Fact Pattern:
Huron Industries has recently developed two new products, a cleaning unit for video discs and a disc duplicator for reproducing movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these product
Gross profit.
Fact Pattern:
A.P. Hill Corporation uses a process-costing system. Products are manufactured in a series of three departments. The following data relate to Department Two for the month of February:
Beginning work-in-process
(70% complete)
10,000 units
Goo
$112,500
A conglomerate outsources the cleaning of its theaters. The cleaning vendor's charges are based upon the total hours needed to clean the facilities, and more cleaning time is needed as more people attend the theater. The conglomerate has accumulated the f
$13,000
A corporation expects to incur $70,000 of factory overhead and $60,000 of general and administrative costs next year. Direct labor costs at $5 per hour are expected to total $50,000. If factory overhead is to be applied per direct labor hour, how much ove
$140
A company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements conce
The total electricity cost per unit of production will increase as production volume increases.
A capital-intensive manufacturer of large construction equipment has a manufacturing process that relies heavily on specialized machinery. This machinery is run by a relatively small number of highly skilled laborers. In determining its predetermined over
Machine hours.
Fact Pattern:
Believing that its traditional cost system may be providing misleading information, Farragut Manufacturing is considering an activity-based costing (ABC) approach. It now employs a traditional cost system and has been applying its manufactur
$6.30
Which one of the following alternatives correctly classifies the business application to the appropriate costing system?
Job Costing System
Process Costing System
Print shop
Beverage manufacturer
Fact Pattern:
Goggle-Eyed Old Snapping Turtle, a sporting goods manufacturer, buys wood as a direct material for baseball bats. The Forming Department processes the baseball bats, and the bats are then transferred to the Finishing Department where a seala
$7,600
A company uses a job costing system and applies overhead to products on the basis of direct labor cost. Job No. 75, the only job in process on January 1, had the following costs assigned as of that date: direct materials, $40,000; direct labor, $80,000; a
$24,000 overapplied.
A review of the year-end accounting records of a company discloses the following information:
Raw materials
$ 80,000
Work-in-process
128,000
Finished goods
272,000
Cost of goods sold
1,120,000
The company's underapplied overhead equals $133,000. On the ba
$1,218,000
Conversion cost pricing
Could be used when the customer furnishes the material used in manufacturing a product.
Fixed manufacturing overhead costs totaled $150,000 and variable selling costs totaled $75,000. How should these costs be classified under variable costing?
$225,000 period costs; $0 product costs.
The term "prime costs" refers to
The sum of raw material costs and direct labor costs.
An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost pool, which is then applied to work in process using a single application base. The assembly plant management wants to estimate the magnitude of the total m
The variable cost per unit and the total fixed costs remain constant.
The allocation of general overhead costs to operating departments can be least justified in determining
Costs for making management's decisions.
Multiple or departmental overhead rates are considered preferable to a single or plantwide overhead rate when
Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.
A company is determining the cost behavior of several items in order to budget for the upcoming year. Past trends have indicated the following dollars were spent at three different levels of output:
Unit Levels
10,000
12,000
15,000
Cost A
$25,000
$29,000
Semivariable, fixed, and variable.
A manufacturing process normally produces defective units equal to 1% of production. Defective units are subsequently reworked and sold. The cost of reworking these defective units should be charged to
Factory overhead control.
A primary reason for a company to change from traditional costing to activity-based costing (ABC) is that ABC
Reduces product undercosting or overcosting.
Normal costing systems are said to offer a user several distinct benefits when compared with actual costing systems. Which one of the following is not a benefit associated with normal costing systems?
Improved accuracy of job and product costing.
A cosmetics manufacturer has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for makeup is $27,500. In an attempt to distribute quality c
$525.50 higher than the cost using the traditional system.
Fact Pattern:
Levittown Company employs a process cost system for its manufacturing operations. All direct materials are added at the beginning of the process and conversion costs are added proportionately. Levittown's production quantity schedule for Nov
5,000 units.
The allocation of costs to particular cost objects allows a firm to analyze all of the following except
Why the sales of a particular product have increased.
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore extraction operations. The following information pertains to work-in-process inventories and operations for the month of May:
Completion %
Units
Materials
Conversion
BWIP on
$2.30
Fact Pattern:
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May.
Units
Beginning work-in-process inventory, May 1
16,000
Star
$4.50
Production costs for July are
Direct materials
$120,000
Direct labor
108,000
Factory overhead
6,000
What is the amount of costs traceable to specific products?
$228,000
An entity estimates its total materials handling costs at two production levels as follows:
Cost
Gallons
$160,000
80,000
$132,000
60,000
What is the estimated total cost for handling 75,000 gallons?
$153,000
Assuming two overhead accounts are used, what is the entry to close them and to charge underapplied overhead to cost of goods sold?
Factory O/H applied XX
Cost of goods sold XX
Factory O/H control. XX
During the production of its single product, a company discovers that an unusual overnight power failure ruined an entire day's in-process production. How should the cost of these spoiled units be charged?
Written off as a loss.
Which of the following statements about activity-based costing (ABC) is false?
Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
Generally, individual departmental rates rather than a plantwide rate for applying manufacturing overhead are used if
The manufactured products differ in the resources consumed from the individual departments in the plant.
A manufacturing company has two departments, Machining and Assembly, at its Shanghai plant. This year's budget for the plant contained the following information.
Machining
Assembly
Manufacturing overhead
$4,000,000
$2,000,000
Direct labor hours
100,000
20
$100/hr. $10/hr.
An entity provides the following summary of its total budgeted production costs at three production levels:
Volume in Units
1,000
1,500
2,000
Cost A
$1,420
$2,130
$2,840
Cost B
1,550
2,200
2,900
Cost C
1,000
1,000
1,000
Cost D
1,630
2,445
3,260
The cost b
Variable, semivariable, fixed, and variable.
Which one of the following best describes direct labor?
Both a product cost and a prime cost.
A standard-cost system may be used in
Process Costing
Job-Order Costing
Activity-Based Costing
Yes
Yes
Yes
A firm uses a weighted-average process-costing system. Material B is added at two different points in the production of shirms, 40% is added when the units are 20% completed, and the remaining 60% of Material B is added when the units are 80% completed. A
8,800
Costs are allocated to cost objects in many ways and for many reasons. Which one of the following is a purpose of cost allocation?
Measuring income and assets for external reporting.
A firm uses a process-costing system and inspects its goods at the end of manufacturing. The inspection as of June 30 revealed the following information for the month of June:
Good units completed
16,000
Normal spoilage (units)
300
Abnormal spoilage (unit
16,000
$154,850
A joint process is a manufacturing operation yielding two or more identifiable products from the resources employed in the process. The two characteristics that identify a product generated from this type of process as a joint product are that it
Is identifiable as an individual product only upon reaching the split-off point, and it has relatively significant sales value when compared with the other products.
A company has the following budget formula for annual electricity expense in its shop:
Expense = $7,200 + (Units produced � $0.60)
If management expects to produce 20,000 units during February, for the purpose of performance evaluation, what amount of exp
$12,600
Fact Pattern: A company wants to determine its marketing costs for budgeting purposes. Activity measures and costs incurred for 4 months of the current year are presented in the table below. Advertising is considered to be a discretionary cost. Salesperso
Mixed cost
$16,000 per month plus $1.40 per unit sold
The most important criterion in accurate cost allocations is
Using homogeneous cost pools.
A manufacturer produces unique tapestries and bedding for hotel chains and uses a job order costing system. During the current month, the manufacturer purchased $50,000 of direct materials and incurred $22,000 in direct labor. Overhead is applied on the b
$79,700
A company has discovered that the cost of processing customer invoices is strictly variable within the relevant range. Which one of the following statements concerning the cost of processing customer invoices is incorrect?
The cost per unit for processing customer invoices will decline as the volume of customer invoices increases.
A company uses a normal costing system and a predetermined overhead rate to allocate its overhead costs. The manufacturing process requires the use of machining equipment, which is a primary driver of overhead. The actual factory overhead amount is $450 f
$98 underapplied.
A specialty instrument manufacturer is in the process of establishing a cost system. The company produces machines that are unique and distinctive. These machines are produced when purchase requests are received from customers. Although some common parts
Job-order costing.
A plant has two departments, Machining and Assembly. This year's budget for the plant contained the following information.
Machining
Assembly
Manufacturing overhead
$4,000,000
$2,000,000
Direct labor hours
100,000
200,000
Machine hours
410,000
40,000
If t
$20 per hour.
Fact Pattern: Atmel, Inc. manufactures and sells two products. Data with regard to these products are given below.
Product A
Product B
Units produced and sold
30,000
12,000
Machine hours required per unit
2
3
Receiving orders per product line
50
150
Produ
$3.75
A manufacturer uses a weighted-average process costing system and has the following costs and activity during October:
Materials
$40,000
Conversion cost
32,500
Total beginning work-in-process inventory
$72,500
Materials
$ 700,000
Conversion cost
617,500
T
$1,155,000. $235,000
The pro forma statement of employee benefit costs, a budget schedule that is prepared as part of an organization's annual profit plan, would include costs related to
Company-paid benefits and company-paid payroll taxes.
The two most appropriate factors for budgeting manufacturing overhead expenses would be
Management judgment and production volume.
Fact Pattern: A company has sales of one of its products of $400,000 per year and a contribution margin ratio of 20%. Its margin of safety is $40,000.
What is the company's breakeven point?
$360,000
For the month of June, a company expects to sell 12,500 cases of small cherries at $25 per case and 33,000 cases of large cherries at $32 per case. Sales personnel receive a 6% commission on each case of small cherries and an 8% commission on each case of
$84,480
The master budget
Contains the operating budget.
All of the following would appear on a projected schedule of cost of goods manufactured except for
Beginning finished goods inventory.
In an organization that plans by using comprehensive budgeting, the master budget is
A compilation of all the separate operational and financial budget schedules of the organization.
Fact Pattern: Siberian Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The sales department assures management that it can sell betw
Produce 12,000 pairs of mountaineering skis because they are more profitable.
Mason Enterprises has prepared the following budget for the month of July:
Selling Price
Variable Cost
Unit
Per Unit
Per Unit
Sales
Product A
$10.00
$4.00
15,000
Product B
15.00
8.00
20,000
Product C
18.00
9.00
5,000
Assuming that total fixed costs will b
21,819 units.
A budgeting approach that requires a manager to justify the entire budget for each budget period is known as
Zero-based budgeting.
A company has a beginning cash balance of $10,000 and expects $40,000 in cash receipts for each of the next 2 months. Typically, disbursements total about $20,000 per month. The company's payables policy has been to pay the bills upon receipt to maintain
The company should arrange a short-term line of credit large enough to cover the projected $10,000 shortfall during the first month.
A firm manufactures only one product and is preparing its budget for next year based on the following information:
Selling price per unit
$ 100
Variable costs per unit
75
Fixed costs
250,000
Effective tax rate
35%
If the firm wants to achieve a net income
90,000 units.
A continuous profit plan
Is a plan that is revised monthly or quarterly.
Fact Pattern:
Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have accounted for 10% of total sales, and payments for credit sales have been received as follows:
40% of credit sales in the mo
Be unchanged.
Zero-based budgeting forces managers to
Justify all expenditures at the beginning of every budget period.
The purpose of project budgeting is to identify, evaluate, and select beneficial projects that require
Commitments of large sums of funds, and the appropriate time frame is over the project's life cycle.
All of the following statements concerning standard costs are correct except that
Standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis.
A controller developed the following direct-costing income statement for Year 1:
Per
Unit
Sales (150,000 units at $30)
$ 4,500,000
$30
Variable costs:
Direct materials
$1,050,000
$ 7
Direct labor
1,500,000
10
Mfg. overhead
300,000
2
Selling & mktg.
300,00
$420,000
A corporation anticipates the following sales during the last 6 months of the year:
July
$460,000
August
500,000
September
525,000
October
500,000
November
480,000
December
450,000
20% of the corporation's sales are for cash. The balance is subject to the
$294,000
A manufacturer is considering dropping a product line. It currently produces a multi-purpose woodworking clamp in a simple manufacturing process that uses special equipment. Variable costs amount to $6.00 per unit. Fixed overhead costs, exclusive of depre
4,500 units.
The change in period-to-period operating income when using variable costing can be explained by the change in the
Unit sales level multiplied by a constant unit contribution margin.
The foundation of a profit plan is the
Sales forecast.
While an operating budget is a key element in planning and control, it is not likely to
Set out long-range, strategic concepts.
A home building company offers its customers the choice of 1 of 12 home designs on lots located in several developing areas. During its 15-year existence, the company created its annual budget by adjusting the prior year's actual results for changes in in
Zero-based budgeting.
A continuous (rolling) budget
Is a plan that is revised monthly or quarterly, dropping one period and adding another.
The board of directors is concerned that the budget committee has fallen into the practice of applying a flat 3% growth to the prior year performance, placing too much emphasis on the past and not focusing on the future opportunities and related activitie
Zero-based budgeting.
Fact Pattern: Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quart
78,000
A company's breakeven point in sales dollars may be affected by equal percentage increases in both selling price and variable cost per unit (assume all other factors are constant within the relevant range). The equal percentage changes in selling price an
Remain unchanged.
A sales budget shows quarterly sales for the next year as follows:
Quarter
Units
1
10,000
2
8,000
3
12,000
4
14,000
Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's sales. Budgeted producti
8,800 units.
Fact Pattern:
Kim is thinking of organizing a fundraiser to support a local charity. She has planned to rent a banquet hall and provide the guests with food, entertainment, and various party favors. She has decided to charge $500 a person. After researchi
$480
A master budget was prepared based on the following projections:
Sales
$2,400,000
Decrease in inventories
60,000
Decrease in accounts payable
100,000
Gross margin
40%
Estimated cash disbursements for inventories are
$1,480,000
Which one of the combinations listed correctly depicts the chronological order of preparation for the following budgets?
I Cost of goods sold budget
II Production budget
III Purchases budget
IV. Administrative budget
II, III, I, IV.
Which one of the following items should be done first when developing a comprehensive budget for a manufacturing company?
Development of a sales budget.
Fact Pattern: Total production costs of prior periods for a company are listed as follows. Assume that the same cost behavior patterns can be extended linearly over the range of 3,000 to 35,000 units and that the cost driver for each cost is the number of
$5.98
A company has developed the following sales projections for the calendar year.
May
$100,000
June
120,000
July
140,000
August
160,000
September
150,000
October
130,000
Normal cash collection experience has been that 50% of sales are collected during the mo
$414,000
In developing the budget for the next year, which one of the following approaches would produce the greatest amount of positive motivation and goal congruence?
Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan.
Fact Pattern: The data below are available for Xerbert Co.:
Xerbert Co.
Budget and Actual Income Statements
For the Year Ending December 31
(000s omitted)
Budget
Actual
Xenox
Xeon
Total
Xenox
Xeon
Total
Unit sales
150
100
250
130
130
260
Net dollar sales
$65,000 unfavorable.
A firm is considering discontinuing a certain product line if it does not have a margin of safety higher than 15%. The breakeven sales are $76,800, and the margin of safety is $13,200. Based on this information, the controller has recommended that the fir
No, because the margin of safety ratio of 14.7% is not better than 15%.
A company breaks even at an annual sales volume of 75,000 units. Actual annual sales volume was 100,000 units, and the company reported operating income of $200,000. The annual fixed costs are
$600,000
Traditional budgeting methods look at historical data and current resources and then project forward. Activity-based budgeting is different in that
I. It looks at desired outcomes and works back from there to determine resources needed.
II. It uses curren
I and III only.
A firm has prepared budgets for the next 5 months: May, June, July, August, and September. As soon as May results are reported, the firm will add October to their budget plans. What type of budget system is the firm using?
Continuous budgeting.
One approach for developing standard costs incorporates communication, bargaining, and interaction among product line managers; the immediate supervisors for whom the standards are being developed; and the accountants and engineers before the standards ar
Team development approach.
Which one of the following budgeting methodologies would be most appropriate for a firm facing a significant level of uncertainty in unit sales volumes for next year?
Flexible budgeting.
A company budgeted $148,000 sales on account for June, $120,000 for July, $211,000 for August, $198,000 for September, and $164,000 for October. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36%
October.
A company produces one product and budgeted 220,000 units for the month of August with the following budgeted manufacturing costs:
Total Costs
Cost Per Unit
Variable costs
$1,408,000
$ 6.40
Batch set-up cost
880,000
4.00
Fixed costs
1,210,000
5.50
Total
$
$3,930,000
Fact Pattern: Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisi
$(4,200,000)
In developing a comprehensive budget for a manufacturing company, which one of the following items should be done first?
Development of a sales plan.
Fact Pattern: M&P Tool has three service departments that support the production area. Outlined below is the estimated overhead by department for the upcoming year:
Estimated
Number of
Service Departments
Overhead
Employees
Receiving
$25,000
2
Repair
35,0
$0
Fact Pattern: Barnes Corporation manufactures skateboards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.
Sales
$1,500,000
Cost of sales:
Direct materials
$250,000
Direct labor
$729,027
Fact Pattern: Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly's operations are as follows:
Sales are budgeted at $220,000 for December Year 1 and $200,000 for January Year 2.
Collections a
$208,000
Fact Pattern: Polk Retailers is developing cash and other budget information for July, August, and September. At June 30, Polk had cash of $6,600, accounts receivable of $524,000, inventories of $371,280, and accounts payable of $159,666. The budget is to
$407,332
Fact Pattern:
Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table tops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly Department takes a
2,340 tables.
An advantage of incremental budgeting when compared with zero-based budgeting is that incremental budgeting
Accepts the existing base as being satisfactory.
Ineffective budget control systems are characterized by
All of the answers are correct.
The controller of a store has asked a staff accountant to prepare detailed reports that summarize the firm's cash flows for the upcoming accounting period and cash position at the end of the period. Accordingly, the controller has requested preparation of
Listing of cash collections
Pro forma statement of cash flows
Fact Pattern: The managers of Rochester Manufacturing are discussing ways to allocate the cost of service departments, such as Quality Control and Maintenance, to the production departments. To aid them in this discussion, the controller has provided the
$421,053
Fact Pattern: The budget data for the Bidwell Company appear below.
Sales (100,000 units)
$1,000,000
Costs:
Fixed
Variable
Direct materials
$ 0
$300,000
Direct labor
0
200,000
Manufacturing overhead
100,000
150,000
Selling and administrative costs
110,000
120,000 units.
A gift shop maintains a 35% gross profit percentage on sales and carries an ending inventory balance each month sufficient to support 30% of the next month's expected sales. Anticipated sales for the fourth quarter are as follows:
October
$42,000
November
$40,820
When allocating costs from one department to another, a dual-rate cost-allocation method may be used. The dual-rate cost-allocation method is most useful when
Costs are separated into variable-cost and fixed-cost subpools.
Fact Pattern:
Mountain Corporation manufactures cabinets but outsources the handles. Eight handles are needed for a cabinet, with assembly requiring 30 minutes of direct labor per unit. Ending finished goods inventory is planned to consist of 50% of proje
14.375
A company sells products on account and experiences the following collection schedule:
In the month of sale
10%
In the month after sale
60%
In the second month after sale
30%
At December 31, the company reports accounts receivable of $211,500. Of that amo
$174,500
Due to a change in market conditions, a company finds that it can sell as many of each of its three main products as it can produce. Which one of the following is most important in determining which of the three products to produce and market?
Contribution margin per hour of production time available.
The following direct labor information relates to the manufacture of televisions.
Number of workers
60
Number of product hours per week, per worker
40
Hours required to make 1 unit
3
Weekly wages per worker
$600
Employee benefits treated as direct labor c
$54
An enterprise sells three chemicals: petrol, septine, and tridol. Petrol is the company's most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm's overall breakeven point for the upcomi
An increase in anticipated sales of petrol relative to sales of septine and tridol.
A corporation is considering three new product lines but can only invest in one of the three. The expected annual revenue and costs for each product line are shown below. All three product lines are assumed to operate for the same length of time.
A
B
C
Un
B only.
Fact Pattern: Superflite expects April sales of its deluxe model airplane, the C-14, to be 402,000 units at $11 each. Each C-14 requires three purchased components shown below.
Number Needed
Purchase Cost
for Each C-14 Unit
A-9
$0.50
1
B-6
0.25
2
D-28
1.0
400,000 units.
Fact Pattern: Scarborough Corporation manufactures and sells two products, Thingone and Thingtwo. Scarborough's budget department gathered the following data to project sales and budget requirements:
Projected Sales
Product
Units
Price
Thingone
60,000
$ 7
$390,000. $492,000
A furniture company manufactures several steel products. It has three production departments: Fabricating, Assembly, and Finishing. The service departments include Maintenance, Material Handling, and Designing. Currently, the company does not allocate ser
Request an excessive amount of service.
Fact Pattern: The budget data for the Bidwell Company appear below.
Sales (100,000 units)
$1,000,000
Costs:
Fixed
Variable
Direct materials
$ 0
$300,000
Direct labor
0
200,000
Manufacturing overhead
100,000
150,000
Selling and administrative costs
110,000
80,500 units.
A corporation's current year-end sales totaled $240 million, and its ending cash balance was $20 million. The corporation anticipates its sales for the upcoming year will be $260 million. On average, 10% of a year's sales will be collected during the foll
$2 million
A company has sales of $500,000, variable costs of $300,000, and operating income of $150,000. If the company increased the sales price per unit by 10%, reduced fixed costs by 20%, and left variable cost per unit unchanged, what would be the new breakeven
$88,000
There are several methods for allocating service department costs to the production departments. The method that recognizes service provided by one service department to another but does not recognize reciprocal interdepartmental service is the
Step-down method.
Positive operating income is shown on a cost-volume-profit chart when the
Total sales revenue line exceeds the total expense line.
In the quest to develop a more achievable budget for the coming year, the chief executive officer has elected to develop the company's budget by using a decentralized bottom-up budget approach. A production manager's involvement in the budget process this
Require development of a production budget after receiving the division's projected sales forecast
Fact Pattern: Paradise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1 through June 30:
July 1
June 30
Direct material*
40,000
50,000
Work-in-
1,010,000 units.
A company needs special gears. The machinery to make the gears can be rented for $100,000 for 1 year, but the company can buy the gears and avoid the rental cost. Because the demand for the gears may be high (0.6 probability) or low (0.4 probability) and
The expected value of buying is $70,000.
Which one of the following is in a company's cash budget?
Disposal of land.
The present value may be calculated for discounted cash
Inflows
Outflows
Annuities
Yes
Yes
Yes
The cash receipts budget includes
Loan proceeds.
A company currently sells 46,000 units of its product annually at a sales price of $38 per unit. Variable costs per unit total $21 and the total fixed costs each year are $749,000. Fixed costs include the annual salary of three sales staff, which is $55,0
Yes, because it will increase operating income by $67,000.
A company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project?
9%
A difference between standard costs used for cost control and the budgeted costs of the same manufacturing effort can exist because
Standard costs represent what costs should be, whereas budgeted costs are expected actual costs.
One disadvantage of using the internal rate of return (IRR) method to calculate profitability of a project is that
Multiple positive and negative cash flows over the life of the project will yield multiple IRRs
A corporation is considering the purchase of a new machine for $800,000. The machine is capable of producing 1.6 million units of product over its useful life. The manufacturer's engineering specifications state that the machine-related cost of producing
No, the machine-related cost of producing each unit is $.67.
Fact Pattern: Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per
Lose $3.00 per unit.
Fact Pattern: Data available for the current year are presented below.
Whole Company
Division 1
Division 2
Variable manufacturing cost of goods sold
$ 400,000
$220,000
$180,000
Unallocated costs (e.g., president's salary)
100,000
Fixed costs controllable
$470,000
Fact Pattern: Calamity Cauliflower Corporation is considering undertaking a capital project.
The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate
$9,600
The technique that reflects the time value of money and is calculated by dividing the present value of the future net after-tax cash inflows that have been discounted at the desired cost of capital by the initial cash outlay for the investment is called t
Profitability index method.
Fact Pattern: Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year.
Option One -- Acquire a New Finishing Machine
The cost of the machine is $1,000,000, and i
Relevant because it is a decrease in cash outflow.
A manufacturer makes picture frames that require one sheet of glass each. Each sheet of glass comes from one larger sheet that is cut into four pieces. Normally, the company is able to produce 400 frames using 110 large sheets of glass, as there is typica
It is a theoretical standard because it assumes that all equipment is in order and employees work as expected.
Fact Pattern: Jennilyn Jasper, whose annual salary as a flight instructor is $40,000, has just inherited $100,000 after taxes. She is considering quitting her job and opening a day-care center. Certificates of deposit at the local bank are currently payin
An accounting profit but not an economic profit.
Estimated monthly sales will be as follows:
January
$100,000
February
150,000
March
180,000
Historical trends indicate that 40% of sales are collected during the month of sale, 50% are collected in the month following the sale, and 10% are collected two m
$108,000
Which one of the combinations listed correctly depicts the chronological order of preparation for the following budgets?
I. Cost of goods sold budget
II. Production budget
III. Purchases budget
IV. Administrative budget
II, III, I, IV.
A manufacturer is considering two independent projects, each requiring a cash outlay of $500,000 and having an expected life of 10 years. The forecasted annual net cash inflows for each project and the probability distributions for these cash inflows are
Accept both projects.
Fact Pattern: Berol Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of the next month's estimated sales. There
$2,640,000
Fact Pattern:
A company is evaluating the possible introduction of a new version of an existing product that will have a 2-year life cycle. At the end of 2 years, this version will be obsolete, with no additional cash flows or salvage value. The initial a
$1,200,550
A company is analyzing a $200,000 equipment investment to produce a new product for the next 5 years. A study of expected annual after-tax cash flows from the project produced the following data:
Annual
After-Tax
Cash Flow
Probability
$45,000
.10
50,000
.
40%
A company manufactures classroom desk chairs and tables. In the present market, the company can sell as many units of product as it can manufacture, but it is constrained by its availability of machine-hour capacity. Sales price and cost information for e
Both products are equally profitable.
A firm is analyzing the market potential for its specialty turbines. The firm developed pricing and cost structures for its specialty turbines over various relevant ranges. The pricing and cost data for each relevant range are presented below.
Units produ
14 units.
Fact Pattern: Polk Retailers is developing cash and other budget information for July, August, and September. At June 30, Polk had cash of $6,600, accounts receivable of $524,000, inventories of $371,280, and accounts payable of $159,666. The budget is to
$345,000
A company's sales budget for the coming year is as follows.
Item
Volume in Units
Sales Price
Sales Revenue
1
200,000
$50
$10,000,000
2
150,000
10
1,500,000
3
300,000
30
9,000,000
Total sales revenue
$20,500,000
Items 1 and 3 are different models of the sa
$1,050,000
There are various budgets within the master budget cycle. One of these budgets is the production budget. Which one of the following best describes the production budget?
It is calculated from the desired ending inventory and the sales forecast.
Which of the following statements apply to the continuous budget methodology?
I. The current financial forecast reflects the most recent monthly results and any material changes to the company's outlook or economy.
II. Forecasts are updated every few mont
I and II only.
Fact Pattern: Rex Company is considering an investment in a new plant, which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before
9.2 years.
An investment decision is acceptable if the
Net present value is greater than or equal to $0.
Data regarding Mill Company's direct materials costs is as follows:
Actual unit cost
$2.00
Standard unit cost
2.20
Actual quantity purchased and used
28,000 units
Standard units of materials per unit
of finished goods
3 units
Actual output of finished goo
$5,600 favorable.
Flexible budgets
Accommodate changes in activity levels.
A corporation's master budget calls for the production of 5,000 units of product monthly. The master budget includes indirect labor of $144,000 annually; the corporation considers indirect labor to be a variable cost. During the month of April, 4,500 unit
$700 favorable.
Fact Pattern: Information pertaining to Noskey Corporation's sales revenue is presented in the following table:
November
December
January
Year 1
Year 1
Year 2
(Actual)
(Budget)
(Budget)
Cash sales
$ 80,000
$100,000
$ 60,000
Credit sales
240,000
360,000
18
$283,500
Which budget is prepared after the creation of the cash budget?
Budgeted balance sheet.
Fact Pattern: A proposed investment is not expected to have any salvage value at the end of its 5-year life. Because of realistic depreciation practices, the net carrying amount and the salvage value are equal at the end of each year. For present value pu
The IRR is over 12%.
Fact Pattern: Paradise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1 through June 30:
July 1
June 30
Direct material*
40,000
50,000
Work-in-
450,000 units.
A major difference between economic profit and accounting profit is that economic profit
Reduces profits by associated cost of capital.
Fact Pattern: ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of direct materials in inventory were purchased for $105,000, and two units of direct materials are required to produce one unit of final prod
$12,500 unfavorable.
A company produces ready-to-bake pie crusts. In deciding whether to process this product further into complete ready-to-bake pies by adding filling, relevant dollar amounts to consider would include all of the following except the
Cost to manufacture the crusts.
Which one of the following variances is most controllable by the production control supervisor?
Materials usage variance.
A gift shop maintains a 35% gross profit percentage on sales and carries an ending inventory balance each month sufficient to support 30% of the next month's expected sales. Anticipated sales for the fourth quarter are as follows:
October
$42,000
November
$40,820
A retail furniture company currently sells products in four categories: recliners, sofas, dining sets, and patio. Due to recent poor performance, the company is considering eliminating the patio furniture line.
Recliners
Sofas
Dining
Patio
Sales
$500,000
Eliminate the patio furniture line, which will increase the company's operating income by $2,000.
Fact Pattern: Lazar Industries produces two products, crates and trunks. Per unit selling prices, costs, and resource utilization for these products are as follows.
Crates
Trunks
Selling price
$20
$30
Direct material costs
5
5
Direct labor costs
8
10
Vari
$2,000,000
Which one of the following items would most likely cause the planning and budgeting system to fail? The lack of
Top management support.
Fact Pattern: Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a market study
Sunk cost.
A firm is considering opening a new restaurant. The expected purchase price is $270,000; expected annual revenues are $150,000; and expected annual costs are $90,000, including $22,500 of depreciation. The investment has a payback period of approximately
3.3 years.
A corporation's Marketing Department recently accepted a rush order for a nonstock item from a valued customer. The Marketing Department filed the necessary paperwork with the Production Department, which complained greatly about the lack of time to do th
Purchasing, Marketing, and Production.
A start-up company wants to use cost-based pricing for its only product, a unique new video game. The company expects to sell 10,000 units in the upcoming year. Variable costs will be $65 per unit and annual fixed operating costs (including depreciation)
$79.00
Fact Pattern: The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, an
$(105,000)
Flexible budgets
Accommodate changes in activity levels.
At the beginning of the year, a company prepared the following monthly budget for direct materials.
Units produced and sold
10,000
15,000
Direct material
$15,000
$22,500
At the end of the month, the company's records showed that 12,000 units were produced
$2,000 unfavorable.
Fact Pattern: The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18,000. It has a 10-year life and is
$136,800
Fact Pattern: Calvin, Inc., is considering the purchase of a new state-of-the-art machine to replace its hand-operated machine. Calvin's effective tax rate is 40%, and its cost of capital is 12%. Data regarding the existing and new machines are presented
$26,000
Which of the following is irrelevant in projecting the cash flows of the final year of a capital project?
Historical cost of equipment disposed of in the project's first year.
Which of the following pricing policies involves the selling company setting freight charges to customers at the actual average freight cost?
Uniform delivered pricing.
In order to avoid pitfalls in relevant-cost analysis, management should focus on
Anticipated revenues and costs that differ for each alternative.
In which of the following variances is the standard unit cost used in the calculations?
Both the direct materials usage variance and the direct materials price variance.
A company's approach to an insourcing vs. outsourcing decision
Involves an analysis of avoidable costs.
The definition of economic cost is
The sum of all explicit and implicit costs of the business firm.
An entity has just developed a new product with a manufacturing cost of $30. The Marketing Director has identified three marketing approaches for this new product.
Approach X
Set a selling price of $36 and have the firm's sales staff sell the product at a
Z, X, Y.
Which one of the following schedules would be the last item to be prepared in the normal budget preparation process?
Cash budget.
Fact Pattern: Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product.
Standard
Standard
Standard
Quantity
Pr
$17,100 favorable.
A company is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. The company's sales are expected to increase by $3 million per year as a result of the expansion. Cash investment in curre
$4.6 million.
Fact Pattern: Kator Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB-96. This product has the following financial structure per unit:
Selling price
$150
Direct materials
$ 20
$50
A company is performing a capital budgeting analysis on a new product it is considering. Annual sales are expected to be 50,000 units in the first year, 100,000 units in the second year, and 125,000 units the year thereafter. Selling price will be $80 in
$1,058,750
A company produces a component that is popular in many refrigeration systems. Data on three of the five different models of this component are as follows:
Model
A
B
C
Units of production
5,000
6,000
3,000
Manufacturing costs:
Variable direct costs
$10
$24
The Freezer Department's manufacturing plan should include 5,000 units of Model A and 4,500 units of Model B.
A master budget was prepared based on the following projections:
Sales
$2,400,000
Decrease in inventories
60,000
Decrease in accounts payable
100,000
Gross margin
40%
Estimated cash disbursements for inventories are
$1,480,000
A retail company has three segments with total operating income of $500,000. Selected financial information for Segment 1 is presented below:
Segment 1
Unit sales
28,000
Sales revenue
$700,000
Cost of sales
420,000
Administrative expenses
144,000
Commissi
No, because total operating income would decrease by $234,000.
Fact Pattern: Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per
$190,000
Fact Pattern:
Daffy Tunes manufactures a toy rabbit with moving parts and a built-in voice box. Projected sales in units for the next 5 months are as follows:
Projected
Month
Sales in Units
January
30,000
February
36,000
March
33,000
April
40,000
May
29,0
54,000 units.
Fact Pattern: Mercken Industries is contemplating four projects, Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each independent project are listed below. Mercken's desired after-tax opportunity
Project Q because it has the highest net present value.
Which one of the following best describes the capital budget?
It assesses the long-term needs of the company for plant and equipment purchases.
A firm has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions hav
Standard variable cost.
A company budgeted sales of $220,000 for June, $200,000 for July, $280,000 for August, $264,000 for September, $244,000 for October, and $300,000 for November. Approximately 75% of sales are on credit; the remainder are cash sales. Collection experience i
November.