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Accounting_Chapter_26 Accounting_Chapter_26

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TRUE-FALSE STATEMENTS

1. An important step in management's decision-making process is to determine and evaluate

possible courses of action.

2. In making decisions, management ordinarily considers both financial and nonfinancial

information.

3. In incremental analysis, total variable costs will always change under alternative courses

of action, and total fixed costs will always remain constant.

4. Accountants are mainly involved in developing nonfinancial information for management's

consideration in choosing among alternatives.

5. Decision-making involves choosing among alternative courses of action.

6. Financial data are developed for a course of action under an incremental basis and then it

is compared to data developed under a differential basis before a decision is made.

7. A special one-time order should never be accepted if the unit sales price is less than the

unit variable cost.

8. If a company has excess capacity and present markets will not be affected, it would be

profitable to accept an order at a special unit price even though the price is less than the

unit variable cost to manufacture the item.

9. A company should never accept an order for its product at less than its regular sales

price.

10. A decision whether to continue to make a product or buy it externally, depends on the

external price and the amount of variable and fixed costs that can be eliminated assuming

no alternative uses of resources.

11. An opportunity cost is the potential benefit obtained by using resources in an alternative

course of action.

12. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make

an item, management should always make the decision to choose the lowest cost

alternative.

13. In a sell or process further decision, management should process further as long as the

incremental revenues from additional processing exceed the incremental variable costs.

14. It is always better to sell now rather than process further because of the time value of

money.

15. In a decision concerning replacing old equipment with new equipment, the book value of

the old equipment can be considered a sunk cost.

16. In a decision to retain or replace old equipment, the salvage value of the old equipment is

relevant in incremental analysis.

17. It is better not to replace old equipment if it is not fully depreciated.

18. From a quantitative standpoint, a segment should be eliminated if its contribution margin

is less than the fixed costs that can be eliminated.

19. The elimination of an unprofitable product line may adversely affect the remaining product

lines.

20. When a company has limited resources to manufacture products, it should manufacture

those products which have the highest contribution margin per unit of limited resource.

21. If a company has only a certain number of machine hours available for production, it is

generally more profitable to produce and sell the product with the highest unit contribution

margin.

22. Capital budgeting decisions usually involve large investments and can have a significant

impact on a company's future profitability.

23. The annual rate of return technique requires dividing a project's annual cash inflows by

the economic life of the project.

24. A hurdle rate is the rate of return set by applying ideal standards.

25. A major advantage of the annual rate of return technique is that it considers the time value

of money.

26. The cash payback capital budgeting technique is a quick way to calculate a project's net

present value.

27. The cash payback method is frequently used as a screening tool but it does not take into

consideration the profitability of a project.

28. Using the net present value method, a net present value of zero indicates that the project

would be acceptable.

29. The net present value method can only be used in capital budgeting if the expected cash

flows from a project are an equal amount each year.

30. The interest rate yielded by a project is a rate that will cause the present value of the

proposed capital expenditure to equal the present value of the expected annual cash

inflows.

31. Accounting contributes to management's decision-making process through internal

reports that review the actual impact of the decision.

32. The process used to identify the financial data that change under alternative courses of

action is called allocation of limited resources.

33. If a company is operating at full capacity, the incremental costs of a special order will likely

include fixed manufacturing costs.

34. The basic decision rule in a sell or process further decision is: sell without further

processing as long as the incremental revenue from processing exceeds the incremental

processing costs.

35. In deciding on the future status of an unprofitable segment, management should

recognize that net income could decrease by eliminating the unprofitable segment.

36. The annual rate of return is computed by dividing expected annual net income by average

investment.

37. The discounted cash flow technique considers estimated total cash inflows from the

investment but not the time value of money.

MULTIPLE CHOICE QUESTIONS

38. A major accounting contribution to the managerial decision-making process in evaluating

possible courses of action is to

a. assign responsibility for the decision.

b. provide relevant revenue and cost data about each course of action.

c. determine the amount of money that should be spent on a project.

d. decide which actions that management should consider.

39. Which of the following stages of the management decision-making process is improperly

sequenced?

a. Evaluate possible courses of action Make decision.

b. Assign responsibility for the decision Identify the problem.

c. Identify the problem Determine possible courses of action.

d. Assign responsibility for decision Determine possible courses of action.

40. Internal reports that review the actual impact of decisions are prepared by

a. department heads.

b. the controller.

c. management accountants.

d. factory workers.

41. Which of the following steps in the management decision-making process does not

generally involve the managerial accountant?

a. Determine possible courses of action

b. Make the appropriate decision based on relevant data

c. Prepare internal reports that review the impact of decisions

d. None of these

42. The process of evaluating financial data that change under alternative courses of action is

called

a. double entry analysis.

b. contribution margin analysis.

c. incremental analysis.

d. cost-benefit analysis

.

43. Nonfinancial information that management might evaluate in making a decision would not

include

a. employee turnover.

b. contribution margin.

c. the environment.

d. the corporate profile in the community.

44. Incremental analysis is synonymous with

a. difficult analysis.

b. differential analysis.

c. gross profit analysis.

d. derivative analysis.

45. In incremental analysis,

a. only costs are analyzed.

b. only revenues are analyzed.

c. both costs and revenues may be analyzed.

d. both costs and revenues that stay the same between alternate courses of action will

be analyzed.

46. Incremental analysis is most useful

a. in developing relevant information for management decisions.

b. in choosing between the net present value method and the internal rate of return

method.

c. in evaluating the master budget.

d. as a replacement technique for variance analysis.

47. The source of data to serve as inputs in incremental analysis is generated by

a. market analysts.

b. engineers.

c. accountants.

d. all of these.

48. Which of the following is not a true statement?

a. Incremental analysis might also be referred to as differential analysis.

b. Incremental analysis is the same as CVP analysis.

c. Incremental analysis is useful in making decisions.

d. Incremental analysis focuses on decisions that involve a choice among alternative

courses of action.

49. Incremental analysis would not be appropriate for

a. a make or buy decision.

b. an allocation of limited resource decision.

c. elimination of an unprofitable segment.

d. analysis of manufacturing variances.

50. Incremental analysis would be appropriate for

a. acceptance of an order at a special price.

b. a retain or replace equipment decision.

c. a sell or process further decision.

d. all of these.

51. Which of the following is a true statement about cost behaviors in incremental analysis?

1. Fixed costs will not change between alternatives.

2. Fixed costs may change between alternatives.

3. Variable costs will always change between alternatives.

a. 1

b. 2

c. 3

d. 2 and 3

52. A company is considering the following alternatives:

Alternative 1 Alternative 2

Revenues $120,000 $120,000

Variable costs 60,000 70,000

Fixed costs 35,000 35,000

Which of the following are relevant in choosing between the alternatives?

a. Variable costs

b. Revenues

c. Fixed costs

d. Variable costs and fixed costs

53. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom

scale which normally sells for $35. A foreign wholesaler offers to purchase 2,000 scales at

$15 each. Garner would incur special shipping costs of $1 per scale if the order were

accepted. Garner has sufficient unused capacity to produce the 2,000 scales. If the

special order is accepted, what will be the effect on net income?

a. $4,000 increase

b. $4,000 decrease

c. $6,000 decrease

d. $30,000 increase

54. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales

price of $88. Fixed manufacturing costs were $240,000 when 10,000 units were produced

and sold. The company has a one-time opportunity to sell an additional 1,000 units at $70

each in a foreign market which would not affect its present sales. If the company has

sufficient capacity to produce the additional units, acceptance of the special order would

affect net income as follows:

a. Income would decrease by $4,000.

b. Income would increase by $4,000.

c. Income would increase by $70,000.

d. Income would increase by $20,000.

55. In incremental analysis,

a. costs are not relevant if they change between alternatives.

b. all costs are relevant if they change between alternatives.

c. only fixed costs are relevant.

d. only variable costs are relevant.

56. If a plant is operating at full capacity and receives a one-time opportunity to accept an

order at a special price below its usual price, then

a. only variable costs are relevant.

b. fixed costs are not relevant.

c. the order will likely be accepted.

d. the order will likely be rejected.

57. Miley, Inc. has excess capacity. Under what situations should the company accept a

special order for less than the current selling price?

a. Never

b. When additional fixed costs must be incurred to accommodate the order

c. When the company thinks it can use the cheaper materials without the customer's

knowledge

d. When incremental revenues exceed incremental costs

58. If a company must expand capacity to accept a special order, it is likely that there will be

a. an increase in unit variable costs.

b. no increase in fixed costs.

c. an increase in variable and fixed costs per unit.

d. an increase in fixed costs.

59. Which of the following is true if a company can accept a special order without affecting its

regular sales and is within plant capacity?

a. Net income will not be affected.

b. Net income will increase if the special sales price per unit exceeds the unit variable

costs.

c. Net income will decrease.

d. Additional fixed costs will probably be incurred.

60. If a company anticipates that other sales will be affected by the acceptance of a special

order, then

a. lost sales should be considered in the incremental analysis.

b. lost sales should not be considered in the incremental analysis.

c. the order should not be accepted.

d. the order will only be accepted if the plant is below capacity.

61. Martin Company incurred the following costs for 50,000 units:

Variable costs $180,000

Fixed costs 240,000

Martin has received a special order from a foreign company for 5,000 units. There is

sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will

require spending an additional $8,500 for shipping.

If Martin wants to break even on the order, what should the unit sales price be?

a. $10.10

b. $5.30

c. $3.60

d. $8.40

62. Martin Company incurred the following costs for 50,000 units:

Variable costs $180,000

Fixed costs 240,000

Martin has received a special order from a foreign company for 5,000 units. There is

sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will

require spending an additional $8,500 for shipping.

If Martin wants to earn $8,000 on the order, what should the unit price be?

a. $3.30

b. $11.70

c. $5.20

d. $6.90

63. Which decision will involve no incremental revenues?

a. Make or buy decision

b. Drop a product line

c. Accept a special order

d. Additional processing decision

64. An opportunity cost

a. should be initially recorded as an asset.

b. is the cost of a new product proposal.

c. is the potential benefit that may be obtained by following an alternative course of action.

d. is classified as manufacturing overhead.

65. Opportunity cost must be considered in decisions involving

a. budgeting.

b. financial accounting.

c. CVP analysis.

d. resources that have alternative uses.

66. The opportunity cost of an alternate course of action that is relevant to a make-or-buy

decision is

a. subtracted from the "Make" costs.

b. added to the "Make" costs.

c. added to the "Buy" costs.

d. none of these.

67. Opportunity cost is usually

a. a standard cost.

b. a potential benefit.

c. a sunk cost.

d. included as part of cost of goods sold.

68. Each of the following is a disadvantage of buying rather than making a component of a

company's product except that

a. quality control specifications may not be met.

b. the outside supplier could increase prices significantly in the future.

c. profitable product lines may be dropped.

d. the supplier may not deliver on time.

69. Tex's Manufacturing Company can make 100 units of a necessary component part with

the following costs:

Direct Materials $60,000

Direct Labor 10,000

Variable Overhead 30,000

Fixed Overhead 20,000

If Tex's Manufacturing Company purchases the component externally, $15,000 of the

fixed costs can be avoided. At what external price for the 100 units is the company

indifferent between making or buying?

a. $120,000

b. $85,000

c. $115,000

d. $100,000

70. Tex's Manufacturing Company can make 100 units of a necessary component part with

the following costs:

Direct Materials $60,000

Direct Labor 10,000

Variable Overhead 30,000

Fixed Overhead 20,000

If Tex's Manufacturing Company can purchase the component externally for $110,000

and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy

decision?

a. Make and save $5,000

b. Buy and save $5,000

c. Make and save $15,000

d. Buy and save $15,000

71. Bell's Shop can make 1,000 units of a necessary component with the following costs:

Direct Materials $72,000

Direct Labor 18,000

Variable Overhead 9,000

Fixed Overhead ?

The company can purchase the 1,000 units externally for $117,000. The avoidable fixed

costs are $6,000 if the units are purchased externally. An analysis shows that at this

external price, the company is indifferent between making or buying the part. What are the

fixed overhead costs of making the component?

a. $24,000

b. $18,000

c. $12,000

d. Cannot be determined.

72. Ruth Company produces 1,000 units of a necessary component with the following costs:

Direct Materials $24,000

Direct Labor 16,000

Variable Overhead 4,000

Fixed Overhead 7,000

Ruth Company could avoid $3,000 in fixed overhead costs if it acquires the components

externally. If cost minimization is the major consideration and the company would prefer to

buy the components, what is the maximum external price that Ruth Company would

accept to acquire the 1,000 units externally?

a. $51,000

b. $47,000

c. $48,000

d. $44,000

73. Ruth Company produces 1,000 units of a necessary component with the following costs:

Direct Materials $24,000

Direct Labor 16,000

Variable Overhead 4,000

Fixed Overhead 7,000

None of Ruth Company's fixed overhead costs can be reduced, but another product could

be made that would increase profit contribution by $8,000 if the components were

acquired externally. If cost minimization is the major consideration and the company

would prefer to buy the components, what is the maximum external price that Ruth

Company would be willing to accept to acquire the 1,000 units externally?

a. $43,000

b. $55,000

c. $48,000

d. $52,000

74. Fornelli, Inc. can produce 100 units of a component part with the following costs:

Direct Materials $30,000

Direct Labor 13,000

Variable Overhead 32,000

Fixed Overhead 22,000

If Fornelli, Inc. can purchase the units externally for $80,000, by what amount will its total

costs change?

a. An increase of $80,000

b. An increase of $5,000

c. An increase of $17,000

d. A decrease of $22,000

75. Fornelli, Inc. can produce 100 units of a component part with the following costs:

Direct Materials $30,000

Direct Labor 13,000

Variable Overhead 32,000

Fixed Overhead 22,000

If Fornelli, Inc. can purchase the component part externally for $88,000 and only $8,000 of

the fixed costs can be avoided, what is the correct make-or-buy decision?

a. Make and save $1,000

b. Buy and save $1,000

c. Make and save $5,000

d. Buy and save $13,000

76. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following

costs:

Direct Materials $11,000

Direct Labor 15,000

Variable Overhead 3,000

Fixed Overhead 7,000

Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost

minimization is the major consideration and the company would prefer to buy the 60,000

units externally, what is the maximum external price that Crigui would expect to pay for

the units?

a. $32,000

b. $29,000

c. $36,000

d. $33,000

77. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following

costs:

Direct Materials $11,000

Direct Labor 15,000

Variable Overhead 3,000

Fixed Overhead 7,000

None of Crigui’s fixed overhead costs can be reduced, but another product could be made

that would increase profit contribution by $4,000 if the CDs were acquired externally. If

cost minimization is the major consideration and the company would prefer to buy the

CDs, what is the maximum external price that Crigui would be willing to accept to acquire

the 60,000 units externally?

a. $36,000

b. $32,000

c. $33,000

d. $40,000

78. Tasty Bites produces corn chips. The cost of one batch is below:

Direct materials $18.00

Direct labor 13.00

Variable overhead 11.00

Fixed overhead 14.00

An outside supplier has offered to produce the corn chips for $25 per batch. How much

will Tasty Bites save if it accepts the offer?

a. $2.00 per batch

b. $17.00 per batch

c. $31.00 per batch

d. $6.00 per batch

79. NF Toy Company is unsure of whether to sell its product assembled or unassembled. The

unit cost of the unassembled product is $30 and NF Toy would sell it for $65. The cost to

assemble the product is estimated at $21 per unit and the company believes the market

would support a price of $85 on the assembled unit. What decision should NF Toy make?

a. Sell before assembly, the company will be better off by $1 per unit.

b. Sell before assembly, the company will be better off by $20 per unit.

c. Process further, the company will be better off by $29 per unit.

d. Process further, the company will be better off by $14 per unit.

80. Moreland Clean Company spent $4,000 to produce Product 89, which can be sold as is

for $5,000, or processed further incurring additional costs of $1,500 and then be sold for

$7,000. Which amounts are relevant to the decision about Product 89?

a. $4,000, $5,000, and $7,000

b. $4,000, $1,500, and $7,000

c. $5,000, $1,500, and $7,000

d. $4,000, $5,000, $1,500 and $7,000

81. Pratt Company has old inventory on hand that cost $12,000. Its scrap value is $16,000.

The inventory could be sold for $40,000 if manufactured further at an additional cost of

$12,000. What should Pratt do?

a. Sell the inventory for $16,000 scrap value

b. Dispose of the inventory to avoid any further decline in value

c. Hold the inventory at its $12,000 cost

d. Manufacture further and sell it for $40,000

82. New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce

and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen

at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each.

a. Face cream must be processed further because its profit is $9 each.

b. Face cream must not be processed further because costs increase more than

revenue.

c. Face cream must not be processed further because it decreases profit by $1 each.

d. Face cream must be processed further because it increases profit by $3 each.

83. Janssen Company has old inventory on hand that cost $18,000. Its scrap value is

$24,000. The inventory could be sold for $60,000 if manufactured further at an additional

cost of $18,000. What should Janssen do?

a. Sell the inventory for $24,000 scrap value

b. Dispose of the inventory to avoid any further decline in value

c. Hold the inventory at its $18,000 cost

d. Manufacture further and sell it for $60,000.

84. A company has a process that results in 15,000 pounds of Product A that can be sold for

$8 per pound. An alternative would be to process Product A further at a cost of $100,000

and then sell it for $14 per pound. Should management sell Product A now or should

Product A be processed further and then sold? What is the effect of the action?

a. Process further, the company will be better off by $10,000.

b. Sell now, the company will be better off by $10,000.

c. Process further, the company will be better off by $90,000.

d. Sell now, the company will be better off by $100,000.

85. The decision rule on whether to sell or process further

a. varies from situation to situation.

b. is process further as long as total revenue exceeds present revenues.

c. is process further if incremental revenue from such processing exceeds incremental

fixed costs.

d. is process further if incremental revenue from such processing exceeds the

incremental processing costs.

86. Eddy Company is starting business and is unsure of whether to sell its product assembled

or unassembled. The unit cost of the unassembled product is $80 and Eddy Company

would sell it for $180. The cost to assemble the product is estimated at $36 per unit and

Eddy Company believes the market would support a price of $232 on the assembled unit.

What is the correct decision using the sell or process further decision rule?

a. Sell before assembly, the company will be better off by $36 per unit.

b. Sell before assembly, the company will be better off by $52 per unit.

c. Process further, the company will be better off by $52 per unit.

d. Process further, the company will be better off by $16 per unit.

87. Mallory Company manufactures widgets. Bowden Company has approached Mallory with

a proposal to sell the company widgets at a price of $80,000 for 100,000 units. Mallory is

currently making these components in its own factory. The following costs are associated

with this part of the process when 100,000 units are produced:

Direct material $ 31,000

Direct labor 29,000

Manufacturing overhead 40,000

Total $100,000

The manufacturing overhead consists of $16,000 of costs that will be eliminated if the

components are no longer produced by Mallory. From Mallory's point of view, how much

is the incremental cost or savings if the widgets are bought instead of made?

a. $20,000 incremental savings

b. $4,000 incremental cost

c. $4,000 incremental savings

d. $20,000 incremental cost

88. The focus of a sell or process further decision is

a. incremental revenue.

b. incremental cost.

c. both incremental revenue and incremental cost.

d. neither incremental revenue nor incremental cost.

89. Marcus Company gathered the following data about the three products that it produces:

Present Estimated Additional Estimated Sales

Product Sales Value Processing Costs if Processed Further

A $12,000 $8,000 $21,000

B 14,000 5,000 18,000

C 11,000 3,000 16,000

Which of the products should not be processed further?

a. Product A

b. Product B

c. Product C

d. Products A and C

90. A company decided to replace an old machine with a new machine. Which of the following

is considered a relevant cost?

a. The book value of the old equipment

b. Depreciation expense on the old equipment

c. The loss on the disposal of the old equipment

d. The current disposal price of the old equipment

91. Which of the following is not relevant information in a decision whether old equipment

presently being used should be replaced by new equipment?

a. The cash price of the new equipment

b. The salvage value of the old equipment

c. The book value of the old equipment

d. The cost savings if the new equipment is purchased

92. Book value of old equipment is considered to be a

a. relevant cost.

b. semi-relevant cost.

c. sunk cost.

d. cost that can be changed by a present or future decision.

93. A company is deciding on whether to replace some old equipment with new equipment.

Which of the following is not a relevant cost for incremental analysis?

a. Annual operating cost of the new equipment

b. Annual operating cost of the old equipment

c. Net cost of the new equipment

d. Accumulated depreciation on the old equipment

94. A company is considering replacing old equipment with new equipment. Which of the

following is a relevant cost for incremental analysis?

a. Annual depreciation charge on the old equipment

b. Book value of the old equipment

c. Estimated annual depreciation of the new equipment

d. Cost of the new equipment

95. In a retain or replace equipment decision, trade-in allowance available on old equipment

a. increases the cost of the new equipment.

b. is relevant because it will not be realized if the old equipment is retained.

c. is not relevant to the decision.

d. reduces the cost of the old equipment.

96. Sala Co. is contemplating the replacement of an old machine with a new one. The

following information has been gathered:

Old Machine New Machine

Price $250,000 $500,000

Accumulated Depreciation 75,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $200,000 $150,500

If the old machine is replaced, it can be sold for $20,000.

Which of the following amounts is a sunk cost?

a. $200,000

b. $150,500

c. $500,000

d. $175,000

97. Sala Co. is contemplating the replacement of an old machine with a new one. The

following information has been gathered:

Old Machine New Machine

Price $250,000 $500,000

Accumulated Depreciation 75,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $200,000 $150,500

If the old machine is replaced, it can be sold for $20,000.

Which of the following amounts is relevant to the replacement decision?

a. $175,000

b. $250,000

c. $49,500

d. $0

98. Sala Co. is contemplating the replacement of an old machine with a new one. The

following information has been gathered:

Old Machine New Machine

Price $250,000 $500,000

Accumulated Depreciation 75,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $200,000 $150,500

If the old machine is replaced, it can be sold for $20,000.

The net advantage (disadvantage) of replacing the old machine is

a. $15,000

b. $20,000

c. $(5,000)

d. $(50,000)

99. Abel Company produces three versions of baseball bats: wood, aluminum, and hard

rubber. A condensed segmented income statement for a recent period follows:

Wood Aluminum Hard Rubber Total

Sales $500,000 $200,000 $65,000 $765,000

Variable expenses 325,000 140,000 58,000 523,000

Contribution margin 175,000 60,000 7,000 242,000

Fixed expenses 75,000 35,000 22,000 132,000

Net income (loss) $100,000 $ 25,000 $(15,000) $110,000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be

total net income if the line is dropped?

a. $125,000

b. $103,000

c. $105,000

d. $140,000

100. Abel Company produces three versions of baseball bats: wood, aluminum, and hard

rubber. A condensed segmented income statement for a recent period follows:

Wood Aluminum Hard Rubber Total

Sales $500,000 $200,000 $65,000 $765,000

Variable expenses 325,000 140,000 58,000 523,000

Contribution margin 175,000 60,000 7,000 242,000

Fixed expenses 75,000 35,000 22,000 132,000

Net income (loss) $100,000 $ 25,000 $(15,000) $110,000

Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total

net income if the line is dropped?

a. $125,000

b. $103,000

c. $105,000

d. $140,000

101. What will most likely occur if a company eliminates an unprofitable segment when a

portion of fixed costs are unavoidable?

a. All expenses of the eliminated segment will be eliminated.

b. Net income will decrease.

c. Net income will increase.

d. The company's variable costs will increase.

102. A company has three product lines, one of which reflects the following results:

Sales $215,000

Variable expenses 125,000

Contribution margin 90,000

Fixed expenses 140,000

Net loss $ (50,000)

If this product line is eliminated, 60% of the fixed expenses can be eliminated and the

other 40% will be allocated to other product lines. If management decides to eliminate this

product line, the company's net income will

a. increase by $50,000.

b. decrease by $90,000.

c. decrease by $6,000.

d. increase by $6,000.

103. A company is considering eliminating a product line. The fixed costs currently allocated to

the product line will be allocated to other product lines upon discontinuance. If the product

line is discontinued,

a. total net income will increase by the amount of the product line's fixed costs.

b. total net income will decrease by the amount of the product line's fixed costs.

c. the contribution margin of the product line will indicate the net income increase or

decrease.

d. the company's total fixed costs will decrease.

104. A segment has the following data:

Sales $350,000

Variable expenses 150,000

Fixed expenses 275,000

What will be the incremental effect on net income if this segment is eliminated, assuming

the fixed expenses will be allocated to profitable segments?

a. $200,000 increase

b. $200,000 decrease

c. $275,000 decrease

d. Cannot be determined from the data provided.

105. Talbot Company expects income of $2,000 per year over the life of an investment that will

cost $25,000. The calculation of the accounting rate of return is .16. The rate of return

indicates that

a. Talbot expects to earn 16% of $2,000 as profit each year the asset is used.

b. Talbot expects to earn 16% of its investment annually.

c. Talbot expects to earn 16% of its cash outlay back over the life of the asset.

d. Talbot expects the asset will earn 16 times as much profit as its cost.

106. A company can sell all the units it can produce of either Product A or Product B but not

both. Product A has a unit contribution margin of $16 and takes two machine hours to make

and Product B has a unit contribution margin of $30 and takes three machine hours to

make. If there are 1,000 machine hours available to manufacture a product, income will be

a. $2,000 more if Product A is made.

b. $2,000 less if Product B is made.

c. $2,000 less if Product A is made.

d. the same if either product is made.

107. If a company has limited resources, the key factor in performing incremental analysis is

a. contribution margin.

b. limited resources required.

c. contribution margin per unit of limited resource.

d. none of these.

108. A company can produce and sell only one of the following two products:

Machine Contribution

Hours Required Margin Per Unit

Product 1 3 $30

Product 2 2 $25

If the company has machine capacity of 2,000 hours, what is the total contribution margin

of the product it should produce to maximize net income?

a. $20,000

b. $24,000

c. $25,000

d. $16,000

109. Ruiz Company’s contribution margin is $4 per unit for Product A and $5 for Product B.

Product A requires 2 machine hours and Product B requires 4 machine hours. How much

is the contribution margin per unit of limited resource for each product?

A B

a. $4.00 $5.00

b. $2.00 $1.25

c. $1.25 $2.00

d. $2.50 $1.00

110. A company is considering purchasing factory equipment that costs $320,000 and is

estimated to have no salvage value at the end of its 8-year useful life. If the equipment is

purchased, annual revenues are expected to be $90,000 and annual operating expenses

exclusive of depreciation expense are expected to be $38,000. The straight-line method of

depreciation would be used.

If the equipment is purchased, the annual rate of return expected on this equipment is

a. 32.5%.

b. 3.8%.

c. 7.5%.

d. 16.3%.

111. A company is considering purchasing factory equipment that costs $320,000 and is

estimated to have no salvage value at the end of its 8-year useful life. If the equipment is

purchased, annual revenues are expected to be $90,000 and annual operating expenses

exclusive of depreciation expense are expected to be $38,000. The straight-line method of

depreciation would be used.

The cash payback period on the equipment is

a. 13.3 years.

b. 8.0 years.

c. 6.2 years.

d. 3.1 years.

112. Aaron Co. is considering purchasing a new machine which will cost $200,000, but which

will decrease costs each year by $40,000. The useful life of the machine is 10 years. The

machine would be depreciated straight-line with no residual value over its useful life at the

rate of $20,000/year. The cash payback period is

a. 4.0 years.

b. 4.5 years.

c. 5.0 years.

d. 10.0 years.

113. The following are all quantitative capital budgeting techniques except

a. annual rate of return technique.

b. cost-volume-profit technique.

c. discounted cash flow technique.

d. cash payback technique.

114. A company's cost of capital refers to the

a. rate management expects to pay on all borrowed and equity funds.

b. total cost of a capital project.

c. cost of printing and registering common stock shares.

d. rate of return earned on total assets.

115. How is annual cash inflow determined?

a. Depreciation is subtracted from net income because it is an expense.

b. Depreciation is added back to net income because it is not an outflow of cash.

c. Depreciation is subtracted from net income because it is an outflow of cash.

d. Depreciation is added back to net income because it is an inflow of cash.

116. If an asset cost $210,000 and is expected to have a $30,000 salvage value at the end of

its ten-year life, and generates annual net cash inflows of $30,000 each year, the cash

payback period is

a. 8 years.

b. 7 years.

c. 6 years.

d. 5 years.

117. If the payback period for a project is greater than its economic life, the

a. project will always be profitable.

b. entire initial investment will never be recovered.

c. project would only be acceptable if the company's cost of capital was low.

d. project's return will always exceed the company's cost of capital.

118. A company is considering purchasing factory equipment which costs $480,000 and is

estimated to have no salvage value at the end of its 8-year useful life. If the equipment is

purchased, annual revenues are expected to be $225,000 and annual operating expenses

exclusive of depreciation expense are expected to be $95,000. The straight-line method of

depreciation would be used. If the equipment is purchased, the annual rate of return

expected on this project is

a. 54.2%.

b. 14.6%.

c. 29.2%.

d. 27.1%.

119. Capital budgeting is the process

a. used in sell or process further decisions.

b. of determining how much capital stock to issue.

c. of making capital expenditure decisions.

d. of eliminating unprofitable product lines.

120. Which of the following is not a common method of capital budgeting?

a. Gross profit method

b. Payback method

c. Discounted cash flow method

d. Annual rate of return method

121. The rate that management expects to pay on borrowed or equity funds is known as

a. the hurdle rate.

b. the cost of capital.

c. the cutoff rate.

d. all of these.

122. The higher the rate of return for a given risk, the

a. more attractive the investment.

b. less attractive the investment.

c. higher the cost of capital.

d. higher the hurdle rate.

123. The annual rate of return method is based on

a. accounting data.

b. time value of money data.

c. market values.

d. replacement values.

124. A company projects an increase in net income of $225,000 each year for the next five

years if it invests $900,000 in new equipment. The equipment has a five-year life and an

estimated salvage value of $300,000. What is the annual rate of return on this

investment?

a. 25.0%

b. 37.5%

c. 50.0%

d. 57.5%

125. When using the payback method, payback is expressed in terms of

a. a percent.

b. dollars.

c. time.

d. a discount factor.

126. The payback method is criticized on the grounds that it

a. ignores obsolescence factors.

b. ignores the cost of an investment.

c. is complicated to use.

d. ignores the time value of money.

127. Nance Company is considering buying a machine for $90,000 with an estimated life of ten

years and no salvage value. The straight-line method of depreciation will be used. The

machine is expected to generate net income of $6,000 each year. The cash payback on

this investment is

a. 15 years.

b. 10 years.

c. 6 years.

d. 3 years.

128. Garza Company is considering buying equipment for $240,000 with a useful life of five

years and an estimated salvage value of $12,000. If annual expected income is $21,000,

the denominator in computing the annual rate of return is

a. $240,000.

b. $120,000.

c. $126,000.

d. $252,000.

129. A capital budgeting technique which takes into consideration the time value of money is

the

a. annual rate of return approach.

b. return on stockholders' equity approach.

c. payback approach.

d. net present value method.

130. Mussina Company had an investment which cost $260,000 and had a salvage value at

the end of its useful life of zero. If Mussina's expected annual net income is $15,000, the

annual rate of return is:

a. 5.8%.

b. 9.8%.

c. 11.5%.

d. 15%.

131. Giraldi Company has identified that the cost of a new computer will be $60,000, but with

the use of the new computer, net income will increase by $5,000 a year. If depreciation

expense is $3,000 a year, the cash payback period is:

a. 30 years.

b. 20 years.

c. 12 years.

d. 7.5 years.

132. Benaflek Co. purchased some equipment 3 years ago. The company's required rate of

return is 12%, and the net present value of the project was $(450). Annual cost savings

were: $5,000 for year 1; $4,000 for year 2; and $3,000 for year 3. The amount of the initial

investment was

Present Value PV of an Annuity

Year of 1 at 12% of 1 at 12%

1 .893 .893

2 .797 1.690

3 .712 2.402

a. $10,239.

b. $9,158.

c. $10,058.

d. $9,339.

.

133. Fehr Company is considering two capital investment proposals. Estimates regarding each

project are provided below:

Project Blue Project Gray

Initial investment $400,000 $600,000

Annual net income 20,000 42,000

Net annual cash inflow 100,000 142,000

Estimated useful life 5 years 6 years

Salvage value 0 0

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The cash payback period for Project Blue is

a. 20 years.

b. 10 years.

c. 5 years.

d. 4 years.

134. Fehr Company is considering two capital investment proposals. Estimates regarding each

project are provided below:

Project Blue Project Gray

Initial investment $400,000 $600,000

Annual net income 20,000 42,000

Net annual cash inflow 100,000 142,000

Estimated useful life 5 years 6 years

Salvage value 0 0

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The annual rate of return for Project Blue is

a. 5%.

b. 10%.

c. 25%.

d. 50%.

135. Fehr Company is considering two capital investment proposals. Estimates regarding each

project are provided below:

Project Blue Project Gray

Initial investment $400,000 $600,000

Annual net income 20,000 42,000

Net annual cash inflow 100,000 142,000

Estimated useful life 5 years 6 years

Salvage value 0 0

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The net present value for Project Gray is

a. $618,410.

b. $182,912.

c. $100,000.

d. $18,410.

136. Fehr Company is considering two capital investment proposals. Estimates regarding each

project are provided below:

Project Blue Project Gray

Initial investment $400,000 $600,000

Annual net income 20,000 42,000

Net annual cash inflow 100,000 142,000

Estimated useful life 5 years 6 years

Salvage value 0 0

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The internal rate of return for Project Gray is approximately

a. 10%.

b. 11%.

c. 12%.

d. 9%.

137. Use the following table,

Present Value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 10% and is considering investing in a

project that requires an investment of $98,000 and is expected to generate cash inflows of

$42,000 at the end of each year for three years. The present value of future cash inflows

for this project is

a. $98,000.

b. $104,454.

c. $114,898.

d. $6,454.

138. Use the following table,

Present Value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 9% and is considering investing in a

project that costs $175,000 and is expected to generate cash inflows of $70,000 at the

end of each year for three years. The net present value of this project is

a. $177,170.

b. $35,000.

c. $17,718.

d. $2,170.

139. Use the following table,

Present Value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 8% and is considering investing in a

project that costs $68,337 and is expected to generate cash inflows of $27,000 each year

for three years. The approximate internal rate of return on this project is

a. 8%.

b. 9%.

c. 10%.

d. less than the required 8%.

140. Woods Company wants to purchase an asset with a 3-year useful life, which is expected

to produce cash inflows of $15,000 each year for two years, and $10,000 in year 3.

Woods has a 14% cost of capital, and uses the following factors. What is the present

value of these future cash flows?

Present Value of 1

Period 14%

1 .88

2 .77

3 .67

a. $29,800

b. $30,400

c. $31,450

d. $34,750

. Humphrey, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful

life. The equipment will provide cost savings of $7,300 and will be depreciated straight-line

over its useful life with no salvage value. Humphrey, Inc. requires a 10% rate of return.

Present Value of an Annuity of 1

Period 8% 9% 10% 11% 12% 15%

6 4.623 4.486 4.355 4.231 4.111 3.784

What is the approximate net present value of this investment?

a. $13,800

b. $1,792

c. $886

d. $2,748

142. Humphrey, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful

life. The equipment will provide cost savings of $7,300 and will be depreciated straight-line

over its useful life with no salvage value. Humphrey, Inc. requires a 10% rate of return.

Present Value of an Annuity of 1

Period 8% 9% 10% 11% 12% 15%

6 4.623 4.486 4.355 4.231 4.111 3.784

What is the approximate internal rate of return for this investment?

a. 9%

b. 10%

c. 11%

d. 12%

143. Which one of the following is correct?

a. Cash flows are used to calculate the internal rate of return.

b. Accrual income is used to calculate the payback period.

c. Cash flows are used to calculate the annual rate of return.

d. Accrual income is used to calculate the net present value.

144. If a company's required minimum rate of return is 10%, and in using the net present value

method, a project's net present value is zero, this indicates that the

a. project's rate of return exceeds 10%.

b. project's rate of return is less than the minimum rate required.

c. project earns a rate of return of 10%.

d. project earns a rate of return of 0%.

145. Using the net present value method, the total present value of cash inflows for Project A is

$30,000 and the total present value of cash inflows of Project B is $36,000. If Project A

and Project B both require an initial investment of $30,000 and have the same economic

life, the project that should be accepted is

a. Project A.

b. Project B.

c. neither; they are both the same.

d. not capable of being calculated.

146. Hale Plumbing used the net present value method and determined that project 34 had a

zero net present value. What does this tell management about the project?

a. The return from this project is equal to the cost of capital.

b. The project guarantees company profitability.

c. The project's cash inflows will equal its cash outflows.

d. The project earns the company's desired minimum rate of return.

147. In using the internal rate of return method, the internal rate of return factor was 4.0 and

the equal annual cash inflows were $40,000. The initial investment in the project must

have been

a. $40,000.

b. $10,000.

c. $160,000.

d. an amount which cannot be determined.

148. Use the following table,

Present value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 9%. It is considering investing in a

project which costs $420,000 and is expected to generate cash inflows of $168,000 at the

end of each year for three years. The net present value of this project is

a. $425,208.

b. $252,000.

c. $42,516.

d. $5,208.

149. Use the following table,

Present value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 8%. It is considering investing in a

project that costs $227,790 and is expected to generate cash inflows of $90,000 each

year for three years. The approximate internal rate of return on this project is

a. 8%.

b. 9%.

c. 10%.

d. The IRR on this project cannot be approximated.

150. Use the following table,

Present value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 10%. It is considering investing in a

project that requires an investment of $210,000 and is expected to generate cash inflows

of $90,000 at the end of each year for three years. The present value of future cash

inflows for this project is

a. $210,000.

b. $223,830.

c. $246,210.

d. $13,830.

151. The conceptually superior approach to capital budgeting is

a. a discounted cash flow method.

b. the payback method.

c. the annual rate of return method.

d. none of these.

152. The appropriate table to use when an investment promises to return unequal cash flows is the

a. future value of 1 table.

b. future value of annuity table.

c. present value of 1 table.

d. present value of annuity table.

153. Accounting's contribution to the decision-making process occurs in all of the following

steps except to

a. identify the problem and assign responsibility.

b. determine possible courses of action.

c. review results of the decision.

d. make a decision.

154. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product,

which normally sells for $38 per unit. A foreign wholesaler offers to purchase 3,000 units

at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were

accepted. Dryer has sufficient unused capacity to produce the 3,000 units. If the special

order is accepted, what will be the effect on net income?

a. $3,000 decrease

b. $3,000 increase

c. $9,000 increase

d. $54,000 increase

155. In a make-or-buy decision, opportunity costs are

a. added to the make total cost.

b. deducted from the make total cost.

c. added to the buy total cost.

d. ignored.

156. Which of the following would generally not affect a make-or-buy decision?

a. Selling expenses

b. Direct labor

c. Variable manufacturing costs

d. Opportunity cost

157. A cost that cannot be changed by any present or future decision is a(n)

a. incremental cost.

b opportunity cost.

c. sunk cost.

d. variable cost.

158. If an unprofitable segment is eliminated

a. it is impossible for net income to decrease.

b. fixed expenses allocated to the eliminated segment will be eliminated.

c. variable expenses of the eliminated segment will be eliminated.

d. it is impossible for net income to increase.

159. All of the following are relevant in deciding whether to eliminate an unprofitable segment

except the segment's

a. sales.

b. variable expenses.

c. contribution margin.

d. fixed expenses.

160. In the Rossetto Company, contribution margin per unit is $12 for Product X and $20 for

Product Y. Product X requires 4 machine hours and Product Y requires 8 machine hours.

What is the contribution margin per unit of limited resource for each product?

X Y

a. $3.00 $2.50

b. $5.00 $3.00

c. $2.50 $1.50

d. $5.00 $1.50

161. The rate of return that management expects to pay on all borrowed and equity funds is the

a. cost of capital.

b. cutoff rate.

c. hurdle rate.

d. minimum rate.

162. The cash payback formula is

a. Cost of capital investment Net income.

b. Cost of capital investment Annual cash inflow.

c. Average investment Net income.

d. Average investment Annual cash inflow.

163. To determine annual cash inflow, depreciation is

a. subtracted from net income because it is an expense.

b. subtracted from net income because it is an outflow of cash.

c. added back to net income because it is an inflow of cash.

d. added back to net income because it is not an outflow of cash.

164. Net present value is the difference between the

a. future cash inflows and the capital investment.

b. future cash inflows and the present value of the capital investment.

c. present value of future cash inflows and the capital investment.

d. present value of future net income and the capital investment.

165. A negative net present value means that the

a. project's rate of return exceeds the required rate of return.

b. project's rate of return is less than the required rate of return.

c. project's rate of return equals the required rate of return.

d. project is acceptable.

BRIEF EXERCISES

BE 166

Sedgwick Inc. is considering Plan 1 which is estimated to have sales of $40,000 and costs of

$15,000. The company currently has sales of $38,000 and costs of $14,000.

Instructions

Compare plans using incremental analysis.

BE 167

Pederson Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs

and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, of

which Pederson has the capacity to produce. Pederson will incur extra shipping costs of $1.25

per bear.

Instructions

Determine the incremental income or loss that Pederson Enterprises would realize by accepting

the special order.

BE 168

Notson, Inc. produces several models of clocks. An outside supplier has offered to produce the

commercial clocks for Notson for $420 each. Notson needs 1,200 clocks annually. Notson has

provided the following unit costs for its commercial clocks:

Direct materials $100

Direct labor 120

Variable overhead 80

Fixed overhead (40% avoidable) 150

Instructions

Prepare an incremental analysis which shows the effect of the make-or-buy decision.

BE 169

Parks Corporation currently manufactures 3,000 staplers annually for its main product. The costs

per stapler are as follows:

Direct materials $ 3.00

Direct labor 8.00

Variable overhead 4.00

Fixed overhead 7.00

Total $22.00

Gallup Company has contacted Parks with an offer to sell it 3,000 staplers for $18.00 each. $5 of

the fixed overhead per unit is unavoidable.

Instructions

Prepare an incremental analysis for the make-or-buy decision.

BE 170

Paola Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production

generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or the

chickens can be slaughtered in house and then sold for $2.25 each. It costs $55,000 more to turn

the annual chicken crop into chicken meat.

Instructions

If Paola Farms slaughters the chickens, determine how much incremental profit or loss it would

report. What should Paola Farms do?

BE 171

Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of

$60,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient

machine is available at a cost of $225,000 that will have a 5-year useful life with no salvage

value. The new machine will lower annual variable production costs from $400,000 to $310,000.

Instructions

Prepare an analysis showing whether the old machine should be retained or replaced.

BE 172

Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. The allocated fixed

costs are based on units sold and are unavoidable. Demand of individual products is not affected

by changes in other product lines. 40% of the fixed costs are direct, and the other 60% are

allocated. Results of June follow:

Sour Cream Ice Cream Yogurt Butter Total

Units sold 2,000 500 400 200 3,100

Revenue $10,000 $20,000 $10,000 $20,000 $60,000

Variable departmental costs 6,000 13,000 4,200 4,800 28,000

Fixed costs 5,000 2,000 3,000 7,000 17,000

Net income (loss) $ (1,000) $ 5,000 $ 2,800 $ 8,200 $15,000

Instructions

Prepare an incremental analysis of the effect of dropping the sour cream product line.

BE 173

Meierhoff Company provided the following information concerning two products:

Contribution margin per unit—Product 12 $23

Contribution margin per unit—Product 43 $15

Machine hours required for one unit—Product 12 2.5 hours

Machine hours required for one unit—Product 43 1.5 hours

Instructions

Compute the contribution margin per unit of limited resource for each product. Which product

should Meierhoff tell its sales personnel to ‘push’ to customers?

BE 174

Lightle Co. is considering investing in new equipment that will cost $900,000 with a 10-year useful

life. The new equipment is expected to produce annual net income of $30,000 over its useful life.

Depreciation expense, using the straight-line rate, is $90,000 per year.

Instructions

Compute the cash payback period.

BE 175

Holt Co. is considering investing in a new facility to extract and produce salt. The facility will

increase revenues by $240,000, but will also increase annual expenses by $160,000. The facility

will cost $980,000 to build, but will have a $20,000 salvage value at the end of its 20-year useful

life.

Instructions

Calculate the annual rate of return on this facility.

BE 176

Puckett Company is proposing to spend $140,000 to purchase a machine that will provide annual

cash flows of $25,000. The appropriate present value factor for 10 periods is 5.65.

Instructions

Compute the proposed investment’s net present value, and indicate whether the investment

should be made by Puckett Company.

BE 177

An investment costing $90,000 is being contemplated by Linn Co. The investment will have a life

of 8 years with no salvage value and will produce annual cash flows of $16,870.

Instructions

Compute the approximate internal rate of return for this investment. (Table C-2 is needed)

EXERCISES

Ex. 178

Felter Company produced and sold 50,000 units of product and is operating at 70% of plant

capacity. Unit information about its product is as follows:

Sales Price $70

Variable manufacturing cost $45

Fixed manufacturing cost ($500,000 ÷ 50,000) 10 55

Profit per unit $15

The company received a proposal from a foreign company to buy 15,000 units of Felter

Company's product for $50 per unit. This is a one-time only order and acceptance of this proposal

will not affect the company's regular sales. The president of Felter Company is reluctant to accept

the proposal because he is concerned that the company will lose money on the special order.

Instructions

Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the

acceptance of this order might have on the company's income.

.

Ex. 179

Carney Company manufactures cappuccino makers. For the first eight months of 2010, the

company reported the following operating results while operating at 80% of plant capacity:

Sales (500,000 units) $90,000,000

Cost of goods sold 54,000,000

Gross profit 36,000,000

Operating expenses 24,000,000

Net income $12,000,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and

variable operating expenses are $35 per unit.

Ex. 179 (Cont.)

In September, Carney Company receives a special order for 30,000 machines at $135 each from

a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs

but no increase in fixed expenses.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Carney Company accept the special order? Justify your answer.

Ex. 180

Gregg Company supplies schools with floor mattresses to use in physical education classes.

Gregg has received a special order from a large school district to buy 600 mats at $45 each.

Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping

costs.

For the first 6 months of 2010, the company reported the following operating results while

operating at 80% capacity:

Sales (100,000 units) $7,000,000

Cost of goods sold 4,200,000

Gross profit 2,800,000

Operating expenses 2,000,000

Net income $ 800,000

Cost of goods sold was 70% variable and 30% fixed; operating expenses were 75% variable and

25% fixed.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Gregg Company accept the special order? Justify your answer.

Ex. 181

Larkin Company produces golf discs which it normally sells to retailers for $6 each. The cost of

manufacturing 25,000 golf discs is:

Materials $ 10,000

Labor 30,000

Variable overhead 20,000

Fixed overhead 40,000

Total $100,000

Innova also incurs 5% sales commission ($0.30) on each disc sold.

Rudd Corporation offers Innova $4.25 per disc for 5,000 discs. Rudd would sell the discs

under its own brand name in foreign markets not yet served by Larkin. If Larkin accepts the offer,

its fixed overhead will increase from $50,000 to $55,000 due to the purchase of a new imprinting

machine. No sales commission will result from the special order.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Innova accept the special order? Why or why not?

Ex. 181 (Cont.)

(b) As shown in the incremental analysis, Larkin should accept the special order because

incremental revenue exceeds incremental expenses by $4,250.

Ex. 182

Kasten, Inc. budgeted 10,000 widgets for production during 2010. Kasten has capacity to produce

12,000 units. Fixed factory overhead is allocated to production. The following estimated costs

were provided:

Direct material ($7/unit) $ 70,000

Direct labor ($15/hr. × 2 hrs./unit) 300,000

Variable manufacturing overhead ($3/unit) 30,000

Fixed factory overhead costs ($5/unit) 50,000

Total $450,000

Cost per unit = $45

Instructions

Answer each of the following independent questions:

1. Kasten received an order for 1,000 units from a new customer in a country in which Kasten

has never done business. This customer has offered $43 per widget. Should Kasten accept

the order?

2. Kasten received an offer from another company to manufacture the same quality widgets for

$39. Should Kasten let someone else manufacture all 10,000 widgets and focus only on

distribution?

Ex. 183

Coyle Company manufactured 6,000 units of a component part that is used in its product and

incurred the following costs:

Direct materials $35,000

Direct labor 15,000

Variable manufacturing overhead 10,000

Fixed manufacturing overhead 20,000

$80,000

Another company has offered to sell the same component part to the company for $12 per unit.

The fixed manufacturing overhead consists mainly of depreciation on the equipment used to

manufacture the part and would not be reduced if the component part was purchased from the

outside firm. If the component part is purchased from the outside firm, Coyle Company has the

opportunity to use the factory equipment to produce another product which is estimated to have a

contribution margin of $14,000.

Instructions

Prepare an incremental analysis report for Coyle Company which can serve as informational

input into this make or buy decision.

.

Ex. 184

Agler Corporation currently manufactures a subassembly for its main product. The costs per unit

are as follows:

Direct materials $ 1

Direct labor 10

Variable overhead 5

Fixed overhead 8

Total $24

Funkhouser Company has contacted Agler with an offer to sell it 5,000 of the subassemblies for

$18 each. If Agler makes the subassemblies, $3 of the fixed overhead per unit will be allocated to

other products.

Ex. 184 (Cont.)

Instructions

Should Agler make or buy the subassemblies? Explain your answer.

Ex. 185

Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company is

currently operating at 100% capacity, and variable manufacturing overhead is charged to

production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per

unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000

bicycles per year.

A supplier offers to make the bicycle seats at a price of $20 each. If the bicycle company accepts

this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed

manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by

other products.

Instructions

(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.

(b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer.

Ex. 186

Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint

manufacturers. In 2010, the company incurred $344,000 of costs to produce 40,000 gallons of the

chemical. The selling price of the chemical is $11.00 per gallon. The costs per unit to

manufacture a gallon of the chemical are presented below:

Direct materials $6.00

Direct labor 1.20

Variable manufacturing overhead .80

Fixed manufacturing overhead .60

Total manufacturing costs $8.60

The company is considering manufacturing the paint itself. If the company processes the

chemical further and manufactures the paint itself, the following additional costs per gallon will be

incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No

increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.00

per gallon.

Instructions

Determine the incremental per gallon increase in net income and the total increase in net income

if the company manufactures the paint.

Ex. 187

Ecker, Inc. produces milk at a total cost of $66,000. The production generates 60,000 gallons of

milk which can be sold for $1 per gallon to a pasteurization company, or the milk can be

processed further into ice cream and then sold for $2.50 per gallon. It costs $75,000 more to turn

the annual milk supply into ice cream.

Ex. 187 (Cont.)

Instructions

If Ecker processes the milk into ice cream, how much is the incremental profit or loss? Should

Ecker process the milk into ice cream or sell it as is?

.

Ex. 188

Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an

unassembled bike is as follows.

Direct materials $150

Direct labor 70

Variable overhead (70% of direct labor) 49

Fixed overhead (30% of direct labor) 21

Manufacturing cost per unit $290

The unassembled bikes are sold to retailers at $400 each.

Speedy currently has unused productive capacity that is expected to continue indefinitely;

management has concluded that some of this capacity can be used to assemble the bikes and

sell them at $440 each. Assembling the bikes will increase direct materials by $5 per bike, and

direct labor by $10 per bike. Additional variable overhead will be incurred at the normal rates, but

there will be no additional fixed overhead as a result of assembling the bikes.

Instructions

(a) Prepare an incremental analysis for the sell-or-process-further decision.

(b) Should Speedy sell or process further? Why or why not?

Ex. 189

Harris Timber Corporation uses a machine that removes the bark from cut timber. The machine is

unreliable and results in a significant amount of downtime and excessive labor costs. The

management is considering replacing the machine with a more efficient one which will minimize

downtime and excessive labor costs. Data are presented below for the two machines:

Old Machine New Machine

Original purchase cost $340,000 $430,000

Accumulated depreciation 230,000 —

Estimated life 5 years 5 years

It is estimated that the new machine will produce annual cost savings of $95,000. The old

machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of

zero if operated for the remainder of their useful lives.

Instructions

Determine whether the company should purchase the new machine.

Ex. 190

Kinder Enterprises relies heavily on a copier machine to process its paperwork. Recently the copy

clerk has not been able to process all the necessary copies within the regular work week.

Management is considering updating the copier machine with a faster model.

Current Copier New Model

Original purchase cost $10,000 $20,000

Accumulated depreciation 8,000 —

Estimated operating costs (annual) 9,000 4,200

Useful life 5 years 5 years

If sold now, the current copier would have a salvage value of $1,000. If operated for the

remainder of its useful life, the current machine would have zero salvage value. The new machine

is expected to have zero salvage value after five years..

Ex. 190 (Cont.)

Instructions

Prepare an analysis to show whether the company should retain or replace the machine.

.

Ex. 191

Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of May, 2010 are presented

below.

Bud Wise Er Total

Units sold 3,000 5,000 2,000 10,000

Revenue $70,000 $50,000 $40,000 $160,000

Less variable costs 32,000 26,000 16,000 74,000

Less direct fixed costs 14,000 19,000 12,000 45,000

Less allocated fixed costs 6,000 10,000 4,000 20,000

Net income $18,000 $ (5,000) $ 8,000 $ 21,000

All of the allocated costs will continue even if a division is discontinued. Milwaukee allocates

indirect fixed costs based on the number of units to be sold. Since the Wise division has a net

loss, Milwaukee feels that it should be discontinued. Milwaukee feels if the division is closed, that

sales at the Bud division will increase by 10%, and that sales at the Er division will stay the same.

Instructions

(a) Prepare an analysis showing the effect of discontinuing the Wise division.

(b) Should Milwaukee close the Wise division? Briefly indicate why or why not.

Ex. 192

Trump Forest Corporation operates two divisions, the Timber Division and the Consumer

Division. The Timber Division manufactures and sells logs to paper manufacturers. The

Consumer Division operates retail lumber mills which sell a variety of products in the do-ityourself

homeowner market. The company is considering disposing of the Consumer Division

since it has been consistently unprofitable for a number of years. The income statements for the

two divisions for the year ended December 31, 2010 are presented below:

Timber Division Consumer Division Total

Sales $1,500,000 $500,000 $2,000,000

Cost of goods sold 900,000 350,000 1,250,000

Gross profit 600,000 150,000 750,000

Selling & administrative expenses 250,000 180,000 430,000

Net income $ 350,000 $ (30,000) $ 320,000

In the Consumer Division, 70% of the cost of goods sold are variable costs and 25% of selling

and administrative expenses are variable costs. The management of the company feels it can

save $45,000 of fixed cost of goods sold and $60,000 of fixed selling expenses if it discontinues

operation of the Consumer Division.

Instructions

(a) Determine whether the company should discontinue operating the Consumer Division.

(b) If the company had discontinued the division for 2010, determine what net income would

have been.

Ex. 193

Mercer has three product lines in its retail stores: books, videos, and music. Results of the fourth

quarter are presented below:

Books Music Videos Total

Units sold 1,000 2,000 2,000 5,000

Revenue $22,000 $40,000 $23,000 $85,000

Variable departmental costs 17,000 22,000 12,000 51,000

Direct fixed costs 1,000 3,000 2,000 6,000

Allocated fixed costs 7,000 7,000 7,000 21,000

Net income (loss) $ (3,000) $ 8,000 $ 2,000 $ 7,000

The allocated fixed costs are unavoidable. Demand of individual products are not affected by

changes in other product lines.

Instructions

What will happen to profits if Mercer discontinues the Books product line?

Ex. 194

A recent accounting graduate from Marvel State University evaluated the operating perform-ance

of Fanning Company's four divisions. The following presentation was made to Fanning's Board of

Directors. During the presentation, the accountant made the recommendation to eliminate the

Southern Division stating that total net income would increase by $60,000. (See analysis below.)

Other Three Divisions Southern Division Total

Sales $2,000,000 $480,000 $2,480,000

Cost of Goods Sold 950,000 400,000 1,350,000

Gross Profit 1,050,000 80,000 1,130,000

Operating Expenses 800,000 140,000 940,000

Net Income $ 250,000 $ (60,000) $ 190,000

For the other divisions, cost of goods sold is 80% variable and operating expenses are 70%

variable. The cost of goods sold for the Southern Division is 35% fixed, and its operating

expenses are 75% fixed. If the division is eliminated, only $10,000 of the fixed operating costs will

be eliminated.

Instructions

Do you concur with the new accountant's recommendation? Present a schedule to support your

answer.

Ex. 195

Ridley Company has 8,000 machine hours available to use to produce either Product A or

Product B. The cost accounting department developed the following unit information for each of

the products:

Product A Product B

Sales price $57 $71

Direct materials 19 21

Direct labor 15 14

Variable manufacturing overhead 8 12

Fixed manufacturing overhead 3 6

Machine hours required .6 1.2

Management desires to make a decision regarding which product to produce in order to maximize

the company's income.

Instructions

Taking into consideration the constraint under which the company operates, prepare a report to

show which product should be produced and sold.

Ex. 196

Hughes Company manufactures and sells two products. Relevant per unit data concerning each

product are given below:

Product

Standard Deluxe

Selling price $28 $32

Variable costs $10 $12

Machine hours 4 5

Ex. 196 (Cont.)

Instructions

(a) Compute the contribution margin per unit of the limited resource for each product.

(b) If 1,000 additional machine hours are available, which product should be manufactured?

(c) Prepare an analysis showing the total contribution margin if the additional hours are

(1) Divided equally among the products.

(2) Allocated entirely to the product identified in (b) above.

Ex. 197

Finney Company estimates the following cash flows and depreciation on a project that will cost

$200,000 and will last 10 years with no salvage value:

Revenues

Sales $70,000

Operating expenses

Salary expense $32,000

Depreciation expense 20,000

Miscellaneous expenses 8,000 60,000

Net Income $10,000

Ex. 197 (Cont.)

Instructions

(a) Calculate the expected annual rate of return on this project showing calculations to support

your answer.

(b) Calculate the cash payback on this project showing calculations to support your answer.

Ex. 198

Wesley Medical Center is considering purchasing an ultrasound machine for $1,135,000. The machine

has a 10-year life and an estimated salvage value of $40,000. Installation costs and freight

charges will be $24,200 and $800, respectively. The Center uses straight-line depreci-ation.

The medical center estimates that the machine will be used five times a week with the average

charge to the patient for ultrasound of $850. There are $10 in medical supplies and $40 of

technician costs for each procedure performed using the machine.

Instructions

(a) Compute the payback period for the new ultrasound machine.

(b) Compute the annual rate of return for the new machine.

Ex. 199

Laramie Service Center just purchased an automobile hoist for $13,000. The hoist has a 5-year

life and an estimated salvage value of $960. Installation costs were $2,900, and freight charges

were $740. Laramie uses straight-line depreciation.

The new hoist will be used to replace mufflers and tires on automobiles. Laramie estimates

that the new hoist will enable his mechanics to replace four extra mufflers per week. Each muffler

sells for $65 installed. The cost of a muffler is $35, and the labor cost to install a muffler is $10.

Instructions

(a) Compute the payback period for the new hoist.

(b) Compute the annual rate of return for the new hoist. (Round to one decimal.)

Ex. 200

Cepeda Manufacturing Company is considering three new projects, each requiring an equipment

investment of $20,000. Each project will last for 3 years and produce the following cash inflows.

Year AA BB CC

1 $ 7,000 $ 9,500 $11,000

2 9,000 9,500 10,000

3 15,000 9,500 9,000

Total $31,000 $28,500 $30,000

The equipment's salvage value is zero. Cepeda uses straight-line depreciation. Cepeda will not

accept any project with a payback period over 2 years. Cepeda's minimum required rate of return

is 12%.

Instructions

(a) Compute each project's payback period, indicating the most desirable project and the least

desirable project using this method. (Round to two decimals.)

(b) Compute the net present value of each project. Does your evaluation change? (Round to

nearest dollar.)

e.

Ex. 201

Gantner Company is considering a capital investment of $200,000 in additional productive

facilities. The new machinery is expected to have a useful life of 5 years with no salvage value.

Depreciation is by the straight-line method. During the life of the investment, annual net income

and cash inflows are expected to be $18,000 and $58,000, respectively. Gantner has a 12% cost

of capital rate, which is the minimum acceptable rate of return on the investment.

Instructions

(Round to two decimals.)

(a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed

capital expenditure.

(b) Using the discounted cash flow technique, compute the net present value.

Ex. 202

Ace Corporation recently purchased a new machine for its factory operations at a cost of

$840,000. The investment is expected to generate $250,000 in annual cash flows for a period of

five years. The required rate of return is 12%. The new machine is expected to have zero salvage

value at the end of the five-year period.

Instructions

Calculate the internal rate of return. (Table 2 from Appendix C is needed.)

Ex. 203

Sargent Company is considering two new projects, each requiring an equipment investment of

$72,000. Each project will last for three years and produce the following annual net income.

Year TIP TOP

1 $ 6,000 $ 9,000

2 9,000 9,000

3 14,000 9,000

$29,000 $27,000

The equipment will have no salvage value at the end of its three-year life. Sargent Company uses

straight-line depreciation. Sargent requires a minimum rate of return of 12%. Present value data

are as follows:

Present Value of 1 Present Value of an Annuity of 1

Period 12% Period 12%

1 .893 1 .893

2 .797 2 1.690

3 .712 3 2.402

Instructions

(a) Compute the net present value of each project.

(b) Which project should be selected? Why?

Ex. 204

Yanik Company is considering investing in a project that will cost $162,000 and have no salvage

value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows

of $45,000 each year. The company has a hurdle or cutoff rate of return of 8% and uses the

following compound interest table:

Present Value of an Annuity of 1

Period 6% 8% 10% 12% 15%

5 4.212 3.993 3.791 3.605 3.352

Instructions

Using the internal rate of return method, determine if this project is acceptable by calculating an

approximate interest yield for the project.

Ex. 205

Martinez Company has money available for investment and is considering two projects each

costing $70,000. Each project has a useful life of 3 years and no salvage value. The investment

cash flows follow:

Project A Project B

Year 1 $ 8,000 $28,000

Year 2 24,000 28,000

Year 3 52,000 28,000

Ex. 205 (Cont.)

Instructions

If 8% is an acceptable earnings rate, which project should be selected? Justify your response.

(Table 1 from Appendix C is needed.)

COMPLETION STATEMENTS

206. An important purpose of management accounting is to provide _____________________

for decision making.

207. The process used to identify the financial data that change under alternative courses of

action is called __________________ analysis.

208. In a decision on whether an order should be accepted at a special price when there is

plant capacity available, a major consideration is whether the special price exceeds

__________________.

209. The potential benefit that may be obtained by following an alternative course of action is

called an _________________ cost.

210. A decision whether to sell a product now or to process it further, depends on whether the

incremental _____________ from processing further are greater than the incremental

processing ______________.

211. The ______________ value of old equipment is irrelevant in a decision to replace that

equipment and is often referred to as a _____________ cost.

212. In an environment where there are limited resources, the products with the highest

contribution per unit of ______________ should identify the products to be produced.

213. The process of making capital expenditure decisions in business is called ___________.

214. Three quantitative techniques which are frequently used in capital budgeting decisions are

(1) _________________, (2) _________________, and (3) ___________________.

215. A major limitation of the annual rate of return approach is that it does not consider the

_______________ of money.

216. The technique which identifies the time period required to recover the cost of the

investment is called the ________________ method.

217. The two discounted cash flow techniques used in capital budgeting are (1) the

_______________________ method and (2) the ______________________ method.

218. Knowledge of the ______________________ is necessary when discounting future cash

flows under the net present value approach.

219. In using the net present value approach, a project is acceptable if the project's net present

value is ____________ or _______________.

220. The internal rate of return method differs from the net present value method in that it

results in finding the ___________________ of the potential investment.

MATCHING

221. Match the items below by entering the appropriate code letter in the space provided.

A. Incremental analysis F. Cash payback technique

B. Opportunity cost G. Hurdle or cutoff rate

C. Discounted cash flow technique H. Net present value method

D. Capital budgeting I. Sunk cost

E. Annual rate of return technique J. Internal rate of return method

____ 1. A cost that cannot be changed by any present or future decision.

____ 2. A capital budgeting technique that considers both the estimated total cash inflows

from the investment and the time value of money.

____ 3. A method used in capital budgeting in which cash inflows are discounted to their

present value and then compared to the capital outlay required by the capital

investment.

____ 4. The process of identifying the financial data that change under alternative courses of

action.

____ 5. A method used in capital budgeting that results in finding the interest yield of the

potential investment.

____ 6. The minimum rate of return management requires on an investment.

____ 7. The determination of the profitability of a capital expenditure by dividing expected

annual net income by the average investment.

____ 8. The potential benefit that may be lost from following an alternative course of action.

____ 9. The process of making capital expenditure decisions in business.

____ 10. A capital budgeting technique that identifies the time period required to recover the

cost of a capital investment from the annual cash inflow produced by the investment.

SHORT-ANSWER ESSAY QUESTIONS

S-A E 222

Management is often faced with the alternative of continuing to make a product or component

internally, or going to an external source and purchasing the product or component. In gathering

relevant information for these two alternatives, briefly identify the quantitative factors that should

be considered. Are there any qualitative factors that should also be considered?

Ans: N/A,

S-A E 223

Management uses several capital budgeting approaches in evaluating projects for possible

investment. Identify those approaches that are more desirable from a conceptual standpoint, and

briefly explain what features these approaches have that make them more desirable than other

approaches. Also identify the least desirable approach and explain its major weaknesses.

S-A E 224

Define the term "opportunity cost." How may this cost be relevant in a make-or-buy decision?

Ans: N/A,

S-A E 225

Manny Perez is trying to understand the term "cost of capital." Define the term, and indicate its

relevance to the decision rule under the annual rate of return technique.

S-A E 226 (Ethics)

Tom Mullins is on the capital budgeting committee for his company, Colgan Tile. Ken Scales is an

engineer for the firm. Ken expresses his disappointment to Tom that a project that was given to

him to review before submission looks extremely good on paper. "I really hoped that the cost

projections wouldn't pan out," he tells his friend. "The technology used in this is pie in the sky

kind of stuff. There are a hundred things that could go wrong. But the figures are very convincing.

I haven't sent it on yet, though I probably should."

"You can keep it if it's really that bad," assures Tom. "Anyway, you can probably get it shot out of

the water pretty easily, and not have the guy who submitted it mad at you for not turning it in. Just

fix the numbers. If you figure, for instance, that a cost is only 50% likely to be that low, then

double it. We do it all the time, informally. Best of all, the rank and file don't get to come to those

sessions. Your engineering genius need never know. He'll just think someone else's project was

even better than his."

Required:

1. Who are the stakeholders in this situation?

2. Is it ethical to adjust the figures to compensate for risk? Explain.

3. Is it ethical to change the proposal before submitting it? Explain.

S-A E 227 (Communication)

You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles,

California. The company has decided to upgrade its equipment. It currently has a widely used

version of a word processing program. The company wishes to invest in more up-to-date software

and to improve its printing capabilities.

Two options have emerged. Option #1 is for the company to keep its existing computer system,

and upgrade its word processing program. The memory of each individual work station would be

enhanced, and a larger, more efficient printer would be used. Better telecommunications

equipment would allow for the electronic transmission of some documents as well.

Option #2 would be for the company to invest in an entirely different computer system. The

software for this system is extremely impressive, and it comes with individual laser printers.

However, the company is not well known, and the software does not connect well with well-known

software. The net present value information for these options follows:

Option #1 Option #2

Initial Investment $(95,000) $(270,000)

Returns Year 1 55,000 90,000

Year 2 30,000 90,000

Year 3 10,000 90,000

Net Present Value 0 0

Required:

Prepare a brief report for management in which you make a recommendation for one system or

the other, using the information given.

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TRUE-FALSE STATEMENTS

1. Inventories cannot be valued at standard cost in financial statements.

2. Standard cost is the industry average cost for a particular item.

3. A standard is a unit amount, whereas a budget is a total amount.

4. Standard costs may be incorporated into the accounts in the general ledger.

5. An advantage of standard costs is that they simplify costing of inventories and reduce

clerical costs.

6. Setting standard costs is relatively simple because it is done entirely by accountants.

7. Normal standards should be rigorous but attainable.

8. Actual costs that vary from standard costs always indicate inefficiencies.

9. Ideal standards will generally result in favorable variances for the company.

10. Normal standards incorporate normal contingencies of production into the standards.

11. Once set, normal standards should not be changed during the year.

12. In developing a standard cost for direct materials, a price factor and a quantity factor must

be considered.

13. A direct labor price standard is frequently called the direct labor efficiency standard.

14. The standard predetermined overhead rate must be based on direct labor hours as the

standard activity index.

15. Standard cost cards are the subsidiary ledger for the Work in Process account in a

standard cost system.

16. A variance is the difference between actual costs and standard costs.

17. If actual costs are less than standard costs, the variance is favorable.

18. A materials quantity variance is calculated as the difference between the standard direct

materials price and the actual direct materials price multiplied by the actual quantity of

direct materials used.

19. An unfavorable labor quantity variance indicates that the actual number of direct labor

hours worked was greater than the number of direct labor hours that should have been

worked for the output attained.

20. Standard cost + price variance + quantity variance = Budgeted cost.

21. The overhead controllable variance relates primarily to fixed overhead costs.

22. The overhead volume variance relates only to fixed overhead costs.

23. If production exceeds normal capacity, the overhead volume variance will be favorable.

24. There could be instances where the production department is responsible for a direct

materials price variance.

25. The starting point for determining the causes of an unfavorable materials price variance is

the purchasing department.

26. The total overhead variance is the difference between actual overhead costs and

overhead costs applied to work done.

27. Variance analysis facilitates the principle of "management by exception."

28. A credit to a Materials Quantity Variance account indicates that the actual quantity of

direct materials used was greater than the standard quantity of direct materials allowed.

29. A standard cost system may be used with a job order cost system but not with a process

cost system.

30. A debit to the Overhead Volume Variance account indicates that the standard hours

allowed for the output produced was greater than the standard hours at normal capacity.

31. In concept, standards and budgets are essentially the same.

32. Standards may be useful in setting selling prices for finished goods.

33. The materials price standard is based on the purchasing department's best estimate of

the cost of raw materials.

34. The materials price variance is normally caused by the production department.

35. The use of an inexperienced worker instead of an experienced employee can result in a

favorable labor price variance but probably an unfavorable quantity variance.

36. In using variance reports, top management normally looks carefully at every variance.

37. The use of standard costs in inventory costing is prohibited in financial statements.

a38. The overhead controllable variance is the difference between the actual overhead costs

incurred and the budgeted costs for the standard hours allowed.

MULTIPLE CHOICE QUESTIONS

39. What is a standard cost?

a. The total number of units times the budgeted amount expected

b. Any amount that appears on a budget

c. The total amount that appears on the budget for product costs

d. The amount management thinks should be incurred to produce a good or service

40. A standard cost is

a. a cost which is paid for a group of similar products.

b. the average cost in an industry.

c. a predetermined cost.

d. the historical cost of producing a product last year.

41. The difference between a budget and a standard is that

a. a budget expresses what costs were, while a standard expresses what costs should

be.

b. a budget expresses management's plans, while a standard reflects what actually

happened.

c. a budget expresses a total amount, while a standard expresses a unit amount.

d. standards are excluded from the cost accounting system, whereas budgets are

generally incorporated into the cost accounting system.

42. Standard costs may be used by

a. universities.

b. governmental agencies.

c. charitable organizations.

d. all of these.

43. Which of the following statements is false?

a. A standard cost is more accurate than a budgeted cost.

b. A standard is a unit amount.

c. In concept, standards and budgets are essentially the same.

d. The standard cost of a product is equivalent to the budgeted cost per unit of product.

44. Budget data are not journalized in cost accounting systems with the exception of

a. the application of manufacturing overhead.

b. direct labor budgets.

c. direct materials budgets.

d. cash budget data.

45. It is possible that a company's financial statements may report inventories at

a. budgeted costs.

b. standard costs.

c. both budgeted and standard costs.

d. none of these.

46. If standard costs are incorporated into the accounting system,

a. it may simplify the costing of inventories and reduce clerical costs.

b. it can eliminate the need for the budgeting process.

c. the accounting system will produce information which is less relevant than the

historical cost accounting system.

d. approval of the shareholders is required.

47. Standard costs

a. may show past cost experience.

b. help establish expected future costs.

c. are the budgeted cost per unit in the present.

d. all of these.

48. Which of the following statements about standard costs is false?

a. Properly set standards should promote efficiency.

b. Standard costs facilitate management planning.

c. Standards should not be used in "management by exception."

d. Standard costs can simplify the costing of inventories.

49. Which of the following is not considered an advantage of using standard costs?

a. Standard costs can reduce clerical costs.

b. Standard costs can be useful in setting prices for finished goods.

c. Standard costs can be used as a means of finding fault with performance.

d. Standard costs can make employees "cost-conscious."

50. If a company is concerned with the potential negative effects of establishing standards, it

should

a. set loose standards that are easy to fulfill.

b. offer wage incentives to those meeting standards.

c. not employ any standards.

d. set tight standards in order to motivate people.

51. A standard which represents an efficient level of performance that is attainable under

expected operating conditions is called a(n)

a. ideal standard.

b. loose standard.

c. tight standard.

d. normal standard.

52. Ideal standards

a. are rigorous but attainable.

b. are the standards generally used in a master budget.

c. reflect optimal performance under perfect operating conditions.

d. will always motivate employees to achieve the maximum output.

53. The final decision as to what standard costs should be is the responsibility of

a. the quality control engineer.

b. the managerial accountants.

c. the purchasing agent.

d. management.

54. The labor time requirements for standards may be determined by the

a. sales manager.

b. product manager.

c. industrial engineers.

d. payroll department manager.

55. The two levels that standards may be set at are

a. normal and fully efficient.

b. normal and ideal.

c. ideal and less efficient.

d. fully efficient and fully effective.

56. The most rigorous of all standards is the

a. normal standard.

b. realistic standard.

c. ideal standard.

d. conceivable standard.

57. Most companies that use standards set them at

a. the normal level.

b. a conceivable level.

c. the ideal level.

d. last year's level.

58. A managerial accountant

1. does not participate in the standard setting process.

2. provides knowledge of cost behaviors in the standard setting process.

3. provides input of historical costs to the standard setting process.

a. 1

b. 2

c. 3

d. 2 and 3

59. The cost of freight-in

a. is to be included in the standard cost of direct materials.

b. is considered a selling expense.

c. should have a separate standard apart from direct materials.

d. should not be included in a standard cost system.

60. The direct materials quantity standard would not be expressed in

a. pounds.

b. barrels.

c. dollars.

d. board feet.

61. The direct materials quantity standard should

a. exclude unavoidable waste.

b. exclude quality considerations.

c. allow for normal spoilage.

d. always be expressed as an ideal standard.

62. The direct labor quantity standard is sometimes called the direct labor

a. volume standard.

b. effectiveness standard.

c. efficiency standard.

d. quality standard.

63. A manufacturing company would include setup and downtime in their direct

a. materials price standard.

b. materials quantity standard.

c. labor price standard.

d. labor quantity standard.

64. Allowance for spoilage is part of the direct

a. materials price standard.

b. materials quantity standard.

c. labor price standard.

d. labor quantity standard.

65. The total standard cost to produce one unit of product is shown

a. at the bottom of the income statement.

b. at the bottom of the balance sheet.

c. on the standard cost card.

d. in the Work in Process Inventory account.

66. An unfavorable materials quantity variance would occur if

a. more materials were purchased than were used.

b. actual pounds of materials used were less than the standard pounds allowed.

c. actual labor hours used were greater than the standard labor hours allowed.

d. actual pounds of materials used were greater than the standard pounds allowed.

67. Fugate Company planned to use 1 yard of plastic per unit budgeted at $81 a yard.

However, the plastic actually cost $80 per yard. The company actually made 2,600 units,

although it had planned to make only 2,200 units. Total yards used for production were

2,640. How much is the total materials variance?

a. $32,400 U

b. $3,240 U

c. $2,640 F

d. $600 U

68. If actual direct materials costs are greater than standard direct materials costs, it means that

a. actual costs were calculated incorrectly.

b. the actual unit price of direct materials was greater than the standard unit price of

direct materials.

c. the actual unit price of raw materials or the actual quantities of raw materials used was

greater than the standard unit price or standard quantities of raw materials expected.

d. the purchasing agent or the production foreman is inefficient.

69. If actual costs are greater than standard costs, there is a(n)

a. normal variance.

b. unfavorable variance.

c. favorable variance.

d. error in the accounting system.

70. A total materials variance is analyzed in terms of

a. price and quantity variances.

b. buy and sell variances.

c. quantity and quality variances.

d. tight and loose variances.

71. A company developed the following per-unit standards for its product: 2 pounds of direct

materials at $4 per pound. Last month, 1,000 pounds of direct materials were purchased

for $3,800. The direct materials price variance for last month was

a. $3,800 favorable.

b. $200 favorable.

c. $100 favorable.

d. $200 unfavorable.

72. The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month,

2,800 gallons of direct materials that actually cost $10,600 were used to produce 1,500

units of product. The direct materials quantity variance for last month was

a. $800 favorable.

b. $600 favorable.

c. $800 unfavorable.

d. $1,400 unfavorable.

73. The purchasing agent of the Aldrich Company ordered materials of lower quality in an

effort to economize on price. What variance will most likely result?

a. Favorable materials quantity variance

b. Favorable total materials variance

b. Unfavorable materials price variance

d. Unfavorable labor quantity variance

74. The per-unit standards for direct labor are 2 direct labor hours at $15 per hour. If in

producing 1,200 units, the actual direct labor cost was $32,000 for 2,000 direct labor

hours worked, the total direct labor variance is

a. $1,200 unfavorable.

b. $4,000 favorable.

c. $2,500 unfavorable.

d. $4,000 unfavorable.

75. The standard rate of pay is $15 per direct labor hour. If the actual direct labor payroll was

$88,200 for 6,000 direct labor hours worked, the direct labor price (rate) variance is

a. $1,800 unfavorable.

b. $1,800 favorable.

c. $2,250 unfavorable.

d. $2,250 favorable.

76. The standard number of hours that should have been worked for the output attained is

6,000 direct labor hours and the actual number of direct labor hours worked was 6,300. If

the direct labor price variance was $3,150 unfavorable, and the standard rate of pay was

$9 per direct labor hour, what was the actual rate of pay for direct labor?

a. $8.50 per direct labor hour

b. $7.50 per direct labor hour

c. $9.50 per direct labor hour

d. $9.00 per direct labor hour

77. Which one of the following statements is true?

a. If the materials price variance is unfavorable, then the materials quantity variance

must also be unfavorable.

b. If the materials price variance is unfavorable, then the materials quantity variance

must be favorable.

c. Price and quantity variances move in the same direction. If one is favorable, the others

will be as well.

d. There is no correlation of favorable or unfavorable for price and quantity variances.

78. Variances from standards are

a. expressed in total dollars.

b. expressed on a per-unit basis.

c. expressed on a percentage basis.

d. all of these.

79. A favorable variance

a. is an indication that the company is not operating in an optimal manner.

b. implies a positive result if quality control standards are met.

c. implies a positive result if standards are flexible.

d. means that standards are too loosely specified.

80. The total materials variance is equal to the

a. materials price variance.

b. difference between the materials price variance and materials quantity variance.

c. product of the materials price variance and the materials quantity variance.

d. sum of the materials price variance and the materials quantity variance.

81. Information on Francona's direct labor costs for the month of August is as follows:

Actual rate $10

Standard hours 11,000

Actual hours 10,000

Direct labor price variance—unfavorable $6,000

What was the standard rate for August?

a. $9.94 c. $10.60

b. $9.40 d. $10.06

82. The total variance is $25,000. The total materials variance is $10,000. The total labor

variance is twice the total overhead variance. What is the total overhead variance?

a. $2,500

b. $5,000

c. $7,500

d. $10,000

83. The formula for the materials price variance is

a. (AQ × SP) – (SQ × SP).

b. (AQ × AP) – (AQ × SP).

c. (AQ × AP) – (SQ × SP).

d. (AQ × SP) – (SQ × AP).

84. The formula for the materials quantity variance is

a. (SQ × AP) – (SQ × SP).

b. (AQ × AP) – (AQ × SP).

c. (AQ × SP) – (SQ × SP).

d. (AQ × AP) – (SQ × SP).

85. A company uses 8,400 pounds of materials and exceeds the standard by 400 pounds.

The quantity variance is $1,800 unfavorable. What is the standard price?

a. $1.50

b. $3.00

c. $4.50

d. Cannot be determined from the data provided.

86. A company purchases 20,000 pounds of materials. The materials price variance is $3,000

favorable. What is the difference between the standard and actual price paid for the

materials?

a. $.75

b. $.15

c. $3.75

d. Cannot be determined from the data provided.

87. A company uses 20,000 pounds of materials for which it paid $6.00 a pound. The

materials price variance was $30,000 unfavorable. What is the standard price per pound?

a. $1.50

b. $4.50

c. $6.00

d. $7.50

88. If the materials price variance is $2,400 F and the materials quantity and labor variances

are each $1,800 U, what is the total materials variance?

a. $2,400 F

b. $1,800 U

c. $600 F

d. $2,700 U

89. Keller Company has a materials price standard of $2.00 per pound. Five thousand pounds

of materials were purchased at $2.20 a pound. The actual quantity of materials used was

5,000 pounds, although the standard quantity allowed for the output was 4,500 pounds.

Keller Company's materials price variance is

a. $100 U.

b. $1,000 U.

c. $900 U.

d. $1,000 F.

90. Keller Company has a materials price standard of $2.00 per pound. Five thousand pounds

of materials were purchased at $2.20 a pound. The actual quantity of materials used was

5,000 pounds, although the standard quantity allowed for the output was 4,500 pounds.

Keller Company's materials quantity variance is

a. $1,000 U.

b. $1,000 F.

c. $1,100 F.

d. $1,100 U.

91. Keller Company has a materials price standard of $2.00 per pound. Five thousand pounds

of materials were purchased at $2.20 a pound. The actual quantity of materials used was

5,000 pounds, although the standard quantity allowed for the output was 4,500 pounds.

Keller Company's total materials variance is

a. $2,000 U.

b. $2,000 F.

c. $2,100 U.

d. $2,100 F.

92. The standard quantity allowed for the units produced was 6,500 pounds, the standard

price was $2.50 per pound, and the materials quantity variance was $375 favorable. Each

unit uses 1 pound of materials. How many units were actually produced?

a. 6,350

b. 6,500

c. 15,875

d. 6,650

93. The matrix approach to variance analysis

a. will yield slightly different variances than the formula approach.

b. is more accurate than the formula approach.

c. does not separate the price and quantity variance calculations.

d. provides a convenient structure for determining each variance.

94. Labor efficiency is measured by the

a. materials quantity variance.

b. total labor variance.

c. labor quantity variance.

d. labor rate variance.

95. An unfavorable labor quantity variance may be caused by

a. paying workers higher wages than expected.

b. misallocation of workers.

c. worker fatigue or carelessness.

d. higher pay rates mandated by union contracts.

96. The investigation of materials price variance usually begins in the

a. first production department.

b. purchasing department.

c. controller's office.

d. accounts payable department.

97. The investigation of a materials quantity variance usually begins in the

a. production department.

b. purchasing department.

c. sales department.

d. controller's department.

98. If the labor quantity variance is unfavorable and the cause is inefficient use of direct labor,

the responsibility rests with the

a. sales department.

b. production department.

c. budget office.

d. controller's department.

99. Kitselman Inc. produces a product requiring 3 direct labor hours at $20.00 per hour.

During January, 2,000 products are produced using 6,300 direct labor hours. Kitselman’s

actual payroll during January was $122,850. What is the labor quantity variance?

a. $2,850 U

b. $6,000 F

c. $3,150 F

d. $6,000 U

100. A company developed the following per-unit standards for its product: 2 gallons of direct

materials at $6 per gallon. Last month, 3,000 gallons of direct materials were purchased

for $17,100. The direct materials price variance for last month was

a. $17,100 favorable.

b. $450 favorable.

c. $900 favorable.

d. $900 unfavorable.

101. The per-unit standards for direct materials are 2 pounds at $4 per pound. Last month,

11,200 pounds of direct materials that actually cost $42,400 were used to produce 6,000

units of product. The direct materials quantity variance for last month was

a. $3,200 favorable.

b. $2,400 favorable.

c. $3,200 unfavorable.

d. $5,600 unfavorable.

102. The per-unit standards for direct labor are 1.5 direct labor hours at $12 per hour. If in

producing 2,400 units, the actual direct labor cost was $36,800 for 3,000 direct labor

hours worked, the total direct labor variance is

a. $1,920 unfavorable.

b. $6,400 favorable.

c. $4,000 unfavorable.

d. $6,400 unfavorable.

103. The standard rate of pay is $10 per direct labor hour. If the actual direct labor payroll was

$39,200 for 4,000 direct labor hours worked, the direct labor price (rate) variance is

a. $800 unfavorable.

b. $800 favorable.

c. $1,000 unfavorable.

d. $1,000 favorable.

104. The standard number of hours that should have been worked for the output attained is

10,000 direct labor hours and the actual number of direct labor hours worked was 10,500.

If the direct labor price variance was $10,500 unfavorable, and the standard rate of pay

was $15 per direct labor hour, what was the actual rate of pay for direct labor?

a. $14 per direct labor hour

b. $12 per direct labor hour

c. $16 per direct labor hour

d. $15 per direct labor hour

105. A company purchases 15,000 pounds of materials. The materials price variance is $6,000

favorable. What is the difference between the standard and actual price paid for the

materials?

a. $2.00

b. $.40

c. $2.50

d. $10.00

106. A company uses 40,000 gallons of materials for which they paid $9.00 a gallon. The

materials price variance was $80,000 favorable. What is the standard price per gallon?

a. $2.00

b. $7.00

c. $10.00

d. $11.00

107. LRF, Inc. produces a product requiring 4 pounds of material costing $2.50 per pound.

During December, LRF purchased 4,200 pounds of material for $10,080 and used the

material to produce 500 products. What was the materials price variance for December?

a. $400 F

b. $420 F

c. $80 U

d. $480 U

108. Finney Co. manufactures a product requiring two pounds of direct material. During 2011,

Finney purchases 24,000 pounds of material for $74,400 when the standard price per

pound is $3.00. During 2011, Finney uses 22,000 pounds to make 12,000 products. The

standard direct material cost per unit of finished product is

a. $6.20.

b. $6.76.

c. $6.00.

d. $6.40.

109. Gant Co. manufactures a product with a standard direct labor cost of two hours at $24.00

per hour. During July, 2,000 units were produced using 4,200 hours at $24.40 per hour.

The labor quantity variance was

a. $4,880 F.

b. $4,800 U.

c. $3,280 U.

d. $4,880 U.

110. Gant Co. manufactures a product with a standard direct labor cost of two hours at $24.00

per hour. During July, 2,000 units were produced using 4,200 hours at $24.40 per hour.

The labor price variance was

a. $1,680 U.

b. $6,480 U.

c. $6,480 F.

d. $4,800 U.

111. A company developed the following per unit materials standards for its product: 3 pounds

of direct materials at $4 per pound. If 12,000 units of product were produced last month

and 37,500 pounds of direct materials were used, the direct materials quantity variance

was

a. $3,600 favorable.

b. $6,000 unfavorable.

c. $3,600 unfavorable.

d. $6,000 favorable.

112. The standard direct labor cost for producing one unit of product is 5 direct labor hours at a

standard rate of pay of $12. Last month, 15,000 units were produced and 73,500 direct

labor hours were actually worked at a total cost of $810,000. The direct labor quantity

variance was

a. $18,000 unfavorable.

b. $27,000 unfavorable.

c. $27,000 favorable.

d. $18,000 favorable.

113. Herrera Co. produces a product requiring 10 pounds of material at $1.50 per pound.

Herrera produced 10,000 units of this product during 2009 resulting in a $30,000

unfavorable materials quantity variance. How many pounds of direct material did Herrera

use during 2011?

a. 120,000 pounds

b. 100,000 pounds

c. 200,000 pounds

d. 145,000 pounds

114. ToolTime has a standard of 1.5 pounds of materials per unit, at $4 per pound. In

producing 2,000 units, ToolTime used 3,100 pounds of materials at a total cost of

$12,090. ToolTime's total variance is

a. $300 F.

b. $90 U.

c. $310 U.

d. $400 U.

115. ToolTime has a standard of 1.5 pounds of materials per unit, at $4 per pound. In

producing 2,000 units, ToolTime used 3,100 pounds of materials at a total cost of

$12,090. ToolTime's materials price variance is

a. $90 U.

b. $310 F.

c. $400 F.

d. $700 F.

116. ToolTime has a standard of 1.5 pounds of materials per unit, at $4 per pound. In

producing 2,000 units, ToolTime used 3,100 pounds of materials at a total cost of

$12,090. ToolTime's materials quantity variance is

a. $90 F.

b. $310 U.

c. $400 U.

d. $700 U.

117. ToolTime has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000

units, ToolTime used 3,850 hours of labor at a total cost of $46,970. ToolTime's total labor

variance is

a. $770 U.

b. $800 U.

c. $1,030 F.

d. $1,930 F.

118. ToolTime has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000

units, ToolTime used 3,850 hours of labor at a total cost of $46,970. ToolTime's labor

price variance is

a. $770 U.

b. $800 U.

c. $1,030 F.

d. $1,930 F.

119. ToolTime has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000

units, ToolTime used 3,850 hours of labor at a total cost of $46,970. ToolTime's labor

quantity variance is

a. $770 U.

b. $1,030 F.

c. $1,800 F.

d. $1,930 F.

120. Which one of the following describes the total overhead variance?

a. The difference between what was actually incurred and the flexible budget amount

b. The difference between what was actually incurred and overhead applied

c. The difference between the overhead applied and the flexible budget amount

d. The difference between what was actually incurred and the total production budget

121. Manufacturing overhead costs are applied to work in process on the basis of

a. actual hours worked.

b. standard hours allowed.

c. ratio of actual variable to fixed costs.

d. actual overhead costs incurred.

122. When is a variance considered to be 'material'?

a. When it is large compared to the actual cost

b. When it is infrequent

c. When it is unfavorable

d. When it could have been controlled more effectively

123. Variance reports are

a. external financial reports.

b. SEC financial reports.

c. internal reports for management.

d. all of these.

124. In using variance reports, management looks for

a. total assets invested.

b. significant variances.

c. competitors’ costs in comparison to the company's costs.

d. more efficient ways of valuing inventories.

125. Parnell Company prepared its income statement for internal use. How would amounts for

cost of goods sold and variances appear?

a. Cost of goods sold would be at actual costs, and variances would be reported

separately.

b. Cost of goods sold would be combined with the variances, and the net amount

reported at standard cost.

c. Cost of goods sold would be at standard costs, and variances would be reported

separately.

d. Cost of goods sold would be combined with the variances, and the net amount

reported at actual cost.

126. Colt Widgets prepared its income statement for management using a standard cost

accounting system. Which of the following appears at the “standard” amount?

a. Sales

b. Selling expenses

c. Gross profit

d. Cost of goods sold

127. The costing of inventories at standard cost for external financial statement reporting

purposes is

a. not permitted.

b. preferable to reporting at actual costs.

c. in accordance with generally accepted accounting principles if significant differences

exist between actual and standard costs.

d. in accordance with generally accepted accounting principles if significant differences

do not exist between actual and standard costs.

128. Income statements prepared internally for management often show cost of goods sold at

standard cost and variances are

a. separately disclosed.

b. deducted as other expenses and revenues.

c. added to cost of goods sold.

d. closed directly to retained earnings.

129. The balanced scorecard approach

a. uses only financial measures to evaluate performance.

b. uses rather vague, open statements when setting objectives in order to allow

managers and employees flexibility.

c. normally sets the financial objectives first, and then sets the objectives in the other

perspectives to accomplish the financial objectives.

d. evaluates performance using about 10 different perspectives in order to effectively

incorporate all areas of the organization.

130. The customer perspective of the balanced scorecard approach

a. is the most traditional view of the company.

b. evaluates the internal operating processes critical to the success of the organization.

c. evaluates how well the company develops and retains its employees.

d. evaluates how well the company is performing from the viewpoint of those people who

buy its products and services.

131. The perspectives included in the balanced scorecard approach include all of the following

except the

a. internal process perspective.

b. capacity utilization perspective.

c. learning and growth perspective.

d. customer perspective.

a132. If 10,000 pounds of direct materials are purchased for $7,200 on account and the

standard cost is $.70 per pound, the journal entry to record the purchase is

a. Raw Materials Inventory ..................................................... 7,200

Accounts Payable ...................................................... 7,200

b. Work In Process Inventory.................................................. 7,200

Accounts Payable ...................................................... 7,000

Materials Quantity Variance ....................................... 200

c. Raw Materials Inventory ..................................................... 7,200

Accounts Payable ...................................................... 7,000

Materials Price Variance ............................................ 200

d. Raw Materials Inventory ..................................................... 7,000

Materials Price Variance..................................................... 200

Accounts Payable ...................................................... 7,200

a133. Debit balances in variance accounts represent

a. unfavorable variances.

b. favorable variances.

c. favorable for price variances; unfavorable for quantity variances.

d. favorable for quantity variances; unfavorable for price variances.

a134. Budgeted overhead for Mengotti Company at normal capacity of 30,000 direct labor hours

is $4.50 per hour variable and $3 per hour fixed. In May, $232,500 of overhead was

incurred in working 31,500 hours when 32,000 standard hours were allowed. The

overhead controllable variance is

a. $3,750 favorable.

b. $1,500 favorable.

c. $7,500 favorable.

d. $7,500 unfavorable.

a135. Budgeted overhead for Mengotti Company at normal capacity of 30,000 direct labor hours

is $4.50 per hour variable and $3 per hour fixed. In May, $232,500 of overhead was

incurred in working 31,500 hours when 32,000 standard hours were allowed. The

overhead volume variance is

a. $6,000 favorable.

b. $8,250 favorable.

c. $3,750 favorable.

d. $7,500 favorable.

a136. An overhead volume variance is calculated as the difference between normal capacity

hours and standard hours allowed

a. times the total predetermined overhead rate.

b. times the predetermined variable overhead rate.

c. times the predetermined fixed overhead rate.

d. divided by actual number of hours worked.

a137. Which of the following statements is false?

a. The overhead volume variance indicates whether plant facilities were used efficiently

during the period.

b. The costs that cause the overhead volume variance are usually controllable costs.

c. The overhead volume variance relates solely to fixed costs.

d. The overhead volume variance is favorable if standard hours allowed for output are

greater than the standard hours at normal capacity.

a138. If the standard hours allowed are less than the standard hours at normal capacity,

a. the overhead volume variance will be unfavorable.

b. variable overhead costs will be underapplied.

c. the overhead controllable variance will be favorable.

d. variable overhead costs will be overapplied.

a139. Which of the following statements about overhead variances is false?

a. Standard hours allowed are used in calculating the controllable variance.

b. Standard hours allowed are used in calculating the volume variance.

c. The controllable variance pertains solely to fixed costs.

d. The total overhead variance pertains to both variable and fixed costs.

a140. The overhead volume variance relates only to

a. variable overhead costs.

b. fixed overhead costs.

c. both variable and fixed overhead costs.

d. all manufacturing costs.

a141. What does the controllable variance measure?

a. Whether a company incurred more or less fixed overhead costs compared to the

amount of overhead applied

b. Whether a company incurred more or less overhead costs than allowed

c. The efficiency of using variable overhead resources

d. Whether the production manager is able to control the production facility

a142. The overhead controllable variance is calculated as the difference between actual

overhead costs incurred and the budgeted

a. overhead costs for the standard hours allowed.

b. overhead costs applied to the product.

c. overhead costs at the normal level of activity.

d. fixed overhead costs.

a143. If the standard hours allowed are less than the standard hours at normal capacity, the

volume variance

a. cannot be calculated.

b. will be favorable.

c. will be unfavorable.

d. will be greater than the controllable variance.

a144. The budgeted overhead costs for standard hours allowed and the overhead costs applied

to the product are the same amount

a. for both variable and fixed overhead costs.

b. only when standard hours allowed are less than normal capacity.

c. for variable overhead costs.

d. for fixed overhead costs.

a145. The following information was taken from the annual manufacturing overhead cost budget

of Coen Company.

Variable manufacturing overhead costs $46,200

Fixed manufacturing overhead costs $27,720

Normal production level in labor hours 23,100

Normal production level in units 5,775

Standard labor hours per unit 4

During the year, 5,600 units were produced, 18,340 hours were worked, and the actual

manufacturing overhead was $75,600. Actual fixed manufacturing overhead costs

equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis

of direct labor hours. Coen's total overhead rate is

a. $1.20.

b. $2.00.

c. $3.20.

d. $3.27.

a146. The following information was taken from the annual manufacturing overhead cost budget

of Coen Company.

Variable manufacturing overhead costs $46,200

Fixed manufacturing overhead costs $27,720

Normal production level in labor hours 23,100

Normal production level in units 5,775

Standard labor hours per unit 4

During the year, 5,600 units were produced, 18,340 hours were worked, and the actual

manufacturing overhead was $75,600. Actual fixed manufacturing overhead costs

equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis

of direct labor hours. Coen's total overhead variance is

a. $840 U.

b. $3,080 U.

c. $3,920 U.

d. $11,200 U.

a147. The following information was taken from the annual manufacturing overhead cost budget

of Coen Company.

Variable manufacturing overhead costs $46,200

Fixed manufacturing overhead costs $27,720

Normal production level in labor hours 23,100

Normal production level in units 5,775

Standard labor hours per unit 4

During the year, 5,600 units were produced, 18,340 hours were worked, and the actual

manufacturing overhead was $75,600. Actual fixed manufacturing overhead costs

equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis

of direct labor hours. Coen's controllable overhead variance is

a. $840 U.

b. $3,080 U.

c. $3,920 U.

d. $11,200 U.

a148. The following information was taken from the annual manufacturing overhead cost budget

of Coen Company.

Variable manufacturing overhead costs $46,200

Fixed manufacturing overhead costs $27,720

Normal production level in labor hours 23,100

Normal production level in units 5,775

Standard labor hours per unit 4

During the year, 5,600 units were produced, 18,340 hours were worked, and the actual

manufacturing overhead was $75,600. Actual fixed manufacturing overhead costs

equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis

of direct labor hours. Coen's volume overhead variance is

a. $840 U.

b. $3,080 U.

c. $3,920 U.

d. $11,200 U.

149. All of the following are advantages of standard costs except they

a. facilitate management planning.

b. are useful in setting selling prices.

c. simplify costing in inventories.

d. increase net income.

150. Standards based on the optimum level of performance under perfect operating conditions

are

a. attainable standards.

b. ideal standards.

c. normal standards.

d. practical standards.

151. The direct materials price standard should include an amount for all of the following

except

a. receiving costs.

b. storing costs.

c. handling costs.

d. normal spoilage costs.

. 152. The standard unit cost is used in the calculation of which of the following variances?

Materials Price Variance Materials Quantity Variance

a. No No

b. No Yes

c. Yes No

d. Yes Yes

153. The difference between the actual labor rate multiplied by the actual labor hours worked

and the standard labor rate multiplied by the standard labor hours is the

a. total labor variance.

b. labor price variance.

c. labor quantity variance.

d. labor efficiency variance.

154. The formula for the labor price variance is

a. (AH) x (SR) less (SH) x (SR).

b. (AH) x (AR) less (AH) x (SR).

c. (AH) x (AR) less (SH) x (SR).

d. (AH) x (SR) less (AH) x (SR).

155. Which department is usually responsible for a labor price variance attributable to

misallocation of workers?

a. Quality control

b. Purchasing

c. Engineering

d. Production

156. In reporting variances,

a. promptness is relatively unimportant.

b. management normally investigates all variances.

c. the reports should facilitate management by exception.

d. the reports are not departmentalized.

Ans: C,

a157. A standard cost system may be used in

Job Order Costing Process Costing

a. No No

b. Yes No

c. No Yes

d. Yes Yes

a158. The formula for computing the overhead volume variance is

a. fixed overhead rate times (actual hours less standard hours allowed).

b. variable overhead rate times (actual hours less standard hours allowed).

c. fixed overhead rate times (normal capacity hours less standard hours allowed).

d. variable overhead rate times (normal capacity hours less standard hours allowed).

a159. The overhead controllable variance is the difference between the

a. budgeted overhead based on standard hours allowed and the overhead applied to

production.

b. budgeted overhead based on standard hours allowed and budgeted overhead based

on actual hours worked.

c. actual overhead and the overhead applied to production.

d. actual overhead and budgeted overhead based on standard hours allowed.

BRIEF EXERCISES

BE 160

Loomis Company uses both standards and budgets. The company estimates that production for

the year will be 250,000 units of Product Fast. To produce these units of Product Fast, the

company expects to spend $600,000 for materials and $800,000 for labor.

Instructions

Compute the estimates for (a) a standard cost and (b) a budgeted cost.

BE 161

Labor data for making one pound of finished product in Ortiz Company are as follows: (1) Price—

hourly wage rate $10.00, payroll taxes $0.80, and fringe benefits $1.20. (2) Quantity—actual

production time 1.1 hours, rest periods and clean up 0.25 hours, and setup and downtime 0.15

hours.

Instructions

Compute the following.

(a) Standard direct labor rate per hour.

(b) Standard direct labor hours per pound.

(c) Standard cost per pound.

BE 162

During March, Odle Company purchases and uses 6,600 pounds of materials costing $26,730 to

make 3,000 tiles. Odle Company’s standard material cost per tile is $8 (2 pounds of material ×

$4.00).

Instructions

Compute the total, price, and quantity material variances for Odle Company for March.

BE 163

During January, HPA Company incurs 1,850 hours of direct labor at an hourly cost of $9.60 in

producing 1,000 units of its finished product. HPA standard labor cost per unit of output is $18 (2

hours x $9.00).

Instructions

Compute the total, price, and quantity labor variances for HPA Company for January.

BE 164

In October, Falk Inc. reports 42,000 actual direct labor hours, and it incurs $192,000 of

manufacturing overhead costs. Standard hours allowed for the work done is 40,000 hours. Falk’s

predetermined overhead rate is $5.00 per direct labor hour.

Instructions

Compute the total manufacturing overhead variance.

aBE 165

Overhead data for Falk Inc. are given in BE 164. In addition, the flexible manufacturing overhead

budget shows that budgeted costs are $3.50 variable per direct labor hour and $75,000 fixed.

Instructions

Compute the manufacturing overhead controllable variance.

aBE 166

Using the data in BE 164 and BE 165, compute the manufacturing overhead volume variance.

Normal capacity was 50,000 direct labor hours.

aBE 167

Cinelli Company purchased 6,000 units of raw material on account for $11,700, when the

standard cost was $12,000. Later in the month, Cinelli Company issued 5,600 units of raw

materials for production, when the standard units were 5,800.

Instructions

Journalize the transactions for Cinelli Company to account for this activity.

aBE 168

Griffith Co. incurred direct labor costs of $48,000 for 6,000 hours. The standard labor cost was

$48,600. During the month, Griffith assigned 6,000 direct labor hours costing $48,000 to

production. The standard hours were 6,200.

Instructions

Journalize the transactions for Griffith Co. to account for this activity.

aBE 169

Manufacturing overhead data for the production of Product B by Elliott Company are as follows.

Overhead incurred for 68,000 actual direct labor hours worked $206,000

Overhead rate (variable $2.00; fixed $1.00) at normal capacity of

72,000 direct labor hours $3.00

Standard hours allowed for work done 68,000

Instructions

Compute the controllable and volume overhead variances.

EXERCISES

Ex 170

Greinke Company is planning to produce 3,000 units of product in 2010. Each unit requires

3 pounds of materials at $6 per pound and a half hour of labor at $16 per hour. The overhead rate

is 75% of direct labor.

Instructions

(a) Compute the budgeted amounts for 2010 for direct materials to be used, direct labor, and

applied overhead.

(b) Compute the standard cost of one unit of product.

Ex. 171

Lloyd Inc. manufactures and sells a nutrition drink for children. It wants to develop a standard cost

per gallon. The following are required for production of a 100 gallon batch:

1,960 ounces of lime Kool-Drink at $.12 per ounce

40 pounds of granulated sugar at $.60 per pound

63 kiwi fruit at $.50 each

100 protein tablets at $.90 each

4,000 ounces of water at $.003 per ounce

Lloyd estimates that 2% of the lime Kool-Drink is wasted, 20% of the sugar is lost, and 10% of the

kiwis cannot be used.

Instructions

Compute the standard cost of the ingredients for one gallon of the nutrition drink.

Ex. 172

Kwik Repair Service, Inc. is trying to establish the standard labor cost of a typical engine tune-up.

The following data have been collected from time and motion studies conducted over the past

month.

Actual time spent on the tune-up 1.0 hour

Hourly wage rate $12

Payroll taxes 10% of wage rate

Setup and downtime 10% of actual labor time

Cleanup and rest periods 20% of actual labor time

Fringe benefits 25% of wage rate

Instructions

(a) Determine the standard direct labor hours per tune-up

(b) Determine the standard direct labor hourly rate.

(c) Determine the standard direct labor cost per tune-up.

(d) If a tune-up took 1.5 hours at the standard hourly rate, what was the direct labor quantity

variance?

Ex. 173

Malone, Inc. manufactures one product called tybos. The company uses a standard cost system

and sells each tybo for $8. At the start of monthly production, Malone estimated 8,000 tybos

would be produced in March. Malone has established the following material and labor standards

to produce one tybo:

Standard Quantity Standard Price

Direct materials 2.5 pounds $3 per pound

Direct labor 0.6 hours $10 per hour

Ex. 173 (Cont)

During March 2011, the following activity was recorded by the company relating to the production

of tybos:

1. The company produced 7,500 units during the month.

2. A total of 20,000 pounds of materials were purchased at a cost of $55,000.

3. A total of 20,000 pounds of materials were used in production.

4. 4,000 hours of labor were incurred during the month at a total wage cost of $44,000.

Instructions

Calculate the following variances for March for Malone, Inc.

(a) Materials price variance

(b) Materials quantity variance

(c) Labor price variance

(d) Labor quantity variance

Ex. 174

The following direct labor data pertain to the operations of Nagel Manufacturing Company for the

month of November:

Actual labor rate $9.20 per hr.

Actual hours used 18,000

Standard labor rate $9.00 per hr.

Standard hours allowed 17,100

Ex. 174 (Cont.)

Instructions

Prepare a matrix and calculate the labor variances.


Price Variance Quantity Variance

Total

Labor Variance

Ex. 175

The following direct materials data pertain to the operations of Osborn Manufacturing Company

for the month of December.

Standard materials price$4.00 per pound

Actual quantity of materials purchased and used16,500 pounds

Ex. 175 (Cont.)

The standard cost card shows that a finished product contains 4 pounds of materials. The 16,500

pounds were purchased in December at a discount of 5% from the standard price. In December,

4,000 units of finished product were manufactured.

Instructions

Prepare a matrix for materials and calculate the materials variances.

Price Variance Quantity Variance

Total

Materials Variance

Ex. 176

Ratliff Industries provided the following information about its standard costing system for 2011:

Standard Data Actual Data

Materials 10 lbs. @ $4 per lbs. Produced 6,000 units

Labor 3 hrs. @ $21 per hr. Materials purchased 75,000 lbs. for $315,000

Budgeted fixed overhead $100,000 Materials used 61,500 lbs.

Budgeted variable overhead $30 per unit Labor worked 16,500 hrs. costing $330,000

Budgeted production 5,000 units Actual overhead $355,000

Instructions

Calculate the labor price variance and the labor quantity variance.

Ex. 177

Ratliff Industries provided the following information about its standard costing system for 2011:

Standard Data Actual Data

Materials 10 lbs. @ $4 per lbs. Produced 6,000 units

Labor 3 hrs. @ $21 per hr. Materials purchased 75,000 lbs. for $315,000

Budgeted fixed overhead $100,000 Materials used 61,500 lbs.

Budgeted variable overhead $30 per unit Labor worked 16,500 hrs. costing $330,000

Budgeted production 5,000 units Actual overhead $355,000

Instructions

Determine the amount of the materials price variance. By how much will the materials price

variances differ if the price variance is determined at the time of production?

Ex. 178

Tebbetts Company estimated it would produce 6,200 buckets, though actual production was

6,000 during August. The standard labor cost is 2 buckets per hour at $24.00 per hour. Actual

cost per hour was $24.50 with a total labor cost of $71,050.

Instructions

Determine the amounts of the labor price and the labor quantity variances for August.

Ex. 179

Stumfoll Inc., which produces a single product, has prepared the following standard cost sheet for

one unit of the product.

Direct materials (6 pounds at $2 per pound) $12

Direct labor (2 hours at $12 per hour) $24

During the month of April, the company manufactures 250 units and incurs the following actual

costs.

Direct materials purchased and used (1,550 pounds) $3,255

Direct labor (515 hours) $5,974

Instructions

Compute the total, price, and quantity variances for materials and labor.

Ex. 180

Benton Company produces one product, a putter called PAR-putter. Benton uses a standard cost

system and determines that it should take one hour of direct labor to produce one PAR-putter.

The normal production capacity for this putter is 100,000 units per year. The total budgeted

overhead at normal capacity is $600,000 comprised of $200,000 of variable costs and $400,000

of fixed costs. Benton applies overhead on the basis of direct labor hours.

During the current year, Benton produced 85,000 putters, worked 89,000 direct labor hours, and

incurred variable overhead costs of $180,000 and fixed overhead costs of $400,000.

Instructions

(a) Compute the predetermined variable overhead rate and the predetermined fixed overhead

rate.

(b) Compute the applied overhead for Benton for the year.

(c) Compute the total overhead variance.

Ex. 181

Vega Company has developed the following standard costs for its product for 2011:

VEGA COMPANY

Standard Cost Card

Product A

Cost Element Standard Quantity × Standard Price = Standard Cost

Direct materials 4 pounds $3 $12

Direct labor 3 hours 8 24

Manufacturing overhead 3 hours 4 12

$48

The company expected to produce 25,000 units of Product A in 2011 and work 75,000 direct

labor hours.

Actual results for 2011 are as follows:

26,000 units of Product A were produced.

Actual direct labor costs were $630,800 for 76,000 direct labor hours worked.

Actual direct materials purchased and used during the year cost $283,500 for 105,000 pounds.

Actual variable overhead incurred was $130,000 and actual fixed overhead incurred was

$170,000.

Instructions

Compute the following variances showing all computations to support your answers. Indicate

whether the variances are favorable or unfavorable.

(a) Materials quantity variance.

(b) Total direct labor variance.

(c) Direct labor quantity variance.

(d) Direct materials price variance.

(e) Total overhead variance.

Ex. 182

Wagner Company developed the following standard costs for its product for 2011:

WAGNER COMPANY

Standard Cost Card

Cost Elements Standard Quantity × Standard Price = Standard Cost

Direct materials 4 pounds $ 5 $20

Direct labor 2 hours 10 20

Variable overhead 2 hours 4 8

Fixed overhead 2 hours 2 4

$52

The company expected to work at the 60,000 direct labor hours level of activity and produce

30,000 units of product.

Actual results for 2011 were as follows:

28,400 units of product were actually produced.

Direct labor costs were $546,000 for 56,000 direct labor hours actually worked.

Actual direct materials purchased and used during the year cost $554,400 for 115,500 pounds.

Total actual manufacturing overhead costs were $340,000.

Ex. 183

Humphreys, Inc. uses standard costing for its one product, baseball bats. The standards call for 3

board-feet of wood at $1.40 per board-foot, and 45 minutes of work at $12 per hour per bat. Total

manufacturing overhead costs were estimated at $5,250, of which the variable portion was $0.50

per bat and the fixed portion was $0.75 per bat with an estimate of 4,200 bats to be produced.

Humphreys identifies price variances at the earliest possible point in time.

During March, the company had the following results:

Direct labor used = 3,200 hours at a cost of $37,760

Actual manufacturing overhead fixed costs = $3,000

Actual manufacturing overhead variable costs = $2,050

Bats produced = 4,000

Instructions

Compute the following variances for March.

1. Labor quantity variance

2. Total labor variance

a3. Overhead controllable variance

a4. Overhead volume variance

Ex. 184

Hurley, Inc. manufactures widgets for distribution. The standard costs for the manufacture of

widgets follow:

Standard Costs Actual Costs

Direct materials 3 lbs. per widget at 15,500 lbs. at $34

$35 per pound per pound

Direct labor 2.5 hours per widget 11,250 hours at

at $11 per hour $11.80 per hour

Factory overhead Variable cost, $24/widget $120,750 variable cost

Fixed cost, $40/widget $190,625 fixed cost

Ex. 184 (Cont.)

Budgeted factory overhead was $320,000. Overhead applied is based on widgets produced. The

company estimated that 5,000 widgets would be produced; however, only 4,800 were produced.

Instructions

Calculate the following amounts.

1. Rate at which total factory overhead is applied

2. Materials price variance

3. Total materials variance

a4. Overhead volume variance

a5. Overhead controllable variance

Ex. 185

National Sporting Goods Company manufactures aluminum baseball bats that it sells to university

athletic departments. It has developed the following per unit standard costs for 2011 for each

baseball bat:

Manufacturing

Direct Materials Direct Labor Overhead

Standard Quantity 2 Pounds (Aluminum) 1/2 hour 1/2 hour

Standard Price $4.00 $10.00 $6.00

Unit Standard Cost $8.00 $5.00 $3.00

In 2011, the company planned to produce 80,000 baseball bats at a level of 40,000 hours of

direct labor.

Actual results for 2011 are presented below:

1. Direct materials purchases were 164,000 pounds of aluminum which cost $688,800.

2. Direct materials used were 145,000 pounds of aluminum.

3. Direct labor costs were $379,270 for 39,100 direct labor hours actually worked.

4. Total manufacturing overhead was $235,000.

5. Actual production was 76,000 baseball bats.

Instructions

(a) Compute the following variances:

1. Direct materials price.

2. Direct materials quantity.

3. Direct labor price.

4. Direct labor quantity.

5. Total overhead variance.