: D Diff: 1 LO: 5-1 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 3) Historical or past information can have an indirect bearing on a manager's decision because ________.

A) the past decision resulted in a favorable outcome B) it can help predict the future C) the past decision resulted in a bonus for the manager D) the manager wants to repeat the past decisions made some of the time Answer: B Diff: 1 LO: 5-1 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs

1 .

4) When managers make decisions, the accountant's primary role is ________.

A) making the decision B) providing information that may be useful to the manager C) uncertain because it depends on the decision being made D) uncertain because it depends on the manager Answer: B Diff: 1 LO: 5-1 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 5) Information is relevant in business decisions if it is a(n) ________.

A) expected future revenue or it differs among alternatives B) expected future revenue and it differs among alternatives C) past revenue and it differs among alternatives D) expected future revenue that differs from past revenue Answer: B Diff: 1 LO: 5-1 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 6) Cantrall Company is trying to decide which product to manufacture. Expected direct materials costs are $4.00 per unit for each product. The expected direct labor costs are $2.00 per unit for one product and $4.00 per unit for another product. In choosing between the two products, the direct materials costs are ________ and the direct labor costs are ________.

A) relevant; irrelevant B) irrelevant; relevant C) relevant; relevant D) irrelevant; irrelevant Answer: B Diff: 2 LO: 5-1 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

2 .

7) A company is trying to decide which product to manufacture. The following information is available: Costs Direct Materials 1 Direct Materials 2 Direct Materials 3 Direct Labor

Product A $2.00 per unit $1.25 per unit $0.50 per unit $0.70 per unit

Product B $2.20 per unit $1.50 per unit $0.80 per unit $0.70 per unit

Which product cost is irrelevant to the decision?

A) Direct Materials 1 B) Direct Materials 2 C) Direct Materials 3 D) Direct Labor Answer: D Diff: 2 LO: 5-1 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 8) Relevant information is the historical costs and revenues that differ due to alternative courses of action.

Answer: FALSE Diff: 2 LO: 5-1 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 9) Historical data may have a direct bearing on a decision made today.

Answer: FALSE Diff: 2 LO: 5-1 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 10) When managers make decisions, the accountant is seen as the technical expert on financial analysis.

Answer: TRUE Diff: 1 LO: 5-1 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs

3 .

5.2 Questions 1) When managers make decisions, the decision process used has the following steps in the order of occurrence: A) Historical and Other Information, Prediction Model, Prediction, Decision Model, Decision, Implementation, Feedback B) Historical and Other Information, Decision Model, Prediction Method, Implementation, Decision, Feedback C) Historical and Other Information, Decision Model, Prediction Method, Decision, Implementation, Feedback D) Historical and Other Information, Prediction Method, Prediction, Decision Model, Decision, Implementation, Feedback Answer: D Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 2) When managers use the decision process to make decisions, which information is used to make predictions about the amount of expected sales for Product XYZ? A) historical data from the accounting system only B) data outside the accounting system only C) data outside the organization only D) A and B Answer: D Diff: 1 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 3) A manager is trying to decide which product to emphasize in promotion and advertising efforts.

Following the decision process used by managers, predictions about the amounts of future sales of the two products are used as input to the ________.

A) prediction model B) prediction method C) decision model D) evaluation model Answer: C Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs

4 .

4) When managers use the decision process to make decisions, what is the output after using the prediction method?

A) decision B) implementation C) predictions D) evaluation Answer: C Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 5) If perfectly accurate and relevant information is not available for decision making, the accountant should consider using information that is ________.

A) precise but irrelevant B) imprecise but irrelevant C) imprecise but relevant D) imprecise but timely Answer: C Diff: 1 LO: 5-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 6) In determining whether to purchase a labor-saving machine, extreme resistance to the machine by employees would be a(n) ________.

A) relevant qualitative factor B) relevant quantitative factor C) irrelevant qualitative factor D) irrelevant quantitative factor Answer: A Diff: 2 LO: 5-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 7) In considering whether to produce a single product, the associated direct materials and direct labor costs would probably be ________.

A) relevant qualitative factors B) relevant quantitative factors C) irrelevant qualitative factors D) irrelevant quantitative factors Answer: B Diff: 2 LO: 5-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

5 .

8) In decision making situations, ________ aspects may dominate quantitative aspects in many decisions.

A) relevant B) precision C) accuracy D) qualitative Answer: D Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 9) What are the qualitative aspects of a decision?

A) those which are not relevant to a decision B) those with a concrete dollar amount C) those for which measurement in dollars and cents is difficult and imprecise D) those which are always relevant to a decision Answer: C Diff: 2 LO: 5-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 10) Which of the following statements is FALSE about information used for decision making?

A) Precise but irrelevant information is worthless for decision making.

B) Imprecise but relevant information can be useful for decision making.

C) Relevant information must be reasonably accurate but not precisely so.

D) Relevant information must be totally accurate or it is useless.

Answer: D Diff: 2 LO: 5-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 11) Precise but irrelevant information is worthless for decision making.

Answer: TRUE Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 12) The degree to which information is relevant or precise often depends on the degree to which it is qualitative or quantitative.

Answer: TRUE Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs

6 .

13) Accountants are sometimes forced to trade relevant information for accurate information.

Answer: TRUE Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 14) Imprecise but relevant information can be useful.

Answer: TRUE Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 15) Qualitative aspects of information are those for which measurement in dollars and cents is easy and precise.

Answer: FALSE Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 16) Qualitative aspects of information can carry more weight than quantitative aspects in a business decision.

Answer: TRUE Diff: 2 LO: 5-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 5.3 Questions 1) For internal decision-making purposes, many companies use the income statement using the ________ approach. For external reporting, most companies use the income statement using the ________ approach.

A) absorption; absorption B) absorption; contribution C) contribution; absorption D) full costing; variable costing Answer: C Diff: 1 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

7 .

2) It is misleading to use the absorption costing income statement to predict the effect of changes in sales volume because ________.

A) variable production costs per unit do not change with small changes in sales volume B) total fixed production costs do not change with small changes in sales volume C) fixed production costs per unit do not change with small changes in sales volume D) total variable production costs do not change with small changes in sales volume Answer: B Diff: 3 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 3) Variable selling expenses affect the calculation of ________ on the contribution income statement.

Variable selling expenses do NOT affect the calculation of ________ on the absorption income statement.

A) gross margin; contribution margin B) operating income; contribution margin C) contribution margin; gross margin D) gross margin; operating income Answer: C Diff: 2 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 4) Fixed selling expenses affect the calculation of ________ on the contribution income statement.

Fixed selling expenses do NOT affect the calculation of ________ on the absorption income statement.

A) contribution margin; gross margin B) gross margin; contribution margin C) operating income; gross margin D) operating income; contribution margin Answer: C Diff: 2 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

8 .

5) Fixed indirect production costs affect the calculation of ________ on the absorption income statement.

Fixed indirect production costs do NOT affect the calculation of ________ on the contribution income statement.

A) contribution margin; gross margin B) gross margin; contribution margin C) operating income; gross margin D) contribution margin; operating income Answer: B Diff: 2 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 6) Variable administrative expenses affect the calculation of ________ on the contribution income statement. Variable administrative expenses do NOT affect the calculation of ________ on the absorption income statement.

A) gross margin; contribution margin B) contribution margin; gross margin C) operating income; contribution margin D) gross margin; operating income Answer: B Diff: 2 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 7) Under absorption costing, all ________ costs are product or inventoriable costs.

A) indirect production B) direct and indirect production C) direct production D) selling and administrative Answer: B Diff: 1 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

9 .

8) Under the contribution approach to the income statement, the difference between sales and ________ is contribution margin.

A) cost of goods sold B) manufacturing costs C) all variable expenses D) all fixed expenses Answer: C Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 9) The contribution approach to the income statement emphasizes the distinction between ________.

A) value chain functions B) different functional areas in a firm C) different business segments D) variable and fixed costs Answer: D Diff: 1 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 10) Using absorption costing, the primary classifications of costs on the income statement are by ________.

A) cost behavior patterns B) manufacturing departments C) major management functions D) manufacturing segments Answer: C Diff: 2 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

10 .

11) Santana Company has no beginning and ending inventories, and reports the following information for its only product: Direct materials used Direct labor Fixed indirect manufacturing Variable indirect manufacturing Variable selling and administrative Fixed selling and administrative Units produced and sold

$250,000 $120,000 $60,000 $20,000 $50,000 $10,000 40,000

Santana Company uses the absorption approach to prepare the income statement. What is the product cost per unit?

A) $11.00 B) $11.25 C) $12.00 D) $12.75 Answer: B Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

11 .

12) Camile Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$100,000 $80,000 $50,000 $220,000 $20,000 $75,000 $84 10,000

Camile Company uses the absorption approach to prepare the income statement. What is the product cost per unit?

A) $20 B) $25 C) $27.50 D) $32.50 Answer: B Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 13) The contribution approach to the income statement offers several benefits to decision makers. Which of the following is NOT a benefit of this approach?

A) This approach makes it easier to understand the impact of changes in sales volume on operating income.

B) This approach stresses the role of fixed costs in operating income.

C) This approach is used with CVP analysis.

D) This approach is accepted by U.S. Generally Accepted Accounting Principles.

Answer: D Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

12 .

14) Sanchez Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$100,000 $80,000 $100,000 $170,000 $20,000 $90,000 $100 12,000

Sanchez Company uses the absorption approach to prepare the income statement. What is the manufacturing cost of goods sold?

A) $270,000 B) $300,000 C) $390,000 D) $500,000 Answer: B Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

13 .

15) Gonzalez Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$300,000 $80,000 $100,000 $190,000 $20,000 $90,000 $50 10,000

Gonzalez Company uses the absorption approach to prepare the income statement. What is the gross margin?

A) $0 B) $20,000 C) $100,000 D) $120,000 Answer: A Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 16) When absorption costing is used for the income statement, the difference between sales and ________ is gross margin.

A) manufacturing cost of goods sold B) selling expenses C) selling and administrative expenses D) variable expenses Answer: A Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

14 .

17) Garcia Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$270,000 $180,000 $130,000 $150,000 $120,000 $60,000 $99 30,000

Garcia Company uses the absorption approach to prepare the income statement. What is the operating income?

A) $2,060,000 B) $2,120,000 C) $2,240,000 D) $2,970,000 Answer: A Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

15 .

18) Gomez Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$470,000 $180,000 $130,000 $150,000 $120,000 $60,000 $100 30,000

Gomez Company uses the contribution approach to prepare the income statement. What is the operating income?

A) $1,890,000 B) $2,100,000 C) $2,190,000 D) $2,250,000 Answer: A Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 19) Under absorption costing, fixed manufacturing costs are used to calculate ________ on the income statement.

A) contribution margin B) manufacturing cost of goods sold C) total variable costs D) total fixed costs Answer: B Diff: 3 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

16 .

20) The ________ approach is useful for short-run pricing decisions and the ________ approach is useful for long-run pricing decisions.

A) contribution; absorption B) absorption; contribution C) full costing; target costing D) full costing; contribution Answer: A Diff: 1 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 21) On the income statement, the absorption approach separates manufacturing costs from ________.

A) some nonmanufacturing costs B) all nonmanufacturing costs C) all variable costs D) all fixed costs Answer: B Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

17 .

22) Winter Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$200,000 $80,000 $100,000 $300,000 $20,000 $60,000 $150 10,000

Winter Company uses the absorption approach to prepare the income statement. What is the gross margin?

A) $740,000 B) $1,040,000 C) $1,100,000 D) $1,160,000 Answer: C Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

18 .

23) Latinovich Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$200,000 $80,000 $180,000 $150,000 $130,000 $160,000 $150 10,000

Latinovich Company uses the contribution approach to prepare the income statement. What is the contribution margin?

A) $600,000 B) $910,000 C) $930,000 D) $1,090,000 Answer: C Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

19 .

24) Zeman Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$200,000 $180,000 $100,000 $150,000 $120,000 $60,000 $75 10,000

Zeman Company uses the contribution approach to prepare the income statement. What is the contribution margin?

A) $150,000 B) $190,000 C) $250,000 D) $370,000 Answer: B Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

20 .

25) Schaefer Company has no beginning and ending inventories, and reports the following data about its only product: Direct materials used Direct labor Fixed indirect manufacturing Fixed selling and administrative Variable indirect manufacturing Variable selling and administrative Selling price(per unit) Units produced and sold

$200,000 $80,000 $100,000 $150,000 $20,000 $60,000 $50 10,000

Schaefer Company uses the contribution approach to prepare the income statement. What is the contribution margin?

A) $100,000 B) $140,000 C) $200,000 D) $220,000 Answer: B Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 26) The absorption costing approach to the income statement is used by companies for external financial reporting.

Answer: TRUE Diff: 2 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 27) The absorption approach to the income statement emphasizes the distinction between fixed and variable costs.

Answer: FALSE Diff: 2 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

21 .

28) On the income statement, the contribution margin is computed using variable manufacturing costs and variable selling and administrative costs.

Answer: TRUE Diff: 2 LO: 5-3 AACSB: Reflective thinking skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

22 .

29) Whitney Company has just completed its first year of operations. The company's accountant has prepared an absorption costing income statement for the year as seen below: Sales (35,000 units at $25) Beginning Inventory Cost of Goods Manufactured (35,000 × $12) + $160,000 = Cost of Goods Available Ending Inventory Cost of Goods Sold Gross Margin Selling and Administrative Expenses Net Income The variable production costs per unit are determined as follows: Direct materials Direct labor Variable production Total variable production costs

$875,000 0 580,000 580,000 0 580,000 295,000 280,000 $15,000

$5 6 1 $12

The company's fixed production costs are $160,000 per year. The company's selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit in variable expenses.

Required: Prepare the company's income statement in the contribution format.

Answer: Sales $875,000 Variable Expenses: Production Costs(35,000 × $12) $420,000 Selling and Administrative(35,000 × $2) 70,000 Total Variable Expenses 490,000 Contribution Margin 385,000 Fixed Expenses: Production Costs 160,000 Selling and Administrative 210,000 Total Fixed Expenses 370,000 Net Income $15,000 Diff: 3 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

23 .

30) Stewart Company has no beginning and ending inventories, and reports the following information about its only product: Direct materials used Direct labor Variable indirect production Fixed indirect production Variable selling and administrative expenses Fixed selling and administrative expenses

$29,000 $17,000 $13,000 $18,000 $22,000 $11,000

Units produced and sold Selling price per unit

10,000 $25

Required: A) Prepare an income statement using the contribution approach.

B) Prepare an income statement using the absorption approach.

24 .

Answer: A) Sales (10,000 × $25) Variable expenses: Direct materials Direct labor Variable indirect production Variable manufacturing cost of goods sold Variable selling and admin. expenses Total variable expenses Contribution margin Fixed expenses: Indirect production Selling and admin.

Total fixed expenses Operating income

$250,000 $29,000 17,000 13,000 59,000 22,000 81,000 169,000 18,000 11,000 29,000 $140,000

B) Sales $250,000 Manufacturing cost of goods sold: Direct materials $29,000 Direct labor 17,000 Variable indirect production 13,000 Fixed indirect production 18,000 Manufacturing cost of goods sold 77,000 Gross margin 173,000 Selling and administrative expenses 33,000 Operating income $140,000 Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations

25 .

31) Margaret Company has been producing and selling 100,000 units per year. They have excess capacity, and there are no beginning and ending inventories. The following budget was prepared for the next year: Selling price per unit Direct materials per unit Direct labor per unit Variable manufacturing overhead per unit Variable selling and administrative per unit Total fixed manufacturing overhead costs Total fixed selling and administrative

$11.00 $5.00 $3.00 $1.00 $0.25 $50,000 $15,000

Required: A) Prepare an income statement using the contribution approach.

B) Prepare an income statement using the absorption approach.

Answer: A) Sales (100,000 × $11.00) Variable expenses: Direct materials Direct labor Variable overhead Variable manufacturing cost of goods sold Variable selling and admin. expense Total variable expenses Contribution margin Fixed expenses: Manufacturing Selling and admin. expense Total fixed expenses Operating income

$1,100,000 500,000 300,000 100,000 900,000 25,000 925,000 175,000 50,000 15,000 65,000 $110,000

B) Sales $1,100,000 Manufacturing cost of goods sold: Direct materials $500,000 Direct labor 300,000 Variable overhead 100,000 Fixed overhead 50,000 Manufacturing cost of goods sold 950,000 Gross margin 150,000 Selling and administrative expense 40,000 Operating income $110,000 Diff: 2 LO: 5-3 AACSB: Analytic skills Learning Outcome: Define basic managerial accounting concepts and prepare an income statement for different types of organizations 26 .

5.4 Questions 1) When evaluating short-term special order decisions, which of the following types of income statements should be used?

A) method used for external reporting B) method that follows U.S. Generally Accepted Accounting Principles C) absorption approach D) contribution approach Answer: D Diff: 1 LO: 5-4 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 2) In special order situations, unit costs are useful for predicting total ________. In special order situations, unit costs are not useful for predicting total ________.

A) mixed costs; step costs B) step costs; mixed costs C) variable costs; fixed costs D) fixed costs; variable costs Answer: C Diff: 2 LO: 5-4 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 3) Franklin Company uses activity-based costing, and normally produces 1,000,000 units per month. At this level of production, the costs per unit are as follows: Direct materials used Direct labor Variable indirect production Setup costs

$14 $6 $1 $3

For 1,000,000 units, 500 setups are required at a cost of $6,000 per setup. The company has received a special order for 100,000 units at $22 per unit. The company has excess capacity. The company estimates that 5 setups will be required for the special order. What is the cost of the special order?

A) $2,100,000 B) $2,130,000 C) $2,400,000 D) $2, 430,000 Answer: B Diff: 3 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

27 .

4) Oak Creek Company uses activity-based costing, and normally produces 1,000,000 units per month. At this level of production, the costs per unit are as follows: Direct materials used Direct labor Variable indirect production Setup costs

$15 $6 $1 $5

For 1,000,000 units, 500 setups are required at a cost of $10,000 per setup. The company has received a special order for 100,000 units at $22 per unit. The company has excess capacity. The company estimates that 5 setups will be required for the special order. Variable selling costs of $1 per unit will also be incurred for the special order. What is the cost of the special order?

A) $2,300,000 B) $2,350,000 C) $2,700,000 D) $2,800,000 Answer: B Diff: 3 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 5) Which of the following items is usually NOT important to special order decisions?

A) affect of special order on regular business B) whether idle capacity is available C) total fixed costs D) increase in variable costs per unit due to special order Answer: C Diff: 2 LO: 5-4 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 6) Missouri Company has a current production capacity level of 200,000 units per month. At this level of production, variable costs are $0.60 per unit and fixed costs are $0.50 per unit. Current monthly sales are 173,000 units. Gates Company has contacted Missouri Company about purchasing 20,000 units at $1.00 each. Current sales would not be affected by the special order and no additional fixed costs would be incurred on the special order. If the order is accepted, what is Missouri Company's change in profits?

A) $8,000 increase B) $8,000 decrease C) $10,000 increase D) $10,000 decrease Answer: A Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

28 .

7) Wisconsin Company has a current production capacity level of 200,000 units per month. At this level of production, variable costs are $1.00 per unit and fixed costs are $0.50 per unit. Current monthly sales are 164,500 units. Gates Company has contacted Wisconsin Company about purchasing 20,000 units at $2.00 each. Current sales would not be affected by the special order and no additional fixed costs would be incurred on the special order. Variable costs would increase $0.10 per unit with the special order. If the order is accepted, what is Wisconsin Company's increase in operating income?

A) $8,000 B) $18,000 C) $20,000 D) $24,000 Answer: B Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 8) Each month Fig Company produces 11,000 units of a product that sells for $18 per unit, and has variable costs of $12 per unit. Total fixed costs for the month are $77,000. A special order is received for 5,000 units at a price of $14 per unit. Fig Company has adequate capacity for the special order. If Fig Company accepts the special order, what is the profit to Fig Company from the special order?

A) $0 B) $10,000 C) $22,000 D) $99,000 Answer: B Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 9) Each month Newton Company produces 30,000 units of a product that has variable costs of $70 per unit. Total fixed costs for the month are $99,000. A special order is received for 1,000 units at a price of $80 per unit. Newton Company has adequate capacity for the special order. If Newton Company accepts the special order, what is the profit to Newton Company from the special order?

A) $0 B) $6,700 C) $7,000 D) $10,000 Answer: D Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

29 .

10) Minnesota Company has no beginning and ending inventories, and has the following data about its only product: Fixed manufacturing costs Fixed selling and administrative costs Variable manufacturing costs Variable selling and administrative costs Selling price(per unit)

$92,000 $69,000 $1,030,000 $120,000 $125

Units produced and sold

23,000

Assume there is excess capacity. The company has received a special order for 1,000 units at $60.00 per unit. If the special order is accepted, what will be the effect on net income?

A) net income increases by $3,000 B) net income increases by $6,000 C) net income increases by $10,000 D) net income increases by $15,220 Answer: C Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 11) Dakota Company has been producing and selling 42,000 hats a year. There are no beginning and ending inventories. The Dakota Corporation has the capacity to produce 52,000 hats. The following data is available: Selling price per unit Variable manufacturing costs per unit Variable selling and administrative costs per unit

$30 $13 $7

Total fixed manufacturing costs Total fixed selling and administrative costs

$126,000 $84,000

If a special order is accepted for 10,000 hats at a price of $25 per unit, net income would ________.

A) increase by $20,000 B) increase by $50,000 C) increase by $90,000 D) decrease by $24,000 Answer: B Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

30 .

12) Arkansas Company has no beginning and ending inventories, and has obtained the following data for its only product: Selling price per unit Direct materials used Direct labor Variable factory overhead Variable selling and administrative expenses Fixed factory overhead Fixed selling and administrative expenses

$65 $150,000 $225,000 $140,000 $60,000 $370,000 $30,000

Units produced and sold

20,000

Assume there is excess capacity. There is a special order outstanding for 1,000 units at $40.00 per unit. If Arkansas Company accepts the special order, net income would ________.

A) increase by $40,000 B) increase by $11,250 C) decrease by $28,750 D) decrease by $10,000 Answer: B Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 13) Kansas Company uses activity-based costing. The company produces and sells 20,000 units at $22 per unit. Kansas Company's product cost is calculated as follows: Variable costs Fixed costs Setup costs Total costs

$10 per unit $2 per unit $3 per unit $15 per unit

A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units. Kansas Company has received a special order to sell 5,000 units at $12 per unit. Kansas Company has excess capacity available, but these 5,000 units would require 60 setups. If Kansas Company accepts the special order, what is the increase or decrease in net income?

A) $0 B) decrease $5,000 C) decrease $15,000 D) increase $2,800 Answer: D Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

31 .

14) Nebraska Company uses activity-based costing. The company produces and sells 20,000 units at $20 per unit. Nebraska Company's product cost is calculated as follows: Variable costs Fixed costs Setup costs Total costs

$8 per unit $2 per unit $3 per unit $13 per unit

A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units. Nebraska Company has received a special order to sell 5,000 units at $11 per unit. Nebraska Company has excess capacity available, but these 5,000 units would require 60 setups. If Nebraska Company accepts the special order, what is Nebraska's increase in net income?

A) increase $5,000 B) increase $7,800 C) decrease $2,800 D) decrease $5,000 Answer: B Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 15) A small appliance manufacturer is deciding whether to accept or reject a special order for 1,750 appliances. There is sufficient capacity available for the special order. What is relevant information for the decision whether to accept or reject the special order?

A) the cost of the parts for the 1,750 appliances B) the supervisor's salary in the production area C) the depreciation on assembly equipment D) the accountant's salary Answer: A Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 16) In a special order decision, which of the following costs are usually irrelevant to the decision?

A) variable manufacturing costs B) fixed manufacturing costs C) variable selling costs D) variable indirect production costs Answer: B Diff: 2 LO: 5-4 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs

32 .

17) Surly Company makes small boats. The company produces and sells 5,500 boats per year at a selling price of $160 per boat. Surly Company has excess capacity and is trying to get special orders. A new retailer wants to purchase 1,000 boats for $125 per boat. Surly Company is going to decline the special order because it costs $130 to make a single boat as seen below: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total

$50 per unit $55 per unit $10 per unit $15 per unit $130 per unit

Required: A) Should Surly Company reject the special order from the new retailer? Why? B) How much will Surly's net income increase with the special offer?

Answer: A) No, because net income will increase with the special order.

B) The relevant cost of making a boat is: Direct materials $50 per unit Direct manufacturing labor $55 per unit Variable manufacturing overhead $10 per unit Total cost $115 per unit So, the profit on each boat will be $10 per boat, which equals $125 - $115. $10 times 1,000 boats equals $10,000 increase in net income with the special order.

Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

33 .

18) Texas Company produces and sells 22,000 units of a single product. Costs associated with this level of production are as follows: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling costs

$15 per unit $45 per unit $25 per unit $40 per unit $10 per unit

The product normally sells for $160 per unit. Texas Company has received a special order to sell 2,000 units at $120 per unit. With the special order, variable selling costs will increase by $5 per unit to $15 per unit. Texas Company has excess production capacity.

Required: Compute the amount by which the operating income of Texas Company would change if the special order was accepted.

Answer: Additional sales (2,000 × $120) $240,000 Variable costs: Direct materials (2,000 × $15) $30,000 Direct labor (2,000 × $45) $90,000 Variable selling (2,000 × $15) $30,000 Variable manuf. overhead (2,000 × $25) $50,000 Additional operating income $40,000 Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs

34 .

19) Stangle Company manufactures ties. When 28,000 ties are produced, the costs per unit are: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling Fixed selling

$0.60 $3.00 $1.20 $1.60 $0.80 $1.13

The ties normally sell for $22 each. The company has received a special order for 2,000 ties at $8.00 per tie.

The company will incur an additional variable selling cost of $1.50 per unit with the special order. The company has excess capacity.

Required: Compute the amount by which the operating income would change if the order were accepted.

Answer: Additional sales (2,000 × $8.00) $16,000 Additional expenses: Direct materials (2,000 × $0.60) $1,200 Direct labor (2,000 × $3.00) 6,000 Variable manuf. overhead (2,000 × $1.20) 2,400 Variable selling (2,000 × $2.30) 4,600 14,200 Additional operating income $1,800 Diff: 2 LO: 5-4 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 5.5 Questions 1) In imperfect competition, if prices have little or no effect on sales volume, demand is ________.

A) stable B) uniform C) highly elastic D) highly inelastic Answer: D Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None

35 .

2) In imperfect competition, firms should produce and sell units until the ________ equals the ________.

A) average revenue; marginal cost B) marginal revenue; average revenue C) average revenue; average cost D) marginal revenue; marginal cost Answer: D Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 3) In managerial accounting, ________ can be a reasonable approximation of marginal cost in many situations.

A) fixed cost B) mixed cost C) step cost D) variable cost Answer: D Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 4) In perfect competition, all firms charge the same market price. The only decision for managers is ________.

A) how to minimize costs B) how to maximize average revenue C) how much to produce D) how to minimize marginal costs Answer: C Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 5) ________ is the additional cost resulting from producing and selling one additional unit.

A) Marginal cost B) Common cost C) Opportunity cost D) Target cost Answer: A Diff: 1 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None

36 .

6) Price elasticity measures the ________.

A) effect of sales volume changes on prices B) effect of cost changes on prices C) effect of price changes on sales volume D) customers' attitudes toward price changes Answer: C Diff: 1 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 7) In perfect competition, the profit-maximizing volume is the quantity at which ________.

A) marginal cost equals price B) contribution margin equals fixed cost C) marginal revenue equals price D) price exceeds marginal cost Answer: A Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 8) In perfect competition, additional sales will be profitable if ________.

A) the marginal cost is less than marginal revenue B) sales price exceeds the variable product cost C) total variable cost is less than sales price D) the fixed cost equals the contribution margin Answer: A Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 9) In imperfect competition, ________.

A) a firm will produce as many units as it can sell B) the price a firm charges for a unit influences the quantity of units it sells C) a firm does not have to reduce prices to generate additional sales D) a firm should produce and sell units until the marginal revenue exceeds the marginal cost Answer: B Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None

37 .

10) If a small price increase causes large volume declines, demand is highly inelastic.

Answer: FALSE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 11) Marginal cost is the additional cost resulting from producing and selling one additional unit.

Answer: TRUE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 12) With perfect competition, at some point marginal costs begin to rise with increases in production because facilities become inefficient.

Answer: TRUE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 13) With perfect competition, marginal revenue is the additional revenue resulting from the sale of an additional unit.

Answer: TRUE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 14) In perfect competition, the marginal revenue curve is a vertical line equal to the price per unit at all volumes of sales.

Answer: FALSE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 15) In perfect competition, the profit-maximizing volume is the quantity at which the difference between the sales price and marginal cost is at its greatest.

Answer: FALSE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None

38 .

16) In imperfect competition, a firm must decrease the sales price to generate additional sales.

Answer: TRUE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 17) In imperfect competition, marginal revenue usually decreases as volume increases.

Answer: TRUE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 18) In managerial accounting, variable cost is a reasonable approximation of marginal cost in many situations.

Answer: TRUE Diff: 2 LO: 5-5 AACSB: Reflective thinking skills Learning Outcome: None 5.6 Questions 1) In the long run, the selling price of a product should cover ________.

A) all variable costs only B) all variable costs and some fixed costs C) all fixed costs only D) all variable costs and all fixed costs Answer: D Diff: 1 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None 2) Courts in the United States have ruled that pricing is predatory only if companies set prices below the ________.

A) average full cost B) average variable cost C) average production cost D) average fixed cost Answer: B Diff: 1 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None

39 .

3) Many managers set prices by cost plus pricing. What is cost plus pricing? Assume it is a long run decision.

A) average cost per unit plus markup per unit B) average target cost plus markup per unit C) average cost per unit minus markup per unit D) average target cost minus markup per unit Answer: A Diff: 2 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None 4) Predatory pricing occurs when a firm sets ________.

A) prices below the average cost for each product B) prices below the production cost for each product C) prices below their competitors' prices D) prices so low that competitors are driven out of the market Answer: D Diff: 2 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None 5) Discriminatory pricing occurs when a firm sets ________.

A) prices below their competitors' prices B) different prices for a product in different regions of the United States due to a cost differential in providing the product C) different prices for different customers for the same product or service D) discounts for all customers if they pay within a certain number of days after purchase Answer: C Diff: 2 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None 6) In the short run, when managers set prices for products, the minimum selling price should be equal to ________.

A) all variable costs of producing, selling and distributing the good or service B) all fixed costs of producing, selling and distributing the good or service C) all fixed and variable costs of producing, selling, and distributing the good or service D) all manufacturing costs Answer: A Diff: 2 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None

40 .

7) Discriminatory pricing is the act of charging different prices to different customers for the same product or service.

Answer: TRUE Diff: 1 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None 8) Pricing is not discriminatory if it reflects a cost differential incurred in providing the good or service.

Answer: TRUE Diff: 2 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None 9) Overcapacity in some countries often causes aggressive pricing policies, particularly for a company's imported goods.

Answer: FALSE Diff: 2 LO: 5-6 AACSB: Dynamics of the global economy Learning Outcome: None 10) Markup is the amount by which cost exceeds price.

Answer: FALSE Diff: 1 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None 11) In the short run, the sales price of a good or service must be high enough to cover all costs.

Answer: FALSE Diff: 2 LO: 5-6 AACSB: Reflective thinking skills Learning Outcome: None

41 .

5.7 Questions 1) Frequently, companies do not use a contribution approach to pricing because ________.

A) it promotes price stability B) it provides the best defense for legal challenges C) of a fear of underpricing products by using variable costs to price products D) it is not sensitive to cost-volume-profit relationships Answer: C Diff: 1 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None 2) Which of the following is an advantage of the absorption approach to pricing products?

A) It displays variable and fixed cost behavior patterns.

B) It offers insights into the long run and short run effects of cutting prices on special orders.

C) It can easily address changes in sales volume.

D) It recovers all costs necessary for a firm to stay in business.

Answer: D Diff: 2 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None 3) The total of all production costs plus the total of all ________ costs equals the full cost of a product.

A) selling B) distribution C) distribution and marketing D) selling and administrative Answer: D Diff: 2 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None

42 .

4) Kulvekowski Company has budgeted sales of $30,000 with the following budgeted costs: Direct materials Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative costs Fixed selling and administrative costs

$6,300 $4,100 $3,700 $5,600 $2,400 $3,200

What is the average target markup percentage for setting prices as a percentage of total costs?

A) 15.7% B) 18.6% C) 20.1% D) none of the above Answer: B Diff: 2 LO: 5-7 AACSB: Analytic skills Learning Outcome: None 5) Barber Company has budgeted sales of $30,000 with the following budgeted costs: Direct materials Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative costs Fixed selling and administrative costs

$6,300 $4,100 $3,700 $5,600 $2,400 $3,200

What is the average target markup percentage for setting prices as a percentage of total variable costs?

A) 45% B) 57% C) 82% D) none of the above Answer: C Diff: 2 LO: 5-7 AACSB: Analytic skills Learning Outcome: None

43 .

6) Brankov Company has budgeted sales of $30,000 with the following budgeted costs: Direct materials Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative costs Fixed selling and administrative costs

$6,300 $4,100 $3,700 $5,600 $2,400 $3,200

What is the average target markup percentage for setting prices as a percentage of variable manufacturing costs?

A) 53% B) 76% C) 113% D) none of the above Answer: C Diff: 2 LO: 5-7 AACSB: Analytic skills Learning Outcome: None 7) Butters Company has budgeted sales of $30,000 with the following budgeted costs: Direct materials Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative costs Fixed selling and administrative costs

$6,300 $4,100 $3,700 $5,600 $2,400 $3,200

What is the average target markup percentage for setting prices as a percentage of total manufacturing costs?

A) 34% B) 52% C) 61% D) none of the above Answer: B Diff: 2 LO: 5-7 AACSB: Analytic skills Learning Outcome: None

44 .

8) Full cost means the total of all variable manufacturing costs and all fixed manufacturing costs.

Answer: FALSE Diff: 2 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None 9) Full cost means the total of all manufacturing costs.

Answer: FALSE Diff: 2 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None 10) Managers may use different markup rates for different categories of costs.

Answer: TRUE Diff: 1 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None 11) Prices based on variable costs represent a contribution approach to pricing.

Answer: TRUE Diff: 1 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None 12) The total manufacturing cost and full cost approaches to pricing often fail to highlight different cost behavior patterns.

Answer: TRUE Diff: 2 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None 13) A company will bid near the minimum sales price to establish a presence in new markets or with a new customer.

Answer: TRUE Diff: 2 LO: 5-7 AACSB: Reflective thinking skills Learning Outcome: None

45 .

5.8 Questions 1) In target costing, managers design a product so that the product's cost does not exceed ________.

A) the product's production costs B) the product's nonproduction costs C) the product's production and nonproduction costs D) the product's target cost Answer: D Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None 2) How do managers obtain the target cost for a new product under consideration? Assume the market price per unit is known and it cannot be influenced by management.

A) the sum of all production and nonproduction costs B) the sum of all production costs C) price per unit minus gross profit per unit D) the sum of all variable costs Answer: C Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None 3) If the projected cost for a new product to be manufactured exceeds the target cost, what measures can the company undertake to reduce the projected cost?

A) kaizen costing B) value engineering C) supplier negotiations D) all of the above Answer: D Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None

46 .

4) Management cannot influence the price of a new product. The market price is $100 per unit. The estimated production cost is $30 per unit. The estimated nonproduction cost is $40 per unit. If the gross profit is 40 percent of the market price, what is the target cost of the new product?

A) $30 B) $40 C) $60 D) $70 Answer: C Diff: 2 LO: 5-8 AACSB: Analytic skills Learning Outcome: None 5) Michigan Company has budgeted the following costs for the production of its only product: Direct Materials Direct Labor Variable indirect production costs Fixed indirect production costs Variable selling and administrative costs Fixed selling and administrative costs Total Costs

$35,000 25,000 30,000 15,000 7,500 12,500 $125,000

Michigan Company wants a profit of $50,000, and expects to produce 1,000 units. The market price is $150 per unit. What is the target cost per unit of the product?

A) $100 per unit B) $125 per unit C) $150 per unit D) $175 per unit Answer: A Diff: 2 LO: 5-8 AACSB: Analytic skills Learning Outcome: None

47 .

6) Illinois Company has budgeted the following costs for the production of its only product: Direct Materials Direct Labor Variable indirect production costs Fixed indirect production costs Variable selling and administrative costs Fixed selling and administrative costs Total Costs

$35,000 25,000 30,000 15,000 7,500 12,500 $125,000

Illinois Company has a target profit of $40,000. The company will produce 1,000 units. The market price is $160 per unit. What is the target cost per unit?

A) $40 B) $120 C) $125 D) $165 Answer: B Diff: 2 LO: 5-8 AACSB: Analytic skills Learning Outcome: None 7) Chocolate Company is considering the production of a new product. Chocolate Company has the following data available: Expected sales(units) over product life Variable production costs Variable selling costs Annual fixed production costs Annual fixed selling costs Research and development costs

15,000 $42 per unit $16 per unit $15,000 $5,000 $184,000

What is the total variable cost of the product over the product life cycle?

A) $204,000 B) $716,000 C) $870,000 D) $880,000 Answer: C Diff: 2 LO: 5-8 AACSB: Analytic skills Learning Outcome: None

48 .

8) Rainbow Company is considering the production of a new product. Rainbow Company has the following data available: Expected product life Expected sales (units) over product life Variable production costs Variable selling costs Annual fixed production costs Annual fixed selling costs

5 years 2,000 $42 per unit $16 per unit $15,000 $5,000

What is the total fixed cost of the product over the product life cycle?

A) $20,000 B) $100,000 C) $116,000 D) $464,000 Answer: B Diff: 2 LO: 5-8 AACSB: Analytic skills Learning Outcome: None 9) Bunch Company is considering the production of a new product. Bunch Company has the following data available: Expected product life Expected sales (units) over product life Variable production costs Variable selling costs Annual fixed production costs Annual fixed selling costs Research and development costs

4 years 2,000 $42 per unit $16 per unit $15,000 $5,000 $184,000

What is the total cost of the product over the product life cycle?

A) $116,000 B) $196,000 C) $264,000 D) $380,000 Answer: D Diff: 2 LO: 5-8 AACSB: Analytic skills Learning Outcome: None

49 .

10) Sue Company is considering the production of a new product. Sue Company has the following data available: Expected product life Expected sales (units) over product life Variable production costs Variable selling costs Annual fixed production costs Annual fixed selling costs Research and development costs Selling price

4 years 2,000 $42 per unit $16 per unit $15,000 $5,000 $184,000 $200 per unit

What is the expected profit or (loss) of the product over the product life cycle?

A) $(40,000) B) $20,000 C) $204,000 D) $880,000 Answer: B Diff: 2 LO: 5-8 AACSB: Analytic skills Learning Outcome: None 11) Target costing sets prices by computing an average cost and then adding a desired markup.

Answer: FALSE Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None 12) Companies use cost-plus pricing for products where management actions can influence the market price.

Answer: TRUE Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None 13) Target costing is most effective at reducing costs if used during the product design phase.

Answer: TRUE Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None

50 .

14) Product design affects a small amount of costs in the value chain.

Answer: FALSE Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None 15) Market focus group studies and surveys may be used by a firm to determine the price of a product or service.

Answer: TRUE Diff: 1 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None 16) The difference between the gross margin and the market price is the target cost for a new product.

Answer: TRUE Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None 17) Value engineering is used primarily during the distribution stage of the value chain.

Answer: FALSE Diff: 2 LO: 5-8 AACSB: Reflective thinking skills Learning Outcome: None 18) With increased global competition in many industries, companies are increasingly limited in influencing product prices.

Answer: TRUE Diff: 2 LO: 5-8 AACSB: Dynamics of the global economy Learning Outcome: None

51 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 6 Relevant Information for Decision Making with a Focus on Operational Decisions 6.1 Questions 1) Differential cost is the difference in ________ between two alternatives.

A) average cost B) marginal cost C) median cost D) total cost Answer: D Diff: 1 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 2) Differential revenue is the difference in ________ between two alternatives.

A) average revenue B) marginal revenue C) median revenue D) total revenue Answer: D Diff: 1 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 3) Incremental costs are the ________ generated by a proposed alternative.

A) additional revenues B) additional revenues or reduced costs C) reduced costs D) additional costs or reduced revenues Answer: D Diff: 2 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions

1 .

4) Incremental benefits are the ________ generated by a proposed alternative.

A) reduced revenues B) additional costs C) additional profits D) additional revenues or reduced costs Answer: D Diff: 2 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 5) Johnston Company wants to double production of Product X from 1,000 units to 2,000 units. The variable manufacturing cost per unit is $10. The variable nonmanufacturing cost per unit is $20. There are no fixed costs. The selling price per unit is $50. What is the incremental cost of the proposed change?

A) $10,000 B) $20,000 C) $30,000 D) $60,000 Answer: C Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions 6) Jeffrey Company wants to double production of Product X from 1,000 units to 2,000 units. The variable manufacturing cost per unit is $10. The variable nonmanufacturing cost per unit is $20. There are no fixed costs. The selling price per unit is $50. What is the incremental revenue of the proposed change?

A) $10,000 B) $20,000 C) $30,000 D) $50,000 Answer: D Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions

2 .

7) Marjorie Company has an idle machine that originally cost $200,000. The book value of the machine is $100,000. The company is considering three alternative uses of the idle machine: Alternative 1: Disposal of machine. Disposal value of machine is $50,000.

Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be $60,000.

Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be $70,000.

When considering Alternative 3, what is the opportunity cost of the idle machine?

A) $50,000 B) $60,000 C) $70,000 D) $110,000 Answer: B Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions 8) Marianne Company has an idle machine that originally cost $200,000. The book value of the machine is $100,000. The company is considering three alternative uses of the idle machine: Alternative 1: Disposal of machine. Disposal value of machine is $50,000.

Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be $60,000.

Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be $70,000.

When considering Alternative 2, what is the opportunity cost of the idle machine?

A) $50,000 B) $60,000 C) $70,000 D) $110,000 Answer: C Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions

3 .

9) Nancy Company has an idle machine that originally cost $200,000. The book value of the machine is $100,000. The company is considering three alternative uses of the idle machine: Alternative 1: Disposal of machine. Disposal value of machine is $50,000.

Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be $60,000.

Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be $70,000.

When considering the opportunity cost of the idle machine, what is the net financial benefit from Alternative 3?

A) $10,000 B) $20,000 C) $50,000 D) $70,000 Answer: A Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions 10) When evaluating alternative uses of a capital asset, equivalent decisions are reached using the opportunity cost approach and ________.

A) cost-volume-profit analysis B) contribution margin approach C) absorption costing approach D) incremental analysis Answer: D Diff: 1 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 11) A proposed project will require the use of ten machines in a company. Each machine has five alternative uses. What is the simplest way to evaluate the desirability of the project?

A) incremental analysis B) cost-volume-profit analysis C) opportunity cost approach D) scarce resource approach Answer: C Diff: 2 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions

4 .

12) The key to determining the financial difference between two alternative courses of action is to identify the ________.

A) opportunity cost of each alternative B) marginal cost C) differential costs and revenues D) joint cost of both alternatives Answer: C Diff: 1 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 13) The term opportunity cost applies to a resource that a company ________.

A) is thinking about purchasing B) already owns only C) has committed to purchase only D) already owns or has committed to purchase Answer: D Diff: 1 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 14) An opportunity cost is ________.

A) the additional costs generated by a proposed alternative B) the difference in total cost between two alternatives C) a cash disbursement in the future D) the maximum available benefit foregone by using a resource for a particular purpose instead of the best alternative use Answer: D Diff: 1 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 15) The salary foregone by a person who quits a job to start a business is an example of a(n) ________.

A) sunk cost B) opportunity cost C) depreciable cost D) outlay cost Answer: B Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions

5 .

16) Nestle Company paid $130,000 for a machine used to mill oats. The annual contribution margin from oat sales is $60,000. The machine could be sold for $80,000. The opportunity cost of producing the oats is ________.

A) $20,000 B) $60,000 C) $80,000 D) $130,000 Answer: C Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions 17) Sue is considering leaving her current position to open a coffee shop. Sue's current annual salary is $83,000. Annual coffee shop revenue and costs are estimated at $260,000 and $210,000, respectively. What is Sue's opportunity cost of staying at her current work position?

A) $50,000 B) $83,000 C) $210,000 D) $343,000 Answer: A Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions 18) Mary is considering leaving her current position to open an ice cream shop. Mary's current annual salary is $77,000. Annual ice cream shop revenue and costs are estimated at $260,000 and $210,000, respectively. What is Mary's annual opportunity cost of starting the ice cream shop?

A) $50,000 B) $77,000 C) $210,000 D) $260,000 Answer: B Diff: 2 LO: 6-1 AACSB: Analytic skills Learning Outcome: Use incremental analysis to make short-term decisions 19) Determining the opportunity cost of a project depends on the alternatives available.

Answer: TRUE Diff: 1 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions

6 .

20) Opportunity costs and outlay costs are widely used synonyms.

Answer: FALSE Diff: 1 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 21) Opportunity costs apply to resources that a company has committed to purchase.

Answer: TRUE Diff: 2 LO: 6-1 AACSB: Reflective thinking skills Learning Outcome: Use incremental analysis to make short-term decisions 6.2 Questions 1) In a make-or-buy decision for a part for a product, which of the following qualitative factors play a role?

A) quality of purchased part B) credit terms offered by supplier of part C) timeliness of delivery of purchased part by supplier D) all of the above Answer: D Diff: 2 LO: 6-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 2) What is the most common value-chain function outsourced in most businesses?

A) production process B) research and development C) product design D) corporate support Answer: D Diff: 2 LO: 6-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

7 .

3) In make-or-buy decisions for a part for a product, relevant costs include ________.

A) some variable costs of making the part B) all variable costs of making the part C) fixed costs that can be avoided in the future if the part is purchased D) B and C Answer: D Diff: 2 LO: 6-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 4) In a make-or-buy decision, which of the following is the fundamental question that is asked in making the decision?

A) What is the difference in present costs between the two alternatives?

B) What is the difference in present revenues between the two alternatives?

C) What is the difference in future revenues between the two alternatives?

D) What is the difference in future costs between the two alternatives?

Answer: D Diff: 2 LO: 6-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

8 .

5) Bonneville Company is producing a subassembly used in the production of a product. The costs incurred for the subassembly follow:

Direct materials Direct labor Variable factory overhead Fixed supervisor salary Depreciation expense on factory equipment General fixed factory overhead allocated Total costs

Per Unit $6.00 4.00 1.00 3.00 2.00 5.00 $21.00

The above per unit costs are based on 8,000 units. An outside supplier will provide 8,000 subassemblies for $19 per unit. The supervisor will be terminated if the subassemblies are not produced in house. The idle factory will be used to manufacture another product with a contribution margin of $60,000. What should Bonneville do?

A) make the subassemblies and save $20,000 B) make the subassemblies and save $40,000 C) buy the subassemblies and save $20,000 D) buy the subassemblies and save $40,000 Answer: C Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 6) Blue Company is a small company with limited expertise with customer service. Blue Company has a contract with New Company to handle all of Blue Company's customer service needs. For Blue Company, this is an example of ________.

A) technology transfer B) technology osmosis C) outsourcing D) none of the above Answer: C Diff: 1 LO: 6-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

9 .

7) Fixed overhead costs that will continue regardless of a make-or-buy decision are ________ to the makeor-buy decision.

A) relevant B) irrelevant C) opportunity costs D) incremental costs Answer: B Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 8) When making a make-or-buy decision for a part used in a product, which of the following item is relevant to the decision?

A) variable costs of making the part B) contribution margin on new products manufactured in idle area not used for making part C) rental income from idle plant when not making the part D) all of the above Answer: D Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

10 .

9) Buddy Company manufactures a part for its production cycle. The costs per unit for 5,000 units of the part are as follows:

Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

Per Unit $3.00 5.00 4.00 4.00 $16.00

The fixed factory overhead costs are avoidable. Spalding Company has offered to sell 5,000 units of the same part to Buddy Company for $15 per unit. Assuming no other use for the facilities, Buddy Company should ________.

A) make the part to save $5,000 B) make the part to save $15,000 C) buy the part from Spalding Company to save $5,000 D) buy the part from Spalding Company to save $15,000 Answer: C Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 10) Benton Company manufactures a part for its production cycle. The costs per unit for 38,000 units of the part are as follows:

Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

Per Unit $3.00 5.00 3.00 4.00 $15.00

The fixed factory overhead costs are unavoidable. Assume no other use for the facilities. What is the highest price Benton Company should pay for the part from an outside supplier?

A) $8 B) $11 C) $12 D) $15 Answer: B Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

11 .

11) Christian Company manufactures a part for its production cycle. The annual costs per unit for 5,000 units of the part are as follows:

Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

Per Unit $3.00 5.00 4.00 2.00 $14.00

The fixed factory overhead costs are unavoidable. Another company has offered to sell 5,000 units of the same part to Christian Company for $15 per unit. The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year. Christian Company should ________.

A) make the part to save $5,000 B) make the part to save $15,000 C) buy the part and rent facilities to save $5,000 D) buy the part and rent facilities to save $15,000 Answer: C Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 12) Laskowski Company manufactures a part for its production cycle. The annual costs per unit for 5,000 units of the part are as follows:

Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

Per Unit $3.00 5.00 4.00 2.00 $14.00

The fixed factory overhead costs are unavoidable. Hendricks Company has offered to sell 5,000 units of the same part to Laskowski Company for $14 per unit. The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses. No additional fixed costs would be incurred with the new product. Laskowski Company should ________.

A) make the part to save $5,000 B) make the part to save $15,000 C) make the new product and buy the part to save $5,000 D) make the new product and buy the part to save $15,000 Answer: D Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 12 .

13) Krakowski Company manufactures a part for its production cycle. The costs per unit for 10,000 units of the part are as follows:

Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

Per Unit $20.00 15.00 16.00 10.00 $61.00

The fixed factory overhead costs are unavoidable. Winters Company has offered to sell 10,000 units of the same part to Krakowski Company for $55 per unit. Assuming no other use for the facilities, Krakowski Company should ________.

A) make the part to save $40,000 B) make the part to save $60,000 C) buy the part from Winters Company to save $40,000 D) buy the part from Winters Company to save $60,000 Answer: A Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 14) Corrao Company manufactures a part for its production cycle. The costs per unit for 10,000 units of the part are as follows:

Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

Per Unit $20.00 13.00 15.00 14.00 $62.00

The fixed factory overhead costs are unavoidable. Assuming no other use for the facilities, what is the highest price that Corrao Company should be willing to pay for the part?

A) $33 B) $47 C) $48 D) $62 Answer: C Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

13 .

15) Potter Company manufactures a part for its production cycle. The annual costs per unit for 10,000 units of the part are as follows:

Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

Per Unit $20.00 15.00 16.00 10.00 $61.00

The fixed factory overhead costs are unavoidable. Paulson Company has offered to sell 10,000 units of the same part to Potter Company for $60 per unit. The facilities currently used to make the part could be rented out to another manufacturer for $100,000 per year. Potter Company should ________.

A) make the part to save $10,000 B) make the part to save $25,000 C) buy the part and rent the facilities to save $10,000 D) buy the part and rent the facilities to save $25,000 Answer: C Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 16) Golden Company manufactures a part for its production cycle. The annual costs per unit for 10,000 units of the part are as follows:

Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

Per Unit $20.00 15.00 6.00 10.00 $51.00

The fixed factory overhead costs are unavoidable. Olson Company has offered to sell 10,000 units of the same part to Golden Company for $55 per unit. The facilities currently used to make the part could be used to make 10,000 units per year of a new product that has a contribution margin of $20 per unit. No additional fixed costs would be incurred with the new product. Golden Company should ________.

A) make the part to save $40,000 B) make the part to save $140,000 C) make the new product and buy the part to save $60,000 D) make the new product and buy the part to save $140,000 Answer: C Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 14 .

17) Kaiman Company currently produces a key part at a total cost of $210,000. Annual variable costs are $170,000. Of the annual fixed costs, $10,000 relate specifically to this part. The remaining fixed costs are unavoidable.

Another manufacturer has offered to supply the part annually for $200,000. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year. Alternatively, the facilities could be rented out at $60,000 per year. Given all of these alternatives, what is Kaiman Company's lowest net relevant cost for the parts?

A) $130,000 B) $140,000 C) $170,000 D) $180,000 Answer: B Diff: 3 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 18) Dolphin Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.

Variable costs are $300,000 annually. Of the annual fixed costs, $140,000 relate specifically to this part. The remaining fixed costs are unavoidable.

Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year. Alternatively, the facilities could be rented out at $60,000 per year. Given all of these alternatives, what is Dolphin Company's lowest net relevant cost for the parts?

A) $420,000 B) $440,000 C) $450,000 D) $480,000 Answer: A Diff: 3 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

15 .

19) Thompson Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.

Annual variable costs are $300,000. Of the annual fixed costs, $140,000 relate specifically to this part. The remaining fixed costs are unavoidable.

Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $60,000 annually. Alternatively, the facilities could be rented out at $70,000 annually. If Thompson Company makes the part, what is the annual opportunity cost of the facilities?

A) $13,000 B) $28,000 C) $60,000 D) $70,000 Answer: D Diff: 3 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 20) Madison Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

$108,000 156,000 72,000 168,000 $504,000

Of the fixed factory overhead costs, $72,000 are avoidable. Middleton Company has offered to sell 5,000 units of the same part to Madison for $87.00 per unit. Assuming there is no other use for the facilities, Madison Company should ________.

A) make the part to save $24,000 B) make the part to save $27,000 C) buy the part to save $24,000 D) buy the part to save $27,000 Answer: B Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

16 .

21) Davidson Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

$108,000 156,000 70,000 168,000 $502,000

Of the fixed factory overhead costs, $72,000 are avoidable. Assuming there is no other use for the facilities. What is the highest price Davidson Company should be willing to pay for 5,000 units of the part?

A) $264,000 B) $334,000 C) $406,000 D) $502,000 Answer: C Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 22) Gonzalez Company produces a part that is used in the manufacture of one of its products. The annual costs associated with the production of 5,000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs

$100,000 56,000 72,000 168,000 $396,000

Of the fixed factory overhead costs, $72,000 are avoidable. Another company has offered to sell 5,000 units of the same part to Gonzalez for $70.00 per unit. The facilities currently used to make the part can be rented out to another manufacturer for $72,000 per year. What should Gonzalez Company do?

A) Make the part to save $22,000.

B) Make the part to save $50,000.

C) Buy the part and rent the facilities to save $22,000.

D) Buy the part and rent the facilities to save $72,000.

Answer: C Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

17 .

23) Fast Company has just decided to outsource the production of a part for a product. Assume Fast Company leaves the area of the manufacturing plant idle where it was producing the outsourced part. It has no alternative uses of the plant. What is the opportunity cost of the idle area of the manufacturing plant to Fast Company?

A) zero B) definitely a negative number C) the disposal value of the entire manufacturing plant D) none of the above Answer: A Diff: 3 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 24) Outsourcing is the purchase of products or services by a company from an outside supplier.

Answer: TRUE Diff: 1 LO: 6-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 25) Qualitative factors do not affect a make-or-buy decision.

Answer: FALSE Diff: 1 LO: 6-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 26) In a make-or-buy decision, if plant facilities will remain idle when the decision is made to outsource a part used in a product, then the opportunity cost of the plant facilities is zero. Assume there are no alternative uses of the plant facilities available.

Answer: TRUE Diff: 2 LO: 6-2 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

18 .

27) Each year, Madsen Company purchases 8,000 units of a part that it needs for production of its product. The supplier notified Madsen Company that a price increase will take effect shortly, which will bring the price of the part to $25 per part. Madsen Company is considering the use of idle facilities to produce the part. The annual production costs to produce the needed 8,000 parts are as follows: Direct materials Direct labor Variable indirect production costs Fixed indirect production costs

$17,500 30,000 14,000 33,500

The idle facilities could also be rented out at an annual rent of $99,000. All the fixed indirect production costs are avoidable.

Required: Determine if Madsen Company should buy the part or produce it internally.

Answer: Alternatives: Buy Part: $25 × 8,000 units = $200,000 Buy Part and Rent Facilities: ($25 × 8,000) - $99,000 = $101,000 Make Part: ($17,500 + $30,000 + $14,000 + $33,500) = $95,000 Conclusion: The lowest cost alternative is to make the part. Madsen Company should make the part.

Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

19 .

28) Andrea Company manufactures a part for its production cycle. The annual costs per unit for 20,000 units of this part are as follows: Direct materials Direct labor Variable indirect production costs Fixed indirect production costs Total cost

$15 12 19 16 $62

Andrea Company has been approached by a supplier who will sell 20,000 units of the same part for $940,000. All the fixed indirect production costs are unavoidable if Andrea Company ceases production of the part.

Required: A) Assuming there is no alternative use for the facilities, should Andrea Company buy or make the part?

B) Assume the facilities can be rented out for $100,000 per year. Should Andrea Company buy the part? If so, how much money will be saved?

Answer: A) Alternatives: Make part: ($15 + $12 + $19) × 20,000 = $920,000 Buy part: $940,000 Conclusion: The least costly alternative is to make the part.

B) Alternatives: Make part: $920,000 Buy part: $940,000 Buy part and rent out facilities: $940,000 - $100,000 = $840,000 Conclusion: The least costly alternative is to buy the part and rent out the facilities. In contrast to making the part, the company would save $80,000 ($920,000 - $840,000) per year.

Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

20 .

29) Jeff Company produces a part that is used in the manufacture of one of its products. The annual costs associated with the production of 11,000 units of this part are as follows: Direct materials Direct labor Variable indirect production costs Fixed indirect production costs Total costs

$25,000 34,000 65,000 40,000 $164,000

A supplier is willing to sell 11,000 units of the part to Jeff Company for $12.50 per unit. When examining the fixed indirect production costs, Jeff Company determines $10,000 is avoidable.

Required: A) If there are no alternative uses for the facilities, should Jeff Company take advantage of the supplier's offer?

B) If Jeff Company decides to buy the part from the supplier, Jeff Company can rent out the idle facilities for $50,000 per year. Should Jeff Company take advantage of the supplier's offer?

Answer: A) Alternatives: Make part: ($25,000 + $34,000 + $65,000 + $10,000) = $134,000 Buy part: ($12.50 × 11,000) = $137,500 Conclusion: The least costly alternative is to make the part. Jeff should not accept the supplier's offer.

B) Alternatives: Make part: $134,000 Buy part: $137,500 Buy part and rent out facilities: $137,500 - $50,000 = $87,500 Conclusion: The least costly alternative is to buy the part and rent out the facilities.

Diff: 2 LO: 6-2 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

21 .

6.3 Questions 1) If a department in a department store is under consideration to be eliminated, unavoidable fixed expenses are ________ to the decision.

A) incremental B) marginal C) relevant D) irrelevant Answer: D Diff: 2 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 2) Department A covers one section of a large factory building. Which of the following costs is relevant to the decision to eliminate Department A? A) Heating expenses of building allocated to Department A B) General corporate overhead allocated to Department A C) Depreciation Expense on store building allocated to Department A D) Salary Expense of Supervisor in Department A; he only works in Department A Answer: D Diff: 1 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 3) If a department in a grocery store is under consideration to be eliminated, which of the following cost(s) is(are) NOT relevant to the decision?

A) avoidable fixed expenses B) unavoidable costs C) common costs D) B and C Answer: D Diff: 2 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

22 .

4) If a department in a department store is eliminated, ________ costs will not continue.

A) unavoidable B) common C) corporate D) avoidable Answer: D Diff: 1 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 5) Central Industries has three product lines: A, B and C. The following information is available:

Sales Variable costs Contribution margin Avoidable fixed costs Unavoidable fixed costs Operating income(loss)

Product A $100,000 76,000 24,000 9,000 6,000 $9,000

Product B $90,000 48,000 42,000 18,000 9,000 $15,000

Product C $44,000 35,000 9,000 3,000 7,700 $(1,700)

Central Industries is thinking about dropping Product C because it is reporting a loss. Assume Central Industries drops Product C and does not replace it. What will happen to operating income?

A) increase by $600 B) increase by $2,400 C) decrease by $6,000 D) decrease by $9,000 Answer: C Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

23 .

6) Sahara Industries has three product lines: A, B and C. The following annual information is available: Product A Product B Product C Sales $100,000 $90,000 $88,000 Variable costs 76,000 48,000 79,000 Contribution margin 24,000 42,000 9,000 Avoidable fixed costs 9,000 18,000 3,000 Unavoidable fixed costs 6,000 9,000 9,400 Operating income(loss) $9,000 $15,000 $(3,400) Sahara Industries is thinking about dropping Product C because it is reporting a loss. Assume Sahara Industries drops Product C and the space formerly used to produce Product C is rented out for $15,000 per year. What will happen to operating income?

A) increase by $6,600 B) increase by $9,000 C) increase by $14,400 D) increase by $15,000 Answer: B Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 7) Cesar Company has three product lines: A, B and C. The following annual information is available: Product A Product B Product C Sales $100,000 $90,000 $44,000 Variable costs 76,000 48,000 35,000 Contribution margin 24,000 42,000 9,000 Avoidable fixed costs 9,000 18,000 3,000 Unavoidable fixed costs 6,000 9,000 7,700 Operating income(loss) $9,000 $15,000 $(1,700) Assume Cesar Company drops Product C. Cesar Company then doubles the production and sales of Product B without increasing fixed costs. What will happen to operating income?

A) increase by $15,000 B) increase by $24,000 C) increase by $36,000 D) increase by $42,000 Answer: C Diff: 3 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

24 .

8) Bally Company has three product lines: A, B and C. The following annual information is available: Product A Product B Product C Sales $60,000 $90,000 $24,000 Variable costs 36,000 48,000 20,000 Contribution margin 24,000 42,000 4,000 Avoidable fixed costs 9,000 18,000 3,000 Unavoidable fixed costs 6,000 9,000 2,400 Operating income(loss) $9,000 $15,000 $(1,400) Assume Bally Company drops Product C. What will happen to operating income?

A) increase by $1,400 B) increase by $3,800 C) decrease by $1,000 D) decrease $1,400 Answer: C Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 9) The most recent income statement for the Venetian Branch of Palm Harbor Bank is presented below: Sales Variable costs Contribution margin Avoidable fixed costs Unavoidable fixed costs Operating loss

$57,000 31,500 25,500 13,500 20,000 $(8,000)

Palm Harbor Bank is thinking about eliminating the Venetian Branch. If the branch is eliminated, Palm Harbor Bank's operating income will ________.

A) increase by $8,000 B) increase by $25,500 C) decrease by $12,000 D) decrease by $31,500 Answer: C Diff: 1 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

25 .

10) The most recent income statement for the South Branch of First Financial Bank is presented below: Sales Variable costs Contribution margin Avoidable fixed costs Unavoidable fixed costs Operating loss

$57,000 31,500 25,500 13,500 18,000 $(6,000)

First Financial Bank is thinking about eliminating the South Branch. If the branch is eliminated, First Financial Bank's operating income will ________.

A) increase by $6,000 B) increase by $25,500 C) decrease by $12,000 D) decrease by $31,500 Answer: C Diff: 1 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 11) ________ are relevant in deciding whether to add or delete a department from a department store.

A) Avoidable fixed expenses B) Common costs C) Unavoidable fixed expenses D) None of the above Answer: A Diff: 1 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 12) In deciding whether to add or delete a product or service, common costs are probably ________.

A) relevant and avoidable B) relevant and unavoidable C) irrelevant and avoidable D) irrelevant and unavoidable Answer: D Diff: 2 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

26 .

13) When deciding whether to add or delete a department, managers should keep the department as long as ________ from the department exceeds ________.

A) contribution margin; variable costs B) contribution margin; common costs C) contribution margin; avoidable fixed costs D) contribution margin; unavoidable fixed costs Answer: C Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 14) In deciding whether to add or delete a product, the insurance expense associated with the custombuilt equipment used to produce the product is an ________ cost. Assume the equipment will be sold if the company discontinues the product.

A) avoidable fixed B) avoidable variable C) unavoidable fixed D) unavoidable variable Answer: A Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant cost, Use incremental analysis to make short-term decisions 15) In deciding whether to add or delete a product, the salary of the plant manager is an ________.

Assume the plant manager supervised the production of several products.

A) avoidable fixed cost B) avoidable variable cost C) unavoidable fixed cost D) unavoidable variable cost Answer: C Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 16) Variable expenses are divided into avoidable and unavoidable costs.

Answer: FALSE Diff: 1 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

27 .

17) Unavoidable costs are never relevant in deciding whether to eliminate a product or department.

Answer: TRUE Diff: 2 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 18) Heating and air conditioning costs are examples of common costs to the different departments in a retail store.

Answer: TRUE Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 19) When adding or dropping a product line, variable costs are the only relevant costs.

Answer: FALSE Diff: 2 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 20) When adding or dropping a product line, fixed avoidable costs may be relevant costs.

Answer: TRUE Diff: 2 LO: 6-3 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 21) Qualitative information can influence decisions to add or drop a department.

Answer: TRUE Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

28 .

22) Freedom Company has three departments. Data for the most recent year are presented below:

Sales Variable expenses Unavoidable fixed expenses Avoidable fixed expenses

Dept. X $400 128 96 116

Dept. Y $200 52 52 104

Dept. Z $80 34 12 54

Required: A) Compute the operating income for Freedom Company.

B) Compute the contribution margin for each department.

C) Compute the operating income for each department.

D) Which department(s) should be eliminated? Why? Answer: A) Sales $680 Variable expenses (214) Avoidable fixed expenses (274) Unavoidable fixed expenses (160) Operating income $32 B) Dept. X: $400 - $128 = $272 Dept. Y: $200 - $52 = $148 Dept. Z: $80 - $34 = $46 C) Dept. X: $272 - $212 = $60 Dept. Y: $148 - $156 = $(8) Dept. Z: $46 - $66 = $(20) D) Dept. Z should be eliminated because the contribution margin of $46 is less than avoidable fixed expenses of $54. Dept. Y should not be eliminated because the contribution margin of $148 exceeds the avoidable fixed expenses of $104. Dept. X should not be eliminated because the contribution margin of $272 exceeds the avoidable fixed expenses of $116.

Diff: 2 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

29 .

23) Olson Company has three departments. Data for the most recent year is presented below:

Sales Variable expenses Unavoidable fixed expenses Avoidable fixed expenses Operating income (loss)

Dept. C $4,000 3,280 480 555 $(315)

Dept. A $1,920 1,420 180 265 $55

Dept. T $2,240 520 440 360 $920

Olson Company is considering eliminating Dept. C because it is operating at a loss.

Required: A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace it.

B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales of Dept. T without increasing fixed costs.

Answer: A) Operating income will decrease by $165. $4,000 - ($3,280 + $555) = $165 B) Operating income will increase by $1,555. $2,240 - ($520 + $165) = $1,555 Diff: 3 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 6.4 Questions 1) A company can sell any mix of Product A and Product B at full capacity. The company has 100,000 hours of capacity. The demand for each product exceeds the capacity. It takes one hour to make one unit of Product A and two hours to make one unit of Product B. The following information is available: Product A 100,000 $20

Units produced from capacity available Contribution margin per unit

If capacity is the limiting factor, which product should be produced?

A) 0 units of Product A and 50,000 units of Product B B) 20,000 units of Product A and 30,000 units of Product B C) 30,000 units of Product A and 20,000 units of Product B D) 100,000 units of Product A and 0 units of Product B Answer: D Diff: 1 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None

30 .

Product B 50,000 $30

2) A company has 100,000 hours of capacity and manufactures two products, Product X and Product Z. Neither product has enough demand to utilize the entire capacity, but the combined demand of both products exceeds the capacity of the plant. It takes one hour to make one unit of Product X and two hours to make one unit of Product Z. The following information is available: Product X 100,000 $20

Units produced from capacity available Contribution margin per unit

Product Z 50,000 $30

What product or products should be made?

A) only make Product X B) only make Product Z C) make Product X to meet customer demand and then make Product Z D) make Product Z to meet customer demand and then make Product X Answer: C Diff: 1 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 3) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2 hours per unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product 1 is $5. The contribution margin per unit for Product 2 is $6. The demand for either product exceeds the factory capacity. Which product or products should be manufactured?

A) 3,000 units of Product 1 and 2,000 units of Product 2 B) 2,500 units of Product 1 and 3,333 units of Product 2 C) make 5,000 units of Product 1 and 0 units of Product 2 D) make 3,333 units of Product 2 and 0 units of Product 1 Answer: C Diff: 1 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 4) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2 hours per unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product 1 is $5. The contribution margin per unit for Product 2 is $6. Neither product has enough demand to use all of the plant capacity, but the demand for both products exceeds the plant capacity. Which product or products should be manufactured?

A) 5,000 units of Product 1 and 0 units of Product 2 B) 0 units of Product 1 and 5,000 units of Product 2 C) make Product 1 first until meet customer demand, then make Product 2 D) make Product 2 first until meet customer demand, then make Product 1 Answer: C Diff: 1 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 31 .

5) ________ is the item that restricts or constrains the production or sale of a product.

A) A limiting factor B) A scarce resource C) Floor space D) All of the above Answer: D Diff: 1 LO: 6-4 AACSB: Analytic skills Learning Outcome: None 6) If demand is the limiting factor, and there are no other scarce resources, managers should emphasize the product with ________.

A) the highest selling price per unit B) the lowest variable costs per unit C) the highest contribution margin per unit D) the highest contribution margin per hour Answer: C Diff: 2 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 7) Bronski Corporation manufactures two products, Simple and Complex. The following information was gathered: Simple Complex Selling price per unit $37.00 $26.00 Variable cost per unit 32.00 22.00 Total fixed costs are $18,000. Assume demand for either product exceeds the factory's capacity. It takes one hour of production time to make Simple and two hours to make Complex. The annual capacity of the plant is 10,000 hours. How many units of Simple and Complex should Bronski Corporation produce and sell to maximize profits?

A) 0 units of Simple and 5,000 units of Complex B) 6,000 units of Simple and 3,000 units of Complex C) 10,000 units of Simple and 0 units of Complex D) 3,000 units of Simple and 6,000 units of Complex Answer: C Diff: 2 LO: 6-4 AACSB: Analytic skills Learning Outcome: None

32 .

8) Watson Corporation manufactures two products, Simple and Complex. The following annual information was gathered: Simple Complex Selling price per unit $47.00 $26.00 Variable cost per unit 42.00 22.00 Total annual fixed costs are $18,000. Assume demand for either product exceeds the factory's capacity. It takes one hour to make one unit of Complex. However, Simple takes 50% longer to manufacture when compared to Complex. Only 120,000 hours of plant capacity are available. How many units of Simple and Complex should Watson Corporation produce and sell in a year to maximize profits?

A) an equal number of Simple and Complex B) 80,000 units of Simple and 0 units of Complex C) 0 units of Simple and 120,000 units of Complex D) either Simple or Complex; it does not matter Answer: C Diff: 2 LO: 6-4 AACSB: Analytic skills Learning Outcome: None 9) A scarce resource restricts or constrains the production or sale of a product.

Answer: TRUE Diff: 1 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 10) Scarce resources include labor hours.

Answer: TRUE Diff: 1 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 11) In retail sales, the limiting resource is often floor space.

Answer: TRUE Diff: 1 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 12) If the limiting factor is demand, the most profitable product is the one with the highest contribution margin per unit.

Answer: TRUE Diff: 2 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 33 .

13) Inventory turnover is the number of times the average inventory is sold per year.

Answer: TRUE Diff: 1 LO: 6-4 AACSB: Reflective thinking skills Learning Outcome: None 6.5 Questions 1) Which of the following is(are) characteristic(s) of joint products?

A) when two or more products can be identified before the split-off point.

B) when two or more products have significant sales value.

C) when two or more products are not separately identifiable as individual products until the split-off point.

D) B and C Answer: D Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 2) When manufacturing multiple products that are not initially separately identifiable, manufacturing costs incurred after the split-off point are known as ________ costs.

A) joint B) product C) split-off D) separable Answer: D Diff: 1 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 3) The ________ is the juncture in manufacturing where the joint products become individually identifiable.

A) joint processing juncture B) split-off point C) common point D) joint processing point Answer: B Diff: 1 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

34 .

4) ________ costs are costs of manufacturing two or more products that are not separately identifiable as individual products until their split-off point.

A) Separable B) Joint C) Incremental D) Sunk Answer: B Diff: 1 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 5) Which of the following item is irrelevant to the decision whether to process joint products beyond the split-off point?

A) separable costs B) additional costs from further processing beyond the split-off point C) additional revenue from further processing beyond the split-off point D) joint costs Answer: D Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 6) Which of the following cost is relevant to the decision whether to process joint products beyond the split-off point?

A) joint costs B) allocated joint costs C) separable costs D) additional revenue from further processing beyond split-off point Answer: C Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

35 .

7) Joint products should be processed beyond the split-off point if ________.

A) sale of the products are guaranteed B) additional revenue from further processing exceeds additional expenses from further processing C) additional revenue from further processing exceeds the joint costs D) the marginal revenue of the joint products before the split-off point exceeds the marginal cost of the joint products Answer: B Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 8) Uptown Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $20,000.

Other data follows:

Product P G A

Sales Value at Split-Off $32,000 16,500 6,400

Separable Processing Costs after Split-Off $5,000 7,500 8,000

Sales Value at Completion $39,000 29,000 10,000

Processing Product P beyond the split-off point will cause profits to ________.

A) be unchanged B) increase by $2,000 C) increase by $3,000 D) increase by $7,000 Answer: B Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

36 .

9) Mayfair Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $15,000.

Other data follows:

Product P G A

Sales Value at Split-Off $62,000 12,500 9,400

Separable Processing Costs after Split-Off $5,000 6,500 5,000

Sales Value at Completion $88,000 19,500 12,000

Processing Product G beyond the split-off point will cause profits to ________.

A) be unchanged B) increase by $500 C) increase by $1,000 D) increase by $7,000 Answer: B Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 10) Southridge Corporation has a joint process that produces two products: A and B. Each product may be sold at the split-off point or processed further and then sold. Joint-processing costs for a year are $20,000.

Product A can be sold at the split-off point for $32,000. Alternatively, Product A can be processed further and sold for $40,000. Additional processing costs are $5,000.

When deciding whether to sell Product A at the split-off point or to process further, the ________ is NOT relevant.

A) joint processing cost of $20,000 B) sales value at split-off of $32,000 C) sales value at completion of $40,000 D) additional processing cost of $5,000 Answer: A Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

37 .

11) Brookfield Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000. Other data follows:

Product X Y Z

Sales Value at Split-Off $128,000 75,000 32,600

Separable Processing Costs after Split-Off $16,000 26,000 20,000

Sales Value at Completion $150,000 99,000 50,000

Processing Product X beyond the split-off point will cause profits to ________.

A) be unchanged B) increase by $6,000 C) increase by $16,000 D) increase by $22,000 Answer: B Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 12) Boston Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000.

Other data follows:

Product X Y Z

Sales Value at Split-Off $128,000 50,000 25,600

Separable Processing Costs after Split-Off $16,000 25,000 20,000

Sales Value at Completion $160,000 77,000 40,000

Processing Product Y beyond the split-off point will cause profits to ________.

A) be unchanged B) increase by $1,000 C) increase by $2,000 D) increase by $27,000 Answer: C Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

38 .

13) Cleveland Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000. Other data follows:

Product X Y Z

Sales Value at Split-Off $128,000 50,000 25,600

Separable Processing Costs after Split-Off $16,000 27,000 10,000

Sales Value at Completion $140,000 76,000 40,000

To maximize profits, the corporation should process ________ further.

A) Product Z only B) Product Y only C) Product X only D) Products X, Y and Z Answer: A Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 14) Chicago Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000. Other data follows:

Product X Y Z

Sales Value at Split-Off $128,000 50,000 25,600

Separable Processing Costs after Split-Off $16,000 26,000 20,000

Sales Value at Completion $152,000 76,000 40,000

Processing Product X beyond the split-off point will cause profits to ________.

A) be unchanged B) increase by $8,000 C) increase by $24,000 D) decrease by $24,000 Answer: B Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

39 .

15) DesPlaines Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 10,000 units. Other data follows:

Product P G A

Sales Value at Split-Off $12 10 15

Separable Processing Costs after Split-Off $8 4 6

Sales Value at Completion $20 17 19

If Product P is processed beyond the split-off point, profits will ________.

A) increase by $90,000 B) increase by $120,000 C) increase by $210,000 D) remain the same Answer: D Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 16) Lisle Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000.

The production level for each product is 10,000 units. Other data follows:

Product P G A

Sales Value at Split-Off $12 10 15

Separable Processing Costs after Split-Off $9 3 6

Sales Value at Completion $21 17 19

Product G ________.

A) should be sold at split-off point to maximize profits B) should be processed further to increase profits by $30,000 C) should be processed further to increase profits by $40,000 D) should be processed further to increase profits by $70,000 Answer: C Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

40 .

17) Downers Grove Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 10,000 units. Other data follows:

Product P G A

Sales Value at Split-Off $12 12 10

Separable Processing Costs after Split-Off $10 4 6

Sales Value at Completion $21 17 19

To maximize profits, Downers Grove Corporation should process ________ further.

A) Product P only B) Product G only C) Product A only D) Products G and A only Answer: D Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 18) Naperville Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 10,000 units. Other data follows: Sales Value Separable Processing Sales Value Product at Split-Off Costs after Split-Off at Completion P $12 $8 $21 G 10 4 17 A 15 6 19 Processing Product P beyond the split-off point will cause profits to ________.

A) be unchanged B) increase by $10,000 C) increase by $80,000 D) increase by $90,000 Answer: B Diff: 2 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

41 .

19) Woodridge Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 1,000 units. Other data follows:

Product P G A

Sales Value at Split-Off $12 10 15

Separable Processing Costs after Split-Off $9 4 6

Sales Value at Completion $21 17 19

Assume Woodridge Corporation processes the joint products beyond the split-off point that will maximize net income. Woodridge Corporation's net income is ________.

A) $12,000 B) $15,000 C) $17,000 D) $25,000 Answer: B Diff: 3 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 20) Separable costs are part of a joint process and cannot be exclusively identified with individual products.

Answer: FALSE Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 21) The split-off point is the juncture in manufacturing where the joint products become individually identifiable.

Answer: TRUE Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

42 .

22) The relevant information for a sell or process further decision for joint products includes the costs incurred before the split-off point.

Answer: FALSE Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 23) It is profitable to extend processing or to incur additional costs on a joint product if the additional revenue exceeds the joint cost.

Answer: FALSE Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 24) The allocation of joint costs to joint products should affect the decision to sell or process the joint products further.

Answer: FALSE Diff: 2 LO: 6-5 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

43 .

25) Foster Corporation has a joint process, which produces three products, A, B and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year are $40,000. Other relevant data are:

Product A B C

Sales Value at Split-Off $15,500 18,000 24,000

Separable Processing Costs After Split-Off $2,200 8,000 11,500

Sales Value at Completion $17,700 23,000 37,500

Required: A) Which products should be processed further? Why? B) If the Foster Company maximizes profits, what is the operating income?

Answer: A) Only Product C should be processed further. The additional revenues ($37,500 - $24,000) exceed the additional costs ($11,500) of further processing.

B) Product A Revenue $15,500 Product B Revenue 18,000 Product C Revenue 37,500 Less: Joint Costs (40,000) Less: Product C Addtl. Costs (11,500) Operating income $19,500 Diff: 3 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

44 .

26) Sealy Company has a joint process, which produces three products called A, B and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year are $20,000.

Other relevant data are:

Product A B C

Sales Value at Split-Off $94,000 60,000 66,000

Separable Processing Costs After Split-Off $28,000 10,000 14,000

Sales Value at Completion $115,000 82,000 79,000

Required: A) Which products should be processed further? Why? B) If the Sealy Company maximizes profits, what is the operating income?

Answer: A) Only Product B should be processed further. The additional revenues ($82,000 - $60,000) exceed the additional costs ($10,000) of further processing.

B) Product A Revenue $94,000 Product B Revenue 82,000 Product C Revenue 66,000 Less: Joint Costs (20,000) Less: Product B Addtl. Costs (10,000) Operating income $212,000 Diff: 3 LO: 6-5 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 6.6 Questions 1) Equipment to be sold has a book value of $4,000. The cost of the equipment is $10,000. The cash received at sale is $2,000. What is the gain or loss on disposal of the equipment?

A) loss on disposal of $2,000 B) loss on disposal of $4,000 C) loss on disposal of $6,000 D) gain on disposal of $2,000 Answer: A Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

45 .

2) When considering the replacement of old equipment, which of the following item is relevant?

A) loss on disposal of old equipment B) book value of old equipment C) accumulated depreciation on old equipment D) future maintenance costs of old equipment Answer: D Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 3) Book value on a depreciable asset is defined as ________.

A) residual value less cost B) residual value less accumulated depreciation C) cost less accumulated depreciation D) residual value Answer: C Diff: 1 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 4) Which of the following costs is NOT relevant to an equipment replacement decision?

A) cost of new equipment B) operating cost of new equipment C) operating cost of old equipment(several years left) D) cost of old equipment Answer: D Diff: 2 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 5) Which of the following cost is relevant to an equipment replacement decision?

A) cost of old equipment B) cost of new equipment C) book value of old equipment D) depreciation expense on old equipment Answer: B Diff: 2 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

46 .

6) BEE Company is considering the replacement of a machine that is presently used in production. Which of the following items are irrelevant to the replacement decision?

A) annual operating cost of the old machine (2 years left) B) original cost of the new machine C) disposal value of the old machine at time of replacement D) original cost of old machine Answer: D Diff: 2 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 7) Ernie Company is considering replacing a machine that is currently used in the production process.

The ________ is irrelevant to the replacement decision.

A) cost of the new machine B) disposal value of old machine C) book value of old machine D) annual operating cost of old machine (2 years left) Answer: C Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

47 .

8) Benson Company is considering the replacement of a machine that is presently used in production. The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs

Old Machine $57,000 17 12 $39,000 $8,000 0 $7,000

New Machine $35,000 5 0 0 $4,000

Adding all five years together, the total relevant costs to consider if the new machine is purchased is ________.

A) $12,000 B) $27,000 C) $47,000 D) $55,000 Answer: C Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

48 .

9) Gray Lake Company is considering the replacement of a machine that is presently used in production.

The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs

Old Machine $57,000 17 12 $39,000 $8,000 0 $7,000

New Machine $35,000 5 0 0 $4,000

Adding all five years together, the total relevant costs to consider if the old machine is not replaced is ________.

A) $22,000 B) $31,000 C) $35,000 D) $39,000 Answer: C Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

49 .

10) Inverness Company is considering the replacement of a machine that is presently used in production.

The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs

Old Machine $57,000 17 12 $39,000 $8,000 0 $7,000

New Machine $35,000 5 0 0 $4,000

Adding all five years together, what is the difference in total relevant costs between the old machine and the new machine?

A) $12,000 B) $15,000 C) $22,000 D) $37,000 Answer: A Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

50 .

11) Amanda Company is considering the replacement of a machine that is presently used in production.

The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs

Old Machine $200,000 10 5 $100,000 $32,000 0 $20,000

New Machine $160,000 5 0 0 $14,000

Adding all five years together, the total relevant costs to consider if the new machine is purchased is ________.

A) $70,000 B) $100,000 C) $198,000 D) $230,000 Answer: C Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 12) Park Ridge Company is considering the replacement of a machine that is presently used in production. The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs

Old Machine $200,000 10 5 $100,000 $32,000 0 $20,000

New Machine $160,000 5 0 0 $14,000

Adding all five years together, the total relevant costs to consider if the old machine is kept is ________.

A) $32,000 B) $68,000 C) $80,000 D) $100,000 Answer: D Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 51 .

13) Gurnee Company is considering the replacement of a machine that is presently used in production.

The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs

Old Machine $200,000 10 5 $100,000 $32,000 0 $20,000

New Machine $160,000 5 0 0 $14,000

Adding all five years together, what is the difference in total relevant costs between the old and new machines?

A) $12,000 B) $30,000 C) $98,000 D) $130,000 Answer: C Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 14) The gain or loss on the disposal of equipment is determined by ________.

A) subtracting the book value of the old equipment to the cost of the new equipment B) subtracting the disposal value of the old equipment to the book value of the old equipment C) subtracting the book value of the old equipment from the cash received for the old equipment D) subtracting the book value of the old equipment from the cost of the new equipment Answer: C Diff: 2 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

52 .

15) Sunbury Company is considering the replacement of a machine that is presently used in production.

The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs

Old Machine $60,000 10 5 $25,000 $8,000 0 $12,000

New Machine $35,000 5 0 0 $4,000

Adding all five years together, the total relevant costs to consider if the old machine is kept are ________.

A) $30,000 B) $50,000 C) $52,000 D) $60,000 Answer: D Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 16) The disposal value of old equipment is relevant in equipment replacement decisions.

Answer: TRUE Diff: 2 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 17) Sunk cost is used to describe a historical cost or past cost.

Answer: TRUE Diff: 1 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

53 .

18) When making a decision to replace some old equipment with new equipment, the book value of the old equipment is irrelevant information.

Answer: TRUE Diff: 2 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 19) An equipment's book value is the original cost plus accumulated depreciation.

Answer: FALSE Diff: 2 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 20) The cost of new equipment is relevant in deciding whether to keep or replace old equipment.

Answer: TRUE Diff: 2 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 21) Past costs are irrelevant in equipment replacement decisions.

Answer: TRUE Diff: 1 LO: 6-6 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

54 .

22) Jorgensen Company is considering the replacement of equipment used in operations. The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 7 years Annual cash operating costs

Old Equipment $210,000 12 5 $65,000 $30,000 0 $9,000

New Equipment $40,000 7 0 0 $8,000

Required: A) Prepare a cost comparison for replacing the old equipment. Use only relevant items and add the items together for the next 7 years.

B) Should the old equipment be replaced?

Answer: A) Keep Replace Difference Cash operating costs $63,000 $56,000 $7,000 Disposal value old equip.

(30,000) 30,000 New equipment, cost ______ 40,000 (40,000) Total relevant costs $63,000 $66,000 $(3,000) B) The old equipment should not be replaced.

Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions

55 .

23) Mueller Company is considering the replacement of equipment used in operations. The following data are available:

Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 6 years Annual cash operating costs

Old Equipment $93,000 13 7 $57,000 $50,000 0 $14,000

New Equipment $60,000 6 0 0 $11,000

Required: A) Prepare a cost comparison for replacing the old equipment. Use only relevant items and add the items together for the next 6 years.

B) Should the old equipment be replaced?

Answer: A) Keep Replace Difference Cash operating costs $84,000 $66,000 $18,000 Disposal value of old equip.

(50,000) 50,000 New equipment, cost ______ 60,000 (60,000) Total relevant costs $84,000 $76,000 $8,000 B) The old equipment should be replaced.

Diff: 2 LO: 6-6 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 6.7 Questions 1) When choosing between two alternatives, what of the following are relevant costs?

A) future variable costs that are the same under two alternatives B) future variable costs that are different under two alternatives C) future fixed costs that are different under two alternatives D) B and C Answer: D Diff: 2 LO: 6-7 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs

56 .

2) The following is a useful rule of thumb when making operational decisions. Managers should NOT use ________.

A) variable cost per unit B) total variable costs C) fixed cost per unit D) total fixed costs Answer: C Diff: 2 LO: 6-7 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 3) LL Company produces and sells a product that has variable costs of $9 per unit and fixed costs of $200,000 per year. If production decreases from 50,000 to 40,000 units, the total cost per unit will ________.

A) increase by $1 B) increase by $13 C) decrease by $1 D) decrease by $14 Answer: A Diff: 1 LO: 6-7 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 4) Melissa Company produces and sells a product that has variable costs of $8 per unit and fixed costs of $240,000 per year. If 20,000 units are produced and sold in a year, what is the total cost per unit?

A) $5 B) $8 C) $12 D) $20 Answer: D Diff: 1 LO: 6-7 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 5) Zach Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. If 40,000 units are produced and sold in a year, what is the total cost per unit?

A) $7 B) $10 C) $12 D) $17 Answer: C Diff: 1 LO: 6-7 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 57 .

6) Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. If production increases from 20,000 units to 25,000 units, the total cost will ________.

A) increase by $35,000 B) decrease by $2 per unit C) decrease by $8 per unit D) stay the same Answer: B Diff: 1 LO: 6-7 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs 7) When analyzing alternatives, it is not advisable to use fixed costs per unit because a new fixed cost per unit must be calculated for every different volume of production.

Answer: TRUE Diff: 2 LO: 6-7 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 8) Future costs are irrelevant if they are the same under all feasible alternatives.

Answer: TRUE Diff: 2 LO: 6-7 AACSB: Reflective thinking skills Learning Outcome: Distinguish between relevant and irrelevant costs 6.8 Questions 1) Managers may be tempted to make decisions that are not in the best interests of the company because ________.

A) performance measures in use reward them for decisions that are in the best interests of the company B) performance measures in use reward them for decisions that are not in the best interests of the company C) the managers do not understand the use of decision-making tools D) the managers are evaluated several times each year Answer: B Diff: 2 LO: 6-8 AACSB: Reflective thinking skills Learning Outcome: None

58 .

2) A widespread problem in practice is that the decision model used by managers for ________ and the model used by their superiors in ________ are different.

A) outsourcing; incremental analysis B) outsourcing; differential analysis C) decision making; performance evaluation D) operational decisions; joint costing Answer: C Diff: 2 LO: 6-8 AACSB: Reflective thinking skills Learning Outcome: None 3) Since managers are usually evaluated based on the operating results in one year, they do not usually consider the long range impact of their decisions.

Answer: TRUE Diff: 2 LO: 6-8 AACSB: Reflective thinking skills Learning Outcome: None 4) Conflicts in the decision-making process can arise when superiors evaluate a manager's performance using a model consistent with the decision model used by the manager.

Answer: FALSE Diff: 2 LO: 6-8 AACSB: Reflective thinking skills Learning Outcome: None 5) Generally, companies use aggregate measures of performance when conducting performance evaluations of managers.

Answer: TRUE Diff: 2 LO: 6-8 AACSB: Reflective thinking skills Learning Outcome: None

59 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 7 Introduction to Budgets and Preparing the Master Budget 7.1 Questions 1) Which of the following statements about budgets and budgeting is FALSE? A) Budgets help coordinate financial and operational activities.

B) The vast majority of managers use budgeting as an effective cost management tool.

C) Budgeting is the process of formulating an organization's plans.

D) Managers do not use budgets for performance evaluation.

Answer: D Diff: 2 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 2) In practice, when developing a budget, two extremes used for guidance are ________ and ________.

A) participative budget; zero-base budget B) strategic budget; long-range budget C) financial planning budget; strategic budget D) zero-base budget; activities of current or prior period Answer: D Diff: 2 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 3) A major benefit of effective budgeting is that ________.

A) it compels managers to think ahead B) it aids managers in communicating objectives to employees C) it provides benchmarks to evaluate subsequent performance D) all of the above Answer: D Diff: 1 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

1 .

4) A(n) ________ starts with the assumption that current activities in a company will not automatically continue in the next period.

A) activity-based budget B) strategic budget C) master budget D) zero-base budget Answer: D Diff: 2 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 5) The most effective budget processes facilitate communication from top management to ________ and from lower level managers and employees to ________.

A) the SEC; the audit committee B) stockholders; creditors C) lower level managers and employees; top management D) creditors; stockholders Answer: C Diff: 1 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 6) Potential problems that can limit the benefits of budgeting do NOT include ________.

A) low levels of employee participation in the budget process B) incentives to lie and cheat in the budget process C) difficulties in obtaining accurate sales forecasts D) an emphasis on functional budgeting Answer: D Diff: 1 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

2 .

7) A major drawback of using historical results for judging current performance is that ________.

A) past results may be inaccurate B) results may refer to a different manager C) inefficiencies may be concealed in past results D) managers may have cooked the books Answer: C Diff: 2 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 8) A budget is an example of an informal business plan.

Answer: FALSE Diff: 1 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 9) A budget is a qualitative expression of a plan of action.

Answer: FALSE Diff: 1 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 10) There are fewer benefits from budgeting in companies with uncertain or complicated environments.

Answer: FALSE Diff: 2 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 11) Budgeted performance goals generally provide a better basis for evaluating actual performance than past performance.

Answer: TRUE Diff: 2 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

3 .

12) A major drawback of using historical results for judging current performance is that inefficiencies may be concealed in past performance.

Answer: TRUE Diff: 2 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 13) An effective budget process communicates from the top down, but not from the bottom up.

Answer: FALSE Diff: 2 LO: 7-1 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7.2 Questions 1) Factors that affect employee acceptance of budgets include ________.

A) perceived attitude of top management towards budgeting B) level of participation by employees in budget process C) degree of alignment between budget and employees' performance goals D) all of the above Answer: D Diff: 1 LO: 7-2 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 2) Misalignment between the ________ stressed in budgets and ________ used to reward employees and managers can limit the advantages of budgeting.

A) performance goals; participative goals B) performance goals; performance measures C) sales goals; bonuses D) resource goals; bonuses Answer: B Diff: 1 LO: 7-2 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

4 .

3) One way to reduce negative attitudes of managers toward budgets is by ________.

A) zero-based budgeting B) activities-based budgeting C) long range planning D) participative budgeting Answer: D Diff: 1 LO: 7-2 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 4) ________ budgeting is when budgets are formulated with the active involvement of all affected employees.

A) Rolling B) Team C) Participative D) Zero-based Answer: C Diff: 1 LO: 7-2 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 5) The effectiveness of any budgeting system depends directly on the attitudes of top management toward the budgeting system.

Answer: TRUE Diff: 2 LO: 7-2 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 6) Participative budgeting is the active participation of all affected employees in the formulation of the budget.

Answer: TRUE Diff: 1 LO: 7-2 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

5 .

7.3 Questions 1) Budgeting can result in incentives to lie and cheat that undermine ________.

A) a company's ethical standards B) a company's value chain C) standard of objectivity promulgated by the Institute of Management Accountants D) none of the above Answer: A Diff: 1 LO: 7-3 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 2) Managers may ________ their budgeted costs or ________ their budgeted revenue to create a budget target that is easier to achieve.

A) understate; overstate B) overstate; understate C) understate; understate D) overstate; overstate Answer: B Diff: 1 LO: 7-3 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 3) Which of the following is NOT a reason for budgetary slack?

A) to buffer managers from budget cuts imposed by top management B) to provide protection against cost increases or revenue shortfalls due to unforeseen events C) to facilitate attainment of performance goals D) to impose a formal structure for planning purposes Answer: D Diff: 1 LO: 7-3 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

6 .

4) Misuse of budgets can lead to incentives to cheat and lie. Cheating and lying may take the form of ________.

A) making short-run decisions to increase profits that are not in the company's best long-run interests B) budgetary slack C) decreasing profits when actual profits significantly exceed the profit target D) all of the above Answer: D Diff: 2 LO: 7-3 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 5) How can a company avoid lying by employees when preparing a budget?

A) reward good budget forecasts B) reward good performance against the budget C) reward good budget forecasts and reward good performance against the budget D) reward good recipes for cooking the books Answer: C Diff: 1 LO: 7-3 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 6) Managers may lie to increase the resources allocated to their departments.

Answer: TRUE Diff: 2 LO: 7-3 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7) Budgetary slack helps buffer managers from budget cuts imposed by higher-level management.

Answer: TRUE Diff: 2 LO: 7-3 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 8) "Cooking the books" refers to recording fictitious sales or omitting costs.

Answer: TRUE Diff: 2 LO: 7-3 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7 .

7.4 Questions 1) Where does a company find forecasted financial statements for a five to ten year period?

A) strategic plan B) master budget C) rolling budget D) long-range plan Answer: D Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 2) A company identifies the following goals and objectives: Increase sales 10 percent each year.

Increase profits 5 percent each year.

Increase total plant assets 5 percent each year.

Which of the following budgets identifies the overall goals and objectives of an organization?

A) sales budget B) master budget C) strategic plan D) financial planning model Answer: C Diff: 2 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 3) A manager has several forecasts of sales corresponding to different levels of advertising. The manager decides to implement $1 million of advertising in the next fiscal year. At this level of advertising, the manager uses the ________ in the ________.

A) sales goal; sales forecast B) sales budget; sales forecast C) sales forecast; sales goal D) sales forecast; sales budget Answer: D Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

8 .

4) Which schedule gives the expected sales under a given set of conditions?

A) sales goal B) sales budget C) sales forecast D) master budget Answer: C Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 5) Important factors used to forecast sales for a company include all of the following items EXCEPT ________.

A) changes in firm's prices B) general economic conditions C) changes in product mix D) layout of production equipment Answer: D Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 6) Decisions made during long-range planning include ________.

A) addition or deletion of product line B) location of new plant C) purchase of equipment D) all of the above Answer: D Diff: 2 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

9 .

7) No matter how many technical experts a company uses in forecasting, the sales budget should ultimately be the responsibility of the ________.

A) economists B) CEO C) line managers D) market research staff Answer: C Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 8) Which of the following statements is FALSE about a strategic plan?

A) A strategic plan does not deal with a specific time period.

B) A strategic plan does not produce forecasted financial statements.

C) A strategic plan guides day-to-day operations.

D) A strategic plan provides an overall framework for a long-range plan.

Answer: C Diff: 2 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 9) Which of the following statements about long-range plans is FALSE? A) Long-range plans provide forecasted financial statements for five to ten year periods.

B) Long-range plans guide day-to-day operations.

C) Companies coordinate long-range plans with capital budgets.

D) A decision made during long-range planning is the acquisition of a plant building.

Answer: B Diff: 2 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 10) Which of the following budgets identifies the overall goals and objectives of the organization?

A) capital budget B) cash budget C) master budget D) strategic plan Answer: D Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 10 .

11) When examining a master budget, where does a company find the planned expenditures for facilities and equipment?

A) operating expense budget B) capital budget C) operating budget D) purchases budget Answer: B Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 12) A sales budget is a prediction of sales under a given set of conditions.

Answer: FALSE Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 13) Accurate sales forecasting is essential to effective budgeting.

Answer: TRUE Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 14) Sales forecasts are usually prepared under the direction of the top sales executive.

Answer: TRUE Diff: 1 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 15) The sales budget should be the responsibility of line management.

Answer: TRUE Diff: 2 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

11 .

16) The most forward-looking and least detailed budget is the strategic plan.

Answer: TRUE Diff: 2 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 17) A decision made during long-range planning includes whether to delete a product from a company's product line.

Answer: TRUE Diff: 2 LO: 7-4 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7.5 Questions 1) Which budget guides day-to-day operations in a business?

A) sales budget B) strategic plan C) master budget D) long-range plan Answer: C Diff: 1 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 2) In a master budget, the schedule of cash disbursements for operating expenses is used to prepare the ________.

A) capital budget B) purchases and cost of goods sold budget C) sales budget D) cash budget Answer: D Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

12 .

3) In a master budget, the schedule of cash disbursements for purchases of inventory is used to prepare the ________.

A) operating expense budget B) purchases budget C) capital budget D) cash budget Answer: D Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 4) In a master budget, a capital budget is used to prepare the ________.

A) sales budget B) budgeted income statement C) purchases and cost of goods sold budget D) cash budget Answer: D Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 5) The master budget is a detailed and comprehensive analysis of the ________ of the ________ plan.

A) first month; activity-based strategic B) first month; strategic C) first year; continuous D) first year; long-range Answer: D Diff: 1 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 6) The two main components of the master budget are the ________.

A) cash budget and the capital budget B) purchases budget and the budgeted income statement C) budgeted income statement and the budgeted balance sheet D) operating budget and the financial budget Answer: D Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 13 .

7) The ________ budget focuses on the budgeted income statement and the supporting schedules.

A) financial B) operating C) operating expense D) purchases and cost of goods sold Answer: B Diff: 1 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 8) Which of the following is NOT a component of the operating budget?

A) sales budget B) operating expense budget C) capital budget D) budgeted income statement Answer: C Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 9) Which of the following is NOT a component of the operating budget?

A) capital budget B) purchases and cost of goods sold budget C) budgeted income statement D) operating expense budget Answer: A Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 10) Which of the following is NOT a component of the financial budget?

A) capital budget B) cash budget C) budgeted balance sheet D) budgeted income statement Answer: D Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 14 .

11) Which of the following is a component of the financial budget?

A) budgeted balance sheet B) budgeted income statement C) sales budget D) purchases budget Answer: A Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 12) The financial budget includes ________.

A) the capital budget and the sales budget only B) the capital budget and the budgeted income statement only C) the capital budget, the cash budget and the budgeted balance sheet D) the cash budget and the purchases budget only Answer: C Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 13) A cash budget is a business plan that includes a set of schedules and financial statements.

Answer: FALSE Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 14) The elements of a financial budget for a merchandising firm include the capital budget, the cash budget and the budgeted balance sheet.

Answer: TRUE Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

15 .

15) An operating budget is the major part of the master budget that focuses on the balance sheet and supporting schedules.

Answer: FALSE Diff: 2 LO: 7-5 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7.6 Questions 1) The final output of the operating budget is ________.

A) budgeted statement of stockholders' equity B) budgeted balance sheet C) budgeted income statement D) budgeted statement of cash flows Answer: C Diff: 2 LO: 7-6 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 2) The final output of the financial budget is ________.

A) budgeted statement of stockholders' equity B) budgeted balance sheet C) budgeted income statement D) budgeted statement of cash flows Answer: B Diff: 2 LO: 7-6 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 3) What is the sequence of steps(order of preparation) for the operating budget?

A) sales budget, operating expense budget, purchases and cost of goods sold budget B) sales budget, capital budget, operating expense budget C) sales budget, purchases and cost of goods sold budget, schedule of cash collections from customers, operating expense budget D) sales budget, schedule of cash collections from customers, purchases and cost of goods sold budget, schedule of cash disbursements for purchases, operating expense budget Answer: D Diff: 2 LO: 7-6 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 16 .

4) What is the sequence of steps(order of preparation) for the financial budget?

A) sales budget, capital budget, cash budget, budgeted income statement B) sales budget, operating expense budget, purchases and cost of goods sold budget C) capital budget, cash budget, budgeted balance sheet D) disbursements for purchases, disbursements for operating expenses, cash budget Answer: C Diff: 2 LO: 7-6 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 5) What is the sequence of steps in preparing the master budget?

A) Output from the financial budget is used to prepare the operating budget.

B) Output from the operating budget is used to prepare the financial budget.

C) Output from the financial budget is used to prepare the budgeted income statement.

D) Output from the financial budget is used to prepare the operating expense budget.

Answer: B Diff: 2 LO: 7-6 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7.7 Questions 1) Which budget is used to develop the schedule of cash disbursements for operating expenses?

A) purchases and cost of goods sold budget B) cash disbursements budget C) operating expense budget D) cash budget Answer: C Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

17 .

2) What item is NOT a line item on the purchases and cost of goods sold budget?

A) purchases of inventory B) sales C) beginning inventory D) desired ending inventory Answer: B Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 3) The schedule of cash disbursements for purchases uses the ________.

A) sales budget B) operating expense budget C) schedule of cash disbursements for operating expenses D) purchases and cost of goods sold budget Answer: D Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 4) The schedule of cash collections from customers has ________.

A) cash sales only B) collections on credit sales only C) A and B D) budgeted purchases Answer: C Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 5) The schedule of cash disbursements for operating expenses does NOT have ________.

A) rent expense B) insurance expense C) wages expense D) amortization expense on patents Answer: D Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

18 .

6) When preparing the budgeted income statement, which of the following is the source for the amount of Cost of Goods Sold?

A) sales budget B) operating expense budget C) schedule of disbursements for operating expense D) purchases and cost of goods sold budget Answer: D Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7) When preparing the budgeted income statement, which of the following is the source for the amount of operating expenses?

A) schedule of disbursements for operating expenses B) purchases budget C) schedule of disbursements for purchases D) operating expense budget Answer: D Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 8) When preparing the budgeted income statement, which of the following is the source for the amount of sales?

A) sales budget B) purchases budget C) operating expense budget D) schedule of cash collections from customers Answer: A Diff: 1 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

19 .

9) The first step in preparing the master budget is the ________.

A) cash budget B) capital budget C) operating expense budget D) sales budget Answer: D Diff: 1 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 10) The first step in preparing the financial budget is the ________.

A) cash budget B) capital budget C) operating expense budget D) sales budget Answer: B Diff: 1 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 11) For next year, David Company has budgeted sales of 8,000 units, target ending inventory of 1,000 units and a beginning inventory of 300 units. How many units should be purchased?

A) 5,700 B) 6,300 C) 7,700 D) 8,700 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

20 .

12) Matthew Company has a sales budget for next month of $400,000. Cost of goods sold is expected to be 40% of sales. All units are paid for in the month following purchase. The beginning inventory is $5,000 and an ending inventory of $12,000 is desired. Beginning accounts payable is $76,000. The cost of goods sold for next month is ________.

A) $140,000 B) $160,000 C) $172,000 D) $220,000 Answer: B Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 13) Michael Company has a sales budget for next month of $300,000. Cost of goods sold is expected to be 50% of sales. All units are paid for in the month following purchase. The beginning inventory is $10,000 and an ending inventory of $12,000 is desired. Beginning accounts payable is $76,000. The purchases for next month are ________.

A) $138,000 B) $140,000 C) $150,000 D) $152,000 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

21 .

14) Benjamin Company has the following data: Month January February March April

Budgeted Sales $108,000 132,000 144,000 120,000

Cost of goods sold average 60% of sales. The inventory at December 31 was $19,440. Desired ending inventory levels are 20% of next month's sales at cost. What is the desired ending inventory value at February 28?

A) $15,840 B) $17,280 C) $26,400 D) $28,800 Answer: B Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 15) Downstairs Company has the following sales budget for the last six months of 2010: July August September October November December

$100,000 80,000 110,000 80,000 100,000 94,000

Historically, the cash collection of sales has been as follows: 65% of sales collected in month of sale 25% of sales collected in month following sale 8% of sales collected in second month following sale 2% of sales uncollectible What are the expected cash collections of sales in October?

A) $79,500 B) $85,900 C) $92,400 D) $99,500 Answer: B Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 22 .

16) Upstairs Company has the following data: Month January February March April

Budgeted Sales $108,000 132,000 144,000 120,000

The gross profit rate is 40% of sales and ending inventory at December 31 was $19,440. Desired ending inventory levels are 30% of next month's sales at cost. What are the expected total purchases for February?

A) $79,200 B) $81,360 C) $102,960 D) $105,120 Answer: B Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 17) Sebring Company has the following data: Month April May June July August

Budgeted Sales $40,000 44,000 50,000 52,000 48,000

The cost of goods sold percentage is 70% of sales and the desired ending inventory level is 25% of next month's sales at cost. ________ was the beginning inventory on May 1.

A) $3,300 B) $7,700 C) $8,750 D) $11,000 Answer: B Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

23 .

18) Segal Company has the following data: Month May June July August

Budgeted Sales $46,000 50,000 52,000 49,000

The cost of goods sold percentage is 80% of sales and the desired ending inventory level is 25% of next month's sales at cost. What is the beginning inventory on August 1?

A) $4,200 B) $8,450 C) $9,800 D) $10,400 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 19) Bronkov Company has the following data: Month May June July August

Budgeted Sales $46,000 50,000 52,000 48,000

The cost of goods sold percentage is 65% of sales and the desired ending inventory level is 25% of next month's sales at cost. What are the expected total purchases for June?

A) $17,500 B) $32,500 C) $32,825 D) $40,950 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

24 .

20) Audrey Company has the following data: Month May June July August

Budgeted Sales $46,000 50,000 52,000 48,000

The cost of goods sold percentage is 65% of sales and the desired ending inventory is 25% of next month's sales at cost. What are the total purchases budgeted for July?

A) $33,150 B) $33,800 C) $41,600 D) $42,250 Answer: A Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 21) Santelle Company expects August sales to be $30,000. Approximately 40% of sales are cash sales.

Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in August from August sales.

A) $9,000 B) $12,000 C) $21,000 D) $36,000 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

25 .

22) Hoover Company expects June sales to be $30,000. Of these sales, credit sales are expected to be $12,000. Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in June from June sales.

A) $9,200 B) $14,000 C) $17,200 D) $24,000 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 23) Bush Company expects May sales to be $20,000. Approximately 40% of sales are cash sales. Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in May from May sales.

A) $4,000 B) $6,000 C) $8,000 D) $14,000 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

26 .

24) The following sales budget has been prepared: Month September October November December

Cash Sales $167,000 225,000 330,000 135,000

Credit Sales $123,000 180,000 210,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What are the estimated cash collections in December?

A) $135,000 B) $197,000 C) $325,000 D) $332,000 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 25) Stickel Company has the following sales budget: Month September October November December

Cash Sales $100,000 125,000 207,000 67,000

Credit Sales $200,000 190,000 199,000 144,000

Collection of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What is the expected balance of Accounts Receivable at October 31?

A) $95,000 B) $110,000 C) $115,000 D) $180,000 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

27 .

26) Slowinski Company has the following sales budget: Month September October November December

Cash Sales $100,000 125,000 130,000 135,000

Credit Sales $300,000 180,000 210,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What are the estimated cash collections in November?

A) $130,000 B) $197,000 C) $327,000 D) $337,000 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 27) Corbin Company has prepared the following sales budget: Month September October November December

Cash Sales $99,000 225,000 310,000 94,000

Credit Sales $250,000 180,000 210,000 170,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What is the expected balance in Accounts Receivable at November 30?

A) $77,500 B) $105,000 C) $123,000 D) $210,000 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

28 .

28) Dooley Company has prepared the following sales budget: Month September October November December

Cash Sales $123,000 140,000 167,000 189,000

Credit Sales $210,000 200,000 260,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What are the estimated cash collections in October from October sales?

A) $125,000 B) $140,000 C) $230,000 D) $240,000 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 29) John Company has the following sales budget: Month September October November December

Cash Sales $100,000 125,000 130,000 135,000

Credit Sales $200,000 180,000 210,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What is the expected balance in Accounts Receivable at December 31?

A) $95,000 B) $116,000 C) $190,000 D) $210,000 Answer: B Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

29 .

30) Rodney Company has the following sales budget: Month September October November December

Cash Sales $100,000 125,000 130,000 135,000

Credit Sales $250,000 180,000 210,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months following sale. No uncollectible accounts are expected. What are the estimated cash collections in September from September sales?

A) $100,000 B) $200,000 C) $225,000 D) $250,000 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 31) Donnie Company has the following information: Month January February March April Budgeted Operating Expenses Per Month Wages Advertising Depreciation Other expenses

Budgeted Sales $80,000 85,000 92,000 79,000

$15,000 12,000 3,000 4% of sales

All cash expenses are paid as incurred. What are the total operating expenses budgeted for the month of January?

A) $30,000 B) $30,040 C) $31,200 D) $33,200 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 30 .

32) Atkinson Company has the following information: Month January February March April Budgeted Operating Expenses Per Month Wages Advertising Depreciation Other expenses

Budgeted Sales $76,000 85,000 92,000 80,000

$15,000 12,000 3,000 4% of sales

All cash expenses are paid as incurred. What are the total operating expenses budgeted for the month of April?

A) $3,160 B) $30,000 C) $33,200 D) $33,680 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

31 .

33) Jupiter Company has the following information: Month January February March April Budgeted Operating Expenses Per Month Wages Advertising Depreciation Sales Commissions

Budgeted Sales $76,000 85,000 100,000 79,000

$15,000 12,000 3,000 4% of sales

All cash expenses are paid as incurred. What are the budgeted total cash disbursements for operating expenses in March?

A) $3,680 B) $30,000 C) $31,000 D) $34,000 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

32 .

34) Venus Company has the following information: Month January February March April

Budgeted Sales $90,000 85,000 92,000 79,000

Budgeted Operating Expenses Per Month Wages Advertising Depreciation Sales Commission

$15,000 12,000 3,000 4% of sales

All cash expenses are paid as incurred. What are the total cash disbursements budgeted for operating expenses for the month of January?

A) $28,200 B) $30,000 C) $30,600 D) $33,600 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 35) Paulson Company's expected sales for April are $29,000. Other information follows: Budgeted Operating Expenses Wages Advertising Depreciation Rent Promotion

Amount $4,000 1,680 1,440 2,560 5% of sales

What are the total expected operating expenses for April?

A) $6,240 B) $9,680 C) $9,690 D) $11,130 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

33 .

36) Potter Company's expected sales for April are $29,000. Other information follows: Budgeted Operating Expenses Wages Advertising Depreciation Rent Promotion

Amount $4,000 1,680 1,440 2,560 5% of sales

All cash expenses are paid as incurred. What are the expected total cash disbursements for operating expenses for April?

A) $6,240 B) $9,680 C) $9,690 D) $11,130 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 37) Paul Company's expected sales for April are $27,600. Other information follows: Budgeted Operating Expenses Wages Advertising Patent amortization Rent Marketing

Amount $2,000 1,680 1,440 2,560 5% of sales

Which of the following operating expenses is a noncash expense?

A) Advertising B) Rent C) Patent amortization D) Wages Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

34 .

38) Mark Company has the following information: Month January February March April May

Budgeted Purchases $40,000 29,000 30,520 29,480 27,680

Purchases are paid as follows: 10% in the month of purchase 50% one month after purchase 40% two months after purchase What is the estimated cash disbursement in March from January purchases?

A) $3,052 B) $12,000 C) $14,500 D) $16,000 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

35 .

39) Christian Company has the following information: Month January February March April May

Budgeted Purchases $26,800 29,000 30,520 29,480 27,680

Purchases are paid as follows: 10% in the month of purchase 50% one month after purchase 40% two months after purchase What is the expected balance in Accounts Payable at March 31?

A) $2,900 B) $18,312 C) $30,520 D) $39,068 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

36 .

40) Healing Company has the following information: Month January February March April May

Budgeted Purchases $56,800 49,000 30,520 35,480 27,680

Purchases are paid as follows: 10% in the month of purchase 50% one month after purchase 40% two months after purchase What is the estimated cash disbursement in May from April purchases?

A) $11,072 B) $11,792 C) $13,840 D) $17,740 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

37 .

41) May Company has the following information: Month January February March April May

Budgeted Purchases $33,000 37,000 31,000 30,000 27,680

Purchases are paid as follows: 75% in the month of purchase 25% one month after purchase What is the expected balance in Accounts Payable on April 30?

A) 0 B) $7,500 C) $20,250 D) $30,000 Answer: B Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

38 .

42) Marjorie Company has the following information: Month January February March April May

Budgeted Purchases $25,000 19,000 33,000 27,000 27,680

Purchases are paid as follows: 75% in the month of purchase 25% one month after purchase What are the estimated cash disbursements in March?

A) $22,500 B) $24,750 C) $29,500 D) $39,000 Answer: C Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

39 .

43) Margaret Company has the following information: Month January February March April May

Budgeted Purchases $26,800 29,000 30,520 29,480 27,680

Purchases are paid as follows: 10% in the month of purchase 50% one month after purchase 40% two months after purchase What is the expected balance in Accounts Payable on May 31?

A) $2,948 B) $11,792 C) $24,912 D) $36,704 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

40 .

44) Mary Company has the following information: Month January February March April May

Budgeted Purchases $26,800 29,000 30,520 29,480 27,680

Purchases are paid as follows: 10% in the month of purchase 50% one month after purchase 40% two months after purchase

A) $14,740 B) $17,508 C) $26,948 D) $29,716 Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 45) ________ expense is driven by sales volume.

A) Rent B) Insurance C) Depreciation D) Sales commission Answer: D Diff: 1 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

41 .

46) The Wehr Company is preparing a budgeted income statement. The dollar amount of Wages Expense put on the income statement can be found on the ________.

A) purchases budget B) sales budget C) schedule of cash disbursements for purchases D) operating expense budget Answer: D Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 47) Cash collections from customers in any given month include the current month's cash sales and expected collections on credit sales.

Answer: TRUE Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 48) The first step in preparing the master budget is the preparation of the budgeted income statement.

Answer: FALSE Diff: 2 LO: 7-7 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

42 .

49) The Pinsky Company has the following information available: Month March April May June July

Budgeted Sales $150,000 153,000 151,000 254,500 252,500

The gross profit rate is 40% and the desired ending inventory level is 20% of the next month's cost of sales.

Required: Prepare a purchases and cost of goods sold budget for April, May and June.

Answer: April May June Budg. cost of goods sold $91,800 $90,600 $152,700 Plus: Ending inventory 18,120 30,540 30,300 Total merchandise needed 109,920 121,140 183,000 Less: Beginning inventory (18,360) (18,120) (30,540) Purchases $91,560 $103,020 $152,460 Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

43 .

50) The McGraw Company has the following information available: Month June July August September October

Budgeted Sales $68,000 72,000 74,000 76,000 78,000

The cost of goods sold rate is 65% and the desired ending inventory level is 25% of the next month's cost of sales.

Required: Prepare a purchases and cost of goods sold budget for July, August and September.

Answer: July August September Budg. cost of goods sold $46,800 $48,100 $49,400 Plus: Ending inventory 12,025 12,350 12,675 Total merchandise needed 58,825 60,450 62,075 Less: Beginning inventory (11,700) (12,025) (12,350) Purchases $47,125 $48,425 $49,725 Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

44 .

51) Phillip Corporation has the following sales budget: Month May June July August September

Budgeted Sales $84,000 100,000 92,000 110,000 90,000

Credit sales are 80% of total sales. Collections of credit sales are 80% in the month of sale, 15% in the month after sale and 5% are never collected.

Required: Prepare a schedule of cash collections for June, July and August.

Answer: June July August Cash sales $20,000 $18,400 $22,000 Collections of credit sales: Current month 64,000 58,880 70,400 Previous month 10,080 12,000 11,040 Total collections $94,080 $89,280 $103,440 Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

45 .

52) Marvin Company has the following sales budget: Month February March April

Cash Sales $14,000 12,800 10,800

Credit Sales $30,000 32,000 28,000

Collections of credit sales are 40% in the month of sale, 50% in the month after sale and 10% two months after sale. No uncollectible accounts are expected.

Required: Prepare a schedule of cash collections for April.

Answer: Cash sales $10,800 Credit sales: Current month 11,200 Previous month 16,000 Two months ago 3,000 Total collections $41,000 Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

46 .

53) Olson Company has the following data: Month January February March April May

Budgeted Purchases $225,000 190,000 200,000 220,000 150,000

Purchases are paid as follows: 10% in the month of purchase 80% one month after purchase 10% two months after purchase Required: Prepare a schedule of cash disbursements for purchases for March, April and May. Answer: March April May January $22,500 February 152,000 $19,000 March 20,000 160,000 $20,000 April 22,000 176,000 May ______ ______ 15,000 Total $194,500 $201,000 $211,000 Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

47 .

54) Jorgensen Company has the following data: Month April May June July

Budgeted Sales $154,000 160,000 142,000 136,000

Budgeted Operating Expenses Per Month Wages $12,600 Advertising 27,200 Depreciation 19,000 Rent 20,400 Freight-out 20% of sales Sales commission 5% of sales Required: Prepare a schedule of cash disbursements for operating expenses for April, May and June. All cash expenses are paid when incurred.

Answer: April May June Wages $12,600 $12,600 $12,600 Advertising 27,200 27,200 27,200 Rent 20,400 20,400 20,400 Freight-out 30,800 32,000 28,400 Sales commission 7,700 8,000 7,100 Total disbursements $98,700 $100,200 $95,700 Diff: 2 LO: 7-7 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7.8 Questions 1) Which of the following budget(s) has(have) the disbursement for a planned purchase of equipment?

A) operating expense budget B) purchases and cost of goods sold budget C) cash budget only D) cash budget and capital budget Answer: D Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

48 .

2) On the cash budget, how do we obtain the available cash balance?

A) beginning cash balance B) minimum cash balance desired C) total cash increase from financing plus net cash receipts and disbursements D) beginning cash balance minus minimum cash balance desired Answer: D Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 3) On a cash budget, if available cash balance plus net cash receipts and disbursements is negative, ________.

A) repayment of loan is suggested B) repayment of loan is required C) borrowing is necessary D) borrowing is not necessary Answer: C Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 4) When preparing a budgeted balance sheet, the balance for the inventory account is found on the ________.

A) sales budget B) cash budget C) operating expense budget D) purchases and cost of goods sold budget Answer: D Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

49 .

5) When preparing a budgeted balance sheet, the balance in the cash account is found on the ________.

A) sales budget B) cash budget C) operating expense budget D) capital budget Answer: B Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 6) When preparing a budgeted balance sheet, the balance in the equipment account is derived from information in the ________.

A) operating expense budget B) capital budget C) purchases and cost of goods sold budget D) schedule of cash disbursements for operating expenses Answer: B Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 7) The financial budget is used by managers to ________.

A) manage financial affairs B) manage employee hiring patterns C) manage the cash balance D) plan for future stock dividends Answer: C Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 8) The total amount of cash collections from customers by month appears on the ________.

A) sales budget B) operating expense budget C) cash budget D) budgeted balance sheet Answer: C Diff: 1 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 50 .

9) Jensen Company is preparing a cash budget for the month of June. The following information is available: Cash Balance, May 31, 2015 Cash collections from customers in June Cash paid for merchandise in June Paid operating expenses in June Purchase furniture for cash in June Depreciation expense in June Amortization expense in June

$10,000 76,000 42,000 17,000 5,000 2,000 3,000

The minimum cash balance desired is $10,000. What are the net cash receipts and disbursements for the month of June?

A) $7,000 B) $10,000 C) $12,000 D) $17,000 Answer: C Diff: 3 LO: 7-8 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 10) Wininger Company is preparing a cash budget for the month of June. The following information is available: Cash Balance, May 31, 2015 Cash collections from customers in June Cash paid for merchandise in June Paid operating expenses in June Purchase furniture for cash in June Depreciation expense in June Amortization expense in June

$20,000 46,000 42,000 12,000 3,000 2,000 4,000

The minimum cash balance desired is $10,000. What is the deficiency of cash before financing at June 30, 2015?

A) $(1,000) B) $(3,000) C) $(7,000) D) $(11,000) Answer: A Diff: 3 LO: 7-8 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

51 .

11) Goller Company is preparing a cash budget for the month of June. The following information is available: Cash Balance, May 31, 2015 Cash collections from customers in June Cash paid for merchandise in June Cash paid for operating expenses in June Purchase furniture for cash in June Depreciation expense in June Amortization expense in June

$10,000 66,000 42,000 12,000 3,000 5,000 5,000

The minimum cash balance desired is $10,000. What is the cash balance on June 30, 2015?

A) $9,000 B) $10,000 C) $11,000 D) $19,000 Answer: D Diff: 3 LO: 7-8 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 12) Cornish Company is preparing a cash budget for the month of June. The following information is available: Cash Balance, May 31, 2015 Cash collections from customers in June Depreciation expense in June Cash paid for equipment in June Cash paid for merchandise in June Cash paid for operating expenses in June Cash dividend paid in June

$11,000 43,000 10,000 20,000 20,000 20,000 5,000

The minimum cash balance desired is $5,000. What are the net cash receipts and disbursements for the month of June?

A) $(2,000) B) $(3,000) C) $(22,000) D) $(32,000) Answer: C Diff: 3 LO: 7-8 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

52 .

13) Cornell Company is preparing a cash budget for the month of June. The following information is available: Cash Balance, May 31, 2014 Cash collections from customers in June Cash paid for land in June Patent amortization expense in June Cash paid for merchandise in June Cash paid for operating expenses in June Cash dividend paid in June

$11,000 43,000 10,000 5,000 20,000 20,000 5,000

The minimum cash balance desired is $5,000. What is the deficiency of cash before financing at June 30, 2014?

A) $(5,000) B) $(6,000) C) $(11,000) D) $(12,000) Answer: B Diff: 3 LO: 7-8 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 14) Warbel Company is preparing a cash budget for the month of June. The following information is available: Cash Balance, May 31, 2015 Cash collections from customers in June Cash paid for merchandise in June Cash paid for operating expenses in June Paid cash dividend in June

$11,000 43,000 20,000 20,000 5,000

The minimum cash balance desired is $5,000. What is the cash balance on June 30, 2015?

A) $8,000 B) $9,000 C) $10,000 D) $13,000 Answer: B Diff: 3 LO: 7-8 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

53 .

15) ________ usually prepare and use the operating budget. ________ focus on the financial budget.

A) Sales managers; the board of directors B) Controllers and treasurers; line operating managers C) Line operating managers; controllers and treasurers D) The audit committee; the board of directors Answer: C Diff: 1 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 16) Budgets that focus on the budgeted cost of activities required to produce and sell products are called ________.

A) strategic budgets B) master budgets C) activity-based budgets D) rolling budgets Answer: C Diff: 1 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 17) The activity-based budgeting system emphasizes ________.

A) the resources needed by a company B) the preparation of budgets by function C) the attainment of long-range goals D) activities and their consumption of resources Answer: D Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

54 .

18) ________ models are mathematical models that can react to any set of assumptions about sales, costs and product mix.

A) Strategic B) Long-range C) Financial planning D) Operating budget Answer: C Diff: 1 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 19) The beginning available cash balance equals the beginning cash balance plus the minimum cash balance desired.

Answer: TRUE Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 20) The cash budget begins with the ending cash balance from the previous period.

Answer: TRUE Diff: 1 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 21) Depreciation expense is usually a disbursement listed on the cash budget.

Answer: FALSE Diff: 1 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 22) The following rule applies when preparing the cash budget. If available cash plus net cash receipts and disbursements is negative, then borrowing is necessary.

Answer: TRUE Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

55 .

23) Line operating managers usually prepare and use the operating budget.

Answer: TRUE Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 24) The operating budget is a better measure of a company's long-term performance than the financial budget.

Answer: TRUE Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 25) Activity-based budgets are an example of functional budgeting.

Answer: FALSE Diff: 2 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 26) Financial planning models enable managers to get answers to "what-if" questions.

Answer: TRUE Diff: 1 LO: 7-8 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

56 .

27) Donald Company has the following information: Cash Balance, May 31 Dividends paid in June Cash paid for operating expenses in June Equipment depreciation expense in June Patent amortization expense in June Cash collections on sales in June Merchandise purchases paid in June Purchase equipment for cash in June

$45,000 12,000 36,800 4,500 2,000 99,000 56,200 17,500

Donald Company wants to keep a minimum cash balance of $10,000. Assume that borrowing occurs at the beginning of the month and repayments occur at the end of the month. Interest of 1% is paid in cash at the end of each month when debt is outstanding. Borrowing and repayments are carried out in multiples of $1,000.

Required: Prepare a cash budget for June.

Answer: Beginning cash balance Minimum cash balance desired Available cash balance

$45,000 10,000 $35,000

Cash receipts and disbursements: Collections from customers $99,000 Payments for merchandise (56,200) Payments for operating expenses (36,800) Dividends paid (12,000) Purchase equipment for cash (17,500) Net cash receipts and disbursements (23,500) Excess of cash before financing $11,500 Borrowing 0 Total cash increase from financing 0 Ending cash balance $21,500 Diff: 3 LO: 7-8 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

57 .

28) O'Brien Company has the following information: Cash Balance, June 30 Dividends paid in July Cash paid for operating expenses in July Depreciation expense in July Cash collections on sales in July Merchandise purchases paid in July Purchase equipment for cash in July

$50,000 60,000 185,500 12,000 510,000 180,000 94,500

O'Brien Company wants to maintain a minimum cash balance of $50,000. Assume that borrowing occurs at the beginning of the month and repayments occur at the end of the month. Interest of 1% per month is paid in cash at the end of each month debt is outstanding. Borrowing and repayment is carried out in multiples of $1,000.

Required: Prepare a cash budget for July.

Answer: Beginning cash balance Minimum cash balance desired Available cash balance

$50,000 50,000 $0

Cash receipts and disbursements: Collections from customers $510,000 Payments for merchandise (180,000) Payments for operating expenses (185,500) Dividends paid (60,000) Purchase equipment for cash (94,500) Net cash receipts and disbursements (10,000) Deficiency of cash before financing $(10,000) Borrowing(at beginning of month) 11,000 Interest Payment($11,000 x 1%) (110) Total cash increase from financing 10,890 Ending cash balance $50,890 Diff: 3 LO: 7-8 AACSB: Analytic skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

58 .

7.9 Questions 1) Systematically varying budget data input to determine the effects of each change on the budget is called ________ analysis.

A) operating budget B) financial budget C) sensitivity D) master budget Answer: C Diff: 1 LO: 7-9 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget 2) A spreadsheet can be used to prepare ________.

A) the operating budget B) the financial budget C) schedules from the master budget D) all of the above Answer: D Diff: 2 LO: 7-9 AACSB: Reflective thinking skills Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the master budget

59 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 8 Flexible Budgets and Variance Analysis 8.1 Questions 1) An example of a favorable variance is ________.

A) actual revenues are less than expected revenues B) actual expenses are less than expected expenses C) actual material prices are greater than expected material prices D) expected labor costs are less than actual labor costs Answer: B Diff: 2 LO: 8-1 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis 2) Spending less than budgeted for maintenance costs will result in a(n) ________ variance. When actual revenues exceed budgeted revenues, this results in a(n) ________ variance.

A) unfavorable; unfavorable B) unfavorable; favorable C) favorable; unfavorable D) favorable; favorable Answer: D Diff: 2 LO: 8-1 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 3) Unfavorable variances ________ represent bad decisions made by managers.

A) always B) sometimes C) never D) none of the above Answer: B Diff: 1 LO: 8-1 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 4) If actual expenses are less than expected expenses, the expense variance will be unfavorable.

Answer: FALSE Diff: 2 LO: 8-1 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis

1 .

5) A favorable expense variance is when budgeted expenses are less than actual expenses.

Answer: FALSE Diff: 2 LO: 8-1 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis 8.2 Questions 1) A budget prepared for one expected level of activity is called a ________.

A) flexible budget B) static budget C) variable budget D) rolling budget Answer: B Diff: 1 LO: 8-2 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 2) A budget prepared for different levels of activity is called a ________.

A) rolling budget B) operating budget C) flexible budget D) static budget Answer: C Diff: 1 LO: 8-2 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 3) The static budget is based on the ________ level of output and the flexible budget is based on the ________ level of output.

A) actual; expected B) expected; actual C) expected; planned D) actual; projected Answer: B Diff: 2 LO: 8-2 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

2 .

4) A static budget is prepared for one expected level of activity.

Answer: TRUE Diff: 1 LO: 8-2 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 5) A static budget has multiple levels of activity.

Answer: FALSE Diff: 1 LO: 8-2 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 6) A flexible budget is different from a variable budget.

Answer: FALSE Diff: 1 LO: 8-2 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 7) A flexible budget adjusts for changes in sales volume and other cost-drivers.

Answer: TRUE Diff: 1 LO: 8-2 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 8.3 Questions 1) To calculate the numbers in a flexible budget, managers use ________.

A) cost functions developed from regression analysis B) flexible budget formulas C) cost functions obtained from the high-low method D) all of the above Answer: D Diff: 2 LO: 8-3 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

3 .

2) When preparing a flexible budget income statement, ________ costs are constant at different levels of activity.

A) variable B) step C) contributed D) fixed Answer: D Diff: 2 LO: 8-3 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 3) Which of the following statements is FALSE? A) Flexible budgets are prepared for a range of activity.

B) Flexible budgets are matched to actual levels of activity.

C) A flexible budget is also called a variable budget.

D) Flexible budgets are based on different assumptions about cost behavior than those used for static budgets.

Answer: D Diff: 2 LO: 8-3 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 4) Oroz Company had the following information available: Expected Costs and Selling Price Based on 5,000 units: Variable manufacturing costs per unit Fixed manufacturing costs per unit Selling price per unit Expected production level

$32 $20 $70 5,000 units

In the flexible budget at 10,000 units, what is the total manufacturing cost?

A) $250,000 B) $420,000 C) $520,000 D) $700,000 Answer: B Diff: 2 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

4 .

5) Perez Company had the following information available: Expected Costs and Selling Price Based on 5,000 Units: Variable manufacturing costs per unit Fixed manufacturing costs per unit Selling price per unit Expected production level

$32 $20 $70 5,000 units

In the flexible budget at 15,000 units, what is the total manufacturing cost?

A) $480,000 B) $580,000 C) $680,000 D) $780,000 Answer: B Diff: 2 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 6) Huntsman Company's variable selling and administrative expenses are $48,000 at a production level of 6,000 units. If the production level is 8,000 units, what are the variable selling administrative expenses?

A) $48,000 B) $56,000 C) $64,000 D) $80,000 Answer: C Diff: 1 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 7) Which of the following is used to develop flexible budgets?

A) fixed overhead variances B) static budget variances C) flexible budget variances D) cost functions Answer: D Diff: 1 LO: 8-3 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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8) A company that has an activity-based costing system with multiple cost drivers will prepare a(n) ________ budget.

A) financial planning B) short-range planning C) activity-based flexible D) strategic Answer: C Diff: 2 LO: 8-3 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 9) When should a company use an activity-based flexible budget with multiple cost drivers instead of a simple flexible budget with one cost driver?

A) when a significant portion of costs vary with only one cost driver B) when a significant portion of costs vary with the number of units of output C) when a significant portion of costs vary with the number of units of sales D) when a significant portion of costs vary with cost drivers other than units of output Answer: D Diff: 2 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 10) Perez Company uses activity-based costing. The company is trying to estimate the costs of the processing activity in the factory. The company has developed the following flexible budget formula: Y = $10.50X + $13,000 Where: Y = Total processing cost per quarter and X = Number of machine hours If 10,000 machine hours are used next quarter, total variable costs are ________ and total fixed costs are ________.

A) $105,000; $13,000 B) $105,000; $130,000,000 C) $113,000; $130,000,000 D) $10.50; $13,000 Answer: A Diff: 2 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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11) Garcia Company planned to produce 12,000 units. This level of activity required 40 setups at a cost of $18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost was $26,000. What is the static budget amount for total setup costs?

A) $21,000 B) $25,500 C) $26,000 D) $38,000 Answer: D Diff: 2 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 12) Sanchez Company planned to produce 12,000 units. This level of activity required 20 setups at a cost of $22,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost was $26,000. At 10,000 units, what is the flexible budget amount for total setup costs?

A) $7,500 B) $22,000 C) $26,000 D) $29,500 Answer: D Diff: 2 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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13) Fill in the blanks to complete the flexible budget for Mammoth Company. Assume the different levels of output are in the relevant range. ____________________________________________________________ Budget Various Levels of Output Formula Per Unit Units 3,000 4,000 5,000 Sales $25 _____ _____ _____ Variable costs: Manufacturing _____ _____ $32,000 _____ Administrative $2.625 _____ _____ _____ Fixed costs: Manufacturing Administrative

_____ $12,500

_____ _____

$25,000 _____

Operating income _____ _____ _____ Answer: 3,000 4,000 5,000 Sales $75,000 $100,000 $125,000 Variable costs: Manufacturing 24,000 32,000 40,000 Administrative 7,875 10,500 13,125 Fixed costs: Manufacturing 25,000 25,000 25,000 Administrative 12,500 12,500 12,500 Operating income $5,625 $20,000 $34,375 Diff: 2 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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14) Use the following data to prepare a flexible budget for possible production levels of 5,000, 5,500 and 6,000 units. Assume all levels of production are in the same relevant range.

Sales price Variable costs: Manufacturing Administrative Selling

$12.00 per unit $6.00 per unit $1.50 per unit $0.50 per unit

Fixed costs(at 5,000 units): Manufacturing $15,000 Administrative $5,000 Answer: Units 5,000 5,500 6,000 Sales $60,000 $66,000 $72,000 Variable costs: Manufacturing 30,000 33,000 36,000 Administrative 7,500 8,250 9,000 Selling 2,500 2,750 3,000 Contribution margin 20,000 22,000 24,000 Fixed costs: Manufacturing 15,000 15,000 15,000 Administrative 5,000 5,000 5,000 Operating income $0 $2,000 $4,000 Diff: 2 LO: 8-3 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 8.4 Questions 1) The activity-level variance for fixed costs equals zero when ________.

A) the actual level of output equals the static budget level of output B) the actual level of output is greater than the static budget level of output C) the actual level of output is less than the static budget level of output D) all of the above Answer: D Diff: 3 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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2) In the relevant range, the sales-activity variance for fixed costs is always ________.

A) greater than the flexible budget variance B) less than the flexible budget variance C) greater than the static budget variance D) zero Answer: D Diff: 3 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 3) The static budget variance is the difference between the ________ and the ________.

A) amounts for the flexible budget; amounts for the static budget B) flexible budget variance; activity level variance C) actual results; amounts for the static budget D) actual results; amounts for the flexible budget Answer: C Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 4) The static budget variance is equal to the sum of ________ and ________.

A) direct materials variance; direct labor variance B) fixed overhead variance; variable overhead variance C) flexible budget variance; activity-level variance D) direct materials price variance; direct materials quantity variance Answer: C Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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5) Kilsdonk Company has the following information available: Budgeted cost of direct materials at 900,000 units Budgeted cost of direct materials at 820,000 units Actual cost of direct materials at 820,000 units Actual level of output(units) Planned level of output(units)

$900,000 $820,000 $840,000 820,000 900,000

The cost driver of product costs is units of output. What is the static budget variance for direct material costs?

A) $20,000 Unfavorable B) $20,000 Favorable C) $60,000 Favorable D) $60,000 Unfavorable Answer: C Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 6) Margaret Duffy Company has the following information available: Budgeted cost of direct materials at 900,000 units Budgeted cost of direct materials at 820,000 units Actual cost of direct materials at 820,000 units Actual level of output(units) Planned level of output(units)

$900,000 $820,000 $840,000 820,000 900,000

The cost driver of product costs is units of output. What is the flexible budget variance for direct material costs?

A) $20,000 Unfavorable B) $20,000 Favorable C) $60,000 Favorable D) $60,000 Unfavorable Answer: A Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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7) Corrao Company had a static budgeted operating income of $8.6 million. Actual operating income was $6.4 million. The flexible budget operating income at the actual level of output is $7,000,000. What is the static-budget variance of operating income?

A) $1.6 million Favorable B) $1.6 million Unfavorable C) $2.2 million Favorable D) $2.2 million Unfavorable Answer: D Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 8) For the current year, LeBombard Company's static budget sales were $225,000. Actual sales for the current year were $220,000. Actual sales last year were $219,000. Expected sales last year were $225,000.

What is the static budget variance for sales in the current year?

A) $5,000 Favorable B) $5,000 Unfavorable C) $6,000 Favorable D) $6,000 Unfavorable Answer: B Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 9) Differences between the actual results and the flexible budget at the actual level of output achieved are ________ variances.

A) static budget B) activity budget C) flexible budget D) operating budget Answer: C Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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10) Conner Company has the following information: Actual operating loss at 5,000 units Budgeted operating income at 5,000 units Budgeted operating income at 10,000 units Planned level of operations Actual level of operations

$(11,000) $5,000 $12,000 10,000 units 5,000 units

Assume units of output are the cost driver for product costs. What is the static budget variance for operating income?

A) $11,000 Unfavorable B) $12,000 Unfavorable C) $23,000 Unfavorable D) $23,000 Favorable Answer: C Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 11) Potter Company has the following information: Actual operating loss at 5,000 units Budgeted operating income at 5,000 units Budgeted operating income at 10,000 units Planned level of operations Actual level of operations

$(11,000) $5,000 $12,000 10,000 units 5,000 units

Assume the cost driver of product costs is units of production. What is the flexible budget variance for operating income?

A) $5,000 Unfavorable B) $11,000 Unfavorable C) $16,000 Unfavorable D) $16,000 Favorable Answer: C Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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12) Assume sales are the cost driver for product costs. The difference between the static budget amount for sales and the flexible budget amount for sales at the actual level of sales is called the ________. The difference between the flexible budget amount for sales at the actual level of sales and the actual amount for sales is called the ________.

A) static variance; flexible budget variance B) master variance; flexible budget variance C) quantity variance; static budget variance D) sales activity variance; flexible budget variance Answer: D Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 13) Differences between actual results and the static budget at the original planned level of output are ________ variances.

A) flexible budget B) financial budget C) operating budget D) static budget Answer: D Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 14) Flexible budget variances are the deviations of actual results from the ________.

A) flexible budget amounts for the achieved level of activity B) flexible budget amounts for the static level of activity C) static budget amounts for the expected level of activity D) static budget amounts for last year's level of activity Answer: A Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 15) The amount of actual operating income may differ from the static budget amount for operating income because ________.

A) actual output levels were not the same as in the static budget B) actual variable costs were higher than expected variable costs C) actual fixed costs were higher than expected fixed costs D) all of the above Answer: D Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 14 .

16) Which is NOT a reason for a static budget variance?

A) Actual sales volume was higher than projected sales volume.

B) Actual variable costs were higher than static budget variable costs.

C) Actual fixed costs were higher than static budget fixed costs.

D) Actual sales volume in current period was higher than projected sales volume in last period.

Answer: D Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 17) If sales are the cost driver, unfavorable flexible budget variances result from ________.

A) actual costs exceeding planned costs B) planned costs exceeding actual costs C) actual sales exceeding planned sales D) planned sales exceeding actual sales Answer: A Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 18) Flexible budget variances are the difference between the actual results and ________.

A) the static budget for the planned level of output B) the flexible budget for the planned level of output C) the flexible budget for the actual level of output D) the master budget for the planned level of output Answer: C Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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19) The following data are for Pablo Corporation:

Units Sales Variable costs Contribution margin Fixed costs Operating income

Actual 18,000 $360,000 234,000 $126,000 76,000 $50,000

Static Budget 16,000 $320,000 192,000 $128,000 80,000 $48,000

Flexible Budget for Actual Sales Activity 18,000 $360,000 216,000 $144,000 80,000 $64,000

The flexible budget variance for operating income is ________.

A) $2,000 Favorable B) $2,000 Unfavorable C) $14,000 Favorable D) $14,000 Unfavorable Answer: D Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 20) The following data are for California Closets:

Units Sales Variable costs Contribution margin Fixed costs Operating income

Actual 18,000 $360,000 234,000 $126,000 76,000 $50,000

Static Budget 16,000 $320,000 192,000 $128,000 80,000 $48,000

Flexible Budget for Actual Sales Activity 18,000 $360,000 216,000 $144,000 80,000 $64,000

The sales activity variance for operating income is ________.

A) $14,000 Favorable B) $14,000 Unfavorable C) $16,000 Favorable D) $16,000 Unfavorable Answer: C Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

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21) The following data are for Sandy Corporation:

Units Sales Variable costs Contribution margin Fixed costs Operating income

Actual 18,000 $360,000 234,000 $126,000 76,000 $50,000

Static Budget 16,000 $320,000 192,000 $128,000 80,000 $48,000

Flexible Budget for Actual Sales Activity 18,000 $360,000 216,000 $144,000 80,000 $64,000

The static budget variance for operating income is ________.

A) $2,000 Favorable B) $2,000 Unfavorable C) $16,000 Favorable D) $16,000 Unfavorable Answer: A Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 22) If the flexible budget variance was $6,000 Favorable and the sales activity variance was $3,000 Favorable, then the static budget variance was ________.

A) $3,000 Favorable B) $3,000 Unfavorable C) $9,000 Favorable D) $9,000 Unfavorable Answer: C Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 23) Who is usually responsible for sales activity variances for income?

A) operating managers in factory B) marketing managers C) research and development function D) product design function Answer: B Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

17 .

24) If the sales activity variance was $8,000 Favorable and the static budget variance was $10,000 Favorable, then the flexible budget variance was ________.

A) $2,000 Favorable B) $2,000 Unfavorable C) $18,000 Favorable D) $18,000 Unfavorable Answer: A Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 25) The sales activity variance for ________ will always be zero.

A) sales B) contribution margin C) variable costs D) fixed costs Answer: D Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 26) Brad Company planned to produce 12,000 units. This level of production required 20 setups at a cost of $18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost was $26,000. What is the static budget variance for setup costs?

A) $2,000 Favorable B) $2,000 Unfavorable C) $2,500 Favorable D) $2,500 Unfavorable Answer: A Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 27) Leshan Company planned to produce 12,000 units. This level of production required 20 setups at a cost of $18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost was $26,000. What is the flexible budget variance for setup costs?

A) $500 Favorable B) $500 Unfavorable C) $2,000 Favorable D) $2,000 Unfavorable Answer: B Diff: 3 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 18 .

28) Which statement would NOT be a reason for a flexible budget variance?

A) Material prices were different than expected.

B) Labor prices were different than expected.

C) Actual volume of activity was different than expected.

D) Amount of labor used per unit of output was different than expected.

Answer: C Diff: 3 LO: 8-4 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis 29) Total static budget variances are equal to the sum of activity-level variances and flexible budget variances.

Answer: TRUE Diff: 3 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 30) The static budget variance is the difference between actual results and the static budget for the original planned level of output.

Answer: TRUE Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 31) If the total sales-activity variance and the static-budget variance are equal, there is no flexible budget variance.

Answer: TRUE Diff: 2 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

19 .

32) The following data are for the month of January for the Soloway Company. Assume the cost driver is the number of units sold.

Static budget data: Sales of 9,000 pairs at $90 per pair Variable costs of $69 per pair Total fixed costs $108,000 Actual results: Sales of 9,600 pairs at $87 per pair Variable costs of $72 per pair Total fixed costs $109,200 Required: A) What is the static budget operating income?

B) What is the sales activity variance for operating income?

C) What is the flexible budget variance for operating income?

Answer: Actual Flexible Budget Sales $835,200 $864,000 Variable costs 691,200 662,400 Fixed costs 109,200 108,000 Operating income $34,800 $93,600

Static Budget $810,000 621,000 108,000 $81,000

A) $81,000 B) $12,600 Favorable C) $58,800 Unfavorable Diff: 2 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

20 .

33) Sunday Corporation prepared the following performance report for variable overhead costs for the last quarter of the year. Machine hours are the cost driver for all overhead costs.

Cost Driver(Machine Hours) Variable Overhead Costs: Utilities Indirect Labor Supplies Maintenance Total Variable Overhead Costs

Static Budget 35,000

Actual 38,000 $15,700 86,500 26,000 44,900 $173,100

Variances $14,000 $1,700 U 80,500 6,000 U 21,000 5,000 U 42,000 2,900 U $157,500 $15,600 U

The cost formulas used for the variable overhead costs are: Variable Overhead Costs Utilities Indirect Labor Supplies Maintenance

Cost Formula $0.40 per machine hour $2.30 per machine hour $0.60 per machine hour $1.20 per machine hour

Your boss called you into the office and reprimanded you for the unfavorable variances. The boss says you are fired unless you can explain why the variances are all unfavorable.

Required: Calculate the flexible budget variances and the activity-level variances for each cost.

Answer:

Utilities Indirect Labor Supplies Maintenance Total

Flexible Budget Actual Variances $15,700 $500 U 86,500 900 F 26,000 3,200 U 44,900 700 F $173,100 $2,100 U

Activity Flexible Level Budget Variances $15,200 $1,200 U 87,400 6,900 U 22,800 1,800 U 45,600 3,600 U $171,000 $13,500 U

Static Budget $14,000 80,500 21,000 42,000 $157,500

Diff: 3 LO: 8-4 AACSB: Analytic skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets

21 .

34) Differentiate between a static budget variance and a flexible budget variance.

Answer: A static budget variance is the difference between the originally planned (static) amount and the actual amount. In the case of sales, the static budget variance for sales is the difference between sales at the planned level of operations and sales at the actual level of operations.

A flexible budget variance is the difference between the actual amount and the amount that is expected for the actual level of output achieved. In the case of sales, the flexible budget variance is the difference between sales at the actual level of operations and expected sales at the actual level of operations.

Diff: 3 LO: 8-4 AACSB: Reflective thinking skills Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets 8.5 Questions 1) One variance often influences another variance. If the direct materials price variance is favorable, then it is possible that this variance will cause ________.

A) the direct materials quantity variance to be unfavorable B) the direct labor price variance to be unfavorable C) the direct labor price variance to be favorable D) the direct materials quantity variance to be favorable Answer: A Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 2) Which of the following is NOT an example of efficient performance?

A) Direct labor hours used per unit were less than expected.

B) Direct material used per unit was less than expected.

C) More outputs were achieved with less inputs than predicted.

D) More outputs were produced than expected.

Answer: D Diff: 2 LO: 8-5 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis 3) Purple Rain Company planned to sell 35,000 units. Actual sales were 30,000 units. Based on this information, Blue Company was ________.

A) efficient B) inefficient C) effective D) ineffective Answer: D Diff: 1 LO: 8-5 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis 22 .

4) Yellow Cake Company planned to produce and sell 900 units at a total cost of $180,000. Actual production and sales were 900 units at a cost of $170,000. The company was ________.

A) efficient and ineffective B) inefficient and ineffective C) inefficient and effective D) efficient and effective Answer: D Diff: 1 LO: 8-5 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis 5) ________ is the degree to which an organization minimizes the ________ used to achieve an objective.

A) Efficiency; costs B) Efficiency; resources C) Effectiveness; resources D) Effectiveness; costs Answer: B Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 6) When a firm meets a sales goal, it is said to be ________. When a firm incurs more direct material costs to manufacture products than expected, the firm is said to be ________.

A) effective; ineffective B) efficient; inefficient C) effective; inefficient D) efficient; ineffective Answer: C Diff: 2 LO: 8-5 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis 7) A favorable materials price variance can affect all of the following variances except ________.

A) labor rate variance B) labor efficiency variance C) materials quantity variance D) flexible budget variance for direct materials Answer: A Diff: 2 LO: 8-5 AACSB: Analytic skills Learning Outcome: Discuss standard costing and variance analysis

23 .

8) Which of the following statements about perfection standards is TRUE? A) It is generally believed that they have a negative influence on employee morale.

B) They are expressions of the most efficient performance possible.

C) They usually result in unfavorable variances.

D) All of the above Answer: D Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 9) Variances should be investigated if they ________.

A) are favorable B) are unfavorable C) are smaller than the variances in the prior period D) exceed certain dollar amounts or percentage deviations from the budget Answer: D Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 10) Favorable variances do not require investigation.

Answer: FALSE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 11) Favorable flexible budget variances are always good news.

Answer: FALSE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 12) Sales-activity variances measure how efficient managers have been in meeting the planned sales goal.

Answer: FALSE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis

24 .

13) Perfection standards and ideal standards are different.

Answer: FALSE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 14) Ideal standards make no provision for waste, spoilage and machine breakdowns.

Answer: TRUE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 15) Ideal standards have an adverse effect on employee motivation.

Answer: TRUE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 16) As the terms are used in the budgeting process, it is possible for a company to be efficient at the same time it is ineffective.

Answer: TRUE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 17) Efficiency is the degree to which a goal or objective is met.

Answer: FALSE Diff: 1 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 18) Currently attainable standards do not make allowances for spoilage and waste.

Answer: FALSE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis

25 .

19) Currently attainable standards are levels of performance that can be achieved by realistic levels of effort.

Answer: TRUE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 20) The unfavorable variances resulting from ideal standards are intended to constantly remind personnel of the continuous need for improvement.

Answer: TRUE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 21) One of the first questions a manager should consider when explaining a large variance is whether expectations are valid.

Answer: TRUE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis 22) In most companies, variances are investigated only if they exceed a minimum dollar amount or percentage deviation from budgeted amounts.

Answer: TRUE Diff: 2 LO: 8-5 AACSB: Reflective thinking skills Learning Outcome: Discuss standard costing and variance analysis

26 .

8.6 Questions 1) The following information is available for Munter Manufacturing Company.

-- Direct materials price standard is $3.25 per pound.

-- Direct materials quantity standard is six pounds per finished unit.

-- Budgeted production is 25,000 finished units.

-- 175,000 pounds of direct materials were purchased for $525,000.

-- 175,000 pounds of direct materials were used in production.

-- 25,600 finished units of product were produced.

What is the direct materials price variance?

A) $43,750 Unfavorable B) $43,750 Favorable C) $350,000 Unfavorable D) $350,000 Favorable Answer: B Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 2) The following information is available for Maher Manufacturing Company.

-- Direct materials price standard is $3.25 per pound.

-- Direct materials quantity standard is six pounds per finished unit.

-- Budgeted production is 25,000 finished units.

-- 175,000 pounds of direct materials were purchased for $525,000.

-- 175,000 pounds of direct materials were used in production.

-- 25,600 finished units of product were produced.

What is the direct materials quantity variance?

A) $21,400 Unfavorable B) $21,400 Favorable C) $69,550 Unfavorable D) $69,550 Favorable Answer: C Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

27 .

3) The following information is presented for the Marathon Manufacturing Company.

— Direct labor rate standard is $11.55.

— Direct labor efficiency standard is 2.5 hours per unit.

— Budgeted production is 1,200 units.

— Production required 2,910 direct labor hours at a cost of $33,174.

— Actual production is 1,150 units.

What is the direct labor price variance?

A) $172.50 Favorable B) $180.00 Unfavorable C) $436.50 Favorable D) $435.50 Unfavorable Answer: C Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 4) The direct materials price variance reflects the effects of ________.

A) changing input prices, holding the quality of outputs constant B) changing input quantities, holding the input price constant C) changing input prices, holding the quantity of inputs constant D) changing input quantities, while changing the input price Answer: C Diff: 2 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 5) The following information is presented for the Maybeel Manufacturing Company.

— Direct labor rate standard is $11.55.

— Direct labor efficiency standard is 2.5 hours per unit.

— Budgeted production is 1,200 units.

— Production required 2,910 direct labor hours at a cost of $33,174.

— Actual production is 1,150 units.

What is the direct labor efficiency variance?

A) $404.25 Favorable B) $404.25 Unfavorable C) $1,039.50 Favorable D) $1,039.50 Unfavorable Answer: B Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

28 .

6) Johnsen Company reported a flexible budget variance for direct labor of $8,000 Favorable for the current year. If the direct labor price variance was $2,000 Unfavorable, what was the direct labor efficiency variance?

A) $6,000 Unfavorable B) $6,000 Favorable C) $10,000 Favorable D) $10,000 Unfavorable Answer: C Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 7) Christian Company reported a flexible budget variance for direct materials costs of $10,000 Favorable for the current year. If the direct materials price variance was $2,000 Favorable, what was the direct materials quantity variance?

A) $8,000 Unfavorable B) $8,000 Favorable C) $12,000 Favorable D) $12,000 Unfavorable Answer: B Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 8) A company has the following information available about one of its products: Standard price per pound of input Actual price per pound of input Standard inputs per unit of output Actual units of output Direct Materials Quantity Variance

$25 $24 3 pounds 2,770 $250 F

How many pounds of material were used?

A) $8,300 B) $8,310 C) $8,320 D) $8,330 Answer: A Diff: 3 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

29 .

9) A company has the following information available about one of its products: Standard price per pound of input Actual price per pound of input Standard inputs per unit of output Actual units of output Direct Materials Price Variance Actual pounds of input used

? $27 3 pounds 3,000 $18,000 F 9,000

What is the standard price per pound of input?

A) $25 B) $27 C) $29 D) $33 Answer: C Diff: 3 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 10) Beckowski Company had the following information available for its specialty product: Standards for one unit of product: Direct Materials: 5 pounds at $2 per pound Direct Labor: 0.50 hour at $16 per hour Materials and Labor Used to produce 8,500 units: Direct Materials: 46,000 pounds at ? per pound Direct Labor: 4,000 hours at $16.80 per hour If the Direct Materials Price Variance is $4,600 Unfavorable, what is the actual cost per pound of direct materials used?

A) $1.80 B) $1.90 C) $2.00 D) $2.10 Answer: D Diff: 3 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

30 .

11) Parrish Company had the following information available for its specialty product: Standards for one unit of product: Direct Materials: 5 pounds at $2 per pound Direct Labor: 0.50 hour at $16 per hour Materials and Labor Used to produce 8,500 units: Direct Materials: ? pounds at $2.10 per pound Direct Labor: 4,000 hours at $16.80 per hour If the Direct Materials Quantity Variance is $7,000 Unfavorable, what is the actual quantity of direct materials used?

A) 7,000 B) 42,500 C) 46,000 D) 47,000 Answer: C Diff: 3 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 12) Cornell Company had the following information available for its specialty product: Standards for one unit of product: Direct Materials: 5 pounds at $2 per pound Direct Labor: 0.50 hour at $16 per hour Materials and Labor Used to produce 8,500 units: Direct Materials: 46,000 pounds at $3 per pound Direct Labor: 4,000 hours at ? per hour If the Direct Labor Price Variance is $4,600 Unfavorable, what is the actual labor rate per hour?

A) $16.00 B) $16.50 C) $17.10 D) $17.15 Answer: D Diff: 3 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

31 .

13) Gollerowski Company had the following information available for its specialty product: Standards for one unit of product: Direct Materials: 5 pounds at $2 per pound Direct Labor: 0.50 hour at $16 per hour Materials and Labor Used to produce 8,500 units: Direct Materials: 46,000 pounds at 4 per pound Direct Labor: ? hours at $17 per hour If the Direct Labor Efficiency Variance is $4,000 Unfavorable, what are the actual number of hours worked?

A) $4,000 B) $4,250 C) $4,400 D) $4,500 Answer: D Diff: 3 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 14) The quantity variance for direct materials can be computed by multiplying the standard price by the difference between the ________.

A) standard inputs allowed and expected inputs allowed at actual output B) quantity of inputs actually used and the quantity of inputs that should have been used for the expected output C) standard inputs allowed and expected inputs allowed for expected output D) quantity of inputs actually used and the quantity of inputs that should have been used for actual output Answer: D Diff: 2 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 15) Rate variances are the same as ________ variances. Efficiency variances are the same as ________ variances.

A) spending; effective B) activity; static C) usage; quantity D) price; quantity Answer: D Diff: 1 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

32 .

16) A ________ is most likely to be held accountable for price variances for direct materials.

A) machine operator B) production supervisor C) purchasing manager D) marketing director Answer: C Diff: 1 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 17) In which of the following scenarios can Eastman Company NOT have favorable flexible budget variance for direct materials?: When direct material price variance is ________, and when direct material quantity variance is ________, A) favorable; unfavorable B) unfavorable; favorable C) unfavorable; unfavorable D) favorable; favorable Answer: C Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 18) If the direct labor price variance is $800 Favorable and the direct labor usage variance is $700 Unfavorable, then ________.

A) the flexible budget variance for direct labor is $100 Favorable B) actual total wages paid were $800 more than expected C) actual labor hours were less than expected D) actual material prices were less than expected Answer: A Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

33 .

19) The following information is for Brankov Corporation: Direct Materials (measured in pounds) Standard price per unit of input Actual price per unit of input Standard inputs per unit of output Actual units of input Actual units of output

$20 $18 3 pounds 8,300 pounds 2,770 units

What is the flexible budget variance for direct materials?

A) $16,400 Favorable B) $16,400 Unfavorable C) $16,800 Favorable D) $16,800 Unfavorable Answer: C Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 20) Barber Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of $10 per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor hours.

What is the direct labor price variance?

A) $2,500 Favorable B) $2,500 Unfavorable C) $4,750 Favorable D) $4,750 Unfavorable Answer: D Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 21) Butters Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of $10 per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor hours. What is the direct labor quantity variance?

A) $2,500 Favorable B) $2,500 Unfavorable C) $2,750 Favorable D) $2,750 Unfavorable Answer: A Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

34 .

22) Ivanovich Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of $10 per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor hours. What is the flexible budget variance for direct labor?

A) $2,250 Favorable B) $2,250 Unfavorable C) $7,500 Favorable D) $7,500 Unfavorable Answer: B Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 23) The Cheeseman Company makes tables and the following standards have been developed:

Direct Materials Direct Labor

Standard Inputs Expected For Each Unit of Output 10 pounds 3 hours

Standard Price Expected Per Unit of Input $4 per pound $16 per hour

Production of 230 tables was expected in July, but 250 tables were actually completed. Direct materials purchased and used were 2,200 pounds at an actual price of $4.50 per pound. Direct labor cost for the month was $10,620, and the actual pay per hour was $18.00. What is the direct material price variance for July?

A) $800 Favorable B) $800 Unfavorable C) $1,100 Favorable D) $1,100 Unfavorable Answer: D Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

35 .

24) The Cornell Company makes tables for which the following standards have been developed:

Direct Materials Direct Labor

Standard Inputs Expected For Each Unit of Output 10 pounds 3 hours

Standard Price Expected Per Unit of Input $4 per pound $16 per hour

Production of 200 tables was expected in July, but 220 tables were actually completed. Direct materials purchased and used were 2,000 pounds at an actual price of $4.40 per pound. Direct labor cost for the month was $10,620, and the actual pay per hour was $18.00. What is the direct material quantity variance for July?

A) $800 Favorable B) $800 Unfavorable C) $880 Favorable D) $880 Unfavorable Answer: A Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 25) The Matthew Company makes tables for which the following standards have been developed:

Direct Materials Direct Labor

Standard Inputs Expected For Each Unit of Output 17 pounds 3 hours

Standard Price Expected Per Unit of Input $5.20 per pound $16 per hour

Production of 200 tables was expected in May, but 220 tables were actually completed. Direct materials purchased and used were 2,100 pounds at an actual price of $4.40 per pound. Direct labor cost for the month was $10,620, and the actual pay per hour was $18.00. What is the direct labor price variance for the month of May? A) $1,180 Favorable B) $1,180 Unfavorable C) $1,200 Favorable D) $1,200 Unfavorable Answer: B Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

36 .

26) The Quinn Company makes tables for which the following standards have been developed:

Direct Materials Direct Labor

Standard Inputs Expected For Each Unit of Output 10 pounds 3 hours

Standard Price Expected Per Unit of Input $4 per pound $16 per hour

Production of 200 tables was expected in June, but 220 tables were actually completed. Direct materials purchased and used were 2,100 pounds at an actual price of $4.40 per pound. Direct labor cost for the month was $10,620, and the actual pay per hour was $18.00. What is the direct labor quantity variance for the month of June?

A) $1,120 Favorable B) $1,120 Unfavorable C) $1,260 Favorable D) $1,260 Unfavorable Answer: A Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 27) The Brucker Company makes mugs for which the following standards have been developed:

Direct Materials Direct Labor

Standard Inputs Expected For Each Unit of Output 5 ounces 1.5 hours

Standard Price Expected Per Unit of Input $2 per ounce $8 per hour

Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials purchased and used were 2,100 ounces at an actual price of $2.30 per ounce. Direct labor cost for the month was $5,310, and the actual pay per hour was $9.00. What is the direct material price variance for July?

A) $400 Favorable B) $400 Unfavorable C) $630 Favorable D) $630 Unfavorable Answer: D Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

37 .

28) The Savage Company makes mugs for which the following standards have been developed:

Direct Materials Direct Labor

Standard Inputs Expected For Each Unit of Output 5 ounces 1.5 hours

Standard Price Expected Per Unit of Input $2 per ounce $8 per hour

Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials purchased and used were 2,100 ounces at an actual price of $2.20 per ounce. Direct labor cost for the month was $5,310, and the actual pay per hour was $9.00. What is the direct material quantity variance for July?

A) $200 Favorable B) $200 Unfavorable C) $220 Favorable D) $220 Unfavorable Answer: A Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 29) The Tulip Company makes mugs for which the following standards have been developed:

Direct Materials Direct Labor

Standard Inputs Expected For Each Unit of Output 5 ounces 2.5 hours

Standard Price Expected Per Unit of Input $2 per ounce $8 per hour

Production of 400 mugs was expected in August, but 440 mugs were actually completed. Direct materials purchased and used were 2,100 ounces at an actual price of $2.20 per ounce. Direct labor cost for the month was $5,310, and the actual pay per hour was $9.00. What is the direct labor price variance for August?

A) $420 Favorable B) $420 Unfavorable C) $590 Favorable D) $590 Unfavorable Answer: D Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

38 .

30) The Banks Company makes mugs for which the following standards have been developed:

Direct Materials Direct Labor

Standard Inputs Expected For Each Unit of Output 5 ounces 1.5 hours

Standard Price Expected Per Unit of Input $2 per ounce $8 per hour

Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials purchased and used were 2,100 ounces at an actual price of $2.30 per ounce. Direct labor cost for the month was $5,310, and the actual pay per hour was $9.00. What is the direct labor quantity variance for July?

A) $560 Favorable B) $560 Unfavorable C) $630 Favorable D) $630 Unfavorable Answer: A Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 31) In a manufacturing area of a firm, poor product design and problems with the quality of materials will, more than likely, result in a(n) ________ variance or ________ variance.

A) unfavorable material efficiency; unfavorable labor usage B) favorable material efficiency; unfavorable labor price C) unfavorable material price; unfavorable labor rate D) unfavorable material price; unfavorable labor usage Answer: A Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 32) One cause of a flexible budget variance for direct labor may be a difference between standard and actual hourly wage rates for factory workers.

Answer: TRUE Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

39 .

33) A quantity variance for direct materials measures the deviation between the quantity of inputs that should have been used to achieve the actual output and the actual quantity of inputs used to achieve the actual output.

Answer: TRUE Diff: 2 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 34) The direct materials price variance is based on the standard quantity of inputs allowed for the actual output.

Answer: FALSE Diff: 2 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 35) The flexible budget variance for direct labor can be broken down into a price variance and an effectiveness variance.

Answer: FALSE Diff: 2 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 36) The quantity variance and efficiency variance for direct labor are different types of variances.

Answer: FALSE Diff: 1 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 37) The flexible budget variance for direct labor equals the labor price variance plus the labor quantity variance.

Answer: TRUE Diff: 2 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 38) A favorable materials price variance may lead to an unfavorable materials usage variance.

Answer: TRUE Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

40 .

39) Std. price per unit of input Actual price per unit of input Std. inputs allowed per unit of output Actual units of input

Direct Material $12 per foot $14 per foot 5 feet 2,500 feet

Actual units of output

Direct Labor $14 per hour $13 per hour 3 hours 1,550 hours

600 units

Required: Compute the price and quantity variances for direct materials and direct labor.

Answer: Direct material: Price variance: ($14 - $12) × 2,500 = $5,000 Unfavorable Quantity variance: [2,500 - (600 × 5)] × $12 = $6,000 Favorable Direct labor: Price variance: ($13 - $14) × 1,550 = $1,550 Favorable Quantity variance: [1,550 - (600 × 3)] × $14 = $3,500 Favorable Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 40) The following data was obtained for a company that makes statues:

Direct material Direct labor

Standard Inputs Expected For Each Unit of Output 5 pounds 1.5 hours

Standard Price Per Unit of Input $12 per pound $12 per hour

During the month of July, the company actually produced 1,000 statutes, which is 100 units less than expected. Direct material purchased and used amounted to 5,500 pounds at a cost of $12.50 per pound.

Actual direct labor was 1,450 hours at an actual cost of $13.00 per hour.

Required: A) Compute the price and quantity variances for direct materials.

B) Compute the price and quantity variances for direct labor.

Answer: A) Price variance = ($12.50 - $12.00) × 5,500 = $2,750 Unfavorable Quantity variance = (5,500 - 5,000) × $12 = $6,000 Unfavorable B) Price variance = ($13.00 - $12.00) × 1,450 = $1,450 Unfavorable Quantity variance = (1,450 - 1,500) × $12.00 = $600 Favorable Diff: 2 LO: 8-6 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

41 .

41) What are some common causes of unfavorable quantity variances for direct labor?

Answer: Some common causes are poor quality of material, untrained workers, poor workmanship, changes in production method, new workers, machine breakdowns, faulty product designs, and inefficient machines.

Diff: 2 LO: 8-6 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 8.7 Questions 1) Variable overhead efficiency variances are unfavorable when ________.

A) the actual cost-driver activity exceeds the standard activity allowed for the actual output B) the actual cost-driver activity is less than the standard activity allowed for the actual output C) the actual cost-driver activity exceeds the standard activity allowed for the static budget output D) the actual cost-driver activity is less than the standard activity allowed for the static budget output Answer: A Diff: 3 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 2) Simmons Company has the following information available for variable overhead costs. Direct labor hours are the cost driver for variable overhead costs.

Actual variable overhead costs Standard variable overhead costs Actual direct labor hours Standard direct labor hours per unit Units produced

$4,700 $1.20 per hour 3,750 hours 5 hours 700

What is the variable overhead spending variance?

A) $200 Favorable B) $200 Unfavorable C) $500 Favorable D) $500 Unfavorable Answer: B Diff: 3 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

42 .

3) Dooley Company has the following information available for variable overhead costs. Direct labor hours are the cost driver for variable overhead costs.

Actual variable overhead costs Standard variable overhead costs Actual direct labor hours Standard direct labor hours per unit Units produced

$4,700 $1.20 per hour 3,750 hours 5 hours 700

What is the variable overhead efficiency variance?

A) $300 Favorable B) $300 Unfavorable C) $500 Favorable D) $500 Unfavorable Answer: B Diff: 3 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 4) Indian Company has the following information available for variable overhead costs. Direct labor hours are the cost driver for variable overhead costs.

Actual variable overhead costs Standard variable overhead costs Actual direct labor hours Standard direct labor hours per unit Units produced

$5,120 $3.00 per hour 2,000 hours 3 hours 1,000

What is the variable overhead spending variance?

A) $880 Favorable B) $1,000 Unfavorable C) $3,880 Favorable D) $3,880 Unfavorable Answer: A Diff: 3 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

43 .

5) Switsdorf Company has the following information available for variable overhead costs. Direct labor hours are the cost driver for variable overhead costs.

Actual variable overhead costs Standard variable overhead costs Actual direct labor hours Standard direct labor hours per unit Units produced

$5,120 $3.00 per hour 2,000 hours 3 hours 1,000

What is the variable overhead efficiency variance?

A) $1,000 Favorable B) $2,000 Unfavorable C) $2,000 Favorable D) $3,000 Favorable Answer: D Diff: 3 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 6) At 60,000 machine hours, Norwall Company's static budget for variable overhead costs is $180,000. At 60,000 machine hours, the company's static budget for fixed overhead costs is $300,000. Machine hours are the cost driver of all overhead costs. The static budget is based on 60,000 machine hours. At 60,000 machine hours, the company produces 40,000 units. The following data is available: Actual units produced and sold Actual machine hours Actual variable overhead costs Actual fixed overhead costs

42,000 64,000 $185,600 $302,400

What is the variable overhead spending variance?

A) $6,400 Unfavorable B) $6,400 Favorable C) $1,000 Favorable D) $1,000 Unfavorable Answer: B Diff: 3 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

44 .

7) The flexible budget variance for variable overhead costs is composed of a(n) ________ variance and a(n) ________ variance.

A) efficiency; effective B) spending; rate C) quantity; efficiency D) spending; efficiency Answer: D Diff: 2 LO: 8-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 8) The variable overhead efficiency variance depends on whether the quantity of the cost driver used is more or less than ________.

A) the standard amount of output for the expected amount of output B) the quantity allowed for the expected amount of output C) the quantity allowed for the static budget amount of output D) the standard quantity allowed for the actual output Answer: D Diff: 2 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 9) The variable overhead spending variance combines ________ and ________ effects.

A) price; quantity B) price; efficiency C) efficiency; sales activity D) rate; sales activity Answer: A Diff: 2 LO: 8-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 10) Variable overhead efficiency variances are unfavorable when actual cost driver activity exceeds the ________.

A) standard cost-driver activity allowed for the actual output B) activity allowed for the expected output C) activity allowed for the planned output D) activity allowed for last period's output Answer: A Diff: 2 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

45 .

11) The variable overhead spending variance is the difference between the actual variable overhead cost and the amount of variable overhead cost budgeted for the actual level of cost driver activity.

Answer: TRUE Diff: 2 LO: 8-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 12) The variable overhead efficiency variance indicates to management how much variable overhead cost it may waste by not controlling the use of cost-driver activity.

Answer: TRUE Diff: 2 LO: 8-7 AACSB: Reflective thinking skills 13) Answer: Spending variance = $20,570 - (2,450 × $8) = $970 Unfavorable Efficiency variance = [2,450 - (500 × 5)] × $8 = $400 Favorable variances Diff: 2 LO: 8-7 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 8.8 Questions 1) For fixed overhead costs, the spending variance is ________ equal to the flexible-budget variance.

A) always B) sometimes C) never D) indeterminate Answer: A Diff: 2 LO: 8-8 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

46 .

2) Wendel Company has actual fixed overhead costs of $14,700. Fixed overhead costs based on the flexible budget and the actual use of the cost driver are $14,400. Actual variable overhead costs are $14,500. What is the flexible-budget variance for fixed overhead costs?

A) $300 Favorable B) $300 Unfavorable C) $100 Favorable D) $100 Unfavorable Answer: B Diff: 3 LO: 8-8 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 3) Wetzel Company has actual fixed overhead costs of $14,500. Fixed overhead costs based on the flexible budget and the standard use of the cost driver are $14,400. Actual variable overhead costs are $14,700.

Flexible budget costs for variable overhead costs are $15,000. What is the flexible-budget variance for fixed overhead costs?

A) $100 Favorable B) $100 Unfavorable C) $300 Favorable D) $300 Unfavorable Answer: B Diff: 3 LO: 8-8 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 4) The efficiency variance for fixed overhead costs ________.

A) is greater than the flexible budget variance for fixed overhead costs B) is greater than the spending variance for fixed overhead costs C) is greater than the flexible budget variance for variable overhead costs D) does not exist Answer: D Diff: 2 LO: 8-8 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

47 .

5) At 60,000 machine hours, Clark Company's static budget for variable overhead costs is $180,000. At 60,000 machine hours, the company's static budget for fixed overhead costs is $300,000. Machine hours are the cost driver of all overhead costs. The static budget is based on 60,000 machine hours. At 60,000 machine hours, the company produces 40,000 units. The following data is available: Actual units produced and sold Actual machine hours Actual variable overhead costs Actual fixed overhead costs

42,000 64,000 $185,600 $302,400

What is the fixed overhead spending variance?

A) $2,400 Unfavorable B) $2,400 Favorable C) $1,000 Favorable D) $1,000 Unfavorable Answer: A Diff: 3 LO: 8-8 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 6) The flexible budget variance for fixed overhead costs equals the ________ variance.

A) efficiency B) spending C) static budget D) operating budget Answer: B Diff: 2 LO: 8-8 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

48 .

7) Sloth Company reports the following information for the last year of operations: Actual fixed overhead costs(7,000 units) Budgeted fixed overhead costs(10,000 units) Planned level of operations(in units) Actual level of operations(in units)

$77,000 80,000 10,000 7,000

What is the fixed overhead spending variance?

A) $3,000 Favorable B) $21,000 Unfavorable C) $24,000 Unfavorable D) $30,000 Favorable Answer: A Diff: 2 LO: 8-8 AACSB: Analytic skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances 8) In the relevant range, fixed overhead costs do not vary with cost driver activity.

Answer: TRUE Diff: 2 LO: 8-8 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances

49 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 9 Management Control Systems and Responsibility Accounting 9.1 Questions 1) Elements of the planning and control process for a management control system do NOT include ________.

A) measure, monitor and report B) plan and execute C) evaluate and reward D) feedback and control Answer: D Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 2) Planning in the management control system does NOT include ________.

A) defining goals B) establishing plans to achieve goals C) carrying out plans to achieve goals D) measuring performance measures Answer: D Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 3) The organizational goal of a hotel chain is to increase customer satisfaction. Which of the following is NOT a valid performance measure to meet the organizational goal?

A) number of repeat customers B) number of complaints by customers C) occupancy rate D) average room rate Answer: D Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None

1 .

4) ________ is the logical integration of techniques to gather and use data for planning and control decisions and to evaluate performance.

A) An internal control system B) A quality control system C) A financial reporting system D) A management control system Answer: D Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 5) A management control system includes the techniques to gather and use information to ________.

A) motivate employee behavior B) evaluate performance C) make planning and control decisions D) all of the above Answer: D Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 6) Which of the following is the first and most basic component in a management control system?

A) the organization's long-range budget B) the organization's goals C) the stockholders' goals D) managerial effort Answer: B Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 7) ________ are characteristics or attributes that managers must achieve to drive the organization toward its goals.

A) Nonfinancial performance measures B) Targets C) Key success factors D) Objectives Answer: C Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None

2 .

8) Which of the following statements about performance measures is FALSE? A) Organizational goals without performance measures do not motivate managers.

B) Every performance measure used to evaluate employees should be consistent with organizational goals.

C) An ideal management control system should include at least one performance measure related to every goal.

D) Performance measures become more specific at higher levels of the organization.

Answer: D Diff: 2 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 9) A hotel has the following organizational goal: Increase employee satisfaction. Which one of the following is the best performance measure of the organizational goal?

A) number of new employees trained B) turnover rate of hotel employees C) overall rating on employee service on guest satisfaction survey D) percent of guests writing complaints about employees Answer: B Diff: 1 LO: 9-1 AACSB: Analytic skills Learning Outcome: None 10) A management control system is a logical integration of techniques to gather and use data and to evaluate performance.

Answer: TRUE Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 11) The purpose of performance measures is to set direction and to motivate managers.

Answer: TRUE Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 12) The first and most basic component in a management control system is the employee's goals.

Answer: FALSE Diff: 2 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None

3 .

13) In the management control system, feedback and learning affect all elements of the system.

Answer: TRUE Diff: 2 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 14) Measures of performance do not have to be consistent with organizational goals.

Answer: FALSE Diff: 1 LO: 9-1 AACSB: Reflective thinking skills Learning Outcome: None 9.2 Questions 1) Most employees perform better when performance reports lead to ________.

A) goal congruence B) managerial effort C) managerial control D) personal rewards Answer: D Diff: 1 LO: 9-2 AACSB: Reflective thinking skills Learning Outcome: None 2) To design a management control system that meets an organization's needs, managers must identify what motivates employees, ________ and ________.

A) develop performance measures based on these employee motivators; establish a monitoring and reporting structure for the performance measures B) develop performance measures to encourage managerial effort; establish a monitoring and reporting structure for productivity C) develop performance measures that meet organizational objectives; establish an accounting system to measure productivity D) develop performance measures based on goal congruence; establish an accounting system to measure goal congruence Answer: A Diff: 2 LO: 9-2 AACSB: Analytic skills Learning Outcome: None

4 .

3) Which of the following statements about managerial effort is FALSE? A) Managerial effort is the exertion towards a goal.

B) Goal congruence must be accompanied by managerial effort.

C) Managerial effort includes all conscious actions that result in more efficiency and effectiveness.

D) Managerial effort does not have to accompany goal congruence.

Answer: D Diff: 2 LO: 9-2 AACSB: Reflective thinking skills Learning Outcome: None 4) Goal congruence exists when ________.

A) short-run goals and long-run goals are the same B) employees respond to incentives created by a management control system and make decisions that help meet the goals of the organization C) the management control system reflects the organization's goals D) performance reports are used constructively Answer: B Diff: 2 LO: 9-2 AACSB: Reflective thinking skills Learning Outcome: None 5) ________ is the drive for some selected goal that creates effort and action toward that goal.

A) Goal congruence B) Managerial effort C) Motivation D) Personal rewards Answer: C Diff: 1 LO: 9-2 AACSB: Reflective thinking skills Learning Outcome: None 6) To increase and improve employees' work efforts in organizations, organizations should link ________ to ________ such as bonuses.

A) motivation; goal congruence B) managerial effort; key success factors C) managerial control; motivation D) performance measures; personal rewards Answer: D Diff: 2 LO: 9-2 AACSB: Reflective thinking skills Learning Outcome: None

5 .

7) Which of the following statements about performance reports and variances is FALSE? A) They are most effective when managers use them positively to encourage employees to improve performance.

B) When they are used negatively, employees will resist and undermine these techniques.

C) These tools should be used to find weaknesses and deficiencies in employees' performance.

D) These tools should be used constructively to influence behavior.

Answer: C Diff: 2 LO: 9-2 AACSB: Reflective thinking skills Learning Outcome: None 8) Goal congruence exists when individuals aim at short-term goals and groups aim at long-term organizational goals.

Answer: FALSE Diff: 2 LO: 9-2 AACSB: Reflective thinking skills Learning Outcome: None 9) Managerial effort does not necessarily have to accompany goal congruence.

Answer: FALSE Diff: 2 LO: 9-2 AACSB: Reflective thinking skills Learning Outcome: None 9.3 Questions 1) Which one of the following is NOT a nonfinancial performance measure of customer satisfaction on a commercial airline?

A) number of lost bag reports B) number of flights cancelled C) number of employees with advanced degrees D) number of flights on time Answer: C Diff: 1 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None

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2) Organizational learning can NOT be monitored by ________.

A) employee training time B) employee turnover C) employee satisfaction scores on internal surveys D) percentage of employees with children Answer: D Diff: 1 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 3) For most organizations, an effective management control system requires performance measures that are ________ and ________.

A) rolling; static B) flexible; static C) strategic; continuous D) financial; nonfinancial Answer: D Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 4) An example of a nonfinancial goal is ________.

A) increase customer satisfaction B) increase profits C) increase segment margin D) increase required return on investment Answer: A Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 5) Effective performance measures have all the following characteristics EXCEPT ________.

A) used consistently and regularly in evaluating and rewarding employees B) readily understood by employees C) balance long-term and short-term concerns D) unaffected by the actions of managers Answer: D Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None

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6) ________ performance measures are often ________ indicators that arrive too late to prevent problems in organizations.

A) Nonfinancial; leading B) Nonfinancial; lagging C) Financial; leading D) Financial; lagging Answer: D Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 7) In most organizational settings, superior ________ performance usually follows from superior ________ performance.

A) financial; nonfinancial B) nonfinancial; financial C) financial; strategic D) nonfinancial; strategic Answer: A Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 8) The components of a successful organization are organizational learning, business process improvement, ________ and ________.

A) profitability; organizational culture B) profitability; customer satisfaction C) customer satisfaction; financial strength D) goal congruence; managerial effort Answer: C Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 9) A well-designed management control system ignores nonfinancial objectives and focuses on financial objectives to develop and report performance measures.

Answer: FALSE Diff: 1 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None

8 .

10) Nonfinancial measures of performance include profit targets and required return on investment.

Answer: FALSE Diff: 1 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 11) Good performance measures should only focus on long-term concerns.

Answer: FALSE Diff: 1 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 12) Good performance measures should be reasonably subjective.

Answer: FALSE Diff: 1 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 13) Nonfinancial performance measures are often lagging indicators that arrive too late to help prevent problems.

Answer: FALSE Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 14) Some management experts have said that the only sustainable competitive advantage is the rate at which a company's managers learn.

Answer: TRUE Diff: 1 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 15) Organizational learning may be monitored by measuring employee turnover.

Answer: TRUE Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None

9 .

16) A key driver of performance is the culture within the organization that fosters continual learning and growth.

Answer: TRUE Diff: 2 LO: 9-3 AACSB: Reflective thinking skills Learning Outcome: None 9.4 Questions 1) ________ costs include those costs that a manager's decisions and actions can influence to a reasonable degree.

A) uncontrollable B) controllable C) third party D) allocated Answer: B Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 2) ________ costs provide evidence about a manager's performance. ________ costs do not provide evidence about a manager's performance.

A) Allocated; unallocated B) Controllable; uncontrollable C) Uncontrollable; controllable D) Allocated; third party Answer: B Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 3) Which of the following statements about responsibility centers is FALSE? A) Responsibility centers usually have one goal.

B) Management control systems monitor responsibility center goals.

C) Responsibility centers are usually classified according to their managers' primary financial responsibility.

D) Cost centers, profit centers and investment centers are all examples of responsibility centers.

Answer: A Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting

10 .

4) In a(n) ________ center, managers are responsible for costs only.

A) profit B) cost C) investment D) accounting Answer: B Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 5) Managers in profit centers are responsible for controlling ________ and ________.

A) costs; invested capital B) revenues; invested capital C) revenues; costs D) expenses; invested capital Answer: C Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 6) A ________ refers to the set of activities assigned to a manager or a group of managers or other employees.

A) internal control system B) management control system C) responsibility center D) quality control report Answer: C Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 7) A(n) ________ cost is any cost that management cannot reasonably affect within a given time span.

A) controllable B) quality C) uncontrollable D) opportunity Answer: C Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting

11 .

8) Costs uncontrolled by a segment manager should be ________ when evaluating the performance of the segment manager.

A) considered B) weighed heavily C) weighed lightly D) ignored Answer: D Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 9) A responsibility center for which separate measures of revenues and costs are obtained is called a(n) ________.

A) cost center B) contribution center C) contribution margin center D) segment Answer: D Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 10) The manager of a(n) ________ responsibility center is responsible for the revenues, costs and invested capital from the center.

A) profit B) cost C) investment D) accounting Answer: C Diff: 1 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 11) A responsibility center for controlling revenues and costs is called a revenue center.

Answer: FALSE Diff: 1 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting

12 .

12) The term "cost center" may be used to describe responsibility centers that are assigned responsibility for capital investment.

Answer: FALSE Diff: 1 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 13) A set of machines may be a responsibility center for a production supervisor.

Answer: TRUE Diff: 1 LO: 9-4 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 14) The entire firm may be a responsibility center for the firm's president.

Answer: TRUE Diff: 2 LO: 9-4 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 15) Responsibility centers usually have a single goal that the management control system monitors.

Answer: FALSE Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 16) A profit center can exist in a nonprofit organization.

Answer: TRUE Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 17) Evaluations of the responsibility center manager's performance should ignore uncontrollable costs.

Answer: TRUE Diff: 2 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting

13 .

18) Segments are responsibility centers for which a separate measure of revenues and costs is obtained.

Answer: TRUE Diff: 1 LO: 9-4 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 9.5 Questions 1) Wingate Company has the following information available for three divisions of the company:

Sales Variable expenses Fixed expenses controllable by division manager Fixed expenses controllable by others

Division A $250,000 52% $60,000 $10,000

Division B $400,000 30% $200,000 $5,000

Division C $350,000 40% $175,000 $7,500

Unallocated expenses for all three divisions are $22,000. What is the contribution by Division A? A) $28,000 B) $50,000 C) $60,000 D) $120,000 Answer: B Diff: 3 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 2) Wininger Company has the following information available for the past quarter:

Sales Variable expenses Fixed expenses controllable by division manager Fixed expenses controllable by others

Division A $250,000 52% $60,000 $10,000

Division B $400,000 30% $200,000 $5,000

Division C $350,000 40% $175,000 $7,500

Unallocated expenses for all three divisions are $22,000. What is the contribution controllable by the division manager in Division B? A) $53,000 B) $75,000 C) $80,000 D) $280,000 Answer: C Diff: 3 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

14 .

3) Wetzel Company has the following information available for the past quarter:

Sales Variable expenses Fixed expenses controllable by division manager Fixed expenses controllable by others

Division A $250,000 52% $60,000 $10,000

Division B $400,000 30% $200,000 $5,000

Division C $350,000 40% $175,000 $7,500

Unallocated expenses for all three divisions are $22,000. What is the contribution controllable by the division manager in Division C? A) $5,500 B) $27,500 C) $35,000 D) $210,000 Answer: C Diff: 3 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 4) Wendell Company has the following information available for the past quarter: Division A Sales $250,000 Variable expenses 52% Fixed expenses controllable by division manager $60,000 Fixed expenses controllable by others $10,000

Division B $400,000 30% $200,000 $5,000

Division C $350,000 40% $175,000 $7,500

Unallocated expenses for all three divisions are $25,000. What is the contribution by Division C? A) $2,500 B) $27,500 C) $35,000 D) $210,000 Answer: B Diff: 3 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

15 .

5) A manager at a local home improvement store is considering the following costs. Which of the following is a cost controllable by the manager?

A) Salaries of public relations staff at corporate headquarters B) Salaries of attorneys at corporate headquarters C) Salary of treasurer of company D) Salary of head cashier Answer: D Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 6) A grocery store manager is responsible for the operating performance of three grocery stores in a small city. From the manager's point of view, which of the following is NOT a controllable cost?

A) cost of advertising for grocery stores sent to residents in local area B) cost of advertising for grocery stores included in local newspaper C) cost of flyers with grocery store coupons sent to local residents D) insurance premium on three store buildings Answer: D Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 7) A grocery store manager is responsible for the operating performance of a grocery store. From the manager's point of view, which of the following is NOT a controllable cost?

A) temporary stocking staff hired to reorganize products in every aisle B) supplies in break room that include coffee, cups, donuts, cookies and stirring sticks C) fee charged by pest management company to apply pesticide D) rent expense on store building Answer: D Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 8) A company manufactures household furniture at several different plants. When preparing segmented income statements for each plant, unallocated costs do NOT include ________.

A) Salaries of attorneys at corporate office B) Salaries of human resources staff at corporate office C) Advertising initiated at corporate office D) Depreciation expense on testing equipment in plant Answer: D Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting

16 .

9) Financial performance of a manager is measured by ________. Financial performance of a segment is measured by ________.

A) contribution by segment; contribution margin B) contribution margin; net income of segment C) contribution controllable by segment manager; contribution by segment D) contribution margin; contribution controllable by segment manager Answer: C Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 10) Classifying costs as controllable or uncontrollable by a segment manager is ________ and ________.

A) objective; easily undertaken B) objective; subject to controversy C) subjective; easily undertaken D) subjective; subject to controversy Answer: D Diff: 1 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 11) The following information pertains to the East Division of Saturn Company: Net sales Variable costs: Cost of merchandise sold Operating expenses Fixed costs: Controllable by segment manager Controllable by others Unallocated costs

$21,000 10,300 3,700 2,400 1,000 600

The contribution margin of the East Division is ________.

A) $7,000 B) $7,700 C) $8,000 D) $10,700 Answer: A Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

17 .

12) The following information pertains to the West Division of Burger Company: Net sales Variable costs: Cost of merchandise sold Operating expenses Fixed costs: Controllable by segment manager Controllable by others Unallocated costs

$6,000 1,000 450 1,600 1,250 750

The contribution margin of the West Division is ________.

A) $2,750 B) $3,650 C) $4,350 D) $4,550 Answer: D Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 13) The following information is available for Paperback Books Inc. and its two divisions, Books and Periodicals: Whole Books Periodicals Company Division Division Division Net Sales $100,000 $60,000 $40,000 Fixed Costs Controllable

By Division Manager 26,500 22,500 4,000 Fixed Costs Not Controlled

By Division Manager 18,000 15,000 3,000 Variable Costs: Cost of Merchandise Sold 24,500 17,500 7,000 Operating Expenses 26,400 20,000 6,400 Unallocated Costs 7,000 What is the contribution margin for the Books Division?

A) $15,000 B) $22,500 C) $32,500 D) $42,500 Answer: B Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

18 .

14) The following information is available for Half Price Books Inc. and its two divisions, Books and Periodicals: Whole Books Periodicals Company Division Division Net Sales $100,000 $50,000 $50,000 Fixed Costs Controllable

By Division Manager 26,500 22,500 4,000 Fixed Costs Not Controlled

By Division Manager 18,000 15,000 3,000 Variable Costs: Cost of Merchandise Sold 24,500 17,500 7,000 Operating Expenses 17,400 10,000 7,400 Unallocated Costs 4,000 What is the contribution margin for the Periodicals Division?

A) $29,600 B) $32,600 C) $35,600 D) $43,000 Answer: C Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 15) Assume you are preparing an income statement with different segments. To calculate the contribution by segment, take contribution controllable by segment manager minus ________.

A) unallocated costs B) variable operating expenses C) fixed costs controllable by others(not segment manager) D) fixed costs controllable by segment manager Answer: C Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 16) To calculate income before taxes for a segmented company as a whole, take contribution by segments and subtract ________.

A) allocated costs B) unallocated costs C) costs controllable by segment managers D) costs controllable by third parties Answer: B Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 19 .

17) Assume you are preparing income statements for different segments. Which of the following is NOT a fixed cost controllable by a segment manager?

A) salespersons' salaries for segment B) advertising costs in local paper to promote segment C) training costs for new employees at segment D) segment manager's salary Answer: D Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 18) When preparing segmented income statements, fixed costs controllable by others, and not the segment manager, include ________.

A) depreciation on building used by a segment B) local advertising costs for a segment C) local promotion costs for a segment D) salary of supervisor of sales staff for a segment Answer: A Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 19) Segment contribution margin less ________ describes the segment contribution that is controllable by segment managers.

A) fixed costs controllable by segment managers B) fixed costs controlled by others(not segment managers) C) unallocated costs D) uncontrollable costs Answer: A Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting

20 .

20) The following information pertains to the Midwest Division of Clearly Natural Company: Net Sales Variable Costs: Cost of merchandise sold Operating expenses Fixed costs: Controllable by segment manager Controllable by others Unallocated costs

$25,000 7,200 2,700 2,400 1,000 600

The contribution controllable by a segment manager is ________.

A) $7,100 B) $7,700 C) $11,100 D) $12,700 Answer: D Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 21) The following information pertains to the Northern Division of Johnson Company: Net Sales Variable Costs: Cost of merchandise sold Operating expenses Fixed costs: Controllable by segment manager Controllable by others Unallocated costs

$21,000 7,200 2,700 2,400 1,000 7,600

The contribution by segment is ________.

A) $7,100 B) $7,700 C) $8,700 D) $11,100 Answer: B Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

21 .

22) The following information pertains to the Southern Division of Olson Company: Net Sales Variable Costs: Cost of merchandise sold Operating expenses Fixed costs: Controllable by segment manager Controllable by others Unallocated costs

$5,250 1,200 450 600 1,250 1,150

The contribution controllable by a segment manager is ________.

A) $2,350 B) $2,500 C) $3,000 D) $3,350 Answer: C Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 23) The following information pertains to the Southern Division of Swenson Company: Net Sales Variable Costs: Cost of merchandise sold Operating expenses Fixed costs: Controllable by segment manager Controllable by others Unallocated costs

$5,000 1,200 450 600 250 750

The contribution by segment is ________.

A) $2,350 B) $2,500 C) $2,750 D) $3,350 Answer: B Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

22 .

24) The following information is available for Halquist Stone Company and its two divisions, Crushed Stone and Fieldstone.

Whole Crushed Company Stone Fieldstone Net sales $100,000 $60,000 $40,000 Fixed costs controllable by Division Manager 16,500 12,500 4,000 Fixed costs controlled by others 8,000 5,000 3,000 Variable costs: Cost of merchandise sold 24,500 17,500 7,000 Operating expenses 16,400 10,000 6,400 Unallocated costs 1,000 What is the contribution controllable by the manager of the Crushed Stone Division?

A) $20,000 B) $32,500 C) $35,000 D) $42,500 Answer: A Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 25) The following information is available for Stonefield Inc. and its two divisions, Crushed Stone and Fieldstone.

Whole Crushed Company Stone Fieldstone Net sales $100,000 $50,000 $50,000 Fixed costs controllable by Division Manager 16,500 12,500 4,000 Fixed costs controlled by others 8,000 5,000 3,000 Variable costs: Cost of merchandise sold 24,500 17,500 7,000 Operating expenses 16,400 10,000 6,400 Unallocated costs 1,000 What is the contribution controllable by the manager of the Fieldstone Division?

A) $29,600 B) $32,600 C) $36,000 D) $36,600 Answer: B Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 23 .

26) The following information is available for Bargain Books and its two divisions, Textbooks and Fiction Books.

Whole Fiction Company Textbooks Books Net sales $100,000 $60,000 $40,000 Fixed costs controllable by Division Manager 16,500 12,500 4,000 Fixed costs controlled by others 8,000 5,000 3,000 Variable costs: Cost of merchandise sold 24,500 17,500 7,000 Operating expenses 16,400 10,000 6,400 Unallocated costs 8,000 What is the contribution by segment for the Textbooks Division?

A) $15,000 B) $20,000 C) $32,500 D) $42,500 Answer: A Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 27) The following information is available for Nobelski Books and its two divisions, Textbooks and Tablets.

Whole Company Textbooks Tablets Net sales $100,000 $50,000 $50,000 Fixed costs controllable by Division Manager 16,500 12,500 4,000 Fixed costs controlled by others 8,000 5,000 3,000 Variable costs: Cost of merchandise sold 24,500 17,500 7,000 Operating expenses 16,400 10,000 6,400 Unallocated costs 1,000 What is the contribution by segment for the Tablets Division?

A) $28,600 B) $29,600 C) $32,600 D) $36,600 Answer: B Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

24 .

28) The following information is available for Discounted Supplies Inc. and its two divisions, Durable Goods and Nondurable Goods.

Whole Durable Nondurable Company Goods Goods Net sales $100,000 $60,000 $40,000 Fixed costs controllable by Division Manager 16,500 12,500 4,000 Fixed costs controlled by others 8,000 5,000 3,000 Variable costs: Cost of merchandise sold 24,500 17,500 7,000 Operating expenses 16,400 10,000 6,400 Unallocated costs 1,000 What is the income before taxes for the company as a whole?

A) $15,000 B) $29,600 C) $33,600 D) $34,600 Answer: C Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 29) When preparing segmented income statements, unallocated costs include ________.

A) costs controlled by others(not segment managers) B) central corporate costs C) costs controllable by segment managers D) costs traced to segments Answer: B Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting 30) The financial performance of a segment manager is evaluated by ________.

A) contribution margin of segment B) contribution margin of segment less fixed costs controllable by others C) contribution margin of segment less fixed costs controllable by segment manager D) contribution by segment Answer: C Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting

25 .

31) When preparing segmented income statements, unallocated costs do NOT include ________.

A) cost of public relations department B) salaries of top management C) corporate level advertising D) segment level advertising Answer: D Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 32) To evaluate the financial performance of a segment, and not the financial performance of the segment's manager, use ________.

A) income before taxes B) contribution by segment C) contribution controllable by segment managers D) contribution margin by segment Answer: B Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 33) The contribution controllable by segment managers is used to evaluate the performance of segment managers.

Answer: TRUE Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 34) Property taxes on a building used by a segment are not considered when evaluating the performance of the segment manager.

Answer: TRUE Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 35) Fixed costs not controllable by a segment manager usually include depreciation and property taxes on the building used by the segment.

Answer: TRUE Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting

26 .

36) When evaluating a segment manager, unallocated costs usually include central corporate costs.

Answer: TRUE Diff: 2 LO: 9-5 AACSB: Reflective thinking skills Learning Outcome: Discuss responsibility accounting 37) The following information is available for Ohlson Consulting Company and its two offices:

Net sales Fixed costs: Controllable by division manager Controllable by others Variable costs: Cost of merchandise sold Operating expenses

Greenfield Office $100,000

Greendale Office $200,000

78,000 4,000

48,000 8,000

30,000 15,000

120,000 60,000

Unallocated costs were $152,000.

Required: A) Compute the contribution margin for the Greenfield office.

B) Compute the contribution (or loss) controllable by the manager of the Greendale Office.

C) Compute the contribution (or loss) by segment for the Greenfield office.

D) Compute the income (or loss) before taxes for the company as a whole.

Answer: A) $100,000 - $30,000 - $15,000 = $55,000 B) $200,000 - $120,000 - $60,000 - $48,000 = $(28,000) C) $100,000 - $30,000 - $15,000 - $78,000 - $4,000 = $(27,000) D) $100,000 - $78,000 - $4,000 - $30,000 - $15,000 + $200,000 - $48,000 - $8,000 - $120,000 - $60,000 - $152,000 = $(215,000) Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

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38) The following information is available for Pet Store Company and its two divisions, Pet Supplies and Training.

Whole Pet Supplies Training Company Division Division Net sales $170,000 $70,000 $100,000 Fixed costs: Controllable by division managers 16,000 10,000 6,000 Controllable by others 8,000 6,000 2,000 Variable costs: Cost of merchandise sold 46,000 28,000 18,000 Operating expenses 14,000 8,000 6,000 Unallocated costs 14,000 Required: A) Compute the contribution margin for the Pet Supplies Division.

B) Compute the contribution controllable by the manager of the Training Division.

C) Compute the contribution by segment for the Training Division.

D) Compute the income before taxes for the whole company.

Answer: A) $70,000 - $28,000 - $8,000 = $34,000 B) $100,000 - $18,000 - $6,000 - $6,000 = $70,000 C) $100,000 - $18,000 - $6,000 -$6,000 - $2,000 = $68,000 D) $170,000 - $46,000 - $14,000 - $16,000 - $8,000 - $14,000 = $72,000 Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

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39) Shaley Company has two divisions and the following information available: a. Net sales were $130,000. $90,000 was attributed to the Jewel Division. b. Variable costs were $80,000. 40% was attributed to the Song Division. c. Total separable fixed costs controllable by division managers were $30,000, of which $20,000 applied to the Jewel Division. d. Total separable fixed costs, not controllable by division managers were $10,000 in the Jewel Division and $4,000 in the Song Division. e. Unallocated costs were $7,000.

Required: 1. Prepare a contribution approach income statement for the company as a whole and each division.

2. Which division manager should receive a bonus? Why? Answer: 1.

Whole Jewel Song Company Division Division Net sales $130,000 $90,000 $40,000 Variable costs 80,000 48,000 32,000 Contribution margin 50,000 42,000 8,000 Fixed costs controllable by div. managers 30,000 20,000 10,000 Contribution controllable by div. managers 20,000 22,000 (2,000) Fixed costs controllable by others 14,000 10,000 4,000 Contribution by division 6,000 $12,000 $(6,000) Less: Unallocated costs 7,000 Income before taxes $(1,000) 2. The manager of the Jewel Division should receive a bonus because this division reported a positive Contribution Controllable by Division Manager of $22,000. The manager of the Song Division should not receive a bonus because this division reported a negative Contribution Controllable by Division Manager of $(2,000).

Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

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40) The Gregory Company provided the following information:

Net sales Fixed costs controllable by div. managers Fixed costs controllable by others Variable costs: Cost of merchandise sold Operating expenses Unallocated costs

Whole Company $99,000 16,000 10,000

Office Division $66,000 10,000 5,000

Factory Division $33,000 6,000 5,000

38,000 8,000 6,000

22,000 5,000

16,000 3,000

Required: Prepare a contribution approach income statement for the whole company and for each division.

Answer: Whole Office Factory Company Division Division Net sales $99,000 $66,000 $33,000 Variable costs: Cost of goods sold 38,000 22,000 16,000 Operating expenses 8,000 5,000 3,000 Contribution margin 53,000 39,000 14,000 Fixed costs controllable by div. managers 16,000 10,000 6,000 Contribution controllable by div. managers 37,000 29,000 8,000 Fixed costs controllable by others 10,000 5,000 5,000 Contribution by division 27,000 $24,000 $3,000 Less: Unallocated costs 6,000 Income before taxes $21,000 Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

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41) Costs for a department store in Austin, Texas are listed below. The headquarters of the company are located in Dallas, Texas. From the view of the store manager in Austin, identify each cost as one of the following: A. Variable cost B. Fixed cost controllable by store manager C. Fixed cost controllable by others (not store manager) D. Unallocated cost _____ 1. Insurance on Austin store _____ 2. Sales supervisor's salary in Austin store _____ 3. Depreciation expense on Austin store _____ 4. Corporate-level advertising costs _____ 5. Temporary sales staff wages in Austin store _____ 6. Cost of merchandise sold in Austin store _____ 7. Local advertising costs for Austin store _____ 8. CEO salary _____ 9. Salary of store manager in Austin store _____ 10. Public relations department at corporate headquarters _____ 11. Supplies for break room in Austin store _____ 12. Salaries of attorneys at corporate headquarters _____ 13. Salaries of accountants at corporate headquarters _____ 14. Wages of janitors at Austin store _____ 15. Wages of janitors at corporate headquarters Answer: 1. C 2. B 3. C 4. D 5. A 6. A 7. B 8. D 9. C 10. D 11. A 12. D 13. D 14. A 15. D Diff: 2 LO: 9-5 AACSB: Analytic skills Learning Outcome: Discuss responsibility accounting

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9.6 Questions 1) Which of the following is NOT an appraisal cost for quality control?

A) inspection and testing of purchased materials B) product quality audits C) maintenance of test equipment D) training program for material suppliers Answer: D Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 2) Which of the following is NOT a prevention activity for quality control?

A) improvements in production processes B) engineering analyses to improve product design for better manufacturing C) inspection of incoming materials D) quality training of employees Answer: C Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 3) In the area of quality control, which of the following statement(s) about Six Sigma is(are) TRUE? A) The focus is on measuring the number of defects in a production process.

B) It is a data-driven approach to eliminate defects.

C) The goal is to eliminate all defects in the production process.

D) All of the above Answer: D Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 4) To identify defective products, companies incur inspection costs or ________ costs.

A) prevention B) appraisal C) internal failure D) external failure Answer: B Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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5) ________ costs involve efforts to improve product design for more efficient production processes.

A) Prevention B) Appraisal C) Internal failure D) External failure Answer: A Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 6) The traditional approach to quality control in the United States was to ________.

A) inspect products upon completion and reject or rework the defective products B) prevent defects before they occur C) set tolerance standards of zero defects D) emphasize customer satisfaction over product quality Answer: A Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 7) Costs of defective components or products that are scrapped or reworked are examples of ________ costs.

A) prevention B) appraisal C) internal failure D) external failure Answer: C Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 8) ________ is the effort to insure that products perform according to customer requirements.

A) Cycle time B) Managerial effort C) Production control D) Quality control Answer: D Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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9) The ________ report is a report that displays the financial impact of quality.

A) performance B) cost of quality C) cycle time D) production control Answer: B Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 10) The ________ chart is the statistical plot of measures of various product quality dimensions or attributes.

A) cycle-time B) productivity-control C) quality-control D) throughput-time Answer: C Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 11) Total quality management (TQM) ________.

A) does not advocate high quality levels for all products B) is not used in the development of organizational goals C) promotes maximizing the cost of quality D) focuses on the prevention of defects and on the achievement of customer satisfaction Answer: D Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 12) Inspection costs of incoming raw materials are ________ costs.

A) prevention B) appraisal C) internal failure D) external failure Answer: B Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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13) Rework costs for manufactured products are a form of ________ costs.

A) prevention B) appraisal C) internal failure D) external failure Answer: C Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 14) Warranty costs are a form of ________ costs.

A) prevention B) appraisal C) internal failure D) external failure Answer: D Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 15) Which of the following costs is NOT an appraisal cost for quality control?

A) inspection of purchased materials B) testing of purchased materials C) warranty D) product quality audit Answer: C Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 16) Which of the following is NOT a type of quality costs?

A) prevention B) appraisal C) internal failure D) development Answer: D Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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17) External failure costs associated with quality control do NOT include ________.

A) field repairs B) rework C) customer returns of goods D) warranty expense Answer: B Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 18) Lower cycle times often lead to ________ quality products and ________ defect rates.

A) lower; lower B) lower; higher C) higher; higher D) higher; lower Answer: D Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 19) An alternative term for cycle time is ________ time.

A) productivity B) manufacturing C) throughput D) production Answer: C Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 20) Decreasing cycle time ________.

A) results in a lower-quality product B) creates reduced flexibility in the production process C) results in slower reactions to customer requests D) requires smooth-running processes Answer: D Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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21) Which of the following statements about productivity is FALSE? A) Productivity is a measure of outputs divided by inputs.

B) The fewer inputs needed to produce a given output, the more productive the organization.

C) Inputs and outputs are difficult to measure.

D) Productivity measures can be compared over time without making adjustments for inflation.

Answer: D Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 22) Smiley Company has the following results: Rolls of film processed Sales revenue Direct labor hours worked Direct labor cost

350,000 $1,200,000 5,500 $47,000

If productivity is measured using the number of rolls of film processed per direct labor hour, what is the productivity of Smiley Company?

A) $3.43 per roll B) $260.87 per direct labor hour C) 2,553% of direct labor cost D) 63.64 rolls per direct labor hour Answer: D Diff: 2 LO: 9-6 AACSB: Analytic skills Learning Outcome: None

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23) Little Rock Corporation and Memphis Corporation are movie companies. Comparative data for 20X0 and 20X1 are given below: Little Rock Memphis Corporation Corporation Sales revenue 20X0 $8,000,000 $4,400,000 20X1 9,600,000 6,175,000 Number of employees

20X0 20X1

10,000 9,000

5,500 6,500

Assume that each 20X0 dollar is equivalent to 1.60 of each 20X1 dollar, due to inflation. Taking inflation into account, what is Little Rock Corporation's 20X0 productivity measure in terms of revenue per employee?

A) $1,083.08 B) $1,280.00 C) $1,422.22 D) $1,600.00 Answer: B Diff: 2 LO: 9-6 AACSB: Analytic skills Learning Outcome: None 24) Lorna Corporation and Carol Corporation are moving companies. Comparative data for 20X4 and 20X5 are given below: Lorna Carol Corporation Corporation Sales revenue 20X4 $8,400,000 $4,400,000 20X5 9,900,000 6,175,000 Number of employees

20X4 20X5

8,000 10,000

5,500 6,500

Assume that each 20X4 dollar is equivalent to 1.75 of each 20X5 dollar, due to inflation. Taking inflation into account, what is Lorna Corporation's 20X4 productivity measure in terms of revenue per employee?

A) $950.00 B) $990.00 C) $1,050.00 D) $1,837.50 Answer: D Diff: 2 LO: 9-6 AACSB: Analytic skills Learning Outcome: None

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25) A cost of quality report displays the financial impact of organizational goals and objectives.

Answer: FALSE Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 26) In recent years, companies in the United States have discovered it is more cost effective to prevent defects than to detect and correct them.

Answer: TRUE Diff: 1 LO: 9-6 AACSB: Reflective thinking skills 27) The four categories of quality costs include production costs, appraisal costs, internal failure costs and external failure costs.

Answer: FALSE Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 28) Internal delays and lost sales are examples of opportunity costs for a firm.

Answer: TRUE Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 29) Total quality management is the application of quality principles to the most important of an organization's departments to satisfy customers.

Answer: FALSE Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 30) Decreasing cycle time often results in bringing products more quickly to customers.

Answer: TRUE Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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31) Productivity is a measure of inputs divided by outputs.

Answer: FALSE Diff: 1 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 32) Increased productivity can be shown by maintaining the number of inputs but increasing the number of outputs.

Answer: TRUE Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None 33) A measure of labor productivity is sales revenue divided by the number of employees.

Answer: TRUE Diff: 2 LO: 9-6 AACSB: Analytic skills Learning Outcome: None 34) When comparing productivity measures over time, changes in the rate of inflation may cause the comparisons to be misleading.

Answer: TRUE Diff: 2 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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35) Gerald Corporation and Nell Corporation are two companies in the same industry. Comparative data for two years are given below: Gerald Nell Corporation Corporation Sales revenue 20X1 $905,520 $1,090,000 20X6 1,950,000 2,962,500 Number of employees 20X1 1,750 2,500 20X6 2,250 4,375 Assume each 20X1 dollar is equivalent to 2.00 dollars in 20X6 due to inflation.

Required: A) After considering inflation, compute the revenue per employee for each company for 20X1 and 20X6.

B) What is the change in productivity between the five years for each company?

Answer: A) Gerald Corporation: 20X1: ($905,520 × 2.00)/1,750 = $1,034.88 per employee 20X6: $1,950,000/2,250 = $866.67 per employee Nell Corporation: 20X1: ($1,090,000 × 2.00)/2,500 = $872 per employee 20X6: $2,962,500/4,375 = $677.14 per employee B) Gerald Corporation: Productivity decreased 16.25%.

Nell Corporation: Productivity decreased 22.35%.

Diff: 2 LO: 9-6 AACSB: Analytic skills Learning Outcome: None

41 .

36) GEM Company has the following information available: Quality engineering of products Quality training of employees Net cost of scrap Rework labor Warranty repairs Product recalls Liability arising from defective products Maintenance of test equipment Quality improvement projects Setups for testing Supplies used in testing Downtime caused by defects Disposal of defective products

$20,000 $2,000 $30,000 $4,500 $100,000 $200,000 $1,000,000 $44,000 $55,000 $3,000 $5,500 $70,000 $80,000

Required: Prepare the quality cost report for the GEM Company.

Answer: Prevention Costs Quality engineering of products $20,000 Quality training of employees 2,000 Quality improvement projects 55,000 $77,000 Internal Failure Costs Net cost of scrap $30,000 Rework labor 4,500 Downtime caused by defects 70,000 Disposal of defective products 80,000 $184,500 External Failure Costs Warranty repairs $100,000 Product recalls 200,000 Liability arising from defective products 1,000,000 $1,300,000 Appraisal Costs Maintenance of test equipment $44,000 Setups for testing 3,000 Supplies used in testing 5,500 $52,500 Diff: 3 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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37) CIS Company has the following information available: Quality engineering of products Technical support provided by CIS to suppliers Cost of field servicing Supervision of testing activities Net cost of spoilage Depreciation of testing equipment Plant utilities in inspection area Retesting of reworked products Lost sales arising from a reputation for poor quality products Reinspection of reworked products Warranty replacements Returns and allowances given to customers due to quality issues Rework labor and overhead Required: Prepare the quality cost report for CIS Company.

Answer: Prevention Costs Quality engineering of products Technical support provided by CIS to suppliers

$20,000 $2,000 $80,000 $30,000 $55,000 $4,500 $100,000 $200,000 $1,000,000 $44,000 $3,000 $5,500 $70,000

$20,000 $2,000 $22,000

Appraisal Costs Supervision of testing activities Depreciation of testing equipment Plant utilities in inspection area

$30,000 $4,500 $100,000 $134,500

Internal Failure Costs Retesting of reworked products Reinspection of reworked products Net cost of spoilage Rework labor and overhead

$200,000 $44,000 $55,000 $70,000 $369,000

External Failure Costs Lost sales arising from a reputation for poor quality products Warranty replacements Returns and allowances given to customers due to quality issues Cost of field servicing Diff: 3 LO: 9-6 AACSB: Reflective thinking skills Learning Outcome: None

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$1,000,000 3,000 5,500 80,000 $1,088,500

9.7 Questions 1) A popular approach to performance measurement that integrates financial and nonfinancial measures and links them to the organization's goals and objectives is called the ________.

A) balanced scorecard B) contribution approach C) quality control approach D) TQM approach Answer: A Diff: 2 LO: 9-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 2) The balanced scorecard focuses management attention on the ________.

A) measures of productivity B) measures that drive an organization to achieve its goals C) measures that increase cycle time D) measures that decrease quality costs Answer: B Diff: 2 LO: 9-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 3) The classic balanced scorecard developed by Robert Kaplan and David Norton includes four categories of key performance indicators. Which of the following items is NOT one of the categories used by Kaplan and Norton?

A) financial B) customers C) innovation and learning D) quality control Answer: D Diff: 2 LO: 9-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

44 .

4) The balanced scorecard is a system that strikes a balance between ________ and ________ performance measures.

A) financial; nonfinancial B) strategic; nonstrategic C) innovative; tutorial D) goal-oriented; strategic-oriented Answer: A Diff: 2 LO: 9-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 5) Key performance indicators for a balanced scorecard are usually grouped into two categories.

Answer: FALSE Diff: 1 LO: 9-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 6) Financial performance measures are usually not included in a balanced scorecard.

Answer: FALSE Diff: 1 LO: 9-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 7) Describe a balanced scorecard and identify the categories of key performance indicators advocated by Kaplan and Norton.

Answer: A balanced scorecard is a popular approach to performance measurement that integrates financial and nonfinancial measures and ties them to organizational goals. The balanced scorecard focuses management's attention on measures that drive an organization to achieve its goals. Kaplan and Norton grouped key performance indicators into four categories: (1) financial, (2) customers, (3) internal business processes and (4) innovation and learning. Most companies develop performance measures for each category.

Diff: 2 LO: 9-7 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

45 .

9.8 Questions 1) Management control systems in nonprofit organizations will probably never be as highly developed as those in profit-seeking firms. Which of the following is NOT a reason for this to occur?

A) Organizational goals are less clear in nonprofit organizations.

B) Employees in nonprofit organizations have different motivation drivers and incentive drivers than their counterparts in profit-seeking firms.

C) There is less competitive pressure to improve management control systems in nonprofit organizations.

D) There are low levels of discretionary fixed costs in nonprofit organizations.

Answer: D Diff: 1 LO: 9-8 AACSB: Reflective thinking skills Learning Outcome: None 2) Why do most nonprofit organizations face substantial difficulties in implementing management control systems?

A) The outputs of nonprofit organizations are easy to measure.

B) It is difficult to measure the quantity of outputs from nonprofit organizations.

C) It is difficult to measure the quality of outputs from nonprofit organizations.

D) B and C Answer: D Diff: 2 LO: 9-8 AACSB: Reflective thinking skills Learning Outcome: None 3) Management control systems in nonprofit organizations will never be as highly developed as in profitseeking firms because output measurements are more difficult.

Answer: TRUE Diff: 2 LO: 9-8 AACSB: Reflective thinking skills Learning Outcome: None 4) The keys to successful management control in any organization are proper training of employees, motivation of employees and consistent monitoring of performance measures.

Answer: TRUE Diff: 2 LO: 9-8 AACSB: Reflective thinking skills Learning Outcome: None

46 .

5) Once a management control system is designed for a nonprofit organization, it does not have to be altered in the future.

Answer: FALSE Diff: 1 LO: 9-8 AACSB: Reflective thinking skills Learning Outcome: None 6) Why will management control systems in nonprofit organizations probably never be as highly developed as those in profit-seeking firms?

Answer: 1. Organizational goals are not as clear in nonprofit organizations.

2. Employees in nonprofit organizations are opposed to formal control systems.

3. Measurement of performance measures is more difficult in nonprofit organizations.

4. There is less competitive pressure from other nonprofit organizations to improve management control systems.

5. The role of budgeting is different in nonprofit organizations. The goal in nonprofit organizations is to get the largest possible authorization.

6. Motivations and incentives of employees in nonprofit organizations are different from those in profitseeking firms.

Diff: 2 LO: 9-8 AACSB: Reflective thinking skills Learning Outcome: None

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Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 10 Management Control in Decentralized Organizations 10.1 Questions 1) The concentration of decision-making authority only at the highest levels of the organization is called ________.

A) management by objective B) balanced scorecard C) decentralization D) centralization Answer: D Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 2) All of the following are disadvantages of decentralization EXCEPT for ________.

A) Local managers make decisions that are not in the organization's best interests.

B) Managers spend time negotiating transfer prices for goods and services transferred between divisions and segments.

C) Local managers duplicate services.

D) Local managers have more authority and greater levels of job satisfaction.

Answer: D Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 3) Which of the following statements is NOT a benefit of decentralization?

A) Lower-level managers are able to make faster and better decisions on local decisions than higher-level managers.

B) By delegating decision-making authority to local managers, higher-level managers free up time to deal with larger issues and fundamental strategy.

C) Local managers can develop management skills.

D) Managers in decentralized units may spend time negotiating transfer prices for goods transferred between units.

Answer: D Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None

1 .

4) Decentralization is more successful in organizations when ________.

A) multiple segments buy from the same outside suppliers B) multiple segments sell to the same customers C) there are frequent purchases and sales made between segments of the organization D) an organization's segments are relatively independent of each other Answer: D Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 5) ________ is the delegation of decision-making power to segment managers of an organization.

A) Goal congruence B) Segment autonomy C) Managerial effort D) Segment contribution Answer: B Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 6) Decentralization may increase a firm's costs because ________.

A) lower level managers duplicate services that may be less expensive if centralized B) information costs rise as top management needs additional reports to learn about decentralized units C) lower level managers may make decisions that are not in the best interests of the firm as a whole D) all of the above Answer: D Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 7) The lower in the organization that authority is delegated, the greater the decentralization.

Answer: TRUE Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 8) Segment autonomy means that the activities of segment managers are directed by top managers.

Answer: FALSE Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None

2 .

9) When compared to a decentralized organization, there are really no advantages to a centralized organization.

Answer: FALSE Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 10) Some level of decentralization in an organizational structure creates benefits for most organizations.

Answer: TRUE Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 11) Higher-level managers have the best information concerning local conditions.

Answer: FALSE Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 12) Local managers in decentralized organizations tend to duplicate services that may be less expensive if centralized.

Answer: TRUE Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 13) The costs of accumulating and processing information frequently decline under decentralization.

Answer: FALSE Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 14) Managers in decentralized units may waste time negotiating with other units about goods or services one unit transfers to the other.

Answer: TRUE Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None

3 .

15) Decentralization is more popular in nonprofit organizations than in profit-seeking organizations.

Answer: FALSE Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 16) Decentralization is most successful when an organization's segments are relatively independent of one another.

Answer: TRUE Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 17) If the segments in a firm buy from the same outside suppliers all the time, they are good candidates for decentralization.

Answer: FALSE Diff: 1 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 18) A disadvantage of decentralization in organizations is higher overhead costs due to duplication.

Answer: TRUE Diff: 2 LO: 10-1 AACSB: Reflective thinking skills Learning Outcome: None 10.2 Questions 1) The management control system should be designed to achieve the best possible alignment between ________ and ________.

A) cost centers; profit centers B) local managers' decisions; upper managers' bonuses C) employee behavior; agency theory D) local managers' decisions; the actions upper management seeks Answer: D Diff: 2 LO: 10-2 AACSB: Reflective thinking skills Learning Outcome: None

4 .

2) Which of the following statements about management control systems is FALSE? A) In designing management control systems, top managers must consider the system's impact on the employee behavior desired by the organization.

B) The management control system should be designed to achieve the best possible alignment between managerial effort and goal congruence.

C) The design of a management control system should consider the responsibilities of managers and the amount of autonomy they have.

D) Profit-center managers always have more decentralized decision-making authority than cost-center managers.

Answer: D Diff: 2 LO: 10-2 AACSB: Reflective thinking skills Learning Outcome: None 3) Profit-center managers always have more decentralized decision-making authority than cost-center managers.

Answer: FALSE Diff: 2 LO: 10-2 AACSB: Reflective thinking skills Learning Outcome: None 4) In designing management control systems, top managers should consider the system's impact on the behavior of employees.

Answer: TRUE Diff: 1 LO: 10-2 AACSB: Reflective thinking skills Learning Outcome: None 10.3 Questions 1) Managers' incentives for performance are defined as the ________.

A) relationship between cost and perceived benefit B) relationship between goal congruence and managerial effort C) rewards for managerial effort and actions D) influence of uncontrollable factors on a manager's performance Answer: C Diff: 2 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None

5 .

2) Organizations should choose performance metrics that improve the alignment of managerial incentives with ________.

A) managerial effort B) organizational objectives C) ethical behavior D) agency theory Answer: B Diff: 1 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 3) In agency theory, risk to the manager is defined as ________.

A) probability that a desired outcome will not be achieved B) possibility that performance will be measured inaccurately C) probability that an undesirable outcome will be achieved D) the influence of uncontrollable factors on a manager's performance Answer: D Diff: 2 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 4) An ideal performance metric would measure and reward the manager for ________ factors, and neither reward nor punish the manager for ________ factors.

A) allocated; unallocated B) controllable; uncontrollable C) unallocated; allocated D) uncontrollable; controllable Answer: B Diff: 1 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 5) Which of the following statements is FALSE about performance metrics?

A) The cost benefit criterion leads companies to rely on imperfect, low-cost performance metrics.

B) The more a manager's reward depends on a performance metric, the more incentive the manager has to take actions to maximize that measure.

C) Top management should define the performance metric to promote goal congruence and base enough reward on it to achieve managerial effort.

D) The more uncontrollable factors affect a manager's reward, the less risk the manager bears.

Answer: D Diff: 2 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None

6 .

6) According to agency theory, employment contracts will balance three factors that include ________.

A) cost-benefit, risk and uncontrollable factors B) goal congruence, incentive and risk C) cost of measuring performance, cost-benefit and risk D) incentive, risk and cost of measuring performance Answer: D Diff: 1 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 7) Incentives do not increase managerial effort toward goal congruence.

Answer: FALSE Diff: 2 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 8) Performance-based rewards can be monetary or nonmonetary.

Answer: TRUE Diff: 1 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 9) According to agency theory, employment contracts will balance three factors that include risk, incentive and the cost of measuring performance.

Answer: TRUE Diff: 2 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 10) The greater the influence of noncontrollable factors on responsibility center results, the more problems there are in using the results to measure and reward a manager's performance.

Answer: TRUE Diff: 2 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 11) Companies must pay managers more if the managers bear more risk, assuming the managers are risk averse.

Answer: TRUE Diff: 2 LO: 10-3 AACSB: Reflective thinking skills Learning Outcome: None 7 .

10.4 Questions 1) In return on investment calculations, we should measure invested capital ________ because ________.

A) at the end of the period; it is easiest B) at the end of the period; income is measured at the end of the period C) at the beginning of the period; it is a lead indicator D) as an average for the period under review; income is measured over a period of time Answer: D Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 2) Julie Company's revenues for the year are $300 and average invested capital for the year is $240.

Expenses are currently 50% of revenues. Julie Company's current return on investment is ________.

A) 50% B) 62.5% C) 80% D) 100% Answer: B Diff: 1 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 3) Maury Company's revenues are $300 for the year. Average invested capital for the year is $240.

Expenses are currently 84% of revenues. If Maury Company can reduce its expenses to 70% of revenues, return on investment will be ________.

A) 20% B) 37.5% C) 70% D) 93.75% Answer: B Diff: 1 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

8 .

4) Sterling Company's revenues are $300 for the year. Average invested capital for the year is $240.

Expenses are currently 70% of revenues. If Sterling Company can reduce its average invested capital by 25%, return on investment will be ________.

A) 18.75% B) 50.00% C) 75.00% D) 93.75% Answer: B Diff: 1 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 5) The following information is available for the Stanley Company: Sales for year Average invested capital for year Return on investment

$1,000,000 $312,500 20%

What is the operating income?

A) $62,500 B) $100,000 C) $312,500 D) $687,500 Answer: A Diff: 1 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

9 .

6) The following information is available for the Thompson Company: Sales for year Average invested capital for year Return on investment

$1,000,000 $500,000 10%

What is the capital turnover ratio?

A) 0.10 B) 0.35 C) 0.50 D) 2.00 Answer: D Diff: 1 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 7) The following information is available for the Paul Ryan Company: Sales for year Average invested capital for year Return on investment

$150,000 $156,250 10%

What is the return on sales?

A) 10.00% B) 10.42% C) 62.50% D) 100.00% Answer: B Diff: 1 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 8) ________ is a measure of income divided by the investment required to obtain that income.

A) Return on sales B) Capital turnover C) Return on investment D) Residual income Answer: C Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

10 .

9) Return on investment can be computed as ________ times ________.

A) residual income; capital turnover B) return on assets; asset turnover C) return on sales; capital turnover D) net income; cost of capital Answer: C Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 10) A decrease in either capital turnover or return on sales, without changing the other, will also ________ the ________.

A) decrease; gross book value of long-term assets B) decrease; return on investment C) decrease; cost of capital D) decrease: net book value of long-term assets Answer: B Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 11) Operating income divided by sales is ________.

A) residual income B) capital turnover C) return on investment D) return on sales Answer: D Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 12) Residual income is defined as ________.

A) sales less operating expenses B) operating income divided by revenue C) net operating profit after tax less a capital charge D) net operating profit after tax Answer: C Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 11 .

13) The following information pertains to the Vertigo Company: Total assets Total current liabilities Total expenses Total liabilities Total revenues

$150,000 $110,000 $70,000 $115,000 $80,000

Return on sales equals ________.

A) 12.5% B) 50.0% C) 75.0% D) 133.0% Answer: A Diff: 1 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 14) Economic profit is ________ less ________.

A) net operating profit; capital charge B) residual income; capital charge C) income before interest expense and taxes; capital charge D) income before interest expense but after taxes; capital charge Answer: D Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

12 .

15) Gonzalez Company reports the following information: Net operating income after taxes Before-tax operating income Average invested capital After-tax cost of capital

$200,000 $300,000 $500,000 10%

What is the residual income for Gonzalez Company?

A) $30,000 B) $50,000 C) $150,000 D) $250,000 Answer: C Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 16) Garcia Company reports the following information: Net operating income after taxes Before-tax operating income Average invested capital After-tax cost of capital

$100,000 $300,000 $500,000 10%

What is the residual income for Garcia Company?

A) $30,000 B) $50,000 C) $250,000 D) $450,000 Answer: B Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

13 .

17) Sanchez Company reports the following information: Net operating profit after taxes Adjusted net operating profit after taxes Average invested capital Adjusted average invested capital After-tax cost of capital

$500,000 $670,000 $500,000 $700,000 10%

The adjusted figures reflect adjustments used by Stern Stewart & Company. What is the EVA for Sanchez Company?

A) $430,000 B) $450,000 C) $600,000 D) $620,000 Answer: C Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 18) Gokey Company reports the following information: Net operating profit after taxes Adjusted net operating profit after taxes Average invested capital Adjusted average invested capital After-tax cost of capital

$400,000 $570,000 $600,000 $700,000 10%

The adjusted figures reflect adjustments used by Stern Stewart & Company. What is the EVA for Gokey Company?

A) $330,000 B) $340,000 C) $500,000 D) $510,000 Answer: C Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

14 .

19) Which of the following adjustments to after-tax operating income is used to approximate cash income for EVA? A) expensing research and development costs B) using LIFO inventory method C) deducting after tax interest expense D) using taxes paid rather than tax expense Answer: D Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 20) Juan Company's after-tax operating income was $882 million. Average total assets were $5,900 million and average total stockholders' equity was $4,050 million. Juan Company's cost of capital was 10%. Juan Company uses total assets as the measure of invested capital. What is Juan Company's residual income?

A) $187 million B) $292 million C) $477 million D) $667 million Answer: B Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 21) To calculate economic value added, several adjustments are made to after tax operating profit that include ________ and ________.

A) the use of LIFO inventory valuation; capitalization of research and development costs B) taxes paid rather than tax expense; capitalization of research and development costs C) the use of average cost inventory valuation; current costs of fixed assets D) the use of LIFO inventory valuation; current costs of fixed assets Answer: B Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

15 .

22) The following information pertains to Sanjay Company: Total assets Total current liabilities Total expenses Total liabilities Total revenues

$50,000 $30,000 $60,000 $45,000 $100,000

Invested capital is defined as total assets. What is the capital turnover?

A) 0.40 B) 0.63 C) 1.79 D) 2.00 Answer: D Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 23) The following information pertains to Kumperor Company: Average total assets Total current liabilities Total expenses Total liabilities Total revenues

$100,000 $30,000 $60,000 $35,000 $80,000

Invested capital is defined as total assets. What is the return on investment?

A) 20% B) 60% C) 70% D) 160% Answer: A Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

16 .

24) The following information pertains to Singh Company: Average total assets Net operating profit after taxes Total current liabilities Total expenses Total liabilities Total revenues

$50,000 $15,000 $30,000 $60,000 $35,000 $80,000

Invested capital is defined as total assets. The capital charge is 10%. What is the residual income?

A) $1,600 B) $10,000 C) $15,000 D) $20,000 Answer: B Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 25) The following information pertains to Garcia Company: Total assets Net operating profit after taxes Total current liabilities Total expenses Total liabilities Total revenues

$50,000 $10,000 $10,000 $60,000 $15,000 $80,000

Invested capital is defined as total assets minus current liabilities. The after-tax cost of capital is 20%.

What is the residual income?

A) $2,000 B) $4,000 C) $12,000 D) $20,000 Answer: A Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

17 .

26) The following information pertains to Arnez Company: Total assets Net operating profit after taxes Total current liabilities Total expenses Total liabilities Total revenues

$150,000 $12,000 $110,000 $160,000 $115,000 $180,000

Invested capital is defined as total assets minus current liabilities. The after-tax cost of capital is 10%.

What is the economic profit?

A) $8,000 B) $20,000 C) $40,000 D) $50,000 Answer: A Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 27) When measuring invested capital for purposes of calculating return on investment, managers in practice predominantly use ________.

A) net book value at current cost B) net book value at historical cost C) gross book value at historical cost D) gross book value at replacement cost Answer: B Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 28) Historical cost is widely used for asset valuation in calculating return on investment because ________.

A) it reports the replacement cost of long-term assets B) it is more subjective than other approaches C) it requires additional data collection D) the cost of obtaining additional data exceeds the benefit Answer: D Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

18 .

29) The following information is available for Arnett Company: Current assets Property, plant and equipment Other assets Total assets

$100,000 150,000 50,000 $300,000

Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$75,000 100,000 125,000 $300,000

Invested capital is defined as total assets. Net operating income is $60,000. What is ROI? A) 20% B) 30% C) 50% D) 120% Answer: A Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 30) The following information is available for Pohler Company: Current assets Property, plant and equipment Other assets Total assets

$100,000 50,000 150,000 $300,000

Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$75,000 100,000 125,000 $300,000

Invested capital is defined as total assets. Before-tax operating profit is $175,000. After-tax operating profit is $125,000. The after-tax cost of capital is 10%. What is economic profit?

A) $95,000 B) $125,000 C) $145,000 D) $175,000 Answer: A Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

19 .

31) The following information is available for Applegate Company: Current assets Property, plant and equipment Other assets Total assets

$100,000 150,000 50,000 $300,000

Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$175,000 100,000 25,000 $300,000

Invested capital is defined as total assets less current liabilities. The after-tax operating income is $150,000. The after-tax cost of capital is 20%. The before-tax operating income is $200,000. What is the residual income?

A) $90,000 B) $120,000 C) $125,000 D) $175,000 Answer: C Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 32) Return on investment equals operating income divided by investment.

Answer: TRUE Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 33) Return on sales can be computed by multiplying return on investment by the capital turnover.

Answer: FALSE Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 34) Return on investment equals return on sales divided by capital turnover.

Answer: FALSE Diff: 1 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

20 .

35) Return on sales equals revenue divided by income.

Answer: FALSE Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 36) Capital turnover equals revenue divided by invested capital.

Answer: TRUE Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 37) Return on sales can be increased by increasing expenses.

Answer: FALSE Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 38) Capital turnover can be increased by decreasing investment.

Answer: TRUE Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 39) Increasing capital turnover is one of the advantages of implementing the JIT philosophy.

Answer: TRUE Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 40) EVA equals adjusted after-tax operating income minus capital turnover.

Answer: FALSE Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

21 .

41) EVA uses after-tax numbers for operating income.

Answer: TRUE Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 42) In general, use of economic profit or EVA will promote goal congruence and lead to better investment decisions than the use of ROI. Answer: TRUE Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 43) Possible definitions of invested capital for purposes of calculating return on investment include total assets and total stockholders' equity.

Answer: TRUE Diff: 1 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 44) The proponents of gross book value for purposes of calculating return on investment maintain that it facilitates comparisons between years and between plants or divisions.

Answer: TRUE Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 45) The rate of return on net book value for equipment decreases as the equipment ages.

Answer: FALSE Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

22 .

46) Managers evaluated using net book value for plant assets will tend to replace assets sooner than managers evaluated using gross book value.

Answer: FALSE Diff: 2 LO: 10-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 47) The use of net book value for plant assets promotes a more conservative approach to asset replacement when compared to gross book value.

Answer: TRUE Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 48) Selected data for two divisions of the Royal Company are given below:

Net sales for year Average total assets for year Operating income before taxes for year Tax rate Average after-tax cost of capital

South Division $4,000,000 $2,000,000 $360,000 20% 10%

North Division $7,000,000 $2,000,000 $420,000 20% 12%

Required: A) Compute the ROI for each division. Income is defined as operating income after taxes.

B) Based on the ROI, which division manager should receive a bonus? Bonuses are awarded if ROI equals or exceeds 15 percent.

C) Compute the residual income for each division. Invested capital is defined as total assets.

D) Based on the residual income, which division manager should receive a bonus? Bonuses are awarded if residual income is greater than $100,000.

Answer: A) South Division: 14.4% = ($360,000 × 80%) / $2,000,000 North Division: 16.8% = ($420,000 × 80%) / $2,000,000 B) North Division C) South Division: $88,000 = ($360,000 × 80%) - (10% × $2,000,000) North Division: $96,000 = ($420,000 × 80%) - (12% × $2,000,000) D) Neither division manager.

Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

23 .

49) The following information is available for the Tyson Company: Sales for year Average invested capital for year Return on investment for year

$1,000,000 $500,000 25%

Required: A) Compute capital turnover.

B) Compute operating income.

C) Compute return on sales.

Answer: A) 2.0 = $1,000,000/$500,000 B) $125,000 = 25% × $500,000 C) 12.5% = $125,000 / $1,000,000 Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

24 .

50) Hudson Company has two divisions. The following information is available:

Revenue for year Operating income before taxes for year Average invested capital for year Invested capital at end of year Tax rate After-tax cost of capital for year

North Division $300,000

South Division $500,000

$100,000 $100,000 $200,000 30% 20%

$90,000 $200,000 $300,000 30% 15%

Required: 1. Using operating income after taxes as the income measure, compute the following for each division: A) Return on investment.

B) Return on sales C) Capital turnover D) Residual income 2. Which division is more successful? Why? Answer: 1.

A) North Division: $70,000/$100,000 = 70% South Division: $63,000/$200,000 = 31.5% B) North Division: $70,000/$300,000 = 23.3% South Division: $63,000/$500,000 = 12.6% C) North Division: $300,000/$100,000 = 3 South Division: $500,000/$200,000 = 2.5 D) North Division: $70,000 - (20% × $100,000) = $50,000 South Division: $63,000 - (15% × $200,000) = $33,000 2. The North Division has a higher ROI and a larger residual income.

Diff: 2 LO: 10-4 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

25 .

10.5 Questions 1) When a company uses economic profit as a performance metric, managers have an incentive to invest only in projects ________.

A) earning less than the return on investment of the segment or division B) earning more than the return on investment of the segment or division C) earning more than the cost of capital of the segment or division D) earning less than the cost of capital of the segment or division Answer: C Diff: 2 LO: 10-5 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 2) When a company uses return on investment as a performance metric, managers have an incentive to invest only in projects ________.

A) that increase the return on investment of the segment or division B) that decrease the return on investment of the segment or division C) that have a return on investment that exceeds the cost of capital of the segment or division D) that have a return on investment that is less than the cost of capital of the segment or division Answer: A Diff: 2 LO: 10-5 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 3) Brady Division has operating income of $200,000 for the year ending December 31, 2011. Average invested capital is $1,000,000 and the weighted-average cost of capital is 10%. The division is considering a new investment that would cost $500,000 and earn 15% annually. If return on investment is the performance metric, should the manager of the Brady Division accept the new investment?

A) No, because the return on investment of the division decreases with the new investment.

B) No, because the return on investment of the division increases with the new investment.

C) Yes, because the return on investment of the division decreases with the new investment.

D) Yes, because the return on investment of the division increases with the new investment.

Answer: A Diff: 3 LO: 10-5 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

26 .

4) Wisconsin Division has operating income of $40,000 for the year ending December 31, 2011. Average invested capital is $800,000 and the weighted-average cost of capital is 10%. The division is considering a new investment that would cost $800,000 and earn 7% annually. If return on investment is the performance metric, should the manager of the Wisconsin Division accept the new investment?

A) No, because the return on investment of the division decreases with the new investment.

B) No, because the return on investment of the division increases with the new investment.

C) Yes, because the return on investment of the division decreases with the new investment.

D) Yes, because the return on investment of the division increases with the new investment.

Answer: D Diff: 3 LO: 10-5 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 5) Bombard Division has operating income of $200,000 for the year ending December 31, 2011. Average invested capital is $1,000,000 and the weighted-average cost of capital is 10%. The division is considering a new investment that would cost $500,000 and earn 15% annually. If economic profit is the performance metric, should the manager of the Bombard Division accept the new investment?

A) No, because the return on investment of the division decreases with the new investment.

B) No, because the return on investment of the division increases with the new investment.

C) Yes, because the economic profit of the division increases with the new investment.

D) Yes, because the return on investment of the division increases with the new investment.

Answer: C Diff: 3 LO: 10-5 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 6) Wendell Division has operating income of $40,000 for the year ending December 31, 2011. Average invested capital is $800,000 and the weighted-average cost of capital is 10%. The division is considering a new investment that would cost $800,000 and earn 7% annually. If economic profit is the performance metric, should the manager of the Wendell Division accept the new investment?

A) No, because the return on investment of the division decreases with the new investment.

B) No, because the economic profit for the investment is negative.

C) Yes, because the economic profit for the investment is positive.

D) Yes, because the return on investment of the division increases with the new investment.

Answer: B Diff: 3 LO: 10-5 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

27 .

7) Use of ________ in evaluating capital investment projects will promote goal congruence and lead to better decisions than using ________.

A) return on investment; economic profit B) economic profit; contribution by segment C) contribution controllable by division manager; contribution by segment D) economic profit, return on investment Answer: D Diff: 3 LO: 10-5 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 8) Evaluation of capital investments based on economic profit motivates managers to invest in projects that ________ because those investments increase the division's economic profit.

A) earn a return in excess of the project's return on investment B) earn a return in excess of the segment's return on investment C) earn a return in excess of the cost of capital D) earn a return in excess of the segment's net income Answer: C Diff: 3 LO: 10-5 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 9) Why do some companies prefer the use of economic profit over return on investment in decisionmaking?

A) The calculations for economic profit are easier.

B) The data needed to calculate return on investment are not always available.

C) Return on investment can motivate managers to make investment decisions that are not in the best interests of the company as a whole.

D) The concept behind economic profit is more logical.

Answer: C Diff: 2 LO: 10-5 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

28 .

10) From the view of the company as a whole, managers should accept investment projects that earn more than the ________. ________ should not be used for investment decisions.

A) return on investment; Return on sales B) return on sales; Capital turnover C) cost of capital; Return on investment D) capital turnover; Return on sales Answer: C Diff: 2 LO: 10-5 AACSB: Reflective thinking skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 11) The following information pertains to a segment of the Moore Company. Invested capital is defined as total assets. The weighted average cost of capital is 10%. The ROI of the segment before the project is 20%. The ROI of the segment after the project is 18%. The manager is evaluated based on the segment's ROI. A project earning a ROI of 12% should be ________.

A) accepted B) rejected C) compared to the company's ROI D) compared to the company's residual income Answer: B Diff: 2 LO: 10-5 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards 12) The following information pertains to a segment of the Marian Company. Invested capital is defined as total assets. The weighted average cost of capital is 10%. The ROI of the segment before the project is 20%. The ROI of the segment after the project is 18%. The manager is evaluated based on the segment's economic profit. A project earning a ROI of 12% should be ________.

A) accepted B) rejected C) compared to the company's ROI D) compared to the company's residual income Answer: A Diff: 2 LO: 10-5 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

29 .

13) Selected data for two divisions of the Ramble Company are given below:

Net sales Average total assets Net operating income after taxes Average plant assets Average cost of capital

South Division $4,000,000 $2,000,000 $360,000 $950,000 10%

North Division $7,000,000 $2,000,000 $420,000 $800,000 12%

Each division is considering a capital investment of $1,000,000. The annual return on the capital investment is 11%. Invested capital is defined as total assets.

Required: A) The South Division's manager is evaluated using residual income. Should South Division accept the capital investment? Why? B) The North Division's manager is evaluated using residual income. Should North Division accept the capital investment? Why? C) The South Division's manager is evaluated using return on investment. Should South Division accept the capital investment? Why? Answer: A) Yes, the manager should accept the investment because residual income from the investment is positive. Residual income = $110,000 - $100,000= $10,000 Return on investment = 11% × $1,000,000 = $110,000 Cost of capital = 10% × $1,000,000 = $100,000 B) No, the manager should not accept the investment because residual income from the investment is negative. Residual income = $110,000 - $120,000 = $(10,000) Return on investment = 11% × $1,000,000 = $110,000 Cost of capital = 12% × $1,000,000 = $120,000 C) No, the manager should not accept the capital investment. The return on investment declines to 15.6 percent with the capital investment from 18 percent without the capital investment. ($360,000 + $110,000) / ($2,000,000 + $1,000,000) = 15.7% $360,000 / $2,000,000 = 18% Diff: 3 LO: 10-5 AACSB: Analytic skills Learning Outcome: Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

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10.6 Questions 1) What does a decentralized company expect from its transfer pricing system?

A) to increase the transferring segment's profits only B) to increase the buying segment's profits only C) to increase the company's overall profits only D) to increase the transferring segment's profits and the company's overall profits Answer: D Diff: 2 LO: 10-6 AACSB: Reflective thinking skills Learning Outcome: None 2) In companies with segment autonomy, who determines the transfer price for internal sales and purchases of products?

A) all segment managers B) segment mangers involved in transfer C) upper management D) outside suppliers Answer: B Diff: 2 LO: 10-6 AACSB: Reflective thinking skills Learning Outcome: None 3) Which of the following statements about the establishment of transfer prices for internal sales and purchases between segments is FALSE? A) In decentralized organizations, transfer pricing policy sometimes leads to dysfunctional decisions.

B) There is seldom a perfect transfer pricing policy.

C) Organizations use a variety of methods to determine transfer prices.

D) In centralized organizations, segment managers set transfer prices.

Answer: D Diff: 2 LO: 10-6 AACSB: Reflective thinking skills Learning Outcome: None 4) Transfer prices are ________.

A) revenues of the segment producing the transferred product B) costs of the segment acquiring the transferred product C) costs of the segment producing the transferred product D) revenues of the segment producing the transferred product and costs of the segment acquiring the transferred product Answer: D Diff: 2 LO: 10-6 AACSB: Analytic skills Learning Outcome: None 31 .

5) A transfer price exists when two segments of the same organization sell ________.

A) a product to the same customer B) a product to each other C) a product in a foreign country D) the same service to customers Answer: B Diff: 1 LO: 10-6 AACSB: Reflective thinking skills Learning Outcome: None 6) Transfer prices are the amounts charged by one segment of an organization for a product that it supplies to an outside firm.

Answer: FALSE Diff: 1 LO: 10-6 AACSB: Reflective thinking skills Learning Outcome: None 7) The transfer price is revenue to the acquiring segment, and it is a cost to the segment producing the product.

Answer: FALSE Diff: 1 LO: 10-6 AACSB: Reflective thinking skills Learning Outcome: None 10.7 Questions 1) If capacity constraints prevent a segment from meeting internal and external demand for a product, the opportunity cost of selling internally equals ________.

A) the variable cost of producing the product B) the controllable costs of producing the product C) the contribution margin the producing segment could have received from selling in the external market rather than the internal market D) the variable cost plus the avoidable fixed cost of producing the product Answer: C Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None

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2) Division AA does not have excess capacity to produce Product XX. The division can sell Product XX for $10 per unit outside the company. Variable costs are $6 per unit. Division BB wants to purchase Product XX from Division AA to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product XX for $12 per unit. What is the minimum transfer price for Division AA? A) $4 per unit B) $6 per unit C) $10 per unit D) $12 per unit Answer: C Diff: 3 LO: 10-7 AACSB: Analytic skills Learning Outcome: None 3) Division South does not have excess capacity to produce Product Y. The division can sell Product Y for $10 per unit outside the company. Variable costs are $6 per unit. Division North wants to purchase Product Y from Division South to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product Y for $12 per unit. What is the maximum price Division North will pay for Product Y? A) $12 per unit B) $13 per unit C) $25 per unit D) none of the above Answer: A Diff: 3 LO: 10-7 AACSB: Analytic skills Learning Outcome: None 4) Division West does not have excess capacity to produce Product XX. The division can sell Product XX for $10 per unit outside the company. Variable costs are $6 per unit. Division East wants to purchase Product XX from Division West to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product XX for $11 per unit. What is the maximum price Division East will pay for Product XX? A) $11 per unit B) $12 per unit C) $13 per unit D) none of the above Answer: A Diff: 3 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

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5) Division Big does have excess capacity to produce Product XX. The division can sell Product XX for $10 per unit outside the company. Variable costs are $6 per unit. Division Small wants to purchase Product XX from Division Big to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product XX for $12. What is the minimum transfer price for Division Big? A) $4 per unit B) $6 per unit C) $10 per unit D) $12 per unit Answer: B Diff: 3 LO: 10-7 AACSB: Analytic skills Learning Outcome: None 6) A variable-costing transfer pricing system is appropriate when there is ________.

A) constrained capacity for the selling segment B) constrained capacity for the buying segment C) excess capacity for the selling segment D) excess capacity for the buying segment Answer: C Diff: 3 LO: 10-7 AACSB: Analytic skills Learning Outcome: None 7) If a selling segment has excess capacity, the opportunity cost of selling a product internally equals ________.

A) the variable costs of producing the product B) the contribution margin the producing segment could have received from selling in the external market rather than the internal market C) the variable costs plus the avoidable fixed costs of producing the product D) zero Answer: D Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None

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8) What is the general rule for determining transfer prices on transferred products between segments of a company? The transfer price equals ________ plus ________.

A) fixed costs; opportunity costs B) outlay cost; sunk cost C) outlay cost; variable cost D) outlay cost; opportunity cost Answer: D Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 9) North Division sells a part internally to South Division. South Division uses the part to produce inexpensive products sold at discount stores. North Division incurs costs of $1.50 per part, while South Division incurs additional costs of $4.80 per product. North Division sells the part to South Division for $2.00 per part. The final product is sold to external customers for $8.00 each. Which of the following formulas correctly reflects the company's operating income?

A) $8.00 - $1.50 - $4.80 - $2.00 = $(0.30) B) $8.00 - $1.50 - $4.80 = $1.70 C) $8.00 - $4.80 -$2.00 = $1.20 D) $8.00 - $1.50 = $6.50 Answer: B Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None 10) High Division sells a part internally to Low Division. Low Division uses the part to produce inexpensive products sold at discount stores. High Division incurs costs of $1.50 per part, while Low Division incurs additional costs of $4.80 per product. High Division sells the part to Low Division for $2.00 per part.

Low Division can purchase the part from an outside supplier for $1.00 per part, but does not accept the offer. The final product is sold to external customers for $8.00 each. Which of the following formulas correctly reflects the company's operating income?

A) $8.00 - $1.50 - $4.80 - $2.00 - $1.00 = $(1.30) B) $8.00 - $1.50 - $4.80 = $1.70 C) $8.00 - $4.80 - $2.00 = $1.20 D) $8.00 - $1.50 = $6.50 Answer: B Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

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11) There is(are) ________ goal(s) of transfer pricing systems. There is no universally ________ transfer price.

A) multiple; maximum B) one; maximum C) multiple; optimal D) one; optimal Answer: C Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 12) The West and East Divisions are divisions in the same company. Currently the East Division buys a part from West Division for $384 per unit. The West Division wants to increase the price of the part it sells to East Division by $96 to $480. The manager of the East Division has stated that he cannot pay that much insofar as the division's profit goes below zero. The manager of the East Division can buy the part from an outside supplier for $440 per unit. The cost data pertaining to the part is supplied by the West Division: Direct materials Direct labor Variable overhead Fixed overhead

$136 200 40 42

If West Division does not produce the parts for the East Division, it will be able to avoid one-third of the fixed manufacturing overhead costs. The West Division has excess capacity but no alternative uses for the facilities. From the standpoint of the company as a whole, should the East Division buy the part from the West Division or the outside supplier?

A) East Division should buy the part from the West Division because the company's profit will be $14.00 per unit larger.

B) East Division should buy the part from the West Division because the company's profit will be $40.00 per unit larger.

C) East Division should buy the part from the West Division because the company's profit will be $50.00 per unit larger.

D) East Division should buy from an outside supplier at $440 per unit.

Answer: C Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

36 .

13) The South and North Divisions are divisions in the same company. Currently the North Division buys a part from South Division for $384 per unit. The South Division wants to increase the price of the part it sells to North Division by $96 to $480. The manager of the North Division has stated that he cannot pay that much insofar as the division's profit goes below zero. The manager of the North Division can buy the part from an outside supplier for $448 per unit. The cost data pertaining to the part is supplied by the South Division: Direct materials Direct labor Variable overhead Fixed overhead

$136.00 200.00 40.00 38.40

If South Division does not produce the parts for the North Division, it will be able to avoid one-third of the fixed manufacturing overhead costs. The South Division has excess capacity but no alternative uses for the facilities. North Division will sell the finished product with the part (from South Division) for $1,000 after incurring additional processing costs of $600. What is the maximum transfer price per unit that North Division should pay for the part?

A) $388.80 B) $400.00 C) $448.00 D) $480.00 Answer: B Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

37 .

14) The West and East Divisions are divisions in the same company. Currently the East Division buys a part from West Division for $384 per unit. The West Division wants to increase the price of the part it sells to East Division by $96 to $480. The manager of the East Division has stated that he cannot pay that much insofar as the division's profit goes below zero. The manager of the East Division can buy the part from an outside supplier for $448 per unit. The cost data pertaining to the part is supplied by the West Division: Direct materials Direct labor Variable overhead Fixed overhead

$136 200 40 42

If West Division does not produce the parts for the East Division, it will be able to avoid one-third of the fixed manufacturing overhead costs. The West Division has excess capacity but no alternative uses for the facilities. West Division normally sells the part outside the company for $400 per unit. What is the minimum transfer price per unit that West Division should charge East Division?

A) $376 B) $390 C) $400 D) $448 Answer: B Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None 15) If there is a competitive market for the product being transferred internally, using the ________ as the transfer price will lead to ________.

A) full cost; goal congruence B) variable cost; goal congruence C) full cost plus profit; goal congruence D) market price; goal congruence Answer: D Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None

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16) Assuming a company uses a cost-based pricing system for transfer pricing, which of the following items would NOT be used?

A) variable-costing only B) full-costing plus profit only C) full-costing only D) fixed-costing only Answer: D Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 17) Capricorn Company's records reveal the following: Division X Market price of finished component to outsiders Variable costs per component Division Y Sale price of finished product Variable costs: Division X (1 component) Division Y Assembly Division Y Packaging

$32 per unit $24 per unit $42 per unit ?

9 per unit 4 per unit

Division Y wants to buy the component from Division X. The variable costs of Division Y will be incurred whether it buys the component from Division X or from an outside supplier. Division Y can buy the component for $30 per unit from an outside supplier. Division X has no excess capacity. What is the highest price per unit that Division Y should pay to Division X for the components?

A) $22 per unit B) $29 per unit C) $30 per unit D) $32 per unit Answer: B Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

39 .

18) Maralee Company's records reveal the following: Division X Market price of finished component to outsiders Variable costs per component Division Y Sale price of finished product Variable costs: Division X (1 component) Division Y Assembly Division Y Packaging

$32 per unit $24 per unit $42 per unit ?

9 per unit 4 per unit

Division Y wants to buy the component from Division X. The variable costs of Division Y will be incurred whether it buys the component from Division X or from an outside supplier. Assume Division X is working at full capacity; there is no excess capacity. Division Y can buy the component from an outside supplier for $32 per unit. What is the lowest transfer price per unit Division X should accept from Division Y for the component?

A) $8 per unit B) $22 per unit C) $24 per unit D) $32 per unit Answer: D Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

40 .

19) Bernice Company's records reveal the following: Division X Market price of finished component to outsiders Variable costs per component

$32 per unit $24 per unit

Division Y Sale price of finished product Variable costs: Division X(1 component) Division Y Assembly Division Y Packaging

$42 per unit ?

9 per unit 4 per unit

Division Y wants to buy the component from Division X. The variable costs of Division Y will be incurred whether it buys the component from Division X or from an outside supplier. Assume Division X has excess capacity. Division Y can buy the component from an outside supplier for $32 per unit. What is the lowest transfer price per unit at which Division X would be willing to sell to Division Y? A) $8 B) $22 C) $24 D) $32 Answer: C Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

41 .

20) Helen Company's records reveal the following: Division A Market price of finished part to outsiders Variable costs per part Division B Sale price of finished product per unit Variable costs: Division A (1 part) Division B Processing Division B Selling

$75 per unit $51 per unit $105 per unit ?

27 per unit 12 per unit

Division B wants to buy the part from Division A. The variable costs of Division B will be incurred whether it buys the part from Division A or from an outside supplier. Division B can buy the parts from an outside supplier at $70 per unit. Division A has no excess capacity. What is the highest price that Division B should pay to Division A for the parts per unit?

A) $51 B) $66 C) $70 D) $75 Answer: B Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

42 .

21) Campbell Company's records reveal the following: Division A Market price of finished part to outsiders Variable costs per part Division B Sale price of finished product per unit Variable costs: Division A(1 part) Division B Processing Division B Selling

$74 per unit $50 per unit $105 per unit ?

27 per unit 12 per unit

Division B wants to buy the part from Division A. The variable costs of Division B will be incurred whether it buys the part from Division A or from an outside supplier. Assume Division A is working at full capacity, and there is no excess capacity. Division B can buy the parts from an outside supplier at $70 per unit. What is the lowest transfer price per unit Division A should accept from Division B? A) $24 B) $66 C) $70 D) $74 Answer: D Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

43 .

22) Dersey Company's records reveal the following: Division A Market price of finished part to outsiders Variable costs per part Division B Sale price of finished product per unit Variable costs: Division A(1 part) Division B Processing Division B Selling

$74 per unit $50 per unit

$105 per unit ?

27 per unit 12 per unit

Division B wants to buy the part from Division A. The variable costs of Division B will be incurred whether it buys the part from Division A or from an outside supplier. Division A has excess capacity.

Division B can buy the part for $75 per unit from an outside supplier. What is the lowest transfer price per unit Division A will accept from Division B? A) $24 B) $50 C) $66 D) $75 Answer: B Diff: 2 LO: 10-7 AACSB: Analytic skills Learning Outcome: None 23) ________ is an approach for establishing a market-based transfer price.

A) Full cost plus a normal profit markup B) External market price less selling and delivery costs saved from selling internally C) External market price plus a profit markup D) Variable cost plus unavoidable fixed cost Answer: B Diff: 1 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 24) If market prices are not available for transfer prices, most companies use ________ transfer prices.

A) negotiated B) average C) cost-based D) activity-based Answer: C Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 44 .

25) Cost-based transfer prices are easy to implement but can lead to ________ decisions.

A) questionable B) negotiated C) dysfunctional D) autonomous Answer: C Diff: 1 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 26) A general rule for transfer pricing is that the transfer price should equal the sum of outlay cost and opportunity cost.

Answer: TRUE Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 27) When determining a transfer price, outlay cost is often the variable cost for producing the item transferred.

Answer: TRUE Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 28) In cases of constrained capacity, the opportunity cost of transferring a product internally is zero.

Answer: FALSE Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 29) Dysfunctional decisions are decisions that conflict with organizational goals and objectives.

Answer: TRUE Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 30) It is recommended that standard costs be used instead of actual costs for cost-based transfer prices.

Answer: TRUE Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None

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31) If actual costs are used for transfer pricing by a selling division, the selling division has little incentive to control costs.

Answer: TRUE Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 32) A full-cost transfer price can potentially create dysfunctional decisions.

Answer: TRUE Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None 33) The time and effort spent negotiating a transfer price between a company's divisions adds nothing directly to the profits of a company.

Answer: TRUE Diff: 2 LO: 10-7 AACSB: Reflective thinking skills Learning Outcome: None

46 .

34) Collier Products has a Valve Division that manufactures and sells a standard valve. The Valve Division has a capacity of 100,000 units. The variable costs per unit are $16. The fixed costs per unit are $9, based on the capacity of 100,000 units. None of the fixed costs are avoidable. The selling price to outside customers in the intermediate market are $30 per unit.

The Pump Division wants to purchase the valve from the Valve Division for one of its pumps. The Pump Division is currently purchasing 10,000 valves per year from an overseas supplier at a cost of $29 per valve. The selling price of the completed pump is $100 per unit and the costs to complete the pump are $60 per unit, excluding the valve purchased from the other division.

Required: A) Assume the Valve Division has ample idle capacity to produce the 10,000 valves for the Pump Division. What should be the transfer price between the two divisions? Give a range. Determine the minimum transfer price for the Valve Division and the maximum transfer price for the Pump Division.

B) Assume the Valve Division does not have idle capacity to produce the valves for the Pump Division. It is selling all that it can produce to outside customers in the intermediate market. What should be the transfer price between the two divisions? Give a range. Determine the minimum transfer price for the Valve Division and the maximum transfer price for the Pump Division. Will a transfer occur?

C) Assume the Valve Division does not have idle capacity to produce the valves for the Pump Division. It is selling all that it can produce to outside customers in the intermediate market. Now assume the Valve Division saves $3.00 per unit by selling internally. What should be the transfer price between the two divisions? Give a range. Determine the minimum transfer price for the Valve Division and the maximum transfer price for the Pump Division.

Answer: A) $16 per unit to $29 per unit. $16 is the minimum transfer price for the Valve Division and represents the outlay cost. The opportunity cost is zero because there is idle capacity. $29 is the maximum transfer price for the Pump Division and represents the minimum of $29 and $40. ($40 = $100 - $60) B) No transfers will be made. The Valve Division will want to sell at $30 per unit, which is the minimum transfer price. The Pump Division can purchase the valves at $29 per unit externally, which is the maximum transfer price.

C) $27 per unit to $29 per unit. The minimum transfer price for the Valve Division will be $30 minus $3.00 = $27. The maximum transfer price for the Pump Division will be the lower of $29 and $40.

Diff: 3 LO: 10-7 AACSB: Analytic skills Learning Outcome: None

47 .

10.8 Questions 1) Multinational companies use transfer prices to minimize worldwide income taxes, ________ and ________.

A) tariffs; financial restrictions imposed by U.S. government B) tariffs; import duties C) financial restrictions imposed by U.S. government; import duties D) foreign bribes; import duties Answer: B Diff: 2 LO: 10-8 AACSB: Reflective thinking skills Learning Outcome: None 2) ABC Division is in the United States with high income tax rates. ABC Division produces a component for the Spain Division in a low income-tax-rate country. What transfer price should ABC Division set for the component sold to the Spain Division to minimize taxes?

A) ABC Division should set a high transfer price to maximize profits.

B) ABC Division should set a low transfer price to maximize profits.

C) ABC Division should set a high transfer price to minimize taxes.

D) ABC Division should set a low transfer price to minimize taxes.

Answer: D Diff: 3 LO: 10-8 AACSB: Reflective thinking skills Learning Outcome: None 3) The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit. The part is produced in Portugal and transferred to a plant in the United States. Portugal has a 10% income tax rate.

The United States has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume Part X is transferred at full cost. By using full cost instead of variable cost for the transfer price, the income tax effect per unit in Portugal is ________.

A) a decrease in tax by $3 per unit B) an increase in tax by $3 per unit C) a decrease in tax by $15 per unit D) an increase in tax by $15 per unit Answer: B Diff: 2 LO: 10-8 AACSB: Analytic skills Learning Outcome: None

48 .

4) The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit. The part is produced in Country Z and transferred to a plant in Country B. Country Z has a 10% income tax rate.

Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume Part X is transferred at full cost. By using full cost instead of variable cost for the transfer price, the income tax effect per unit in Country B is ________.

A) a decrease in tax by $9 per unit B) an increase in tax by $9 per unit C) a decrease in tax by $15 per unit D) an increase in tax by $15 per unit Answer: C Diff: 2 LO: 10-8 AACSB: Analytic skills Learning Outcome: None 5) The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit. The part is produced in Country Z and transferred to a plant in Country B. Country Z has a 10% income tax rate.

Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume Part X is transferred at full cost. By using full cost instead of variable cost for the transfer price, the net savings is ________.

A) $3 per unit B) $6 per unit C) $9 per unit D) $15 per unit Answer: C Diff: 2 LO: 10-8 AACSB: Analytic skills Learning Outcome: None 6) Multinational companies use transfer pricing to minimize their worldwide income taxes, duties and tariffs.

Answer: TRUE Diff: 2 LO: 10-8 AACSB: Reflective thinking skills Learning Outcome: None 7) For multinational companies, worldwide income taxes do not influence the setting of transfer prices.

Answer: FALSE Diff: 2 LO: 10-8 AACSB: Reflective thinking skills Learning Outcome: None

49 .

8) In a multinational setting, low transfer prices generally lead to low import duties.

Answer: TRUE Diff: 2 LO: 10-8 AACSB: Reflective thinking skills Learning Outcome: None 9) U.S. multinational companies must follow the Internal Revenue Code when setting transfer prices.

Answer: TRUE Diff: 2 LO: 10-8 AACSB: Reflective thinking skills Learning Outcome: None 10.9 Questions 1) The joint formulation by a manager and his or her superior of a set of goals and plans for achieving the goals for a forthcoming period is known as ________.

A) capital budgeting B) managerial effort C) management control system D) management by objectives Answer: D Diff: 1 LO: 10-9 AACSB: Reflective thinking skills Learning Outcome: None 2) Which of the following types of organizations can use management by objectives?

A) profit-seeking organizations only B) nonprofit organizations only C) universities, hospitals and churches only D) all of the above Answer: D Diff: 1 LO: 10-9 AACSB: Reflective thinking skills Learning Outcome: None 3) A management by objectives approach uses responsibility center budgets.

Answer: TRUE Diff: 2 LO: 10-9 AACSB: Reflective thinking skills Learning Outcome: None

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Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 11 Capital Budgeting 11.1 Questions 1) Investments of large amounts of cash in plant assets are called ________.

A) cash outflows B) capital budgeting C) capital projects D) capital outlays Answer: D Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 2) The most widely used capital budgeting models are ________.

A) payback method B) accounting rate of return C) return on investment D) discounted cash flow methods Answer: D Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 3) Which of the following statements is FALSE? A) Discounted cash flow models focus on future cash inflows and outflows.

B) Discounted cash flow models consider the time value of money.

C) Discounted cash flow models focus on net income.

D) Discounted cash flow models compare cash outflows today to the present value of future cash flows.

Answer: C Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

1 .

4) Steps used in applying the net present value method to a proposed capital investment do NOT include ________.

A) identify the amount and timing of relevant expected cash inflows and outflows B) find the present value of each expected future cash inflow and outflow C) find the sum of the present values of each expected future cash inflow and outflow D) find the future value of the cash outflow that occurs at the present time.

Answer: D Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 5) Which of the following statements is FALSE? A) The higher the minimum desired rate of return, the lower the present value of each future cash flow.

B) Higher required rates of return lead to lower net present values for capital investments.

C) Higher required rates of return lead to higher net present values for capital investments.

D) The net present value for a project can be negative or positive depending on the minimum desired rate of return used.

Answer: C Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 6) When using the Net Present Value model, which of the following assumptions is/are used?

A) We assume the predicted cash inflows and outflows are certain to occur at the times specified.

B) We assume perfect capital markets.

C) The Net Present Value model meets the cost-benefit criterion.

D) A and B Answer: D Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

2 .

7) A capital investment has a net present value of $1,000.00 at a required rate of return of 10%. At a 12% required rate of return, the net present value of the investment is $100.00. At a 14% required rate of return, the net present value of the investment is $0. The capital investment should be rejected if ________.

A) the required rate of return exceeds 14% B) the required rate of return exceeds 12% C) the required rate of return is less than 14% D) the required rate of return is less than 12% Answer: A Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

3 .

8) Dolly Madison Company is considering two investments. The relevant data follows:

Cost Annual cash savings(end of year) Terminal salvage value Estimated useful life in years Minimum desired rate of return Method of depreciation

5% 6% 7% 8% 10% 12% 14%

Project A $200,000 $50,692 $50,000 5 10% Straight-line

Project B $300,000 $60,995 $70,000 5 10% Straight-line

Present Value Of $1 for 5 periods

Present Value of Ordinary Annuity of $1 for 5 periods 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331

0.7835 0.7473 0.713 0.6806 0.6209 0.5674 0.5194

Ignoring taxes, the internal rate of return for Project A is approximately ________.

A) 8% B) 10% C) 12% D) 14% Answer: D Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

4 .

9) New Jersey Company is considering two investments. The relevant data follows:

Cost Annual cash savings (end of year) Terminal salvage value Estimated useful life in years Minimum desired rate of return Method of depreciation

5% 6% 7% 8% 10% 12% 14%

Project A $200,000 $50,692 $50,000 5 10% Straight-line

Project B $300,000 $60,995 $70,000 5 10% Straight-line

Present Value Of $1 for 5 periods

Present Value of Ordinary Annuity of $1 for 5 periods 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331

0.7835 0.7473 0.713 0.6806 0.6209 0.5674 0.5194

Ignoring taxes, the internal rate of return for Project B is approximately ________.

A) 6% B) 7% C) 8% D) 10% Answer: B Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

5 .

10) New Hampshire Company is considering two investments. The relevant data follows:

Cost Annual cash savings(end of year) Terminal salvage value Estimated useful life in years Minimum desired rate of return Method of depreciation

5% 6% 7% 8% 10% 12% 14%

Project A $200,000 $50,692 $50,000 5 10% Straight-line

Project B $300,000 $60,995 $70,000 5 10% Straight-line

Present Value Of $1 for 5 periods

Present Value of Ordinary Annuity of $1 for 5 periods 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331

0.7835 0.7473 0.713 0.6806 0.6209 0.5674 0.5194

Ignore taxes. Using the net present value method, which project should be accepted?

A) Project A only B) Project B only C) both Project A and Project B D) neither Project A nor Project B Answer: A Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

6 .

11) Pennsylvania Company is considering two investments. The relevant data follows:

Cost Annual cash savings (end of year) Terminal salvage value Estimated useful life in years Minimum desired rate of return Method of depreciation

5% 6% 7% 8% 10% 12% 14%

Project A $205,010 $50,000 $0 5 10% Straight-line

Project B $259,770 $60,000 $0 5 10% Straight-line

Present Value Of $1 for 5 periods

Present Value of Ordinary Annuity of $1 for 5 periods 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331

0.7835 0.7473 0.713 0.6806 0.6209 0.5674 0.5194

Ignoring taxes, the internal rate of return for Project A is approximately ________.

A) 6% B) 7% C) 8% D) 10% Answer: B Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

7 .

12) California Company is considering two investments. The relevant data follows:

Cost Annual cash savings(end of year) Terminal salvage value Estimated useful life in years Minimum desired rate of return Method of depreciation

5% 6% 7% 8% 10% 12% 14%

Project A $205,010 $50,000 $0 5 10% Straight-line

Project B $259,770 $60,000 $0 5 10% Straight-line

Present Value Of $1 for 5 periods

Present Value of Ordinary Annuity of $1 for 5 periods 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331

0.7835 0.7473 0.713 0.6806 0.6209 0.5674 0.5194

Ignoring taxes, the internal rate of return for Project B is approximately ________.

A) 5% B) 6% C) 7% D) 8% Answer: A Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

8 .

13) Arizona Company is considering two investments. The relevant data follows:

Cost Annual cash savings (end of year) Terminal salvage value Estimated useful life in years Minimum desired rate of return Method of depreciation

5% 6% 7% 8% 10% 12% 14%

Project A $205,010 $50,000 $0 5 10% Straight-line

Project B $259,770 $60,000 $0 5 10% Straight-line

Present Value Of $1 for 5 periods

Present Value of Ordinary Annuity of $1 for 5 periods 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331

0.7835 0.7473 0.713 0.6806 0.6209 0.5674 0.5194

Ignore taxes. Using the internal rate of return method, which project should be accepted?

A) Project A only B) Project B only C) Project A and Project B D) neither Project A nor Project B Answer: D Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 14) The internal rate of return method and the ________ method usually result in the same investment decisions.

A) payback period B) accounting rate of return C) net present value D) return on investment Answer: C Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 9 .

15) The phases of capital budgeting do NOT include ________.

A) a post-audit of the investment B) gathering data to aid investment decisions C) the identification of potential investments D) sensitivity analysis of investment models Answer: D Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 16) In the capital budgeting process, accountants are NOT involved in ________.

A) follow-up monitoring of investments B) choosing which investments to make C) gathering data to aid the investment decision D) identifying potential investments Answer: D Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 17) The minimum desired rate of return on an investment is sometimes referred to as ________.

A) the discount rate B) the hurdle rate C) the required rate of return D) all of the above Answer: D Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

10 .

18) In net present value analysis, the minimum desired rate of return for an investment project depends on the ________ of a proposed project.

A) expected return B) desired return C) risk D) payback period Answer: C Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 19) The higher the risk of an investment project, the ________ for the project.

A) lower the minimum desired rate of return B) higher the minimum desired rate of return C) lower the expected rate of return D) higher the expected rate of return Answer: B Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 20) The net present value method computes the present value of all ________ using a minimum desired rate of return.

A) expected future cash inflows only B) expected future cash outflows only C) expected future cash inflows and expected future cash outflows D) past cash inflows Answer: C Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

11 .

21) Using the net present value method, managers sum the present values of all expected future cash flows from the project and ________.

A) add the initial investment B) subtract the initial investment C) ignore the initial investment D) add the depreciation expense Answer: B Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 22) If the net present value of an investment project is positive, then the project is ________. If the net present value of an investment project is negative, then the project is ________.

A) ignored; accepted B) desirable; undesirable C) unacceptable; acceptable D) rejected; accepted Answer: B Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 23) Accepting a project with a ________ NPV makes the firm worse off financially because the cost of the investment exceeds the ________.

A) positive; present value of future benefits B) negative; present value of future cash flows C) negative; present value of present cash flows D) positive; present value of present cash flows Answer: B Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

12 .

24) What is the first step in applying the net-present-value method to investment projects?

A) Identify the amount and timing of relevant future cash inflows.

B) Identify the amount and timing of relevant future cash inflows and outflows.

C) Find the present value of each expected cash flow.

D) Sum the individual present values of the cash flows.

Answer: B Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 25) Assume the net present value method is used to evaluate investment opportunities. A manager is faced with several investments, but only has funding for one investment. Which investment should be chosen?

A) the investment with the lowest net present value B) the investment with a net present value equal to zero C) the investment with a negative net present value D) the investment with the largest net present value Answer: D Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

13 .

26) Zebron Company is considering the following investment: Initial capital investment Estimated useful life Estimated disposal value in 3 years Estimated annual savings in cash operating costs(end of year) Minimum desired rate of return Present value of ordinary annuity of one, 3 periods at 10% Present value of one, 3 periods at 10%

$200,000 3 years $1,000 $100,000 10% 2.4869 0.7513

Assume straight-line depreciation is used. Ignore income taxes. The net present value of the investment is ________.

A) $48,690 B) $49,441 C) $49,690 D) $101,000 Answer: B Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 27) Hewlett Company is considering the following investment: Estimated capital investment Estimated useful life Estimated disposal value in 3 years Estimated annual savings in cash operating costs(end of year) Minimum desired rate of return Present value of ordinary annuity of one, 3 periods at 12% Present value of one, 3 periods at 12%

$220,000 3 years $10,000 $120,000 12% 2.4018 0.7118

Assume straight-line depreciation is used. Ignore income taxes. The net present value of the investment is ________.

A) $68,216 B) $75,334 C) $78,216 D) $150,229 Answer: B Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

14 .

28) Brown Company is considering the following investment: Estimated capital investment Estimated useful life Estimated disposal value in 3 years Estimated annual savings in cash operating costs(end of year) Minimum desired rate of return Present value of ordinary annuity of one, 3 periods at 12% Present value of one, 3 periods at 12%

$220,000 3 years $5,000 $120,000 12% 2.4018 0.7118

Assume straight-line depreciation is used. Ignore income taxes. The net present value of the investment is ________.

A) $68,216 B) $71,775 C) $73,216 D) $145,090 Answer: B Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 29) Keisha Company is considering the following investment: Estimated capital investment Estimated useful life Estimated disposal value in 3 years Estimated annual savings in cash operating costs(end of year) Minimum desired rate of return Present value of ordinary annuity of one, 3 periods at 12% Present value of one, 3 periods at 12%

$300,000 3 years $10,000 $130,000 12% 2.4018 0.7118

Assume straight-line depreciation is used. Ignore income taxes. The net present value of the investment is ________.

A) $12,234 B) $19,352 C) $22,234 D) $100,000 Answer: B Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

15 .

30) You can receive $10,000 today or $3,000 per year at the end of each year for the next five years. If the required rate of return is 10%, what option should be selected? (The present value of an ordinary annuity of one at 10% for five periods is 3.7908. The present value of one at 10% for five periods is 0.6209.)

A) Receive $10,000 today.

B) Receive $3,000 per year for the next five years.

C) The results are the same for both options.

D) Neither option is desirable.

Answer: B Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 31) The net present value of a project is zero. The minimum desired rate of return used to obtain the net present value of zero is 8%. Which of the following statements is TRUE? A) The project is desirable if the minimum desired rate of return is 10%.

B) The project is desirable if the minimum desired rate of return is 6%.

C) The project is desirable if the minimum desired rate of return is 6% or 10%.

D) The project is undesirable if the minimum desired rate of return is 6%.

Answer: B Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 32) As the minimum required rate of return increases for an investment project, the net present value of the project ________.

A) increases B) does not change C) decreases D) becomes positive Answer: C Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

16 .

33) When using the net present value method, if the net present value of a project is negative, then the ________.

A) the project should be rejected B) the project should be accepted C) the project should be recalculated for missing cash inflows D) none of the above Answer: A Diff: 1 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 34) The internal rate of return model determines the ________ at which the net present value of an investment project equals ________.

A) cost of capital; a positive number B) hurdle rate; a positive number C) interest rate; zero D) discount rate; a positive number Answer: C Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 35) If the IRR on a project is greater than the required rate of return, then the net present value of the project is ________.

A) equal to zero B) less than zero C) greater than zero D) none of the above Answer: C Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

17 .

36) If the internal rate of return on a project is ________ the required rate of return, then the project should be accepted.

A) higher than B) lower than C) the same as D) none of the above Answer: A Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 37) The internal rate of return and the net present value methods usually result in the same investment decisions.

Answer: TRUE Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 38) Capital-budgeting decisions have significant financial effects beyond the current year.

Answer: TRUE Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 39) Discounted-cash-flow models focus on a project's cash inflows and cash outflows without regard to the time value of money.

Answer: FALSE Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

18 .

40) Discounted-cash-flow models do not focus on net income.

Answer: TRUE Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 41) Discounted-cash-flow models are not based on the theory of compound interest.

Answer: FALSE Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 42) The minimum desired rate of return for an investment under the NPV method is based on the cost of capital.

Answer: TRUE Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 43) If a company accepts a project with a negative NPV, the project will increase the value of the firm.

Answer: FALSE Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 44) When choosing among several investments, managers should pick the project with the highest net present value.

Answer: TRUE Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

19 .

45) When using an NPV model, we assume predicted cash flows are certain to occur at the times specified.

Answer: TRUE Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 46) When using the NPV model, it is assumed that we can borrow or lend money at the same interest rate.

Answer: TRUE Diff: 1 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 47) In the absence of taxes, depreciation expense on a long-term asset is a relevant cash flow for the NPV model.

Answer: FALSE Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts 48) The IRR model determines the interest rate at which the NPV of an investment equals zero.

Answer: TRUE Diff: 2 LO: 11-1 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

20 .

49) Marvel Company is considering the acquisition of two machines.

Initial investment Annual operating revenues (end of year) Annual expenses (end of year) Terminal salvage value Estimated useful life Minimum desired rate of return

Machine A $200,000 $100,000 $25,000 $10,000 5 years 14%

Machine B $200,000 $160,000 $85,000 $20,000 5 years 14%

Assume straight-line depreciation. Ignore income taxes. The present value of an ordinary annuity of one at 14% and 5 periods is 3.4331. The present value of one at 14% and 5 periods is 0.5194.

Required: A) Calculate the net present value for both machines.

B) Assume there are enough funds to purchase both machines. Should both machines be purchased?

C) Assume there are funds to purchase only one machine. Which machine should be purchased?

Answer: A) Machine A: Net present value = [($100,000 - $25,000) × 3.4331] + ($10,000 × 0.5194) - $200,000 = $62,676.50 Machine B: Net present value = [($160,000 - $85,000) × 3.4331] + ($20,000 × 0.5194) - $200,000 = $67,870.50 B) Yes, the present values for both machines are positive.

C) Machine B is the best alternative.

Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

21 .

50) Whitney Company is contemplating three different equipment investments. The relevant data follows: Proposal D Proposal O Proposal G Cost $200,000 $300,000 $830,000 Annual cash savings (end of year) $40,000 $70,000 $150,000 Terminal salvage value $10,000 $5,000 $20,000 Estimated useful life in years 10 10 10 Minimum desired rate of return 12% 12% 12% Method of depreciation Straight-line Straight-line Straight-line The present value factor of an ordinary annuity of one for 10 periods at 12% is 5.6502.

The present value factor of one for 10 periods at 12% is 0.322.

Required: A) Compute the net present value of each investment. Ignore income taxes.

B) If only one investment can be acquired, which investment should be chosen?

Answer: A) Proposal D: NPV = ($40,000 × 5.6502) + ($10,000 × 0.322) - $200,000 = $29,228 Proposal O: NPV = ($70,000 × 5.6502) + ($5,000 × 0.322) - $300,000 = $97,124 Proposal G: NPV = ($150,000 × 5.6502) + ($20,000 × 0.322) - $830,000 = $23,970 B) Proposal O has the largest NPV and should be chosen.

Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

22 .

11.2 Questions 1) Valesano Company is considering a project with the following information: Project 1 $4,000 $2,000 $0 3 10% 0.7513

Cost Annual cash operating savings(end of year) Terminal salvage Useful life in years Required rate of return Present value of one for 3 periods at 10% Present value of ordinary annuity of one for 3 periods at 10%

2.4869

Ignoring taxes, what is the lowest level of annual cash operating savings that will result in a positive net present value?

A) $1,550 B) $1,600 C) $1,608 D) $2,000 Answer: C Diff: 2 LO: 11-2 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

23 .

2) Jonathon Company is considering an investment in the project below: Project 1 $10,000 $3,000 $0 5 10% 0.6209

Cost Annual cash operating savings (end of year) Terminal salvage Useful life in years Required rate of return Present value of one for 5 periods at 10% Present value of ordinary annuity of one for 5 periods at 10%

3.7908

Ignoring taxes, what is the lowest level of annual cash operating savings that will result in a positive net present value?

A) $2,420 B) $2,638 C) $3,000 D) $3,120 Answer: B Diff: 2 LO: 11-2 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 3) What will happen to the net present value of a project if my predictions of cash flows change? I think the cash flows may be overestimated. What should be done to address this?

A) net present value analysis B) internal rate of return C) sensitivity analysis D) payback period Answer: C Diff: 1 LO: 11-2 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

24 .

4) The " break-even" cash inflow for an investment project is the point at which ________.

A) the present value of the variable cost of future cash flows equals the present value of the fixed cost of future cash flows B) the present value of the variable cost of future cash flows equals the present value of the variable cost of past cash flows C) the net present value of the investment project is zero D) the total cash revenues equal total cash expenses Answer: C Diff: 2 LO: 11-2 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 5) In capital budgeting decisions, the riskiness of a project may be shown by ________.

A) the size of the future cash inflows from the project B) the size of the future cash outflows from the project C) the timing of the cash flows from the project D) the project's sensitivity to changes in predictions of cash flows Answer: D Diff: 2 LO: 11-2 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 11.3 Questions 1) Spitzer Company is considering two investments. If the differential approach to investment decisions is used, which of the following steps is NOT used?

A) list the differences in cash flows for each investment for each year B) calculate the net present value of the differential cash flows C) identify the relevant cash flows D) calculate the net present value of the cash flows for each investment Answer: D Diff: 2 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

25 .

2) Ignoring taxes, the total project approach to investment decisions calculates the difference in the ________. Ignoring income taxes, the differential approach to investment decisions computes the net present value of the difference in ________.

A) depreciation expense; operating cost savings B) tax savings due to depreciation expense; tax savings due to operating cost savings C) cash flows between two projects; net present values between two projects D) net present values between two projects; cash flows between two projects Answer: D Diff: 2 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts 3) Using the total project approach to investment decisions, the following information is available: Net present value of Alternative A is $12,000 Net present value of Alternative B is $14,000 If the differential approach is used to evaluate Alternatives A and B, what is the numerical result obtained?

A) $0 B) $2,000 advantage to Alternative B C) $12,000 D) $14,000 Answer: B Diff: 2 LO: 11-3 AACSB: Analytic skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts 4) When comparing projects using the total project approach, a manager should choose the project with the ________.

A) smallest net present value B) largest net present value C) zero net present value D) largest differential net present value Answer: B Diff: 2 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

26 .

5) The ________ approach computes the differences in cash flows between two alternatives and then finds the present value of these differences.

A) differential B) payback C) total project D) sensitivity Answer: A Diff: 2 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts 6) Which of the following approaches should be used to compare four investment alternatives?

A) total project approach B) sensitivity analysis C) payback method D) differential approach Answer: A Diff: 1 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts 7) The first step in using the differential approach to investment analysis is to ________.

A) calculate the present value of the differential cash flows B) sum the individual present values of each investment C) estimate the difference in cash flows between two projects for each year D) estimate the relevant cash inflows and cash outflows for each project Answer: D Diff: 1 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

27 .

8) A company is considering two investment projects. If they use the total project approach and the differential approach, both approaches produce ________.

A) different answers B) similar answers C) the same answer D) not enough information is given to make an assessment Answer: C Diff: 2 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts 9) Two common methods for comparing alternative investments are the total project approach and the conversion approach.

Answer: FALSE Diff: 1 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts 10) The total project approach to investments can be used to compare any number of projects.

Answer: TRUE Diff: 1 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts 11) The differential approach to investments can be used to compare any number of projects.

Answer: FALSE Diff: 1 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts 12) Generally, the most difficult part of capital budgeting decisions is predicting accurately the relevant cash flows.

Answer: TRUE Diff: 1 LO: 11-3 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

28 .

11.4 Questions 1) Which of the following items is NOT a relevant cash inflow or cash outflow when using the net present value method? (Ignore income taxes.)

A) acquisition cost of new equipment at time zero B) future disposal value of a long-term plant asset C) future operating cash inflows from a long-term plant D) depreciation expense in future periods Answer: D Diff: 2 LO: 11-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts; Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 2) In the net present value method, the disposal value of a long-term asset at the end of its useful life is considered to be a ________.

A) cash outflow at time zero B) cash inflow at time zero C) cash outflow in the year of disposal D) cash inflow in the year of disposal Answer: D Diff: 2 LO: 11-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts; Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 3) A company is considering the acquisition of new equipment to replace old equipment. When using the net present value method, which of the following items is NOT relevant? Ignore taxes.

A) cash outflow for the purchase of new equipment B) cash installation costs associated with the new equipment C) disposal value of old equipment replaced with new equipment D) fixed overhead costs that are the same under both alternatives Answer: D Diff: 2 LO: 11-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts; Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

29 .

4) In net present value analysis, a reduction in a future cash outflow is treated as ________.

A) an irrelevant cash flow B) a cash inflow C) a disposal value of a long-term asset D) an expense Answer: B Diff: 2 LO: 11-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts; Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 5) In the NPV method, errors in forecasting terminal disposal values are usually not crucial because the present value of these cash flows is small.

Answer: TRUE Diff: 2 LO: 11-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts; Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 6) In the net present value method, the only relevant operating cash flows are the ones that differ among alternatives.

Answer: TRUE Diff: 2 LO: 11-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts; Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 7) The book value of an asset that is being replaced is a relevant cash flow in the net present value method.

Answer: FALSE Diff: 2 LO: 11-4 AACSB: Reflective thinking skills Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts; Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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11.5 Questions 1) Which of the following items does NOT affect the present value of the tax deduction for depreciation expense used in the net present value calculation of an investment?

A) recovery period B) tax rates C) discount rate D) gain on disposal of investment Answer: D Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 2) Which of the following is the benefit of depreciation expense on a plant asset when considering investment decisions with taxes?

A) increased future operating income B) future tax deduction C) increased cost of plant asset D) decreased cost of plant asset Answer: B Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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3) Danworth Company is contemplating whether to use MACRS depreciation or straight-line depreciation for a plant asset. The following information is available:

Year 1 Year 2 Year 3 Year 4

MACRS Depreciation $13,333 $17,780 $5,924 $2,964

Straight-line Depreciation $10,000 $10,000 $10,000 $10,000

Present Value of One At 12% 0.8929 0.7972 0.7118 0.6355

Over the four years examined, how much did Danworth Company gain by using MACRS depreciation instead of straight-line depreciation for the plant asset? The tax rate is 40%. (Find the present value.)

A) $722 B) $1,806 C) $2,976 D) $9,178 Answer: A Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 4) Danville Company is contemplating whether to use MACRS depreciation or straight-line depreciation for a plant asset. The following information is available:

Year 1 Year 2 Year 3 Year 4

MACRS Depreciation $13,333 $17,780 $5,924 $2,964

Straight-line Depreciation $10,000 $10,000 $10,000 $10,000

Present Value of One At 12% 0.8929 0.7972 0.7118 0.6355

Assume the tax rate is 40%. Over the four years examined, what is the present value of the difference in tax savings between MACRS depreciation and straight-line depreciation?

A) $722 B) $1,806 C) $2,976 D) $9,178 Answer: A Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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5) The present value of tax savings from depreciation deductions from an accelerated depreciation method will be ________ those from the straight-line method.

A) the same as B) greater than C) less than D) none of the above Answer: B Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 6) Haworth Company is considering the purchase of a labor saving piece of equipment with the following information: Purchase cost of equipment Annual cost savings, excluding depreciation (end of year) Terminal salvage value Useful life of equipment Required rate of return Tax rate Depreciation method for tax purposes Present value of ordinary annuity of one at 10% for 12 periods Present value of one at 10% for 12 periods

$432,000 $90,000 0 12 years 10% 30% Straight-line 6.8137 0.3186

What is the net present value of the equipment?

A) $(2,737) B) $(174,442) C) $70,851 D) $168,968 Answer: C Diff: 3 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

33 .

7) Vanduser Company is considering the purchase of a labor saving piece of equipment with the following information: Purchase cost of equipment Annual cost savings, excluding depreciation(end of year) Terminal salvage value Useful life of equipment Required rate of return Tax rate Depreciation method for tax purposes Present value of ordinary annuity of one at 10% for 12 periods Present value of one at 10% for 12 periods

$432,000 $80,000 $10,000 12 years 10% 30% Straight-line 6.8137 0.3186

What is the net present value of the equipment?

A) $(50,433) B) $23,155 C) $24,638 D) $124,458 Answer: C Diff: 3 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 8) What is the after-tax amount of annual cash operating savings associated with a proposed machine?

A) operating savings times the tax rate B) operating savings times (1 minus the tax rate) C) $0 D) operating savings Answer: B Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

34 .

9) Apple Company pays 15% on the first $50,000 of pretax income and 30% on any additional pretax income. Apple Company currently earns $52,000. An investment under consideration is expected to add $20,000 in pretax income. What is the tax rate on the additional income from the investment?

A) 15% B) 22.5% C) 30% D) 43% Answer: C Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 10) The marginal tax rate for a company is the ________.

A) average tax rate for the company B) highest possible tax rate that may be imposed on the company by IRS C) lowest tax rate that may be imposed on the company by IRS D) tax rate paid on additional amounts of pretax income Answer: D Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 11) Lonestar Company pays taxes of 25% on their first $25,000 of taxable income and 30% on any taxable income in excess of $25,000. The company's current taxable income is $30,000. What is the marginal tax rate?

A) 25% B) 30% C) 40% D) 65% Answer: B Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

35 .

12) Monster Company is required to pay taxes of 25% on income up to $20,000 and 30% on any income in excess of $20,000. The company has pretax income of $80,000. What is the average tax rate for Monster Company?

A) 25.0% B) 26.5% C) 28.75% D) 32.5% Answer: C Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 13) Stonefield Company pays taxes of 25% on their first $30,000 of pretax income and 30% on any taxable income in excess of $30,000. The current pretax income is $45,000. What is the marginal tax rate for Stonefield Company?

A) 25% B) 30% C) 40% D) 65% Answer: B Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 14) Nancy Company pays taxes of 15% on their first $20,000 of pretax income and 40% on any taxable income in excess of $20,000. The current pretax income is $50,000. What is the average tax rate?

A) 15% B) 21% C) 24% D) 30% Answer: D Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

36 .

15) A five year recovery period for a long-term asset means ________.

A) the number of years it takes to recover the cost of a long-term asset B) the number of years a company expects to use a long-term asset C) the number of years a company can depreciate a long-term asset for tax purposes D) the number of years a long-term asset will generate future cash inflows Answer: C Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 16) Sharpie Company will purchase a van for $75,000. The van's depreciable life is 5 years. The van has no terminal salvage value. Assume a tax rate of 30% and a required after-tax rate of return of 12%. The company uses the straight-line method of depreciation for tax purposes. What is the annual after-tax cash flow from depreciation expense?

A) $4,500 cash outflow B) $4,500 cash inflow C) $10,500 cash outflow D) $10,500 cash inflow Answer: B Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 17) Pilot Company will purchase a truck for $80,000. The truck's depreciable life is 5 years. The truck has no terminal salvage value. Assume a tax rate of 30% and a required after-tax rate of return of 12%. The company uses the straight-line method of depreciation for tax purposes. What is the annual after-tax cash flow from depreciation expense?

A) $4,800 cash outflow B) $4,800 cash inflow C) $11,200 cash outflow D) $11,200 cash inflow Answer: B Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

37 .

18) The use of accelerated depreciation for tax purposes will generally produce a present value of tax savings from depreciation expense that is ________.

A) less than the present value of tax savings provided by straight-line depreciation B) greater than the present value of tax savings provided by straight-line depreciation C) the same as the present value of tax savings provided by straight-line depreciation D) less than the present value of tax savings provided by other depreciation methods Answer: B Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 19) Paper Company has a tax rate of 40% and a required rate of return of 10%. Depreciation expense relating to operating equipment is $80,000 per year. The asset has a five year life. The present value of one for five years at 10% is 0.6209. The present value of an ordinary annuity of one for five years at 10% is 3.7908. What is the present value of the after-tax cash flows from the annual depreciation expense over the life of the equipment?

A) $0 B) $19,869 C) $80,000 D) $121,306 Answer: D Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 20) Ruth Company has a tax rate of 40% and a required rate of return of 12%. The company has new equipment that saves $200,000 per year in labor costs. What is the annual after-tax cash flow from the labor cost savings?

A) $80,000 cash outflow B) $80,000 cash inflow C) $120,000 cash outflow D) $120,000 cash inflow Answer: D Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

38 .

21) Daisy Company is considering the purchase of equipment for $400,000. The equipment will have a ten year life with no terminal salvage value. Straight-line depreciation will be used for tax purposes. It is expected that the equipment will generate annual sales of $180,000 and annual production costs, exclusive of depreciation, of $120,000. The tax rate is 40%. What is the net annual after-tax cash flow from the equipment?

A) $16,000 cash inflow B) $36,000 cash inflow C) $52,000 cash inflow D) $60,000 cash inflow Answer: C Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 22) Dixie Company is considering the purchase of equipment for $360,000. The equipment will have a ten year life with no terminal salvage value. Straight-line depreciation will be used for tax purposes. It is expected that the equipment will generate annual sales of $180,000 and annual production costs, exclusive of depreciation, of $120,000. The tax rate is 40%. What is the net annual after-tax cash flow from the equipment?

A) $14,400 cash inflow B) $24,000 cash inflow C) $36,000 cash inflow D) $50,400 cash inflow Answer: D Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 23) Marian Company is considering the purchase of equipment for $400,000. The equipment will have a ten year life with no terminal salvage value. Straight-line depreciation will be used for tax purposes. It is expected that the equipment will generate annual sales of $200,000 for ten years and annual production costs, exclusive of depreciation, of $120,000 for ten years. The tax rate is 40%. The required rate of return is 10%. The present value of one for 10 years at 10% is 0.3855. The present value of an ordinary annuity of one for 10 years at 10% is 6.1446. What is the net present value of the equipment?

A) $(6,746) B) $(42,411) C) $(80,000) D) $(105,059) Answer: A Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 39 .

24) Maroon Company is considering the purchase of equipment for $600,000. The equipment will have a ten year life with no terminal salvage value. Straight-line depreciation will be used for tax purposes. It is expected that the equipment will generate annual sales of $400,000 for ten years and annual production costs, exclusive of depreciation, of $300,000 for ten years. The tax rate is 20%. The required rate of return is 12%. The present value of one for ten periods at 12% is 0.322. The present value of an ordinary annuity of one for ten periods at 12% is 5.6502. What is the net present value of the equipment?

A) $(80,182) B) $32,822 C) $123,226 D) $191,028 Answer: A Diff: 2 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 25) When undertaking a capital budgeting problem with taxes, the total cash effect of depreciation expense on a long-term asset is equal to ________.

A) $0 B) depreciation expense times the tax rate C) depreciation expense times (1 minus the tax rate) D) depreciation expense divided by the tax rate Answer: B Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 26) Levine Company will purchase a van for $40,000. It will have a depreciable life of 5 years and a terminal salvage value of $10,000. Assume a tax rate of 30% and a required rate of return of 12%. The company uses the straight-line method of depreciation for tax purposes. The annual cash operating savings at the end of each year, exclusive of depreciation, are $10,000 for five years. The present value of an ordinary annuity factor of one for 5 periods at 12% is 3.6048. The present value of one for 5 periods at 12% is 0.5674. What is the net present value of the van?

A) $(441) B) $(2,604) C) $1,722 D) $5,420 Answer: B Diff: 3 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

40 .

27) Christina Company will purchase a van for $40,000. It will have a depreciable life of 5 years and a terminal salvage value of $10,000. Assume a tax rate of 20% and a required after-tax rate of return of 12%.

The company uses straight-line depreciation for tax purposes. The annual cash operating savings at the end of each year, exclusive of depreciation, are $10,000 for five years. The present value of one for five periods at 12% is 0.5674. The present value of an ordinary annuity of one for five periods at 12% is 3.6048.

What is the net present value of the van?

A) $(5,394) B) $(1,162) C) $11,909 D) $17,583 Answer: B Diff: 3 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 28) U.S. corporations are required to use the same method of calculating depreciation on both their income tax return and their annual financial statements.

Answer: FALSE Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 29) The marginal income tax rate is the tax rate paid on additional amounts of pretax income.

Answer: TRUE Diff: 1 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 30) When making capital budgeting decisions, the manager should utilize the marginal tax rate for the company instead of the average tax rate.

Answer: TRUE Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

41 .

31) When using accelerated depreciation methods, most of the depreciation taken on an asset occurs at the end of its life.

Answer: FALSE Diff: 1 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 32) A deduction for depreciation expense lowers a company's tax liability.

Answer: TRUE Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 33) The present value of tax savings from depreciation is greater for straight-line depreciation than an accelerated depreciation method.

Answer: FALSE Diff: 2 LO: 11-5 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

42 .

34) Lorenzo Company is considering the purchase of equipment with an eight year life that requires a $1,600,000 investment. At the end of eight years, the equipment will have no salvage value. For eight years, the equipment will provide net income at the end of each year as follows: Sales Less: Variable Expenses Contribution margin Less: Fixed Expenses: Advertising Depreciation on equipment Net income

$3,000,000 1,800,000 1,200,000 700,000 200,000 $300,000

Other information follows: Required rate of return 18% Tax rate 30% Depreciation method for tax purposes Straight-line Present value of ordinary annuity of one at 18% for 8 periods 4.0776 Present value of one at 18% for 8 periods 0.266 Required: 1. Compute the after tax annual cash flows generated by the equipment.

2. Compute the equipment's net present value.

3. If the salvage value of the equipment is $10,000, compute the equipment's net present value.

Answer: 1. After-tax operating savings: ($300,000 + $200,000) = $500,000 × 70% = $350,000 Tax savings from depreciation expense: $200,000 × 30% = $60,000 2. ($350,000 × 4.0776) + ($60,000 × 4.0776) - $1,600,000 = $71,816 3. Depreciation expense: ($1,600,000 - $10,000) / 8 = $198,750 ($350,000 x 4.0776) + ($198,750 × 30% × 4.0776) + ($10,000 × 0.266) - $1,600,000 = $72,946.90 Diff: 3 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

43 .

35) Stanley Company has obtained the following information about a proposed project: Annual cash operating savings (excluding depreciation) for 5 years (end of year) Depreciation expense per year for tax purposes Estimated salvage value in 5 years Cost of equipment Required rate of return Income tax rate Estimated useful life (in years) Depreciation method for tax purposes Present value of ordinary annuity of one at 10% for 5 periods Present value of one at 10% for 5 periods

$50,000 $33,000 $10,000 $175,000 10% 40% 5 Straight-line 3.7908 0.6209

Required: A) What is the NPV of the project?

B) Should the project be undertaken?

Answer: A) $33,000 × 40% × 3.7908 = $50,038.56 $50,000 × 60% × 3.7908 = 113,724.00 $10,000 × 0.6209 = 6,209.00 Total $169,971.56 Less: Cost of equipment 175,000.00 NPV (5,028.44) B) No Diff: 3 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

44 .

36) Jesse Company has obtained the following data about a possible planned investment: Cost Terminal salvage value in 10 years Annual cash operating savings excluding depreciation for 10 years (end of year) Estimated useful life in years Minimum desired rate of return Present value of ordinary annuity, 10%, 10 periods Present value of one, 10%, 10 periods Income tax rate

$300,000 0 $50,000 10 10% 6.1446 0.3855 40%

The company uses the straight-line depreciation method for taxes.

Required: A) Compute the net present value of the investment.

B) Compute the net present value of the investment if the terminal salvage value is estimated to be $50,000 in 10 years.

Answer: A) ($50,000 × 6.1446 × 0.60) + ($30,000 × 0.40 × 6.1446) - $300,000 = $(41,926.80) B) ($50,000 × 6.1446 × 0.60) + ($25,000 × 0.40 × 6.1446) + ($50,000 × 0.3855) - $300,000 = $(34,941) Diff: 3 LO: 11-5 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 11.6 Questions 1) A five-year MACRS asset that cost $50,000 was sold at the end of its useful life for $20,000. The book value of the asset at the time of sale was $0. The asset had no expected terminal value. The tax rate is 20%.

What is the net after-tax cash effect from the sale of the asset?

A) $16,000 cash inflow B) $16,000 cash outflow C) $24,000 cash inflow D) $24,000 cash outflow Answer: A Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

45 .

2) A plant asset with a book value of $40,000 is sold for $10,000. The applicable tax rate is 20%. The net after-tax cash effect of the sale is a ________.

A) $6,000 cash inflow B) $10,000 cash inflow C) $16,000 cash inflow D) $16,000 cash outflow Answer: C Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 3) A plant asset with a book value of $50,000 is sold for $40,000. The applicable tax rate is 50%. What is the tax effect of the loss on sale?

A) $5,000 cash outflow B) $5,000 cash inflow C) $20,000 cash inflow D) $25,000 cash inflow Answer: B Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 4) A plant asset with a book value of $320,000 is sold for $560,000. The tax rate is 20%. What is the net after-tax cash inflow resulting from this sale?

A) $144,000 B) $512,000 C) $560,000 D) $656,000 Answer: B Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

46 .

5) A plant asset with a book value of $320,000 is sold for $400,000. The tax rate is 20%. What is the tax effect of the gain on sale?

A) $16,000 cash outflow B) $16,000 cash inflow C) $64,000 cash inflow D) $80,000 cash inflow Answer: A Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 6) A plant asset with a book value of $160,000 is sold for $100,000. The applicable tax rate is 20%. What is the net after-tax cash inflow resulting from the sale?

A) $12,000 cash inflow B) $88,000 cash inflow C) $100,000 cash inflow D) $112,000 cash inflow Answer: D Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 7) A plant asset with a book value of $200,000 is sold for $150,000. The applicable tax rate is 40%. What is the tax effect of the loss on sale?

A) $20,000 cash outflow B) $20,000 cash inflow C) $30,000 cash inflow D) $170,000 cash inflow Answer: B Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

47 .

8) The cash inflow from the sale of a long-term plant asset at a loss is equal to the ________.

A) amount of the loss plus the loss times the tax rate B) amount of the loss C) selling price of asset plus the loss times the tax rate D) selling price of asset minus the loss times the tax rate Answer: C Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 9) A recognized loss on the sale of a long-term asset causes a company's tax liability to decrease.

Answer: TRUE Diff: 2 LO: 11-6 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 10) Cowboy Company wishes to sell a machine with a book value of $40,000. The income tax rate is 30%.

The machine is sold for $60,000.

Required: A) What is the net after-tax cash flow from the sale of the machine? Is it an inflow or outflow?

B) If the machine is sold for $30,000, what is the net after-tax cash flow from the sale of the machine?

Answer: A) Net cash flow: $60,000 - $6,000 = $54,000 inflow B) Net cash flow: $30,000 + $3,000 = $33,000 inflow Diff: 2 LO: 11-6 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 11.7 Questions 1) Major weaknesses of the payback method do NOT include which of the following?

A) It does not measure profitability.

B) It ignores the time value of money.

C) It ignores cash flows beyond the payback period.

D) It cannot be used as a rough estimate of the riskiness of a project.

Answer: D Diff: 1 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

48 .

2) Tomlin Company spends $12,000 for a forklift with an estimated useful life of four years. The company expects annual savings of $4,000 per year for four years, and a salvage value of $5,000 at the end of 4 years. What is the payback period?

A) 2 years B) 2.8 years C) 3 years D) 4 years Answer: C Diff: 2 LO: 11-7 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 3) The time it will take to recoup in the form of cash inflows the initial dollars invested in an investment project is called the ________.

A) payback period B) accounting rate of return C) internal rate of return period D) recovery period Answer: A Diff: 1 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 4) Which of the following statements about the payback model is FALSE? A) The payback model measures how quickly investment dollars may be recouped.

B) The payback model provides a rough estimate of the riskiness of a project.

C) The payback model does not consider cash flows after the payback period.

D) The payback model measures profitability.

Answer: D Diff: 2 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

49 .

5) An investment of $42,000 is expected to generate the following annual cash flows: Year 1 Year 2 Year 3 Year 4

$10,000 $15,000 $15,000 $12,000

Assume straight-line depreciation is used. Ignore income taxes. What is the payback period?

A) 3 years B) 3.17 years C) 3.83 years D) 4 years Answer: B Diff: 2 LO: 11-7 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 6) A machine that costs $180,000 is expected to generate $40,000 in cost savings annually for five years.

The terminal value at the end of five years is $10,000. Assume straight-line depreciation is used. Ignore income taxes. What is the payback period?

A) 3.00 years B) 4.00 years C) 4.20 years D) 4.50 years Answer: D Diff: 1 LO: 11-7 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 7) A plant asset of $180,000 is expected to generate $80,000 in operating cash savings (excluding depreciation expense) annually for three years. Assume straight-line depreciation is used. The useful life is 3 years. The asset has no expected residual value. Ignore income taxes. The accounting rate of return based on the initial investment is ________.

A) 11.11% B) 16.67% C) 33.33% D) 44.44% Answer: A Diff: 1 LO: 11-7 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

50 .

8) A plant asset of $270,000 is expected to generate $180,000 in operating cash savings (excluding depreciation expense) annually for three years. Assume straight-line depreciation is used. The useful life is three years. The asset has no expected residual value. Ignore income taxes. The accounting rate of return based on the average investment is ________.

A) 11.11% B) 33.33% C) 44.44% D) 66.67% Answer: D Diff: 1 LO: 11-7 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 9) ________ is a capital budgeting model that ignores the time value of money and focuses on the profitability of an investment project.

A) Payback model B) Internal rate of return model C) Accounting rate of return model D) Real options model Answer: C Diff: 1 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 10) A disadvantage of the accounting rate of return model is ________.

A) it focuses on cash flows B) it is inconsistent with accrual accounting C) it is not based on the familiar financial statements D) it ignores the time value of money Answer: D Diff: 1 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 11) The payback model measures profitability as well as how quickly investment dollars are recouped.

Answer: FALSE Diff: 2 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

51 .

12) Managers may use the payback period as a rough estimate of the riskiness of a project.

Answer: TRUE Diff: 2 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 13) Projects that recoup their investment quickly may be less risky than those that require a longer time.

Answer: TRUE Diff: 2 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 14) The accounting rate of return model ignores the time value of money.

Answer: TRUE Diff: 2 LO: 11-7 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

52 .

15) Woods Company is considering the purchase of some equipment. The initial investment will be $100,000. The estimated useful life of the equipment will be 5 years, at which point it will have a zero terminal salvage value. The annual savings in cash operating costs at the end of each year, for five years, is $29,000. The company has a minimum desired rate of return of 12%. The company uses straight-line depreciation for financial reporting. Ignore income taxes. The cash operating savings of $29,000 do not include depreciation expense.

Given: The present value of ordinary annuity of one at 12% and 5 periods is 3.6048.

The present value of one at 12% and 5 periods is 0.5674.

Required: Compute: A) Net present value B) Payback period C) Accounting rate of return using the average investment Answer: A) ($29,000 × 3.6048) - $100,000 = $4,539.20 B) $100,000/$29,000 = 3.45 years C) $29,000 - $20,000 = 18% $50,000 Diff: 2 LO: 11-7 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

53 .

16) Bryant Company has obtained the following data about a possible planned investment: Cost Terminal salvage value in 8 years Annual cash operating savings for 8 years (end of year) Estimated useful life in years Minimum desired rate of return Present value of ordinary annuity of one, 10%, 8 periods Present value of one, 10%, 8 periods

$270,000 $10,000 $50,000 8 10% 5.3349 0.4665

The company uses straight-line depreciation method for financial reporting. Ignore income taxes. The cash operating savings of $50,000 do not include depreciation expense.

Required: A) Compute the net present value of the investment.

B) Compute the payback period.

C) Compute the accounting rate of return using the initial required investment.

Answer: A) ($50,000 × 5.3349) + ($10,000 × 0.4665) - $270,000 = $1,410 B) $270,000/$50,000 = 5.40 years C) ($50,000 - $32,500) = 6.48% $270,000 Diff: 2 LO: 11-7 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 11.8 Questions 1) The best way to reconcile any conflict between capital budgeting models and performance evaluation is to use the ________ for both capital budgeting decisions and performance evaluation.

A) payback period model B) accounting rate of return model C) real options model D) discounted cash flow model Answer: D Diff: 1 LO: 11-8 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

54 .

2) Managers who are evaluated based on the accounting rate of return model are reluctant to use ________ for capital budgeting decisions.

A) payback period model B) real options model C) discounted cash flow models D) return on investment model Answer: C Diff: 1 LO: 11-8 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 3) Reasons for the post-audit of an investment project do NOT include ________.

A) ensuring that the investment expenditures are proceeding on time and within budget B) providing information for improving future predictions of cash flows C) evaluating the continuation of the project D) comparing actual project results with actual results from prior projects to evaluate manager performance Answer: D Diff: 2 LO: 11-8 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 4) A follow-up evaluation of capital-budgeting decisions is called a post-audit.

Answer: TRUE Diff: 2 LO: 11-8 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 5) One purpose of a post-audit is to provide information for improving future predictions of cash flows.

Answer: TRUE Diff: 2 LO: 11-8 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

55 .

11.9 Questions 1) ________ is the decline in the general purchasing power of the monetary unit.

A) The nominal percentage B) The real rate percentage C) The payback period D) Inflation Answer: D Diff: 1 LO: 11-9 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 2) Which of the following items below does NOT require an explicit adjustment for inflation?

A) future operating cash flows B) future disposal value of a long-term asset C) future tax deductions for depreciation D) future overhaul cost for equipment Answer: C Diff: 2 LO: 11-9 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 3) The annual after-tax cash operating inflows of a newly purchased machine are expected to be $60,000.

The expected useful life of the machine is 5 years. The after-tax minimum desired rate of return, including an inflation factor, is 25%. The inflation rate is 10% per year. What is the annual after-tax cash operating inflow for year 1 for the machine?

A) $54,000 B) $60,000 C) $66,000 D) $75,000 Answer: C Diff: 3 LO: 11-9 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

56 .

4) The annual after-tax cash operating inflows of a newly purchased machine are expected to be $60,000.

The expected useful life of the machine is 5 years. The after-tax minimum desired rate of return, including an inflation factor, is 25%. The inflation rate is 10% per year. What is the annual after-tax cash operating inflow for year 2 for the machine?

A) $54,000 B) $60,000 C) $66,000 D) $72,600 Answer: D Diff: 3 LO: 11-9 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 5) The annual after-tax cash operating inflows of a newly purchased machine are expected to be $60,000.

The expected useful life of the machine is 5 years. The after-tax minimum desired rate of return, including an inflation factor, is 25%. The inflation rate is 10% per year. After adjusting for inflation, what is the rate of return used to find the net present value of the machine?

A) 10% B) 15% C) 25% D) none of the above Answer: C Diff: 3 LO: 11-9 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 6) When adjusting for inflation in a capital budgeting problem, which of the following items should be adjusted for inflation?

A) required rate of return only B) operating cash flows only C) required rate of return and operating cash flows D) depreciation expense Answer: C Diff: 2 LO: 11-9 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

57 .

7) The real rate of interest equals the risk-free rate plus the business-risk rate.

Answer: TRUE Diff: 2 LO: 11-9 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment 8) The nominal rate of interest equals the real rate of interest minus the inflation rate.

Answer: FALSE Diff: 2 LO: 11-9 AACSB: Reflective thinking skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

58 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 12 Cost Allocation 12.1 Questions 1) For management purposes, managers trace and allocate the costs from value-chain functions to ________.

A) products only B) customers only C) products and customers D) none of the above Answer: C Diff: 1 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 2) Managers trace ________ to service departments. Managers allocate ________ to service departments.

A) producing department costs; service department costs B) producing department costs; producing department costs C) direct costs; indirect costs D) direct costs; producing department costs Answer: C Diff: 1 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 3) Managers allocate the salaries of human resource personnel to a producing department. The salaries are considered to be a(n) ________ for the producing department and a(n) ________ for the human resource department.

A) direct cost; indirect cost B) indirect cost; direct cost C) indirect cost; indirect cost D) traceable cost; common cost Answer: B Diff: 2 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None

1 .

4) Service department costs can be assigned to ________.

A) customers only B) producing departments only C) customers and producing departments D) none of the above Answer: C Diff: 2 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 5) Why do managers assign the direct costs of service departments to customers instead of the producing department?

A) for ease of calculation B) to reduce bookkeeping costs C) to prevent cost distortions due to the use of a cost allocation base by the producing department that has little relationship to the cause of customer service costs D) because customers are the only cost objects with direct costs Answer: C Diff: 2 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 6) For costs that accountants cannot directly trace to products or services, accountants use ________ or ________.

A) ABC methods; payback method B) cost-budgeting methods; ignore remaining costs C) sensitivity analysis; financial planning models D) cost-allocation methods; leave costs unallocated Answer: D Diff: 1 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 7) For external financial reporting, ________ costs are assigned to products or services.

A) some production B) all production C) all value chain function D) all production and some value chain function Answer: B Diff: 2 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None

2 .

8) Service departments in organizations exist to support ________.

A) other service departments and customers only B) producing departments and suppliers only C) other service departments, producing departments and customers D) producing departments and customers only Answer: C Diff: 1 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 9) Which of the following departments is NOT a service department?

A) laundry department in a hospital B) maintenance department in a hospital C) housekeeping department in a hospital D) surgery floor in a hospital Answer: D Diff: 1 LO: 12-1 AACSB: Analytic skills Learning Outcome: None 10) Why do companies develop cost allocation methods to assign service department costs to producing departments?

A) to identify the total cost of production B) to accurately determine the cost of a product C) to develop transfer prices for products D) A and B Answer: D Diff: 1 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 11) Some service department activities support customers rather than the production process. These costs are traced directly to ________ instead of ________.

A) products; producing departments B) producing departments; service departments C) customers; producing departments D) service departments; producing departments Answer: C Diff: 2 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None

3 .

12) If the vast majority of costs were directly traceable to cost objects, then cost allocation would be a minor issue.

Answer: TRUE Diff: 1 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 13) Companies must assign all production costs and only production costs to products for external financial reporting purposes.

Answer: TRUE Diff: 2 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 14) Companies must assign all value chain costs to products for internal financial reports.

Answer: FALSE Diff: 2 LO: 12-1 AACSB: Reflective thinking skills Learning Outcome: None 15) Examples of service departments in a hospital include the housekeeping and laundry departments.

Answer: TRUE Diff: 2 LO: 12-1 AACSB: Analytic skills Learning Outcome: None 16) Cubic feet are the logical cost driver for depreciation expense from heating and air conditioning equipment. The cost object is the assembly department in a factory.

Answer: TRUE Diff: 2 LO: 12-1 AACSB: Analytic skills Learning Outcome: None 17) The logical cost driver for building rent cost of $10,000 is square feet. The cost object is the assembly department in a factory.

Answer: TRUE Diff: 1 LO: 12-1 AACSB: Analytic skills Learning Outcome: None

4 .

12.2 Questions 1) When allocating service department costs to producing departments, which of the following guidelines is NOT followed?

A) Allocate variable- and fixed-cost pools separately.

B) Establish the cost-allocation procedure before rendering the service.

C) Evaluate performance using flexible budgets for each service department.

D) Establish the cost-allocation procedure after rendering the service.

Answer: D Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 2) The Computer Department in a large company provides services to many departments. The cost driver for costs in the Computer Department is the number of computer hours. When allocating variable costs of the Computer Department to a user department, which of the following formulas is used?

A) actual computer hours used × (total budgeted variable costs of Computer Department / total budgeted computer hours of Computer Department) B) budgeted computer hours to be used × (total budgeted variable costs of Computer Department/ total budgeted computer hours of Computer Department) C) actual computer hours used × (total actual variable costs of Computer Department/ total actual computer hours of Computer Department) D) budgeted computer hours to be used × (total actual variable costs of Computer Department/ total budgeted computer hours of Computer Department) Answer: A Diff: 3 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 3) The Computer Department in a large company provides services to many departments. The cost driver for costs in the Computer Department is the number of computer hours. When allocating fixed costs of the Computer Department to a user department such as Department A, which of the following formulas is used?

A) budgeted fixed cost × (budgeted hours to be used by Department A/total available capacity hours of Computer Department) B) budgeted fixed cost × (actual hours used by Department A/total available capacity hours of Computer Department) C) actual fixed cost × (budgeted hours to be used by Department A/total available capacity hours of Computer Department) D) actual fixed cost × (actual hours used by Department A/total available capacity hours of Computer Department) Answer: A Diff: 3 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 5 .

4) The allocation of fixed costs in service departments to user departments is based on ________.

A) actual capacity used in last period B) budgeted capacity available to user C) actual usage by user department D) actual usage by service department Answer: B Diff: 3 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 5) Variable costs of service departments are allocated to user departments using ________ cost rates instead of ________ cost rates.

A) actual; budgeted B) budgeted; actual C) long-range; short-range D) short-range; long-range Answer: B Diff: 1 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 6) Budgeted cost rates are used for allocating variable costs of service departments to user departments because ________.

A) it provides service departments a greater incentive to be efficient B) it protects user departments from inefficiencies in service departments C) it protects managers in service departments from inflation D) A and B Answer: D Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 7) The preferred guidelines for allocating service department costs to user departments include ________.

A) combining variable-cost and fixed-cost pools B) establishing details about cost allocation after providing services C) using actual costs for allocation of fixed costs and variable costs D) allocating variable-cost and fixed-cost pools separately Answer: D Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None

6 .

8) Which of the following formulas should be used to allocate variable costs from service departments to user departments?

A) budgeted unit rate × total budgeted units planned to be used B) actual unit rate × total budgeted units planned to be used C) budgeted unit rate × actual units used D) actual unit rate × actual units used Answer: C Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 9) Robert Company has two production departments called Assembly and Finishing. The maintenance department serves both production departments. Maintenance costs are allocated based on labor hours.

Budgeted fixed costs for the maintenance department are $30,000. Budgeted variable costs for the maintenance department are $5.00 per labor hour. Actual maintenance department costs are $36,000 fixed and $100,000 variable. Other relevant data follow:

Capacity available Capacity used

Assembly 20,000 labor hours 15,000 labor hours

Finishing 15,000 labor hours 9,000 labor hours

The amount of variable maintenance department costs allocated to the Assembly Department should be ________.

A) $48,000 B) $62,500 C) $75,000 D) $100,000 Answer: C Diff: 2 LO: 12-2 AACSB: Analytic skills Learning Outcome: None

7 .

10) Todd Company has two production departments called Assembly and Finishing. The maintenance department serves both production departments. Maintenance costs are allocated based on labor hours.

Budgeted fixed costs for the maintenance department are $30,000. Budgeted variable costs for the maintenance department are $5.00 per labor hour. Other relevant data follow:

Capacity available Capacity used

Assembly 20,000 labor hours 15,000 labor hours

Finishing 15,000 labor hours 9,000 labor hours

Actual maintenance department costs: Fixed $36,000 Variable $100,000 The amount of variable maintenance department costs allocated to the Finishing Department should be ________.

A) $37,500 B) $42,000 C) $45,000 D) $75,000 Answer: C Diff: 2 LO: 12-2 AACSB: Analytic skills Learning Outcome: None 11) The Technical Services Department of Georgia State University leased a photocopy machine for $1,500 per month plus $0.04 per copy. Additional budgeted variable operating costs were $0.02 per copy. The Technical Services Department estimated the machine would produce 30,000 copies per month. The Accounting Department estimated it would make 6,000 copies per month but it actually made 5,000 copies. Assume fixed and variable cost pools are allocated separately. What is the amount of variable cost allocated to the Accounting Department for the month?

A) $200 B) $240 C) $300 D) $360 Answer: C Diff: 2 LO: 12-2 AACSB: Analytic skills Learning Outcome: None

8 .

12) When allocating fixed costs from service departments to production departments, managers should use ________ instead of ________.

A) capacity used; capacity available B) capacity available; budgeted capacity C) capacity used; budgeted capacity D) capacity available; capacity used Answer: D Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 13) The Technical Services Department of Wichita State University leased a photocopy machine for $2,000 per month plus $0.04 per copy. Additional budgeted variable operating costs were $0.02 per copy. The Technical Services Department estimated the machine would produce 30,000 copies per month. The Accounting Department estimated is would make 6,000 copies per month but it actually made 4,000 copies. Assume fixed and variable cost pools are allocated separately. What is the amount of fixed cost allocated to the Accounting Department for the month?

A) $200 B) $267 C) $360 D) $400 Answer: D Diff: 2 LO: 12-2 AACSB: Analytic skills Learning Outcome: None 14) A reason for using capacity available instead of capacity used when allocating budgeted fixed costs from service departments to user departments is ________.

A) actual usage by user departments does not affect short run allocations to other user departments B) actual usage by user departments does not affect long run allocations to other user departments C) that the allocation methods to assign service department costs to producing departments are inaccurate D) that the allocation methods to assign service department costs to producing departments are not available Answer: A Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None

9 .

15) In practice, companies often inappropriately allocate fixed cost pools for service departments to producing departments on the basis of ________ instead of ________.

A) budgeted costs; actual costs B) actual costs; budgeted costs C) capacity used; capacity available D) capacity available; capacity used Answer: C Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 16) Stevens Company has two production departments called Assembly and Finishing. The maintenance department serves both production departments. Maintenance costs are allocated based on labor hours.

Budgeted fixed costs for the maintenance department are $40,000. Budgeted variable costs for the maintenance department are $4.00 per labor hour. Other relevant data follow:

Capacity available Capacity used

Assembly 18,000 labor hours 15,000 labor hours

Finishing 12,000 labor hours 9,000 labor hours

Actual maintenance department costs: Fixed $36,000 Variable $100,000 The amount of fixed maintenance department costs allocated to the Assembly Department should be ________.

A) $16,000 B) $22,500 C) $24,000 D) $25,000 Answer: C Diff: 2 LO: 12-2 AACSB: Analytic skills Learning Outcome: None

10 .

17) Robertson Company has two production departments called Assembly and Finishing. The maintenance department serves both production departments. Maintenance costs are allocated based on labor hours. Budgeted fixed costs for the maintenance department are $40,000. Budgeted variable costs for the maintenance department are $4.00 per labor hour. Other relevant data follow:

Capacity available Capacity used

Assembly 18,000 labor hours 15,000 labor hours

Finishing 12,000 labor hours 9,000 labor hours

Actual maintenance department costs: Fixed $36,000 Variable $100,000 The amount of fixed maintenance department costs allocated to the Finishing Department should be ________.

A) $11,250 B) $14,400 C) $15,000 D) $16,000 Answer: D Diff: 2 LO: 12-2 AACSB: Analytic skills Learning Outcome: None 18) Allocating fixed costs based on long-range plans may inadvertently result in a tendency of mangers to ________.

A) underutilize available capacity B) overestimate planned usage C) underestimate planned usage D) overestimate planned costs Answer: C Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 19) Variable and fixed costs from service departments should be allocated separately to user departments.

Answer: TRUE Diff: 1 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None

11 .

20) When allocating service department costs to user departments, fixed costs should be allocated using budgeted cost rates times the actual cost driver level.

Answer: FALSE Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 21) The use of actual cost rates for allocating variable costs of service departments protects the user departments from inefficiencies in service departments.

Answer: FALSE Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 22) When allocating fixed costs from service departments to user departments, a predetermined lumpsum allocation based on the long-range capacity available to the user should be used.

Answer: TRUE Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None 23) If a company allocated fixed costs from service departments to user departments based on long-range plans, there is a tendency on the part of managers to underestimate their planned usage.

Answer: TRUE Diff: 2 LO: 12-2 AACSB: Reflective thinking skills Learning Outcome: None

12 .

24) Johnson Company's power plant provides electricity to two producing departments. The annual budget for the power plant shows the following: Budgeted fixed costs Budgeted variable costs per kilowatt hour

$500,000 $1

Actual annual costs incurred by the power plant were: Actual fixed costs Actual variable costs

$215,000 $350,000

Additional annual data follows: Producing Department 1 Capacity available 250,000 kilowatt hours Capacity used 270,000 kilowatt hours

Producing Department 2 150,000 kilowatt hours 165,000 kilowatt hours

Required: A) Compute the amount of fixed costs allocated to each producing department.

B) Compute the amount of variable costs allocated to each producing department.

Answer: A) $250,000/$400,000 × $500,000 = $312,500 to Producing Department 1 $150,000/$400,000 × $500,000 = $187,500 to Producing Department 2 B) $1 × 270,000 = $270,000 to Producing Department 1 $1 × 165,000 = $165,000 to Producing Department 2 Diff: 2 LO: 12-2 AACSB: Analytic skills Learning Outcome: None 12.3 Questions 1) Which of the following methods of allocating service department costs to user departments is superior?

A) The step down method is superior because it is easy to understand.

B) The direct method is superior because it recognizes the support provided between service departments.

C) The direct and step down methods allocate the same amount of total costs so both methods are comparable.

D) The step down method is superior because it recognizes the support provided between service departments.

Answer: D Diff: 2 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None

13 .

2) Which of the following statements is FALSE? A) Under the step-down method, after allocating Service Department 1 costs to Service Department 2, we do not allocate any costs back to Service Department 1.

B) Under the step-down method, we ignore services provided by a service department to itself.

C) The total amount of service department costs allocated to user departments is the same for the stepdown and direct methods.

D) Under the step-down method, the first service department to allocate costs to the user departments is the one that provides the most service to the producing departments.

Answer: D Diff: 3 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 3) The direct method of allocating service department costs to producing departments ignores ________.

A) services provided by service departments to central corporate offices B) services provided by service departments to user departments C) services provided by service departments to other service departments D) services provided by service departments to producing departments Answer: C Diff: 2 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 4) The three methods for allocating service department costs to other departments are ________.

A) step-down, indirect and reciprocal allocation B) direct, step-up and reciprocal allocation C) step-down, direct and reciprocal allocation D) step-up, indirect and simultaneous equations Answer: C Diff: 1 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 5) The ________ method recognizes that some service departments support the activities in other service departments as well as those in production departments.

A) direct B) indirect C) step-down D) cost driver Answer: C Diff: 1 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None

14 .

6) In the step-down method, the first service department used in the sequence to allocate service department costs is the department that renders the ________.

A) greatest service as measured by physical capacity B) greatest service as measured by total employees C) greatest service as measured by costs to the other service departments D) greatest service as measured by costs to the producing departments Answer: C Diff: 2 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 7) When using the step-down method of allocating service department costs, service departments provide support activities to ________.

A) producing departments only B) producing departments and other service departments C) service departments only D) producing departments and corporate central offices only Answer: B Diff: 2 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 8) John Company has two service departments, Maintenance and Human Resources. John Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $126,000 800 8

Human Resources $84,000 400 12

Mixing $105,000 1,600 24

Finishing $175,000 1,200 32

If the direct method is used to allocate service department costs, then the total cost of the Mixing Department after allocation would be ________.

A) $36,000 B) $105,000 C) $108,000 D) $213,000 Answer: D Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

15 .

9) Jerome Company has two service departments, Maintenance and Human Resources. Jerome Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resource costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $126,000 800 8

Human Resources $84,000 400 12

Mixing $105,000 1,600 24

Finishing $175,000 1,200 32

If the direct method is used to allocate service department costs, then the total cost of the Finishing Department after allocation would be ________.

A) $48,000 B) $102,000 C) $175,000 D) $277,000 Answer: D Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None 10) Landslide Company has two service departments, Maintenance and Human Resources. Landslide Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $126,000 800 8

Human Resources $84,000 400 12

Mixing $105,000 1,600 24

Finishing $175,000 1,200 32

If the step-down method is used to allocate service department costs, and the Maintenance Department is allocated first, the amount of costs allocated from the Maintenance Department to the Mixing Department is ________.

A) $36,000 B) $42,000 C) $42,750 D) $63,000 Answer: D Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

16 .

11) Gonzalez Company has two service departments, Maintenance and Human Resources. Gonzalez Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $126,000 800 8

Human Resources $84,000 400 12

Mixing $105,000 1,600 24

Finishing $175,000 1,200 32

Assume the step-down method is used to allocate service department costs, and the Maintenance Department is allocated first. The amount of cost allocated from the Maintenance Department to the Finishing Department would be ________.

A) $31,500 B) $42,750 C) $47,250 D) $57,000 Answer: C Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None 12) Garcia Company has two service departments, Maintenance and Human Resources. Garcia Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $126,000 800 8

Human Resources $84,000 400 12

Mixing $105,000 1,600 24

Finishing $175,000 1,200 32

Assume the step-down method is used to allocate service department costs. Which department should be allocated first?

A) Maintenance B) Human Resources C) Mixing D) Finishing Answer: A Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

17 .

13) Salinas Company has two service departments, Maintenance and Human Resources. Salinas Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $126,000 800 20

Human Resources $84,000 100 12

Mixing $105,000 1,300 28

Finishing $175,000 1,100 32

Assume the step-down method is used to allocate service department costs. Which department should be allocated first?

A) Maintenance B) Human Resources C) Mixing D) Finishing Answer: B Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None 14) Sanchez Company has two service departments, Maintenance and Human Resources. Sanchez Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $126,000 800 8

Human Resources $84,000 400 12

Mixing $105,000 1,600 24

Finishing $175,000 1,200 32

Assume the step-down method is used to allocate service department costs and the Maintenance Department is allocated first. What are the total costs of the Mixing Department after the allocation of service department costs?

A) $210,750 B) $275,500 C) $277,000 D) $279,250 Answer: A Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

18 .

15) Train Company has two service departments, Maintenance and Human Resources. Train Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $50,400 1,600 16

Human Resources $33,600 800 24

Mixing $42,000 3,200 48

Finishing $70,000 2,400 64

If the direct method is used to allocate service department costs, then the total cost of the Human Resources Department after the Maintenance Department cost allocation would be ________.

A) $33,600 B) $38,640 C) $39,900 D) $50,400 Answer: A Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None 16) Bender Company has two service departments, Maintenance and Human Resources. Bender Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $50,400 1,600 16

Human Resources $33,600 800 24

Mixing $42,000 3,200 48

Finishing $70,000 2,400 64

If the direct method is used to allocate service department costs, then the total cost of the Maintenance Department after the Human Resources Department cost allocation would be ________.

A) $33,600 B) $50,400 C) $54,600 D) $70,000 Answer: B Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

19 .

17) Wenzel Company has two service departments, Maintenance and Human Resources. Wenzel Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $50,400 1,600 16

Human Resources $33,600 800 24

Mixing $42,000 3,200 48

Finishing $70,000 2,400 64

Assume the step-down method is used to allocate service department costs and the Maintenance Department is allocated first. What amount of costs would be allocated from the Maintenance Department to the Human Resources Department?

A) $0 B) $5,040 C) $6,300 D) $16,800 Answer: C Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None 18) Marvelous Company has two service departments, Maintenance and Human Resources. Marvelous Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $50,400 1,600 16

Human Resources $33,600 800 24

Mixing $42,000 3,200 48

Finishing $70,000 2,400 64

Assume the step-down method is used to allocate service department costs and the Maintenance Department is allocated first. Then the amount of cost allocated from the Human Resources Department to the Maintenance Department would be ________.

A) $0 B) $3,539 C) $4,200 D) $4,998 Answer: A Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

20 .

19) Christina Company has two service departments, Maintenance and Human Resources. Christina Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $50,400 1,600 16

Human Resources $33,600 800 24

Mixing $42,000 3,200 48

Finishing $70,000 2,400 64

Assume the step-down method is used to allocate service department costs and the Human Resources Department is allocated first. Then the cost allocated from the Human Resources Department to the Maintenance Department is ________.

A) $0 B) $3,539 C) $4,200 D) $13,440 Answer: C Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None 20) Adam Company has two service departments, Maintenance and Human Resources. Adam Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $50,400 1,600 16

Human Resources $33,600 800 24

Mixing $42,000 3,200 48

Finishing $70,000 2,400 64

Assume the step-down method is used to allocate service department costs and the Human Resources Department is allocated first. Then the amount of cost allocated from the Maintenance Department to the Human Resources Department is ________.

A) $0 B) $5,040 C) $6,300 D) $6,825 Answer: A Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

21 .

21) Stevie Company has two service departments, Maintenance and Human Resources. Stevie Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $50,400 1,600 16

Human Resources $33,600 800 24

Mixing $42,000 3,000 40

Finishing $70,000 2,000 60

If the direct method is used to allocate service department costs, then the cost allocated from the Maintenance Department to the Mixing Department is ________.

A) $20,160 B) $25,200 C) $30,240 D) $50,400 Answer: C Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None 22) Lindsey Company has two service departments, Maintenance and Human Resources. Lindsey Company also has two production departments, Mixing and Finishing. Maintenance costs are allocated based on square footage while Human Resources costs are allocated based on number of employees. The following information has been gathered for the current year:

Direct costs Square footage Number of employees

Maintenance $50,400 1,600 16

Human Resources $35,000 800 24

Mixing $42,000 3,200 40

Finishing $70,000 2,400 60

If the direct method is used to allocate service department costs, then the cost allocated from the Human Resources Department to the Finishing Department is ________.

A) $14,000 B) $16,800 C) $21,000 D) $33,600 Answer: C Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

22 .

23) Two popular methods for allocating service department costs to user departments are the direct method and the step-up method.

Answer: FALSE Diff: 1 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 24) The direct method of allocating service department costs ignores other service departments when allocating service departments' costs to user departments.

Answer: TRUE Diff: 2 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 25) The direct method sequence of allocations begins with the service department that renders the greatest service to the greatest number of other service departments.

Answer: FALSE Diff: 2 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 26) When using the step-down method, once a service department's costs are allocated to other departments, nothing is ever allocated back to it.

Answer: TRUE Diff: 2 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None 27) The direct method of cost allocation is generally preferred because it recognizes the effect of support provided by service departments to other service departments.

Answer: FALSE Diff: 2 LO: 12-3 AACSB: Reflective thinking skills Learning Outcome: None

23 .

28) Purple Company has three service departments, X, Y and Z and two production departments, P1 and P2. Costs in Departments X and Y are allocated based on square feet and costs in Department Z are allocated based on direct labor hours.

The following data are available:

Service Department: X Y Z Producing Department: P1 P2

Direct costs

Square feet occupied

Direct labor hours

$100,000 $225,000 $480,000

6,000 4,000 2,000

13,000 7,000 4,000

$750,000 $600,000

10,000 6,000

20,000 10,000

Assume the direct method of allocating service department costs is used.

Required: A) What is the total cost of Producing Department P1 after allocating the service departments' costs?

B) What is the total cost of Producing Department P2 after allocating the service departments' costs?

Answer: A) Service Dept. X: 10/16 × $100,000 = $62,500 Service Dept. Y: 10/16 × $225,000 = $140,625 Service Dept. Z: 20/30 × $480,000 = $320,000 Producing Dept. P1: Given $750,000 Total $1,273,125 B) Service Dept. X: 6/16 × $100,000 = Service Dept. Y: 6/16 × $225,000 = Service Dept. Z: 10/30 × $480,000 = Producing Dept. P2: Given Total Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

$37,500 $84,375 $160,000 $600,000 $881,875

24 .

29) Evermore Company has two service departments, Maintenance and Cafeteria, as well as two production departments, Mixing and Finishing. Maintenance Department costs are allocated based on direct labor hours and Cafeteria Department costs are allocated based on number of employees. The following data are available:

Direct costs Direct labor hours Number of employees

Maintenance $7,000 180 36

Cafeteria $2,800 50 120

Mixing $1,200 20 540

Finishing $400 10 60

Assume the step-down method of allocating service departments' costs is used. Assume the Maintenance Department is allocated first.

Required: A) Determine the total costs of the Mixing Department after allocating the service departments' costs.

B) Determine the total costs of the Finishing Department after allocating the service departments' costs.

Answer: A) Service Dept. Maintenance: 20/80 × $7,000 = $1,750.00 Service Dept. Cafeteria: 540/600 × ($2,800 + $4,375) = 6,457.50 Production Dept. Mixing: Given $1,200.00 Total $9,407.50 B) Service Dept. Maintenance: 10/80 × $7,000 = Service Dept. Cafeteria: 60/600 × ($2,800 + $4,375) = Production Dept. Finishing: Given Total Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None

$875.00 $717.50 $400.00 $1,992.50

25 .

30) Salerno Company has two service departments, Maintenance and Cafeteria, as well as two production departments, Mixing and Bottling. Maintenance Department costs are allocated based on square footage and Cafeteria Department costs are allocated based on number of employees. The following data was available:

Direct costs Square footage Number of employees Direct labor hours

Maintenance $200,000 1,000 30 8,000

Cafeteria $120,000 2,000 20 6,000

Mixing $76,000 4,000 60

Bottling $85,000 6,000 100

Assume the direct method is used to allocate service department costs to producing departments.

Required: A) Determine the total costs of the Mixing Department after allocating the service departments' costs.

B) Determine the total costs of the Bottling Department after allocating the service departments' costs.

Answer: A) Service Dept. Maintenance: 4/10 × $200,000 = $80,000 Service Dept. Cafeteria: 60/160 × $120,000 = 45,000 Production Dept. Mixing: Given 76,000 Total $201,000 B) Service Dept. Maintenance: 6/10 × $200,000 = $120,000 Service Dept. Cafeteria: 100/160 × $120,000 = $75,000 Production Dept. Bottling: Given $85,000 Total $280,000 Diff: 2 LO: 12-3 AACSB: Analytic skills Learning Outcome: None 12.4 Questions 1) Under the traditional approach to cost allocation, which of the following steps is NOT used in allocating costs to products?

A) Divide the costs in each producing department, including allocated costs, into direct costs and indirect costs.

B) Trace the direct costs to the appropriate products.

C) Select cost pools and cost-allocation bases in each producing department and assign all indirect costs to the appropriate cost pool.

D) Collect relevant data concerning costs and the physical flow of cost-allocation base units among resources and activities.

Answer: D Diff: 2 LO: 12-4 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system 26 .

2) Under the ABC approach to cost allocation, which of the following steps is NOT used in allocating costs to products?

A) Determine the key components of the system and the relationship among them.

B) Calculate and interpret the new ABC information.

C) Collect relevant data concerning costs and the physical flow of cost-allocation base units among resources and activities.

D) Select cost pools and cost-allocation bases in each producing department and assign all indirect costs to the appropriate cost pool.

Answer: D Diff: 2 LO: 12-4 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system 3) Smith Company has developed the following information about two products:

Approach Traditional ABC

Cost Per Unit Product 1 $5,400 $6,000

Cost Per Unit Product 2 $2,500 $2,400

If managers believe the ABC approach is more accurate to cost products than the traditional approach, then ________.

A) the traditional approach underestimates the profitability of Product 1 and overestimates the profitability of Product 2 B) the traditional approach overestimates the profitability of Product 1 and underestimates the profitability of Product 2 C) the ABC approach underestimates the profitability of Product 1 and overestimates the profitability of Product 2 D) the ABC approach overestimates the profitability of Product 1 and underestimates the profitability of Product 2 Answer: B Diff: 2 LO: 12-4 AACSB: Analytic skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system

27 .

4) When determining product costs, the last step in the traditional approach to cost allocation is ________.

A) divide costs in each producing department into direct costs and indirect costs B) trace direct costs to products C) select cost pools and cost allocation bases in each production department and assign indirect department costs to the appropriate cost pool D) allocate the costs in each cost pool to the products in proportion to their usage of the related costallocation base Answer: D Diff: 2 LO: 12-4 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system 5) The phrase "cost application" refers to the allocation of the total departmental costs to ________.

A) service departments B) service departments and producing departments C) revenue-producing departments D) revenue-producing products Answer: D Diff: 2 LO: 12-4 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system 6) Under the traditional approach to cost allocation, the costs in each cost pool are allocated to a product in proportion to the product's usage of the ________.

A) available capacity B) budgeted capacity C) cost-allocation base D) cost pool Answer: C Diff: 2 LO: 12-4 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system

28 .

7) The traditional approach to cost allocation focuses on accumulating and reporting costs by ________.

The activity-based approach to cost allocation focuses on accumulating and reporting costs by ________.

A) cost behavior; resources used B) departments; activities C) fixed costs; variable costs D) product; customer Answer: B Diff: 1 LO: 12-4 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system 8) Timothy Company manufactures two models of pens, a standard model and a deluxe model. Three activities have been identified in the production of the pens. The following information is available:

Product Standard Deluxe

Number of Setups 22 28

Cost Pool Setup Costs Assembly Costs Labor Costs

Total Costs $30,000 $36,000 $9,000

Number of Components 8 12

Number of Direct Labor Hours 375 225

Cost Driver Number of setups Number of components Number of direct labor hours

If activity-based costing is used, the setup cost assigned to the standard model is ________.

A) $33 B) $8,400 C) $13,200 D) $44,000 Answer: C Diff: 2 LO: 12-4 AACSB: Analytic skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system

29 .

9) Matthew Company manufactures two models of pens, a standard model and a deluxe model. Three activities have been identified in the production of the pens. The following information is available:

Product Standard Deluxe

Number of Setups 22 28

Cost Pool Setup Costs Assembly Costs Labor Costs

Total Costs $15,000 $36,000 $9,000

Number of Components 8 12

Number of Direct Labor Hours 375 225

Cost Driver Number of setups Number of components Number of direct labor hours

If activity-based costing is used, the total costs assigned to the standard model are ________.

A) $22,500 B) $26,625 C) $33,375 D) $37,500 Answer: B Diff: 2 LO: 12-4 AACSB: Analytic skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system

30 .

10) Michael Company manufactures two models of pens, a standard model and a deluxe model. Three activities have been identified in the production of the pens. The following information is available:

Product Standard Deluxe

Number of Setups 22 28

Cost Pool Setup Costs Assembly Costs Labor Costs

Total Costs $15,000 $36,000 $9,000

Number of Components 8 12

Number of Direct Labor Hours 375 225

Cost Driver Number of setups Number of components Number of direct labor hours

If activity-based costing is used, the total cost assigned to the deluxe model is ________.

A) $22,500 B) $26,625 C) $33,375 D) $37,500 Answer: C Diff: 2 LO: 12-4 AACSB: Analytic skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system 11) The phrase " cost distribution" refers to the allocation of total departmental costs to revenueproducing products or services.

Answer: FALSE Diff: 1 LO: 12-4 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system 12) Activity-based costing systems focus on accumulating costs into key activities instead of departments.

Answer: TRUE Diff: 1 LO: 12-4 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts; Compare a traditional cost allocation system to an activity based costing system

31 .

12.5 Questions 1) Customer profitability does NOT depend on ________.

A) gross margin on products purchased by customer B) cost of order changes C) cost of sales returns D) transfer prices between producing departments Answer: D Diff: 2 LO: 12-5 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 2) Customers with a high cost to serve have ________.

A) large order quantity B) few order changes C) standard delivery requirements D) frequent returns Answer: D Diff: 2 LO: 12-5 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 3) Customers with a low cost to serve have ________.

A) small order quantities B) many order changes C) large amount of pre-sales support D) small amount of post-sales support Answer: D Diff: 2 LO: 12-5 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 4) The cost to serve percentage for a customer equals ________.

A) gross margin per unit divided by selling price per unit B) contribution margin per unit divided by selling price per unit C) cost of goods sold per unit divided by selling price per unit D) costs associated with customer divided by sales revenue Answer: D Diff: 2 LO: 12-5 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

32 .

5) Assume the cost object is customers. Why should indirect costs associated with customers be allocated to customers instead of producing departments?

A) The allocation to customers would be based on production-related output measures that are related to the cause of customer-service costs.

B) The allocation to customers would be based on production-related output measures that are probably not related to the cause of customer-service costs.

C) The cost-allocation base cannot be determined.

D) Actual costs would be used instead of budgeted costs.

Answer: B Diff: 2 LO: 12-5 AACSB: Reflective thinking skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 6) Gomez Company makes three types of products. The company has two types of customers. The cost to serve all customers is $12,000 and is allocated to customer types based on the number of manager visits to customer locations. The following data are available:

Sales Cost of goods sold Gross margin

Product 1 Sales Product 2 Sales Product 3 Sales Manager visits

Product 1 $5,000 4,000 $1,000

Product 2 $6,000 4,800 $1,200

Customer Type 1 $500 $1,000 $16,000 4

Product 3 $30,000 15,000 $15,000 Customer Type 2 $4,500 $5,000 $14,000 16

What is the gross profit margin for all three products for Customer Type 1?

A) $8,000 B) $8,200 C) $8,250 D) $8,300 Answer: D Diff: 2 LO: 12-5 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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7) Patrick Company makes three types of products. The company has two types of customers. The cost to serve all customers is $12,000 and is allocated to customer types based on the number of manager visits to customer locations. The following data are available:

Sales Cost of goods sold Gross margin

Product 1 Sales Product 2 Sales Product 3 Sales Manager visits

Product 1 $5,000 4,000 $1,000

Product 2 $6,000 4,800 $1,200

Customer Type 1 $500 $1,000 $16,000 4

Product 3 $30,000 15,000 $15,000 Customer Type 2 $4,500 $5,000 $14,000 16

What is the gross profit margin for all three products for Customer Type 2?

A) $450 B) $1,000 C) $7,000 D) $8,900 Answer: D Diff: 2 LO: 12-5 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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8) McArthur Company makes three types of products. The company has two types of customers. The cost to serve all customers is $12,000 and is allocated to customer types based on the number of manager visits to customer locations. The following data are available:

Sales Cost of goods sold Gross margin

Product 1 Sales Product 2 Sales Product 3 Sales Manager visits

Product 1 $5,000 4,000 $1,000

Product 2 $6,000 4,800 $1,200

Customer Type 1 $500 $1,000 $16,000 4

Product 3 $30,000 15,000 $15,000 Customer Type 2 $4,500 $5,000 $14,000 12

What is the cost to serve for Customer Type 1?

A) $2,400 B) $3,000 C) $9,600 D) $12,000 Answer: B Diff: 2 LO: 12-5 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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9) Utah Company makes three types of products. The company has two types of customers. The cost to serve all customers is $12,000 and is allocated to customer types based on the number of manager visits to customer locations. The following data are available:

Sales Cost of goods sold Gross margin

Product 1 Sales Product 2 Sales Product 3 Sales Manager visits

Product 1 $5,000 4,000 $1,000

Product 2 $6,000 4,800 $1,200

Customer Type 1 $500 $1,000 $16,000 4

Product 3 $30,000 15,000 $15,000 Customer Type 2 $4,500 $5,000 $14,000 12

What is the cost to serve for Customer Type 2?

A) $2,400 B) $6,000 C) $9,000 D) $12,000 Answer: C Diff: 2 LO: 12-5 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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10) Donna Company makes three types of products. The company has two types of customers. The cost to serve all customers is $12,000 and is allocated to customer types based on the number of manager visits to customer locations. The following data are available:

Sales Cost of goods sold Gross margin

Product 1 Sales Product 2 Sales Product 3 Sales Manager visits

Product 1 $5,000 4,000 $1,000

Product 2 $6,000 4,800 $1,200

Customer Type 1 $500 $1,000 $16,000 4

Product 3 $30,000 15,000 $15,000 Customer Type 2 $4,500 $5,000 $14,000 16

What is the operating income for all three products for Customer Type 1?

A) $2,400 B) $5,850 C) $5,900 D) $9,600 Answer: C Diff: 2 LO: 12-5 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system

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11) Summer Company makes three types of products. The company has two types of customers. The cost to serve all customers is $12,000 and is allocated to customer types based on the number of manager visits to customer locations. The following data are available:

Sales Cost of goods sold Gross margin

Product 1 Sales Product 2 Sales Product 3 Sales Manager visits

Product 1 $5,000 4,000 $1,000

Product 2 $6,000 4,800 $1,200

Customer Type 1 $500 $1,000 $16,000 4

Product 3 $30,000 15,000 $15,000 Customer Type 2 $4,500 $5,000 $14,000 16

What is the operating profit (loss) for all three products for Customer Type 2?

A) $(700) B) $(2,600) C) $8,450 D) $9,600 Answer: A Diff: 2 LO: 12-5 AACSB: Analytic skills Learning Outcome: Compare a traditional cost allocation system to an activity based costing system 12.6 Questions 1) The authors recommend that ________ costs should not be allocated to products or services.

A) nonproduction B) value-chain functions C) central corporate support costs D) service department costs Answer: C Diff: 1 LO: 12-6 AACSB: Reflective thinking skills Learning Outcome: None

38 .

2) When allocating central corporate support costs to products, companies often use revenues as the allocation base because ________.

A) revenues are the cost driver B) revenues approximate the actual cost driver C) revenues represent an " ability to bear" philosophy of cost allocation D) revenues represent the actual usage of resources Answer: C Diff: 2 LO: 12-6 AACSB: Reflective thinking skills Learning Outcome: None 3) If a company chooses to allocate central support costs, it is important to allocate them using ________.

A) actual or estimated usage B) a fair approach accepted by managers C) the indirect costs of each division D) A and B Answer: D Diff: 2 LO: 12-6 AACSB: Reflective thinking skills Learning Outcome: None 4) The preferred cost allocation base that can be used to allocate central corporate support costs to products is ________.

A) sales B) cost of goods sold C) total assets D) a measure of usage Answer: D Diff: 1 LO: 12-6 AACSB: Reflective thinking skills Learning Outcome: None 5) An example of central corporate support costs includes ________.

A) tax planning department B) human resources department C) maintenance department D) company cafeteria Answer: A Diff: 1 LO: 12-6 AACSB: Reflective thinking skills Learning Outcome: None

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6) If a company allocates costs of central services to products based on sales, ________ should be used as the allocation base.

A) actual usage B) estimated usage C) actual sales D) budgeted sales Answer: D Diff: 1 LO: 12-6 AACSB: Reflective thinking skills Learning Outcome: None 7) Bambi Company has two departments. Relevant information is presented below:

Budgeted total assets Actual total assets Budgeted sales Actual sales

Department 1 $1,000,000 $1,200,000 $500,000 $300,000

Department 2 $2,000,000 $2,300,000 $2,000,000 $2,100,000

Total company-wide advertising costs are $540,000. The advertising costs are allocated based on sales using the preferred approach. What amount of advertising costs is allocated to Department 1?

A) $67,500 B) $108,000 C) $185,143 D) $270,000 Answer: B Diff: 2 LO: 12-6 AACSB: Analytic skills Learning Outcome: None

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8) Monday Company has two departments. Relevant information is presented below:

Budgeted total assets Actual total assets Budgeted sales Actual sales

Department 1 $500,000 $600,000 $400,000 $200,000

Department 2 $200,000 $400,000 $2,000,000 $2,100,000

Total company-wide advertising costs are $360,000. The advertising costs are allocated based on sales using the preferred approach. What amount of advertising costs is allocated to Department 2?

A) $37,500 B) $50,000 C) $262,500 D) $300,000 Answer: D Diff: 2 LO: 12-6 AACSB: Analytic skills Learning Outcome: None 9) Wehr Company has two departments. Relevant information is presented below:

Budgeted total assets Actual total assets Budgeted sales Actual sales

Department 1 $400,000 $340,000 $400,000 $300,000

Department 2 $500,000 $450,000 $2,000,000 $2,100,000

Total company-wide advertising costs are $300,000. Assume the allocation base is changed from budgeted sales to actual sales. The amount of advertising costs allocated to Department 1 will ________.

A) increase by $12,500 B) increase by $25,000 C) decrease by $12,500 D) decrease by $25,000 Answer: C Diff: 2 LO: 12-6 AACSB: Analytic skills Learning Outcome: None

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10) Wininger Company has two departments. Relevant information is presented below:

Budgeted gross margin Actual gross margin Budgeted sales Actual sales

Department 1 $100,000 $200,000 $500,000 $300,000

Department 2 $500,000 $600,000 $2,000,000 $2,100,000

Corporate management salaries are $3,000,000. The salaries are allocated based on sales using the preferred approach. What amount of salaries is allocated to Department 1?

A) $300,000 B) $375,000 C) $600,000 D) $750,000 Answer: C Diff: 2 LO: 12-6 AACSB: Analytic skills Learning Outcome: None 11) The preferred cost driver for allocating central corporate support costs to products is either actual or estimated usage.

Answer: TRUE Diff: 2 LO: 12-6 AACSB: Reflective thinking skills Learning Outcome: None 12) Public relations costs and top management salaries are examples of central corporate support costs.

Answer: TRUE Diff: 1 LO: 12-6 AACSB: Analytic skills Learning Outcome: None 13) The use of cost drivers to allocate central corporate support costs to products such as revenue or total assets represent an " ability to bear" philosophy.

Answer: TRUE Diff: 1 LO: 12-6 AACSB: Reflective thinking skills Learning Outcome: None

42 .

12.7 Questions 1) To determine the cost of a main product with by-products, we take the cost of the main product and ________.

A) add separable costs of the by-products and add revenues from the by-products B) add separable costs of the by-products and subtract revenues from the by-products C) subtract separable costs of the by-products and add revenues from the by-products D) subtract separable costs of the by-products and subtract revenues from the by-products Answer: B Diff: 3 LO: 12-7 AACSB: Analytic skills Learning Outcome: None 2) By-products differ from joint products because by-products have ________.

A) no joint costs before the split-off point B) joint costs before the split-off point C) significant sales value when compared to other products at the split-off point D) insignificant sales value when compared to other products at the split-off point Answer: D Diff: 1 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 3) Companies routinely allocate joint product costs to products for purposes of ________.

A) inventory valuation only B) income determination only C) decision-making such as further processing of joint products D) inventory valuation and income determination Answer: D Diff: 2 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 4) Joint costs of producing multiple products are allocated to ________.

A) main products only B) by-products only C) main products and by-products D) service departments Answer: A Diff: 1 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None

43 .

5) Two conventional ways of allocating joint costs to products are ________.

A) physical units and incremental revenues B) physical units and incremental expenses C) separable costs and relative sales values D) physical units and relative sales values Answer: D Diff: 1 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 6) Corless Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Corless Company plans to produce 40,000 pounds of Product C and 20,000 pounds of Product U from 60,000 pounds of ore. Product C sells for $30 per pound and Product U sells for $40 per pound. Assume the company uses the physical-units method of allocating joint costs.

What amount of joint costs is allocated to Product C? A) $0 B) $200,000 C) $600,000 D) $800,000 Answer: D Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None 7) Designer Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Designer Company plans to produce 40,000 pounds of Product C and 20,000 pounds of Product U from 60,000 pounds of ore. Product C sells for $30 per pound and Product U sells for $40 per pound. Assume the company uses the physical-units method of allocating joint costs.

What amount of joint costs is allocated to Product U? A) $0 B) $100,000 C) $300,000 D) $400,000 Answer: D Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None

44 .

8) Goyette Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Goyette Company plans to produce 40,000 pounds of Product C and 20,000 pounds of Product U from 60,000 pounds of ore. Product C sells for $30 per pound and Product U sells for $40 per pound. Assume the company uses the relative-sales-value method of allocating joint costs. What amount of joint costs is allocated to Product C? A) $400,000 B) $514,286 C) $720,000 D) $800,000 Answer: C Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None 9) Santelle Company processes copper ore into two products, C and U. The ore costs $5 per pound and conversion costs are $15 per pound. Santelle Company plans to produce 40,000 pounds of Product C and 20,000 pounds of Product U from 60,000 pounds of ore. Product C sells for $30 per pound and Product U sells for $40 per pound. Assume the company uses the relative-sales-value method of allocating joint costs. What amount of joint costs is allocated to Product U? A) $0 B) $400,000 C) $480,000 D) $685,714 Answer: C Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None

45 .

10) Denise Company manufactures three products from a joint process. Joint costs for the year amounted to $250,000. The following data was available: Product X Y Z

Units Produced 5,000 3,000 2,000

Sales Value at Split-off $70,000 $30,000 $100,000

Assume the relative-sales-value method of allocating joint costs is used. What amount of joint costs is allocated to Product X? A) $70,000 B) $87,500 C) $125,000 D) $250,000 Answer: B Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None 11) Kemp Company manufactures three products from a joint process. Joint costs for the year amounted to $250,000. The following data was available: Product X Y Z

Units Produced 5,000 3,000 2,000

Sales Value at Split-off $70,000 $30,000 $100,000

Assume the relative-sales-value method of allocating joint costs is used. What amount of joint costs is allocated to Product Y? A) $30,000 B) $37,500 C) $75,000 D) $250,000 Answer: B Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None

46 .

12) Sandy Company manufactures three products from a joint process. Joint costs for the year amounted to $250,000. The following data was available: Product X Y Z

Units Produced 5,000 3,000 2,000

Sales Value at Split-off $70,000 $30,000 $100,000

Assume the relative-sales-value method of allocating joint costs is used. What amount of joint costs is allocated to Product Z? A) $50,000 B) $100,000 C) $125,000 D) $250,000 Answer: C Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None 13) Karen Company manufactures three products from a joint process. Joint costs for the year amounted to $300,000. The following data was available: Product X Y Z

Units Produced 5,000 3,000 2,000

Sales Value at Split-off $70,000 $30,000 $100,000

Assume the physical-units method of allocating joint costs is used. What amount of joint costs is allocated to Product X? A) $70,000 B) $87,500 C) $150,000 D) $300,000 Answer: C Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None

47 .

14) Jackson Company manufactures three products from a joint process. Joint costs for the year amounted to $300,000. The following data was available: Product X Y Z

Units Produced 5,000 3,000 2,000

Sales Value at Split-off $70,000 $30,000 $100,000

Assume the physical-units method of allocating joint costs is used. What amount of joint costs is allocated to Product Y? A) $30,000 B) $37,500 C) $90,000 D) $300,000 Answer: C Diff: 2 LO: 12-7 AACSB: Analytic skills Learning Outcome: None 15) If we account for a product as a by-product, we allocate ________ to it.

A) joint costs B) separable costs C) avoidable costs D) separable and joint costs Answer: B Diff: 2 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 16) Joint costs include all inputs of material, labor and overhead that are incurred after the split-off point.

Answer: FALSE Diff: 1 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 17) Two conventional ways of allocating joint costs to jointly-produced products are physical units and relative sales value.

Answer: TRUE Diff: 2 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None

48 .

18) The relative-sales-value method of allocating joint costs requires a common physical unit for measuring the output of each product.

Answer: FALSE Diff: 2 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 19) Joint cost allocations should be ignored for decisions such as selling a joint product at the split-off point or processing it further.

Answer: TRUE Diff: 2 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 20) Joint costs from producing multiple products are allocated to main products and to by-products.

Answer: FALSE Diff: 2 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 21) By-products normally have significant sales value in comparison with other jointly-produced products emerging at the split-off point.

Answer: FALSE Diff: 1 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 22) Joint costs are not allocated to a by-product.

Answer: TRUE Diff: 2 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None 23) Revenues from the by-product less separable costs associated with the by-product are added to the cost of the main products.

Answer: FALSE Diff: 2 LO: 12-7 AACSB: Reflective thinking skills Learning Outcome: None

49 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 13 Accounting for Overhead Costs 13.1 Questions 1) Assume machine hours are the cost-allocation base for the budgeted rate for fixed overhead costs. The total fixed overhead cost applied to a product is the result of multiplying the ________ by the ________ for the product.

A) budgeted fixed overhead costs; percent of completion B) actual fixed overhead rate; budgeted machine hours C) budgeted fixed overhead costs; budgeted machine hours D) budgeted fixed overhead rate; actual machine hours used Answer: D Diff: 2 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None 2) The cost-allocation base used for the fixed overhead rate should be ________.

A) underestimated due to the conservatism principle B) overestimated due to the conservatism principle C) the most plausible and reliable measure available of the cause and effect relationship between overhead costs and production volume D) the most plausible and reliable measure available of the relationship between overhead costs and sales Answer: C Diff: 2 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None 3) The two key items in determining the budgeted factory overhead rate are total budgeted factory overhead costs and ________.

A) actual amount of the cost driver B) total actual factory overhead costs C) budgeted cost-allocation base level D) total estimated factory overhead costs Answer: C Diff: 1 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None

1 .

4) The budgeted factory overhead rate is computed as ________.

A) actual factory overhead costs divided by actual production in units B) actual factory overhead costs divided by actual cost driver activity C) budgeted factory overhead costs divided by actual cost driver activity D) budgeted factory overhead costs divided by budgeted cost-allocation base level Answer: D Diff: 1 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None 5) USC Company has the following information available: Budgeted factory overhead costs Actual factory overhead costs Budgeted direct labor hours Actual direct labor hours

$90,000 $80,000 20,000 21,000

Assume direct labor hours are the cost driver of factory overhead costs. The budgeted factory overhead rate is ________.

A) $3.57 per direct labor hour B) $3.81 per direct labor hour C) $4.00 per direct labor hour D) $4.50 per direct labor hour Answer: D Diff: 2 LO: 13-1 AACSB: Analytic skills Learning Outcome: None 6) Dodge Company had the following information: Budgeted factory overhead costs Actual factory overhead costs Budgeted machine hours Actual machine hours

$90,000 $82,000 40,000 35,500

Assume machine hours are the cost driver of factory overhead costs. The budgeted factory overhead rate is ________.

A) $2.025 per machine hour B) $2.05 per machine hour C) $2.25 per machine hour D) $2.875 per machine hour Answer: C Diff: 2 LO: 13-1 AACSB: Analytic skills Learning Outcome: None 2 .

7) Rocky Company had the following information: Budgeted factory overhead costs Actual factory overhead costs Budgeted production setups Actual production setups

$90,000 $80,000 12,000 11,500

Assume production setups are the cost driver for factory overhead costs. The budgeted factory overhead rate is ________.

A) $6.25 per setup B) $6.52 per setup C) $6.78 per setup D) $7.50 per setup Answer: D Diff: 2 LO: 13-1 AACSB: Analytic skills Learning Outcome: None 8) Green Company had the following information: Budgeted factory overhead costs Actual factory overhead costs Budgeted direct labor hours Actual direct labor hours

$144,500 $151,980 34,000 30,400

Assume direct labor hours are the cost driver for factory overhead costs. The budgeted factory overhead rate is ________.

A) $4.25 per direct labor hour B) $4.45 per direct labor hour C) $4.63 per direct labor hour D) $4.84 per direct labor hour Answer: A Diff: 2 LO: 13-1 AACSB: Analytic skills Learning Outcome: None

3 .

9) To apply the budgeted overhead costs to a job, the budgeted overhead rate is multiplied by the ________.

A) actual production in units B) expected production in units C) actual amount of cost driver used by the job D) expected amount of cost driver used by the job Answer: C Diff: 1 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None 10) Kingsway Company had the following information available for the past quarter: Budgeted factory overhead costs Actual factory overhead costs Budgeted direct labor hours Actual direct labor hours

$75,000 $80,000 20,000 21,000

Assume the cost driver for factory overhead costs is direct labor hours and a job uses 2,000 direct labor hours. The job was budgeted to use 2,100 direct labor hours. What amount of factory overhead is applied to the job?

A) $7,140 B) $7,500 C) $7,875 D) $8,000 Answer: B Diff: 2 LO: 13-1 AACSB: Analytic skills Learning Outcome: None

4 .

11) Barenz Builders had the following information available for the past twelve months: Budgeted factory overhead costs Actual factory overhead costs Budgeted machine hours Actual machine hours

$80,000 $82,000 40,000 39,500

Assume the cost driver for factory overhead costs is machine hours and a job uses 10,000 machine hours.

The job was budgeted to use 11,000 machine hours. What amount of factory overhead is applied to the job?

A) $20,000 B) $20,250 C) $22,000 D) $22,278 Answer: A Diff: 2 LO: 13-1 AACSB: Analytic skills Learning Outcome: None 12) A company can increase the accuracy of its product cost information by converting indirect costs to direct costs.

Answer: TRUE Diff: 1 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None 13) When calculating the budgeted overhead rate, the numerator of the fraction is the actual amount of the cost driver.

Answer: FALSE Diff: 1 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None 14) Accountants use actual overhead rates when applying overhead costs to jobs as they are completed.

Answer: FALSE Diff: 2 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None

5 .

15) The overhead cost applied to a job is equal to the budgeted overhead rate times the budgeted amount of the cost driver.

Answer: FALSE Diff: 2 LO: 13-1 AACSB: Reflective thinking skills Learning Outcome: None 13.2 Questions 1) Machine usage in a department causes most of the overhead costs such as depreciation expense, maintenance expense and repair expense. What is the most appropriate cost-allocation base for applying overhead costs to products?

A) the number of machines B) the salvage value of the machines C) the average age of the machines D) the number of machine hours Answer: D Diff: 2 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None 2) In a clothing factory, clothing items are sewn by hundreds of workers using sewing machines and hand stitching. The sewing machines are used 80 percent of the time it takes to make the clothing items.

Overhead costs relate primarily to electricity and indirect materials such as needles, bobbins, thread and thimbles. What is the most appropriate cost-allocation base for applying overhead costs to the clothing items?

A) the number of sewing machines B) the number of direct labor hours C) the number of sewing machine hours D) the number of workers Answer: C Diff: 2 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None 3) What is the 80-20 rule used when selecting cost allocation bases for the budgeted overhead rate?

A) 80% of the cost-allocation bases drive 20% of the overhead costs B) 20% of the cost-allocation bases drive 80% of the overhead costs C) 80% of the overhead rate is determined by 20% of the cost-allocation bases D) 20% of the overhead rate is determined by 80% of the cost-allocation bases Answer: B Diff: 2 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None 6 .

4) Ideally, if a department has more than one cost-allocation base for overhead costs, it should ________.

A) use only one cost-allocation base with the highest amount of overhead costs B) use only two cost-allocation bases with the highest amount of overhead costs C) accumulate a separate cost pool for each cost-allocation base and put the overhead costs into the appropriate cost pool D) determine the budgeted overhead rate using the budgeted overhead costs and the budgeted amount of only one cost driver Answer: C Diff: 2 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None 5) If a department identifies more than one cost driver for overhead costs, the department ideally should ________.

A) put 80 percent of the costs into one pool and 20 percent into a second pool B) select a single cost driver C) allocate 80 percent of the costs with 20 percent of the cost drivers D) create as many cost pools as there are cost drivers Answer: D Diff: 1 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None 6) The cost driver chosen for applying factory overhead costs should be the cost driver that ________.

A) is easiest to understand B) incurs the least administrative costs C) is easiest to calculate D) causes most of the overhead costs Answer: D Diff: 1 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None 7) There should be a strong cause-and-effect relationship between factory overhead costs incurred and the cost-allocation base chosen for its application.

Answer: TRUE Diff: 1 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None

7 .

8) When selecting a cost driver for a budgeted overhead rate, no one cost driver is appropriate for all situations.

Answer: TRUE Diff: 1 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None 9) In practice, it may be too costly to have several cost-allocation bases for applying overhead costs to products.

Answer: TRUE Diff: 1 LO: 13-2 AACSB: Reflective thinking skills Learning Outcome: None 13.3 Questions 1) Causes for the difference between applied and actual overhead costs do NOT include ________.

A) different number of workdays in different months B) price changes in individual overhead items C) inefficient use of overhead items D) repairs made on a regular, consistent basis Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 2) When we use an annual overhead rate consistently throughout the year for product costing, without altering it month to month, this is called a(n) ________.

A) direct costing system B) absorption costing system C) normal costing system D) constant costing system Answer: C Diff: 1 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None

8 .

3) A department's applied overhead cost will ________ equal the actual overhead cost incurred.

A) always B) never C) about fifty percent of the time D) rarely Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 4) When the actual overhead costs exceed the amount of applied overhead costs, the overhead costs are ________. At the end of the accounting period, accountants dispose of the underapplied or overapplied overhead using ________ or ________.

A) overapplied; proration; immediate write-off B) underapplied; proration; immediate write-off C) overapplied; flexible budget variance; proration D) underapplied; flexible budget variance; immediate write-off Answer: B Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 5) Under the immediate write-off method of disposing of underapplied or overapplied overhead costs, current net income is ________ by underapplied overhead costs and current net income is ________ by overapplied overhead costs.

A) increased, decreased B) decreased, increased C) not affected, not affected D) none of the above Answer: B Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 6) To determine the cost of a manufactured product, a normal costing system uses ________.

A) actual direct material, actual direct labor and actual overhead costs B) applied direct material, applied direct labor and applied overhead costs C) applied direct material, applied direct labor and actual overhead costs D) actual direct materials, actual direct labor and normal applied overhead costs Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None

9 .

7) The most important contributor to the variance between actual and applied overhead costs is ________.

A) poor forecasting B) inefficient use of overhead items C) price changes in overhead items D) operating at a different level of volume than the level used as a denominator in calculating the budgeted overhead rate Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 8) The excess of applied overhead costs over the actual overhead costs is called ________.

A) overapplied overhead B) underapplied overhead C) underbudgeted overhead D) overestimated overhead Answer: A Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 9) Victor Company incurred actual overhead costs of $297,500 for the year. A budgeted factory overhead rate of 150% of direct labor cost was determined at the beginning of the year. Budgeted factory overhead was $300,000 and budgeted direct labor cost was $200,000. Actual direct labor cost was $205,000 for the year. The factory overhead variance for the year was ________.

A) $2,500 underapplied B) $2,500 overapplied C) $10,000 underapplied D) $10,000 overapplied Answer: B Diff: 2 LO: 13-3 AACSB: Analytic skills Learning Outcome: None

10 .

10) The following information was gathered for all the products made by the BBB Company: Budgeted direct labor hours Actual direct labor hours Budgeted factory overhead costs Actual factory overhead costs

8,000 8,100 $224,000 $224,970

Assume the cost driver for factory overhead costs is direct labor hours. What is the amount of overapplied or underapplied overhead?

A) $970 underapplied B) $970 overapplied C) $1,830 underapplied D) $1,830 overapplied Answer: D Diff: 2 LO: 13-3 AACSB: Analytic skills Learning Outcome: None 11) The following information was gathered for all the products made by the Ringaling Company: Budgeted direct labor hours Actual direct labor hours Budgeted factory overhead costs Actual factory overhead costs

31,000 32,400 $147,250 $149,980

Assume the cost driver for factory overhead costs is direct labor hours. What is the amount of overapplied or underapplied overhead?

A) $2,730 underapplied B) $2,730 overapplied C) $3,920 underapplied D) $3,920 overapplied Answer: D Diff: 2 LO: 13-3 AACSB: Analytic skills Learning Outcome: None

11 .

12) The immediate write-off of overhead variances is used because ________.

A) it is simpler B) the company has probably sold most of the goods produced during the period so prorating the variance to inventory accounts would not produce materially different results C) the extra overhead costs result from inefficiencies in the current period and therefore do not represent assets D) all of the above Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 13) The most widely used approach to disposing of overhead variances is ________.

A) to allocate it between finished goods inventory, work-in-process inventory and direct materials inventory B) to allocate it between cost of goods sold, finished goods inventory and work-in-process inventory C) to allocate it between cost of goods sold, finished goods inventory and direct materials inventory D) immediate write-off Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 14) In the immediate write-off of overhead variances, underapplied overhead is regarded as a(n) ________.

A) addition to the cost of inventory B) deduction from the cost of inventory C) decrease in cost of goods sold D) increase in cost of goods sold Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 15) In the immediate write-off approach to overhead variances, overapplied overhead is regarded as a(n) ________.

A) addition to the cost of inventory B) reduction to the cost of inventory C) increase in cost of goods sold D) decrease in cost of goods sold Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 12 .

16) In practice, companies generally prorate overhead variances when it would materially affect ________ and ________.

A) inventory valuations; stock dividends B) inventory valuations; cash dividends C) inventory valuations; net income D) stock option plans; manager bonuses Answer: C Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 17) The proration method of disposing of overhead variances assigns the variance in proportion to the sizes of the ending account balances of ________.

A) work-in-process inventory, finished goods inventory and direct materials inventory B) work-in-process inventory, direct materials inventory and cost of goods sold C) work-in-process inventory and direct materials inventory D) work-in-process inventory, finished goods inventory and cost of goods sold Answer: D Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 18) The most common reason for a variance between actual overhead costs and applied overhead costs is the actual level of volume does not equal the level used to calculate the budgeted overhead rate.

Answer: TRUE Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 19) When the amount of overhead applied to a product exceeds the amount incurred to make the product, the difference is called overapplied overhead.

Answer: TRUE Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 20) The most widely used approach in disposing of an overhead variance is proration to the affected accounts.

Answer: FALSE Diff: 1 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 13 .

21) The proration method of disposing of an overhead variance prorates the variance among three accounts that include Direct Materials Inventory, Work-in-Process Inventory and Finished Goods Inventory.

Answer: FALSE Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 22) The immediate write-off method of disposing of underapplied overhead subtracts the dollar amount from Cost of Goods Sold.

Answer: FALSE Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 23) The proration method of disposing of overhead variances prorates the variance based on the beginning of the reporting period account balances in Cost of Goods Sold, Work-in-Process Inventory and Finished Goods Inventory.

Answer: FALSE Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None 24) In practice, proration of overhead variances among the affected accounts is undertaken when it materially affects inventory valuations and net income.

Answer: TRUE Diff: 2 LO: 13-3 AACSB: Reflective thinking skills Learning Outcome: None

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25) The following information was gathered for Edwards Company: Budgeted direct labor hours Actual direct labor hours Budgeted factory overhead costs Actual factory overhead costs Cost driver of overhead costs

75,000 77,500 $562,500 $540,000 Direct labor hours

Required: A) Compute the budgeted factory overhead rate.

B) Compute the factory overhead applied.

C) Compute the amount of underapplied or overapplied factory overhead.

Answer: A) $562,500/75,000 = $7.50 per direct labor hour B) $7.50 × 77,500 = $581,250 C) $581,250 - $540,000 = $41,250 overapplied Diff: 2 LO: 13-3 AACSB: Analytic skills Learning Outcome: None

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26) Johannes Corporation uses a budgeted factory overhead rate to apply overhead to production. Direct labor costs are the cost driver for overhead costs. The following data are available for the year ending December 31, 2015: Budgeted factory overhead costs Actual factory overhead costs Budgeted direct labor costs Actual direct labor costs Cost of goods sold Direct materials inventory, December 31, 2015 Work-in-process inventory, December 31, 2015 Finished goods inventory, December 31, 2015

$675,000 $1,200,000 $250,000 $482,000 $150,000 $120,000 $100,000 $250,000

Required: A) Compute the budgeted factory overhead rate.

B) Compute the applied overhead costs.

C) What is the overhead variance?

D) Prorate the overhead variance to the appropriate accounts.

Answer: A) $675,000/$250,000 = 270% of direct labor cost B) 270% × $482,000 = $1,301,400 C) $1,301,400 - $1,200,000 = $101,400 overapplied D) Cost of goods sold: $150,000/$500,000 × $101,400 = $30,420 Finished goods inventory: $250,000/$500,000 × $101,400 = $50,700 Work-in-process inventory: $100,000/$500,000 × $101,400 = $20,280 Diff: 2 LO: 13-3 AACSB: Analytic skills Learning Outcome: None

16 .

27) Stanley Company applies overhead based on machine hours. The following data was available: Budgeted factory overhead costs Budgeted machine hours Actual factory overhead costs Actual machine hours Cost of goods sold Direct materials inventory, ending balance Work-in-process inventory, ending balance Finished goods inventory, ending balance

$280,000 20,000 $292,000 19,050 $560,000 $60,000 $190,000 $250,000

Required: A) Compute the budgeted factory overhead rate.

B) Compute the underapplied or overapplied factory overhead.

C) Under the immediate write-off approach to overhead variances, how would you dispose of the overhead variance?

D) If the immediate write-off approach to overhead variances is not used, how would you dispose of the overhead variance?

Answer: A) $280,000/20,000 = $14.00 per machine hour B) $14.00 × 19,050 = $266,700 $292,000 - $266,700 = $25,300 underapplied C) Should add $25,300 to Cost of Goods Sold.

D) Cost of Goods Sold: $560,000/$1,000,000 × $25,300 = $14,168 (Increase account) Work-in-process inventory: $190,000/$1,000,000 × $25,300 = $4,807 (Increase account) Finished goods inventory: $250,000/$1,000,000 × $25,300 = $6,325 (Increase account) Diff: 2 LO: 13-3 AACSB: Analytic skills Learning Outcome: None 13.4 Questions 1) In determining product costs, variable costing and absorption costing differ in the treatment of ________.

A) variable overhead costs B) variable selling costs C) fixed selling costs D) fixed overhead costs Answer: D Diff: 1 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None

17 .

2) Under variable costing, fixed manufacturing overhead costs are a ________ cost. Under absorption costing, fixed manufacturing overhead costs are a ________ cost.

A) product, period B) period, product C) product, product D) period, period Answer: B Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 3) Why is absorption costing more widely used than variable costing?

A) Variable costing is not allowed for tax purposes, but absorption costing is allowed.

B) Variable costing is not allowed for external reports, but absorption costing is allowed.

C) Absorption costing removes the impact of changing inventory levels from the financial results.

D) A and B Answer: D Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 4) Why is variable costing used for internal reports?

A) It can also be used for external reports.

B) It is readily available through most computer systems.

C) It removes the impact of changing inventory levels from the financial results.

D) B and C Answer: D Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 5) Variable costing net income does not equal absorption costing net income due to ________.

A) variable selling costs B) variable manufacturing overhead costs C) fixed manufacturing overhead costs D) variable and fixed manufacturing overhead costs Answer: C Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None

18 .

6) Under absorption costing, fixed overhead costs applied to products will be included in ________.

A) Cost of Goods Sold on the income statement when the products are sold B) Ending Inventory on the balance sheet before the products are sold C) Extraordinary Item on the income statement when the products are sold D) A and B Answer: D Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 7) Variable costing considers fixed manufacturing overhead costs as a(n) ________.

A) inventoriable cost B) product cost C) future cost D) immediate expense Answer: D Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 8) The only difference between the net income between variable costing and absorption costing is the treatment of ________.

A) variable selling costs B) variable administrative costs C) fixed selling costs D) fixed manufacturing overhead costs Answer: D Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 9) Variable costing is also called ________.

A) functional costing B) indirect costing C) absorption costing D) the contribution approach Answer: D Diff: 1 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None

19 .

10) ________ is used for external reporting.

A) Absorption costing B) Variable costing C) Direct costing D) The contribution margin approach Answer: A Diff: 1 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 11) The variable-costing method regards fixed manufacturing costs as a period expense when incurred.

Answer: TRUE Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 12) Variable costing is more important for external reports than internal reports.

Answer: FALSE Diff: 1 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 13) Fixed manufacturing overhead costs are excluded from product costs under absorption costing.

Answer: FALSE Diff: 2 LO: 13-4 AACSB: Reflective thinking skills Learning Outcome: None 13.5 Questions 1) To compute contribution margin under variable costing, we deduct ________ and ________ from sales.

A) variable manufacturing costs; fixed manufacturing costs B) variable selling costs; fixed manufacturing costs C) variable administrative costs; fixed manufacturing overhead costs D) variable manufacturing costs; variable selling and administrative costs Answer: D Diff: 2 LO: 13-5 AACSB: Reflective thinking skills Learning Outcome: None

20 .

2) Product costs for variable costing include direct materials, direct labor and ________.

A) variable selling costs B) fixed manufacturing overhead costs C) variable manufacturing overhead costs D) variable manufacturing overhead costs plus variable selling costs Answer: C Diff: 2 LO: 13-5 AACSB: Reflective thinking skills Learning Outcome: None 3) When the variable costing method is used, fixed factory overhead appears on the income statement as a ________.

A) component of cost of goods sold B) component of cost of goods sold and production volume variance C) production volume variance D) fixed expense Answer: D Diff: 2 LO: 13-5 AACSB: Reflective thinking skills Learning Outcome: None 4) Wininger Incorporated reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$300 $480,000 $220,000 $200,000 $60,000 $80,000 $20,000 $10,000 0 0 400 units

Under variable costing, the product cost per unit is ________.

A) $160 B) $170 C) $200 D) $240 Answer: D Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None 21 .

5) Durante Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$300 $480,000 $220,000 $200,000 $60,000 $80,000 $20,000 $10,000 0 0 400 units

Under variable costing, the cost of finished goods ending inventory is ________.

A) $64,000 B) $68,000 C) $80,000 D) $96,000 Answer: D Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

22 .

6) Kaprelian Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$300 $480,000 $220,000 $200,000 $60,000 $80,000 $20,000 $10,000 0 0 400 units

Under variable costing, the variable manufacturing cost of goods sold is ________.

A) $256,000 B) $272,000 C) $320,000 D) $384,000 Answer: D Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

23 .

7) Jorgensen Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$300 $480,000 $220,000 $200,000 $60,000 $80,000 $20,000 $10,000 0 0 400 units

Under variable costing, the contribution margin is ________.

A) $20,000 B) $40,000 C) $76,000 D) $104,000 Answer: C Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

24 .

8) Gnat Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$300 $480,000 $220,000 $200,000 $60,000 $80,000 $20,000 $10,000 0 0 400 units

Under variable costing, the operating income or loss is ________.

A) $(6,000) B) $(14,000) C) $10,000 D) $41,000 Answer: B Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

25 .

9) Stelloh Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$65 $78,000 $25,000 $35,000 $15,000 $10,000 $3,000 $5,000 0 0 1,200 units

Under variable costing, what is the product cost per unit?

A) $30.00 B) $31.25 C) $35.42 D) $39.00 Answer: B Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

26 .

10) Lorna Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$65 $78,000 $25,000 $35,000 $15,000 $10,000 $3,000 $5,000 0 0 1,200 units

Under variable costing, the cost of ending inventory of finished goods is ________.

A) $35,000 B) $37,500 C) $39,000 D) $42,500 Answer: B Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

27 .

11) Dolhun Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$65 $78,000 $25,000 $35,000 $15,000 $10,000 $3,000 $5,000 0 0 1,200 units

Under variable costing, the variable manufacturing cost of goods sold is ________.

A) $35,000 B) $37,500 C) $39,000 D) $42,500 Answer: B Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

28 .

12) Seidner Industries reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$65 $78,000 $25,000 $35,000 $15,000 $10,000 $3,000 $5,000 0 0 1,200 units

Under variable costing, the contribution margin is ________.

A) $32,000 B) $36,000 C) $37,500 D) $39,500 Answer: C Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

29 .

13) Freund Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$100.00 $100,000 $37,500 $36,000 $25,500 20,000 $2,000 $7,500 0 0 1,200 units

Under variable costing, what is the product cost per unit?

A) $40.00 B) $42.00 C) $45.00 D) $54.09 Answer: C Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

30 .

14) Marian Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$100.00 $100,000 $37,500 $36,000 $25,500 $20,000 $2,000 $7,500 0 0 1,200 units

Under variable costing, what is the cost of the finished goods ending inventory?

A) $48,000 B) $50,000 C) $54,000 D) $58,000 Answer: C Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

31 .

15) Joseph Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$100.00 $100,000 $37,500 $36,000 $25,500 $20,000 $2,000 $7,500 0 0 1,200 units

Under variable costing, what is the variable manufacturing cost of goods sold?

A) $45,000 B) $54,000 C) $101,000 D) $119,000 Answer: A Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None

32 .

16) Comerowski Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$100.00 $100,000 $37,500 $36,000 $25,500 $20,000 $2,000 $7,500 0 0 1,200 units

Under variable costing, what is the total contribution margin?

A) $10,500 B) $31,500 C) $49,500 D) $53,000 Answer: D Diff: 3 LO: 13-5 AACSB: Analytic skills Learning Outcome: None 17) Under variable costing, ________ is NOT an inventoriable cost.

A) direct materials B) variable manufacturing overhead C) variable selling and administrative expenses D) direct labor Answer: C Diff: 2 LO: 13-5 AACSB: Reflective thinking skills Learning Outcome: None 18) The variable-costing method does not include fixed overhead costs in a product's costs.

Answer: TRUE Diff: 2 LO: 13-5 AACSB: Reflective thinking skills Learning Outcome: None

33 .

19) The variable-costing income statement uses the contribution-approach format.

Answer: TRUE Diff: 1 LO: 13-5 AACSB: Reflective thinking skills Learning Outcome: None 20) The variable-costing income statement separates costs into fixed costs and variable costs.

Answer: TRUE Diff: 2 LO: 13-5 AACSB: Reflective thinking skills Learning Outcome: None 21) Gross margin is a subtotal on a variable-costing income statement.

Answer: FALSE Diff: 1 LO: 13-5 AACSB: Reflective thinking skills Learning Outcome: None

34 .

22) Trebowski Company prepared the following absorption-costing income statement for the first year of operations. The income statement is for the fiscal year ended May 31, 2015: Sales (16,000 units) Cost of Goods Sold Gross Margin Selling and administrative expenses Operating income Additional data follow: Variable selling and administrative expenses Variable manufacturing costs Direct materials inventory, May 31, 2015 Work-in-process inventory, May 31, 2015 Units produced Units expected to be produced

$320,000 216,000 104,000 46,000 $58,000

$1.50 per unit $11.00 per unit 0 0 17,500 units 17,500 units

Required: Assume actual fixed costs were equal to budgeted fixed costs. Prepare a variable-costing income statement for the year ended May 31, 2015.

Answer: Sales $320,000 Variable expenses: Manufacturing cost of goods sold ($11 × 16,000) 176,000 Selling and administrative expenses ($1.50 × 16,000) 24,000 Contribution margin 120,000 Fixed expenses: Fixed factory overhead (17,500 × $40,000/16,000) 43,750 Fixed selling and administrative expenses 22,000 Operating income $54,250 Diff: 2 LO: 13-5 AACSB: Analytic skills Learning Outcome: None 13.6 Questions 1) A direct-costing income statement has a subtotal for ________ whereas an absorption-costing income statement has a subtotal for ________.

A) gross profit; contribution margin B) contribution margin; gross profit C) cost of goods sold; variable cost of goods sold D) cost of goods manufactured; variable cost of goods manufactured Answer: B Diff: 1 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None

35 .

2) Product costs for absorption costing include direct materials, direct labor and ________.

A) fixed manufacturing overhead costs B) variable manufacturing overhead costs C) fixed and variable selling costs D) fixed and variable manufacturing overhead costs Answer: D Diff: 2 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None 3) The production volume variance appears when ________.

A) the actual production volume equals the expected production volume used in computing the fixed overhead rate B) the actual production volume deviates from the expected production volume used in computing the fixed overhead rate C) the actual production volume deviates from the expected production volume used in computing the variable overhead rate D) the actual production volume equals the expected production volume used in computing the variable overhead rate Answer: B Diff: 2 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None 4) Absorption costing assigns ________ to the product.

A) variable manufacturing costs only; not fixed manufacturing costs B) fixed manufacturing costs only; not variable manufacturing costs C) variable manufacturing costs and variable selling costs D) variable and fixed manufacturing costs Answer: D Diff: 2 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None 5) Fixed factory overhead costs appear on the absorption-costing income statements as ________.

A) a fixed expense B) part of cost of goods sold C) a production volume variance D) part of cost of goods sold and a production volume variance Answer: D Diff: 2 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None

36 .

6) BOTH variable-costing and absorption-costing include ________ as product costs.

A) indirect manufacturing costs B) variable selling and administrative expenses C) fixed selling and administrative expenses D) direct manufacturing costs Answer: D Diff: 2 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None 7) Andy Basil Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Production volume variance Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$225.00 $360,000 $176,000 $100,000 $44,000 $80,000 $20,000 $10,000 0 0 0 400 units

Under absorption costing, what is the Cost of Goods Sold?

A) $256,000 B) $272,000 C) $320,000 D) $360,000 Answer: C Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

37 .

8) Ambrose Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Production volume variance Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$225.00 $360,000 $176,000 $100,000 $44,000 $80,000 $20,000 $10,000 0 0 0 400 units

Under absorption costing, what is the Gross Profit?

A) $0 B) $40,000 C) $84,000 D) $104,000 Answer: B Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

38 .

9) Central Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Production volume variance Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$225.00 $360,000 $176,000 $100,000 $44,000 $80,000 $20,000 $10,000 0 0 0 400 units

Under absorption costing, what is the operating income or loss?

A) $(6,000) B) $(70,000) C) $10,000 D) $20,000 Answer: C Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

39 .

10) Union Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Production volume variance Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$225.00 $315,000 $160,000 $100,000 $60,000 $80,000 $20,000 $30,000 0 0 0 600 units

Under absorption costing, what is the product cost per unit?

A) $130.00 B) $160.00 C) $200.00 D) $225.00 Answer: C Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

40 .

11) Medved Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Production volume variance Ending inventory, Direct Materials Ending inventory, Work-in-process Ending inventory, Finished Goods

$225.00 $315,000 $160,000 $100,000 $60,000 $80,000 $20,000 $30,000 0 0 0 600 units

Under absorption costing, what is the cost of the ending inventory of finished goods?

A) $78,000 B) $96,000 C) $120,000 D) $135,000 Answer: C Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

41 .

12) Jantore Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Production volume variance

$65.00 $78,000 $25,000 $42,000 $17,000 $15,000 $3,000 $5,000 0

The company sold one-half of the units it produced. Under absorption costing, what is the cost of goods sold?

A) $30,000 B) $42,000 C) $49,500 D) $78,000 Answer: C Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

42 .

13) Jimmy Industries Inc. reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Gross profit Production volume variance

$65.00 $78,000 $25,000 $42,000 $17,000 ? $3,000 $5,000 $30,000 0

The company sold one-half of the units it produced. The company uses absorption costing. Fixed factory overhead costs included in the ending inventory of finished goods are ________.

A) 0 B) $6,000 C) $8,400 D) $12,000 Answer: B Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

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14) Couric Company reported the following information about the production and sale of its only product during the first month of operations: Selling price per unit Sales Direct materials used Direct labor Variable factory overhead Fixed factory overhead Variable selling and administrative expenses Fixed selling and administrative expenses Units produced Units sold Production volume variance

$117.00 $117,000 $37,500 $63,000 $25,500 $80,000 $4,500 $7,500 2,000 units 1,000 units $0

Under absorption costing, what is the Cost of Goods Sold?

A) $63,000 B) $103,000 C) $126,000 D) $206,000 Answer: B Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None 15) In absorption costing, sales revenue less cost of goods sold is equal to ________.

A) contribution margin B) operating margin C) operating income D) gross margin Answer: D Diff: 2 LO: 13-6 AACSB: Analytic skills Learning Outcome: None 16) In absorption costing, costs are separated into two categories of ________.

A) fixed costs and variable costs B) variable costs and manufacturing costs C) fixed costs and manufacturing costs D) manufacturing costs and nonmanufacturing costs Answer: D Diff: 2 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None

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17) Absorption-costing income is not affected by differences in expected volume and actual volume.

Answer: FALSE Diff: 2 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None 18) Under absorption-costing, fixed factory overhead costs appear only in cost of goods sold.

Answer: FALSE Diff: 2 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None 19) In an absorption-costing income statement, revenue less variable manufacturing costs is equal to the gross margin.

Answer: FALSE Diff: 1 LO: 13-6 AACSB: Reflective thinking skills Learning Outcome: None

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20) Campbell Company gathered the following information for the year ended December 31, 2015: Units produced Units expected to be produced Units sold Direct labor Direct materials used Fixed selling and administrative expenses Variable selling and administrative expenses Fixed manufacturing overhead Variable manufacturing overhead Direct materials inventory, December 31, 2015 Direct materials inventory, December 31, 2014 Work-in-process inventory, December 31, 2015 Work-in-process inventory, December 31, 2014 Finished goods inventory, December 31, 2014

45,000 45,000 43,200 $137,200 $126,400 $51,000 $58,000 $83,250 $73,900 0 0 0 0 0

Required: A) Under absorption costing, what is the cost of the finished goods inventory on December 31, 2015?

B) Under variable costing, what is the cost of the finished goods inventory on December 31, 2015?

Answer: A) ($126,400 + $137,200 + $73,900 + $83,250)/45,000 = $9.35 $9.35 × 1,800 = $16,830 B) ($126,400 + $137,200 + $73,900)/45,000 = $7.50 $7.50 × 1,800 = $13,500 Diff: 2 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

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21) Smith Company gathered the following information for the year ended April 30, 2015: Units produced Units expected to be produced Units sold Direct labor Direct materials used Fixed selling and administrative expenses Fixed manufacturing overhead Variable manufacturing overhead Direct materials inventory, April 30, 2015 Direct materials inventory, April 30, 2014 Work-in-process inventory, April 30, 2015 Work-in-process inventory, April 30, 2014 Finished goods inventory, April 30, 2014

11,200 11,200 8,400 $99,600 $155,000 $64,800 $52,640 $70,200 0 0 0 0 0

Required: A) Under variable costing, what is the cost of the finished goods inventory on April 30, 2015?

B) Under absorption costing, what is the cost of the finished goods inventory on April 30, 2015?

Answer: A) ($155,000 + $99,600 + $70,200)/11,200 = $29.00 per unit $29.00 × 2,800 = $81,200 B) ($155,000 + $99,600 + $70,200 + $52,640)/11,200 = $33.70 $33.70 × 2,800 = $94,360 Diff: 2 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

47 .

22) The following data are available for Atkinson Company for the year ended December 31, 2015: Sales Sales price Actual variable manufacturing costs Actual fixed manufacturing costs Actual variable nonmanufacturing costs Actual fixed nonmanufacturing costs Work-in-process inventory, January 1, 2015 Finished goods inventory, January 1, 2015 Direct materials inventory, January 1, 2015 Work-in-process inventory, December 31, 2015 Direct materials inventory, December 31, 2015 Expected production Actual production

38,000 units $50 per unit $1,400,000 $228,000 $76,000 $135,000 0 0 0 0 0 40,000 units 40,000 units

Required: A) Using the variable-costing approach, prepare an income statement for the year ended December 31, 2015. Assume actual fixed costs were equal to budgeted fixed costs.

B) Using the absorption-costing approach, prepare an income statement for the year ended December 31, 2015. Assume actual fixed costs were equal to budgeted fixed costs.

Answer: A) Sales (38,000 × $50) Variable expenses: Manufacturing ($1,400,000/40,000 × 38,000) Nonmanufacturing Contribution Margin Fixed expenses: Manufacturing Nonmanufacturing Operating income

$1,900,000 1,330,000 76,000 494,000 228,000 135,000 $131,000

B) Sales Cost of goods sold ($1,628,000/40,000 × 38,000) Gross margin Nonmanufacturing expenses Operating income Diff: 3 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

$1,900,000 1,546,600 353,400 211,000 $142,400

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23) Randy Company has obtained the following data for the first year of operations: Sales Direct materials and labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Units produced Units sold Units expected to be produced

$2,868,750 $1,125,000 $431,250 $656,250 $337,500 $131,250 125,000 112,500 125,000

Required: A) Using variable costing, prepare an income statement for the first year of operations. Assume budgeted fixed costs were equal to actual fixed costs.

B) Using absorption costing, prepare an income statement for the first year of operations. Assume budgeted fixed costs were equal to actual fixed costs.

Answer: A) Sales $2,868,750 Variable expenses: Manufacturing cost of goods sold 1,400,625 Selling expenses 337,500 Contribution margin 1,130,625 Fixed expenses: Fixed factory overhead 656,250 Selling expenses 131,250 Operating income $343,125 B) Sales Cost of goods sold Gross margin Selling expenses Operating income Diff: 2 LO: 13-6 AACSB: Analytic skills Learning Outcome: None

$2,868,750 1,991,250 877,500 468,750 $408,750

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24) The variable costing income statement for Bouve Company is seen below: Sales (6,000 units × $35) Variable expenses: Beginning inventory (680 units × $20) Variable cost of goods manufactured (6,400 units × $20) Available for sale Less: Ending inventory (1,080 units × $20) Variable manufacturing cost of goods sold Variable selling and administrative expenses Contribution margin Fixed expenses: Fixed factory overhead Fixed selling and administrative expenses Operating income

$210,000 $13,600 128,000 141,600 21,600 120,000 24,000 66,000 20,000 15,300 $30,700

Required: Prepare an absorption-costing income statement for the same period of time. Assume that actual fixed costs were equal to budgeted fixed costs and the budgeted fixed overhead rate was constant over the period examined. Assume the production volume variance equals zero.

Answer: Sales $210,000 Cost of goods sold 138,750 Gross margin 71,250 Selling and administrative expenses 39,300 Operating income $31,950 Diff: 2 LO: 13-6 AACSB: Analytic skills Learning Outcome: None 13.7 Questions 1) Which of the following statements is FALSE? A) The expected variable overhead costs per unit used in the flexible budget are equal to the variable overhead costs per unit used in product costing.

B) If the actual volume of production equals the expected volume of production, the variable overhead costs per unit are the same for product costing and budgeting.

C) If the actual volume of production exceeds the expected volume of production, the variable overhead costs per unit are different for product costing and budgeting.

D) If the actual volume of production exceeds the expected volume of production, the variable overhead costs per unit are the same for product costing and budgeting.

Answer: C Diff: 2 LO: 13-7 AACSB: Reflective thinking skills Learning Outcome: None

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2) If the actual volume of production differs from the expected volume of production, the same variable overhead costs per unit are used for ________ and ________ purposes.

A) budgeting; employee motivation B) budgeting; product costing C) flexible budgets; employee hiring D) planning; employee hiring Answer: B Diff: 2 LO: 13-7 AACSB: Reflective thinking skills Learning Outcome: None 3) If the actual volume of production differs from the expected volume of production, the fixed overhead costs used for budgeting and product costing are ________.

A) the same B) different C) indeterminate D) changing over the accounting period Answer: B Diff: 2 LO: 13-7 AACSB: Reflective thinking skills Learning Outcome: None 4) The absorption costing approach applies fixed overhead costs to products as though they have a ________ pattern.

A) mixed cost behavior B) variable cost behavior C) step cost behavior D) fixed cost behavior Answer: B Diff: 2 LO: 13-7 AACSB: Reflective thinking skills Learning Outcome: None 5) In absorption costing, production volume does NOT affect the ________.

A) amount of fixed overhead costs applied to products B) amount of variable overhead costs applied to products C) budgeted amount of fixed overhead costs D) amount of direct materials costs applied to products Answer: C Diff: 2 LO: 13-7 AACSB: Reflective thinking skills Learning Outcome: None

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6) Under absorption costing, fixed manufacturing overhead costs appear on two places on the income statement that include ________ and ________.

A) usage variance for fixed overhead costs; cost of goods sold B) production volume variance; cost of goods sold C) efficiency variance for fixed overhead costs; production volume variance D) efficiency variance for fixed overhead costs; cost of goods sold Answer: B Diff: 2 LO: 13-7 AACSB: Reflective thinking skills Learning Outcome: None 13.8 Questions 1) A favorable production volume variance indicates ________.

A) an effective use of manufacturing capacity B) an ineffective use of manufacturing capacity C) that the use of manufacturing capacity is lower than expected D) that the use of manufacturing capacity is higher than expected Answer: D Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 2) When the actual volume of production exceeds the expected volume of production, the production volume variance is ________ and fixed overhead is ________.

A) favorable; underapplied B) favorable; overapplied C) unfavorable; underapplied D) unfavorable; overapplied Answer: B Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 3) An unfavorable production volume variance ________ a company's operating income.

A) increases B) decreases C) does not affect D) it depends on the size of the variance Answer: B Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None

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4) An unfavorable production volume variance ________ manufacturing costs on the ________ income statement.

A) decreases; variable costing B) increases; variable costing C) decreases; absorption costing D) increases; absorption costing Answer: D Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 5) The following information was compiled by Gorgeous Incorporated: Expected volume of production Actual volume of production Budgeted fixed overhead costs(for 50,000 budgeted units) Actual fixed overhead costs Actual variable overhead costs Budgeted variable overhead costs(for 50,000 budgeted units)

50,000 units 47,500 units $400,000 $415,000 $790,000 $855,000

Assume the cost-allocation base for overhead costs is units of production. What is the production volume variance?

A) $15,000 Favorable B) $15,000 Unfavorable C) $20,000 Favorable D) $20,000 Unfavorable Answer: D Diff: 3 LO: 13-8 AACSB: Analytic skills Learning Outcome: None 6) The production volume variance is the difference between ________.

A) expected fixed overhead costs and actual fixed overhead costs B) expected fixed overhead costs and budgeted fixed overhead costs C) budgeted fixed overhead costs and actual fixed overhead costs D) budgeted fixed overhead costs and applied fixed overhead costs Answer: D Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None

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7) When the actual volume is less than the expected volume, the production volume variance is ________ because the usage of the facilities is ________.

A) favorable; higher than expected B) unfavorable; lower than expected C) favorable; lower than expected D) unfavorable; higher than expected Answer: B Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 8) When the actual volume is less than the expected volume, the fixed overhead costs are ________.

A) favorable B) overapplied C) overbudgeted D) underapplied Answer: D Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 9) The following information was compiled by Gidget Incorporated: Expected volume of production Actual volume of production Budgeted fixed overhead costs(for 50,000 budgeted units) Actual fixed overhead costs Actual variable overhead costs Budgeted variable overhead costs(for 50,000 budgeted units)

50,000 units 47,000 units $200,000 $220,000 $790,000 $855,000

Assume the cost-allocation base for overhead costs is units of production. What is the production volume variance?

A) $6,000 Unfavorable B) $12,000 Unfavorable C) $20,000 Favorable D) $20,000 Unfavorable Answer: B Diff: 3 LO: 13-8 AACSB: Analytic skills Learning Outcome: None

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10) The production volume variance is calculated by the difference between actual volume and applied volume.

Answer: FALSE Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 11) The production volume variance measures the difference between applied and budgeted fixed overhead.

Answer: TRUE Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 12) When the actual production volume exceeds the expected production volume, fixed overhead is underapplied.

Answer: FALSE Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 13) When the actual production volume exceeds the expected production volume, the production volume variance is favorable.

Answer: TRUE Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 14) There is no production volume variance when expected production volume equals actual production volume.

Answer: TRUE Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 15) An unfavorable production volume variance decreases the manufacturing costs shown on the income statement.

Answer: FALSE Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None

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16) Most companies consider production volume variances to be beyond a manager's immediate control.

Answer: TRUE Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 17) Variable overhead costs may have a production volume variance.

Answer: FALSE Diff: 2 LO: 13-8 AACSB: Reflective thinking skills Learning Outcome: None 13.9 Questions 1) The difference in variable costing operating income and absorption costing operating income equals ________.

A) the change in Work-In-Process Inventories times the budgeted fixed overhead rate B) the change in Finished Goods Inventories times the budgeted fixed overhead rate C) the change in Raw Materials Inventories times the budgeted variable overhead rate D) the change in Work-In-Process Inventories times the budgeted variable overhead rate Answer: B Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 2) Steve Harvey Company uses absorption costing and reports the following information: Variances Production Volume Variance Flexible Budget Variance for Fixed Factory Overhead Flexible Budget Variance for Variable Overhead Flexible Budget Variance for Direct Materials

$70,000 Unfavorable $100,000 Unfavorable $40,000 Favorable $20,000 Favorable

Before consideration of the above variances, the company has operating income of $1,500,000. What is the operating income after considering the above variances?

A) $1,330,000 B) $1,390,000 C) $1,400,000 D) $1,560,000 Answer: B Diff: 3 LO: 13-9 AACSB: Analytic skills Learning Outcome: None

56 .

3) Beck Company has determined the following variances at the end of the current year: Variances Production Volume Variance Flexible Budget Variance for Direct Materials Flexible Budget Variance for Direct Labor Flexible Budget Variance for Fixed Overhead Flexible Budget Variance for Variable Overhead

$100,000 Favorable $10,000 Unfavorable $22,000 Unfavorable $30,000 Favorable $25,000 Unfavorable

Before consideration of the above variances, the company has operating income of $1,400,000. What is the operating income after considering the above variances?

A) $1,343,000 B) $1,473,000 C) $1,500,000 D) $1,530,000 Answer: B Diff: 3 LO: 13-9 AACSB: Analytic skills Learning Outcome: None 4) Jorgensen Company has determined the following variances at the end of the current year: Variances Production Volume Variance Flexible Budget Variance for Direct Materials Flexible Budget Variance of Direct Labor Flexible Budget Variance for Fixed Overhead Flexible Budget Variance for Variable Overhead

$200,000 Favorable $10,000 Unfavorable $2,000 Unfavorable $3,000 Favorable $2,000 Unfavorable

Before consideration of the above variances, the company has operating income of $1,000,000. What is the operating income after considering the above variances?

A) $986,000 B) $989,000 C) $1,189,000 D) $1,200,000 Answer: C Diff: 3 LO: 13-9 AACSB: Analytic skills Learning Outcome: None

57 .

5) When the units sold are greater than the units produced, variable costing income is ________ absorption costing income. When the units sold are less than the units produced, variable costing income is ________ absorption costing income.

A) equal to; equal to B) less than; greater than C) greater than; less than D) cannot be determined; cannot be determined Answer: C Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 6) When the number of units sold exceeds the number of units produced, net income under variable costing ________ net income under absorption costing.

A) is less than B) exceeds C) equals D) not enough information to determine Answer: B Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 7) When finished goods inventories decrease over an operating period, net income under variable costing ________ net income under absorption costing.

A) exceeds B) is less than C) equals D) not enough information to determine Answer: A Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 8) There is no difference between variable-costing operating income and absorption-costing operating income if there is no ________.

A) beginning inventory of finished goods B) ending inventory of finished goods C) variable overhead costs D) change in finished goods inventory during the period Answer: D Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 58 .

9) Why do companies use variable costing for internal financial statements?

A) Production volume variance does not affect variable costing income but it does affect absorption costing income.

B) Variable costing does not create an incentive to produce additional unneeded units to increase net income.

C) A sales-oriented company wants to track the effect of sales on net income.

D) All of the above Answer: D Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 10) The production volume variance is a line item on the ________ income statement.

A) contribution approach B) variable costing C) absorption costing D) absorption costing and variable costing Answer: C Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 11) Underapplied fixed factory overhead can be explained by ________ variance and ________ variance.

A) production volume; fixed overhead efficiency B) fixed overhead spending; fixed overhead efficiency C) fixed overhead spending; fixed overhead flexible budget D) fixed overhead spending; production volume Answer: D Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 12) The fixed overhead spending variance is also called the ________ variance.

A) production volume B) fixed overhead efficiency C) fixed overhead flexible budget D) fixed overhead usage Answer: C Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None

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13) The following information was compiled by Fabulous Incorporated: Expected volume of production Actual volume of production Budgeted fixed overhead costs (for 50,000 budgeted units) Actual fixed overhead costs Actual variable overhead costs Budgeted variable overhead costs (for 50,000 budgeted units)

50,000 units 47,500 units $400,000 $415,000 $790,000 $855,000

Assume the cost-allocation base for overhead costs is units of production. What is the fixed overhead flexible budget variance?

A) $15,000 Favorable B) $15,000 Unfavorable C) $20,000 Favorable D) $20,000 Unfavorable Answer: B Diff: 3 LO: 13-9 AACSB: Analytic skills Learning Outcome: None 14) The following information was compiled by Frank Ironman Incorporated: Expected volume of production Actual volume of production Budgeted fixed overhead costs (for 50,000 budgeted units) Actual fixed overhead costs Actual variable overhead costs Budgeted variable overhead costs (for 50,000 budgeted units)

50,000 units 47,000 units $200,000 $220,000 $790,000 $855,000

Assume the cost allocation base for overhead costs is units of production. What is the fixed overhead flexible budget variance?

A) $6,000 Favorable B) $12,000 Unfavorable C) $20,000 Favorable D) $20,000 Unfavorable Answer: D Diff: 3 LO: 13-9 AACSB: Analytic skills Learning Outcome: None

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15) Which of the following variance(s) is(are) computed for fixed overhead costs?

A) production volume variance B) flexible budget variance C) efficiency variance D) production volume variance and flexible budget variance Answer: D Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 16) Johnson Company has the following information available at the end of the fiscal year: Finished goods inventory, January 1, 2015 Finished goods inventory, December 31, 2015 Work in process inventory, January 1, 2015 Work in process inventory, December 31, 2015 Raw materials inventory, January 1, 2015 Raw materials inventory, December 31, 2015 Actual fixed overhead cost rate Actual variable overhead cost rate Budgeted fixed overhead cost rate Budgeted variable overhead cost rate

12,000 units 14,000 units 10,000 units 11,000 units 1,000 units 5,000 units $2.05 per unit $3.10 per unit $2.00 per unit $3.00 per unit

Assume operating income under absorption costing is $100,000. What is the difference in operating income between absorption costing and variable costing?

A) $2,000 B) $4,000 C) $6,000 D) $10,000 Answer: B Diff: 3 LO: 13-9 AACSB: Analytic skills Learning Outcome: None 17) If a company uses the variable-costing approach, a manager may be tempted to produce unneeded units to increase operating income.

Answer: FALSE Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None

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18) Underapplied and overapplied fixed overhead has two components that include a production-volume variance and a fixed overhead flexible budget variance.

Answer: TRUE Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None 19) When sales exceed production, variable-costing income is greater than absorption-costing income.

Answer: TRUE Diff: 2 LO: 13-9 AACSB: Reflective thinking skills Learning Outcome: None

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Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 14 Job-Order Costing and Process-Costing Systems 14.1 Questions 1) Product costing is an averaging process. This statement pertains to ________.

A) job order costing only B) process costing only C) activity-based costing only D) all of the above Answer: D Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 2) Nicholson Company uses job order costing. Supporting documents for the Work-In-Process Inventory account do NOT include ________.

A) labor time tickets B) time cards C) materials requisition forms D) schedule of actual factory overhead costs Answer: D Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 3) Three types of costs are accumulated on job-cost records that include direct materials, ________ and ________.

A) direct labor; actual factory overhead B) direct labor; applied factory overhead C) variable factory overhead; fixed factory overhead D) direct labor; budgeted factory overhead Answer: B Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

1 .

4) The ________ system is better suited for a single physical unit or a few similar units.

A) process-costing B) job-order costing C) activity-based costing D) activity-based management Answer: B Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 5) In job-order costing, all the costs for a particular product or batch of products are recorded on the ________.

A) materials requisition form B) labor time ticket C) time card D) job-cost record Answer: D Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 6) Hybrid-costing systems use a combination of ________.

A) job-order costing and process costing ideas B) activity-based costing and absorption costing C) job-order costing and activity-based costing D) job-order costing and costing for service organizations Answer: A Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 7) Source documents used in job-order costing include ________.

A) labor time tickets B) material requisitions C) time cards D) all of the above Answer: D Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 2 .

8) The ________ account is supported by a file of job-cost records for partially completed jobs.

A) Direct Materials Inventory B) Finished Goods Inventory C) Cost of Goods Sold D) Work-In-Process Inventory Answer: D Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 9) The ________ account is supported by a file of job-cost records for completed jobs.

A) Direct Materials Inventory B) Work-in-process Inventory C) Finished Goods Inventory D) Factory Overhead Control Answer: C Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 10) The centerpiece of a job-order costing system is the balanced scorecard.

Answer: FALSE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 11) Process costing averages costs over large numbers of nearly identical products.

Answer: TRUE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 12) Two extremes of product-costing are job-order costing and normal-order costing.

Answer: FALSE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

3 .

13) Companies that use job-order costing normally have uniform production steps.

Answer: FALSE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 14) Job-order costing only applies to specific jobs with a single physical unit.

Answer: FALSE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 15) Source documents used in job-order costing include material requisition forms and time cards.

Answer: TRUE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 16) Some companies use hybrid costing, which blends the ideas from both job costing and process costing.

Answer: TRUE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 17) In job-order costing, time cards record the materials used in particular jobs.

Answer: FALSE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 18) Each job has its own job-cost record in a job-costing system.

Answer: TRUE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 4 .

19) In job-order costing, actual factory overhead rates are used to apply factory overhead costs to jobs.

Answer: FALSE Diff: 1 LO: 14-1 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 20) Carlson Company has two departments. Factory overhead costs are applied based on direct labor cost in Department A and machine hours in Department B. The following information is available: Budgeted Costs Direct labor cost Machine hours Factory overhead cost

Dept. A $150,000 51,000 $225,000

Dept. B $165,000 20,000 $180,000

Actual data for Job #10 are as follows: Actual Costs Direct materials requisitioned Direct labor cost Machine hours

Dept. A $10,000 $11,000 5,000

Dept. B $16,000 $14,000 3,000

Required: A) Compute the budgeted factory overhead rate for Department A. B) Compute the budgeted factory overhead rate for Department B. C) What is the total overhead cost for Job #10?

D) If Job #10 consists of 50 units of product, what is the unit cost of this job?

Answer: A) $225,000/$150,000 = 150% of direct labor cost B) $180,000/20,000 = $9.00 per machine hour C) ($11,000 × 150%) + ($9.00 × 3,000) = $43,500 D) $10,000 + $16,000 + $11,000 + $14,000 + $43,500 = $94,500 $94,500/50 = $1,890 per unit Diff: 2 LO: 14-1 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

5 .

14.2 Questions 1) In a job-order system, the actual factory overhead costs incurred are $150,000. Applied factory overhead costs are $160,000. What entry is needed to dispose of the overhead variance? Use the immediate write-off method.

A) Debit Factory Department Overhead Control, Credit Factory Department Overhead Applied B) Debit Factory Department Overhead Applied, Credit Cost of Goods Sold C) Debit Factory Department Overhead Applied, Credit Finished Goods Inventory D) Debit Factory Department Overhead Control, Credit Cost of Goods Sold Answer: D Diff: 2 LO: 14-2 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 2) In a job-order system, which of the following statements is TRUE? A) The Work-in-Process Inventory account is increased by the actual factory overhead costs incurred for a job.

B) The Work-in-Process Inventory account is increased by the applied factory overhead costs for a job.

C) The Work-In-Process Inventory account is decreased by the budgeted amount of factory overhead costs for a job.

D) The Work-In-Process Inventory account is increased by the budgeted amount of factory overhead costs for a job.

Answer: B Diff: 1 LO: 14-2 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 3) In a job-order system, accountants apply factory overhead costs to Work-In-Process Inventory by using the ________. The company does not use activity-based costing.

A) actual overhead costs B) budgeted indirect costs for value chain functions C) budgeted overhead rate D) actual overhead rate Answer: C Diff: 2 LO: 14-2 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

6 .

4) Conoco Company has an actual factory overhead cost of Depreciation Expense—Equipment of $5,000.

Job-order costing is used. The journal entry to record this actual cost would include ________.

A) Debit to Factory Department Overhead Control $5,000 and Credit to Accumulated Depreciation— Equipment $5,000 B) Debit to Depreciation Expense—Equipment $5,000 and Credit to Accumulated Depreciation— Equipment $5,000 C) Debit Work-In-Process Inventory $5,000 and Credit to Factory Department Overhead Control $5,000 D) Debit to Work-In-Process Inventory $5,000 and Credit to Factory Department Overhead Applied $5,000 Answer: A Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 5) Direct materials of $10,000 are requisitioned by the production supervisor for the production area. Joborder costing is used. The journal entry to record this transaction is: A) Direct Materials Inventory $10,000 Accounts payable $10,000 B) Direct Materials Inventory $10,000 Work-In-Process Inventory $10,000 C) Work-In-Process Inventory $10,000 Direct Materials Inventory $10,000 D) Finished Goods Inventory $10,000 Direct Materials Inventory $10,000 Answer: C Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 6) In job-order costing, a Debit to Work-In-Process Inventory is used to record ________.

A) a sale of merchandise B) a purchase of direct materials C) the cost of goods completed D) a requisition of direct materials for production area Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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7) In job-order costing, a Debit to Direct Materials Inventory is used to record ________.

A) a requisition of direct materials for production B) cost of goods completed C) a sale of goods D) a purchase of direct materials Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 8) Job-order costing is used. When direct materials are requisitioned for production, which of the following accounts is credited?

A) Work-In-Process Inventory B) Accounts Payable C) Finished Goods Inventory D) Direct Materials Inventory Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 9) Job-order costing is used. Which of the following accounts is debited when direct labor costs are incurred?

A) Work-In-Process Inventory B) Finished Goods Inventory C) Cost of Goods Sold D) Accrued Payroll Answer: A Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

8 .

10) Melody Scott Company uses a job-order costing system and has the following data available: Beginning Direct Materials Inventory Beginning Work-In-Process Inventory Beginning Finished Goods Inventory Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred Factory overhead incurred Cost of goods completed Cost of Goods Sold Overhead application rate (based on direct labor cost)

$26,000 $64,000 $58,000 $148,000 $82,000 $130,000 $146,000 $292,000 $256,000 130%

The journal entry to record the actual factory overhead costs incurred would include a ________.

A) Debit to Factory Department Overhead Control for $146,000 B) Credit to Factory Department Overhead Control for $169,000 C) Debit to Work-In-Process Inventory for $146,000 D) Credit to Work-In-Process Inventory for $169,000 Answer: A Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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11) Bernard Bassuluchi Company uses a job-order costing system and has the following data available: Beginning Direct Materials Inventory Beginning Work-In-Process Inventory Beginning Finished Goods Inventory Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred Factory overhead incurred Cost of goods completed Cost of Goods Sold Overhead application rate (based on direct labor cost)

$26,000 $64,000 $58,000 $148,000 $82,000 $130,000 $146,000 $292,000 $256,000 125%

The journal entry to record the purchase of direct materials would include a ________.

A) Debit to Work-In-Process Inventory for $82,000 B) Debit to Direct Materials Inventory for $148,000 C) Credit to Direct Materials Inventory for $148,000 D) Credit to Work-In-Process Inventory for $148,000 Answer: B Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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12) Brankovich Company uses a job-order costing system and has the following data available: Beginning Direct Materials Inventory Beginning Work-In-Process Inventory Beginning Finished Goods Inventory Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred Factory overhead incurred Cost of goods completed Cost of Goods Sold Overhead application rate (based on direct labor cost)

$26,000 $64,000 $58,000 $148,000 $90,000 $130,000 $146,000 $292,000 $256,000 125%

What is the cost of the ending inventory of Direct Materials?

A) $84,000 B) $90,000 C) $108,000 D) $174,000 Answer: A Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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13) Williams Company uses a job-order costing system and has the following data available: Beginning Direct Materials Inventory Beginning Work-In-Process Inventory Beginning Finished Goods Inventory Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred Factory overhead incurred Cost of goods completed Cost of Goods Sold Overhead application rate (based on direct labor cost)

$26,000 $64,000 $58,000 $148,000 $82,000 $130,000 $146,000 $292,000 $256,000 125%

The journal entry to record the cost of goods completed would include a ________.

A) Credit to Finished Goods Inventory for $292,000 B) Credit to Cost of Goods Sold for $256,000 C) Debit to Work-In-Process Inventory for $256,000 D) Credit to Work-In-Process Inventory for $292,000 Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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14) Gerald Eiche Company uses a job-order costing system and has the following data available: Beginning Direct Materials Inventory Beginning Work-In-Process Inventory Beginning Finished Goods Inventory Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred Factory overhead incurred Cost of goods completed Cost of Goods Sold Overhead application rate (based on direct labor cost)

$26,000 $64,000 $58,000 $148,000 $82,000 $130,000 $146,000 $292,000 $260,000 125%

The journal entry to record the cost of goods sold would include a ________.

A) Debit to Finished Goods Inventory for $292,000 B) Credit to Finished Goods Inventory for $260,000 C) Credit to Work-In-Process Inventory for $260,000 D) Credit to Cost of Goods Sold for $292,000 Answer: B Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 15) In job-order costing, a debit to Finished Goods Inventory is used to record the ________.

A) requisition of direct materials B) cost of goods completed C) sale of merchandise D) purchase of direct materials Answer: B Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 16) In job-order costing, a debit to Work-In-Process Inventory is used to record ________.

A) a requisition of direct materials for a job B) the cost of labor used by a job C) factory overhead applied to a job D) all of the above Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 13 .

17) In job-order costing, the journal entry to record the application of factory overhead costs to jobs includes a Debit to ________.

A) Factory Department Overhead Control B) Factory Department Overhead Applied C) Finished Goods Inventory D) Work-In-Process Inventory Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 18) In job-order costing, the journal entry to record the transfer of completed goods from the production area would include a Credit to ________.

A) Cost of Goods Sold B) Finished Goods Inventory C) Factory Department Overhead Control D) Work-In-Process Inventory Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 19) A home builder just completed the construction of a new home. The home builder uses job-order costing. Costs of $200,000 were incurred to construct the home. The home is ready for sale and is listed with a real estate broker. Which of the following journal entries is necessary when the home is completed?

A) Work-In-Process Inventory $200,000 Direct Materials Inventory $200,000 B) Finished Goods Inventory $200,000 Direct Materials Inventory $200,000 C) Finished Goods Inventory $200,000 Work-In-Process Inventory $200,000 D) Cost of Goods Sold $200,000 Finished Goods Inventory $200,000 Answer: C Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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20) What journal entry is necessary to apply factory overhead to jobs in job-order costing?

A) Work-In-Process Inventory XXX Factory Department Overhead Applied XXX B) Finished Goods Inventory XXX Factory Department Overhead Applied XXX C) Factory Department Overhead Control XXX Various accounts XXX D) Work-In-Process Inventory XXX Factory Department Overhead Control XXX Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 21) A company uses job-order costing. At the end of the year, applied factory overhead costs were $10,000 and actual factory overhead costs were $12,000. The company uses the immediate write-off method to dispose of variances. Which of the following journal entries is necessary under the immediate write-off method?

A) Factory Department Overhead Control $2,000 Cost of Goods Sold $2,000 B) Factory Department Overhead Control $2,000 Finished Goods Inventory $2,000 C) Cost of Goods Sold $2,000 Factory Department Overhead Applied $2,000 D) Cost of Goods Sold $2,000 Factory Department Overhead Control $2,000 Answer: D Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 22) In job-order costing, the journal entry to record the requisition of direct materials for production would include a Debit to Direct Materials Inventory.

Answer: FALSE Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

15 .

23) In job-order costing, the journal entry to record actual factory overhead costs incurred would include a Credit to Factory Department Overhead Control.

Answer: FALSE Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 24) In job-order costing, the journal entry to record the completion of units in process would include a Debit to Finished Goods Inventory.

Answer: TRUE Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 25) In job-order costing, the journal entry to record applied overhead costs would include a Debit to Work-in-Process Inventory.

Answer: TRUE Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 26) In job-order costing, the journal entry to record the completion of goods would include a Debit to Cost of Goods Sold.

Answer: FALSE Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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27) Carpenter Company uses job-order costing. The following is a summary of factory operations: Direct materials purchased on account Direct materials requisitioned Direct labor costs incurred Factory overhead costs incurred (Depreciation Expense only) Cost of goods completed Cost of goods sold Sales on account Factory overhead applied

$125,000 $110,000 $256,000 $150,000 $515,000 $378,000 $430,000 ?

Factory overhead costs are applied at 50% of direct labor costs.

Required: A) Prepare the required journal entries for the above transactions.

B) Prepare the journal entry to dispose of the overhead variance using the immediate write-off method.

C) Is the factory overhead overapplied or underapplied?

D) What is the actual, correct amount of Cost of Goods Sold?

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Answer: A) Direct Materials Inventory Accounts payable

125,000 125,000

Work-in-Process Inventory Direct Materials Inventory

110,000

Work-in-Process Inventory Accrued payroll

256,000

Factory Department Overhead Control Accumulated Depreciation

150,000

Work-in-Process Inventory Factory Department Overhead Control

128,000

Finished Goods Inventory Work-in-Process Inventory

515,000

Cost of Goods Sold Finished Goods Inventory

378,000

Accounts Receivable Sales

430,000

B) Cost of Goods Sold Factory Department Overhead Control

110,000

256,000

150,000

128,000

515,000

378,000

430,000

22,000 22,000

C) Underapplied D) $378,000 + $22,000 = $400,000 Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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28) Michael Company uses job-order costing. The company has gathered the following data: Direct materials purchased for cash $60,000 Direct materials requisitioned $50,000 Direct labor costs incurred $90,000 Factory overhead costs incurred $60,000 Cost of goods completed $180,000 Cost of goods sold $170,000 Sales for cash $300,000 Factory overhead applied ?

Factory overhead costs are applied at 90% of direct labor costs.

Required: A) Prepare the required journal entries for the above transactions.

B) Prepare the journal entry to dispose of the overhead variance using the immediate write-off method.

19 .

Answer: A) Direct Materials Inventory Cash

60,000 60,000

Work-in-Process Inventory Direct Materials Inventory

50,000

Work-in-Process Inventory Accrued payroll

90,000

Factory Department Overhead Control Various accounts

60,000

Work-in-Process Inventory Factory Department Overhead Control

81,000

Finished Goods Inventory Work-in-Process Inventory

180,000

Cost of Goods Sold Finished Goods Inventory

170,000

Cash

300,000 Sales

50,000

90,000

60,000

81,000

180,000

170,000

300,000

B) Factory Department Overhead Control 21,000 Cost of Goods Sold 21,000 Diff: 2 LO: 14-2 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 14.3 Questions 1) One of the primary purposes of an activity-based costing system is to ________.

A) focus on quality improvements in the production process B) focus on cost reduction in the production process C) eliminate all overhead costs for manufactured products D) increase the accuracy of product costs so managers can make better decisions Answer: D Diff: 1 LO: 14-3 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts

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2) In activity-based costing systems, the budgeted overhead rate for products is developed after considering indirect costs for ________.

A) production only B) production and distribution only C) all value chain functions D) production and customer service only Answer: C Diff: 2 LO: 14-3 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts 3) Regardless of the nature of a company's production system, there will always be resources that are shared among different products.

Answer: TRUE Diff: 2 LO: 14-3 AACSB: Reflective thinking skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts 4) Examples of activity centers with indirect costs include receiving, testing and packaging.

Answer: TRUE Diff: 2 LO: 14-3 AACSB: Analytic skills Learning Outcome: Describe activity-based costing and calculate the cost of a job using ABC concepts 14.4 Questions 1) An accounting firm is setting the audit fee for a proposed engagement. The budgeted direct professional labor hours are 100 hours at a rate of $100 per hour. Indirect costs are budgeted at 200% of the direct professional labor cost. Travel costs are budgeted at $20,000. If the markup is 100% of total budgeted costs, what is the audit fee?

A) $30,000 B) $50,000 C) $100,000 D) $640,000 Answer: C Diff: 3 LO: 14-4 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

21 .

2) In nonprofit organizations, a program is defined as a(n) ________.

A) identifiable group of activities that produces outputs in the form of consumable products B) identifiable group of activities that produces outputs in the form of services C) class of products D) none of the above Answer: B Diff: 1 LO: 14-4 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 3) In nonprofit organizations, the challenge is to apply the costs from various departments to different ________.

A) service organizations B) nonprofit revenue accounts C) nonprofit expense accounts D) programs Answer: D Diff: 1 LO: 14-4 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 4) When public accounting firms apply indirect costs to audit engagements, they use ________ or ________ as the cost driver.

A) direct labor cost; equipment usage B) direct labor cost; direct labor hours C) hours of equipment use; hours of computer use D) traveling costs; hours of clerical assistance Answer: B Diff: 1 LO: 14-4 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

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5) Choosing direct labor cost rather than direct labor hours as a cost driver for overhead costs implies that ________.

A) direct labor cost data is more accurate B) direct labor cost data is easier to obtain C) higher paid employees use proportionately less overhead support than lower paid employees D) higher paid employees use proportionately more overhead support than lower paid employees Answer: D Diff: 2 LO: 14-4 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 6) St. Matthew's Hospital uses a job-order costing system for all patients who have surgery. The following information is available: Budgeted indirect costs—pre-operating room Budgeted indirect costs—operating room Budgeted indirect costs—surgery recovery floor Budgeted nursing hours—pre-operating room Budgeted nursing hours—operating room Budgeted nursing hours—surgery recovery floor

$84,000 $66,000 $600,000 4,000 1,000 7,500

The cost driver for all indirect costs is nursing hours. The hospital uses a budgeted rate for indirect costs.

The budgeted rate for indirect costs for the pre-operating room is ________.

A) $21.00 B) $43.25 C) $66.00 D) $80.00 Answer: A Diff: 2 LO: 14-4 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

23 .

7) St. Vincent's Hospital uses a job-order costing system for all patients who have surgery. The following information is available: Budgeted indirect costs—pre-operating room Budgeted indirect costs—operating room Budgeted indirect costs—surgery recovery floor Budgeted nursing hours—pre-operating room Budgeted nursing hours—operating room Budgeted nursing hours—surgery recovery floor

$84,000 $66,000 $600,000 4,000 1,000 7,500

The cost driver for all indirect costs is nursing hours. The hospital uses a budgeted rate for indirect costs.

The budgeted rate for indirect costs for the operating room is ________.

A) $21.00 B) $66.00 C) $69.75 D) $80.00 Answer: B Diff: 2 LO: 14-4 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 8) Benville Hospital uses a job-order costing system for all patients who have surgery. The following information is available: Budgeted indirect costs—pre-operating room Budgeted indirect costs—operating room Budgeted indirect costs—surgery recovery floor Budgeted nursing hours—pre-operating room Budgeted nursing hours—operating room Budgeted nursing hours—surgery recovery floor

$84,000 $66,000 $600,000 4,000 1,000 7,500

The cost driver for all indirect costs is nursing hours. The hospital uses a budgeted rate for indirect costs.

The budgeted rate for indirect costs for the surgery recovery floor is ________.

A) $42.00 B) $45.75 C) $75.00 D) $80.00 Answer: D Diff: 2 LO: 14-4 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

24 .

9) Elmbrook Hospital uses a job-order costing system for all patients who have surgery. The following information is available: Budgeted indirect costs—pre-operating room Budgeted indirect costs—operating room Budgeted indirect costs—surgery recovery floor Budgeted nursing hours—pre-operating room Budgeted nursing hours—operating room Budgeted nursing hours—surgery recovery floor

$84,000 $66,000 $600,000 4,000 1,000 7,500

The cost driver for all indirect costs is nursing hours. The hospital uses a budgeted rate for indirect costs.

A patient spent 8 hours in the pre-operating room, 4 hours in the operating room and 96 hours on the surgery recovery floor. What amount of indirect costs will be applied to this patient?

A) $336.00 B) $600.00 C) $7,680 D) $8,112 Answer: D Diff: 2 LO: 14-4 AACSB: Analytic skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 10) Job-order costing can be used only in manufacturing environments.

Answer: FALSE Diff: 1 LO: 14-4 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs 11) Managers need to know program costs to make ongoing decisions such as which programs to emphasize or deemphasize and the pricing of programs.

Answer: TRUE Diff: 1 LO: 14-4 AACSB: Reflective thinking skills Learning Outcome: Describe a job order cost system and calculate the predetermined overhead rate and allocate indirect costs

25 .

14.5 Questions 1) In process costing, how many Work-In-Process Inventory accounts are used?

A) none B) only one C) one for each processing department D) at least two for each processing department Answer: C Diff: 2 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 2) In a process costing system, which of the following entries is prepared to transfer a finished food product from the cooking process to the packaging process?

A) Debit Work-In-Process Inventory—Cooking, Credit Work-In-Process Inventory—Packaging B) Debit Finished Goods Inventory—Credit Work-In-Process Inventory—Packaging C) Debit Work-In-Process Inventory—Packaging, Credit Work-In-Process Inventory—Cooking D) Debit Work-In-Process Inventory—Packaging, Credit Finished Goods Inventory Answer: C Diff: 2 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 3) In a process costing system, which of the following entries is prepared to transfer direct materials from storage to the cooking process?

A) Debit Direct Materials Inventory, Credit Work-In-Process Inventory—Cooking B) Debit Direct Materials Inventory, Credit Accounts Payable C) Debit Work-In-Process Inventory—Cooking, Credit Work-In-Process Inventory—Storage D) Debit Work-In-Process Inventory—Cooking, Credit Direct Materials Inventory Answer: D Diff: 2 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 4) ________ is the system that applies costs to similar products that are mass-produced in continuous fashion through a series of production processes.

A) Job-order costing B) JIT costing C) Activity-based costing D) Process costing Answer: D Diff: 1 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 26 .

5) Which of the following outputs would NOT use a process costing system?

A) flour B) glass C) toothpaste D) building Answer: D Diff: 1 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 6) Which of the following statements regarding process costing is TRUE? A) Process-costing systems use a single Work-In-Process Inventory account.

B) Process costing is used for products that are easily separated and individually identifiable.

C) The unit cost for process costing is found by accumulating the costs for all the manufacturing departments and dividing the total by the number of units produced.

D) The process-costing approach does not distinguish between individual units of product.

Answer: D Diff: 2 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 7) Process costing can be used for ________ activities.

A) manufacturing B) nonmanufacturing C) manufacturing and nonmanufacturing D) none of the above Answer: C Diff: 1 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 8) In process costing, each department computes the product cost of ________.

A) completed goods transferred out of the department only B) completed goods waiting to be sold only C) uncompleted goods in the department only D) uncompleted goods in the department and completed goods transferred out of the department Answer: D Diff: 2 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

27 .

9) In process costing, units that are started but NOT completed by the end of the accounting period are called ________.

A) Cost of Goods Sold B) ending Direct Materials Inventory C) ending Work-In-Process Inventory D) ending Finished Goods Inventory Answer: C Diff: 2 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 10) Assume a company uses process costing and has several processing departments. When goods are transferred from Department X to Department Y, the journal entry requires a Debit to ________ and a Credit to ________.

A) Work-In-Process Inventory—Department X; Work-In-Process Inventory—Department Y B) Finished Goods Inventory; Work-In-Process Inventory—Department Y C) Cost of Goods Sold; Finished Goods Inventory D) Work-In-Process Inventory—Department Y; Work-In-Process Inventory—Department X Answer: D Diff: 2 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 11) The chemical and glass industries normally use job costing.

Answer: FALSE Diff: 1 LO: 14-5 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 12) Process-costing systems apply costs to like products that are usually mass-produced in continuous fashion through a series of production processes.

Answer: TRUE Diff: 1 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 13) Assume a company uses process costing. When factory overhead is applied to the units in production, Finished Goods Inventory is the Debit part of the journal entry.

Answer: FALSE Diff: 1 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

28 .

14) Unlike job-order costing, process costing requires only one Work-In-Process Inventory account.

Answer: FALSE Diff: 2 LO: 14-5 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 14.6 Questions 1) During the month of May, Masters Company transferred 140,000 gadgets to Finished Goods Inventory.

There was no beginning work-in-process inventory. The company had 40,000 gadgets in process at May 31 and the gadgets were 50 percent complete with respect to conversion costs. All direct materials are added at the end of the production process. The equivalent units for materials for May are ________.

A) 90,000 B) 140,000 C) 160,000 D) 180,000 Answer: B Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 2) During the month of May, Sonny Company transferred 140,000 gadgets to Finished Goods Inventory.

There was no beginning work-in-process inventory. The company had 40,000 gadgets in process at May 31 and the gadgets were 75 percent complete with respect to conversion costs. All direct materials are added at the end of the production process. The equivalent units for conversion costs for May are ________.

A) 140,000 B) 150,000 C) 170,000 D) 180,000 Answer: C Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

29 .

3) In process costing, a company has some unfinished units at the end of the accounting period. ________ units are the number of completed units that could have been produced from the inputs used to create the unfinished units.

A) Physical B) Convertible C) Fully-complete D) Equivalent Answer: D Diff: 1 LO: 14-6 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 4) Xerox Company produces plastic cups in a one-department process. The following data is available for the past month: Work-in-process inventory, beginning Units started Units completed and transferred Work-in-process inventory, ending

0 60,000 48,000 12,000

The units in process at the end of the month are 100 percent complete with respect to materials and 50 percent complete with respect to conversion costs. What are the equivalent units for materials for the month?

A) 12,000 B) 48,000 C) 54,000 D) 60,000 Answer: D Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

30 .

5) Durante Company produces plastic cups in a one-department process. The following data is available for the past month: Work-in-process inventory, beginning Units started Units completed and transferred Work-in-process inventory, ending

0 60,000 48,000 12,000

The units in process at the end of the month are 100 percent complete with respect to materials and 50 percent complete with respect to conversion costs. What are the equivalent units for conversion costs for the month?

A) 12,000 B) 30,000 C) 54,000 D) 60,000 Answer: C Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 6) Excalibur Company produces calendars in a one-department process. The following data is available for the past month: Work-in-process inventory, beginning Units started Units completed and transferred Work-in-process inventory, ending

0 15,000 12,000 3,000

Direct materials added Direct labor Factory overhead costs

$30,000 $20,700 $10,350

The units in process at the end of the month are 100 percent complete with respect to direct materials and 50 percent complete with respect to conversion costs. What are the equivalent units for materials for the month?

A) 3,000 B) 12,000 C) 13,500 D) 15,000 Answer: D Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

31 .

7) Rozman Company produces calendars in a one-department process. The following data is available for the past month: Work-in-process inventory, beginning Units started Units completed and transferred Work-in-process inventory, ending

0 15,000 12,000 3,000

Direct materials added Direct labor Factory overhead costs

$30,000 $20,700 $10,350

The units in process at the end of the month are 100 percent complete with respect to direct materials and 50 percent complete with respect to conversion costs. What are the equivalent units for conversion costs for the month?

A) 3,000 B) 12,000 C) 13,500 D) 15,000 Answer: C Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 8) Orlando Company manufactures phones in a two-department process that includes Assembly and Finishing. Information about the Assembly Department follows: Direct materials added Direct labor Factory overhead Total costs to account for

$310,000 460,000 230,000 $1,000,000

There was no beginning inventory and 80,000 units were started in the Assembly Department. By the end of the month, 67,200 units were completed and transferred to the Finishing Department and 12,800 units were still in process. The partially complete units were 100 percent complete with regard to direct materials but 75 percent complete with regard to conversion costs. The equivalent units for materials for the month for the Assembly Department are ________.

A) 12,800 B) 67,200 C) 76,800 D) 80,000 Answer: D Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

32 .

9) Garcia Company manufactures phones in a two-department process that includes Assembly and Finishing. Information about the Assembly Department follows: Direct materials added Direct labor Factory overhead Total costs to account for

$310,000 460,000 230,000 $1,000,000

There was no beginning inventory and 80,000 units were started in the Assembly Department. By the end of the month, 67,200 units were completed and transferred to the Finishing Department and 12,800 units were still in process. The partially complete units were 100 percent complete with regard to direct materials but 80 percent complete with regard to conversion costs. The equivalent units for conversion costs for the month for the Assembly Department are ________.

A) 12,800 B) 67,200 C) 77,440 D) 80,000 Answer: C Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 10) During the month of May, Gonzalez Clothing transferred 140,000 shirts to Finished Goods Inventory.

There was no beginning work-in-process inventory. The company had 30,000 shirts in process at May 31 and the shirts were 50 percent complete with respect to conversion costs. All direct materials are added at the beginning of the production process. How many shirts were started during May? A) 30,000 B) 110,000 C) 140,000 D) 170,000 Answer: D Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

33 .

11) During the month of May, Sanchez Clothing transferred 140,000 shirts to Finished Goods Inventory.

There was no beginning work-in-process inventory. The company had 40,000 shirts in process at May 31 and the shirts were 50 percent complete with respect to conversion costs. All direct materials are added at the beginning of the production process. The equivalent units for materials for May are ________.

A) 90,000 B) 140,000 C) 160,000 D) 180,000 Answer: D Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 12) During the month of May, Lucas Clothing transferred 140,000 shirts to Finished Goods Inventory.

There was no beginning work-in-process inventory. The company had 40,000 shirts in process at May 31 and the shirts were 75 percent complete with respect to conversion costs. All direct materials are added at the beginning of the production process. The equivalent units for conversion costs for May are ________.

A) 140,000 B) 150,000 C) 170,000 D) 180,000 Answer: C Diff: 2 LO: 14-6 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 13) Equivalent units are computed to assign costs to partially completed units.

Answer: TRUE Diff: 2 LO: 14-6 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 14) Equivalent units are determined by multiplying the number of physical units by the percentage of noncompletion.

Answer: FALSE Diff: 2 LO: 14-6 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

34 .

15) Measures in equivalent units are found only in manufacturing situations.

Answer: FALSE Diff: 2 LO: 14-6 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 14.7 Questions 1) Freund Company produces calendars in a one-department process. The following data is available for the past month: Work-in-process inventory, beginning Units started Units completed and transferred Units in ending inventory

0 15,000 12,000 3,000

Direct materials added Direct labor Factory overhead costs

$30,000 $20,700 $10,350

The units in process at the end of the month are 100 percent complete with respect to materials and 60 percent complete with respect to conversion costs. What are the total costs to account for?

A) $20,700 B) $30,000 C) $50,700 D) $61,050 Answer: D Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

35 .

2) Brown Company manufactures tape dispensers. The Assembly Department reported the follow data for the past month: Units started and completed Units started and not complete Units in beginning inventory Direct materials costs Conversion costs

70,000 10,000 0 $560,000 $240,000

The partially complete units at the end of the month were 100 percent complete with respect to materials and 60 percent complete with respect to conversion costs. The unit cost of direct materials is ________.

A) $1.67 B) $3.32 C) $6.86 D) $7.00 Answer: D Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 3) Williams Company manufactures tape dispensers. The Assembly Department reported the follow data for the past month: Units started and completed Units started and not complete Units in beginning inventory Direct materials costs Conversion costs

70,000 10,000 0 $480,000 $240,000

The partially complete units at the end of the month were 100 percent complete with respect to materials and 40 percent complete with respect to conversion costs. The unit cost of conversion costs is ________.

A) $3.00 B) $3.24 C) $3.42 D) $24.00 Answer: B Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

36 .

4) Barber Company manufactures tape dispensers. The Assembly Department reported the follow data for the past month: Units started and completed Units started and not complete Units in beginning inventory Direct materials costs Conversion costs

70,000 10,000 0 $480,000 $240,000

The partially complete units at the end of the month were 100 percent complete with respect to materials and 50 percent complete with respect to conversion costs. The cost of one completed unit in the Assembly Department is ________.

A) $9.00 B) $9.20 C) $9.42 D) $10.29 Answer: B Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 5) Flajovich Company manufactures tape dispensers. The Assembly Department reported the follow data for the past month: Units started and completed Units started and not complete Units in beginning inventory Direct materials costs Conversion costs

70,000 10,000 0 $480,000 $240,000

The partially complete units at the end of the month were 100 percent complete with respect to materials and 50 percent complete with respect to conversion costs. The total cost of units completed and transferred is ________.

A) $630,000 B) $644,000 C) $690,000 D) $720,000 Answer: B Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

37 .

6) Ropal Company manufactures tape dispensers. The Assembly Department reported the follow data for the past month: Units started and completed Units started and not complete Units in beginning inventory Direct materials costs Conversion costs

70,000 10,000 0 $480,000 $240,000

The partially complete units at the end of the month were 100 percent complete with respect to materials and 50 percent complete with respect to conversion costs. The total cost of ending work-in-process inventory is ________.

A) $60,000 B) $76,000 C) $90,000 D) $91,600 Answer: B Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 7) Green Company manufactures phones in a two-department process that involves Assembly and Finishing. The Assembly Department reported the follow data for the past month: Direct materials added Direct labor Factory overhead Total costs to account for Units started Units completed and transferred Units not complete Units in beginning inventory

$336,000 460,000 204,000 $1,000,000 80,000 67,200 12,800 0

The partially complete units at the end of the month were 100 percent complete with respect to materials and 75 percent complete with respect to conversion costs. The journal entry to record the requisition of direct materials for the Assembly Department includes a Debit to ________.

A) Direct Materials Inventory for $336,000 B) Work-in-Process Inventory, Finishing for $336,00 C) Work-in-Process Inventory, Assembly for $336,000 D) Finished Goods Inventory for $336,000 Answer: C Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 38 .

8) Sherry Company manufactures phones in a two-department process that involves Assembly and Finishing. The Assembly Department reported the follow data for the past month: Direct materials added Direct labor Factory overhead Total costs to account for Units started Units completed and transferred Units not complete Units in beginning inventory

$336,000 460,320 204,000 $1,000,320 80,000 67,200 12,800 0

The partially complete units at the end of the month were 100 percent complete with respect to materials and 75 percent complete with respect to conversion costs. The unit cost of conversion costs is ________.

A) $3.00 B) $6.00 C) $8.65 D) $9.00 Answer: C Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

39 .

9) Paula Inc. manufactures phones in a two-department process that involves Assembly and Finishing.

The Assembly Department reported the follow data for the past month: Direct materials added Direct labor Factory overhead Total costs to account for Units started Units completed and transferred Units not complete Units in beginning inventory

$336,000 460,800 230,400 $1,027,200 80,000 67,200 12,800 0

The partially complete units at the end of the month were 100 percent complete with respect to materials and 75 percent complete with respect to conversion costs. The cost of a finished unit is ________.

A) $12.84 B) $13.20 C) $15.29 D) $17.20 Answer: B Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

40 .

10) Rachel Company manufactures phones in a two-department process that involves Assembly and Finishing. The Assembly Department reported the follow data for the past month: Direct materials added Direct labor Factory overhead Total costs to account for Units started Units completed and transferred Units not complete Units in beginning inventory

$336,000 460,800 230,400 $1,027,200 80,000 67,200 12,800 0

The partially complete units at the end of the month were 100 percent complete with respect to materials and 75 percent complete with respect to conversion costs. The journal entry to record the units completed and transferred to the Finishing Department includes ________.

A) Debit to Work-in-Process Inventory, Finishing for $862,848 B) Credit to Work-in-Process Inventory, Finishing for $862,848 C) Debit to Work-in-Process Inventory, Assembly for $887,040 D) Credit to Work-in-Process Inventory, Assembly for $887,040 Answer: D Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

41 .

11) Roberts Company manufactures phones in a two-department process that involves Assembly and Finishing. The Assembly Department reported the follow data for the past month: Direct materials added Direct labor Factory overhead Total costs to account for Units started Units completed and transferred Units not complete Units in beginning inventory

$336,000 460,800 230,400 $1,027,200 80,000 67,200 12,800 0

The partially complete units at the end of the month were 100 percent complete with respect to materials and 75 percent complete with respect to conversion costs. The ending balance in Work-In-Process Inventory--Assembly is ________.

A) $140,160 B) $168,960 C) $862,848 D) $887,040 Answer: A Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

42 .

12) Zimmerman Company manufactures plastic cups in one department. The following information is available: Work-In-Process Inventory, beginning Units started Units completed and transferred Work-In-Process Inventory, end Direct materials added Direct labor Factory overhead

0 60,000 48,000 12,000 $180,000 $165,600 $82,800

The units in the ending Work-In-Process Inventory are 50 percent complete with respect to direct materials and 60 percent complete with respect to conversion costs. The unit cost of direct materials is ________.

A) $1.00 B) $3.00 C) $3.33 D) $5.00 Answer: C Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 13) Keller Company manufactures plastic cups in one department. The following information is available: Work-In-Process Inventory, beginning Units started Units completed and transferred Work-In-Process Inventory, end Direct materials added Direct labor Factory overhead

0 60,000 48,000 12,000 $240,000 $164,780 $82,000

The units in the ending Work-In-Process Inventory are 50 percent complete with respect to direct materials and 50 percent complete with respect to conversion costs. The unit cost of conversion costs is ________.

A) $0.88 B) $4.14 C) $4.57 D) $5.18 Answer: C Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 43 .

14) Linda Company manufactures gadgets in one department. The following information is available: Work-In-Process Inventory, beginning Units started Units completed and transferred Work-In-Process Inventory, end Direct materials added Direct labor Factory overhead

0 60,000 48,000 12,000 $240,000 $164,780 $82,000

The units in the ending Work-In-Process Inventory are 0 percent complete with respect to materials and 50 percent complete with respect to conversion costs. Direct materials are added at the end of the process.

The cost of one completed unit is ________.

A) $8.14 B) $8.57 C) $9.57 D) $10.18 Answer: C Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 15) Black Company manufactures gadgets in one department. The following information is available: Work-In-Process Inventory, beginning Units started Units completed and transferred Work-In-Process Inventory, end Direct materials added Direct labor Factory overhead

0 60,000 48,000 12,000 $240,000 $164,780 $82,000

The units in the ending Work-In-Process Inventory are 0 percent complete with respect to direct materials and 50 percent complete with respect to conversion costs. Direct materials are added at the end of the process. The total cost of units completed and transferred is ________.

A) $90,240 B) $411,360 C) $459,360 D) $488,400 Answer: C Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 44 .

16) Bombard Company manufactures plastic cups in one department. The following information is available: Work-In-Process Inventory, beginning Units started Units completed and transferred Work-In-Process Inventory, end Direct materials added Direct labor Factory overhead

0 60,000 48,000 12,000 $240,000 $164,780 $82,000

The units in the ending Work-In-Process Inventory are 100 percent complete with respect to direct materials and 50 percent complete with respect to conversion costs. The cost of the ending Work-InProcess Inventory is ________.

A) $61,200 B) $72,200 C) $75,420 D) $102,000 Answer: C Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

45 .

17) Angelina Company manufactures plastic cups in one department. The following information is available: Work-In-Process Inventory, beginning Units started Units completed and transferred Work-In-Process Inventory, end

0 15,000 12,000 3,000

Direct materials added Direct labor Factory overhead

$30,000 $20,700 $10,350

The units in the ending Work-In-Process Inventory are 100 percent complete with respect to direct materials and 60 percent complete with respect to conversion costs. The cost of one completed unit is ________.

A) $4.07 B) $4.25 C) $4.42 D) $5.08 Answer: B Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 18) In process costing, the journal entry to record direct labor costs incurred associated with units in a department would include a ________.

A) Debit to Accrued Payroll B) Credit to Factory Overhead C) Debit to Work-in-Process Inventory—Department Name D) Credit to Finished Goods Inventory Answer: C Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 19) In process costing, the journal entry to record factory overhead applied to units in a department would include a ________.

A) Debit to Factory Overhead B) Debit to Work-in-Process Inventory—Department Name C) Credit to Cost of Goods Sold D) Credit to Finished Goods Inventory Answer: B Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 46 .

20) In process costing, the journal entry to transfer completed units from Department A to Department B would include a ________.

A) Credit to Direct Materials Inventory B) Debit to Work-In-Process Inventory—Department A C) Credit to Work-In-Process Inventory—Department B D) Debit to Work-In-Process Inventory—Department B Answer: D Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 21) The last step in calculating the production-cost report is to apply unit costs to units completed and to units in the ending work-in-process inventory.

Answer: TRUE Diff: 2 LO: 14-7 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 22) Bertinoli's Company makes gadgets. The company uses process costing. All direct materials are introduced at the end of the process. Conversion costs are incurred evenly throughout the process. In February, there was no beginning Work-in-Process Inventory, but 490,000 units were started. At the end of February, there were 90,000 units still in process at the 70% level of completion. Total costs incurred during February were $1,212,500 for materials and $3,664,000 for conversion costs.

Required: A) Compute the number of units completed and transferred.

B) Compute the equivalent units for materials and conversion costs.

C) Compute the cost per equivalent unit for materials and conversion costs. Round to two decimal places.

D) Compute the cost of the units completed and transferred.

E) Compute the cost of ending work-in-process inventory.

Answer: A) 400,000 units B) Materials: 400,000 equivalent units Conversion Costs: 463,000 equivalent units C) Materials: $1,212,500/400,000 = $3.03 per unit Conversion Costs: $3,664,000/463,000 = $7.91 per unit D) $10.94 × 400,000 = $4,376,000 E) (63,000 × $7.91) = $498,330 Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

47 .

23) Burtard Chemical makes a variety of chemicals. The company uses process costing. Materials are added at the end of the process. Conversion costs are added evenly throughout the process. The company has no beginning work-in-process inventory. The Mixing Department had the following data: Units started and completed Units started and 30% complete Direct materials costs Direct labor costs Factory overhead costs

8,000 2,500 $126,000 $31,250 $30,000

Required: A) Compute the equivalent units for materials and conversion costs.

B) Compute the cost per unit for materials and conversion costs.

C) Compute the cost of the goods completed and transferred.

D) Compute the cost of the ending work-in-process inventory.

Answer: A) Materials 8,000 Conversion costs 8,750 B) Materials $15.75 per unit Conversion costs $7.00 per unit C) ($15.75 + $7.00) × 8,000 = $182,000 D) $7.00 × 2,500 × 30% = $5,250 Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

48 .

24) The manufacturing costs of the Assembly Department for the month of July are as follows: Direct materials added Direct labor costs added Factory overhead costs applied

$220,000 $190,000 $140,000

The company uses a process costing system. At July 31, the cost of the goods completed and transferred to the Finishing Department was $563,000.

Required: A) Prepare summary journal entries for the use of direct materials, direct labor and factory overhead.

B) Prepare a journal entry for the transfer of completed goods.

Answer: A) Work-in-Process Inventory—Assembly 220,000 Direct Materials Inventory 220,000 Work-in-Process Inventory—Assembly Accrued Payroll

190,000

Work-in-Process Inventory—Assembly Factory Overhead

140,000

190,000

140,000

B) Work-in-Process Inventory—Finishing 563,000 Work-in-Process Inventory—Assembly 563,000 Diff: 2 LO: 14-7 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 14.8 Questions 1) The weighted-average method of process costing adds the cost of all work done in the current period to ________.

A) the ending work-in-process inventory B) all costs estimated to be incurred in the next department C) the cost of the work done in the preceding period to the current period's ending work-in-process inventory D) the cost of the work done in the preceding period to the current period's beginning work-in-process inventory Answer: D Diff: 2 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

49 .

2) Jorgensen Company manufactures generic notebooks. Material is introduced at the beginning of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of June follow: Work-In-Process Inventory, June 1: Units Direct materials (100% complete) Conversion costs (30% complete)

15,000 $34,000 $14,000

Units started in June Units completed in June Work-In-Process Inventory, June 30

65,000 62,000 18,000

Direct materials added in June Conversion costs added in June

$285,000 $210,000

With regard to the Work-In-Process Inventory on June 30, materials are 100 percent complete and conversion costs are 60 percent complete. What are the equivalent units for materials for June?

A) 62,000 B) 77,000 C) 80,000 D) 83,000 Answer: C Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

50 .

3) Bradley Company manufactures generic notebooks. Material is introduced at the beginning of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of June follow: Work-In-Process Inventory, June 1: Units Direct materials (100% complete) Conversion costs (30% complete)

15,000 $34,000 $14,000

Units started in June Units completed in June Work-In-Process Inventory, June 30

65,000 62,000 18,000

Direct materials added in June Conversion costs added in June

$285,000 $210,000

With regard to the Work-In-Process Inventory on June 30, materials are 100 percent complete and conversion costs are 50 percent complete. What are the equivalent units for conversion costs for June?

A) 62,000 B) 68,300 C) 71,000 D) 80,000 Answer: C Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

51 .

4) Jones Company manufactures greeting cards. Material is introduced at the beginning of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weightedaverage method of process costing is used. Data for the Printing Department for the month of September follow: Work-In-Process Inventory, September 1: Units Direct materials (100% complete) Conversion costs (30% complete)

22,500 $51,000 $20,472

Units started in September Units completed in September Work-In-Process Inventory, September 30

127,500 123,000 27,000

Direct materials added in September Conversion costs added in September

$427,500 $315,000

With regard to the Work-In-Process Inventory on September 30, materials are 100 percent complete and conversion costs are 60 percent complete. The equivalent units for materials are ________.

A) 125,000 B) 145,500 C) 150,000 D) 154,500 Answer: C Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

52 .

5) Smith manufactures greeting cards. Material is introduced at the beginning of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weightedaverage method of process costing is used. Data for the Printing Department for the month of September follow: Work-In-Process Inventory, September 1: Units Direct materials (100% complete) Conversion costs (30% complete)

22,500 $51,000 $20,472

Units started in September Units completed in September Work-In-Process Inventory, September 30

127,500 123,000 27,000

Direct materials added in September Conversion costs added in September

$427,500 $315,000

With regard to the Work-In-Process Inventory on September 30, materials are 100 percent complete and conversion costs are 50 percent complete. The equivalent units for conversion costs are ________.

A) 123,000 B) 132,450 C) 136,500 D) 150,000 Answer: C Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

53 .

6) Brankovich Company manufactures generic notebooks. Material is introduced at the beginning of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of June follow: Work-In-Process Inventory, June 1: Units Direct materials (100% complete) Conversion costs (30% complete)

15,000 $35,000 $14,000

Units started in June Units completed in June Work-In-Process Inventory, June 30

65,000 62,000 18,000

Direct materials added in June Conversion costs added in June

$285,000 $210,000

With regard to the Work-In-Process Inventory on June 30, materials are 100 percent complete and conversion costs are 60 percent complete. The unit cost for materials is ________.

A) $3.54 B) $3.59 C) $4.00 D) $4.91 Answer: C Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

54 .

7) Simeranio Company manufactures generic notebooks. Material is introduced at the beginning of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of June follow: Work-In-Process Inventory, June 1: Units Direct materials (100% complete) Conversion costs (30% complete)

15,000 $35,000 $14,000

Units started in June Units completed in June Work-In-Process Inventory, June 30

65,000 62,000 18,000

Direct materials added in June Conversion costs added in June

$285,000 $210,000

With regard to the Work-In-Process Inventory on June 30, materials are 100 percent complete and conversion costs are 50 percent complete. The unit cost for conversion costs is ________.

A) $2.62 B) $2.80 C) $2.88 D) $3.15 Answer: D Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

55 .

8) Gomez Company manufactures generic notebooks. Material is introduced at the beginning of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of June follow: Work-In-Process Inventory, June 1: Units Direct materials (100% complete) Conversion costs (30% complete)

15,000 $35,000 $8,400

Units started in June Units completed in June Work-In-Process Inventory, June 30

65,000 62,000 18,000

Direct materials added in June Conversion costs added in June

$285,000 $210,000

With regard to the Work-In-Process Inventory on June 30, materials are 100 percent complete and conversion costs are 60 percent complete. The total cost of goods transferred out of the Printing Department is ________.

A) $420,825 B) $434,000 C) $495,000 D) $543,000 Answer: B Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

56 .

9) El Rey Company manufactures generic notebooks. Material is introduced at the beginning of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of June follow: Work-In-Process Inventory, June 1: Units Direct materials (100% complete) Conversion costs (30% complete)

15,000 $35,000 $8,400

Units started in June Units completed in June Work-In-Process Inventory, June 30

65,000 62,000 18,000

Direct materials added in June Conversion costs added in June

$285,000 $210,000

With regard to the Work-In-Process Inventory on June 30, materials are 100 percent complete and conversion costs are 60 percent complete. The total cost of the ending Work-In-Process Inventory is ________.

A) $104,400 B) $111,996 C) $122,175 D) $127,260 Answer: A Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

57 .

10) Saludo Company manufactures greeting cards. Special glittery material is added at the end of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of September follow: Work-In-Process Inventory, September 1: Units Direct materials (0% complete) Conversion costs (30% complete)

22,500 $0 $20,472

Units started in September Units completed in September Work-In-Process Inventory, September 30

127,500 123,000 27,000

Direct materials added in September Conversion costs added in September

$425,000 $315,000

With regard to the Work-In-Process Inventory on September 30, materials are 0 percent complete and conversion costs are 60 percent complete. The unit cost for materials is ________.

A) $2.85 B) $3.20 C) $3.46 D) $3.89 Answer: C Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

58 .

11) Walter Company manufactures greeting cards. Special glittery material is added at the end of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of September follow: Work-In-Process Inventory, September 1: Units Direct materials (0% complete) Conversion costs (30% complete)

22,500 $0 $20,472

Units started in September Units completed in September Work-In-Process Inventory, September 30

127,500 123,000 27,000

Direct materials added in September Conversion costs added in September

$427,500 $315,000

With regard to the Work-In-Process Inventory on September 30, materials are 0 percent complete and conversion costs are 60 percent complete. The unit cost for conversion costs is ________.

A) $2.24 B) $2.26 C) $2.41 D) $2.73 Answer: C Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

59 .

12) Fish Company manufactures greeting cards. Special glittery material is added at the end of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of September follow: Work-In-Process Inventory, September 1: Units Direct materials (0% complete) Conversion costs (30% complete)

22,500 $0 $20,472

Units started in September Units completed in September Work-In-Process Inventory, September 30

127,500 123,000 27,000

Direct materials added in September Conversion costs added in September

$492,000 $315,000

With regard to the Work-In-Process Inventory on September 30, materials are 0 percent complete and conversion costs are 60 percent complete. The total cost of goods transferred out of the Printing Department is ________.

A) $688,800 B) $714,000 C) $788,430 D) $813,972 Answer: C Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

60 .

13) Salmon Company manufactures greeting cards. Special glittery material is added at the end of the process in the Printing Department. Conversion costs are applied uniformly throughout the process. The weighted-average method of process costing is used. Data for the Printing Department for the month of September follow: Work-In-Process Inventory, September 1: Units Direct materials (0% complete) Conversion costs (30% complete)

22,500 $0 $20,472

Units started in September Units completed in September Work-In-Process Inventory, September 30

127,500 123,000 27,000

Direct materials added in September Conversion costs added in September

$427,500 $315,000

With regard to the Work-In-Process Inventory on September 30, materials are 0 percent complete and conversion costs are 60 percent complete. The total cost of the ending Work-In-Process Inventory is ________.

A) $39,042 B) $90,720 C) $128,520 D) $151,200 Answer: A Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 14) When there is beginning work-in-process inventory and process costing, the weighted-average method of inventory costing must be used.

Answer: FALSE Diff: 2 LO: 14-8 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 15) The most popular inventory system that companies use for process costing with beginning inventories is the weighted-average method.

Answer: TRUE Diff: 2 LO: 14-8 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

61 .

16) Under weighted-average process costing, the unit costs used for applying costs to products are based on the total costs incurred to date, regardless of whether those costs were incurred during or before the current period.

Answer: TRUE Diff: 2 LO: 14-8 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 17) Diulio Company produces a product in a process-costing system involving several departments. The company uses the weighted-average method of process costing. The first department's data for the month of April follow: Units in beginning work-in-process inventory Units started during April Units completed during April Units in ending work-in-process inventory

15,000 140,000 120,000 35,000

Direct materials added in current month Conversion costs added in current month Direct materials-beginning work-in-process inventory Conversion costs-beginning work-in-process inventory

$168,000 $186,000 $25,750 $3,225

Stage of Completion: Beginning work-in-process inventory Ending work-in-process inventory

Materials 50% 50%

Conversion Costs 40% 30%

Required: A) Compute equivalent units for materials and conversion costs.

B) Compute the cost per unit for materials and conversion costs. Round to two decimal places.

C) Compute the cost of the units transferred.

D) Compute the cost of the ending work-in-process inventory.

Answer: A) Materials: 137,500 equivalent units Conversion Costs: 130,500 equivalent units B) Materials: $1.41 per unit Conversion Costs: $1.45 per unit C) $343,200 = 120,000 × $2.86 D) $39,900 = (35,000 x 50% × $1.41) + (35,000 × 30% × $1.45) Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

62 .

18) Brother Company prints calendars. All direct materials are added at the inception of the printing process. There were 20,000 units in beginning inventory with a direct material cost of $1,000 and conversion costs of $3,760.

During the month of April, 160,000 calendars were started and 144,000 calendars were completed. Direct materials cost $26,000 for the month of April. Conversion costs for the month of April were $20,000.

Ending work-in-process units are 100% complete with regard to direct materials and 40% complete with regard to conversion costs. The weighted-average method of process costing is used by Binding Company.

Required: A) Compute the equivalent units for materials and conversion costs.

B) Compute the unit costs for materials and conversion costs.

C) Compute the cost of units transferred.

D) Compute the cost of ending work-in-process inventory.

Answer: A) Materials: 180,000 equivalent units Conversion Costs: 158,400 equivalent units B) Materials: $0.15 per unit Conversion Costs: $0.15 per unit C) $43,200 D) $7,560 Diff: 3 LO: 14-8 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 14.9 Questions 1) When using process costing with transferred-in costs, the production report for Department B has ________ columns for ________ different types of costs. Assume Department B adds materials and conversion costs to units received from Department A. A) two; two B) three; three C) four; four D) indeterminate; indeterminate Answer: B Diff: 3 LO: 14-9 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

63 .

2) Department B is the second department in a series of production processes. Department B receives units from Department A. Department B adds materials, labor and overhead to the units received. The company uses process costing. What costs are assigned to each completed unit in Department B? A) material cost per equivalent unit, conversion cost per equivalent unit B) transferred-in cost per equivalent unit, conversion cost per equivalent unit C) transferred-in cost per equivalent unit, material cost per equivalent unit D) transferred-in cost per equivalent unit, material cost per equivalent unit, conversion cost per equivalent unit Answer: D Diff: 3 LO: 14-9 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 3) In process costing, which of the following cost(s) is(are) usually included in transferred-in costs?

A) direct materials cost only B) conversion costs only C) direct materials cost and conversion costs D) none of the above Answer: C Diff: 3 LO: 14-9 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 4) What are transferred-in costs?

A) costs that can be ignored in calculating the cost of ending Work-in-Process Inventory B) costs that can be ignored in calculating the cost of beginning Work-in-Process Inventory C) costs that can be ignored in calculating the cost of units transferred to the next department D) costs incurred in a previous department for units that have been received by a subsequent department Answer: D Diff: 3 LO: 14-9 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

64 .

5) Beckronski Company has the following information available for the month of March: Units Work-in-process inventory, March 1 *Percent complete

240

Transferred-in during March Completed in March Work-in-process inventory, March 31 *Percent complete

400 440 200

TransferredDirect Conversion in Costs Materials Costs $33,600 0 $18,000 100% 0% 62.5%

Costs added in March

100%

0%

80%

$52,000

$13,200

$48,600

The company uses the weighted-average cost method of process costing. What are the equivalent units for March for direct materials?

A) 400 B) 440 C) 600 D) 640 Answer: B Diff: 3 LO: 14-9 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

65 .

6) Latinovich Company has the following information available for the month of March: Units Work-in-process inventory, March 1 *Percent complete

240

Transferred-in during March Completed in March Work-in-process inventory, March 31 *Percent complete

400 440 200

TransferredDirect Conversion in Costs Materials Costs $33,600 0 $18,000 100% 0% 62.5%

Costs added in March

100%

0%

80%

$52,000

$13,200

$48,600

The company uses the weighted-average method of process costing. What are the equivalent units for March for conversion costs?

A) 400 B) 440 C) 600 D) 640 Answer: C Diff: 3 LO: 14-9 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

66 .

7) Schaefer Company has the following information available for the month of March: Units Work-in-process inventory, March 1 *Percent complete

240

Transferred-in during March Completed in March Work-in-process inventory, March 31 *Percent complete

400 440 200

TransferredDirect Conversion in Costs Materials Costs $33,600 0 $18,000 100% 0% 62.5%

Costs added in March

100%

0%

80%

$52,000

$13,200

$48,600

The company uses the weighted-average method for process costing. What are the equivalent units for March for transferred-in costs?

A) 400 B) 440 C) 600 D) 640 Answer: D Diff: 3 LO: 14-9 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

67 .

8) Litfin Company has the following information available for the month of March: Units Work-in-process inventory, March 1 *Percent complete

240

Transferred-in during March Completed in March Work-in-process inventory, March 31 *Percent complete

400 440 200

TransferredDirect Conversion in Costs Materials Costs $33,600 0 $18,000 100% 0% 62.5%

Costs added in March

100%

0%

80%

$52,000

$13,200

$48,600

The company uses the weighted average cost method. What is the cost per equivalent unit for March for direct materials?

A) $20.63 B) $22.00 C) $30.00 D) $33.00 Answer: C Diff: 3 LO: 14-9 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

68 .

9) Zeman Company has the following information available for the month of March: Units Work-in-process inventory, March 1 *Percent complete

240

Transferred-in during March Completed in March Work-in-process inventory, March 31 *Percent complete

400 440 200

TransferredDirect Conversion in Costs Materials Costs $33,600 0 $18,000 100% 0% 62.5%

Costs added in March

100%

0%

80%

$52,000

$13,200

$48,600

The company uses the weighted average cost method. What is the cost per equivalent unit for March for conversion costs?

A) $22.00 B) $40.91 C) $104.06 D) $111.00 Answer: D Diff: 3 LO: 14-9 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 10) In process costing, goods are moved from the Assembly Department to the Packaging Department.

Costs incurred in the Assembly Department for the goods received by the Packaging Department are called ________ by the Packaging Department.

A) equivalent units B) finished goods C) transferred-in costs D) factory overhead applied Answer: C Diff: 2 LO: 14-9 AACSB: Analytic skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing 11) In process costing, the transferred-in costs include only direct materials costs.

Answer: FALSE Diff: 2 LO: 14-9 AACSB: Reflective thinking skills Learning Outcome: Discuss process costing systems and calculate product cost using process costing

69 .

14.10 Questions 1) West Allis Bike Shop uses a backflush-costing system to account for bicycles. Bicycles are scheduled for production only after orders are received and products are shipped to customers immediately upon completion. No Finished Goods Inventory is maintained and product costs are applied directly to Cost of Goods Sold. The standard cost for materials is $150 per bicycle. The standard cost for conversion costs is $75 per bicycle.

During the current month, West Allis Bike Shop purchased $6,000 of direct materials and incurred $3,000 in conversion costs to produce 40 bicycles. The journal entry to record the purchase of materials includes a Debit to ________.

A) Materials Inventory B) Work-in-Process Inventory C) Finished Goods Inventory D) Cost of Goods Sold Answer: A Diff: 1 LO: 14-10 AACSB: Analytic skills Learning Outcome: None 2) Wheel and Sprocket Company uses a backflush-costing system to account for bicycles. Bicycles are scheduled for production only after orders are received and products are shipped to customers immediately upon completion. No Finished Goods Inventory is maintained and product costs are applied directly to Cost of Goods Sold. The standard cost for materials is $150 per bicycle. The standard cost for conversion costs is $75 per bicycle.

During the current month, Wheel and Sprocket Company purchased $6,000 of direct materials and incurred $3,000 in conversion costs to produce 40 bicycles. The journal entry for the incurrence of conversion costs includes a Debit to ________.

A) Finished Goods Inventory for $3,000 B) Work-In-Process Inventory for $3,000 C) Conversion Costs for $3,000 D) Cost of Goods Sold for $3,000 Answer: C Diff: 2 LO: 14-10 AACSB: Analytic skills Learning Outcome: None

70 .

3) Healthy Connection Company uses a backflush-costing system to account for bicycles. Bicycles are scheduled for production only after orders are received and products are shipped to customers immediately upon completion. No Finished Goods Inventory is maintained and product costs are applied directly to Cost of Goods Sold. The standard cost for materials is $150 per bicycle. The standard cost for conversion costs is $75 per bicycle.

During the current month, Healthy Connection Company purchased $6,000 of direct materials and incurred $3,000 in conversion costs to produce 40 bicycles. When production is complete, the journal entry has a Debit to ________.

A) Finished Goods Inventory for $9,000 B) Conversion Costs for $9,000 C) Cost of Goods Sold for $9,000 D) No entry is needed Answer: C Diff: 2 LO: 14-10 AACSB: Analytic skills Learning Outcome: None 4) In backflush costing, any remaining balance in the Conversion Costs account at the end of the accounting period is charged to ________.

A) Cost of Goods Sold B) Work-in-Process Inventory C) Finished Goods Inventory D) Direct Materials Inventory Answer: A Diff: 2 LO: 14-10 AACSB: Analytic skills Learning Outcome: None 5) Backflush costing provides reasonably accurate product costs if materials inventories are ________.

A) high and production cycle times are short B) high and production cycle times are long C) low and production cycle times are short D) low and production cycle times are long Answer: C Diff: 2 LO: 14-10 AACSB: Reflective thinking skills Learning Outcome: None 6) Backflush costing has only two categories of costs that include materials and conversion costs.

Answer: TRUE Diff: 2 LO: 14-10 AACSB: Reflective thinking skills Learning Outcome: None 71 .

7) Backflush costing has no Work-In-Process Inventory account.

Answer: TRUE Diff: 2 LO: 14-10 AACSB: Reflective thinking skills Learning Outcome: None 8) Some backflush costing systems eliminate the Finished Goods Inventory account.

Answer: TRUE Diff: 2 LO: 14-10 AACSB: Reflective thinking skills Learning Outcome: None 9) Kulvekowski Company manufactures aircraft parts. A backflush costing system is used and standard costs for the part follow: Direct materials Conversion costs

$1.50 $2.00

The parts are scheduled for production only after orders are received. They are shipped immediately upon completion. Product costs are charged directly to Cost of Goods Sold. In July, 6,000 parts were produced and immediately shipped to the customer. Materials were purchased for cash at a cost of $10,000 and actual conversion costs were $12,000.

Required: Prepare the necessary journal entries.

Answer: Materials Inventory Cash

10,000 10,000

Conversion Costs Various Accounts

12,000

Cost of Goods Sold Materials Inventory ($1.50 × 6,000) Conversion Costs ($2 × 6,000) Diff: 2 LO: 14-10 AACSB: Analytic skills Learning Outcome: None

21,000

12,000

9,000 12,000

72 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 15 Basic Accounting: Concepts, Techniques, and Conventions 15.1 Questions 1) Which financial statement summarizes the operating performance of a company over a period of time?

A) statement of cash flows B) statement of stockholders' equity C) balance sheet D) income statement Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 2) I want to know where a company stands financially at December 31, 2014. Which financial statement should I use?

A) statement of cash flows B) statement of stockholders' equity C) statement of retained earnings D) balance sheet Answer: D Diff: 2 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 3) What do liabilities and stockholders' equity have in common?

A) They are both held by nonowners of the company.

B) They are both held by owners of the company.

C) They are both creditors.

D) They are both claims on a company's assets Answer: D Diff: 2 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None

1 .

4) The income statement summarizes a company's operating performance ________ and the balance sheet shows a company's financial position ________.

A) at a point in time; over a period of time B) at a point in time; at a point in time C) over a period of time; over a period of time D) over a period of time; at a point in time Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 5) Any event that affects the financial position of an organization and requires recording is called a(n) ________.

A) transaction B) account C) posting D) recognition principle Answer: A Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 6) The statement of financial position is also called the ________.

A) income statement B) statement of cash flows C) statement of retained earnings D) balance sheet Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 7) Economic resources that a company owns and expects to provide future benefits are called ________.

A) stockholders' equity B) assets C) liabilities D) retained earnings Answer: B Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None

2 .

8) For a corporation, the excess of assets over liabilities are called ________.

A) retained earnings B) paid-in capital C) common stock D) stockholders' equity Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 9) An entity's economic obligations to nonowners are called ________.

A) owners' equity B) liabilities C) assets D) retained earnings Answer: B Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 10) Which financial statement discloses the economic resources of the organization and the claims against those resources?

A) income statement B) statement of cash flows C) statement of retained earnings D) balance sheet Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 11) The main sections of the balance sheet include ________.

A) revenues, assets and liabilities B) assets, liabilities and expenses C) expenses, revenues and stockholders' equity D) assets, liabilities and stockholders' equity Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None

3 .

12) Which of the following statements is FALSE? A) Assets are economic resources that are expected to provide future benefits.

B) Liabilities are economic obligations or claims against the assets of an organization by nonowners.

C) Assets must always equal the sum of liabilities and owners' equity.

D) Owners' equity equals the sum of assets and liabilities.

Answer: D Diff: 1 LO: 15-1 AACSB: Analytic skills Learning Outcome: None 13) The ownership claim arising from funds contributed by the owners of the business is called ________.

A) liabilities B) retained earnings C) note payable D) paid-in capital Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 14) The ownership claim arising from the reinvestment of previous profits is called ________.

A) net assets B) stockholders' equity C) investment income D) retained earnings Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 15) In a corporation, stockholders' equity has two parts called ________ and ________.

A) dividends; net profit B) paid in capital; dividends C) net profit; retained earnings D) paid-in capital; retained earnings Answer: D Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None

4 .

16) A transaction is any event that affects the financial position of an organization and requires recording.

Answer: TRUE Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 17) Accounting information only helps assess past financial performance.

Answer: FALSE Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 18) A corporation is not a separate legal entity from its owners.

Answer: FALSE Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 19) The balance sheet shows a company's financial status at only one point in time.

Answer: TRUE Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 20) Liabilities are economic resources.

Answer: FALSE Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 21) Owners' equity represents the excess cash a company has made.

Answer: FALSE Diff: 2 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 22) Liabilities are the entity's economic obligations to owners.

Answer: FALSE Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 5 .

23) For a corporation, assets must equal liabilities plus paid-in capital.

Answer: FALSE Diff: 2 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 24) Stockholders' equity is composed of paid-in capital and retained earnings.

Answer: TRUE Diff: 1 LO: 15-1 AACSB: Reflective thinking skills Learning Outcome: None 15.2 Questions 1) Amounts owed to vendors for purchases on credit are called ________. Amounts due from customers for credit sales are called ________.

A) accounts payable; notes receivable B) notes payable; notes receivable C) accounts payable; accounts receivable D) debt payable; debt receivable Answer: C Diff: 2 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 2) A stockholders contributed $100,000 in exchange for stock in the company. What is the effect of this transaction?

A) assets increase and liabilities increase B) assets increase and revenues increase C) expenses increase and revenues increase D) assets increase and paid-in capital increases Answer: D Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None

6 .

3) Which of the following statements report the amount of net income earned by a company for a period of time?

A) balance sheet and income statement only B) income statement and statement of cash flows only C) income statement, statement of retained earnings and statement of stockholders' equity D) balance sheet and statement of cash flows only Answer: C Diff: 2 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 4) Which of the following explains the change in Retained Earnings from the beginning of the year to the end of the year?

A) revenues and expenses B) contributions by owners C) purchases of inventory D) a purchase of a plant asset Answer: A Diff: 2 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 5) Cash collections from customers who purchased goods on credit will decrease ________.

A) Accounts Receivable B) Accounts Payable C) Cash D) Retained Earnings Answer: A Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 6) A sale of inventory results in a(n) ________ in stockholders' equity equal to the selling price of the inventory. A sale of inventory also results in a(n) ________ in stockholders' equity equal to the cost of the inventory sold.

A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease Answer: C Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None

7 .

7) The acquisition of inventory for cash will ________.

A) increase liabilities and decrease stockholders' equity B) decrease assets and decrease liabilities C) increase assets and decrease liabilities D) increase assets and decrease assets Answer: D Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 8) The acquisition of inventory on account will ________.

A) increase assets and decrease stockholders' equity B) decrease assets and decrease liabilities C) increase assets and increase liabilities D) increase assets and increase stockholders' equity Answer: C Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 9) A cash payment on accounts payable will ________.

A) increase assets and increase liabilities B) increase assets and increase stockholders' equity C) decrease assets and decrease liabilities D) decrease assets and increase stockholders' equity Answer: C Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 10) Increases in ownership claims arising from the delivery of goods are called ________.

A) expenses B) profits C) assets D) revenues Answer: D Diff: 1 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None

8 .

11) Decreases in ownership claims arising from the delivery of goods are called ________.

A) revenues B) profits C) liabilities D) expenses Answer: D Diff: 1 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 12) Consider a firm that provides services to customers. To record revenue, which of the following conditions must be met?

A) the firm must render the services only B) the firm must render the services and receive cash or a promise of payment in the future C) the firm must render the services and receive cash D) the firm must promise to render the services in the future and receive cash Answer: B Diff: 3 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 13) Increases in revenues will ________. Increases in expenses will ________ .

A) increase Retained Earnings; increase Retained Earnings B) increase Retained Earnings; decrease Retained Earnings C) decrease Paid in Capital; decrease Paid in Capital D) increase assets; increase liabilities Answer: B Diff: 1 LO: 15-2 AACSB: Analytic skills Learning Outcome: None

9 .

14) The following information was extracted from the accounting records of Vogel Company: Beginning Paid-in Capital Beginning Retained Earnings Beginning Assets Contributions by Owners Revenues Expenses

$90,000 $300,000 $455,000 $0 $200,000 $155,000

At the beginning of the period, what is the total amount of liabilities?

A) $65,000 B) $100,000 C) $155,000 D) $245,000 Answer: A Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 15) The following information was extracted from the accounting records of Brankov Company: Beginning Paid-in Capital Beginning Retained Earnings Beginning Assets Contributions by Owners Cash dividends declared Revenues Expenses

$90,000 $300,000 $455,000 $0 $0 $200,000 $155,000

At the end of the period, what is the total amount of stockholders' equity?

A) $65,000 B) $135,000 C) $390,000 D) $435,000 Answer: D Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None

10 .

16) The following information was extracted from the accounting records of Kristie Company: Paid-in Capital, December 31, 2014 Retained Earnings, December 31, 2014 Total Assets, December 31, 2014 Revenues for year ended December 31, 2015 Expenses for year ended December 31, 2015 Cash Dividends Declared Total Assets, December 31, 2015 Additional investments by owners in 2015

$87,000 $211,000 $455,000 $200,000 $165,000 $0 $605,000 $0

At December 31, 2015, what is the total amount of liabilities?

A) $45,000 B) $150,000 C) $157,000 D) $272,000 Answer: D Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 17) The following information was extracted from the accounting records of Yamaguchi Company: Paid-in Capital, December 31, 2014 Retained Earnings, December 31, 2014 Total Assets, December 31, 2014 Revenues for year ended December 31, 2015 Expenses for year ended December 31, 2015 Total Assets, December 31, 2015 Additional investments by owners in 2015

$87,000 $211,000 $455,000 $200,000 $165,000 $605,000 $10,000

At December 31, 2014, what is the total amount of liabilities?

A) $45,000 B) $150,000 C) $157,000 D) $272,000 Answer: C Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None

11 .

18) Amounts due from customers are called accounts payable.

Answer: FALSE Diff: 2 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 19) When a company purchases inventory for cash, the net effect on the amount of total assets is zero.

Answer: TRUE Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 20) A cash payment of accounts payable does not affect stockholders' equity.

Answer: TRUE Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 21) Revenues do not affect stockholders' equity.

Answer: FALSE Diff: 2 LO: 15-2 AACSB: Analytic skills Learning Outcome: None 22) The excess of revenues over expenses is called a net profit.

Answer: TRUE Diff: 1 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 23) The balance sheet is not linked to the income statement.

Answer: FALSE Diff: 2 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 24) The income statement measures performance over a given amount of time.

Answer: TRUE Diff: 1 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None 12 .

25) Revenue and expense accounts are permanent stockholders' equity accounts.

Answer: FALSE Diff: 1 LO: 15-2 AACSB: Reflective thinking skills Learning Outcome: None

13 .

26) The following transactions occurred at Clarkson Company: 1. The company acquired $200 of inventory on credit.

2. The company rendered services billed at $100 on account.

3. The company paid $175 in accounts payable.

4. The company's owner invested $375 in cash.

5. The company acquired equipment costing $575 on account.

6. The company paid $25 for inventory.

Required: In the chart below, indicate if each transaction increases, decreases or has no effect on Assets, Liabilities and Stockholders' Equity.

Transaction Assets Liabilities Stockholders' Equity 1.

Increase Increase No effect -------------------------------------------------------------------------------------------------------------------2.

-------------------------------------------------------------------------------------------------------------------3.

-------------------------------------------------------------------------------------------------------------------4.

-------------------------------------------------------------------------------------------------------------------5.

-------------------------------------------------------------------------------------------------------------------6.

-------------------------------------------------------------------------------------------------------------------Answer: __________________________________________________________________ Transaction Assets Liabilities Stockholders' Equity 1.

Increase Increase No effect -------------------------------------------------------------------------------------------------------------------2.

Increase No effect Increase -------------------------------------------------------------------------------------------------------------------3.

Decrease Decrease No effect -------------------------------------------------------------------------------------------------------------------4.

Increase No effect Increase -------------------------------------------------------------------------------------------------------------------5.

Increase Increase No effect -------------------------------------------------------------------------------------------------------------------6.

Increase and No effect No effect Decrease -------------------------------------------------------------------------------------------------------------------Diff: 3 LO: 15-2 AACSB: Analytic skills Learning Outcome: None

14 .

15.3 Questions 1) Under accrual basis accounting, we record revenue when ________.

A) cash is received from customers B) cash is received for any reason C) it meets the criteria for revenue recognition D) a company receives cash from a customer on account Answer: C Diff: 2 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 2) Under accrual basis accounting, we record expenses when ________.

A) a company pays cash to a supplier B) a company incurs a liability C) a company uses resources D) a company pays cash to anyone Answer: C Diff: 2 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 3) For nonprofit organizations, the income statement is ________.

A) used B) replaced with the statement of stockholders' equity C) replaced with the statement of activities D) replaced with the statement of cash flows Answer: C Diff: 2 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 4) For nonprofit organizations, the stockholders' equity section of the balance sheet is replaced with ________.

A) retained earnings B) partners' capital C) partners' withdrawals D) net assets Answer: D Diff: 2 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None

15 .

5) Which of the following is(are) a deficiency(deficiencies) of cash-basis accounting?

A) it omits key revenues and expenses from the balance sheet B) it fails to match revenues and expenses to measure economic performance C) it omits key assets and key liabilities from the balance sheet D) B and C Answer: D Diff: 2 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 6) The cash basis of accounting recognizes the impact of transactions in the period when ________.

A) revenues and expenses occur B) cash is received or disbursed C) the accounting equation changes D) assets or liabilities change Answer: B Diff: 1 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 7) Nicholson Company sold inventory costing $1,000 for $3,000 on account. Nicholson Company operates under the accrual basis. What effect will the transaction have on the liabilities and owners' equity of the company?

A) liabilities will decrease by $2,000 B) liabilities will increase by $2,000 C) owners' equity will increase by $2,000 D) owners' equity will increase by $3,000 Answer: C Diff: 2 LO: 15-3 AACSB: Analytic skills Learning Outcome: None

16 .

8) Patrick Company had the following transactions: 1. The owner started the company by investing $10,000 of cash.

2. The company paid $2,000 for six months of rent. The rent was paid in advance.

3. The company acquired $3,300 in inventory and put one-third of the purchase on account. The company paid $2,200 cash.

4. The company sold inventory costing $1,400 for $2,900 on account.

After all these transactions, what is the balance in the cash account?

A) $1,600 B) $2,900 C) $5,800 D) $8,000 Answer: C Diff: 2 LO: 15-3 AACSB: Analytic skills Learning Outcome: None 9) Cudahy Company had the following transactions: 1. The owner started the company by investing $10,000 of cash.

2. The company paid $2,000 for six months of rent. The rent was paid in advance.

3. The company acquired $3,000 in inventory for cash.

4. The company sold inventory costing $1,400 for $2,900 on account.

After all these transactions, what is the balance in the cash account?

A) $2,100 B) $3,500 C) $5,000 D) $8,000 Answer: C Diff: 2 LO: 15-3 AACSB: Analytic skills Learning Outcome: None

17 .

10) The activity of Sterling Company for the month of April is presented below: Cost of goods sold Cash purchases of inventory Credit purchases of inventory Cash paid for credit purchase of inventory Cash dividend paid Wages earned and paid Wages earned and unpaid Rent paid for April, May and June

$62,000 $25,000 $50,000 $22,000 $7,000 $14,000 $2,000 $6,000

Using the accrual basis of accounting, the total expenses for Sterling Company for the month of April is ________.

A) $62,000 B) $78,000 C) $80,000 D) $86,000 Answer: C Diff: 2 LO: 15-3 AACSB: Analytic skills Learning Outcome: None 11) The activity of Vegas Company for the month of April is given below: Cash purchases of inventory Credit purchases of inventory Cash payment for credit purchases of inventory Cash dividend paid Wages earned and paid Wages earned and unpaid Rent paid for April, May and June

$45,000 $50,000 $12,000 $7,000 $12,000 $2,000 $9,000

Using the cash basis of accounting, the total expenses for Vegas Company for the month of April are ________.

A) $35,000 B) $78,000 C) $80,000 D) $95,000 Answer: B Diff: 2 LO: 15-3 AACSB: Analytic skills Learning Outcome: None

18 .

12) Given below are the activities of the Tamara Company: Credit sales Cash sales Cash collections from credit customers Purchased inventory on account

$90,000 $50,000 $36,000 $27,000

Using the cash basis of accounting, the total revenues for Tamara Company are ________.

A) $56,000 B) $86,000 C) $90,000 D) $173,000 Answer: B Diff: 2 LO: 15-3 AACSB: Analytic skills Learning Outcome: None 13) Given below are the activities of the Phoenix Company: Owners invested cash in business Credit sales Cash sales Cash collections from credit customers Purchased inventory on account

$20,000 $80,000 $20,000 $56,000 $37,000

Using the accrual basis of accounting, the total revenues for Phoenix Company are ________.

A) $46,000 B) $90,000 C) $100,000 D) $173,000 Answer: C Diff: 2 LO: 15-3 AACSB: Analytic skills Learning Outcome: None 14) Source documents are associated with ________.

A) Generally Accepted Accounting Principles B) implicit transactions C) explicit transactions D) compound entries Answer: C Diff: 1 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None

19 .

15) An example of an explicit transaction is ________.

A) recording depreciation expense B) paying cash for three months' rent in advance C) accruing wages expense at the end of the month D) accruing interest expense at the end of the year Answer: B Diff: 2 LO: 15-3 AACSB: Analytic skills Learning Outcome: None 16) Journal entries for the expiration of unexpired assets are usually made before the related cash flows.

Answer: FALSE Diff: 1 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 17) Under the accrual basis of accounting, the impact of transactions is recorded when cash is received or paid.

Answer: FALSE Diff: 1 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 18) Under the cash basis of accounting, expenses are matched with the revenues they help generate.

Answer: FALSE Diff: 2 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 19) Adjusting entries at the end of an accounting period record explicit transactions.

Answer: FALSE Diff: 2 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None 20) An example of an implicit transaction is cash received on account.

Answer: FALSE Diff: 2 LO: 15-3 AACSB: Reflective thinking skills Learning Outcome: None

20 .

15.4 Questions 1) On July 1, 2012, Slowinski Company borrows $100,000 on a 10% note due to a bank in one year. The accounts of Slowinski Company are affected by the adjusting entry at December 31, 2012 in which of the following ways?

A) increase assets and decrease expenses B) increase assets and increase liabilities C) increase expenses and increase liabilities D) increase expenses and increase stockholders' equity Answer: C Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 2) On June 1, 2012, a company borrows $100,000 on a 10% note due to a bank in one year. What amount of interest expense is reported for the year ending December 31, 2012?

A) $5,000 B) $5,833 C) $1,000 D) $10,000 Answer: B Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 3) On April 1, 2012, Company X lends $200,000 to Company Y on a 8% note. On April 1, 2012, which of the following accounts of Company X will be affected by this transaction?

A) Cash and Note Payable B) Cash and Note Receivable C) Cash and Interest Revenue D) Cash and Interest Expense Answer: B Diff: 2 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None

21 .

4) On April 1, 2012, Company Z lends $200,000 to Company Y on a 8% note. For the six months ending June 30, 2012, what amount of interest revenue will Company Z report on this note?

A) $4,000 B) $8,000 C) $12,000 D) $16,000 Answer: A Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 5) On March 1, a landlord received $10,000 rent for the month of April. On March 1, the landlord will ________.

A) increase Cash and increase Rent Revenue B) increase Cash and increase Unearned Rent Revenue C) increase Cash and increase Paid-in Capital D) increase Rent Expense and decrease Cash Answer: B Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 6) On March 1, a landlord received $10,000 rent for the month of April. On April 1, the landlord will ________.

A) decrease Cash and increase Rent Revenue B) decrease Cash and increase Unearned Rent Revenue C) decrease Paid-in Capital and increase Interest Revenue D) decrease Unearned Rent Revenue and increase Rent Revenue Answer: D Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 7) On May 1, Gomez Company paid $36,000 for rent. The rent covers the period May 1 through August 31. Gomez Company recorded Prepaid Rent of $36,000. What is the balance in the Prepaid Rent account on June 1?

A) $0 B) $9,000 C) $18,000 D) $27,000 Answer: D Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 22 .

8) On May 1, Gonzalez Company paid $36,000 for rent. The rent covers the period May 1 through August 31. Gonzalez Company recorded Prepaid Rent of $36,000. What is the Rent Expense for the period, May 1 through June 30?

A) $0 B) $9,000 C) $18,000 D) $27,000 Answer: C Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 9) On January 1, Latinovich Company paid $16,000 for rent. The rent covers the period January 1 through April 30. Latinovich Company recorded Prepaid Rent of $16,000. What is the balance in the Prepaid Rent account on April 1?

A) 0 B) $4,000 C) $8,000 D) $12,000 Answer: B Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 10) On July 1, Singh Company paid 6 months' insurance in advance. The policy covers the period of July 1 through December 31. The total payment was $5,400. At the time of the payment, the company set up the Prepaid Insurance account for $5,400. What is the balance in the Prepaid Insurance account on August 31?

A) 0 B) $1,800 C) $2,700 D) $3,600 Answer: D Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None

23 .

11) Seavers Company paid $2,700 for 6 months' insurance, covering the period of April 1 to September 30.

At the time of the payment, the entire amount was used to increase the balance in the Prepaid Insurance account. The balance in the Prepaid Insurance account on May 31 is ________.

A) $0 B) $900 C) $1,800 D) $2,250 Answer: C Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 12) Under accrual basis accounting, unexpired costs are considered to be ________.

A) expenses if cash has been paid B) expenses if cash has not been paid C) assets D) accrued liabilities Answer: C Diff: 1 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None 13) Under accrual basis accounting, research and development expenses for new products are recorded as ________.

A) assets and written off systematically over the expected life B) assets and expensed when paid in cash C) assets and expensed when the related products are sold D) expenses immediately Answer: D Diff: 2 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None 14) Depreciation expense is recorded for ________.

A) equipment and land B) land and buildings C) equipment and buildings D) equipment, land and building Answer: C Diff: 2 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None

24 .

15) On January 1, 2015, Arizona Company acquired a machine for $33,000. Annual depreciation expense equals $3,000. The residual value of the machine is $3,000. What is the book value of the machine on December 31, 2016?

A) $3,000 B) $27,000 C) $30,000 D) $33,000 Answer: B Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 16) Radison Company owns a fixed asset with an original cost of $100,000. The company estimates it will use the fixed asset for 5 years, at which time the fixed asset will be sold for $5,000. The company uses straight-line depreciation. The annual depreciation expense is ________.

A) $0 B) $10,000 C) $18,000 D) $19,000 Answer: D Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 17) Saint Paul Company owns a fixed asset with an original cost of $100,000. The company estimates it will use the fixed asset for four years, at which time it will be sold for $10,000. The company uses straightline depreciation. The book value of the fixed asset after three years of use is ________.

A) $22,500 B) $25,000 C) $32,500 D) $35,000 Answer: C Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None

25 .

18) The adjusting entry for ________ increases expenses and decreases assets.

A) wages expense B) depreciation expense C) unearned revenue D) accruing interest expense Answer: B Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 19) The adjusting entry that recognizes revenue earned on deferred revenues results in a(n) ________.

A) increase in liabilities and a decrease in stockholders' equity B) decrease in liabilities and a decrease in stockholders' equity C) increase in liabilities and an increase in stockholders' equity D) decrease in liabilities and an increase in stockholders' equity Answer: D Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 20) Cash collected from customers before goods are delivered is known as ________.

A) unearned revenue B) deferred revenue C) customer advances D) all of the above Answer: D Diff: 2 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None 21) Cash collected from customers before goods are delivered will increase ________.

A) assets and increase revenues B) revenues and decrease liabilities C) liabilities and increase assets D) liabilities and decrease revenues Answer: C Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None

26 .

22) A magazine publisher sells annual subscriptions for magazines. The publisher requires cash payment before the magazines are sent out. When the first monthly issue is sent out, the company will ________.

A) increase liabilities and increase assets B) increase assets and increase revenues C) increase revenues and decrease liabilities D) increase liabilities and decrease revenues Answer: C Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 23) Butters Company pays wages of $400 per day. The work week begins on Monday and ends on Friday.

Wages are paid weekly on Friday. The current month ends on a Wednesday. The adjusting entry at the end of the month will ________.

A) increase liabilities by $400 B) increase liabilities by $800 C) increase liabilities by $1,200 D) increase liabilities by $2,000 Answer: C Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 24) The adjusting entry for wages earned but unpaid results in a(n) ________.

A) increase in expenses and an increase in liabilities B) increase in expenses and a decrease in liabilities C) decrease in expenses and a decrease in liabilities D) decrease in expenses and an increase in liabilities Answer: A Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 25) On January 1, 2012, a company paid $3,000 for rent. The rent covers the period January 1, 2012 through June 30, 2012. On June 30, 2012, the fiscal year end, the company prepares an adjusting entry.

What is the effect of this adjusting entry on stockholders' equity?

A) increases B) decreases C) no effect D) not enough information to determine Answer: B Diff: 2 LO: 15-4 AACSB: Analytic skills Learning Outcome: None 27 .

26) Unexpired costs are expenses.

Answer: FALSE Diff: 1 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None 27) Rent received in advance of the rental period would be considered to be a prepaid asset by the landlord.

Answer: FALSE Diff: 2 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None 28) Companies must record research and development costs as expenses immediately.

Answer: TRUE Diff: 2 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None 29) When depreciating a fixed asset, the residual value is not considered.

Answer: FALSE Diff: 2 LO: 15-4 AACSB: Reflective thinking skills Learning Outcome: None 15.5 Questions 1) In order for the board of directors of a corporation to declare a cash dividend, there must be sufficient ________ and ________.

A) revenues; expenses B) net income; cash C) retained earnings; cash D) revenues; cash Answer: C Diff: 2 LO: 15-5 AACSB: Analytic skills Learning Outcome: None

28 .

2) Retained earnings are a general claim against ________.

A) stockholders B) creditors C) paid in capital D) total assets Answer: D Diff: 2 LO: 15-5 AACSB: Reflective thinking skills Learning Outcome: None 3) When cash dividends are declared, ________ decrease(s) and ________ increase(s).

A) retained earnings; cash B) cash; retained earnings C) retained earnings; liabilities D) cash; liabilities Answer: C Diff: 2 LO: 15-5 AACSB: Analytic skills Learning Outcome: None 4) The board of directors of Schwinn Company declared a cash dividend. Two weeks later, the dividend was disbursed to stockholders. The dividend disbursement will ________.

A) decrease net income B) decrease stockholders' equity C) decrease liabilities D) increase stockholders' equity Answer: C Diff: 2 LO: 15-5 AACSB: Analytic skills Learning Outcome: None

29 .

5) Paquin Company has the following information available for the most current year: Paid-in capital, January 1, 2014 Retained earnings, January 1, 2014 Total revenues in 2014 Total expenses in 2014 Dividend declared in 2014

$475,000 $50,000 $890,000 $550,000 $70,000

What was the balance in Retained Earnings at December 31, 2014?

A) $270,000 B) $320,000 C) $390,000 D) $405,000 Answer: B Diff: 2 LO: 15-5 AACSB: Analytic skills Learning Outcome: None 6) Moody Company has the following information available for the most current year: Paid-in capital, January 1, 2014 Retained earnings, January 1, 2014 Total revenues in 2014 Total expenses in 2014 Dividend declared in 2014 Dividend paid in 2014 Investments by owners in 2014

$475,000 $100,000 $870,000 $550,000 $70,000 $0 $10,000

What was the total amount of stockholders' equity for Moody Company at December 31, 2014?

A) $250,000 B) $350,000 C) $485,000 D) $835,000 Answer: D Diff: 2 LO: 15-5 AACSB: Analytic skills Learning Outcome: None

30 .

7) Barber Company has the following information available for the most current year: Paid-in capital, January 1, 2014 Retained earnings, January 1, 2014 Total revenues in 2014 Total expenses in 2014 Dividend declared in 2014 Dividend paid in 2014 Investments by owners in 2014

$475,000 $100,000 $870,000 $550,000 $70,000 $0 $10,000

What was the total amount of Retained Earnings for Barber Company at December 31, 2014?

A) $30,000 B) $250,000 C) $350,000 D) $420,000 Answer: C Diff: 2 LO: 15-5 AACSB: Analytic skills Learning Outcome: None 8) Fahnstock Company has the following information available for the most current year: Paid-in capital, January 1, 2014 Retained earnings, January 1, 2014 Total revenues in 2014 Total expenses in 2014 Dividend declared in 2014 Dividend paid in 2014 Investments by owners in 2014

$475,000 $100,000 $870,000 $550,000 $70,000 $0 $10,000

What was the total amount of paid-in capital for Fahnstock Company at December 31, 2014?

A) $475,000 B) $485,000 C) $535,000 D) $835,000 Answer: B Diff: 2 LO: 15-5 AACSB: Analytic skills Learning Outcome: None 9) Retained earnings indicate the amount of cash available for distribution to shareholders.

Answer: FALSE Diff: 1 LO: 15-5 AACSB: Reflective thinking skills Learning Outcome: None 31 .

10) Dividends paid are considered an expense on the income statement.

Answer: FALSE Diff: 1 LO: 15-5 AACSB: Reflective thinking skills Learning Outcome: None 11) Dividends reduce stockholders' equity when paid.

Answer: FALSE Diff: 2 LO: 15-5 AACSB: Analytic skills Learning Outcome: None 15.6 Questions 1) A multiple step income statement ________.

A) lists all the expenses together and calculates a total B) has a subtotal for gross profit C) has a subtotal for total assets D) has a subtotal for total retained earnings Answer: B Diff: 2 LO: 15-6 AACSB: Reflective thinking skills Learning Outcome: None

32 .

2) Sunday Company reports the following information on December 31, 2014: Cash Accounts receivable Accounts payable Accrued wages payable Unearned revenue Paid-in capital Retained earnings Inventory Prepaid rent Equipment (net)

$20,000 112,000 91,000 6,000 2,000 59,000 80,000 30,000 4,000 12,000

What are total assets at December 31, 2014?

A) $162,000 B) $166,000 C) $178,000 D) $180,000 Answer: C Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None 3) Zeman Company reports the following information on December 31, 2014: Cash Accounts receivable Accounts payable Accrued wages payable Unearned revenue Paid-in capital Retained earnings Inventory Prepaid rent Equipment (net)

$20,000 112,000 91,000 6,000 2,000 59,000 80,000 30,000 4,000 12,000

What are total liabilities at December 31, 2014?

A) $91,000 B) $97,000 C) $99,000 D) $179,000 Answer: C Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None

33 .

4) Marianne Company reports the following information on December 31, 2011: Cash Accounts receivable Accounts payable Accrued wages payable Unearned revenue Paid-in capital Retained earnings Inventory Prepaid rent Equipment (net)

$70,000 102,000 71,000 6,000 2,000 59,000 ?

30,000 4,000 12,000

What is total stockholders' equity at December 31, 2011?

A) $20,000 B) $80,000 C) $139,000 D) $170,000 Answer: C Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None 5) The stockholders' equity section of a corporation's balance sheet can be divided into ________.

A) net income and retained earnings B) retained earnings and paid-in capital C) net income and paid-in capital D) liabilities and retained earnings Answer: B Diff: 1 LO: 15-6 AACSB: Reflective thinking skills Learning Outcome: None

34 .

6) Double Company has the following data available: Dividends declared in 2015 Retained Earnings, December 31, 2014 Net income for the year ended December 31, 2015 Paid-in Capital, December 31, 2014 Paid-in Capital, December 31, 2015

$8,000 $30,000 $14,000 $29,000 $26,000

What is the balance in Retained Earnings on December 31, 2015?

A) $2,000 B) $24,000 C) $36,000 D) $44,000 Answer: C Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None 7) Christian Company has the following data available: Dividends declared in 2015 Retained Earnings, December 31, 2014 Net income for the year ended December 31, 2015 Paid-in Capital, December 31, 2014 Paid-in Capital, December 31, 2015

$8,000 $30,000 $14,000 $29,000 $26,000

What is the company's total stockholders' equity on December 31, 2015?

A) $36,000 B) $46,000 C) $62,000 D) $101,000 Answer: C Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None

35 .

8) California Company opened for business on April 1. Given below is the activity of the company for the month of April.

Owners invested cash in business Credit sales Cash sales Cost of goods sold Cash purchases of inventory Credit purchases of inventory Cash collections from credit customers Cash payment for credit purchases of inventory Cash borrowed on note payable Equipment purchased for cash Cash dividend paid Wages earned and paid Wages earned and unpaid Rent paid for April, May and June

$40,000 $160,000 $20,000 $124,000 $50,000 $100,000 $72,000 $44,000 $54,000 $18,000 $14,000 $28,000 $4,000 $6,000

Under accrual basis accounting, what is the net income for the month of April?

A) $8,000 B) $12,000 C) $18,000 D) $22,000 Answer: D Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None

36 .

9) Arizona Company has the following information available for the month of April: Sales Cost of goods sold Interest expense Income tax expense Wages expense Dividends declared Equipment purchased Rent expense

$100,000 $60,000 $2,000 $1,000 $12,000 $3,000 $20,000 $4,000

The company uses the accrual basis of accounting. What is the net income for the month of April?

A) $21,000 B) $22,000 C) $24,000 D) $27,000 Answer: A Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None 10) Hope Company has the following data available: Retained Earnings, January 1, 2011 Net income for the year ending December 31, 2011 Dividends declared in 2011 Paid-in Capital, January 1, 2011 Total liabilities, January 1, 2011

$12,000 $3,000 $2,000 $50,000 $40,000

What is the retained earnings balance on December 31, 2011?

A) $12,000 B) $13,000 C) $14,000 D) $63,000 Answer: B Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None 11) A multiple-step income statement includes a subtotal for gross profit.

Answer: TRUE Diff: 2 LO: 15-6 AACSB: Reflective thinking skills Learning Outcome: None

37 .

12) Gross profit is the excess of sales over all expenses.

Answer: FALSE Diff: 2 LO: 15-6 AACSB: Reflective thinking skills Learning Outcome: None

38 .

13) Cooley Company reports the following accounts and balances at December 31, 2015: Accounts Payable Accounts Receivable Cash Land Machine Merchandise Inventory Long-term Note Payable Short-term Note Payable Paid-in Capital Retained Earnings Sales Revenue Cost of Goods Sold Operating Expenses

$22,800 18,800 24,400 82,400 129,200 63,600 79,200 14,400 200,000 ?

122,000 80,000 40,000

Required: Prepare a balance sheet at December 31, 2015. Also, prepare an income statement for the year ended December 31, 2015. Ignore depreciation expense and interest expense.

39 .

Answer:

Cooley Company Balance Sheet December 31, 2015

Assets: Cash Accounts Receivable Merchandise Inventory Land Machine Total assets

$24,400 18,800 63,600 82,400 129,200 $318,400

Liabilities: Accounts Payable Short-term Notes Payable Long-term Notes Payable Total liabilities

$22,800 14,400 79,200 $116,400

Stockholders' equity: Paid-in Capital Retained Earnings Total stockholders' equity Total liabilities and stockholders' equity

$200,000 2,000 $202,000 $318,400

Cooley Company Income Statement For the Year Ended December 31, 2015 Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Income Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None

$122,000 80,000 42,000 40,000 $2,000

40 .

14) The Monk Company reports the following accounts and balances on December 31, 2015.

Accounts Payable Accounts Receivable Cash Equipment Land Long-term Note Payable Merchandise Inventory Paid-in Capital Retained Earnings

$14,400 8,000 26,000 80,000 56,000 70,000 28,800 ?

14,400

Required: Prepare a balance sheet at December 31, 2015.

Answer:

Monk Company Balance Sheet December 31, 2015

Assets: Cash Accounts Receivable Merchandise Inventory Land Equipment Total assets

$26,000 8,000 28,800 56,000 80,000 $198,800

Liabilities: Accounts Payable Long-term Notes Payable Total liabilities

$14,400 70,000 $84,400

Stockholders' equity: Paid-in capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None

$100,000 14,400 $114,400 $198,800

41 .

15) Foward Company had the following data available: Net income for the year ending December 31, 2015 Dividends declared during 2015 Dividends paid during 2015 Paid-in capital, January 1, 2015 Retained earnings, January 1, 2015

$50,000 $47,000 $32,000 $45,000 $59,000

Required: Prepare a statement of retained earnings for Forward Company for the year ended December 31, 2015.

Answer: Forward Company Statement of Retained Earnings For the Year Ended December 31, 2015 Retained Earnings, January 1, 2015 Add: Net income Subtotal Less: Dividends declared Retained Earnings, December 31, 2015 Diff: 2 LO: 15-6 AACSB: Analytic skills Learning Outcome: None

$59,000 50,000 109,000 (47,000) $62,000

15.7 Questions 1) In a partnership, a partner's capital account is increased by ________.

A) dividends B) a partner's share of net income C) contributions made by a partner D) B and C Answer: D Diff: 2 LO: 15-7 AACSB: Analytic skills Learning Outcome: None 2) A sole proprietorship has ________ owner's equity account(s). A partnership with three partners has ________ owners' equity account(s).

A) one; one B) two; one C) one; three D) one; four Answer: C Diff: 1 LO: 15-7 AACSB: Reflective thinking skills Learning Outcome: None 42 .

3) The distinction between paid-in capital and retained earnings is not made for ________.

A) corporations B) corporations and partnerships C) corporations and sole proprietorships D) partnerships and sole proprietorships Answer: D Diff: 1 LO: 15-7 AACSB: Reflective thinking skills Learning Outcome: None 4) A sole proprietorship is a business organized as a separate legal entity and owned by its stockholders.

Answer: FALSE Diff: 2 LO: 15-7 AACSB: Reflective thinking skills Learning Outcome: None 5) Financial statements for partnerships do not make distinctions between paid-in capital and retained earnings.

Answer: TRUE Diff: 2 LO: 15-7 AACSB: Reflective thinking skills Learning Outcome: None 15.8 Questions 1) In the United States, Generally Accepted Accounting Principles are developed primarily by ________.

A) International Accounting Standards Board B) Financial Accounting Standards Board C) Securities and Exchange Commission D) International Accounting Federation Answer: B Diff: 1 LO: 15-8 AACSB: Reflective thinking skills Learning Outcome: None

43 .

2) Audits of the financial statements of publicly held companies are conducted in accordance with standards approved by the ________.

A) Financial Accounting Standards Board B) Securities and Exchange Commission C) Institute of Certified Public Accountants D) Public Company Accounting Oversight Board Answer: D Diff: 2 LO: 15-8 AACSB: Analytic skills Learning Outcome: None 3) An audit guarantees that there are absolutely no mistakes in the financial statements.

Answer: FALSE Diff: 2 LO: 15-8 AACSB: Reflective thinking skills Learning Outcome: None 4) Generally Accepted Accounting Principles in the United States are developed by the International Accounting Standards Committee.

Answer: FALSE Diff: 2 LO: 15-8 AACSB: Reflective thinking skills Learning Outcome: None 15.9 Questions 1) Most companies that follow accrual basis accounting recognize revenue after they ________.

A) receive cash from the customer B) deliver goods or perform services C) pay cash for operating expenses D) provide warranty service on a product Answer: B Diff: 2 LO: 15-9 AACSB: Reflective thinking skills Learning Outcome: None

44 .

2) One of the limitations of the balance sheet is that the dollar amounts for different assets reflect different levels of inflation. That is the result of the ________ assumption.

A) recognition B) matching C) stable monetary unit D) conservatism Answer: C Diff: 1 LO: 15-9 AACSB: Reflective thinking skills Learning Outcome: None 3) The matching concept matches ________ and ________.

A) assets; liabilities B) assets; expenses C) revenues; expenses incurred to generate revenues D) net profit; expenses Answer: C Diff: 2 LO: 15-9 AACSB: Reflective thinking skills Learning Outcome: None 4) The matching convention attempts to match revenues and assets to a particular period.

Answer: FALSE Diff: 2 LO: 15-9 AACSB: Reflective thinking skills Learning Outcome: None 15.10 Questions 1) The ________ assumption implies that a company will continue to use existing resources and pay existing liabilities at maturity in an orderly manner.

A) conservatism B) relevance C) going concern D) materiality Answer: C Diff: 1 LO: 15-10 AACSB: Reflective thinking skills Learning Outcome: None

45 .

2) The accounting convention of ________ means selecting the method of measurement that provides the most pessimistic immediate results.

A) cost benefit B) objectivity C) materiality D) conservatism Answer: D Diff: 1 LO: 15-10 AACSB: Reflective thinking skills Learning Outcome: None 3) The accounting convention of ________ permits a company to immediately expense assets with long useful lives and small dollar costs.

A) objectivity B) materiality C) continuity D) conservatism Answer: B Diff: 2 LO: 15-10 AACSB: Reflective thinking skills Learning Outcome: None 4) The main qualities of accounting information that make accounting information useful for decision making are ________ and ________.

A) relevance; reliability B) relevance; comparability C) consistency; comparability D) relevance; faithful representation Answer: D Diff: 2 LO: 15-10 AACSB: Reflective thinking skills Learning Outcome: None 5) Information is relevant if it has ________ and ________.

A) verifiability; comparability B) timeliness; materiality C) predictive value; confirmatory value D) reliability; feedback value Answer: C Diff: 2 LO: 15-10 AACSB: Analytic skills Learning Outcome: None

46 .

6) A company uses the going concern convention when it is in a near-bankrupt situation.

Answer: FALSE Diff: 2 LO: 15-10 AACSB: Reflective thinking skills Learning Outcome: None 7) The materiality concept is not subjective.

Answer: FALSE Diff: 2 LO: 15-10 AACSB: Reflective thinking skills Learning Outcome: None 15.11 Questions 1) Yesterday Company's accountant recorded a debit to Accounts Payable and a credit to Cash. This transaction will ________.

A) increase Cash and decrease Accounts Payable B) decrease Cash and increase Accounts Payable C) increase Cash and increase Accounts Payable D) decrease Cash and decrease Accounts Payable Answer: D Diff: 2 LO: 15-11 AACSB: Analytic skills Learning Outcome: None 2) Uptown Company purchases $4,000 of inventory on account. Uptown Company should debit ________.

A) Cash for $1,000, and credit Accounts Payable for $4,000 B) Cash for $1,000, and credit Note Payable for $4,000 C) Inventory for $4,000, and credit Cash for $4,000 D) Inventory for $4,000, and credit Accounts Payable for $4,000 Answer: D Diff: 2 LO: 15-11 AACSB: Analytic skills Learning Outcome: None

47 .

3) Jackson Company collected $1,200 on account. Jackson will ________.

A) Debit Cash $1,200 and Credit Accounts Payable $1,200 B) Debit Accounts Receivable $1,200 and Credit Cash $1,200 C) Debit Accounts Payable $1,200 and Credit Cash $1,200 D) Debit Cash $1,200 and Credit Accounts Receivable $1,200 Answer: D Diff: 3 LO: 15-11 AACSB: Analytic skills Learning Outcome: None 4) On January 1, 2014, Everest Company paid $4,000 for insurance that covers the period, February 1, 2014 through January 31, 2015. Which of the following journal entries is prepared on January 1, 2014?

A) Debit Insurance Expense $4,000 and Credit Cash $4,000 B) Debit Prepaid Insurance $4,000 and Credit Cash $4,000 C) Debit Cash $4,000 and Credit Insurance Expense $4,000 D) Debit Cash $4,000 and Credit Insurance Revenue $4,000 Answer: B Diff: 2 LO: 15-11 AACSB: Analytic skills Learning Outcome: None

48 .

5) Listed below are the transactions for Kaiman Company: 1. The owners invest $100,000 in the company in exchange for common stock.

2. The company purchases equipment costing $30,000 with a note payable. The equipment has a ten year life and no salvage value. The company uses the straight-line method of depreciation.

3. The company purchases inventory costing $10,000 by paying cash.

4. The company paid $8,000 for four months' rent in advance.

5. The company sold inventory for $9,000 cash. The cost of the inventory was $5,000.

6. The company used one month of rent.

7. The company declared a cash dividend of $500.

8. Depreciation expense on the equipment was recorded for the month.

Required: Prepare journal entries for the above transactions.

Answer: 1. Cash 100,000 Common Stock 2. Equipment 30,000 Note Payable 3. Inventory 10,000 Cash 4. Prepaid Rent 8,000 Cash 5. Cost of Goods Sold 5,000 Inventory Cash 9,000 Sales Revenue 6. Rent Expense 2,000 Prepaid Rent 7. Dividend 500 Dividend Payable 8. Depreciation Expense 250 Accumulated Depreciation Diff: 2 LO: 15-11 AACSB: Analytic skills Learning Outcome: None

100,000 30,000 10,000 8,000 5,000 9,000 2,000 500 250

49 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 16 Understanding Corporate Annual Reports: Basic Financial Statements 16.1 Questions 1) Which of the following assets is NOT classified as a short-term investment?

A) corporate stocks B) corporate bonds C) debt securities issued by governments D) checking account balance Answer: D Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 2) The net amount a company expects to collects on Accounts Receivable is equal to ________.

A) gross Accounts Receivable B) Allowance for Doubtful Accounts C) gross Accounts Receivable minus Allowance for Doubtful Accounts D) gross Accounts Receivable plus Allowance for Doubtful Accounts Answer: C Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 3) Manufacturers have several inventory accounts that do NOT include ________.

A) Finished Goods Inventory B) Raw Materials Inventory C) Work in Process Inventory D) Construction in Process Inventory Answer: D Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None

1 .

4) A unit of ending inventory has a cost of $100 per unit. The selling price per unit is $200. The replacement cost per unit is $90. What value is reported for this inventory on the balance sheet?

A) $90 B) $100 C) $110 D) $200 Answer: A Diff: 2 LO: 16-1 AACSB: Analytic skills Learning Outcome: None 5) Details about Property, Plant and Equipment, such as the age of plant assets and the types of plant assets, are typically reported ________.

A) on the balance sheet B) on the income statement C) on the statement of cash flows D) in a footnote Answer: D Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 6) Leasehold Improvements do NOT include ________.

A) painting and decorating of leased property B) security systems added to leased property C) bookcases built into walls of leased property D) furniture used at leased property Answer: D Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 7) Companies do not amortize indefinite-life intangible assets. What do companies do each year for these assets?

A) only report them on the balance sheet B) only apply an impairment test annually C) only report them on the statement of stockholders' equity D) A and B Answer: D Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None

2 .

8) Current assets are expected to be converted to cash or sold or consumed within ________.

A) one year or operating cycle if longer than one month B) one year or operating cycle if longer than one year C) one year or operating cycle if shorter than one year D) one fiscal year Answer: B Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 9) Which of the following is NOT a current asset?

A) Inventories B) Prepaid Insurance C) Supplies D) Land Answer: D Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 10) On a classified balance sheet, the Equipment account is reduced by ________.

A) Allowance for Bad Debts B) Allowance for Doubtful Accounts C) Accumulated Depreciation D) Depreciation Expense Answer: C Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 11) The purpose of depreciation is to ________.

A) establish the current replacement cost of a fixed asset B) accumulate funds to replace a fixed asset C) set aside cash to replace a fixed asset D) allocate the original cost of a fixed asset to the periods that benefit from the use of the fixed asset Answer: D Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None

3 .

12) Which of the following is NOT a tangible asset?

A) inventories B) land C) equipment D) goodwill Answer: D Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 13) Intangible assets are ________.

A) assets with a physical presence B) assets that can be seen and touched C) rights to expected future benefits D) assets with definite lives only Answer: C Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 14) The amortization of intangible assets applies to ________.

A) Research and Development Costs B) Goodwill C) intangible assets with definite lives D) intangible assets with indefinite lives Answer: C Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 15) Goodwill remains on a company's books until ________.

A) accountants amortize it B) accountants depreciate it C) management sells it D) management determines its value is impaired Answer: D Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None

4 .

16) Accounts receivable is a current asset.

Answer: TRUE Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 17) A company's operating cycle can be longer than one year.

Answer: TRUE Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 18) The Allowance for Bad Debts account is added to the Accounts Receivable account on the balance sheet.

Answer: FALSE Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 19) Land is not depreciated.

Answer: TRUE Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 20) Freight and installation costs are added to the cost of equipment.

Answer: TRUE Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 21) Leasehold improvements are amortized annually.

Answer: TRUE Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None

5 .

22) Some intangible assets are depreciated.

Answer: FALSE Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 23) Research and development costs are expensed when incurred for financial statement purposes.

Answer: TRUE Diff: 1 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 24) Goodwill is amortized for financial statement purposes.

Answer: FALSE Diff: 2 LO: 16-1 AACSB: Reflective thinking skills Learning Outcome: None 16.2 Questions 1) Deferred tax liabilities are ________.

A) expected increases in future income taxes due to past transactions B) expected decreases in future income taxes due to past transactions C) expected increases in future income taxes due to future transactions D) expected decreases in future income taxes due to future transactions Answer: A Diff: 2 LO: 16-2 AACSB: Reflective thinking skills Learning Outcome: None 2) How should Unearned Rent Revenue be classified on a balance sheet at December 31, 2013? The rental contract covers the period, January 1, 2013 through December 31, 2015.

A) current liability only B) long-term liability only C) current and long-term liability D) current asset only Answer: C Diff: 2 LO: 16-2 AACSB: Analytic skills Learning Outcome: None

6 .

3) An example of secured bonds is ________.

A) debentures B) zero coupon bonds C) mortgage bonds D) serial bonds Answer: C Diff: 2 LO: 16-2 AACSB: Reflective thinking skills Learning Outcome: None 4) It is December 31, 2014. A Note Payable is due in five annual installments beginning on December 31, 2015. On the balance sheet dated December 31, 2014, the Note Payable is classified as ________.

A) current liability only B) long-term liability only C) current and long-term liability D) owners' equity Answer: C Diff: 3 LO: 16-2 AACSB: Analytic skills Learning Outcome: None 5) Current liabilities are debts due within the ________ year or within the normal operating cycle if ________.

A) past; longer than a year B) next; longer than a year C) past; shorter than a year D) next; shorter than a year Answer: B Diff: 2 LO: 16-2 AACSB: Reflective thinking skills Learning Outcome: None 6) Unsecured debt holders are creditors who have ________.

A) a specific claim against particular assets B) a specific claim against fixed assets only C) a general claim against fixed assets only D) a general claim against total assets Answer: D Diff: 2 LO: 16-2 AACSB: Reflective thinking skills Learning Outcome: None

7 .

7) Assume you are preparing a balance sheet dated December 31, 2014. Which of the following is NOT a long-term liability?

A) bonds payable due June 30, 2016 B) bonds payable due June 30, 2015 C) bonds payable due December 31, 2016 D) bonds payable due December 31, 2020 Answer: B Diff: 2 LO: 16-2 AACSB: Analytic skills Learning Outcome: None 8) Convertible bonds allow a bondholder to exchange ________.

A) unsecured bonds for secured bonds B) unsubordinated bonds for subordinated bonds C) common stock for bonds D) bonds for mortgage bonds Answer: C Diff: 2 LO: 16-2 AACSB: Analytic skills Learning Outcome: None 9) The account Unearned Revenue is a revenue account.

Answer: FALSE Diff: 1 LO: 16-2 AACSB: Reflective thinking skills Learning Outcome: None 10) Accounts payable, wages payable and income taxes payable are all considered to be current liabilities.

Answer: TRUE Diff: 1 LO: 16-2 AACSB: Reflective thinking skills Learning Outcome: None 11) Accrued interest payable is a long-term liability because it relates to a long-term bond payable.

Answer: FALSE Diff: 1 LO: 16-2 AACSB: Reflective thinking skills Learning Outcome: None

8 .

12) Working capital is equal to current assets plus current liabilities.

Answer: FALSE Diff: 1 LO: 16-2 AACSB: Reflective thinking skills Learning Outcome: None 16.3 Questions 1) Which of the following items is NOT a component of stockholders' equity?

A) paid-in capital B) retained earnings C) accumulated other comprehensive income D) deferred income tax liabilities Answer: D Diff: 2 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None 2) Damon Company sold 10,000 shares of $1 par value common stock. The selling price was $9.00 per share. After the sale, what is the capital in excess of par value?

A) $80,000 B) $90,000 C) $100,000 D) $110,000 Answer: A Diff: 2 LO: 16-3 AACSB: Analytic skills Learning Outcome: None 3) What is Other Comprehensive Income?

A) unrealized gains and loss that are reported on the Statement of Retained Earnings B) unrealized gains and losses that are reported on the traditional Income Statement C) unrealized gains and losses that are reported on the Balance Sheet D) unrealized gains and losses that are not reported on the financial statements Answer: C Diff: 2 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None

9 .

4) Preferred stock has priority over common stock in ________.

A) voting rights B) distribution of assets in liquidation C) payment of dividends D) B and C Answer: D Diff: 2 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None 5) Treasury stock is shown on the balance sheets as a deduction from ________.

A) total assets B) total liabilities C) total current assets D) total stockholders' equity Answer: D Diff: 2 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None 6) Johnson Company's capital stock is currently trading for $22 per share. The following accounts appear on the balance sheet: Common stock, $6.00 par value per share, 10,000 shares issued Paid in capital in excess of par value

$60,000 $200,000

The only transaction affecting the accounts was one issue of the company's common stock. What was the original selling price of the common stock?

A) $6.00 per share B) $20.00 per share C) $22.00 per share D) $26.00 per share Answer: D Diff: 2 LO: 16-3 AACSB: Analytic skills Learning Outcome: None

10 .

7) Joe Anthony Company recently issued 20,000 shares of $1.00 par value common stock for $40,000. This transaction will increase the ________.

A) Common stock account by $20,000 B) Common stock account by $40,000 C) Paid in capital in excess of par account by $40,000 D) Retained earnings account by $40,000 Answer: A Diff: 2 LO: 16-3 AACSB: Analytic skills Learning Outcome: None 8) Treasury stock is ________.

A) unissued shares of stock B) the number of shares of stock that cannot be sold in the future C) shares of stock held in other companies for investment purposes D) shares of stock already issued that are later repurchased by the corporation that originally issued them Answer: D Diff: 2 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None 9) The limited liability of stockholders in a corporation means that ________.

A) the company's creditors cannot seek payment from the stockholders as individuals if the corporation cannot pay its debt B) the company's creditors cannot receive more than the face value of their debt C) the short-term creditors have to be paid before the long-term creditors D) the long-term creditors have to be paid before the short-term creditors Answer: A Diff: 2 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None 10) Treasury stock is a deduction from total stockholders' equity.

Answer: TRUE Diff: 1 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None 11) Par value is the value that is printed on the face of the stock certificate.

Answer: TRUE Diff: 1 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None 11 .

12) Preferred stockholders receive cash dividends before common stockholders.

Answer: TRUE Diff: 1 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None 13) A company's treasury stock is outstanding but not issued.

Answer: FALSE Diff: 1 LO: 16-3 AACSB: Reflective thinking skills Learning Outcome: None

12 .

14) The following balances are available for Thompson Company on December 31, 2015: Accumulated depreciation Accounts payable Accounts receivable Additional paid-in capital Common stock Cash Fixed assets Interest payable Inventory Long-term notes payable Prepaid rent Retained earnings Wages payable

$21,800 11,200 9,800 24,000 6,000 7,400 89,400 2,400 13,600 28,000 2,500 ?

6,400

Required: Prepare a classified balance sheet at December 31, 2015.

13 .

Answer:

Thompson Company Balance Sheet December 31, 2015

Current Assets: Cash Accounts Receivable Inventory Prepaid rent Total current assets Noncurrent Assets: Fixed assets Less: Accumulated Depreciation Total long-term assets Total assets Current Liabilities: Accounts payable Interest payable Wages payable Total current liabilities Noncurrent Liabilities: Long-term notes payable Total liabilities Stockholders' Equity: Common stock Additional paid-in capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Diff: 2 LO: 16-3 AACSB: Analytic skills Learning Outcome: None

$7,400 9,800 13,600 2,500 $33,300 $89,400 (21,800) 67,600 $100,900

$11,200 2,400 6,400 $20,000 28,000 $48,000 $6,000 24,000 22,900 52,900 $100,900

14 .

15) The balances on December 31, 2015 are available for Jennifer Company: Accounts payable Accounts receivable Accumulated depreciation Retained earnings, December 31, 2014 Cash Cost of goods sold Depreciation expense Dividends declared Equipment Income tax expense Interest expense Inventory Long-term notes payable Paid-in capital Prepaid rent Rent expense Sales Wage expense Wages payable

$2,550 3,550 6,250 ?

2,300 52,300 2,500 8,800 29,000 10,700 1,150 6,250 11,500 4,450 350 4,000 118,600 31,900 3,000

Required: Prepare a classified balance sheet at December 31, 2015.

15 .

Answer:

Jennifer Company Balance Sheet December 31, 2015

Current Assets: Cash Accounts Receivable Inventory Prepaid rent Total current assets Noncurrent Assets: Equipment Less: Accumulated Depreciation Total long-term assets Total assets Current Liabilities: Accounts payable Wages payable Total current liabilities Noncurrent Liabilities: Long-term notes payable Total liabilities Stockholders' Equity: Paid-in capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$2,300 3,550 6,250 350 $12,450 $29,000 (6,250) 22,750 $35,200

$2,550 3,000 $5,550 11,500 $17,050 4,450 13,700 18,150 $35,200

Diff: 2 LO: 16-3 AACSB: Analytic skills Learning Outcome: None

16 .

16) The following information is available for Anderson Company at December 31, 2016: Additional paid-in capital, common Common stock, $5 par value, 40,000 shares issued Dividends payable Long-term investment in Jacobs Company Marketable securities Retained earnings Treasury stock, common, 8,000 shares

$490,000 200,000 415,000 1,400,000 610,000 242,000 176,000

Required: Prepare the stockholders' equity section of a classified balance sheet at December 31, 2016. Assume 400,000 shares of common stock are authorized to be issued.

Answer: Common stock, $5 par value, 400,000 shares authorized, 40,000 shares issued, 32,000 shares outstanding $200,000 Additional paid-in capital, common 490,000 Retained earnings 242,000 Total stockholders' equity 932,000 Less: Treasury stock, common, 8,000 shares (176,000) Total stockholders' equity $756,000 Diff: 2 LO: 16-3 AACSB: Analytic skills Learning Outcome: None 16.4 Questions 1) What is gross margin?

A) sales minus operating expenses B) sales minus other expenses C) sales minus cost of goods sold D) sales plus other income Answer: C Diff: 2 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None 2) What is earnings per share?

A) net income divided by weighted average number of preferred shares outstanding B) net income divided by weighted average number of common shares outstanding C) net income plus the weighted average number of common and preferred shares outstanding D) net income plus the weighted average number of bonds outstanding Answer: B Diff: 2 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None 17 .

3) When calculating diluted earnings per share, which of the following items is NOT considered?

A) number of common shares outstanding B) additional common shares from conversion of convertible securities C) additional common shares from exercise of stock options D) number of common shares authorized to be issued Answer: D Diff: 2 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None 4) A multiple step income statement has several measures of profit that do NOT include ________.

A) operating income B) gross margin C) income before taxes D) cost of sales Answer: D Diff: 2 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None 5) ________ summarizes the results of the basic operating activities of a company.

A) Gross margin B) Gross profit C) Net profit D) Operating income Answer: D Diff: 1 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None 6) A nonoperating item on a multiple-step income statement that reflects financial decisions is ________.

A) gain from sale of inventory B) interest expense C) income tax expense D) operating profit Answer: B Diff: 2 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None

18 .

7) Nonoperating items on a multiple-step income statement do NOT include ________.

A) interest income B) interest expense C) gain from disposal of a fixed asset D) selling expenses Answer: D Diff: 2 LO: 16-4 AACSB: Analytic skills Learning Outcome: None 8) Sanders Company had the following data for the year ending December 31, 2014: Cash Depreciation expense Prepaid rent Cost of goods sold Sales Dividends paid Rent expense Wage expense

$6,000 40,000 1,400 69,000 200,000 3,000 3,600 81,000

What is the net income for the year ending December 31, 2014?

A) $400 B) $3,400 C) $6,000 D) $6,400 Answer: D Diff: 2 LO: 16-4 AACSB: Analytic skills Learning Outcome: None

19 .

9) Selected items from the financial statements for Lorna Company are listed below: Paid in capital, December 31, 2014 Retained earnings, December 31, 2014 Common stock dividends declared in 2014 Net income for the year ended December 31, 2014

$100,000 $75,000 $75,000 $100,000

Lorna Company has 5,000 common shares outstanding during the year. What are the earnings per share for the year ended December 31, 2014?

A) $12.00 B) $15.00 C) $20.00 D) $25.00 Answer: C Diff: 2 LO: 16-4 AACSB: Analytic skills Learning Outcome: None 10) Gross profit equals sales minus cost of goods sold.

Answer: TRUE Diff: 1 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None 11) Nonoperating items on a multiple-step income statement include interest expense and interest income.

Answer: TRUE Diff: 2 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None 12) The inventory method a company uses does not affect its income statement.

Answer: FALSE Diff: 1 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None 13) Operating income summarizes the results of basic operating activities of a company.

Answer: TRUE Diff: 1 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None

20 .

14) The last line item on an income statement is earnings per share.

Answer: TRUE Diff: 1 LO: 16-4 AACSB: Reflective thinking skills Learning Outcome: None

21 .

15) The balances on December 31, 2015 are available for Matthew Company: Accounts payable Accounts receivable Accumulated depreciation Retained earnings, December 31, 2014 Cash Cost of goods sold Depreciation expense Dividends declared Equipment Income tax expense Interest expense Inventory Long-term notes payable Paid-in capital Prepaid rent Rent expense Sales Wage expense Wages payable

$2,550 3,550 6,250 6,450 2,300 52,300 2,500 8,800 29,000 10,700 1,150 6,250 11,500 4,450 350 4,000 120,000 41,900 3,000

Required: Prepare a multiple-step income statement for the year ended December 31, 2015.

Answer:

Matthew Company Income Statement For the year ended December 31, 2015

Sales Less: Cost of goods sold Gross profit Operating expenses: Wage expense Depreciation expense Rent expense Total operating expenses Operating income Other expense: Interest expense Income before taxes Income tax expense Net income Diff: 2 LO: 16-4 AACSB: Analytic skills Learning Outcome: None

$120,000 52,300 67,700 $41,900 2,500 4,000 48,400 19,300 (1,150) 18,150 10,700 $7,450

22 .

16) Wheel Company has the following balances at December 31, 2015: Retained earnings, December 31, 2014 Cost of goods sold Depreciation expense Dividends Income tax expense Interest expense Rent expense Sales Wage expense

$30,000 56,000 1,450 8,000 2,000 1,050 1,700 68,000 6,800

Required: Prepare a multiple-step income statement for the year ended December 31, 2015.

Answer: Wheel Company Income Statement For the year ended December 31, 2015 Sales Less: Cost of goods sold Gross profit Operating expenses: Wage expense Depreciation expense Rent expense Total operating expenses Operating income Other expense: Interest expense Income before taxes Income tax expense Net loss Diff: 2 LO: 16-4 AACSB: Analytic skills Learning Outcome: None

$68,000 56,000 12,000 $6,800 1,450 1,700 9,950 2,050 (1,050) 1,000 2,000 $(1,000)

16.5 Questions 1) The statement of changes in stockholders' equity shows the changes in ________.

A) retained earnings only B) dividends only C) each of the stockholders' equity accounts D) fixed assets only Answer: C Diff: 2 LO: 16-5 AACSB: Reflective thinking skills Learning Outcome: None 23 .

2) Mary Company had the following data available: Paid-in capital, December 31, 2014 Retained earnings, December 31, 2014 Net income for the year ended December 31, 2015 Dividends declared in 2015

$43,000 $27,000 $35,400 $20,000

What is the balance in Retained Earnings on December 31, 2015?

A) $23,400 B) $42,400 C) $52,400 D) $66,400 Answer: B Diff: 2 LO: 16-5 AACSB: Analytic skills Learning Outcome: None 3) Michael Company had the following data: Retained earnings, January 1, 2015 Depreciation expense for 2015 Cost of goods sold for 2015 Paid-in capital, January 1, 2015 Rent expense for 2015 Sales for 2015 Dividends declared in 2015 Wage expense for 2015 Prepaid rent, January 1, 2015

$45,000 $7,000 $102,000 $26,000 $12,000 $194,000 $15,000 $40,000 $2,000

What is the balance in Retained Earnings on December 31, 2015?

A) $61,000 B) $63,000 C) $65,000 D) $74,000 Answer: B Diff: 2 LO: 16-5 AACSB: Analytic skills Learning Outcome: None

24 .

4) The ending retained earnings balance of Brothers Company is $700,000. During the current year, net income is $370,000 and dividends declared are $150,000. What is the beginning balance in retained earnings?

A) $480,000 B) $580,000 C) $800,000 D) $1,060,000 Answer: A Diff: 2 LO: 16-5 AACSB: Analytic skills Learning Outcome: None 5) Dividends paid are reported on the Retained Earnings Statement.

Answer: FALSE Diff: 1 LO: 16-5 AACSB: Reflective thinking skills Learning Outcome: None 6) Cash dividends declared are an addition to Retained Earnings on the Retained Earnings Statement.

Answer: FALSE Diff: 1 LO: 16-5 AACSB: Reflective thinking skills Learning Outcome: None 7) Cash dividends are reported as an expense on the Income Statement.

Answer: FALSE Diff: 1 LO: 16-5 AACSB: Reflective thinking skills Learning Outcome: None 16.6 Questions 1) Cash receipts of interest income are reported in the ________ section of the statement of cash flows. The direct method is used.

A) operating activities B) investing activities C) financing activities D) noncash investing and financing activities Answer: A Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None

25 .

2) Cash payments for interest expense are reported in the ________ section of the statement of cash flows.

The direct method is used.

A) operating activities B) investing activities C) financing activities D) noncash investing and financing activities Answer: A Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 3) A payment on bonds payable will be reported in the ________ section of the statement of cash flows.

A) operating activities only B) investing activities C) financing activities D) noncash investing and financing activities Answer: C Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 4) Which of the following events do NOT affect cash flows from operating activities? Assume the direct method is used.

A) cash sale of merchandise inventory B) cash purchase of equipment C) cash purchase of inventory D) cash paid for employees' wages Answer: B Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 5) The cash paid to settle a long-term note payable is included in the ________ section of the statement of cash flows.

A) operating B) investing C) financing D) noncash Answer: C Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None

26 .

6) The cash paid for taxes is included in the ________ section of the statement of cash flows. Assume the direct method is used.

A) operating B) investing C) financing D) noncash Answer: A Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 7) The cash paid for employees' wages is included in the ________ section of the statement of cash flows.

Assume the direct method is used.

A) operating B) financing C) investing D) noncash Answer: A Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 8) The cash paid to purchase equipment is included in the ________ section of the statement of cash flows.

A) operating B) investing C) financing D) noncash Answer: B Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 9) Cash collections from customers are included in the ________ section of the statement of cash flows.

Assume the direct method is used.

A) operating B) investing C) financing D) noncash Answer: A Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None

27 .

10) The cash paid for dividends is included in the ________ section of the statement of cash flows.

A) operating B) investing C) financing D) noncash Answer: C Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 11) The cash received from the sale of common stock is included in the ________ section of the statement of cash flows.

A) operating B) investing C) financing D) noncash Answer: C Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 12) The cash received from the sale of land is included in the ________ section of the statement of cash flows.

A) operating B) investing C) financing D) noncash Answer: B Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 13) The cash received from the sale of bonds payable is included in the ________ section of the statement of cash flows.

A) operating B) investing C) financing D) noncash Answer: C Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None

28 .

14) The cash payment for the maturity value of bonds payable is included in the ________ section of the statement of cash flows.

A) operating B) investing C) financing D) noncash Answer: C Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 15) An example of an operating activity on the statement of cash flows is federal taxes paid. Assume the direct method is used.

Answer: TRUE Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 16) An example of an operating activity on the statement of cash flows is cash dividends received on investments. Assume the direct method is used.

Answer: TRUE Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 17) An example of a financing activity on the statement of cash flows is the payment of cash dividends.

Answer: TRUE Diff: 1 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None 18) An example of a noncash transaction on the statement of cash flows is the purchase of equipment with a long-term note payable.

Answer: TRUE Diff: 2 LO: 16-6 AACSB: Reflective thinking skills Learning Outcome: None

29 .

19) The sections of the statement of cash flows are listed below: Sections of Statement of Cash Flows O = Operating activities I = Investing activities F = Financing activities Required: For each of the following items, identify the section of the statement of cash flows you would find the item. Assume the direct method is used. _____ 1. Paid taxes of $15,000. _____ 2. Borrowed $35,000 from the bank on a long-term note payable. _____ 3. Collected $690,000 from customers. _____ 4. Received $40,000 in dividend income. _____ 5. Paid $12,000 to suppliers for inventory. _____ 6. Issued common stock for $170,000 cash. _____ 7. Purchased $120,000 in long-term securities for cash. _____ 8. Paid $18,000 dividend on common stock. _____ 9. Purchased land for $345,000 cash. _____ 10. Sold long-term securities for cash. No gain or loss on sale. _____ 11. Paid $210,000 on long-term debt. _____ 12. Received $31,000 cash on sale of equipment. No gain or loss on sale.

Answer: 1. O 2. F 3. O 4. O 5. O 6. F 7. I 8. F 9. I 10. I 11. F 12. I Diff: 2 LO: 16-6 AACSB: Analytic skills Learning Outcome: None

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16.7 Questions 1) Georgia Company has the following data available:

Fixed Assets Accumulated Depreciation Long-term debt Common stock Retained earnings

December 31, 2011 $125 $110 $125 $300 $100

December 31, 2012 $125 $117 $5 $400 $120

No dividends were declared or paid for the year ending December 31, 2012. What is the net cash flow from financing activities for the year ended December 31, 2012?

A) $20 cash inflow B) $20 cash outflow C) $100 cash inflow D) $120 cash outflow Answer: B Diff: 2 LO: 16-7 AACSB: Analytic skills Learning Outcome: None 2) Michigan Company has the following data available:

Fixed Assets Accumulated Depreciation Long-term debt Common stock Retained earnings

December 31, 2011 $125 $110 $125 $300 $100

December 31, 2012 $125 $117 $5 $400 $120

Dividends of $20 were declared on December 1, 2012. What is the net income for the year ended December 31, 2012?

A) $10 B) $20 C) $30 D) $40 Answer: D Diff: 2 LO: 16-7 AACSB: Analytic skills Learning Outcome: None

31 .

3) Wisconsin Company reported selected accounts as follows:

Accounts payable Bonds payable Common stock

December 31, 2014 $20,000 $40,000 $20,000

December 31, 2015 $30,000 $28,000 $24,000

Dividends of $8,800 were declared and paid by December 31, 2015. What was the net cash flow from financing activities for the year ended December 31, 2015?

A) $6,800 cash outflow B) $16,800 cash outflow C) $6,800 cash inflow D) $16,800 cash inflow Answer: B Diff: 2 LO: 16-7 AACSB: Analytic skills Learning Outcome: None 4) Old equipment having a book value of $12,000 was sold for $20,000 cash. New equipment was purchased for $25,000 cash. Additional equipment was acquired in exchange for a $17,000 long-term note payable. The net cash flow from investing activities was ________.

A) $5,000 cash outflow B) $22,000 cash outflow C) $25,000 cash outflow D) $42,000 cash outflow Answer: A Diff: 2 LO: 16-7 AACSB: Analytic skills Learning Outcome: None

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5) California Company reports the following information:

Fixed Assets Less: Accumulated Depreciation Net Fixed Assets

12/31/14 $330 (110) $220

12/31/15 $581 (127) $454

Depreciation expense for the year ending December 31, 2015 is $17. No fixed assets were sold during 2015. What is the net cash flow from investing activities for the year ending December 31, 2015?

A) $17 cash inflow B) $251 cash inflow C) $251 cash outflow D) $268 cash outflow Answer: C Diff: 2 LO: 16-7 AACSB: Analytic skills Learning Outcome: None 6) Utah Corporation reports the following data:

Fixed Assets Less: Accumulated Depreciation Net Fixed Assets

12/31/14 $330 (110) $220

12/31/15 $581 (127) $454

Depreciation expense for the year ending December 31, 2015 is $27. The company sold a fixed asset for $10 cash on December 1, 2015. The cost of the fixed asset sold was $20 and the accumulated depreciation on the fixed asset sold was $10. What is the net cash flow from investing activities for the year ending December 31, 2015?

A) $241 cash outflow B) $251 cash outflow C) $261 cash outflow D) $271 cash outflow Answer: C Diff: 2 LO: 16-7 AACSB: Analytic skills Learning Outcome: None

33 .

7) Nebraska Company gave a long-term note payable in the amount of $285,000 to acquire a new piece of land. This transaction will be reported on the statement of cash flows as a ________.

A) investing activity B) financing activity C) investing and financing activity D) noncash investing and financing transaction Answer: D Diff: 2 LO: 16-7 AACSB: Analytic skills Learning Outcome: None 8) An example of a financing activity on the statement of cash flows is the conversion of debt to common stock.

Answer: FALSE Diff: 2 LO: 16-7 AACSB: Reflective thinking skills Learning Outcome: None 9) An example of an investing activity on the statement of cash flows is the purchase of equipment for cash.

Answer: TRUE Diff: 2 LO: 16-7 AACSB: Reflective thinking skills Learning Outcome: None 10) Wyoming Company had the following information for the year ended December 31, 2015 and December 31, 2016.

Equipment Accumulated depreciation

December 31, 2016 $186,000 62,000

December 31, 2015 $156,000 54,000

Depreciation expense for the year ended December 31, 2016 was $18,000. Equipment that cost $20,000 was sold at a $3,000 loss. The equipment had accumulated depreciation of $10,000.

Required: Prepare the investing section of the statement of cash flows for the year ended December 31, 2016.

Answer: Cash flows from investing activities: Purchase of fixed assets $(50,000) Proceeds from sale of fixed asset 7,000 Net cash used for investing activities $(43,000) Diff: 3 LO: 16-7 AACSB: Analytic skills Learning Outcome: None 34 .

16.8 Questions 1) For the year ending December 31, 2014, Martha Company reports net income of $23,000 and depreciation expense of $7,000. The income tax expense for the year ending December 31, 2014 is $20,000.

The following data is available:

Cash Accounts Receivable Inventories Fixed Assets Accumulated Depreciation Accounts Payable Wages Payable

December 31, 2013 $25,000 $25,000 $60,000 $330,000 $110,000 $6,000 $4,000

December 31, 2014 $16,000 $45,000 $100,000 $581,000 $101,000 $74,000 $25,000

What is the net cash provided (used) by operating activities for the year ended December 31, 2014?

Assume the indirect method is used.

A) $(20,000) B) $23,000 C) $59,000 D) $69,000 Answer: C Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None

35 .

2) For the year ending December 31, 2014, Harkins Company reports net income of $35,000 and depreciation expense of $12,000. The income tax expense for the year ending December 31, 2014 is $20,000. The following data is available:

Cash Accounts Receivable Inventories Fixed Assets Accumulated Depreciation Accounts Payable Wages Payable

December 31, 2013 $35,000 $35,000 $70,000 $440,000 $120,000 $6,000 $4,000

December 31, 2014 $16,000 $45,000 $100,000 $581,000 $101,000 $74,000 $25,000

What is the net cash provided by operating activities for the year ended December 31, 2014? Assume the indirect method is used.

A) $5,000 B) $26,000 C) $73,000 D) $96,000 Answer: D Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 3) Listed below are selected accounts for Dentice Corporation:

Accounts Receivable Inventory Accounts Payable Wages payable

December 31, 2013 $20,000 $70,000 $20,000 $22,000

December 31, 2014 $40,000 $30,000 $88,000 $1,000

For the year ended December 31, 2014, net income was $50,000 and depreciation expense was $0. The net cash provided by operating activities for the year ending December 31, 2014 was ________. Assume the indirect method is used.

A) $70,000 B) $90,000 C) $108,000 D) $117,000 Answer: D Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None

36 .

4) When calculating the net cash provided by operating activities, which procedure should NOT be carried out? Assume the indirect method is used.

A) add depreciation expense B) subtract a decrease in accounts payable C) subtract a decrease in prepaid expenses D) add a decrease in inventories Answer: C Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 5) A gain on the sale of a fixed asset is reported on the statement of cash flows ________.

A) as a deduction to net income under operating activities for the indirect method B) as a deduction to the cash proceeds received from the sale of fixed assets under investing activities C) as a noncash transaction D) as a cash inflow under financing activities Answer: A Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 6) Lantern Company reported sales of $200,000, an increase in accounts receivable of $5,000, and a decrease in cash of $20,000. How much cash was collected from customers?

A) $185,000 B) $195,000 C) $200,000 D) $220,000 Answer: B Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 7) Beth Company reported sales on account of $250,000, an increase in inventory of $70,000, and a decrease in accounts receivable of $20,000. How much cash was collected from customers?

A) $180,000 B) $230,000 C) $270,000 D) $320,000 Answer: C Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None

37 .

8) John Company reported cost of goods sold of $910,000, an increase in inventory of $100,000, and an increase in accounts payable of $40,000. How much cash was paid to suppliers?

A) $770,000 B) $810,000 C) $970,000 D) $1,050,000 Answer: C Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 9) Jerome Company reported cost of goods sold of $700,000, a decrease in inventory of $60,000, and an increase in accounts payable of $30,000. How much cash was paid to suppliers?

A) $605,000 B) $610,000 C) $725,000 D) $795,000 Answer: B Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 10) The wages expense of Florida Corporation was $45,000 as per its income statement. Beginning wages payable was $6,000. Ending wages payable was $3,000. The cash paid to employees was ________.

A) $42,000 B) $45,000 C) $48,000 D) $50,000 Answer: C Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 11) Baldwin Company's income statement reported income tax expense of $18,000. Income tax payable at the beginning of the year was $5,000. Income tax payable at the end of the year was $4,000. The cash paid for taxes was ________.

A) $15,000 B) $17,000 C) $19,000 D) $22,000 Answer: C Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 38 .

12) Benson Company's income statement showed rent expense of $16,000. The beginning balance in Prepaid Rent was $5,000. The ending balance in Prepaid Rent was $3,000. The cash paid for rent was ________.

A) $14,000 B) $16,000 C) $19,000 D) $24,000 Answer: A Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 13) When reconciling net income to net cash provided by operating activities, a(n) ________ is a deduction from net income.

A) decrease in inventories B) increase in unearned revenues C) decrease in prepaid rent D) decrease in accounts payable Answer: D Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 14) When reconciling net income to net cash provided by operating activities, a(n) ________ is an addition to net income.

A) increase in inventories B) increase in accounts receivable C) increase in wages payable D) decrease in taxes payable Answer: C Diff: 2 LO: 16-8 AACSB: Analytic skills Learning Outcome: None 15) The indirect and direct methods of preparing the statement of cash flows show the same amount of net cash provided by operating activities.

Answer: TRUE Diff: 2 LO: 16-8 AACSB: Reflective thinking skills Learning Outcome: None

39 .

16) The indirect method of preparing the statement of cash flows is the most popular method in the United States.

Answer: TRUE Diff: 1 LO: 16-8 AACSB: Reflective thinking skills Learning Outcome: None 17) The direct method of preparing the operating activities section of the statement of cash flows begins with net income.

Answer: FALSE Diff: 2 LO: 16-8 AACSB: Reflective thinking skills Learning Outcome: None 18) Under the direct method of preparing the statement of cash flows, the cash collected from customers is determined for the operating activities section.

Answer: TRUE Diff: 2 LO: 16-8 AACSB: Reflective thinking skills Learning Outcome: None 19) When using the direct method of preparing the statement of cash flows, depreciation expense is added to net income.

Answer: FALSE Diff: 2 LO: 16-8 AACSB: Reflective thinking skills Learning Outcome: None 20) Analysts focus on free cash flow from the statement of cash flows.

Answer: TRUE Diff: 2 LO: 16-8 AACSB: Reflective thinking skills Learning Outcome: None 21) Free cash flow equals net cash from operating activities minus capital expenditures.

Answer: TRUE Diff: 2 LO: 16-8 AACSB: Reflective thinking skills Learning Outcome: None

40 .

22) For the year ended December 31, 2015, the following information is available for the Kansas Company: Sales Cost of goods sold Depreciation expense Amortization expense Wage expense Rent expense Loss on sale of fixed assets Interest expense Income tax expense Total expenses Net income

Cash Accounts receivable Inventory Prepaid rent Accounts payable Wages payable Taxes payable

$891,000 662,000 16,000 3,000 91,000 4,000 2,000 13,000 38,000 829,000 $62,000

December 31, 2014 $10,000 $10,000 $20,000 $2,000 $22,000 $12,000 $2,000

December 31, 2015 $12,800 $19,200 $14,100 $1,700 $24,400 $11,300 $3,100

Required: Prepare the operating activities section of the statement of cash flows for the year ending December 31, 2015. Use the indirect method.

Answer: Net income Add: depreciation expense Add: amortization expense Add: loss on sale of fixed assets Less: Increase in accounts receivable Add: Decrease in inventory Add: Decrease in prepaid rent Add: Increase in accounts payable Add: Increase in taxes payable Less: Decrease in wages payable Net cash provided by operating activities Diff: 3 LO: 16-8 AACSB: Analytic skills Learning Outcome: None

$62,000 16,000 3,000 2,000 (9,200) 5,900 300 2,400 1,100 (700) $82,800

41 .

23) Maryland Company had net income of $21,850 for the year ended December 31, 2015. Additional information from the income statement follows: Depreciation expense Interest expense Income tax expense

$8,400 3,900 5,700

The company also reported the following balances: December December 31, 2014 31, 2015 Accounts receivable $10,000 $11,800 Accounts payable $20,000 $23,200 Income taxes payable $22,000 $21,300 Inventory $30,000 $25,000 Required: Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2015. Use the indirect method.

Answer: Net income $21,850 Add: Depreciation expense 8,400 Add: Decrease in inventory 5,000 Add: Increase in accounts payable 3,200 Less: Increase in accounts receivable (1,800) Less: Decrease in income tax payable (700) Net cash provided by operating activities $35,950 Diff: 3 LO: 16-8 AACSB: Analytic skills Learning Outcome: None

42 .

24) The income statement and comparative balance sheets for Sterling Company are presented below: Sterling Company Income Statement For the Year Ended December 31, 2015 Sales Cost of goods sold Depreciation expense Amortization expense Wage expense Rent expense Loss on sale of fixed assets Interest expense Income tax expense Total expenses Net income

Cash Accounts receivable Inventory Prepaid rent Land Fixed assets Accumulated depreciation Patent Total assets Accounts payable Wages payable Interest payable Taxes payable Bonds payable, due 2020 Common stock Retained earnings Total liabilities and Stockholders' equity

$586,000 311,000 14,000 3,000 88,000 24,000 2,600 4,900 56,000 503,500 $82,500 December 31, 2014 $16,300 27,900 53,900 1,800 22,000 118,000 (39,000) 11,000 $211,900 21,100 5,700 400 7,900 36,000 32,000 108,800

December 31, 2015 $19,900 36,300 48,200 2,000 32,000 130,000 (46,000) 12,000 $234,400 27,700 6,200 1,600 6,800 44,000 35,000 113,100

$211,900

$234,400

Required: Prepare a statement of cash flows using the indirect method for the year ended December 31, 2015. No land was sold in 2015. Land was purchased using bonds payable for $8,000 and cash for $2,000. A fixed asset was sold in 2015 for $4,100. Purchases of fixed assets and patents were for cash.

43 .

Answer:

Sterling Company Statement of Cash Flows For the year ended December 31, 2015 Cash flows from operating activities: Net income Add: depreciation expense Add: amortization expense Add: loss on sale of fixed assets Less: Increase in accounts receivable Add: Decrease in inventory Less: Increase in prepaid rent Add: Increase in accounts payable Less: Decrease in taxes payable Add: Increase in wages payable Add: Increase in interest payable Net cash provided by operating activities

$82,500 14,000 3,000 2,600 (8,400) 5,700 (200) 6,600 (1,100) 500 1,200 $106,400

Cash flows from investing activities: Proceeds from sale of fixed asset Purchase of fixed asset Purchase land for cash Purchase of patent Net cash used by investing activities

$4,100 (25,700) (2,000) (4,000) (27,600)

Cash flows from financing activities: Issued common stock Paid dividends Net cash used by financing activities Increase in cash

3,000 (78,200) (75,200) $3,600

Schedule of noncash transactions: Issued long-term bonds payable to acquire land $8,000 Diff: 3 LO: 16-8 AACSB: Analytic skills Learning Outcome: None

44 .

16.9 Questions 1) Why do accountants add Depreciation Expense to net income when determining net cash provided by operating activities? Assume the indirect method is used.

A) because depreciation expense is a source of cash B) because depreciation expense requires the outflow of cash C) because depreciation expense is an investing activity that should be reported in the investing section of the cash flow statement D) because it cancels the earlier deduction when calculating net income Answer: D Diff: 2 LO: 16-9 AACSB: Analytic skills Learning Outcome: None 2) Which of the following statements about depreciation is FALSE? A) Depreciation does not generate cash.

B) Depreciation is an allocation of the original cost of an asset to the periods in which the asset is used.

C) Depreciation does not entail an outflow of cash.

D) Depreciation is a means of setting aside cash for the replacement of an asset.

Answer: D Diff: 2 LO: 16-9 AACSB: Reflective thinking skills Learning Outcome: None 16.10 Questions 1) On January 1, 2014, a company had 100 units of inventory. A company acquired 100 units of inventory on January 31, 2014 and 100 units on December 1, 2014. The company sold 100 units on December 31, 2014, which was the company's only sale. Under FIFO, the cost of goods sold would come from ________.

A) the purchase cost of beginning inventory B) the purchase cost on January 31, 2014 C) the purchase cost on December 1, 2014 D) an average of the cost over the two purchase dates Answer: A Diff: 2 LO: 16-10 AACSB: Analytic skills Learning Outcome: None

45 .

2) LIFO uses the ________ costs to measure the ending inventory.

A) latest B) earliest C) average D) weighted-average Answer: B Diff: 2 LO: 16-10 AACSB: Analytic skills Learning Outcome: None 3) LIFO uses the ________ costs to measure the cost of goods sold.

A) latest B) earliest C) average D) weighted-average Answer: A Diff: 2 LO: 16-10 AACSB: Analytic skills Learning Outcome: None 4) FIFO provides inventory valuations that approximate the actual ________ of inventory at the balance sheet date.

A) cost B) market value C) average cost D) sales value Answer: B Diff: 2 LO: 16-10 AACSB: Analytic skills Learning Outcome: None 5) In periods of inflation, FIFO leads to ________ gross profit than LIFO. A) lower B) the same C) higher D) not enough information Answer: C Diff: 2 LO: 16-10 AACSB: Analytic skills Learning Outcome: None

46 .

6) In periods of inflation, the ________ method of inventory valuation provides a more realistic net income.

A) LIFO B) FIFO C) average cost D) weighted-average cost Answer: A Diff: 2 LO: 16-10 AACSB: Analytic skills Learning Outcome: None 7) During a period of inflation, the LIFO method reports a larger cost of goods sold amount than FIFO. Answer: TRUE Diff: 2 LO: 16-10 AACSB: Reflective thinking skills Learning Outcome: None 8) During a period of inflation, the LIFO method reports a lower ending inventory amount than FIFO. Answer: TRUE Diff: 2 LO: 16-10 AACSB: Reflective thinking skills Learning Outcome: None 9) The LIFO method reports the latest costs for ending inventory.

Answer: FALSE Diff: 2 LO: 16-10 AACSB: Reflective thinking skills Learning Outcome: None 10) In a period of inflation, LIFO results in a higher net income than FIFO. Answer: FALSE Diff: 2 LO: 16-10 AACSB: Reflective thinking skills Learning Outcome: None

47 .

Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 17 Understanding and Analyzing Consolidated Financial Statements 17.1 Questions 1) An investor holds 5% of the outstanding stock of an investee. The investor plans to sell the stock in two months. The investor reports the dividends received from the stock as ________.

A) an increase in the investment account B) a decrease in the investment account C) dividend revenue on the income statement D) equity in earnings of the investee on the income statement Answer: C Diff: 2 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 2) An investor holds 1% of the outstanding stock of an investee. The investor plans to hold the stock for a long time. The investor reports the dividends received from the stock as ________.

A) an increase in the investment account B) a decrease in the investment account C) dividend revenue on the income statement D) equity in earnings of the investee on the income statement Answer: C Diff: 2 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 3) An investor in trading securities has the following information available at December 31, 2012: Market value of trading securities Acquisition cost of trading securities

$8,000 $9,000

How does the investor report the change in market value on the trading securities at December 31, 2012?

A) unrealized loss of $1,000 on income statement B) unrealized gain of $1,000 on income statement C) $1,000 is added to other comprehensive income account on the balance sheet D) $1,000 is subtracted from the other comprehensive income account on the balance sheet Answer: A Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None

1 .

4) An investor in available-for-sale securities has the following information available at December 31, 2012: Market value of available-for-sale securities Acquisition cost of available-for-sale securities

$8,000 $9,000

How does the investor report the change in market value on the available-for-sale securities at December 31, 2012?

A) unrealized loss of $1,000 on income statement B) unrealized gain of $1,000 on income statement C) $1,000 is added to accumulated other comprehensive income account on the balance sheet D) $1,000 is subtracted from the accumulated other comprehensive income account on the balance sheet Answer: D Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 5) Arizona Company has 40,000 shares of its common stock outstanding. Mexico Company owns 5,000 shares of Arizona Company's stock. Which of the following methods should Mexico Company use to account for its investment in Arizona Company?

A) market-value B) equity C) consolidated D) available-for-sale Answer: A Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 6) California Company has 40,000 shares of its common stock outstanding. Utah Company owns 15,000 shares of California Company's stock. Which of the following methods should Utah Company use to account for its investment in California Company?

A) market-value B) equity C) consolidated D) available-for-sale Answer: B Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None

2 .

7) Wyoming Company has 40,000 shares of its common stock outstanding. Dakota Company owns 35,000 shares of Wyoming Company's stock. Which of the following methods should Dakota Company use to account for its investment in Wyoming Company?

A) market-value B) equity C) consolidated financial statements D) cost Answer: C Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 8) An investor holds 5% of the outstanding stock of an investee. Securities that the investor company buys only with the intent to resell them shortly are called ________.

A) available-for-sale securities B) equity method securities C) trading securities D) options Answer: C Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 9) An investor holds 5% of the outstanding stock of an investee. Securities that the investor company does not intend to sell in the near future are called ________.

A) trading securities B) options C) available-for-sale securities D) equity method securities Answer: C Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None

3 .

10) John Company purchased common stock in Garcia Company. John Company treats the investment as available-for-sale securities. During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000. Assume that John Company owns 10% of the outstanding shares of Garcia Company. Garcia Company's net income will affect John Company in which of the following ways?

A) increasing cash and investments by $400,000 B) increasing stockholders' equity and investments by $400,000 C) increasing cash and stockholders' equity by $400,000 D) no effect Answer: D Diff: 1 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 11) Jerome Company purchased common stock in Gonzalez Company. Jerome Company treats the investment as available-for-sale securities. During the current year, Gonzalez Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Jerome Company owns 10% of the outstanding shares of Gonzalez Company. Gonzalez Company's dividend will affect Jerome Company by ________.

A) increasing cash and investments by $100,000 B) increasing investments and investment revenue by $100,000 C) increasing cash and investment revenue by $100,000 D) increasing cash and decreasing investments by $100,000 Answer: C Diff: 1 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 12) Martin Company purchased 10% of the outstanding shares of Winn Company. Martin Company classifies the investments as trading securities. At the end of the year, the market value of the shares increased from the prior year. The increase in market value of Winn Company's shares will affect Martin Company by ________.

A) increasing cash and increasing investments B) decreasing investments and increasing retained earnings C) increasing investments and increasing retained earnings D) increasing cash and increasing stockholders' equity Answer: C Diff: 1 LO: 17-1 AACSB: Analytic skills Learning Outcome: None

4 .

13) Bart Company acquired 10 percent of the voting stock of Ernie Company for $10 million. Bart Company plans to keep the investment for several years. At the end of Year 1, Ernie Company reports net income of $15 million and pays cash dividends of $5 million. At the end of Year 1, the market value of Bart Company's investment in Ernie Company is $11 million. What entry is necessary at the end of Year 1 to account for the change in market value of Bart Company's investment in Ernie Company?

A) No entry is needed.

B) Cash increases $11 million and Stockholders' equity increases $11 million.

C) Investments increase $11 million and Stockholders' equity increases $11 million.

D) Investments increase $1 million and Stockholders' equity increases $1 million.

Answer: D Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 14) Vanessa Company purchased common stock in Gilmore Company. During the current year, Gilmore Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Vanessa Company owns 40 percent of the outstanding shares of Gilmore Company. Gilmore Company's net income will affect Vanessa Company by ________.

A) increasing investments by $1,600,000 B) increasing investments and cash by $2,000,000 C) increasing cash and stockholders' equity by $400,000 D) increasing cash and decreasing investments by $1,600,000 Answer: A Diff: 3 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 15) Van Dover Company purchased common stock in Sanchez Company. During the current year, Sanchez Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Van Dover Company owns 30% of the outstanding shares of Sanchez Company. Sanchez Company's dividend will affect Van Dover Company by ________.

A) increasing cash and stockholders' equity by $300,000 B) increasing investments and stockholders' equity by $300,000 C) increasing cash and decreasing investments by $300,000 D) increasing cash and increasing investments by $300,000 Answer: C Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None

5 .

16) Branson Company purchased 40% of the outstanding shares of Missouri Company as a long-term investment. At the end of the year, the market value of the shares increased. The increase in market value of Missouri Company's shares will affect Branson Company in which of the following ways?

A) increasing assets and increasing stockholders' equity B) decreasing investments and increasing cash C) increasing investments and increasing stockholders' equity D) no effect Answer: D Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 17) Randy Company acquired 40% of the voting stock of Biel Company for $40 million. At the end of Year 1, Biel Company reports net income of $15 million and pays cash dividends of $5 million. At the end of Year 1, the market value of Randy Company's investment in Biel Company is $44 million. The ________ method should be used by Randy Company to account for the investment.

A) market-value B) consolidated C) cost D) equity Answer: D Diff: 2 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 18) Rambo Company acquired 40% of the voting stock of Boulder Company for $40 million. At the end of Year 1, Boulder Company reports net income of $15 million and pays cash dividends of $5 million. At the end of Year 1, the market value of Rambo Company's investment in Boulder Company is $44 million. At the time of the acquisition, what accounts would be affected on the books of Rambo Company?

A) Cash decreases $40 million and Investments increase $40 million B) Cash decreases $40 million and Stockholders' Equity increase $40 million C) Investments increase $40 million and Accounts Payable increase $40 million D) No entry Answer: A Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None

6 .

19) Robert Company acquired 40% of the voting stock of Boulder Company for $40 million. At the end of Year 1, Boulder Company reports net income of $15 million and pays cash dividends of $5 million. At the end of Year 1, the market value of Robert Company's investment in Boulder Company is $44 million.

What accounts on Robert Company's books would be affected by the net income of Boulder Company?

A) none B) Investments increase $15 million and Investment Revenue increases $15 million C) Cash increases $15 million and Investment Revenue increases $15 million D) Investments increase $6 million and Investment Revenue increases $6 million Answer: D Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 20) Randall Company acquired 40% of the voting stock of Boulder Company for $40 million. At the end of Year 1, Boulder Company reports net income of $15 million and pays cash dividends of $5 million. At the end of Year 1, the market value of Randall Company's investment in Boulder Company is $44 million.

What accounts on Randall Company's books would be affected by the dividends of Boulder Company?

A) none B) Cash increase $2 million and Investment Revenue increases $2 million C) Cash increase $5 million and Investment Revenue increases $5 million D) Cash increase $2 million and Investments decrease $2 million Answer: D Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 21) Ramon Company acquired 40% of the voting stock of Boulder Company for $40 million. At the end of Year 1, Boulder Company reports net income of $15 million and pays cash dividends of $5 million. At the end of Year 1, the market value of Ramon Company's investment in Boulder Company is $44 million.

What accounts will be affected on Ramon Company's books to account for the increase in market value of the investment at the end of Year 1?

A) none B) Cash increase $44 million and Stockholders' Equity increase $44 million C) Investments increase $44 million and Stockholders' Equity increase $44 million D) Investments increase $4 million and Stockholders' Equity increase $4 million Answer: A Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None

7 .

22) Under the equity method of accounting for investments, the acquisition cost of an investment is adjusted for ________.

A) dividends received only B) investor's share of earnings or losses of investee after investment date only C) changes in market value of investment D) dividends received and investor's share of earnings or losses of investee after investment date Answer: D Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 23) Under the equity method of accounting for investments, the investor recognizes income for ________.

A) the investor's share of income earned by the investee company B) dividends received from the investee company C) the change in market value of the investee company's stock D) the amortization of goodwill associated with the investee company Answer: A Diff: 2 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 24) An investor in securities accounted for by the equity method has the following information available at December 31, 2012: Market value of securities Acquisition cost of securities

$10,000 $8,000

How does the investor report the change in market value on the securities at December 31, 2012?

A) adjustment to Investment account B) unrealized gain of $2,000 on income statement C) adjustment to " other comprehensive income" account D) not reported Answer: D Diff: 2 LO: 17-1 AACSB: Analytic skills Learning Outcome: None

8 .

25) For trading securities, changes in the market value of the securities are included in ________. For available-for-sale securities, changes in the market value of the securities are included in ________.

A) Other Comprehensive Income; Other Comprehensive Income B) Other Comprehensive Income; Retained Earnings C) Retained Earnings; Other Comprehensive Income D) Retained Earnings; Retained Earnings Answer: C Diff: 3 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 26) Accountants require investors without significant influence over the decisions of an investee firm to use the ________ method.

A) equity B) cost C) market value D) lower of cost or market Answer: C Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 27) Accountants require investors with significant influence, but not control, over the decisions of an investee firm to use the ________ method.

A) equity B) cost C) market value D) lower of cost or market Answer: A Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 28) Accountants require investors that have control over the decisions of an investee firm to use the ________ method.

A) consolidated financial statements B) cost C) market value D) lower of cost or market Answer: A Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None

9 .

29) On January 1, 2014, Jeff Company purchased common stock in Garcia Company for $1,000,000. Jeff Company treats the investment as available-for-sale securities. During 2014, Garcia Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company. The market value of the investment at December 31, 2014 is $1,100,000. What is the balance in the Investment account at December 31, 2014?

A) $1,000,000 B) $1,100,000 C) $1,400,000 D) $1,500,000 Answer: B Diff: 1 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 30) On January 1, 2014, Jonathon Company purchased common stock in Garcia Company for $1,000,000.

Jonathon Company treats the investment as trading securities. During 2014, Garcia Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Jonathon Company owns 10% of the outstanding shares of Garcia Company. The market value of the investment at December 31, 2014 is $1,100,000. What is the balance in the Investment account at December 31, 2014?

A) $1,000,000 B) $1,100,000 C) $1,400,000 D) $1,500,000 Answer: B Diff: 1 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 31) On January 1, 2014, Liberty Company purchased common stock in Garcia Company for $1,000,000.

During 2014, Garcia Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Liberty Company owns 30% of the outstanding shares of Garcia Company. The market value of the investment at December 31, 2014 is $1,100,000. What is the balance in the Investment account at December 31, 2014?

A) $1,000,000 B) $1,100,000 C) $1,900,000 D) $2,200,000 Answer: C Diff: 1 LO: 17-1 AACSB: Analytic skills Learning Outcome: None

10 .

32) When a company owns less than 20 percent of the common stock of another company, the market value method of accounting for investments in equity securities is used.

Answer: TRUE Diff: 2 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 33) Investments acquired with the intent to resell them in the near future are called trading securities.

Answer: TRUE Diff: 1 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 34) If an investor uses the equity method to account for a long-term equity investment, then the investor records income when the investee pays a dividend.

Answer: FALSE Diff: 2 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None 35) If an investor uses the equity method to account for a long-term equity investment, then the investor records income when the investee reports net income.

Answer: TRUE Diff: 2 LO: 17-1 AACSB: Reflective thinking skills Learning Outcome: None

11 .

36) Brankov Company purchased common stock in Ramona Company for $400,000. In the current year, Ramona Company reported net income of $50,000 and paid a dividend of $32,000. At the end of the year, the market value of the investment in Ramona Company was $410,000.

Required: A) Assume Brankov Company owns 10% of the shares of Ramona Company. Brankov Company considers the investment to be available-for-sale securities. Show the effects of the transactions above on the accounts of Brankov Company using the balance sheet equation.

B) Assume Brankov Company owns 25% of the shares of Ramona Company. Show the effects of the transactions above on the accounts of Brankov Company using the balance sheet equation.

Answer: A) Cash + Investments = Liabilities + Stockholders' Equity $(400,000) +$400,000 +$3,200 +$3,200 +$10,000 +$10,000 B) Cash $(400,000)

+ Investments +$400,000 +$12,500 $(8,000)

= Liabilities

+ Stockholders' Equity

+$12,500

+$8,000 Diff: 3 LO: 17-1 AACSB: Analytic skills Learning Outcome: None 17.2 Questions

1) An investor that has effective control over an investee usually owns ________ of the investee's stock.

A) less than 20 percent B) more than 20 percent C) more than 40 percent D) more than 50 percent Answer: D Diff: 1 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None

12 .

2) The company that owns 100 percent of another company's stock is called the ________. The company that is controlled by another company is called the ________.

A) majority interest; minority interest B) controlling interest; noncontrolling interest C) parent; subsidiary D) subsidiary; segment Answer: C Diff: 1 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 3) Rainbow Company acquired 100 percent of the outstanding common stock of Ribbon Company. At the date of acquisition, no goodwill was involved and the book value of the assets and liabilities of Ribbon Company equal their fair values. Immediately after the acquisition, an elimination entry is prepared in order to prepare consolidated financial statements. Which of the following accounts are affected by the elimination entry?

A) Investment in Ribbon Company and Investment Revenue B) Stockholders' Equity of Ribbon Company and Investment Revenue C) Fixed Assets of Ribbon Company and Investment Revenue D) Investment in Ribbon Company and Stockholders' Equity of Ribbon Company Answer: D Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 4) A parent company purchases 100 percent of the outstanding common stock in a subsidiary. What happens to the subsidiary the day after the purchase? Which of the following statements is FALSE? A) The purchase by the parent company does not affect the subsidiary's books.

B) The subsidiary ceases to exist.

C) The subsidiary continues as a separate legal entity.

D) The subsidiary has its own set of books.

Answer: B Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None

13 .

5) When preparing consolidated financial statements, eliminating entries are made to avoid doublecounting ________.

A) assets only B) liabilities only C) assets, liabilities and stockholders' equity D) none of the above Answer: C Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 6) Presented below is the balance sheet of Holmes Company at January 1, 2015: Cash Net Fixed Assets Total Assets

$100 400 $500

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$20 220 260 $500

The balance sheet of Montvale Company at January 1, 2015 is below: Cash Net Fixed Assets Total Assets

$400 380 $780

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$120 280 380 $780

On January 1, 2015, Montvale Company acquired 100 percent of the outstanding common stock of Holmes Company for $260 cash. The book value and fair value of Holmes' assets and liabilities were equal. What is the balance in the Investment in Holmes Company account on the consolidated balance sheet immediately after the acquisition of Holmes Company's stock? (Assume elimination entries are completed.)

A) $0 B) $260 C) $380 D) $500 Answer: A Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None 14 .

7) Presented below is the balance sheet of Houser Company at January 1, 2015: Cash Net Fixed Assets Total Assets

$100 400 $500

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$20 220 260 $500

The balance sheet of Maury Company at January 1, 2015 is below: Cash Net Fixed Assets Total Assets

$400 380 $780

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$120 280 380 $780

On January 1, 2015, Maury Company acquired 100 percent of the outstanding common stock of Houser Company for $260 cash. The book value and fair value of Houser's assets and liabilities were equal. What is the amount of Total Assets on the consolidated balance sheet immediately after the acquisition of Houser Company's stock? (Assume elimination entries are completed.)

A) $0 B) $780 C) $1,020 D) $1,280 Answer: C Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None

15 .

8) Presented below is the balance sheet of Hansen Company at January 1, 2015: Cash Net Fixed Assets Total Assets

$100 400 $500

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$20 220 260 $500

The balance sheet of Monty Company at January 1, 2015 is below: Cash Net Fixed Assets Total Assets

$400 380 $780

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$120 280 380 $780

On January 1, 2015, Monty Company acquired 100 percent of the outstanding common stock of Hansen Company for $260 cash. The book value and fair value of Hansen's assets and liabilities were equal.

What is the amount of Total Liabilities on the consolidated balance sheet immediately after the acquisition of Hansen Company's stock? (Assume elimination entries are completed.)

A) $0 B) $380 C) $400 D) $640 Answer: D Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None

16 .

9) Presented below is the balance sheet of Harry Company at January 1, 2015: Cash Net Fixed Assets Total Assets

$100 400 $500

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$20 220 260 $500

The balance sheet of Marvelous Company at January 1, 2015 is below: Cash Net Fixed Assets Total Assets

$400 380 $780

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$120 280 380 $780

On January 1, 2015, Marvelous Company acquired 100 percent of the outstanding common stock of Harry Company for $260 cash. The book value and fair value of Harry's assets and liabilities were equal.

What is the amount of Total Stockholders' Equity on the consolidated balance sheet immediately after the acquisition of Harry Company's stock? (Assume elimination entries are completed.)

A) $0 B) $260 C) $380 D) $640 Answer: C Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None

17 .

10) Presented below is the balance sheet of Holman Company at January 1, 2015: Cash Net Fixed Assets Total Assets

$100 400 $500

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$20 220 260 $500

The balance sheet of Beck Company at January 1, 2015 is below: Cash Net Fixed Assets Total Assets

$400 380 $780

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$120 280 380 $780

On January 1, 2015, Beck Company acquired 100 percent of the outstanding common stock of Holman Company for $260 cash. The book value and fair value of Holman's assets and liabilities were equal.

Holman Company generated net income of $30 during the year ended December 31, 2015. There were no intercompany sales. What is the balance in the Investment in Holman Company account on December 31, 2015 before elimination entries are prepared?

A) $0 B) $30 C) $230 D) $290 Answer: D Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None

18 .

11) Presented below is the balance sheet of Hellman Company at January 1, 2015: Cash Net Fixed Assets Total Assets

$100 400 $500

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$20 220 260 $500

The balance sheet of Swenson Company at January 1, 2015 is below: Cash Net Fixed Assets Total Assets

$400 380 $780

Accounts Payable Long-term Bonds Payable Stockholders' Equity Total Liabilities and Stockholders' Equity

$120 280 380 $780

On January 1, 2015, Swenson Company acquired 100 percent of the outstanding common stock of Hellman Company for $260 cash. The book value and fair value of Hellman's assets and liabilities were equal. The net income for the year ending December 31, 2015 was $30 for Hellman Company. The net income for the year ending December 31, 2015 was $40 for Swenson Company. There were no intercompany sales. What is the net income on the consolidated income statement for the year ended December 31, 2015?

A) $0 B) $30 C) $40 D) $70 Answer: D Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None

19 .

12) On January 1, 2014, a parent company purchased 100 percent of the stock in a subsidiary. On January 1, 2014, no goodwill was recorded and the book value of the subsidiary's assets equals the market value of the subsidiary's assets. On December 31, 2014, the two companies report the following data: Parent Company Net Income for Past Year $100 million Subsidiary Company Net Income for Past Year $50 million What is the consolidated net income for the year ended December 31, 2014?

A) $0 B) $50 million C) $100 million D) $150 million Answer: D Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None 13) The account "Noncontrolling Interests" as reported on a balance sheet shows ________.

A) the parent company's interest in a subsidiary B) the subsidiary's interest in a parent company C) the outside stockholders' interest in a subsidiary D) the outside stockholders' interest in a parent company Answer: C Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 14) On January 1, 2015, Bernie Company acquired 80 percent of the outstanding shares of Conner Company for $120. At the time of the acquisition, Conner Company's total assets were $550 and total liabilities were $400. The book value and fair value of Conner's assets and liabilities were equal. What is the balance in the Investment in Conner Company account on the consolidated balance sheet immediately after the acquisition of Conner Company's stock? (Assume elimination entries are completed.)

A) $0 B) $120 C) $190 D) $440 Answer: A Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None

20 .

15) Barnard Company owns a 60 percent interest in Simon Company. For the year ended December 31, 2016, the net income of Barnard Company was $80 and the net income of Simon Company was $10. What is the balance in the Noncontrolling Interests account on the consolidated income statement for the year ending December 31, 2016?

A) $0 B) $4 C) $6 D) $48 Answer: B Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None 16) On January 1, 2014, a parent company purchased 90 percent of the stock in a subsidiary. On January 1, 2010, no goodwill was recorded and the book value of the subsidiary's assets equals the market value of the subsidiary's assets. On December 31, 2014, the two companies report the following data: Parent Company Net Income for Past Year Subsidiary Company Net Income for Past Year

$100 million $50 million

What is the consolidated net income for the year ended December 31, 2014?

A) $100 million B) $135 million C) $145 million D) $150 million Answer: C Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None 17) French Company acquired 80 percent of the outstanding shares of Godiva Company for $152 in cash.

(No goodwill was present at the time of acquisition.) The net income for the current year for French Company is $100. The net income for the current year for Godiva Company is $20. There were no intercompany sales. The book value and fair value of Godiva's assets and liabilities were equal at the acquisition date. What is the net income on the consolidated income statement for the current year?

A) $80 B) $96 C) $100 D) $116 Answer: D Diff: 3 LO: 17-2 AACSB: Analytic skills Learning Outcome: None

21 .

18) The existence of a parent company and a subsidiary requires special accounting procedures.

Answer: TRUE Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 19) A subsidiary is a company that owns more than 50 percent of another company's outstanding common stock.

Answer: FALSE Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 20) When an investing company owns less than 50 percent of another company, the companies must prepare consolidated financial statements.

Answer: FALSE Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 21) When a company acquires all of the common stock of a subsidiary, the books of the subsidiary are no longer used.

Answer: FALSE Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 22) Elimination entries avoid double-counting assets, liabilities and stockholders' equity on the consolidated financial statements.

Answer: TRUE Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 23) The Investment in Subsidiary account appears on a consolidated balance sheet.

Answer: FALSE Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None

22 .

24) Noncontrolling interests appear on a consolidated balance sheet when a parent company owns more than 50 percent but less than 100 percent of a subsidiary's common stock.

Answer: TRUE Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 25) Noncontrolling interests affect only the balance sheet of consolidated financial statements.

Answer: FALSE Diff: 3 LO: 17-2 AACSB: Reflective thinking skills Learning Outcome: None 17.3 Questions 1) On January 1, 2012, a parent company acquired all of the stock of a subsidiary. The following data is available: Parent Company Subsidiary Total assets $650 $400 Total liabilities $200 $190 Total stockholders' equity $450 $210 The acquisition by the parent company represents a 100 percent interest in the subsidiary. On January 1, 2012, the fair value of the subsidiary's assets and liabilities are equal to their book value. The parent company paid $250 for the 100 percent interest in the subsidiary. What amount of goodwill is implied in the purchase?

A) $0 B) $10 C) $40 D) $200 Answer: C Diff: 3 LO: 17-3 AACSB: Analytic skills Learning Outcome: None

23 .

2) On January 1, 2012, Parrot Company acquired all of the stock of a subsidiary. The following data is available: Parrot Company Subsidiary Total assets $650 $400 Total liabilities $200 $190 Total stockholders' equity $450 $210 The acquisition by the Parrot Company represents a 100 percent interest in the subsidiary. On January 1, 2012, the fair value of the subsidiary's assets and liabilities are equal to their book value. Parrot Company paid $450 for the 100 percent interest in the subsidiary. What amount of goodwill is implied in the purchase?

A) $0 B) $10 C) $200 D) $240 Answer: D Diff: 3 LO: 17-3 AACSB: Analytic skills Learning Outcome: None 3) On January 1, 2012, Preview Company acquired all of the stock of a subsidiary. The following data is available: Preview Company Subsidiary Total assets $650 $400 Total liabilities $200 $190 Total stockholders' equity $450 $210 The acquisition by the Preview Company represents a 100 percent interest in the subsidiary. On January 1, 2012, the fair value of the subsidiary's assets and liabilities are equal to the book value. Preview Company paid $250 for the 100 percent interest in the subsidiary. On January 1, 2012, what are the total assets on the consolidated balance sheet? (Assume elimination entries are completed.)

A) $650 B) $800 C) $840 D) $1,050 Answer: C Diff: 3 LO: 17-3 AACSB: Analytic skills Learning Outcome: None

24 .

4) On January 1, 2012, Remkus Company acquired all of the stock of a subsidiary. The following data is available: Remkus Company Subsidiary Total assets $650 $400 Total liabilities $200 $190 Total stockholders' equity $450 $210 The acquisition by Remkus Company represents a 100 percent interest in the subsidiary. On January 1, 2012, the fair value of the subsidiary's assets and liabilities are equal to the book value. Remkus Company paid $250 for the 100 percent interest in the subsidiary. On January 1, 2012, what is the total stockholders' equity on the consolidated balance sheet? (Assume elimination entries are completed.)

A) $390 B) $450 C) $800 D) $840 Answer: B Diff: 3 LO: 17-3 AACSB: Analytic skills Learning Outcome: None 5) Goodwill from the purchase of another company appears on the consolidated balance sheet as a ________.

A) stockholders' equity item B) part of the Investment in subsidiary C) separate intangible asset account D) component of other comprehensive income Answer: C Diff: 3 LO: 17-3 AACSB: Reflective thinking skills Learning Outcome: None 6) Each year, goodwill on the consolidated balance sheet is ________.

A) amortized B) depreciated C) evaluated by management to determine if it is impaired D) ignored Answer: C Diff: 3 LO: 17-3 AACSB: Reflective thinking skills Learning Outcome: None

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7) At the date of acquisition by a parent company, the fair value of a subsidiary's fixed assets was larger than their book value. When preparing consolidated financial statements, the fixed assets of the subsidiary are ________ and depreciation expense is ________.

A) decreased to fair value; decreased B) increased to fair value; increased C) not adjusted; not adjusted D) increased to fair value; not adjusted Answer: B Diff: 3 LO: 17-3 AACSB: Reflective thinking skills Learning Outcome: None 8) Naples Company acquired all of the shares of Tampa Company for $80 cash. At the time of the acquisition, the fair values of Tampa Company's assets were $200. At the time of acquisition, the fair values of Tampa Company's liabilities were $120. On the date of acquisition, what is the amount of goodwill on the consolidated balance sheet?

A) $0 B) $20 C) $80 D) $100 Answer: A Diff: 3 LO: 17-3 AACSB: Analytic skills Learning Outcome: None 9) Goodwill is recognized when one company purchases another company and ________.

A) the purchase price of the acquired company exceeds the book value of the acquired company's assets B) the purchase price of the acquired company exceeds the book value of the acquired company's assets less liabilities C) the purchase price of the acquired company exceeds the fair value of the acquired company's assets D) the purchase price of the acquired company exceeds the fair value of the acquired company's assets less liabilities Answer: D Diff: 3 LO: 17-3 AACSB: Reflective thinking skills Learning Outcome: None

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10) A factor that contributes to recording goodwill when acquiring control of another company is ________.

A) outstanding management skills of parent company B) unique product manufactured by parent company C) established brand names by investee company D) all of the above Answer: C Diff: 3 LO: 17-3 AACSB: Reflective thinking skills Learning Outcome: None 11) Goodwill can only be recognized when one company acquires another company.

Answer: TRUE Diff: 3 LO: 17-3 AACSB: Reflective thinking skills Learning Outcome: None 12) Goodwill is amortized on the consolidated financial statements.

Answer: FALSE Diff: 3 LO: 17-3 AACSB: Reflective thinking skills Learning Outcome: None 13) If the fair value of a subsidiary's assets exceeds their book value when the subsidiary is acquired, the assets of the subsidiary are written up at the time consolidated financial statements are prepared.

Answer: TRUE Diff: 3 LO: 17-3 AACSB: Reflective thinking skills Learning Outcome: None 17.4 Questions 1) To compare companies that differ in size, analysts use ________.

A) MD&A B) 10-K filings with the Securities and Exchange Commission C) common size financial statements D) consolidated financial statements Answer: C Diff: 1 LO: 17-4 AACSB: Reflective thinking skills Learning Outcome: None

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2) To prepare common size income statements, percentages for line items are usually based on ________.

To prepare common size balance sheets, percentages for line items are usually based on ________.

A) net income; total stockholders' equity B) net operating profit; total stockholders' equity C) sales; total assets D) expenses; total liabilities Answer: C Diff: 1 LO: 17-4 AACSB: Reflective thinking skills Learning Outcome: None 3) The section of the annual report that explains major changes in the income statement, changes in liquidity and capital resources and the impact of inflation is called the ________.

A) notes to the financial statements B) appendix to the financial statements C) internal control report D) management's discussion and analysis Answer: D Diff: 1 LO: 17-4 AACSB: Reflective thinking skills Learning Outcome: None

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4) Maureen Company has the following income statement for the year ending December 31, 2016: Sales Cost of goods sold Gross profit Operating expenses: Wage expense Depreciation expense Rent expense Miscellaneous expense Total operating expenses Operating income Income tax expense Net income

$1,562 806 756 110 76 36 70 292 464 162 $302

If Maureen Company prepares a common size income statement, what will they report for Wage expense?

A) 7.0% B) 10.2% C) 34.4% D) 66.1% Answer: A Diff: 1 LO: 17-4 AACSB: Analytic skills Learning Outcome: None

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5) Goller Company has the following income statement for the year ending December 31, 2016: Sales Cost of goods sold Gross profit Operating expenses: Wage expense Depreciation expense Rent expense Miscellaneous expense Total operating expenses Operating income Income tax expense Net income

$1,562 806 756 160 26 36 70 292 464 100 $364

If Goller Company prepares a common size income statement, what will they report for Income tax expense?

A) 6.4% B) 11.0% C) 12.4% D) 39.9% Answer: A Diff: 1 LO: 17-4 AACSB: Analytic skills Learning Outcome: None

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6) Keller Company has the following income statement for the year ending December 31, 2016: Sales Cost of goods sold Gross profit Operating expenses: Wage expense Depreciation expense Rent expense Miscellaneous expense Total operating expenses Operating income Income tax expense Net income

$1,562 806 756 160 16 106 10 292 464 162 $302

If Keller Company prepares a common size income statement, what will they report for Rent expense?

A) 2.3% B) 4.3% C) 4.4% D) 6.8% Answer: D Diff: 1 LO: 17-4 AACSB: Analytic skills Learning Outcome: None

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7) The balance sheet for James Company is given below: Cash Accounts Receivable Inventory Prepaid Insurance Fixed Assets Accumulated Depreciation Total Assets

$242 200 388 70 452 (228) $1,124

Accounts payable Wages payable Notes payable Paid-in capital Retained earnings Total liabilities and stockholders' equity

$152 32 420 160 360 $1,124

If a common-size balance sheet was prepared, what would James Company report for accounts receivable?

A) 13.5% B) 17.3% C) 17.8% D) 86.3% Answer: C Diff: 2 LO: 17-4 AACSB: Analytic skills Learning Outcome: None

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8) The balance sheet for Ramon Company is given below: Cash Accounts Receivable Inventory Prepaid Insurance Fixed Assets Accumulated Depreciation Total Assets

$242 194 450 76 390 (228) $1,124

Accounts payable Wages payable Notes payable Paid-in capital Retained earnings Total liabilities and stockholders' equity

$152 32 420 160 360 $1,124

If a common-size balance sheet was prepared, what would Ramon Company report for inventory?

A) 13.5% B) 25.2% C) 34.5% D) 40.0% Answer: D Diff: 2 LO: 17-4 AACSB: Analytic skills Learning Outcome: None

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9) The balance sheet for Jennifer Company is given below: Cash Accounts Receivable Inventory Prepaid Insurance Fixed Assets Accumulated Depreciation Total Assets

$200 236 388 76 452 (228) $1,124

Accounts payable Wages payable Notes payable Paid-in capital Retained earnings Total liabilities and stockholders' equity

$152 32 420 160 360 $1,124

If a common-size balance sheet was prepared, what would Jennifer Company report for Cash?

A) 17.8% B) 21.5% C) 25.2% D) 62.3% Answer: A Diff: 2 LO: 17-4 AACSB: Analytic skills Learning Outcome: None 17.5 Questions 1) Comparing a company's current ratio today with the same company's current ratio for the past ten years is called a(n) ________.

A) cross-sectional comparison B) benchmark comparison C) industry comparison D) time-series comparison Answer: D Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None

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2) The financial ratios for a company can be evaluated using ________.

A) time-series comparisons B) benchmark comparisons C) cross-sectional comparisons D) all of the above Answer: D Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None 3) Comparing a company's debt-to-equity ratio for 2014 to the debt-to-equity ratios for 2014 from other companies in the same industry is called a(n) ________.

A) time-series comparison B) benchmark comparison C) cross-sectional comparison D) efficient ratio analysis Answer: C Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None 4) ________ are profitability ratios.

A) Price earnings ratio and current ratio B) Dividend payout and rate of return on invested capital C) Earnings per share and dividend yield D) Gross profit rate and return on sales Answer: D Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None

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5) The following information is available for the Larry Company: Net income for the year ended December 31, 2014 Total stockholders' equity, December 31, 2014 Total stockholders' equity, December 31, 2013 Total liabilities, December 31, 2014 Total liabilities, December 31, 2013

$127.4 500.0 400.0 240.0 182.0

What is the debt-to-equity ratio at December 31, 2014?

A) 27% B) 41% C) 48% D) 51% Answer: C Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 6) The following information is available for the Christian Company: Net income for the year ended December 31, 2014 Retained earnings, December 31, 2014 Retained earnings, December 31, 2013 $5 par Common stock, December 31, 2014 $5 par Common stock, December 31, 2013 Total liabilities, December 31, 2014 Total liabilities, December 31, 2013

$127.4 150.0 180.0 80.0 80.0 240.0 182.0

What is the earnings per share for the year ended December 31, 2014?

A) $1.04 B) $1.56 C) $7.50 D) $7.96 Answer: D Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

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7) The following information is available for the Novin Company: Net income for the year ended December 31, 2014 Sales for the year ended December 31, 2014 Retained earnings, December 31, 2014 Retained earnings, December 31, 2013 Total assets, December 31, 2014 Total assets, December 31, 2013 Total liabilities, December 31, 2014 Total liabilities, December 31, 2013

$177.4 1,606.0 150.0 180.0 470.0 442.0 240.0 182.0

What is the return on sales for the year ended December 31, 2014?

A) 2.9% B) 7.9% C) 11.0% D) 33.9% Answer: C Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 8) The following information is available for the Platinum Company: Net income for the year ended December 31, 2014 Retained earnings, December 31, 2014 Retained earnings, December 31, 2013 Total assets, December 31, 2014 Total assets, December 31, 2013 Total liabilities, December 31, 2014 Total liabilities, December 31, 2013

$127.4 150.0 180.0 470.0 442.0 280.0 182.0

What is the debt-to-equity ratio at December 31, 2014?

A) 0.29 B) 1.47 C) 1.90 D) 2.00 Answer: B Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

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9) The following information is available for the Gold Company: Net income for the year ended December 31, 2014 Retained earnings, December 31, 2014 Retained earnings, December 31, 2013 Total assets, December 31, 2014 Total assets, December 31, 2013 Total liabilities, December 31, 2014 Total liabilities, December 31, 2013

$127.4 150.0 180.0 470.0 442.0 240.0 182.0

What is the return on stockholders' equity for the year ended December 31, 2014?

A) 24.1% B) 27.1% C) 52.0% D) 55.4% Answer: C Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 10) The following information is available for the Wetzel Company: Net income for the year ended December 31, 2014 Credit sales for the year ended December 31, 2014 Retained earnings, December 31, 2014 Retained earnings, December 31, 2013 Total assets, December 31, 2014 Total assets, December 31, 2013 Total liabilities, December 31, 2014 Total liabilities, December 31, 2013 Accounts Receivable, December 31, 2014 Accounts Receivable, December 31, 2013

$127.4 $1,606.0 150.0 180.0 470.0 442.0 240.0 182.0 180.0 144.0

What is the average collection period in days for the year ended December 31, 2014?

A) 5.0 B) 36.8 C) 40.9 D) 77.3 Answer: B Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

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11) The following information is available for Potter Company: Total Current Assets Total Current Liabilities Total Assets Total Liabilities Cash

$356,000 $203,000 $1,000,000 $500,000 $100,000

What is the current ratio?

A) 0.76 B) 1.75 C) 2.05 D) 2.51 Answer: B Diff: 1 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 12) The Bombard Company reports the following information: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Total common shares outstanding, December 31, 2012 Market price per share, December 31, 2012 Dividends per share, for the year ended December 31, 2012

$106,950 $45,150 $10,300 $18,700 $7,600 $48,400 $20,850 1,000 $75.00 $5.00

What is the return on sales for the year ended December 31, 2012?

A) 6.8% B) 9.6% C) 25.8% D) 42.2% Answer: B Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

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13) The Collander Company reports the following information: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Total common shares outstanding, December 31, 2012 Market price per share, December 31, 2012 Dividends per share, for the year ended December 31, 2012

$106,950 $45,150 $7,300 $18,700 $5,600 $48,400 $20,850 1,000 $75.00 $5.00

What is the current ratio at December 31, 2012?

A) 0.90 B) 1.00 C) 2.32 D) 3.34 Answer: D Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 14) The Corrao Company reports the following information: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Total common shares outstanding, December 31, 2012 Market price per share, December 31, 2012 Dividends per share, for the year ended December 31, 2012 What is the debt-to-equity ratio at December 31, 2012?

A) 15.7% B) 30.9% C) 43.1% D) 75.7% Answer: B Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

40 .

$106,950 $45,150 $7,300 $18,700 $7,600 $88,400 $20,850 1,000 $75.00 $5.00

15) The Conner Company reports the following information: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Total common shares outstanding, December 31, 2012 Market price per share, December 31, 2012 Dividends per share, for the year ended December 31, 2012

$106,950 $52,350 $7,300 $18,700 $7,600 $48,400 $20,850 1,000 $75.00 $5.00

What is the gross profit percentage for the year ended December 31, 2012?

A) 6.8% B) 12.6% C) 16.2% D) 48.9% Answer: D Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 16) The Middleton Company reports the following information: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Average common shares outstanding in 2012 Market price per share, December 31, 2012 Dividends per share, for the year ended December 31, 2012

$106,950 $45,150 $7,300 $18,700 $7,600 $48,400 $20,850 1,000 $75.00 $5.00

What is the earnings per share for the year ended December 31, 2012?

A) $0.26 B) $3.88 C) $7.30 D) $106.95 Answer: C Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

41 .

17) The Vaclav Company reports the following information: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Average common shares outstanding in 2012 Market price per share, December 31, 2012 Dividends per share, for the year ended December 31, 2012

$106,950 $45,150 $7,300 $18,700 $7,600 $48,400 $20,850 1,000 $75.00 $5.00

What is the price-earnings ratio at December 31, 2012?

A) 0.7 B) 10.3 C) 19.3 D) 75.0 Answer: B Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 18) The Kaprelian Company reports the following information: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Average total common shares outstanding in 2012 Market price per share, December 31, 2012 Dividends per share, for the year ended December 31, 2012 What is the dividend yield at December 31, 2012?

A) 6.7% B) 9.7% C) 25.8% D) 68.2% Answer: A Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

42 .

$106,950 $45,150 $7,300 $18,700 $7,600 $48,400 $20,850 1,000 $75.00 $5.00

19) The Stelloh Company reports the following information: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Average total common shares outstanding in 2012 Market price per share, December 31, 2012 Dividends per share, for the year ended December 31, 2012

$106,950 $45,150 $7,300 $18,700 $7,600 $48,400 $20,850 1,000 $75.00 $5.00

What is the dividend payout for the year ended December 31, 2012?

A) 6.7% B) 9.7% C) 65.8% D) 68.5% Answer: D Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 20) The debt-to-equity ratio is used to judge a company's ________.

A) return on investment B) liquidity C) risk of insolvency D) marketability Answer: C Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None 21) Fast growing companies tend to have ________ price-earnings ratios.

A) low B) high C) stable D) erratic Answer: B Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None

43 .

22) All other things equal, a higher current ratio indicates that ________.

A) a company has excess cash to pay liabilities B) a short-term creditor is likely to be paid in full and on time C) a company's long-term debt is coming due within the next year D) a company's short-term debt is coming due within the next year Answer: B Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None 23) In accordance with Generally Accepted Accounting Principles in the United States, the ________ must be reported on the financial statements.

A) price-earnings ratio B) dividend payout ratio C) earnings per share D) dividend yield ratio Answer: C Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None 24) Zemrowski Company has the following data available: Credit Sales for the year ended December 31, 2015 Cash Sales for the year ended December 31, 2015 Cost of Goods Sold for the year ended December 31, 2015 Total Accounts Receivable, December 31, 2015 Total Accounts Receivable, December 31, 2014 Total Inventory, December 31, 2015 Total Inventory, December 31, 2014

$500 $400 $290 $200 $100 $200 $250

What is the average collection period for the fiscal year ending December 31, 2015?

A) 110 days B) 150 days C) 220 days D) 283 days Answer: A Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

44 .

25) Toto Company has the following data available: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Average total common shares outstanding in 2012 Market price per share, December 31, 2012 Preferred dividends declared during 2012

$106,950 $45,150 $7,300 $18,700 $7,600 $48,400 $20,850 1,000 $75.00 $2,000

What are the earnings per share for the year ended December 31, 2012?

A) $2.00 B) $5.30 C) $6.30 D) $7.30 Answer: B Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 26) Miley Company has the following data available: Sales for the year ended December 31, 2012 Gross profit for the year ended December 31, 2012 Net income for the year ended December 31, 2012 Total Current Assets, December 31, 2012 Total Current Liabilities, December 31, 2012 Total Assets, December 31, 2012 Total Liabilities, December 31, 2012 Average total common shares outstanding in 2012 Market price per share, December 31, 2012 Preferred dividends declared during 2012

$106,950 $45,150 $7,300 $18,700 $7,600 $48,400 $20,850 1,000 $75.00 $4,000

What are the earnings per share for the year ended December 31, 2012?

A) $3.30 B) $4.30 C) $7.30 D) none of the above Answer: A Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

45 .

27) Line items on common-size financial statements are expressed in percentages of some base such as total assets.

Answer: TRUE Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None 28) The current ratio equals current assets divided by current liabilities.

Answer: TRUE Diff: 1 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None 29) Return on sales equals gross profit divided by sales.

Answer: FALSE Diff: 2 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None 30) Liquidity ratios focus on whether there are sufficient current assets to satisfy current liabilities as they come due.

Answer: TRUE Diff: 2 LO: 17-5 AACSB: Reflective thinking skills Learning Outcome: None

46 .

31) The income statement for Rozman Company for the year ended December 31, 2013 is given below: Sales Cost of goods sold Gross profit Operating expenses Operating income Income tax expense Net income

$1,600 872 728 436 292 66 $226

Required: Prepare a common-size income statement.

Answer: Sales 100.00% Cost of goods sold 54.50% Gross profit 45.50% Operating expenses 27.25% Operating income 18.25% Income tax expense 4.13% Net income 14.13% Diff: 1 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

47 .

32) The balance sheet for Orlando Company at December 31, 2009 is given below: Current Assets: Cash Accounts Receivable Inventory Total Current Assets Long-term Assets: Fixed Assets Less: Accumulated Depreciation Net Fixed Assets Total Assets Current Liabilities: Accounts Payable Taxes Payable Total Current Liabilities Long-term Bonds Payable Total Liabilities Stockholders' Equity: Paid-in Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity

$78 76 54 $208 $322 (136) $186 $394 $44 14 $58 60 $118

$100 176 $276 $394

Required: Prepare a common-size balance sheet.

48 .

Answer: Current Assets: Cash Accounts Receivable Inventory Total Current Assets Long-term Assets: Fixed Assets Less: Accumulated Depreciation Net Fixed Assets Total Assets Current Liabilities: Accounts Payable Taxes Payable Total Current Liabilities Long-term Bonds Payable Total Liabilities

Stockholders' Equity: Paid-in Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity Diff: 1 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

19.8% 19.3% 13.7% 52.8% 81.7% (34.5)% 47.2% 100.0% 11.2% 3.6% 14.7% 15.2% 29.9%

25.4% 44.7% 70.1% 100.0%

49 .

33) The following information is available for Ward Company: Sales Gross profit Net income Total current assets Total current liabilities Total stockholders' equity, last year Total stockholders' equity, current year

$189,400 $56,400 $25,800 $32,400 $34,400 $192,000 $280,000

Required: Compute the following ratios: A) Current ratio B) Gross profit rate C) Return on sales D) Return on stockholders' equity Answer: A) 0.94 B) 29.8% C) 13.6% D) 10.9% Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None

50 .

34) The following data is available for Everest Company: Credit Sales Net Income Total Current Assets Total Current Liabilities Accounts Receivable, current year Accounts Receivable, prior year Total Stockholders' Equity, current year Total Stockholders' Equity, prior year Retained Earnings, current year Retained Earnings, prior year Market price per share Average Number of Common Shares Outstanding during year

$1,702 $112 $366 $226 $160 $156 $550 $500 $366 $346 $50 46

Required: Compute the following ratios: A) current ratio B) average collection period in days C) return on stockholders' equity D) price-earnings ratio E) dividend yield Answer: A) 1.62 = 366/226 B) 33.9 = (158 × 365)/1702 C) 21.33% = 112/525 D) 20.58 = 50/(112/46) E) 4% = (92/46)/50 Diff: 2 LO: 17-5 AACSB: Analytic skills Learning Outcome: None 17.6 Questions 1) In an efficient capital market, the market prices of securities ________.

A) fully reflect all the information available to the public B) fully reflect all the information available to insiders C) reflect some of the information available to the public D) reflect most of the information available to the public Answer: A Diff: 1 LO: 17-6 AACSB: Analytic skills Learning Outcome: None

51 .

2) In an efficient capital market, searching for ________.

A) overpriced securities is fruitless B) underpriced securities is fruitless C) securities with high dividend yields is fruitless D) low risk securities is fruitless Answer: B Diff: 1 LO: 17-6 AACSB: Reflective thinking skills Learning Outcome: None 3) In an efficient capital market, the appropriate investment strategy for most investors is the ________.

A) daily trading and high volume approach B) inactive portfolio approach C) active portfolio approach D) buy low and sell high approach Answer: B Diff: 1 LO: 17-6 AACSB: Reflective thinking skills Learning Outcome: None 4) In an efficient capital market, the appropriate investment strategy is risk control, ________ and ________.

A) low diversification; high turnover of securities B) low diversification; low turnover of securities C) high diversification; high turnover of securities D) high diversification; low turnover of securities Answer: D Diff: 2 LO: 17-6 AACSB: Reflective thinking skills Learning Outcome: None 5) In an efficient capital market, the role of accounting information is to ________.

A) help investors find underpriced securities B) help investors find overpriced securities C) help investors find low risk securities D) help investors identify the different degrees of risk among different securities Answer: D Diff: 2 LO: 17-6 AACSB: Reflective thinking skills Learning Outcome: None

52 .

6) Besides financial statements, alternative sources of financial information about a company is(are) ________.

A) company press releases B) trade association publications C) brokerage house analyses D) all of the above Answer: D Diff: 1 LO: 17-6 AACSB: Reflective thinking skills Learning Outcome: None 7) An efficient capital market is one in which an order to trade can be placed and executed in a short period of time.

Answer: FALSE Diff: 2 LO: 17-6 AACSB: Reflective thinking skills Learning Outcome: None 8) Research suggests that investors are not fooled by companies that choose the least conservative accounting policies to increase net income.

Answer: TRUE Diff: 2 LO: 17-6 AACSB: Reflective thinking skills Learning Outcome: None

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