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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

 

Cost Management Measuring, Monitoring And Motivating Performance 2nd Edition By Susan K. Wolcott – Test Bank

 

Sample  Questions

 

True-False

  1. Accountants typically do not perform CVP analysis; instead, they delegate that responsibility to production managers.
  2. Accountants develop CVP analysis to help managers decide which products or services to emphasize.
  3. CVP analysis can assist in budgeting for discretionary expenditures, such as fixed costs for advertising.
  4. The contribution margin per unit is calculated as Selling Price per unit minus Variable Cost per unit.
  5. If a company can produce and sell 500 units at $10 each and its variable costs are $6 per unit, expected profit using the profit equation will be $2,000.
  6. CVP calculations can only be used in companies that sell a single product.
  7. CVP analysis can be used in companies that sell multiple products.
  8. An assumption needed for CVP analysis in multiple-product companies is that the sales mix remains constant.
  9. For companies with multiple products, the sales mix should be stated as a proportion of units when performing CVP computations in units.
  10. When an organization produces and sells a number of different products or services, the weighted average contribution margin per unit is used to determine the breakeven point or target profit in units.
  11. The breakeven point can be expressed as a number of units or as total amount of revenue.
  12. The breakeven point is often expressed as a cost per unit.
  13. On a cost-volume-profit graph, the breakeven point is located where the fixed cost line intersects the x-axis.
  14. Assumptions and limitations are irrelevant when using CVP analysis.
  15. Managers implicitly assume that operations will be within the relevant range when using CVP analysis.
  16. A linear revenue function is one of the assumptions involved in CVP analysis.
  17. In CVP analysis, costs are assumed to be linear; that is, they can be expressed as “TC = F + VxQ” format, where F represents total fixed costs.
  18. A CVP analysis indicates that the breakeven point for Rebo Company is 2,000 units. If the company sells 2,100 units, then it will be guaranteed to earn a profit.
  19. Because managers cannot usually be certain about their cost function, they also cannot be certain about the level of sales needed to earn a target profit.
  20. The margin of safety is the excess of a firm’s profits above the breakeven point.
  21. The margin of safety can be expressed in units, dollars, or a percentage.
  22. A larger margin of safety gives managers greater confidence in making plans such as incurring additional fixed costs.
  23. RKH Corporation’s fixed costs total $10,000, while EMO Corporation’s fixed costs total $12,000 for the same period of time. Therefore, EMO has a higher margin of safety than RKH.

 

 

 

Multiple Choice

  1. Managers can use cost-volume-profit analysis to
  2. Plan operating activity levels
  3. Achieve targeted profits

III.    Monitor organizational performance

  1. I only
  2. II and III only
  3. I and III only
  4. I, II, and III
  5. Which of the following is an uncertainty faced by managers in CVP analysis?
  6. Unexpected changes in costs
  7. How quickly demand for new products will change

III.    The amount of budgeted advertising costs

  1. III only
  2. I and II only
  3. I and III only
  4. I, II, and III
  5. CVP analysis is most likely to be used for which of the following decisions?
  6. The amount of discretionary expenditures for the next period
  7. The organizational vision
  8. The exact level of operations at which the organization will operate
  9. Whether to buy a business segment operating in Germany
  10. Which of the following techniques examine changes in profits in response to changes in volume, costs, and prices?
  11. Activity-based costing
  12. Financial statement analysis
  13. Cost-volume-profit analysis
  14. Balanced scorecard
  15. CVP analysis can be used to make decisions about discretionary expenditures, such as
  16. Advertising
  17. Taxes
  18. Direct materials purchases
  19. City license fees
  20. CVP analysis can be used in the following type(s) of organization
  21. Manufacturing
  22. Service

III.    Not-for-profit

  1. I and III only
  2. II and III only
  3. I and II only
  4. I, II, and III
  5. If sales are $80,000, variable costs are $50,000, and fixed costs are $20,000, the contribution margin ratio is
  6. 37.5%
  7. 12.5%
  8. 62.5%
  9. 25.0%

 

  1. Howe Hinges Co. manufactures and sells a single product. This product has the following operational data:

Unit sales price                                            $       30

Variable manufacturing cost per unit                    17

Fixed manufacturing costs                             72,000

Variable selling cost per unit                                  1

Fixed selling costs                                         27,000

Marginal tax rate                                               40%

What amount of total revenue would be needed to meet an after-tax profit target of $48,000?

  1. $365,000
  2. $547,500
  3. $630,000
  4. $447,500

 

Use the following information for the next 5 questions.

ZTL Corporation produces three products.  Cost, price, and volume data is shown below:

Total Fixed costs           $2,400

Tax rate                            40%

 

Picture       Candle          CD

Holders      Holders      Holders

Normal volume                  300            150            200

Price per unit                       $5              $7            $10

Variable cost per unit             2                3                4

  1. The weighted average contribution margin per unit, rounded to the nearest cent, is
  2. $3.00
  3. $4.00
  4. $4.15
  5. $6.00
  6. The weighted average contribution margin ratio, rounded to the nearest whole percent, is
  7. 57%
  8. 59%
  9. 60%
  10. Some other number
  11. When using units as the measure, what proportion of the sales mix do picture holders represent? Round to the nearest whole percent.
  12. 33%
  13. 46%
  14. Some other percentage
  15. Cannot be determined
  16. When using revenues as the measure, what proportion of the sales mix do CD holders represent? Round to the nearest whole percent.
  17. 44%
  18. 38%
  19. 31%
  20. Cannot be determined

 

  1. ZTL’s pretax profit next period is expected to be
  2. $240
  3. $300
  4. More than $300
  5. Cannot be determined
  6. A firm with fixed costs of $61,500 per month sells three products with the following characteristics:

Sales Mix           Contribution

Product                   Percentage               Margin

P                              25%                     $48

Q                             50%                       50

R                              25%                       52

How many total units must be sold to breakeven?

  1. 1,230
  2. 1,500
  3. 1,533
  4. 1,600

 

Use the following information for the next 2 questions.

The Pierson Co. has the following unit and mix data:

Do                  Dah               Total

Unit sales price                                 $5.00               $4.00

Unit contribution margin                     0.75                 1.20

Sales mix ($)                                      80%                 20%

Fixed costs                                                                                    $99,000

Target profit                                                                                    24,750

  1. How many units of Dah must be sold at the breakeven point?
  2. 75,000
  3. 27,500
  4. 37,500
  5. 55,000
  6. How many units in total must be sold to earn the target profit?
  7. 687,500
  8. 165,000
  9. 112,500
  10. 144,375
  11. Nunn Company produces a single product. Following is cost information:

Variable Cost

Fixed Costs                  Per Unit

Manufacturing costs                  $35,000                        $15

Non-manufacturing costs             60,000                          10

If the product sells for $60, how many units must be sold to break even?

  1. 1,000
  2. 2,375
  3. 2,714
  4. 3,800

 

  1. Ryan Company manufactures a single product. The product sells for $10.  The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit.  Ryan incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling.

Ryan is considering changes to its production and distribution procedures.  If the changes are made, total variable costs (manufacturing and selling) will be $3 and total fixed costs (manufacturing, administration, and selling) will be $350,000 per month.  The selling price will remain at $10.  If the changes are made, the number of units required to break even will be

  1. Greater than before
  2. The same as before
  3. Less than before
  4. Cannot be determined
  5. The breakeven point can be defined as
  6. The point at which sales equal variable costs
  7. The point at which the total contribution margin equals the total fixed costs
  8. The level of operations at which the firm earns a profit
  9. The level of operations that equals budgeted sales
  10. At the breakeven point
  11. Sales will be equal to variable costs plus target profit
  12. Sales will be equal to variable costs plus fixed costs
  13. Sales will be equal to fixed costs plus target profit
  14. Fixed costs will be equal to variable costs
  15. Managers should consider which of the following in CVP analysis
  16. Assumptions
  17. Uncertainties

III.    Biases

  1. I and III only
  2. I and III only
  3. I and II only
  4. I, II, and III
  5. Which of the following is not an assumption in CVP analysis?
  6. Actual costs will be exactly the amount that we predict in the analysis
  7. Operations are within the relevant range
  8. The revenue function is linear
  9. The cost function is linear
  10. In CVP analysis, managers usually assume that the cost function is linear. Which of the following equations best represents a linear function for total cost if the cost is a mixed cost?
  11. y = $200 + $60x
  12. y = $60×2
  13. y = $60x
  14. y = $200
  15. The assumption of cost function linearity means
  16. Fixed costs remain fixed.
  17. Sales mix remains constant.

III.    The average cost per unit remains constant.

  1. I only
  2. I and II only
  3. I, II, and III
  4. III only

 

  1. When the assumption of linearity is applied to revenue in CVP analyses
  2. Fixed cost per unit increases as revenue decreases
  3. Variable cost per unit is linear with respect to total revenue
  4. The sales mix and all of the prices remain constant
  5. The sales mix remains constant, but prices decrease as volumes increase
  6. How is the relevant range of activity related to CVP analysis?
  7. Managers are normally uncertain about the relevant range
  8. In CVP analysis, operations are assumed to be within the relevant range
  9. The relevant range is irrelevant to CVP analysis
  10. The relevant range affects costs but not revenues
  11. Which of the following business conditions may violate an assumption of CVP analysis?
  12. Supplier volume discounts
  13. Learning curves

III.    Customer discounts

  1. I and II only
  2. II and III only
  3. I, II, and III
  4. I and III only
  5. The cost function for Liao Company is: TC = $800 + 0.375 × Revenue.  If Liao expects after-tax income of $600 and the tax rate is 40%, what is the firm’s margin of safety?
  6. $3,680
  7. $2,400
  8. $2,880
  9. $1,600
  10. Baldwin’s Bagel Shop had the following activity for December:

Total bagels sold                       17,000

Total revenues                      $595,000

Total fixed costs                       99,000

Total variable costs                 357,000

What was Baldwin’s margin of safety, in dollars?

  1. $430,000
  2. $247,500
  3. $347,500
  4. $357,000
  5. The margin of safety is
  6. The difference between estimated sales and breakeven sales.
  7. Not a useful measure for management in understanding the risk associated with a product line.
  8. The amount sales can drop before the target profit is met.
  9. How far sales must increase to earn a profit.
  10. Which of the following is the amount by which sales could drop before profits reach the breakeven point?
  11. Operating leverage
  12. Total contribution margin
  13. Margin of safety
  14. Incremental sales

 

  1. The ratio of contribution margin ¸ profit is used to compute a company’s
  2. Expected fixed costs
  3. Degree of operating leverage
  4. Margin of safety
  5. Margin of safety percentage
  6. What is the relationship between the margin of safety percentage and the degree of operating leverage?
  7. They are unrelated
  8. They are always the same
  9. They are reciprocals
  10. They are both subject to management bias

 

Use the following information for the next 4 questions.

SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4.  Total fixed costs are $800.  Its CVP graph is as follows:

  1. Point A is best described as
  2. Fixed cost
  3. Margin of safety
  4. Estimated profit at actual volume
  5. Breakeven point
  6. Point B is best described as
  7. Fixed cost
  8. Margin of safety
  9. Estimated profit at actual volume
  10. Breakeven point
  11. Area C is best described as
  12. Fixed cost
  13. Margin of safety
  14. Estimated profit at actual volume
  15. Breakeven point
  16. Area D is best described as
  17. Fixed cost
  18. Margin of safety
  19. Estimated profit at actual volume
  20. Breakeven point
  21. The Nunn Co. produces a single product. Its cost structure is:

Variable Cost

Fixed Cost            Per Unit

Manufacturing costs               $35,000                  $15

Non-manufacturing costs          60,000                    10

If the firm sells 5,000 units per period, what price should be charged to earn $35,000?

  1. $44
  2. $45
  3. $50
  4. $51

 

 

More Difficult Multiple Choice

These multiple choice questions require more complex computations or present information differently than in the textbook.

  1. At a breakeven point of 200 units, the variable costs were $400 and the fixed costs were $200. What will the next (i.e., 401st) unit sold contribute to profit before income taxes?
  2. $0
  3. $2.00
  4. $1.00
  5. Cannot be determined
  6. Steiner Manufacturer’s contribution margin is $200, after-tax income is $96, and the tax rate is 40%. What are the fixed costs?
  7. $60
  8. $50
  9. $40
  10. $33
  11. Smith Co. has a contribution margin ratio of 40% and a breakeven point of $200,000 in sales. If the firm reports net income of $50,000 after taxes of 50%, what were total sales for the year?
  12. $450,000
  13. $466,667
  14. $500,000
  15. $700,000
  16. If the total contribution margin decreases and fixed costs do not change, pretax income
  17. Decreases by an equal amount
  18. Increases by an equal amount
  19. Does not change
  20. Increases by some other amount

 

 

 

Use the following information for the next 9 questions.

Data extracted from the accounting information system of TXC Corporation produced the following graph.  The equation of the dashed line is y = $25x; the equation of the solid line is y = $200 + $5x.

  1. Which of the following terms best describes the graph?
  2. Learning curve graph
  3. Operating leverage graph
  4. Margin of safety graph
  5. Cost-volume-profit graph
  6. The solid line represents
  7. Total variable costs
  8. Total fixed costs
  9. Total costs
  10. Total revenues
  11. The dashed line represents
  12. Total variable costs
  13. Total fixed costs
  14. Total costs
  15. Total revenues
  16. The point where the dashed line intersects the solid line is the
  17. Variable cost per unit
  18. Breakeven point
  19. Unit contribution margin
  20. None of the above
  21. The horizontal (“x”) axis shows
  22. Fixed costs
  23. Revenues
  24. Units
  25. Variable costs
  26. The vertical (“y”) axis shows
  27. Dollars
  28. Units
  29. Contribution margin
  30. Total profit

 

  1. The solid line intersects the y-axis at the
  2. Fixed cost per unit
  3. Variable cost per unit
  4. Total fixed cost
  5. Total variable cost
  6. The area to the right of the point where the two lines intersect, where the dashed line is above the solid line, shows where TXC
  7. Operates at a loss
  8. Operates at a profit
  9. Breaks even if product mix remains constant
  10. Cannot be determined
  11. The area to the left of the point where the two lines intersect, where the dashed line is below the solid line, shows where TXC
  12. Operates at a loss
  13. Operates at a profit
  14. Breaks even if product mix remains constant
  15. Cannot be determined
  16. A firm selling three products has the following data:

Unit    Unit Variable

Product                  Sales Mix                   Price           Cost

P                       60,000 units                $40            $20

Q                      40,000 units                  60              30

R                       20,000 units                  30              15

If the firm can change the sales mix from 60,000 P, 40,000Q, and 20,000 R to 60,000 P, 20,000 Q, and 40,000 R, pretax income will be

  1. Lower
  2. Higher
  3. Unchanged
  4. Cannot be determined
  5. Grady, Inc. produces a single product and projects the following costs for a normal month in which 100 units are produced and sold:

Manufacturing           Nonmanufacturing

Fixed costs                                      $8,000                         $5,000

Total variable costs                           7,700                           6,050

The selling price per unit is $300.  What volume, in units, must Grady sell to break even?

  1. 36
  2. 58
  3. 80
  4. 90
  5. When sales are $1,000, the contribution margin is $600 and a pretax loss of $60 occurs. What is the breakeven point in dollars?
  6. $ 833
  7. $1,100
  8. $1,167
  9. $1,750

 

 

Use the following information for the next 3 questions.

Ruben, Inc. is a management consulting firm specializing in pension plans. Its billing rate to clients is $120 per hour, and variable costs average $80 per hour.  Fixed costs are $24,000 per month.  The income tax rate is 20%.

  1. If variable costs increase by 10% and management increases its billing rate by 8%, what is the effect on the breakeven point, in billable hours?
  2. It increases the breakeven point
  3. The breakeven point will not change
  4. It decreases the breakeven point
  5. Cannot be determined
  6. If variable costs increase by 10% and management increases its billing rate by 10%, what is the effect on the breakeven point, in billable hours?
  7. It increases the breakeven point
  8. The breakeven point will not change
  9. It decreases the breakeven point
  10. Cannot be determined
  11. If fixed costs increase by 10% and management increases its billing rate by 10%, what is the effect on the breakeven point, in billable hours?
  12. It increases the breakeven point
  13. The breakeven point will not change
  14. It decreases the breakeven point
  15. Cannot be determined
  16. Ryan Company manufactures a single product. The product sells for $10.  The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit.  Ryan incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling.

If Ryan raises its selling price by 10% in response to a 10% increase in variable costs, and income taxes are 40%, its new breakeven point in sales dollars (relative to that of the original data above) will be

  1. Higher
  2. Unchanged
  3. Lower
  4. Cannot be determined
  5. The breakeven point for a service organization will decrease if
  6. The variable cost ratio increases
  7. The mix of less profitable services increases
  8. The contribution margin ratio increases
  9. Fixed costs increase
  10. The breakeven point for a service organization will decrease if
  11. Volume increases
  12. The variable cost ratio decreases
  13. Fixed costs increase
  14. The contribution margin ratio decreases
  15. If all other factors remain unchanged, a 10% decrease in both the selling price and variable costs for a product will
  16. Lower the breakeven point in dollars
  17. Raise the breakeven point in dollars
  18. Have no effect on the breakeven point in dollars
  19. Cannot be determined
  20. In CVP analysis, managers usually assume that the revenue function is linear. Which of the following equations best represents a linear revenue function if the cost is a variable cost?
  21. y = $200 + $60x
  22. y = $60×2
  23. y = $60x
  24. y = $200
  25. A limiting assumption in CVP analysis is that
  26. The behavior of both revenues and costs is linear throughout the entire relevant range
  27. Inventories change in breakeven computations
  28. The sales mix is not constant
  29. Efficiency in operations is not constant

 

Use the following information for the next 5 questions.

SXF sells its single product for $14 per unit, and its variable cost per unit is $4.  Total fixed costs are $800.  Its CVP graph is as follows:

 

  1. If SXF increases its volume of sales by 10%, what will happen to its degree of operating leverage?
  2. It will decrease
  3. It will increase
  4. It will stay the same
  5. Cannot be determined
  6. If SXF increases its sales volume by 10%, what will happen to its margin of safety?
  7. It will decrease
  8. It will increase
  9. It will stay the same
  10. Cannot be determined
  11. If SXF increases its sales volume by 10%, what will happen to its breakeven point?
  12. It will decrease
  13. It will increase
  14. It will stay the same
  15. Cannot be determined
  16. Which of the following actions will move Point B higher on the y axis?
  17. An increase in the price of materials
  18. A decrease in the number of units sold
  19. Purchase of new equipment
  20. An increase in variable overhead cost
  21. Which of the following actions will move Point A to the right on the x axis?
  22. An increase in the number of units sold
  23. A decrease in the number of units sold
  24. An increase in the product’s selling price
  25. An increase in the variable cost per unit
  26. Dane Co. sells three products and incurs $18,000 per period in fixed costs. The three products have the following characteristics:

Product                      Price          Variable Cost          Sales Mix

P                            $40                  $20                      3 units

Q                             20                    10                      9 units

R                              49                    24                    12 units

How many units of Product P will be sold at the breakeven point?

  1. 40
  2. 360
  3. 120
  4. 200

 

Use the following information for the next 3 questions.

Nelson Co. incurs $568,000 in fixed costs while producing three products with the following characteristics:

Sales Mix            Unit Contribution          Contribution

Product                 (Units)                      Margin                  Margin Ratio

T                          5                            $900                          45%

Q                         3                              600                          40%

R                          2                              400                          35%

  1. What is the selling price of Product T?
  2. $1,200
  3. $1,143
  4. $2,000
  5. $1,500
  6. What is the breakeven point in units?
  7. 400
  8. 240
  9. 299
  10. 800
  11. At the breakeven point, what is the dollar sales volume for Product Q?
  12. $800,000
  13. $360,000
  14. $288,000
  15. $120,000

 

 

Multiple Choice from Study Guide

s73.      Stuart, Inc. produces one item which sells for $2.40 and costs $1.40 per unit to make. All manufacturing costs are variable. If fixed selling and administrative costs total $140,000, how many units must be sold in order to break even?

  1. 100,000
  2. 140,000
  3. 58,333
  4. None of the above

s74.      The Jean Company expects sales of $500,000 and total variable costs of $200,000 in 2005. Total budgeted fixed costs are $180,000. What is the breakeven volume in sales dollars?

  1. $450,000
  2. $300,000
  3. $360,000
  4. None of the above

s75.      MacDonald Oil Co. expects sales of $1,000,000 and total variable costs of $600,000 for 2005. Total budgeted fixed costs are $200,000. What is the dollar amount of sales necessary to achieve pretax profits of $400,000?

  1. $2,000,000
  2. $1,200,000
  3. $1,500,000
  4. $1,000,000

 

s76.      The Martinez Game Co. produces and sells parlor games. In 2005 sales were $400,000, total variable costs were $200,000, and total fixed costs were $150,000. What is the total revenue required to increase pretax profits by $40,000 and to cover an expected increase of $20,000 in fixed costs?

  1. $300,000
  2. $400,000
  3. $480,000
  4. $520,000

s77.      The breakeven sales volume of the Patin Co. is $800,000. If the variable cost per unit increases next year, then the new breakeven point will be

  1. The same
  2. Higher
  3. Lower
  4. Cannot be determined

s78.      The breakeven sales volume of the Tuck Co. is 800,000 units. If the variable cost per unit increases by $1.50 and the selling price per unit increases by $2.00 next year, then the new breakeven point will be

  1. The same
  2. Higher
  3. Lower
  4. Cannot be determined

 

s79.      The contribution margin ratio of Yoshi enterprises is 60%. If total fixed costs are $200,000, then what is the cost of producing and selling $1,000,000 of Yoshi’s product?

  1. $600,000
  2. $400,000
  3. $900,000
  4. None of the above

s80.      The breakeven point occurs when

  1. Sales equal fixed costs plus contribution margin
  2. Total variable costs equal total contribution margin
  3. Fixed costs plus profit equals sales
  4. Total costs equal total revenue

 

s81.      If the selling price per unit and the variable cost per unit both increase by 5%, what is the effect on the contribution margin per unit and on the contribution margin ratio?

Contribution margin per unit          Contribution margin ratio

  1. Increase Increase
  2. Increase No effect
  3. Decrease No effect
  4. Decrease Increase

s82.      Harvey Enterprises expects sales of $1,000,000 and total variable costs of $250,000 for 2005. Total budgeted fixed costs are $200,000. What is the dollar amount of sales necessary to achieve after-tax profits of $700,000 if the tax rate is 30%?

  1. $1,200,000
  2. $1,600,000
  3. $3,377,333
  4. $4,800,000

s83.      Once a firm reaches the breakeven point, the next unit sold will increase profit by an amount equal to the

  1. Selling price per unit
  2. Variable cost per unit
  3. Contribution margin per unit
  4. Difference between contribution margin and fixed costs

s84.      Harmel, Inc. incurs the following costs each period:

Variable manufacturing costs per unit                   $10

Variable selling costs per unit                                  $2

Total fixed manufacturing costs                     $18,530

Total fixed selling costs                                  $41,370

If the company sells 6,000 units, what price must be charged to earn a pretax profit of $25,000?

  1. $26.15
  2. $13.20
  3. $17.25
  4. $24.15

s85.      Bultena Enterprises projects the following for next year:

Sales                               $300,000

Fixed costs                      $100,000

After-tax profit                 $12,000

Tax rate                                  40%

What is the firm’s margin of safety in revenue?

  1. $200,000
  2. $20,000
  3. $188,000
  4. $50,000

 

 

Use the following information for the next 2 questions.

Old MacDonald had a farm with expected fixed costs for next year of $91,000. The projected selling price per bushel is $12, with variable costs of $5 per bushel.

s86.      How many bushels past the breakeven point does MacDonald have to sell to realize a pretax profit of $37,100?

  1. 18,300
  2. 5,300
  3. 7,420
  4. 13,000

s87.      How much revenue past the breakeven point does MacDonald have to earn to realize a pretax profit of $36,000 if variable costs drop to $3 per bushel?

  1. $61,718
  2. $169,333
  3. $48,000
  4. $54,000

s88.      Wierschem, Inc. projects the following for next year:

Selling price per unit                                              $30

Variable manufacturing costs per unit                   $16

Fixed manufacturing costs                              $74,000

Variable selling costs per unit                                  $2

Fixed administrative costs                               $24,480

After-tax profit                                               $48,000

Tax rate                                                                40%

How many units will Wierschem have to sell to realize the projected after-tax profit?

  1. 12,833
  2. 12,207
  3. 12,749
  4. 14,873

s89.      The Patterson Company is subject to income taxes of 20% on income through $25,000 and 40% on income in excess of $25,000. Projected information for next year follows:

Selling price per unit                                  $40

Variable costs per unit                               $15

Fixed costs                                        $400,000

Sales in units                                         20,000

What is Patterson’s projected after-tax profit?

  1. $65,000
  2. $60,000
  3. $70,000
  4. $75,000

s90.      Tilker Manufacturing sells its product for $40 per unit. Last year variable costs per unit were $15, and fixed costs were $400,000. How many units must be sold this year to earn a pretax profit of $45,000 if variable costs increase by 10%?

  1. 27,813
  2. 18,936
  3. 17,021
  4. 19,778

 

s91.      Which of the following is not an assumption of CVP analysis?

  1. The selling price per unit is constant
  2. Total variable costs vary in proportion with changes in activity levels
  3. The sales mix varies in proportion with changes in activity levels
  4. Employee productivity is constant across all activity levels

s92.      After a company exceeds the breakeven point

  1. The total contribution margin increases
  2. The profit per unit equals the contribution margin ratio
  3. Fixed costs become zero
  4. The contribution margin ratio increases

s93.      Before a company reaches the breakeven point

  1. The total contribution margin is negative
  2. The contribution margin per unit is less than the fixed costs per unit
  3. Total fixed costs are increasing
  4. The contribution margin ratio is negative

s94.      Bauer Company’s sales increased, but its pretax profits did not change. If the increase was within the relevant range, which of the following statements is true?

  1. Bauer’s total fixed costs equal zero
  2. Bauer’s contribution margin is zero throughout the relevant range
  3. Bauer’s tax rate must have changed
  4. None of the above; this could not have happened

s95.      Southwest Log Kits makes kits for pool cabanas. Currently, the company does not advertise and has a low selling price for its kits compared to competitors. Next year, the company plans to increase the selling price and begin a wide advertising campaign. Which of the following statements is true?

  1. Southwest’s breakeven point will be lower next year
  2. Southwest’s operating leverage will be higher next year if the same number of units is sold
  3. Southwest’s profits will be higher next year
  4. Southwest’s margin of safety will be lower next year

s96.      Bhuyan Company’s budgeted profit for next year is lower than this year’s actual profit. The selling price, variable cost per unit, and total fixed costs did not change. Which of the following is false?

  1. Bhuyan’s margin of safety next year will be lower than this year
  2. Bhuyan’s breakeven point is the same last year as this year
  3. Bhuyan’s degree of operating leverage will be higher this year than last year
  4. Bhuyan’s contribution margin ratio this year will be lower than last year

s97.      Mike Manager prefers alternatives that lower the degree of operating leverage. Which of the following statements about Mike is probably true?

  1. Mike loves to gamble in Las Vegas
  2. Mike is a pessimist
  3. Mike likes to avoid risk
  4. Both (b) and (c) are likely to be true

s98.      Melissa Manager expects next year’s degree of operating leverage to increase. Which of the following statements is consistent with Melissa’s expectations?

  1. Next year’s activity level is budgeted to be lower than this year’s
  2. Next year’s total fixed costs are expected to be lower than this year’s
  3. Next year’s selling price is expected to increase
  4. Next year’s variable costs per unit are expected to decrease

 

 

Use the following information for the next 2 questions.

The Harris Co. sells three products in a ratio of 3:2:6. The contribution margins for the units are $10, $25, and $30, respectively. Total fixed costs are $119,600.

s99.      What is the breakeven point in total number of units?

  1. 20,420
  2. 10,120
  3. 15,180
  4. 5,060

s100.    How many of each product must be sold to realize a pretax profit of $39,000?

  1. 450; 300;     900
  2. 1,830; 1,220;  3,660
  3. 1,380; 920;     2,760
  4. 7,320; 4,880;  14,640

s101.    Johnston Co. has total variable costs equal to 40% of sales. Fixed costs are $120,000. What is the breakeven point in revenues?

  1. $300,000
  2. $200,000
  3. $120,000
  4. Cannot be determined

s102.    Ramser Co. has total variable costs equal to 40% of sales. Fixed costs are $120,000. What is the breakeven point in units?

  1. 300,000
  2. 200,000
  3. 480,000
  4. Cannot be determined

 

Use the following information for the next 2 questions.

Blackmon Co. is deciding between two compensation plans. In Plan A, salaries are $100,000 and the commission is $2 per unit. In Plan B, salaries are $40,000 and the commission is $4 per unit.

s103.    At what level of sales, in units, is Blackmon indifferent between the two compensation plans?

  1. 30,000
  2. 20,000
  3. 10,000
  4. Cannot be determined

s104.    Which of the following statements is true?

  1. If expected sales are lower than the indifference point, Blackmon would prefer Plan A
  2. Plan A has a lower breakeven point than Plan B
  3. If Plan B is adopted, the degree of operating leverage will decrease
  4. The margin of safety will be larger if Plan A is adopted

 

 

Multiple Choice from Web Quizzes (Available on Student Web Site)

w105.   All of the following data can be used to develop CVP analysis except

  1. Historical cost information
  2. Data that reflects anticipated future changes
  3. Irrelevant costs
  4. Data found within the accounting records

 

w106.   The contribution margin is

  1. Used to determine the amount of fixed costs needed
  2. Total fixed costs plus total variable costs
  3. The dollars that contribute to fixed costs and then to profit once fixed costs are covered
  4. Not necessary when we solve for the volume of units sold at target profit

w107.   Sales mix reflects

  1. The weighted average contribution margin per unit
  2. The average price per product when there are a variety of products
  3. The number of products and each product’s proportional weight within total sales
  4. Total number of units produced

w108.   The margin of safety is the

  1. Volume of units or revenues needed to cover fixed costs
  2. Amount by which volume of units or sales can drop before an organization reaches the breakeven point
  3. Amount of confidence decision makers have in a CVP analysis
  4. Unrelated to operating leverage

w109.   Degree of operating leverage is

  1. The contribution margin divided by profit
  2. The ratio of total variable costs to total revenues
  3. The volume of revenue needed to breakeven
  4. Only important when the organization is very profitable

w110.   When performing CVP analysis for a single product

  1. The contribution margin per unit can be used to solve for the breakeven point
  2. The price per unit is always needed
  3. Fixed costs are usually low
  4. Operating leverage is usually high

w111.   When performing CVP analysis for a multi-product organization

  1. The sales mix is not important
  2. There is no relationship between changes in sales mix and changes in total revenue
  3. The contribution margin ratio can be used to solve for the breakeven point
  4. There is no relationship between changes in sales mix and changes in total variable cost

w112.   The contribution margin ratio is

  1. Total variable cost divided by total revenue
  2. Total contribution margin divided by total revenue
  3. The same as the margin of safety
  4. Total fixed costs divided by price minus variable cost

w113.   Higher operating leverage

  1. Should be lowered
  2. Increases risk of loss if operations are near the breakeven point
  3. Reduces risk of loss if operations are near the breakeven point
  4. Does not affect the risk of loss regardless of the level of operations

w114.   If the sales mix changes

  1. The fixed costs will change
  2. The change in mix affects the contribution margin ratio
  3. Nothing else changes
  4. Each product’s variable cost will change

 

w115.   The relevant range is important because

  1. CVP assumptions are not valid when operations are in the relevant range
  2. Operations cannot be in any other range
  3. Fixed and variable costs may change outside the relevant range
  4. It describes the limits of operations

w116.   A cost function is used in CVP analysis to predict

  1. Total revenue at the breakeven point
  2. The volume of sales
  3. The relevant range of operations
  4. The number of sales needed for the next period

w117.   Information from CVP analysis helps with all of the following decisions except

  1. The appropriate volume of production
  2. Which products to emphasize
  3. Whether to lay off a specific employee
  4. The most effective cost structure

w118.   Compared to organizations with low operating leverage, organizations with high operating leverage have

  1. Higher risk of loss if they are close to the breakeven point
  2. Lower risk of loss if they are close to the breakeven point
  3. The same level of risk of loss as low operating leverage firms when they are close to the breakeven point
  4. A low proportion of fixed costs in total cost

w119.   CVP analysis is most likely to be used for

  1. A decision to merge two organizations
  2. Separating mixed costs into fixed and variable portions
  3. Predicting the costs of a long term project
  4. Predicting profits across a range of operations

w120.   (CMA) A widely used approach that is used to recognize uncertainty about individual economic variables while obtaining an immediate financial estimate of the consequences of possible prediction errors is

  1. Expected value analysis
  2. Learning curve analysis
  3. Sensitivity analysis
  4. Regression analysis

w121.   At the breakeven point, the contribution margin equals total

  1. Variable costs
  2. Sales revenues
  3. Selling and administrative costs
  4. Fixed costs

w122.   (CPA)  Del Co. has fixed costs of $100,000 and breakeven sales of $800,000.  What is its projected profit at $1,200,000 in sales?

  1. $50,000
  2. $150,000
  3. $200,000
  4. $400,000

 

 

 

Matching

  1. MGZ Corporation sells its product for $25 per unit. Its cost function is TC = $390 + $12Q.  Match the lettered items on the right with the appropriate item on the left.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.
____    1.   $12

____    2.   $13

____    3.   $25

____    4.   $250

____    5.   $390

____    6.   30 units

 

    A.  Breakeven point

B.   Contribution margin per unit

C.   Loss area

D.  Profit area

E.   Profit at 50 units

F.   Slope of the cost line

G.  Slope of the revenue line

H.  Total fixed costs

I.    None of the above

  1. EWL Corporation sells its product for $130 per unit. Its total cost function is TC = $15,000 + $80Q.  EWL’s production capacity is 500 units per month.  It normally operates at 80% of capacity.  Match the lettered items on the right with the appropriate item on the left.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.
____    1.   Actual unit activity minus Breakeven point in units

____    2.   Breakeven point in sales dollars

____    3.   Breakeven point in units

____    4.   Contribution margin / Profit

____    5.   Margin of safety in revenue dollars under normal operations

____    6.   Margin of safety in units when operating at full capacity

    A.  Margin of safety

B.   Degree of operating leverage

C.   100

D.  300

E.   400

G.  $15,000

H.  $39,000

I.    200

J.    None of the above

 

 

  1. Match the lettered items on the right with the appropriate item on the left. Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.
____    1.   (Fixed costs + Target profit) / (Price per unit – Variable cost per unit)

____    2.   A diagram that shows changes in profitability based on activity

____    3.   A technique that examines changes in profit based on changes in volume, prices and costs

____    4.   Fixed costs remain constant in total within the relevant range

____    5.   Evaluating performance

____    6.   Planning and monitoring operations

____    7.   Preparing financial statements

____    8.   Proportion of different products or services a company sells

____    9.   Revenue and cost function linearity

____  10.   Revenue minus Variable costs

    A.  A use of CVP information

B.   An uncertainty, limitation, or assumption

C.   Breakeven point

D.  Contribution margin

E.   Cost-volume-profit analysis

F.   Cost-volume-profit graph

G.  Sales mix

H   Units needed to achieve target profit

I.    None of the above

 

 

Exercises

  1. Desert Blades Manufacturing is considering the production of a new type of in-line skate, the Razor. The skates sell for $80.00 per pair, and direct materials and direct labor will cost about $47.20 per pair.  Fixed costs will increase by $984,000 per year because a new manufacturing assembly line will be required.  The income tax rate is 30%.
  2. What is the breakeven point for the Razor?
  3. How many units must Desert Blades sell to earn $492,000 after taxes?
  4. List the assumptions made in this CVP analysis.
  5. Julie’s Jewels sells cubic zirconium (fake diamond) rings for $80 each. The projected income statement for 2006 follows:

Sales                                                          $4,000,000

Variable costs                                            (2,200,000)

Contribution Margin                              1,800,000

Fixed costs                                                (1,600,000)

Pretax profit                                         $   200,000

 

  1. Compute the contribution margin per ring and the number of rings that must be sold to break even.
  2. Compute the contribution margin ratio and the breakeven point in total revenue.
  3. Suppose the total revenues were $200,000 greater than expected. What is the total pretax profit?
  4. What is the margin of safety in number of rings?
  5. Assume a tax rate of 25%. How many rings must be sold to earn an after-tax profit of $300,000?

 

  1. Quarterly budget data for Hamburger Haven

Sales                                                                                     $100,000

Costs:

Ingredients                                                $30,000

Hourly employees                                      20,000

Manager’s salary                                         10,000

Napkins, straws, and miscellaneous            15,000

Rent, marketing, and administration           20,000

Total Costs                                                                    95,000

Budgeted pretax profit                                                          $    5,000

 

Hourly employees go home when the outlet is not busy.  The rent, marketing, and administration costs include $16,000 that does not vary proportionately with sales volumes.  The income tax rate is 20%.

  1. Compute the revenues needed to achieve a target after-tax income of $45,000.
  2. What is the margin of safety in revenue?
  3. SDZ Corporation produces and sells a single product. Its selling price is $15 per unit, and variable cost per unit is $12.  Total fixed costs per month are $3,000.
  4. What is SDZ’s contribution margin per unit?
  5. Calculate the monthly breakeven point in units.
  6. How many units must SDZ sell for a pretax target profit of $10,000 per month?
  7. NTQ Corporation produces and sells a single product with a price of $12 per unit and variable costs of $8 per unit. Total fixed costs per month are $8,000.
  8. Calculate NTQ’s contribution margin per unit.
  9. How many units must NTQ sell monthly to break even?
  10. If fixed costs increase by $500 per month, how many extra units must NTQ sell each month to continue breaking even?
  11. Heesacker Co. sells a product with a $2 per unit contribution margin. Fixed costs are $70,000 and the tax rate is 60%.  What amount of revenue is needed to obtain an after-tax profit of $30,000 if the unit selling price is $5?
  12. FTH Corporation produces and sells two products: regular scooters and electric scooters.  Last month, the company produced and sold 500 regular and 300 electric scooters.  Last month’s per-unit financial data for both models is presented below:

Regular            Electric

Selling price                                 $100                $150

Variable cost                                    30                    40

Product line fixed cost                     25                    45

Corporate fixed cost                        10                    10

Product line fixed costs can be avoided if the product is dropped, but corporate fixed costs can only be avoided if FTH goes out of business entirely.  Calculate the following amounts:

  1. Total fixed product line costs for each product
  2. Total corporate fixed costs
  3. Overall corporate breakeven point in sales dollars assuming a constant sales mix
  4. Breakeven point in sales dollars for regular scooters, ignoring corporate fixed costs
  5. Breakeven point in sales dollars for electric scooters, ignoring corporate fixed costs

 

  1. CTR Corporation produces and sells three products: chairs, tables, and artificial plants.  Data related to the three products appears in the table below:

Artificial

Chairs              Tables              Plants

Expected sales volume (units)                   800                  200                  150

Price per unit                                        $50.00             $70.00             $20.00

Variable cost per unit                              12.00               30.00                 3.00

CTR’s total fixed costs are $9,000, and its tax rate is 30%.  Based on the preceding information, calculate the following amounts:

  1. Expected sales mix in units for each product as a percent of total unit sales
  2. Expected sales mix in revenues for each product as a percent of total revenue
  3. Expected after-tax income for CTR as a whole
  4. Breakeven point in units for CTR as a whole
  5. RSE Corporation sells its product for $10 per unit. Its variable cost is $3 per unit, and total fixed costs are $700.  Calculate the following:
  6. Breakeven sales in units
  7. Margin of safety in units if RSE sells 150 units
  8. Margin of safety in revenues if RSE sells 200 units
  9. Estimated income or loss if RSE sells 75 units
  10. RSE Corporation sells its product for $10 per unit. Its variable cost is $3 per unit, and total fixed costs are $700.  Assuming next period’s estimated sales are 250 units and that 250 units is within the relevant range, calculate the following amounts:
  11. Degree of operating leverage
  12. Margin of safety in units
  13. Margin of safety in revenues
  14. Estimated income or loss (indicate which)
  15. Dakota Gold sells gold bracelets for $40.00 each. The manufacturing cost (all variable) is $12 per bracelet.  The company is planning to rent an exhibition booth to display and sell the jewelry in a kiosk at a local mall.  The mall management allows three options for each kiosk vendor.  They are:

*    Pay a fixed booth fee of $40,000.

*    Pay a $33,600 fee plus 10% of all revenue from candy sold at the convention.

*    Pay 25% of all revenue from merchandise sold at the kiosk.

  1. Compute the breakeven sales in units for each option.
  2. Which option should Dakota Gold choose, assuming sales are expected to be 2,000 bracelets per month?
  3. At what level of sales in units should the company be indifferent between options 2 and 3?
  4. Which option has the highest risk of loss for the organization? Explain.

 

 

 

More Difficult Exercises

These exercises require more complex computations or present information differently than in the textbook.

  1. SLP Corporation produces and sells a single product for $15 per unit. Variable cost per unit is $6, and total fixed costs currently are $18,000.  SLP’s owner, Lee Cord, can decrease variable cost per unit to $4 if he increases total fixed costs by 20%, with no change in product price or demand.  Lee normally sells 3,000 units each month.
  2. Calculate total expected profit under current conditions.
  3. Calculate total expected profit under the proposed new conditions.
  4. Calculate the indifference point (in units) between the two alternatives.
  5. If Lee expects his monthly sales (in units) to increase by 30% within two months, should he stay with his current cost structure or move to the proposed new structure? Justify your answer with appropriate computations.
  6. A product with a 40% contribution margin broke even at a sales level of $120,000. New safety regulations will raise fixed costs by $20,000.  If no other cost changes occur, what will be the new breakeven point?
  7. EDC Corporation sells a single product for $25 per unit, with variable costs of $10 per unit. Annual fixed costs are $30,000.
  8. Assuming fixed costs are spread evenly throughout the year, what is EDC’s monthly breakeven point in units?
  9. EDC currently sells 500 units per month. What is its annual profit?
  10. If EDC increases its selling price by 20% and all other factors (including demand) remain constant, by what percentage will annual profits increase?
  11. Assume the price remains at $25 per unit and variable costs remain at $10 per unit, but fixed costs increase by 30% annually. Calculate the percentage increase in unit sales required to achieve the same level of annual profit calculated in part (b).

 

 

Short Answer

  1. SBN Corporation produces and sells custom cabinets. The following facts apply to its operation:
  • Cabinets are produced in two colors: brown and black.
  • Custom cabinets are priced from $300 to $500.
  • Last year, SBN’s profit was $45,000.
  • SBN finances its assets with debt (60%) and equity (40%).
  • SBN operates in a competitive market.
  • SBN has a relatively high degree of operating leverage.
  • Variable cost per unit is generally 40% of the product price.

Managers need to perform a breakeven analysis, but they are not sure which information they need.  From the list above, identify relevant information to calculate the breakeven point with cost-volume-profit analysis.  Discuss why each item you identify is relevant to the calculation.

  1. The managers of SBN Corporation are considering an increase in advertising costs that should increase sales by 10%. Describe the pros and cons of using cost-volume-profit analysis for this decision.
  2. SBN Corporation produces and sells custom cabinets in two colors: brown and black.  SBN sells two brown cabinets for every black cabinet sold.  Identify at least three reasons why this sales mix might change.

 

  1. SBN Corporation produces and sells custom cabinets. The following facts apply to its operation:
  • Cabinets are produced in two colors: brown and black.
  • Custom cabinets are priced from $300 to $500.
  • Last year, SBN’s profit was $45,000.
  • SBN finances its assets with debt (60%) and equity (40%).
  • SBN operates in a competitive market.
  • SBN has a relatively high degree of operating leverage.
  • Variable cost per unit is generally 40% of the product price.

The managers are uncertain about the volume of sales for the next period because mortgage rates are the lowest they have been in 30 years, driving a large increase in home sales and remodeling.  How can the accountant help the managers use CVP analysis to explore alternatives around this expected housing boom?

  1. To perform CVP analysis, a number of assumptions are made about revenues and costs across a range of activity. List these assumptions.  Also list one reason why each assumption might not hold.
  2. Suppose a service organization has a mixed cost function. When it experiences a 5% increase in sales, income increases by more than 5%.  Explain why this occurs.
  3. CVP analysis has a number of uses. Describe two of these.
  4. Define operating leverage and explain its importance to managers and accountants when the business environment in which they operate becomes more risky.
  5. Franco’s Flowers is a wholesale flower shop that sells two types of flowers, roses and carnations, by the dozen. The contribution margin on roses is higher than the contribution margin on carnations.  During February, Franco’s sells twice as many roses as in other months, but the same amount of carnations as in other months.  Will the contribution margin in February be higher or lower than in other months?  Explain your answer.
  6. To calculate a breakeven point for an organization that has multiple products, the weighted average contribution margin is calculated. What are the components of a weighted average contribution margin?
  7. Hammond House is a not-for-profit museum. The directors of the museum are considering whether to increase the museum’s admission prices.  The museum charges one price for adults and a lower price for children.  The museum’s accountant performed CVP analysis to help the directors make this decision.  Before conducting the analysis, the accountant estimated the following information for next year:  admission volumes for adults and children, fixed costs, variable cost per admission, and donation revenues.  Each of the following is an assumption of CVP analysis.  For each assumption, list two examples of factors that could cause the assumption to be violated for Hammond House.

*    Fixed costs remain constant in total

*    Sales mix remains constant

 

 

Problems

  1. Dr. Alisa Fleur is a dentist who charges (on average) $90 per patient hour for her services. She incurs the following office-related costs per month:

Office rent                                      $1,000

Secretary/receptionist/assistant          2,300

Utilities                                                400

Total fixed costs                       $3,700

Dr. Fleur is required to obtain continuing education of 40 hours per year, and she budgeted this cost at an average cost of $800 per month.  Due to the nature of her practice, variable costs are minimal, amounting to only $15 per patient hour.

 

  1. How many patient hours does Dr. Fleur need to generate each month to break even?
  2. Dr. Fleur would like an after-tax income of $7,000 per month. She is in a 30% tax bracket.  How many patient hours does she need each month to produce this income?
  3. The doctor enjoys scuba diving in summer and skiing in winter. To pursue these hobbies, she wants to know if she could work 6-hour days and 4-day weeks and still earn the level of income she desires from part (b) above (assume 4 weeks per month).  What average charge per patient hour will generate this level of income?
  4. Discuss whether the actual amount for each of the fixed costs is likely to vary from the amounts shown above during the next year.
  5. Music Masters produces and sells two CDs, Rap Runner which has a contribution margin of $4, and Mo’ Rap Now which has a contribution margin of $10. The planned sales mix is 5 CDs of Rap Runner for each CD of Mo’ Rap Now.  Fixed costs are $42,000.
  6. What is the breakeven point in units for the two products?
  7. Define sales mix generally and as it is used in this problem.
  8. Explain why managers and accountants cannot know for certain what the sales mix will be.
  9. The managers at Music Masters have worked with Mr. Iced Tee, Rap Runner’s artist, for a number of years. A strong bond has developed between the artist and managers.  However, the artist on Mo’ Rap Now is difficult to work with.  Although sales for the last several CDs featuring Mr. Iced Tee have been disappointing, the managers are confident that this new CD will sell well.  Assume that the managers are biased.  How might their bias affect business decisions and profitability at Music Masters?
  10. [Requires Chapter 2] Data for the most recent four months of operations for the Newtown Family Practice Clinic appear below:

March                     April                       May

Patient-visits                         1,600                     1,500                     1,900

Costs:

Physicians’ salaries     $60,000                 $60,000               $  90,000

Nurses’ salaries             20,000                   20,000                   30,000

Supplies                          2,100                     2,250                     2,850

Utilities                              600                        480                        400

Rent                                1,000                     1,000                     1,000

Miscellaneous                 9,400                     9,000                   10,600

Total                           $86,000                 $85,680               $125,930

At the beginning of May, part-time employees were hired to handle increasing numbers of patients.

 

  1. Newtown Family Practice Clinic is a not-for-profit medical clinic serving low income patients. Develop a cost function that can be used to forecast June costs.  Explain the decisions you made in developing the cost function.
  2. If the average fee per patient-visit is $60, estimate how many patient-visits would be required in June to break even.
  3. If 1,900 patient visits are expected during June, what average fee must be set for the clinic to break even?
  4. List factors that would affect patient volumes in a medical clinic.

 

  1. This year Bigtree County made a $400,000 lump-sum budget appropriation to a not-for-profit agency that counsels substance abusers. The county requires the entire appropriation to be spent by the end of the fiscal year.  The variable costs for pharmaceuticals and supplies used by clients average $400 per patient per year.  Fixed costs are $150,000.  The accountant at the agency is developing a CVP analysis for the agency director.  She has asked you to do the following.
  2. Compute the number of clients that could be served per year.
  3. Suppose the total budget for the following year is reduced by 10%. Fixed costs will remain the same.  The same quality of client service will be maintained.  Compute the number of clients that could be served in a year.
  4. Continue to assume a budget reduction of 10%. Fixed costs are to remain the same.  The drug counselors determine the amount of pharmaceuticals and supplies that each client needs.  The agency director does not want to reduce the number of clients served from the original amount in part (a).  Compute the amount by which pharmaceuticals and supplies need to be reduced to maintain current volumes of services.
  5. List reasons why the actual cost of pharmaceuticals and supplies cannot be estimated with complete accuracy.
  6. Organic Strawberry Growers provide gourmet organic strawberries for restaurants in the local area. The income statement for last year follows (based on sales of 4,000 cases):

Income Statement for Last Year

Revenue                                                                                     $400,000

Costs:

Wages for pickers and packers               $200,000

Packing materials                                        40,000

Lease of land and growing costs                 50,000

Administration and selling                          95,000

Inspection wages                                        10,000                 395,000

Pretax income                                                                       5,000

Income taxes @ 30%                                                                        3,000

After-tax income                                                            $    2,000

Pickers, packers, and inspectors are employed on an hourly basis and can be laid off whenever necessary.  Salespeople mostly deliver the product and are paid on a salaried basis.

  1. What is the cost function for Organic Strawberry Growers? Explain your assumptions about cost behavior.
  2. What is the breakeven point for this business?
  3. What sales volume would be necessary for an after-tax profit of $5,000?
  4. The manager believes that he can raise and sell 5,000 cases next year. Estimate after-tax profits at that level of sales.
  5. Over the last several years, 4,000 cases of strawberries have been grown and sold. What does this information suggest about the quality of information you calculated for part (d)?
  6. Describe reasons why the cost function you developed for sales of 4,000 cases might not hold for sales of 5,000 cases.
  7. Trimex Corporation manufactures desk lamps. Following is information for next year’s operations, based on an estimated volume of 20,000 units:

Expected revenues                                     $1,000,000

Unit costs:

Direct materials                                           $  6.25

Direct labor                                                   15.75

Variable overhead                                          5.50

Fixed manufacturing overhead                       2.50

Total                                                     $30.00

Other fixed costs:

Administration, marketing, etc.               $225,000

Income tax rate                                                     30%

  1. What is the breakeven point for next year?
  2. What is next year’s projected after-tax income?
  3. Suppose the managers set a target after-tax income of $100,000. Estimate the number of units that must be sold.
  4. Suppose the marketing department would like to spend $22,500 on a new promotion for this product. What minimum amount of new revenue should be generated from this expenditure to make it worthwhile?
  5. Identify reasons why the managers cannot be certain that the new promotion would generate the amount of new revenue you calculated in part (d).
  6. Anya is the marketing manager at Education Plus, an Internet retail company that sells children’s educational books and supplies. Anya believes that the company could increase sales by $5 million next year if the company spends a fixed $2 million on advertisements with Google and other popular search engines.  Using CVP analysis, she estimated that her proposal would increase pretax income by $0.5 million.
  7. Discuss possible reasons why Anya might be biased in her revenue and cost estimates.
  8. Discuss how uncertainties and biases affect interpretation of CVP results.
  9. Assume that Anya is not biased in her analysis. How could sensitivity analysis help her analyze the reasonableness of her estimates?
  10. Discuss how consideration of the company’s degree of operating leverage could affect whether the top managers accept Anya’s proposal.

True / False

  1. When goods are customized, all costs are easily traced to individual cost objects.
  2. Overhead allocation is the process of tracing costs to products or services.
  3. Job costing can be used in both manufacturing and service organizations.
  4. Direct material and direct labor costs are typically traced to individual jobs in a job costing system.
  5. In a job costing system, costs flow out of work in process into finished goods inventory.
  6. Overhead is typically allocated to jobs in a job costing system, rather than being traced directly.
  7. A “job” refers to a group of individual overhead costs that are accumulated for a particular purpose.
  8. The first step in overhead allocation is to identify the cost object.
  9. Identifying a cost driver is the first step in allocating overhead in a job costing system.
  10. A separate cost allocation base must be chosen for each job in a job costing system.
  11. Actual costing and normal costing are two different names for the same overhead allocation system.
  12. Both actual costing and normal costing systems use the actual quantity of the allocation base to assign overhead costs to jobs.
  13. In actual costing systems, overhead is allocated using the following formula: actual allocation base volume ¸ actual allocation rate.
  14. In normal costing systems, overhead is allocated using the following formula: normal allocation base volume ¸ normal allocation rate.
  15. One of the primary differences between actual and normal costing systems is their treatment of direct material and direct labor costs.
  16. In a job costing system, costs are very accurate because jobs are customized.
  17. Information from job costing systems is subject to uncertainties, and implementing a job costing system requires judgment.
  18. Because overhead costs are allocated in a job costing system, they can be considered “variable” for the purpose of decision making.
  19. Direct costs are subject to less uncertainty than indirect costs in a job costing system, but managers still exercise judgment regarding direct cost tracing.
  20. Allocated overhead generally does not accurately measure a job’s overhead resources.
  21. Spoilage, rework, and scrap are irrelevant in job costing systems.
  22. Spoilage is typically identified as part of the overhead allocation process.
  23. Only spoiled goods are reworked.
  24. Reworked units can always be sold at the regular market price.
  25. Scrap can be sold, discarded, or used in other creative ways.
  26. Potential loss of reputation and market share are opportunity costs of spoilage and rework.
  27. Although they may be significant in amount, quality costs are often measured imprecisely.
  28. Quality initiatives have both quantitative and qualitative benefits.
  29. Accounting processes influence manager behavior in many organizations.

 

 

Multiple Choice

 

Use the following information for the next 2 questions.

Direct               Direct                Direct

Materials        Labor Cost       Labor Hours

Job 200             $   500                $800                    40

Job 201                  350                  200                    10

Job 202               1,000                  600                    30

Franks Fabricating uses job costing and applies overhead using a normal costing system and uses direct labor cost as the allocation base.  This period’s estimated overhead cost is $100,000 and estimated direct labor cost of $50,000 and 2,500 direct labor hours.

  1. What is the overhead allocation rate?
  2. 200%
  3. 50%
  4. 30%
  5. 60%
  6. What is the total manufacturing cost of Job 201?
  7. $550
  8. $950
  9. $850
  10. $1,500

 

Use the following information for the next 2 questions.

Direct               Direct                Direct

Materials        Labor Cost       Labor Hours

Job 400                $200                $800                    40

Job 401                  250                  200                    10

Job 402                  500                  600                    32

O’Hare Sisters Manufacturing uses job costing and applies overhead using a normal costing system using direct labor hours as the allocation base.  This period’s estimated overhead cost is $400,000, estimated direct labor cost is $500,000 and estimated direct labor hours are 25,000.  This period actual overhead cost was $420,000, actual direct labor cost was $390,000, and actual direct labor hours were 20,000.

  1. What is the overhead allocation rate?
  2. $21/hour
  3. $10/hour
  4. $16/hour
  5. $18/hour
  6. What is the total manufacturing cost of Job 400?
  7. $1,200
  8. $1,000
  9. $1,320
  10. $1,640

 

Use the following information for the next 2 questions.

Direct               Direct                Direct

Materials        Labor Cost       Labor Hours

Job 400                $200                $800                    40

Job 401                  250                  200                    10

Job 402                  500                  600                    32

Sparkle Company uses job costing and applies overhead using an actual costing system using direct labor hours as the allocation base.  This period’s estimated overhead cost is $400,000, estimated direct labor cost is $500,000 and estimated direct labor hours are 25,000.  This period actual overhead cost was $420,000, actual direct labor cost was $390,000, and actual direct labor hours were 20,000.

  1. What is the overhead allocation rate?
  2. $21/hour
  3. $10/hour
  4. $16/hour
  5. $18/hour
  6. What is the total manufacturing cost of Job 402?
  7. $1,100
  8. $1,772
  9. $1,320
  10. $1,640

 

Use the following information for the next 2 questions.

Professional      Other Direct      Professional

Labor Cost             Costs            Labor Hours

Client 57           $2,000                $800                    20

Client 58             1,000                  200                    10

Client 59             5,000                  600                    50

Allen’s Accounting Services uses job costing and applies overhead using a normal costing system using professional labor hours as the allocation base.  This period’s estimated overhead cost is $400,000, estimated professional labor cost is $800,000 and estimated direct labor hours are 8,000.  This period actual overhead cost was $426,400, actual direct labor cost was $820,000, and actual direct labor hours were 8,200.

  1. What is the overhead allocation rate?
  2. $60/hour
  3. $55/hour
  4. $52/hour
  5. $50/hour
  6. What is the total cost for Client 58?
  7. $1,300
  8. $1,200
  9. $1,720
  10. $1,700

 

Use the following information for the next 4 questions.

Kelita’s Kar Kare Kompany had the following cost and inventory data for the month.

Costs incurred for the month:

Direct labor                               $6,900

Indirect labor                              1,500

Direct materials purchased          4,500

Factory utilities                           2,200

Factory depreciation                   3,000

Factory supervision                    1,200

 

Inventories:

Ending           Beginning

Direct materials             $1,500             $1,800

Work-in-process             4,500               4,050

Finished goods                6,000               5,250

 

  1. What were the direct materials available for the month?
  2. $4,500
  3. $6,000
  4. $6,300
  5. $7,800
  6. What were the direct costs of production incurred during the month?
  7. $12,000
  8. $11,700
  9. $10,200
  10. $10,500
  11. Assume that the total production costs incurred for the month were $15,000. What was the cost of jobs completed?
  12. $14,550
  13. $19,050
  14. $15,000
  15. $15,450
  16. Assume that total production costs incurred for the month were $15,000. What was the cost of goods sold?
  17. $13,800
  18. $15,300
  19. $19,800
  20. $20,550

 

Use the following information for the next 3 questions.

Asadi Company uses a job costing system and allocates overhead using an estimated overhead allocation rate based on direct labor hours.  Information for 20×5 is as follows:

Estimated              Actual

Manufacturing overhead                 $166,500         $165,000

Direct labor hours                               50,000             60,000

  1. The estimated overhead allocation rate for 20×5 was
  2. $2.75
  3. $3.30
  4. $3.33
  5. $2.76
  6. The overhead allocated to work-in-process during 20×5 before the year-end adjustment was
  7. $199,800
  8. $165,000
  9. $166,500
  10. $198,000
  11. The amount of over- or underapplied overhead for 20×5 was
  12. $1,500 underapplied
  13. $3,000 underapplied
  14. $1,500 overapplied
  15. $34,800 overapplied

 

  1. Following are the budgeted costs for a manufacturing plant producing custom products:

Materials (70% direct and 30% indirect)                     $15,000

Labor (60% direct and 40% indirect)                            12,000

Supervision                                                                     5,000

Depreciation                                                                 10,000

Utilities                                                                           4,860

Total                                                               $46,860

The company uses a normal costing system, and overhead is allocated on the basis of direct labor cost. If actual direct labor cost was $7,500, the overhead allocated was

  1. $29,160
  2. $20,688
  3. $30,375
  4. $48,813

 

Use the following information for the next 2 questions.

Allen, Inc. has budgeted $120,000 in variable overhead and $72,000 in fixed overhead for the current month.  8,000 custom units were expected to be produced using 60,000 machine hours.  During the month, Allen actually used 68,096 machine hours and produced 8,960 units. Actual overhead costs were: $132,000 variable and $73,600 fixed.

  1. Assume Allen uses an actual costing system. The amount of over- or underapplied overhead for the current month is
  2. $9,440 overapplied
  3. $12,307 overapplied
  4. $0
  5. $13,600 overapplied
  6. Assume Allen uses a normal costing system. The variable overhead allocated would be
  7. $136,192
  8. $132,000
  9. $134,400
  10. $120,000
  11. Kelita’s Kar Company projects the following costs:

Direct material                                  $300,000

Direct labor                                         500,000

Indirect labor wages                              50,000

Sales commissions                                30,000

Production foremen salaries                 75,000

Production equipment leases              125,000

Production depreciation                        60,000

Property taxes-plant                              25,000

If overhead is allocated on the basis of direct labor hours and 25,000 direct labor hours are budgeted for next year, the estimated overhead allocation rate will be

  1. $13.40 per direct labor hours
  2. $14.60 per direct labor hours
  3. $12.40 per direct labor hours
  4. $33.40 per direct labor hours
  5. A firm had the following balances at the end of the period

Work in process                                    $   400

Finished goods                                           600

Cost of goods sold                                  1,000

Overapplied overhead                               400

It was determined that the overapplied overhead should be treated as immaterial.  After any adjustments for overapplied overhead are made, the balance of work in process would be

  1. $320
  2. $400
  3. $480
  4. $534
  5. Assume there is $2,000 of overapplied fixed overhead, which is to be prorated. Current balances of selected accounts are:

Work in process                      $15,000

Finished goods                          25,000

Cost of goods sold                    60,000

The adjusting journal entry is

  1. Overapplied fixed overhead 2,000

Work in process                                                           300

Finished goods                                                             500

Cost of goods sold                                                    1,200

  1. Work in process 300

Finished goods                                                 500

Cost of goods sold                                        1,200

Overapplied fixed overhead                                     2,000

  1. Fixed overhead control 2,000

Work in process                                                           300

Finished goods                                                             500

Cost of goods sold                                                    1,200

  1. Work in process 300

Finished goods                                                 500

Cost of goods sold                                        1,200

Fixed overhead allocated                                          2,000

  1. For which of the following products would a job costing system be appropriate?
  2. Brewery, where each brand is a produced in a separate batch process
  3. Jewelry store that manufactures and sells handcrafted jewelry
  4. Cement kiln, where a single identical type of cement product is manufactured
  5. Chemical plant, where each polymer is produced in a separate continuous process
  6. Assume that variable overhead is overapplied by $200 and fixed overhead is underapplied by $100. If these variances are considered immaterial, the effect on cost of goods sold is
  7. $300 increase
  8. $100 increase
  9. $300 decrease
  10. $100 decrease
  11. When overhead is underapplied
  12. Cost of goods sold is understated
  13. Work in process inventory is overstated
  14. Gross profit is understated
  15. Finished goods inventory is overstated
  16. The denominator in an overhead allocation rate for normal costing is
  17. Actual overhead costs
  18. Estimated activity level
  19. Estimated overhead costs
  20. Actual activity level
  21. Normal costing overhead rates are developed at the beginning of each period based on the
  22. Actual overhead costs of the previous period
  23. Actual activity level of the previous period
  24. Direct labor hours at maximum capacity
  25. Expected activity level of the coming period
  26. A costing system that charges jobs with actual direct costs and uses an estimated overhead allocation rate is called a(n)
  27. Actual costing system
  28. Normal costing system
  29. Process costing system
  30. Activity-based costing system
  31. For which costing system is overhead allocated on the basis of the actual direct labor hours worked?
  32. Actual costing system
  33. Normal costing system
  34. Process costing system
  35. Activity-based costing system
  36. Which costing system does not include over- or underapplied overhead?
  37. Actual costing system
  38. Normal costing system
  39. Process costing system
  40. Activity-based costing system
  41. In a normal costing system, which of the following costs are traced to each job?

Direct Materials     Direct Labor

  1. Yes Yes
  2. No Yes
  3. No No
  4. Yes No
  5. In an actual costing system, the overhead allocation rate is calculated as
  6. Actual overhead cost + actual quantity of allocation base
  7. Actual overhead cost ¸ actual quantity of allocation base
  8. Actual quantity of allocation base ¸ actual overhead cost
  9. Actual overhead cost ¸ actual quantity of allocation base
  10. In a normal costing system, the overhead allocation rate is calculated as
  11. Estimated overhead cost / estimated quantity of allocation base
  12. Estimated overhead cost / actual quantity of allocation base
  13. Actual overhead cost / actual quantity of allocation base
  14. Actual overhead cost / estimated quantity of allocation base
  15. Managers reconcile actual and allocated overhead when they use this job costing system.
  16. Actual
  17. Normal
  18. Relevant
  19. Product
  20. In a normal costing system, an immaterial amount of overapplied overhead is allocated 100% to
  21. Work in process
  22. Finished goods
  23. Retained earnings
  24. Cost of goods sold

 

  1. Job costing information can be used to
  2. Report inventory and cost of goods sold on financial statements
  3. Estimate average costs for future jobs

III. Report the costs of marketing for a product

  1. I and II only
  2. II and III only
  3. I and III only
  4. I, II, and III
  5. Which of the following statements regarding the uses and limitations of job costing is true?
  6. Job costs are measured accurately
  7. The total job cost of an individual unit is an incremental cost, that is, it does not include average costs of any type
  8. Developing information within job costing systems requires judgment
  9. Job costing systems are not subject to uncertainties
  10. Which of the following statements regarding the uses and limitations of job costing is true?
  11. Overhead is allocated to match revenues and costs
  12. Most overhead costs are relevant for short-term decisions
  13. Managers frequently assume variable overhead costs are fixed
  14. Overhead costs are not relevant for most short-term decisions
  15. With respect to the uses and limitations of job costing information, accountants’ responsibilities include
  16. Eliminating uncertainty
  17. Educating managers about appropriate information use
  18. Eliminating biases
  19. Classifying fixed costs as variable whenever possible
  20. Jerry and Damien are partners in a house-painting business. Which of the following costs is subject to the least uncertainty for a specific painting job?
  21. Cost of supervisory labor
  22. Depreciation on company vehicle
  23. Cost of fuel used to drive to a specific job site
  24. All of the preceding costs involve uncertainty
  25. Managers use judgment in job costing systems to decide
  26. Whether to use any source documents
  27. Which direct costs to trace to a job
  28. Which indirect costs to trace to a job
  29. Which fixed costs to trace to a job
  30. Managers use estimates in job costing systems to
  31. Establish a bid for a job
  32. Decide whether to accept a job

III. Monitor actual operations

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and III
  5. Which of the following statements regarding overhead allocation is true?
  6. Actual job costs are almost always higher than estimated job costs
  7. Actual job costs are almost always lower than estimated job costs
  8. Actual job costs are almost always the same as estimated job costs
  9. Actual job costs are almost always different from estimated job costs
  10. Units of product that are unacceptable and are either discarded or sold at a reduced price are called
  11. Scrap
  12. Rework
  13. Spoilage
  14. Work in process
  15. Spoiled units that are repaired and sold as if they were originally produced correctly are called
  16. Rework
  17. Scrap
  18. Normal spoilage
  19. Abnormal spoilage
  20. Bits of direct material left over from normal manufacturing processes are called
  21. Scrap
  22. Normal spoilage
  23. Abnormal spoilage
  24. Rework
  25. How is spoilage typically identified?
  26. Through analysis at the account level
  27. Through an inspection process
  28. By regression analysis
  29. By using a scatter plot
  30. An out-of-control manufacturing process is most likely to produce
  31. Normal spoilage
  32. Abnormal spoilage
  33. Finished goods
  34. Research and development expense
  35. The cost of normal spoilage arising from a production process common to several jobs is
  36. Written off as a period expense
  37. Charged to overhead for the jobs with the greatest total cost
  38. Charged to overhead for the jobs with the least total cost
  39. Charged to overhead and allocated with other overhead costs to all jobs
  40. Abnormal spoilage is recorded in a Loss from Abnormal Spoilage account so that managers can
  41. Monitor abnormal spoilage problems
  42. Hide them on the income statement
  43. Minimize income taxes
  44. Decide later which jobs to assign it to
  45. Rework costs are
  46. Always tracked
  47. Never tracked
  48. Sometimes tracked
  49. Deferred until the cash cycle is complete
  50. If the cost of rework is tracked, it is recorded in the accounting system in the same manner as
  51. A period cost
  52. Spoilage
  53. Scrap
  54. A deferred asset

 

  1. How do managers decide whether to incur rework costs for a spoiled unit?
  2. Based on materiality
  3. Based on the matching concept
  4. Based on its relationship to the total cost of a job
  5. Based on cost/benefit analysis
  6. Manufacturers may track scrap to determine whether
  7. Resources are being used efficiently
  8. Machines need replacing
  9. Job costs are being recorded accurately
  10. Cash flow forecasts are accurate.
  11. If scrap can be traced to a specific job, revenue from the scrap is
  12. Debited to work in process
  13. Debited to finished goods
  14. Credited to work in process
  15. Credited to finished goods
  16. Scrap can be planned for and guarded by setting up a
  17. Double-entry accounting system
  18. Job costing system
  19. Control system
  20. Forecasting system
  21. Some organizations use scrap in creative ways to benefit employees and others. Such uses can
  22. Improve employee satisfaction
  23. Enhance the firm’s reputation

III. Provide social value

  1. I and II only
  2. II and III only
  3. I and III only
  4. I, II, and III
  5. Opportunity costs of spoilage should be
  6. Charged to an individual job
  7. Charged to a separate loss account
  8. Considered, but not recorded
  9. Recorded at the time of production
  10. Which of the following costs are charged to overhead?
  11. Scrap traced to individual jobs
  12. Normal spoilage occurring periodically as a regular part of all jobs

III. Scrap common to all jobs

  1. I only
  2. II only
  3. I and III only
  4. II and III only
  5. Which of the following costs are credited to a separate loss account?
  6. Abnormal spoilage
  7. Rework for abnormal defects

III. Rework for normal spoilage

  1. I only
  2. II and III only
  3. I, II, and III
  4. I and II only
  5. Spoilage has implications for
  6. Quality
  7. Behavior

III. Reputation

  1. I only
  2. I and II only
  3. I, II, and III
  4. II and III only
  5. To improve quality, many organizations adopt a variety of business practices. Which of the following is not such a practice?
  6. Total quality management
  7. Linear programming
  8. Six Sigma
  9. Kaizen costing
  10. Accounting practices are likely to influence manager behavior
  11. When bonuses are based on employee turnover
  12. Only in manufacturing organizations
  13. Only in for-profit organizations
  14. When managers are compensated based on accounting earnings

 

Use the following information for the next 2 questions.

The quarterly income statement for Largent is as follows:

Sales                                                                 $1,600

Less variable expenses:

Direct materials                      $280

Direct labor                              300

Manufacturing overhead            60

Administrative expenses            30

Selling expenses                        70                  740

Contribution margin                                               860

Less fixed expenses:

Manufacturing overhead        $180

Administrative expenses          440

Selling expenses                      100                  720

Income before taxes                                         $   140

 

  1. What total amount represents the period costs?
  2. $60
  3. $640
  4. $600
  5. $720
  6. What total amount represents the product costs?
  7. $640
  8. $820
  9. $580
  10. $900

 

  1. Sludge, Inc. has an ending work-in-process inventory of $180 and an ending finished goods inventory of $300. Cost of goods manufactured was $630, and cost of goods sold $540. Production costs incurred during the period were $620. What are the beginning inventories for work-in-process and finished goods, respectively?
  2. $l70 and $390
  3. $190 and $210
  4. $270 and $390
  5. $170 and $210

 

Use the following information for the next 2 questions.

Tern’s Toys incurred $1,500 in production costs for the week. Work-in-process decreased by $100, and finished goods inventory increased by $500.

  1. What was the cost of jobs completed?
  2. $1,100
  3. $1,400
  4. $1,500

$1,600

  1. What was the cost of goods sold?
  2. $1,100
  3. $1,400
  4. $1,500
  5. $1,800

 

 

More Difficult Multiple Choice

These multiple choice questions require more complex computations or present information differently than in the textbook.

  1. The total manufacturing costs incurred for the year are $200,000. Overhead cost was 60% of direct labor cost, and direct materials cost was $25,000. Direct labor cost was
  2. $105,000
  3. $109,375
  4. $ 65,625
  5. $ 70,000

 

Use the following information for the next 2 questions.

Direct materials are 30% of the year’s manufacturing costs incurred. The beginning work in process is 125% of the ending work in process. Labor and overhead costs total $56,000 and the cost of goods manufactured is $90,000.

  1. Direct materials cost is
  2. $24,000
  3. $34,000
  4. $27,000
  5. None of the above
  6. Assume the total manufacturing costs incurred were $80,000. The cost of the beginning work in process is
  7. $10,000
  8. $40,000
  9. $50,000
  10. None of the above
  11. The total cost of Job No. 175 was $1,200. Direct materials amounted to $30. Overhead is allocated at the rate of 30% of direct labor cost. The direct labor cost on this job was
  12. $923.08
  13. $900.00
  14. $853.32
  15. $692.31
  16. The total cost of Job No. 195 was $1,500. Direct materials for this job amounted to $660. Overhead is allocated at the rate of 40% of direct labor cost. The overhead cost on this job was
  17. $600
  18. $840
  19. $470
  20. $240

 

Use the following information for the next 4 questions.

Star Company’s accountants estimate total overhead for each month will be $64,000. They will allocate overhead on the basis of direct labor cost. During the current month, 3 jobs were worked on:

Job 745            Job 746            Job 747

Direct material            $36,000           $56,000           $24,000

Direct labor                 $56,000           $72,000           $40,000

 

Job 745 was completed and sold, Job 746 was completed, and Job 747 is still in process. Budgeted direct labor cost for the month was $160,000 and actual overhead was $65,800.

  1. The amount of over- or underapplied overhead for the month was
  2. $1,400 overapplied
  3. $1,800 underapplied
  4. $4,848 overapplied
  5. $8,000 underapplied
  6. Assuming overhead was $2,000 underapplied and that this amount is considered material, the balance of work in process after allocation of the underapplied overhead based on overhead charged to the accounts during the period is
  7. $115,073
  8. $80,456
  9. $113,727
  10. $79,544
  11. Assuming overhead was $2,000 overapplied and that this amount is considered material, the final adjusted balance of finished goods inventory is
  12. $157,693
  13. $115,053
  14. $113,747
  15. $155,907
  16. Assuming overhead was $100 underapplied and that this amount is considered immaterial, the final adjusted balance of cost of goods sold is
  17. $92,100
  18. $211,900
  19. $114,500
  20. $79,900

 

 

Use the following information for the next 4 questions.

Rayfield Company’s management accountant collected the following inventory and transaction data for the month:

Inventories                      Ending           Beginning

Direct materials                $220                $190

Work-in-process                160                  140

Finished goods                   190                  220

 

The cost of goods available for sale was $1,370. Total manufacturing costs assigned to work-in-process during the month was $1,170. Manufacturing overhead was $334; and direct materials used were $386.

  1. Direct materials purchased during the month were
  2. $356
  3. $416
  4. $386
  5. $606
  6. Direct labor costs incurred during the month were
  7. $450
  8. $458
  9. $720
  10. $844
  11. Cost of jobs completed for the month was
  12. $1,170
  13. $1,310
  14. $1,190
  15. $1,150
  16. Cost of goods sold for the month was
  17. $1,150
  18. $1,370
  19. $1,180
  20. $1,120

 

Use the following information for the next 5 questions.

  • The overhead is allocated to jobs using an estimated rate applied to direct labor hours. The budget for the year called for $180,000 of overhead cost and 60,000 direct labor hours.
  • Accounts payable is used for materials only. The balance on 9/1 was $6,000. September’s payments were $40,000.
  • September 1 finished goods inventory was $11,000.
  • Cost of jobs completed in September was $89,000.
  • On September 30 there was a single job unfinished, consisting of $1,800 (300 hours) of direct labor and $2,600 of direct material.
  • 5,200 direct hours were worked during September. All workers earn the same rate of pay.
  • All actual overhead costs incurred have been recorded.
  1. Materials purchased in September were
  2. $43,000
  3. $48,000
  4. $54,000
  5. $42,000
  6. Cost of goods sold during September was
  7. $89,000
  8. $84,000
  9. $100,000
  10. $83,200
  11. Materials used during September were
  12. $48,000
  13. $42,000
  14. $43,000
  15. None of the above
  16. Work in process balance at September 30 was
  17. $4,400
  18. $4,500
  19. $800
  20. None of the above
  21. Over- or underapplied overhead for September was
  22. $800 underapplied
  23. $800 overapplied
  24. $1,600 underapplied
  25. $1,600 overapplied
  26. The following activity took place in the past year:

Raw materials purchased                                                      $160,000

Raw materials used (90% direct, 10% indirect)                    $140,000

Factory utility costs incurred                                                   $40,000

Salaries and wages incurred (80% direct, 10% indirect,
10% administrative)                                                        $250,000

Factory depreciation                                                               $25,000

Depreciation on sales staff cars                                              $12,000

Estimated overhead allocation rate                 52% of direct labor cost

Cost of jobs completed                                                         $300,000

The under- or overapplied overhead for the year was

  1. $0
  2. $12,00 underapplied
  3. $20,000 underapplied
  4. None of the above

 

 

Multiple Choice from Study Guide

s87.      The cost of poor quality products includes

  1. Company’s loss of reputation
  2. Lost contribution margin from sales of high quality products
  3. Potential loss of future market share
  4. All of the above

 

s88.      Abnormal spoilage costs appear on the

  1. Balance sheet as part of work in process
  2. Income statement as part of cost of good sold
  3. Balance sheet as part of finished goods
  4. Income statement as a loss

s89.      If spoiled goods have a positive disposal value, then the disposal value

  1. Increases the debit to Overhead control if the spoilage is normal
  2. Decreases the job’s cost per unit if the spoilage is directly attributable to the job
  3. Increases the job’s cost per unit if the spoilage is normal
  4. Decreases the debit to Overhead control if the spoilage is abnormal

s90.      Mike’s Bikes makes gears for mountain bikes. It is considered normal for 3% of the good gears in a batch to be defective.  The spoilage costs of a defective gear are $20, but a defective gear can be sold for $5 as scrap.  Batch #248 contains 103 gears, and 3 are defective.  Which of the following is the correct entry to record the costs of spoilage and the sale of the scrap?

  1. Cash 15

Loss from abnormal spoilage                             45

Work in process inventory                                             60

  1. Work in process inventory 45

Cash                                                                  15

Overhead control                                                           60

  1. Cash 15

Overhead control                                               45

Work in process inventory                                             60

  1. Cash 15

Finished goods inventory                                   45

Work in process inventory                                             60

 

s91.      Gloria’s Garments makes house dresses.  Defective units have their labels removed and are sold as “seconds”.  This is an example of

  1. Scrap
  2. Rework
  3. Abnormal spoilage
  4. Normal spoilage

s92.      Pete’s Plastic Products makes plastic toys and car parts.  The injection molding machines leave behind plastic that can be sold to a plastic supplier. This is an example of

  1. Scrap
  2. Rework
  3. Abnormal spoilage
  4. Normal spoilage

s93.      Upon inspection, Joe’s Jumpsuits found that all of the jumpsuits in Batch #987 had the sleeves sewn in backwards.  One of the new seamstresses had not been properly trained, which is highly unusual.  The jumpsuits had to be thrown away.  This is an example of

  1. Scrap
  2. Rework
  3. Abnormal spoilage
  4. Both (a) and (c)

 

s94.      Patsy’s Products recently moved the inspection point for spoilage to an earlier point in the production process.  The most likely effect of this is

  1. Reduce the costs associated with normal spoilage
  2. Reduce the costs associated with abnormal spoilage
  3. Eliminate abnormal spoilage
  4. Both (a) and (b)

s95.      Pete’s Plastic Products makes plastic toys and car parts.  The injection molding machines leave behind plastic that can be ground up and used again in the next batch of production.  The entry to record this includes

  1. Credit to Work in process inventory
  2. Credit to Overhead control
  3. Debit to Raw materials inventory
  4. Both (a) and (c)

s96.      For Fiona Company, defective units of 2% of the good units completed are considered normal.  Job #456 included some unusual specifications.  Because of these, 5% of the units in Job #456 were defective.  Which of the following is true?

  1. The cost of producing 3% of the units in Job #456 is abnormal spoilage.
  2. The cost of producing 2% of the units in Job #456 is part of overhead.
  3. The cost of producing 5% of the units in Job #456 is part of overhead.
  4. None of the above

s97.      In job costing, the allocation of overhead results in a debit to

  1. Overhead control
  2. Work in process inventory
  3. Finished goods inventory
  4. Cost of goods sold

s98.      When developing an estimated overhead allocation rate, which of the following is used in the numerator?

  1. Actual annual overhead cost
  2. Estimated output in units
  3. Estimated annual overhead cost
  4. Estimated direct labor hours

 

Use the following information for the next 2 questions.

Tulalip uses a job costing system that allocates overhead as a percentage of direct labor costs.  The budget for this year was: direct materials $60,000, direct labor $30,000, and overhead $45,000.  Actual costs for this year were: direct materials $50,000, direct labor $35,000, and overhead $45,000.

s99.      What is the estimated overhead allocation rate?

  1. 50% of direct labor costs
  2. 129% of direct labor costs
  3. 150% of direct labor costs
  4. 67% of direct labor costs

s100.    What is the over- or underapplied overhead for this year?

  1. $0
  2. $150 overapplied
  3. $21,550 underapplied
  4. $7,500 overapplied

 

 

Use the following information for the next 3 questions.

Bothell Company uses a job costing system that allocates estimated overhead as 40% of prime costs (direct materials plus direct labor).  The normal cost of its products is 80% of the products’ billed prices to customers.

s101.    What is the cost of a job that required direct materials of $2,000 and direct labor of $5,200?

  1. $9,280
  2. $10,080
  3. $7,200
  4. $8,000

s102.    Assume total revenue for the month is $1,750,000 and that all units produced were sold.  There were no beginning or ending work in process inventories.  How much overhead was allocated this period?

  1. $560,000
  2. $600,000
  3. $875,000
  4. $400,000

s103.    Assume the full cost of Job #392 was $12,000.  What was the price billed?

  1. $15,000
  2. $14,400
  3. $16,000
  4. $16,500

 

 

Multiple Choice from Web Quizzes (Available on Student Web Site)

w104.   Job order costing is used when products are

  1. Mass produced
  2. Custom produced or processed in small batches
  3. Uniform in their use of materials
  4. Easy to cost

w105.   Process costing is used when products are

  1. Mass produced
  2. Custom produced or processed in small batches
  3. Individualized services
  4. Easy to cost

w106.   To develop a cost allocation rate for overhead, normal costing uses

  1. Actual costs and the actual volume of the allocation base
  2. Estimated costs and estimated volumes of the allocation base
  3. Actual costs and estimated volumes of the allocation base
  4. Estimated costs and actual volumes of the allocation base

w107.   Abnormal spoilage arises

  1. As part of regular operations
  2. From out-of-control processes

III. From unusual circumstances, such as flooding that interrupts work

  1. I and III only
  2. II and III only
  3. II only
  4. III only

 

w108.   Job costing is used in manufacturing for the following products

  1. Beverages
  2. Tax returns for small businesses
  3. Lumber
  4. One-of-a-kind motorcycles

w109.   Underapplied and overapplied overhead arise because

  1. The actual amount of overhead costs are known at the beginning of the period
  2. An estimate of production volume is used for the denominator quantity
  3. The actual production volume is known at the beginning of the period
  4. Estimates of direct materials costs are used

w110.   Direct materials in job costing

  1. Can be traced to each product
  2. Are allocated to each product
  3. Are the only costs recorded in cost of goods sold
  4. Are expensed as period costs, not product costs

w111.   Indirect materials

  1. Flow into the overhead account
  2. Can be traced to each product
  3. Are always material in amount
  4. Are ignored in job costing

w112.   Direct labor

  1. Always flows into an overhead T-account
  2. Is recorded to each custom product or service
  3. Cannot be easily traced to a custom product or service
  4. Is not used in service sector job costing

w113.   Job costing is used to

  1. Value inventory or service production for financial statements when custom products or services are sold
  2. Value inventory for financial statements in a mass production manufacturing setting
  3. Allocate operating costs such as administration and marketing
  4. Allocate all costs, direct and indirect, based on the volume of expected activity

w114.   All of the following products or services are likely to use job costing except

  1. An audit of a town library
  2. A private yacht
  3. A can of pineapple slices
  4. A dry cleaner’s bankruptcy case

w115.   When underapplied or overapplied overhead is large, it is

  1. Closed to cost of goods sold
  2. Prorated among work in process, finished goods, and cost of goods sold
  3. Closed to the largest account for the period
  4. Rolled into the next period’s overhead cost

w116.   Abnormal spoilage is accounted for by

  1. Separating it out as a loss for the period.
  2. Adding its cost to the specific jobs where it arose
  3. Adding its cost to overhead to be spread among all of the current period jobs
  4. Ignoring it in the accounting records

 

w117.   Under job costing, the cost of inventory in finished goods

  1. Includes actual direct materials, direct labor, and allocated factory overhead costs
  2. Can be used in short term decisions
  3. Is an incremental cost
  4. Excludes indirect costs

w118.   Jorgensen Furniture uses job costing and allocates its $500,000 of budgeted overhead costs using labor hours.  The rate is $25 per labor hour.  How many hours are used as normal volume for the overhead allocation base?

  1. 25,000
  2. 20,000
  3. 30,000
  4. 10,000

w119.   (CMA)  Lucy Sportswear manufactures a specialty line of T-shirts using a job order cost system.  During March, the following costs were incurred in completing Job ICU2:  direct materials $13,700, direct labor $4,800, administrative $1,400, and selling $5,600.  Factory overhead was allocated at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours.  If Job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be

  1. $6.50
  2. $6.30
  3. $5.70
  4. $5.50

 

Use the following information for the next 2 questions.

(CPA)  Barron’s Corp. manufactures custom made wire baskets used to hold computer components in computer manufacturing operations.

Wages:

Machine operators                                  $400,000

Maintenance workers                                  45,000

Factory supervisors                                     90,000

Materials used:

Metal wire                                               $600,000

Lubricant for oiling machines                       5,000

Clear plastic coating                                  420,000

w120.   Barron’s direct labor cost amounted to

  1. $400,000
  2. $445,000
  3. $135,000
  4. $535,000

w121.   Barron’s direct material costs amounted to

  1. $600,000
  2. $605,000
  3. $1,020,000
  4. $1,025,000

 

 

 

Matching

  1. Fly-By-Night Studios produced three films this year: Bassets on the Run, My Life as a Cat, and I Wanna Be a Fish.  The overhead allocation rate was $500 per direct labor hour based on estimated overhead costs of $3,000,000.  Data on each film appear in the table below:

Overapplied or

(Underapplied)                 Labor

Overhead                     Hours

Bassets on the Run                     $100,000                     2,500

My Life as a Cat                          (500,000)                    2,300

I Wanna Be a Fish                       (700,000)                    2,800

Several costs or other quantitative values are described in the left-hand column below.  Match each explanation with the appropriate value in the right-hand column.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.

____    1.   Actual direct labor hours this period

____    2.   Actual overhead cost for Bassets on the Run

____    3.   Actual overhead cost for I Wanna Be a Fish

____    4.   Estimated direct labor hours for this period

____    5.   Overhead allocated for My Life as a Cat

____    6.   Total estimated overhead cost for next period

      A.  6,000

B.   7,600

C.   $1,150,000

D.  $1,250,000

E.   $2,100,000

F.   Not enough information given to determine amount

  1. Several statements that may apply to actual costing, normal costing, both, or neither appear below. Choose the best answer from the four that follow.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.
  2. Actual costing only
  3. Normal costing only
  4. Both actual and normal costing
  5. Neither actual nor normal costing

 

____    1.   Actual activity and an estimated rate are used to allocate overhead

____    2.   Actual direct materials are traced to each job

____    3.   Direct labor estimates are debited to work in process

____    4.   Estimated direct materials are traced to each job

____    5.   Jobs absorb the actual cost of direct labor

____    6.   Managers allocate overhead using estimated activity and an estimated rate

____    7.   May result in underapplied overhead

____    8.   Overhead is allocated using the actual activity and an actual rate

____    9.   Overhead is not allocated

____  10.   Used to prepare interim income statements

 

  1. Several terms, concepts, and formulas associated with job costing are listed in the left column below. Various explanations, definitions, and situations are listed on the right.  Match each item on the left to the most appropriate item on the right.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.
____    1.   Allocated to work in process

____    2.   Allocation base

____    3.   Cost of direct labor incurred

____    4.   Cost pool

____    5.   Deducted from gross margin on the income statement

____    6.   Direct and indirect costs of producing goods and services

____    7.   Direct material used

____    8.   Identified through an inspection process

____    9.   Increases to work in process inventory

____  10.   Job cost record

____  11.   Loss of market share

____  12.   Normal costing

____  13.   Overapplied overhead

____  14.   The process of assigning costs to customized goods

____  15.   Units in batches of clothing with flaws in the material

      A.  Credit

B.   Debit

C.   Denominator of overhead allocation rate

D.  Group of costs accumulated for a specific purpose

E.   Job costing

F.   May result in underapplied overhead

G.  Never results in under- or overapplied overhead

H.  Numerator of overhead allocation rate

I.    Occurs when actual overhead < allocated overhead

J.    Occurs when actual overhead > allocated overhead

K.  Opportunity cost of spoilage or rework

L.   Overhead costs

M.  Period costs

N.  Process costing

O.  Product cost

P.   Rework

Q.  Scrap

R.   Source document

S.   Spoilage

 

 

Exercises

  1. The Franklin Manufacturing Company uses a job costing system with machine hours as the allocation base for overhead. The company uses normal costing to develop the overhead allocation rate.  The following data are available for the latest accounting period:

Estimated fixed factory overhead cost                      $160,000

Estimated machine-hours                                            100,000

Actual fixed factory overhead cost incurred             $170,000

Actual machine-hours used                                        110,000

(continued)

 

Jobs worked on:

Job No.                         Machine Hours Used

1020                                   12,000

1030                                   18,000

1040                                   15,000

1050                                   10,000

 

  1. Compute the overhead allocation rate.
  2. Determine the overhead allocated to job 1040.
  3. Determine total over or underapplied overhead at the end of the year
  4. Should cost of goods sold be increased or decreased at the end of the year? Explain.
  5. When Franklin incurs an amount of overapplied or underapplied overhead that is quite large (i.e., above 10% of the total allocated cost), how is it assigned?
  6. Fabulous Surf Boards makes custom boards for professional surfers. The boards vary according to the types of materials requested by customers and the amount of direct labor required for the finishing process.

The following costs are estimated for 20×5:

Number of surf boards                           3,000

Direct labor hours                                 45,000

Direct material cost                           $175,000

Direct labor cost                               $900,000

Overhead cost                                   $675,000

 

During 20×5 actual costs were:

Number of surfboards                            3,300

Direct labor hours                                 46,300

Direct materials                                 $185,000

Direct labor                                       $850,000

Overhead                                          $664,000

 

  1. Explain why job costing, and not process costing, should be used for this organization.
  2. Fabulous uses a normal costing system. Overheard is allocated on the basis of direct labor hours.  Calculate the manufacturing cost of a surfboard that takes $150 of direct materials and 36 hours of direct labor.
  3. At the end of 20×5, how much overhead had been allocated to production?
  4. Is the overhead over or underapplied, and by how much?
  5. Assume that any over or underapplied overhead is closed to cost of goods sold. Prepare the journal entry for the adjustment.
  6. During a recent month, Pisces, Inc. reported the following activity:

                            Jobs                    

1             2             3             4

Beginning balance  $1,500    $2,000    $1,000    $   400

Direct materials                0         100      1,200      3,000

Direct labor                  495         405         300         450

Direct labor hours          33           27           20           30

Overhead is allocated at $7.50 per direct labor hour.  Jobs 1, 2, and 4 were completed, and Job 2 was delivered to the customer.

(continued)

 

Determine the following amounts:

  1. Ending WIP inventory
  2. Cost of the jobs that were completed
  3. Costs of goods sold
  4. Ending finished goods inventory

 

  1. PNG Corporation designs and builds roller coasters for amusement parks. At the end of 20×1, managers estimated overhead costs for 20×2 of $150,000 based on expected production of 5 roller coasters using 5,000 labor hours each.  Actual overhead costs for 20×2 were $170,000.  PNG actually designed and built 6 roller coasters with the following direct labor usage and overhead costs:

Overhead Cost          Labor Hours

The Big Dipper                             $28,000                     3,500

The Ultimate Scream                      35,000                     4,000

Loop Me                                         27,000                     5,000

The Screaming Chicken                  40,000                     2,500

You Don’t Know Coasters              25,000                     6,000

Old Faithful                                    15,000                     4,500

 

Assume PNG uses a normal costing system with the number of jobs as the overhead allocation base.

 

  1. How much overhead would be allocated to each job?
  2. Calculate the total over- or underapplied overhead (specify which) for each job.
  3. PNG Corporation designs and builds roller coasters for amusement parks. At the end of 20×1, managers estimated overhead costs for 20×2 of $150,000 based on expected production of 5 roller coasters using 5,000 labor hours each.  Actual overhead costs for 20×2 were $170,000.  PNG actually designed and built 6 roller coasters with the following direct labor usage and overhead costs:

Overhead Cost          Labor Hours

The Big Dipper                             $28,000                     3,500

The Ultimate Scream                      35,000                     4,000

Loop Me                                         27,000                     5,000

The Screaming Chicken                  40,000                     2,500

You Don’t Know Coasters              25,000                     6,000

Old Faithful                                    15,000                     4,500

Assume PNG uses a normal costing system with the number of labor hours as the overhead allocation base.

 

  1. Calculate the allocation rate for 20×2.
  2. Calculate the total corporate over- or underapplied overhead (specify which) for 20×2.
  3. HLY Corporation’s accounting information system showed the following balances at the end of this period:

Work in process                      $20,000

Finished goods                          30,000

Cost of goods sold                    50,000

Overapplied overhead this period totaled $60,000; HLY maintains a single overhead account in its general ledger.

 

Does HLY use an actual or a normal costing system?  Explain your answer.

 

  1. HLY Corporation’s accounting information system showed the following balances at the end of this period:

Work in process                      $20,000

Finished goods                          30,000

Cost of goods sold                    50,000

Overapplied overhead this period totaled $60,000; HLY maintains a single overhead account in its general ledger.

 

If the overapplied overhead is considered material, prepare the journal entry to record its disposition.  If no journal entry is required, explain why.

  1. HLY Corporation’s accounting information system showed the following balances at the end of this period:

Work in process                      $20,000

Finished goods                          30,000

Cost of goods sold                    50,000

Overapplied overhead for this period totaled $60,000; HLY maintains a single overhead account in its general ledger.

 

If the overapplied overhead is not considered material, prepare the journal entry to record its disposition.  If no journal entry is required, explain why.

  1. Following is information about Allen’s Accounting Services.

Professional                                      Professional

Labor Cost             Direct Costs      Labor Hours

Client 57                       $2,000                      $800                    20

Client 58                       $1,000                      $200                    10

Client 59                       $5,000                      $600                    50

Allen’s Accounting Services uses job costing and applies overhead using a normal costing system using professional labor cost as the allocation base.  This period’s estimated overhead cost is $400,000, estimated professional labor cost is $800,000 and estimated direct labor hours are 8,000.  This period actual overhead cost was $426,400, actual direct labor cost was $820,000, and actual direct labor hours were 8,200.

 

  1. What is the overhead allocation rate?
  2. What is the total cost for Client 57?

 

More Difficult Exercises

Although the cost of goods sold schedule is not formally developed in Chapter 5 of the textbook, some instructors may introduce it.  Therefore, we have included several exercises covering it.

  1. Given the following data from the Fun Toys and Games Company for Year X2:

1/1/X2         12/31/X2

Direct materials inventory                               $40,000         $  20,000

WIP inventory                                                  25,000             15,000

Finished goods inventory                                  20,000             25,000

Sales                                                                                       390,000

Gross margin                                                                          115,000

Direct material purchases                                                          80,000

Prime costs (direct material + direct labor)                              210,000

 

Prepare a schedule of cost of goods manufactured.

  1. The following information for August, 20X3 comes from the Jones Co. books.

The balance in Materials Inventory on 8/1 was $35,000

Purchases of direct materials during August were $60,000

Work in Process on 8/1 was $10,000

Finished Goods had a balance on 8/1 of $15,000

Payroll Payable had a balance on 8/1 of $5,000

August payroll totaling $80,000 was credited to Payroll Payable

2,500 indirect hours were worked during the month

All workers make $6.40/hour

Overhead is allocated at $5.00/direct labor hour

Materials used during the month were $70,000

Cost of goods sold for the month was $105,000

Finished goods at 8/30 was $64,000

 

Prepare a schedule of cost of goods manufactured and sold.

 

 

Short Answer

  1. Bright Smile Dentistry is a dental practice with three dentists. The accountant has developed a job costing system for the practice.  List one cost each for direct materials, direct labor, and overhead for this type of organization.
  2. Can overhead be over- or underapplied in an actual job costing system? Explain.
  3. Explain the difference between normal and abnormal spoilage.
  4. Provide one reason why abnormal spoilage is recorded as a loss for the accounting period.
  5. Provide one reason why normal spoilage is considered part of overhead costs and, therefore, as part of the cost of good units completed.
  6. Suppose the amount of underapplied overhead is considered material. In what ways would costs in the financial statements be misstated if 100% of the underapplied overhead is assigned to cost of goods sold?
  7. Describe one advantage and one disadvantage of using actual costing in a job costing system.
  8. Describe one advantage and one disadvantage of using a normal job costing system.
  9. Explain why it is usually inappropriate to use the total job cost per unit of product or service in making short-term decisions.
  10. Job costing information comes from the general ledger system, and yet uncertainties arise when assigning job costs. List two uncertainties that accountants face when developing a job costing system.
  11. Explain how job costing in a service business is different than job costing in a manufacturing business.
  12. Explain, in general terms, the steps taken to implement a job costing system.
  13. Under a normal costing system, explain why the volume used to calculate the estimated allocation rate will not usually be equal to the actual volume.
  14. Critique the following statement: “Our accountants always use past job cost information to estimate the costs for future jobs.  Therefore, we always know how much profit to expect on our jobs.”
  15. An accountant compares the actual costs of jobs with the cost estimates that were developed at the time each job was accepted. She discovers that actual costs are almost always higher than estimated costs.  What does this finding suggest about the quality of information used to estimate job costs?

 

 

Problems

  1. Stonebarger Fountains manufactures customized fountains and uses two types of assembly processes. Some parts of the fountains are completely assembled by labor.  Other parts, such as the pump mechanisms, are made by machines.  The company uses job costing, but has modified the system to reflect the different types of processes that fountains undergo.  The following department overhead rates are used for the production plant:

Overhead cost pool                              Allocation rate

Labor assembly                                   $25 per direct labor hour

Machine assembly                               $10 per machine hour

Quality testing                                      $30 per testing hour

 

Resources used for Fountain #35

Direct labor hours                                5.0 hours

Machine hours                                     2.5 hours

Testing hours                                       2.0 hours

If a single plantwide overhead rate were used instead of separate overhead cost pool rates, overhead would have been allocated to jobs at $56 per direct labor hour.

 

  1. What overhead cost should be allocated to Fountain #35 using the plantwide manufacturing overhead rate?
  2. What total overhead cost should be allocated to Fountain #35 using the separate process overhead rates?
  3. Why do the allocated amounts in parts (a) and (b) differ?
  4. Explain why Stonebarger would use three different overhead allocation bases.
  5. Discuss whether increasing the number of overhead cost pools always increases the accuracy of costs allocated to jobs.
  6. Short Stay Surgery uses a job costing system for all patients who have surgery. The clinic uses a normal costing system with operating hours as the allocation base.  For the month of March, 3,200 operating hours were estimated for use of the surgery suites.  The estimated overhead costs for the suites were $640,000.  Patient Sarah Handy was in surgery for 2.5 hours.

 

Other costs related to Handy’s surgery include:

Patient medicine              $  50

Cost of nurses                    250

Cost of supplies                 150

 

  1. Determine the budgeted (i.e., estimated) overhead rate for the surgery suites.
  2. Determine the total costs for Handy’s surgery.
  3. Short Stay Surgery would like to know which of its services is more profitable so that it can emphasize that service in advertisements. Discuss whether each of the following types of information is relevant for this product emphasis decision:

1)   Direct labor (doctors and nurses)

2)   Direct supplies and medicine

3)   Overhead

  1. Describe a qualitative factor that might affect the decision in part (c).
  2. Customer Survey Research estimated that indirect overhead costs would be $50,000 per month and that professional labor would work 250 hours. Actual overhead costs were $53,250, and actual professional labor hours were 263.  The company uses a normal costing system.

 

  1. Determine the total cost charged to Job 717 if direct costs (labor and materials) were $23,000 and 120 professional labor hours were incurred.
  2. The accountant at Customer Survey Research wants to increase the proportion of direct costs that are traced because she believes it would improve cost control. List one advantage and one disadvantage of this plan.
  3. Currently, only professional labor cost is traced to individual jobs. Staff members who work exclusively on specific jobs could potentially track their time.  If these labor hours were traced as direct costs, would total job costs change for jobs that use about the same amount of professional labor but less staff labor compared to other jobs?  Explain.
  4. At the end of 20×2, BRV Corporation’s accounting information system contained the following balances:

Job 101                $300

Job 102                  500

Job 103                  600

Job 104                  100

Spoilage costs, which are not included in the preceding data, were as follows:

  1. Job 103 had to be stored under very specific temperature and humidity conditions. An electrical failure in the warehouse created a deviation from those conditions.  The resulting spoilage cost for Job 103 was $40.
  2. Additional spoilage costs from the electrical failure totaled $70.

III. While Job 102 was in process, handling errors with material created spoilage costs of $60.  These types of handling errors occur occasionally as part of regular operations.

  1. A key production machine, normally used extensively for all jobs, broke down unexpectedly while Job 104 was in process, in spite of regular preventive maintenance. Associated spoilage costs were $30.

 

  1. Classify each spoilage cost as normal or abnormal. Explain your reasoning.
  2. Using your classifications in part (a), determine revised total costs for each of the 4 jobs. Also identify any other cost accounts that would be affected.
  3. TPM Corporation’s accounting information system showed a balance for Job 405 of $1,700. The job can be reworked at a cost of $150 and sold for $2,000, or sold “as is” for $1,800.

 

  1. Should TPM rework the job or sell it as is? Justify your answer with appropriate computations.
  2. Assume TPM reworks the job. Write out the journal entry to record the sale of Job 405 (assume the rework cost has already been appropriately recorded).
  3. Assume TPM does not rework the job. Write out the journal entry to record the sale of Job 405.
  4. Suppose the spoilage on this job was caused by raw material defects. TPM’s managers are thinking about hiring an employee to inspect raw materials before they are placed in production.  Identify one argument in favor and one argument against this idea.

 

  1. BRF Company operates a machine shop, in which it mills custom parts out of titanium, steel, aluminum, and other metals. During the month of May it completed Job 356, consisting of titanium parts, for a total cost of $20,000.  During May, the company accumulated titanium scrap worth $1,000 from all jobs.  During June, the scrap was sold for $1,000.  The company’s accountant considers the value of titanium scrap to be material.

 

  1. Assume that 50% of the scrap can be associated with Job 356, but that the rest of the scrap resulted from several other jobs and was not traced individually. Write out the scrap journal entry(ies) required for May and June if the company’s policy is to record titanium scrap during the month of production.
  2. Assume that none of the scrap is traced to individual jobs. Write out the scrap journal entry(ies) required for May and June if the company’s policy is to record titanium scrap at the time of sale.
  3. Describe one advantage and one disadvantage to BRF of recording scrap at the time of production.
  4. Describe one advantage and one disadvantage to BRF of tracing the cost of titanium scrap to individual jobs.

 

True / False

  1. Only companies in manufacturing industries produce joint products.
  2. Managers normally differentiate main products from by-products based on their weight.
  3. Managers normally differentiate main products from by-products based on their sales values.
  4. Joint costs are always incurred before the split-off point.
  5. Joint costs are common to all joint products.
  6. Costs incurred after the split-off point are referred to as split-off costs.
  7. Costs allocated to joint products are generally referred to as separable costs.
  8. Separable costs generally must be allocated to joint products because they are difficult to trace directly.
  9. In the beef production industry, bones sold for dogs can generally be considered a by-product.
  10. Managers choose from a variety of logical joint cost allocation methods, but the allocation process itself is always arbitrary.
  11. Managers who want to avoid arbitrary joint cost allocations should use the physical output method.
  12. Different joint cost allocation methods cause products to show different contribution margins.
  13. A company can increase or decrease its total gross margin by using different joint cost allocation methods.
  14. Managers should choose a joint cost allocation method to avoid giving the impression that one or more products are sold at a loss when they actually contribute to profitability.
  15. The sales value at split-off point method of joint cost allocation avoids the problem of negative contribution margins for some products.
  16. The constant gross margin NRV method of allocating joint costs results in all joint products having equal gross margins (in dollars).
  17. The constant gross margin NRV method of allocating joint costs results in all joint products having equal gross profit percentages (gross profit / sales).
  18. The physical output method of joint cost allocation is seldom used in practice because of its measurement difficulties.
  19. The physical output method is appropriate when products are sold in units of similar size and their net realizable values are similar.
  20. The choice of joint cost allocation method depends somewhat on the nature of the products’ characteristics.
  21. By-products can only be recognized at the time of sale.
  22. Joint product cost allocation information can be used for financial reporting and for short-term decisions such as whether to process the product further.
  23. When joint production processes include a sales mix, the sales mix should be incorporated into the allocation method.
  24. Joint costs should be included in the calculation of product profitability for internal reporting purposes.

 

 

Multiple Choice

 

Use the following information for the next 5 questions.

Jordan, Inc. produces 2 products from a joint process costing $24,000.  The results from the most recent period follow:

Sales Value             Separable         Sales Value After

Product                 Tons        at Split-Off                 Costs            Further Processing

Alpha-1                 800           $10,000                 $12,000                 $24,000

Alpha-2                 400               8,000                     4,000                   20,000

Waste                     200                    —                          —                          —

  1. If Jordan uses the physical output method, the joint costs allocated to Alpha-1 were
  2. $8,000
  3. $6,400
  4. $16,000
  5. $9,600
  6. If Jordan uses the sales value at split-off point method, the joint costs allocated to Alpha-2 would be
  7. $8,889
  8. $10,667
  9. $8,727
  10. $13,333
  11. If Jordan uses the net realizable value method, the joint costs allocated to Alpha-1 would be
  12. $8,571
  13. $,9000
  14. $10,909
  15. $10,286
  16. If Jordan uses the physical output method to allocate joint costs, the cost per ton for Alpha-2 would be
  17. $27
  18. $22
  19. $30
  20. $20
  21. If Jordan uses the sales value at split-off point method to allocate joint costs, the cost per ton for Alpha-1 would be
  22. $15
  23. $32
  24. $28
  25. $29

 

Use the following information for the next 2 questions.

Major Foods, Inc. produces a cereal from oat grain.  The company buys unprocessed oats for $400 per ton.  It costs $60 per ton to send the oats through a processor, which produces 1,900 pounds of pure oats and 100 pounds of oat shells.  The oat shells are ground and packaged at a cost of $100 per hundred pounds.  They are sold to a poultry feed company for $3 per pound.  The pure oats are cooked and packaged into 4-pound containers at a cost of $350.  The packaged oats are sold for $2 per 4-pound container.

  1. If Major uses the net realizable value method, the joint costs allocated to the oats is
  2. $345
  3. $110
  4. $350
  5. $115

 

  1. If Major uses the net realizable value method, the gross profit from the oat shells is
  2. $185
  3. $200
  4. $85
  5. $215

 

Use the following information for the next 3 questions.

Recyclers, Inc. reprocesses paper and obtains 2 main products, a by-product, and waste.  By-product revenues are treated as a reduction in joint costs.  During the period, 1,000 tons were processed at a cost of $12,000 for materials and processing, resulting in the following:

Sales Value             Separable         Sales Value After

Product                 Tons        at Split-Off                 Costs            Further Processing

Main-1                   200             $4,000                   $2,000                 $10,000

Main-2                   400               5,000                     6,000                   12,000

By-product            300               2,000                          -0-                     2,000

Waste                     100                    -0-                          -0-                          -0-

  1. If the firm allocates joint costs to the main products using the physical output method, how much will be allocated to Main-1?
  2. $2,000
  3. $2,400
  4. $2,222
  5. $3,333
  6. If the firm allocates joint costs to the main products using the sales value at split-off point method, how much will be allocated to Main-2?
  7. $5,556
  8. $4,545
  9. $5,333
  10. $6,666
  11. If the firm allocates joint costs to the main products using the net realizable value, how much will be allocated to Main-1?
  12. $5,000
  13. $5,714
  14. $6,857
  15. $6,000

 

Use the following information for the next 2 questions.

A joint input costing $500 results in four distinct products at the point of split-off.  Products J, K and L are main products, and product M is a by-product.  Relevant data follows:

Sales Value               Separable         Sales Value After

Product                       at Split-Off                   Cost            Further Processing

J (main)                           $200                      $100                          $400

K (main)                            300                        200                           600

L (main)                             100                            —                             —

M (by-product)                    20                          10                            40

  1. If the revenue from product M is recognized at the time of sale, what amount will be recorded as the cost of product M inventory at the time of split-off?
  2. $0
  3. $10
  4. $20
  5. $30
  6. If the revenue from Product M is recognized at time of sale, at what cost will it be inventoried before further processing?
  7. $0
  8. $10
  9. $20
  10. $30

 

Use the following information for the next 3 questions.

Balley, Inc. produces three milk products (all are main products) from a joint process costing $200,000.  Data from the current period’s operation follow:

Units            Unit Sales Price      Separable     Total Revenue After

Produced            at Split-Off            Costs          Further Processing

Regular               5,000                    $5                 $10,000               $  40,000

Fat-free             15,000                      7                   16,000                 120,000

2%                    30,000                      8                     5,000                 250,000

  1. Which product(s) should be processed beyond the split-off point?
  2. Regular and Fat-free only
  3. Regular and 2% only
  4. Fat-free only
  5. 2% only
  6. If Balley produces and sells the best mix, what is the total gross margin?
  7. $195,000
  8. $210,000
  9. $180,000
  10. $164,000
  11. If Balley allocates joint costs using the physical output method instead of the net realizable value method, income will be
  12. higher
  13. lower
  14. unchanged
  15. unable to determine from data given

 

Use the following information for the next 2 questions.

A joint input costing $500 results in four distinct products at the point of split-off.  Relevant data follows:

Sales Value               Separable         Sales Value After

Product           at Split-Off                   Cost            Further Processing

J                           $200                      $100                          $400

K                           300                        200                           600

L                            100                          50                           140

M                             20                          10                            40

  1. Which of the four products should not be further processed?
  2. J
  3. K
  4. L
  5. M

 

  1. Assume that K is processed further and that management is considering an alternative to the current process. The new separable cost of processing would be $250.  If the firm is to be no worse off, the product must sell for at least
  2. $550
  3. $650
  4. $750
  5. $850
  6. When the products emerging from a joint process are similar in size and in relative value per unit, the most appealing joint cost allocation method is
  7. Relative sales value
  8. Net realizable value
  9. Physical output method
  10. Reciprocal method
  11. When individual products/services become separately identifiable, this is called the
  12. Break point
  13. Split-off point
  14. Breakeven point
  15. Point of no return
  16. Costs incurred beyond the split-off point that are traceable to individual products are
  17. Joint costs
  18. Common costs
  19. Net realizable costs
  20. Separable costs
  21. Joint costs are
  22. Easily traceable to individual product lines
  23. Common costs that result in two or more unique products
  24. Incurred by a particular product
  25. Fixed costs incurred after the split-off point
  26. Joint product costs
  27. Are irrelevant in deciding whether or not to produce beyond the split-off point
  28. Cannot be allocated using the physical output method
  29. Are not included in the costs of ending inventory
  30. Require use of the alternative cost method
  31. When separable costs are deducted from the selling price that can be achieved after further processing, the result is called the
  32. Relative sales value
  33. Net realizable value
  34. Budgeted value
  35. Inventory value
  36. By-products are products that
  37. Are chosen to measure profitability
  38. Are immaterial in value relative to main products
  39. Are intentionally produced
  40. Share in the allocation of joint product costs

 

  1. If the incremental revenues for a joint product that has been processed further exceed the incremental costs, the general decision is to
  2. Process beyond the split-off point
  3. Sell at the split-off point
  4. Be indifferent about whether to process further
  5. Allocate the separable costs using the net realizable value method
  6. In which of the following industries would you be least likely to find a joint production process?
  7. Oil and gas
  8. Food
  9. Chemicals
  10. Textbook production
  11. A main product is typically differentiated from other joint products by its
  12. Allocated joint costs
  13. Size or weight
  14. Sales value
  15. Cost
  16. Which of the following are sub-categories of joint products?
  17. Main products and by-products
  18. Main products and split-off products
  19. By-products and split-off products
  20. Main products, by-products and split-off products
  21. Joint processes can result in
  22. Products
  23. Services

III.    Intangible assets

  1. I only
  2. II only
  3. I and III only
  4. I and II only

 

Use the following information for the next 8 questions.

RKH Corporation produces three joint products.  During a recent accounting period, joint costs totaled $365 and RKH had no beginning inventories.  Additional data appear below:

M1                   M2                   M3

Volume (pounds)                                       150                    50                  300

Sales value at the split-off point              $375                $155                $600

Sales value after further processing         $450                $200                $900

Separable costs                                          $50                  $35                $100

  1. Which of the following methods will result in the greatest joint cost allocation to M1?
  2. Physical output
  3. Sales value at split-off point
  4. Net realizable value
  5. Constant gross margin NRV
  6. Which of the following methods will result in the greatest joint cost allocation to M2?
  7. Constant gross margin NRV
  8. Net realizable value
  9. Physical output
  10. Sales value at split-off point

 

  1. Which of the following methods will result in the smallest joint cost allocation to M3?
  2. Net realizable value
  3. Sales value at split-off point
  4. Physical output
  5. Constant gross margin NRV

 

  1. Which of the following methods will result in the greatest total joint cost allocation among the three products?
  2. Net realizable value
  3. Sales value at split-off point

III.    Physical output

  1. Constant gross margin NRV
  2. I and II only
  3. II and III only
  4. I and IV only
  5. All methods will result in the same total joint cost allocated
  6. Using the constant gross margin NRV method, the combined gross margin percentage (rounded to the nearest whole percent) is:
  7. 65%
  8. 88%
  9. 76%
  10. None of the above
  11. Using the constant gross margin NRV method, the joint costs allocated to M1 will be
  12. $290
  13. $160
  14. $110
  15. $50
  16. Using the constant gross margin NRV method, the total separable costs allocated to the three products will be
  17. $0
  18. $185
  19. $365
  20. $550
  21. Using the constant gross margin NRV method, the total joint costs allocated to the three products will be
  22. $0
  23. $185
  24. $365
  25. $550
  26. Which method of allocating joint costs is most likely to develop a true cost per unit of product?
  27. Physical output
  28. Sales value at split-off point
  29. Net realizable value
  30. None of the above; all methods result in arbitrary allocations
  31. The joint cost allocation method affects the
  32. Apparent profitability of different products
  33. Total profit of an organization
  34. Revenue generated by an individual product
  35. Total revenue of an organization
  36. Managers should choose a joint cost allocation method to
  37. Justify dropping an unprofitable product
  38. Minimize the total joint cost allocated to all products
  39. Maximize the organization’s overall profitability
  40. Avoid giving the mistaken impression that one or more products are sold at a loss
  41. Cost distortions are likely when products have differential incremental contributions under which of the following methods?
  42. Sales value at split-off point
  43. Constant gross margin NRV
  44. Physical output
  45. Net realizable value
  46. Which of the following joint cost allocation methods is used in many industries because they have units of similar size with similar net realizable values?
  47. Physical output
  48. Constant gross margin NRV
  49. Net realizable value
  50. Sales value at split-off
  51. Which joint cost allocation methods are preferred because they are based on a product’s ability to pay for its allocated cost?
  52. Constant gross margin NRV
  53. Physical output

III.    Net realizable value

  1. I and II only
  2. I and III only
  3. II and III only
  4. III only
  5. Which joint cost allocation method best reflects the idea that joint costs cannot be separated?
  6. Net realizable value
  7. Constant gross margin NRV
  8. Physical output
  9. Sales value at split-off
  10. The sales value at split-off point method of joint cost allocation is most appropriate when
  11. Products have roughly equal sales values
  12. Products have roughly equal separable costs
  13. Most products are sold at the split-off point
  14. Few products are sold at the split-off point
  15. When deciding whether to process a product beyond the split-off point
  16. Joint costs are relevant
  17. Joint costs are irrelevant
  18. Separable costs are irrelevant
  19. Revenue is irrelevant
  20. Compared to other products, by-products have
  21. Low sales values
  22. High joint cost allocations
  23. Low sales volumes
  24. Low physical outputs

 

  1. A by-product can become a main product when
  2. Changes in technologies give it greater sales value
  3. Markets contract, lessening demand
  4. Its net costs increase
  5. Its value decreases
  6. DRY Corporation recently disposed of a by-product at a net cost of $500. Provided that amount is considered material, the $500 should be accounted for as
  7. Part of the separable cost of the by-product.
  8. A decrease in by-product inventory on the balance sheet.
  9. An increase in by-product inventory on the balance sheet.
  10. Part of the joint costs of production.
  11. Managers are most likely to select a method of by-product accounting depending upon
  12. The effect of the method on overall profitability
  13. The degree of desired control over the by-product
  14. The physical quantity of the by-product
  15. Their incentive compensation package
  16. The value of a by-product can be recognized at the time
  17. Of production
  18. Of its sale

III.    Joint products are sold

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and III
  5. When by-product value is recognized at the time of sale, the journal entry can include a credit to
  6. Sales revenue
  7. Other income

III.    Cost of goods sold

  1. Work in process
  2. I, II, or IV only
  3. II, III, or IV only
  4. I, II, or III only
  5. I, III, or IV only

 

Use the following information for the next 8 questions.

HGT Corporation produces four products from a common production process.  Selected data from HGT’s accounting system for the four products appears below:

Sofa        Standard       Floor      Full-Body

Cushions     Pillows     Cushions     Pillows

Quantity                                                     100            150              50            200

Price per unit at split-off                            $10            $12            $18            $15

Price per unit after further processing        $13            $15            $20            $18

Separable costs                                        $100          $150          $150          $200

 

Joint costs for the accounting period totaled $5,000.  Each product line has a different product manager, who is evaluated based on product line profitability.  Therefore, each manager is motivated to reduce his / her total product line costs as much as possible.  The managers have been given information about potential joint cost allocations using the following three methods:  physical output, sales at split-off point, and net realizable value.  The managers are comparing the joint cost allocations under each method so that they can give the accountant input about their preferred method(s).

  1. Which product line would receive the least amount of joint cost under the net realizable value method?
  2. Floor cushions and full-body pillows
  3. Full-body pillows
  4. Sofa cushions
  5. None of the above
  6. Which product line would receive the least amount of joint cost under the physical output method?
  7. Floor cushions and sofa cushions
  8. Floor cushions and full-body pillows
  9. Standard pillows and full-body pillows
  10. None of the above
  11. Which product line would receive the least amount of joint cost under the sales value at the split-off point method?
  12. Floor cushions
  13. Full-body pillows
  14. Sofa cushions and standard pillows
  15. None of the above
  16. If HGT allocates joint costs using the physical output method, the total joint cost allocated to standard pillows will be
  17. $1,500
  18. $1,650
  19. $1,250
  20. None of the above
  21. If HGT allocates joint costs using the sales value at split-off point method, the total joint cost allocated to full-body pillows (rounded to the nearest dollar) will be
  22. $2,439
  23. $1,250
  24. $2,039
  25. $2,239
  26. If HGT allocates joint costs using net realizable value method, the total joint cost allocated to floor cushions will be
  27. $570
  28. $720
  29. $420
  30. $563
  31. Assume HGT allocates joint costs using the physical output method. Which of the following correctly orders the four product lines from greatest allocation to least allocation?
  32. Sofa cushions, standard pillows, floor cushions, full-body pillows
  33. Full-body pillows, standard pillows, floor cushions, sofa cushions
  34. Full-body pillows, standard pillows, sofa cushions, floor cushions
  35. Floor cushions, sofa cushions, standard pillows, full-body pillows
  36. Assume HGT allocates joint costs using the net realizable value method. Which of the following correctly orders the four product lines from greatest allocation to least allocation?
  37. Full-body pillows, standard pillows, sofa cushions, floor cushions
  38. Floor cushions, sofa cushions, standard pillows, full-body pillows
  39. Full-body pillows, sofa cushions, standard pillows, floor cushions
  40. Floor cushions, full-body pillows, standard pillows, sofa cushions

 

  1. Joint costs are allocated to individual products primarily to meet requirements for:
  2. Ethical decision making
  3. Financial accounting
  4. Variance analysis
  5. Budgeting
  6. Joint cost allocations are inappropriate when
  7. Deciding whether to process a product beyond the split-off point
  8. Preparing external financial reports

III.    Evaluating the performance of individual project managers

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and III

 

More Difficult Multiple Choice

These multiple choice questions require more complex computations or present information differently than in the textbook.

 

Use the following information for the next 6 questions.

J-M Company uses a joint process costing $15,000 to produce three main products.  The company had no beginning inventory.  Its current period operation data follow:

Units             Sales Value              Separable     Sales Value After                Units

Product             Produced         at Split-Off                   Costs         Further Processing                Sold

S                500             $5,000                $500           $  7,000                  400

T                450               6,000                  650               9,000                  300

R                300               9,000                  700             10,000                  250

  1. If J-M uses the physical output method to allocate joint costs and performs further processing after the split-off point, what is the gross profit for product S?
  2. $1,800
  3. $500
  4. $400
  5. $(900)
  6. If J-M uses the sales value at split-off point method and sells products at the split-off point, what is the gross profit for product T?
  7. $1,000
  8. $(500)
  9. $1,500
  10. $3,000
  11. If J-M uses the net realizable value method and performs further processing after the split-off point, what is the gross profit for product R?
  12. $4,603
  13. $2,936
  14. $3,224
  15. $3,603
  16. If J-M uses the net realizable value method and performs further processing after the split-off point, what is the carrying value of the ending inventory for product S?
  17. $803
  18. $1,134
  19. $907
  20. $1,009
  21. If J-M sells products at the split-off point and uses the relative sales value at split-off point method to allocate joint costs, what is the carrying value of ending inventory for product T?
  22. $1,717
  23. $2,575
  24. $2,250
  25. $1,500
  26. If J-M uses the physical output method and and performs further processing after the split-off point, what is the ending inventory value for product R?
  27. $717
  28. $600
  29. $860
  30. $720

 

Use the following information for the next 2 questions.

Jagger, Inc. production begins in Department A with 1,000 pounds of material, of which 40% goes to Department B, 50% to Department C, and the rest evaporates.  From Department C, 72% goes to Department D, 24% to Department E, and the remainder is scrapped.  There are no intermediate markets.  By-product sales are treated as miscellaneous income.  The following occurred during the month:

Department                 Costs                Sales              Product Type

A                    $20,000                —

B                         5,000           $10,000            By-product

C                       30,000                —

D                      20,000             60,000            Main-1

E                       10,000             30,000            Main-2

  1. If Jagger uses the physical output method, the total cost of Main-1 is
  2. $40,455
  3. $57,500
  4. $42,500
  5. $52,500
  6. If Jagger uses the net realizable value method, the total cost of Main-2 is
  7. $26,667
  8. $22,500
  9. $16,667
  10. $33,333

 

Use the following information for the next 2 questions.

Heston, Inc. produces 2 main products and a by-product.  During the current month it had no beginning inventories.  During the current month it incurred $185,000 of joint costs, which are allocated to main products using the physical output method.  Additional information follows:

Units                 Units              Unit Sales

Product                             Produced               Sold                  Price

Able (main)                          8,000               6,000                  $15

Baker (main)                       12,000               8,000                    22

Delta (by-product)                5,000               4,500                      2

  1. If Heston subtracts the NRV of by-product sales from joint costs at the time of by-product sales, what is the total value of the ending inventory?
  2. $123,200
  3. $52,800
  4. $122,500
  5. $52,500
  6. If Heston subtracts the NRV of by-product sales from joint costs at the time of by-product production, what is the total cost of goods sold for the current month?
  7. $123,200
  8. $52,800
  9. $122,500
  10. $52,500

 

Use the following information for the next 2 questions.

A joint input costing $500 results in four distinct products at the point of split-off.  Relevant data follows:

Sales Value               Separable         Sales Value After

Product           at Split-Off                   Cost            Further Processing

J                           $200                      $100                          $400

K                           300                        200                           600

L                            100                          50                           140

M                             20                          10                            40

  1. Assume that after the split-off point one unit of J can be processed directly into one unit of K, and then processed further as shown for product K. For the purpose of making this decision, what is the opportunity cost to be assigned to a unit of J?
  2. $400
  3. $300
  4. $200
  5. $100
  6. If one unit of L is further processed as shown above, it can be processed again at an additional cost of $160 to obtain product XX. If the firm is to be no worse off from producing product XX, then XX must sell for at least
  7. $250
  8. $260
  9. $290
  10. $300

 

Multiple Choice from Study Guide

s75.      Costs incurred to process joint products beyond a split-off point are called

  1. By-products
  2. Joint costs
  3. Separable costs
  4. Fixed costs

s76.      Suppose 3 products, X, Y, and Z, are produced simultaneously in a joint process. If the sales value at split-off method is used to allocate joint costs, then the joint cost allocated to product X will increase when the

  1. Sales value of Y increases
  2. Sales value of Z decreases
  3. Sales value of X decreases
  4. Separable cost of Z increases

s77.      Assume the total final sales value of a set of joint products exceeds the total joint costs, and that the incremental revenue from processing each product further exceeds the separable costs.  Which joint cost allocation method could result in the reporting of a loss for some products and a profit for others?

  1. Net realizable value method
  2. Physical output method
  3. Sales value at split-off method
  4. Constant gross margin net realizable value method

s78.      Suppose a by-product is created continuously and sold for cash at the end of each day.  If the proceeds of the by-product sales are used to reduce the joint production costs, an increase in the by-products sales value will

  1. Increase the profit reported for by-product sales
  2. Decrease the profit reported for by-product sales
  3. Decrease the gross margin reported by the main products
  4. Increase the gross margin reported by the main products

s79.      To make the most profitable sell-or-process-further decisions, one should consider the

  1. Increase in the cost of further processing
  2. Increase in sales value due to further processing
  3. Increase in sales value due to further processing less the joint costs of processing less the separable costs of processing
  4. Increase in sales value due to further processing less the separable costs of further processing

s80.      Joint costs consist of

  1. Direct materials costs only
  2. Direct materials and direct labor costs only
  3. Direct materials, direct labor, and variable manufacturing overhead costs only
  4. Direct materials, direct labor, and all manufacturing overhead costs

s81.      Items produced from a joint process with a small sales value or a negative value are called

  1. Separate products
  2. By-products
  3. Waste
  4. Garbage

s82.      Which joint cost allocation method may show a loss for a product with a large separable cost?

  1. Sales value at split-off method
  2. Realized value method
  3. Net realizable value method
  4. None of the above

s83.      Suppose a joint process yields 3 main products and one by-product that has no sales value and is disposed of in the normal garbage. Which of the following is appropriate in accounting for the by-product?

  1. Describe it in a footnote to the financial statements
  2. Allocate a portion of the joint cost to the by-product and show the amount in a loss account on the income statement
  3. Allocate a portion of the joint cost to the by-product and show the amount as a reduction of the processing costs of the main products
  4. None of the above; no accounting treatment is necessary

s84.      Which of the following is the most important reason to allocate joint costs?

  1. Accurate product costs are necessary to make product mix decisions
  2. Accurate product costs are necessary to make product pricing decisions
  3. Production costs must be allocated to inventory and cost of goods sold for financial statement and tax reporting reasons
  4. None of the above – joint cost allocation is arbitrary

s85.      A company incurs joint costs of $700 to produce 100 units of product A, 300 units of product B, and 500 units of product C. The 3 products sell for $1, $2, and $3 each, respectively. What amount of joint cost is allocated to product A if the sales value at split-off method is used?

  1. $100.00
  2. $77.78
  3. $31.82
  4. None of the above

 

Use the following information for the next 4 questions.

A joint process has total costs of $1,200 and yields 50 units each of two main products and 10 units of by-product that can be sold for $2.50 each.

s86.      Under the realized value approach to accounting for by-products, the $25 revenue is recognized in the time period that the

  1. By-product is sold
  2. By-product is produced
  3. Main products are produced
  4. Main products are sold

s87.      Under the net realizable value approach to accounting for by-products, the $25 revenue is recognized in the time period that the

  1. By-product is sold
  2. By-product is produced
  3. Main products are produced
  4. Main products are sold

s88.      Under the realized value approach to accounting for by-products, what is the per unit cost of a main product if the physical output method of allocating joint costs is used?

  1. $12.00
  2. $24.00
  3. $11.75
  4. $23.50

s89.      Under the net realizable value approach to accounting for by-products, what is the per unit cost of a main product if the physical output method of allocating joint costs is used?

  1. $12.00
  2. $24.00
  3. $11.75
  4. $23.50

 

Use the following information for the next 5 questions.

The Great Foods Company processes milk into skim milk and butter. This year 70,000 gallons of will be processed, costing $40,000. If processed to the split-off point, this will yield 40,000 gallons of skim milk and 10,000 pounds of butter. Skim milk is sold to distributors for $1 per gallon and butter is sold for $0.75 per pound. Great Foods has the option of processing the two products further. Skim milk can be processed into canned, sweetened, condensed skim milk and sold for $0.80 per can. One gallon of skim milk makes 2 cans of condensed milk. To process 40,000 gallons of skim milk will cost $18,000. Butter can be processed into cake frosting, sold in containers for $2 each. One pound of butter goes into each container of frosting. The cost of processing 10,000 pounds of butter into frosting costs $15,000.

s90.      What is the per-unit joint cost allocated to skim milk and butter if the sales value at split-off method is used?

  1. $0.8421 per gallon and $0.6316 per pound
  2. $1 per gallon and $0.75 per pound
  3. $0.381 per gallon and $0.9524 per pound
  4. $0.7619 per gallon and $0.9524 per pound

s91.      What is the per-unit joint cost allocated to condensed milk and frosting if the sales value at split-off method is used?

  1. $0.8421 per can and $0.6316 per container
  2. $0.42105 per can and $0.6316 per container
  3. $0.381 per can and $0.9524 per container
  4. $0.7619 per can and $0.9524 per container

s92.      What is the per-unit joint cost allocated to condensed milk and frosting if the net realizable value method is used?

  1. $1.64608 per can and $0.7157 per container
  2. $0.82304 per can and $0.7157 per container
  3. $0.90196 per can and $0.3922 per container
  4. $0.45098 per can and $0.3922 per container

s93.      What is the per-unit joint cost allocated to condensed milk and frosting if the constant gross margin net realizable value method is used?

  1. $1.470248 per can and $0.2381 per container
  2. $0.94048 per can and $0.2311 per container
  3. $0.69524 per can and $1.7381 per container
  4. None of the above

s94.      What is the per-unit joint cost allocated to condensed milk and frosting under the physical output method if the number of units of output after further processing is used to measure output?

  1. $0.69524 per can and $1.7381 per container
  2. $0.4444 per can and $0.4444 per container
  3. $1.3905 per can and $1.7381 per container
  4. None of the above

 

Multiple Choice from Web Quizzes (Available on Student Web Site)

w95.     Which of the following is a joint cost allocation method?

  1. Net realizable value method
  2. Throughput method
  3. Job costing method
  4. Process costing method

w96.     Under the constant gross margin NRV method

  1. Only the joint costs are deducted from revenue to determine the gross margin
  2. The gross margin percentage is allocated to all main products

III.    The allocation is calculated by subtracting the gross margin percentage and separable costs from revenue

  1. I and II only
  2. II and III only
  3. I and III only
  4. I, II, and III

w97.     The physical output method of joint product cost allocation is

  1. Useful for all product costing
  2. Rarely useful
  3. Useful when products are packaged and priced similarly
  4. Useful when products vary widely in net realizable values

w98.     Which of the following joint cost allocation methods should be used for decision making?

  1. Physical output method
  2. Net realizable value method

III.    Sales value at split-off point method

  1. I only
  2. II and III only
  3. I, II, and III only
  4. None of the above; they should not be used for decision making

 

w99.     Joint costs are all of the

  1. Variable costs incurred to produce joint products
  2. Fixed costs incurred to produce joint products
  3. Costs incurred to produce joint products
  4. Incremental costs incurred to produce joint products

w100.   Separable costs are

  1. The costs incurred after the split-off point to process products further
  2. All of the costs incurred before the split-off point
  3. All of the costs incurred before and after the split-off point
  4. Only the cost to package and ship the product

w101.   The split-off point is

  1. The point at which the product is completed
  2. The first point at which the joint products can be separately identified
  3. The point at which joint production commences
  4. None of the above

w102.   Joint costs are allocated for

  1. Financial statements
  2. Inventory valuation

III.    Government reporting, for example income tax reports or cost-based reimbursement reports

  1. I only
  2. I and II only
  3. III only
  4. I, II, and III

w103.   By-products are

  1. Products of a joint process that are relatively immaterial compared to main products
  2. Products of a joint process that are relatively material compared to main products

III.    Not allocated joint costs

  1. Allocated joint costs
  2. I and III only
  3. II and IV only
  4. II and III only
  5. I and IV only

w104.   An allocation method is a logical method

  1. To trace variable costs to products
  2. Used to price products
  3. To assign indirect costs to products
  4. To decide which products to produce

w105.   Main products have a

  1. Net realizable value similar to by-products
  2. High net realizable value, relative to by-products
  3. Low net realizable value, relative to by-products
  4. None of the above

w106.   When choosing a cost allocation method

  1. Any method that does not distort cost is best
  2. The most complex method is usually best
  3. The simplest method with least distortion of cost is best
  4. No method is better than any other method

 

w107.   Which of the following would be considered joint products?

  1. Knitting needles and yarn
  2. Cars and trucks
  3. Yachts and their lifeboats
  4. Gasoline and diesel

w108.   The following are joint costs in the lumber industry

  1. Cutting costs of logs
  2. Cost of shipping a load of lumber to a specific customer
  3. Costs incurred to turn sawdust and wood chips into chipboard
  4. Wages of the person who sells the finished products to customers

w109.   The revenue from by-products may be recognized

  1. At the time of production
  2. At the time of sale

III.    Without having joint costs allocated to them

  1. I only
  2. II only
  3. III only
  4. I, II, and III

 

Use the following information for the next 4 questions.

(CPA) Johnson Manufacturing Company buys Fluron for $0.80 per gallon.  At the end of processing in Department 1, Fluron splits off into products Alphon, Cryon, and Runon.  Alphon is sold at the split-off point, with no further processing.  Cryon and Runon require further processing before they can be sold; Cryon is processed in Department 2 and Runon is processed in Department 3.  Following is a summary of costs and other related data for the year ended June 30, 20×5.

                     Department                    

1                      2                      3

Cost of Fluron                                    $96,000

Direct labor                                         $14,000           $45,000           $65,000

Manufacturing overhead                     $10,000           $21,000           $49,000

 

                        Product                       

Alphon             Cryon              Runon

Gallons sold                                          20,000             30,000             45,000

Gallons on hand at June 30, 20×5        10,000                       –             15,000

Sales in dollars                                    $30,000           $96,000         $141,750

 

There were no inventories on hand at July 1, 20×4, and there was no Fluron on hand at June 30, 20×5.  All gallons on hand at June 30, 20×5 were complete as to processing.  Johnson uses the net realizable value method of allocating joint costs.

w110.   For allocating joint costs, the net realizable value of Alphon for the year ended June 30, 20×5 would be

  1. $30,000
  2. $45,000
  3. $21,000
  4. $6,000

 

w111.   The joint costs for the year ended June 30, 20×5, to be allocated are

  1. $300,000
  2. $95,000
  3. $120,000
  4. $96,000

w112.   The cost of Cryon sold for the year ended June 30, 20×5, is

  1. $90,000
  2. $66,000
  3. $88,857
  4. $96,000

w113.   The value of the ending inventory for Alphon is

  1. $24,000
  2. $12,000
  3. $8,000
  4. $13,333

 

 

Matching

  1. BWZ Inc. produces four main products from a single process with joint costs of $8,000. BWZ had no beginning inventories.  Additional data on the four products appear below:

M1             M2             M3             M4

Quantity                                                           200            150            150            500

Price per unit at split-off                                  $25            $20            $15            $10

Price per unit after further processing              $30            $50            $20            $25

Separable costs                                           $1,000       $2,500          $800       $3,500

Assume BWZ allocates joint costs using the physical output method.  Several terms are listed below on the left and several numbers on the right.  Match each term with the number it best describes.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.

____    1.   Total cost of M1

____    2.   Total cost of M2

____    3.   Total cost of M3

____    4.   Total cost of M4

____    5.   Total joint cost allocated to M1

____    6.   Total joint cost allocated to M3

____    7.   M2’s product gross margin

____    8.   M4’s product gross margin

____    9.   M3’s product gross margin

____    10.       M1’s product gross margin

A.  $1,000

B.  $1,600

C.  $3,700

D.  $1,200

E.  $7,500

F.  $2,600

G.  $3,400

H.  $3,800

I.   $5,000

J.   $2,000

 

 

  1. BWZ Inc. produces four main products from a single process with joint costs of $8,000. BWZ had no beginning inventories.  Additional data on the four products appear below:

M1             M2             M3             M4

Quantity                                                           200            150            150            500

Price per unit at split-off                                  $25            $20            $15            $10

Price per unit after further processing              $30            $50            $20            $25

Separable costs                                           $1,000       $2,500          $800       $3,500

Several items are listed below on the left and right.  Match each item on the left with the best response from the column on the right.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.

____    1.   Joint costs allocated to M3 using the physical output method

____    2.   Product with the smallest joint cost allocation using the sales-value at split-off point method

____    3.   Product with 2nd highest joint cost allocation using the sales-value at split-off point method

____    4.   Joint cost allocated to M3 using the net realizable value method

____    5.   Joint cost allocated to M1 using the net realizable value method

____    6.   Total cost of M1 using the constant gross margin NRV method

____    7.   Joint costs allocated to M2 using the constant gross margin NRV method

____    8.   Total cost of M3 using the constant gross margin NRV method

____    9.   Joint costs allocated to M4 using the constant gross margin NRV method

____    10. Product with the highest product gross margin using the constant gross margin NRV method

A.  Less than $1,000

B.  $1,000 to $1,500

C.  $1,501 to $2,000

D.  $2,001 to $2,500

E.  $2,501 to $3,000

F.  More than $3,000

G.  Product M1

H.  Product M2

I.   Product M3

J.   Product M4

 

 

Exercises

  1. Coffee Beverages processes coffee and bottles it as Frappuccino, Cappuccino, and American. During the year the joint costs of processing the coffee were $270,000.  There were no beginning or ending inventories.  Production and sales value information were as follows:

Sales Value

Product               Cases         at Split-Off         Separable Costs        Selling Price

Frappuccino       300,000        $9 per case         $5.00 per case        $32 per case

Cappuccino       200,000        $8 per case         $3.00 per case        $30 per case

American           400,000        $7 per case         $2.00 per case        $20 per case

 

  1. Allocate the joint costs using the physical output method.
  2. Allocate the joint costs using the net realizable value method.
  3. Allocate the joint costs using sales value at split-off point method.
  4. Variable Products Co. produces 3 products from a joint process costing $2,000. These products can be processed further to form another set of 3 products.  Markets exist for all of the products.  Data for the current period are:
At Split-Off Point Separable Costs After Further Processing
Products Sales Value Products Sales Value
D-1 $1,000 $2,000 D-2 $3,800
E-1 200 600 E-2 700
F-1 1,200 3,000 F-2 4,400

 

  1. What is the gross margin if all products are sold after further processing?
  2. What is the gross margin if the best product mix is chosen?
  3. Assume that E-1 cannot be sold at the split-off point. Should this product be processed further?  Explain, and provide computations to support your answer.
  4. Chemical Processors use a joint process to produce two types of base paint, Regular and Premium. Joint costs amount to $60,000 per batch of output.  Each batch totals 12,000 gallons, 60% Regular and 40% Premium.  Both products are processed further without gain or loss in volume.  Data about further processing are as follows:

Selling Price

Separable Costs               After Further Processing

Regular                    $1.00 per gallon                     $15.00 per gallon

Premium                  $3.00 per gallon                     $20.00 per gallon

 

  1. Allocate the joint costs according to the physical output method (number of gallons at the split-off point).
  2. Allocate the joint costs according to the net realizable value method.
  3. The Company has discovered an additional process by which the Regular can be made into a high quality stain and mildew-proof paint called Durable. This paint is especially suited for bathrooms and kitchens.  The new selling price would be $28 per gallon.  Additional processing would increase separable costs by $11.00 (in addition to the $1.00 separable cost required to produce regular).  Assuming no other changes in cost, should the company begin producing Durable?  Provide calculations to support your answer.
  4. Identify a qualitative factor that could affect the decision in part (c).

 

More Difficult Exercises

  1. Crude Oil Processors produce three products from crude oil: Heating Oil, Gasoline, and Diesel.  The sales value at split-off point is used to allocate joint costs.  The following information is available about their processes:

Heating Oil     Gasoline         Diesel            Total

Units produced (barrels)                      3,600                ?                   ?             15,000

Sales value at split-off point                    ?                   ?           $75,000      $300,000

Allocated joint costs                        $72,000                ?                   ?         $180,000

Sales value if processed further     $165,000      $135,000        $90,000      $390,000

Separable cost if processed further  $27,000        $21,000        $15,000        $63,000

 

  1. What is the sales value at split-off point for Heating Oil?
  2. What are the allocated joint costs for Gasoline?
  3. Should the company sell Diesel at the split-off point or process it further? Provide computations to support your answer.
  4. Assume the company allocates joint costs using a physical output method, with volume measuring as number of units. How much joint cost would be allocated to Heating Oil?
  5. Alma, Inc. has joint process that produces five different products at the split-off point. The joint cost of producing these products is $500.  Three of these products are processed further (A, D, and E).  Two of these products are not processed further (B and C).  Products A, C, and D are main products; Products B and E are by-products.

For product costing purposes, the cost reduction method recognized at the time of production is used for by-product B, and the other income method recognized at the time of sale is used for by-product E (Z).

Product                 Product After          Sales Price                 Separable                Sales Price After

at Split-Off         Further Processing      at Split-Off                     Costs                   Further Processing

A                        W                   $200                   $120                      $400

B                         —                        50                         —                            —

C                         —                      400                         —                            —

D                        Y                     100                       80                        320

E                         Z                        10                       20                          50

  1. At what cost will a unit of B be carried in inventory?
  2. At what cost will a unit of E be carried in inventory?
  3. At what cost will a unit of Z be carried in inventory?
  4. How much joint cost will be allocated to product A, if the basis is sales value at split-off point?

 

 

Short Answer

  1. Describe the split-off point and explain its significance for joint product costing.
  2. A decision about processing a product further should not be influenced by joint cost allocation, but should be based on incremental costs and qualitative factors. Explain.
  3. The allocation of a joint cost among joint products is essentially an arbitrary process. If this statement is true, then why are joint costs allocated?
  4. What estimates are required to perform market-based joint cost allocations, that is, the sales at split-off point and the net realizable value methods? What sources of information would be used for these estimates?
  5. Sometimes managers might be indifferent about processing a product further because the incremental contribution margin is about the same as the contribution margin without further processing. Provide an example of one qualitative factor that might influence a decision to process a joint product beyond the split-off point.
  6. Managers sometimes erroneously include joint cost allocations in the information they use for short term decision-making, such as product emphasis. Explain why this practice could lead to suboptimal decisions.
  7. Daisy Dairy produces cheese. The cheese manufacturing process yields whey, which is either disposed of or sold cheaply as animal feed.  Identify the main product and by-product at Daisy Dairy and explain your reasoning.
  8. Sal’s Frankfurters produces a variety of hot dogs and sausages. The accountant has used the physical output method to allocate joint costs of the manufacturing process, but is reconsidering the appropriateness of this method because new gourmet sausages are priced much higher per pound than the old products.  Explain why one of the market-based methods might be a better choice.
  9. For what types of products is the physical output method appropriate? Explain.
  10. Methods to allocate joint costs often require use of estimates. Which of the following two methods is likely to involve the most uncertainty?  Explain.
  11. Physical output method
  12. Net realizable value

 

 

Problems

  1. Daisy Dairy produces butter and cheese products. The process yields whey, in addition to the butter and cheese products.  Years ago, whey was considered human food, but now the dairy sells it very cheaply as animal feed to avoid disposal costs.  Recently, University of California-Davis researchers developed a process whereby whey can be used as a main ingredient in a plastic-like film that can be used to coat foods to keep them fresh.

 

  1. Describe main products and by-products. How are they similar, and how are they different?
  2. Under Daisy’s current practices, would whey be considered a main product or a by-product? Explain.
  3. With the new developments for whey, would you expect any changes in your classification in part (c)? Explain.
  4. Describe several uncertainties that might arise when classifying products as main products versus by-products.

 

  1. Martin, Inc. produces products MP-1 and MP-2 from a joint process costing $2,000 per 1,000 pounds of input. A 1,000-pound batch produces 300 units of MP-1 and 200 units of MP-2.  MP-1 can be processed further for $150, and MP-2 for $250.  Sales prices after further processing are $5 and $7 per unit, respectively.

 

  1. Determine the gross margin for each product, assuming Martin allocates joint costs using the physical output method.

For parts (b) through (d), assume Martin could buy a higher grade of the input material for $3,000 per 1,000 pounds.  The higher grade material would increase MP-1’s separable costs to $400, and MP-2’s unit selling price would become $15.

  1. Would the MP-1 manager want the better quality material to be purchased? Provide computations to support your answer.
  2. Would the MP-2 manager want the better quality material to be purchased? Provide computations to support your answer.
  3. Would the chief executive officer of Martin, Inc. want the better quality material to be purchased? Provide computations to support your answer.
  4. As an accountant for Metals Unlimited, a small mining firm, you are responsible for allocating the joint costs for the minerals. The firm is using the weight of the material to allocate these costs.  Some of the tailings from the mining process are currently being sold as unprocessed gravel to landscape material distributors, but the allocated costs are greater than the revenue.  Therefore, several managers would like to quit selling this product.

 

  1. What joint product allocation method is Metals Unlimited using? Why, under this method, are the joint cost allocations to gravel larger than the revenues?
  2. List two market-based methods that could be used to allocate the joint costs. List the one pro and one con of each method for this organization.
  3. Write a brief paragraph to the managers explaining why they should not use any allocated joint costs in their decisions about whether to keep or drop the gravel product.

 

  1. Benjamin and Lenny are partners in the Double-B Farm, where they grow corn. They process the corn into four separate products.  Double-B Farm’s joint costs typically total $8,000.  Additional data for the products are summarized in the table below:

Quantity                 Sales Price             Separable

Produced                  Per Unit                  Costs

Corn oil                        10,000 gallons        $1.50 per gallon          $3,000

Whole kernel corn        15,000 bushels       $0.75 per bushel         $2,250

Corn husks                     6,000 husks          $0.25 per husk                  -0-

Corn silk                       12,000 pounds        $0.50 per pound            $600

 

  1. Classify each of Double-B’s products as either a main product or a by-product, and justify your classifications.
  2. Describe in your own words two methods for allocating Double-B’s joint costs to its main products. List a pro and a con for each method.  Which would you recommend to Benjamin and Lenny?  Why?
  3. Describe in your own words two methods of accounting for by-products. Which method is generally considered better?  Explain.
  4. Benjamin and Lenny are considering whether to allocate joint costs to the main products using the physical output method. Can this method be used to allocate joint costs given the data in the table above?  Explain.

 

True / False

  1. The total standard cost for a unit of output is the sum of the standard costs for the resources used in production.
  2. The standard cost of direct materials is computed as the standard price per unit of input times the standard quantity per unit of input.
  3. The cost categories that are measured and monitored in a given organization depend, in part, on the costs that managers consider important.
  4. Calculating variances is a necessary, but not sufficient, step for completing a variance analysis.
  5. Variance analysis is used for monitoring and performance evaluation.
  6. A standard cost variance is a difference between a standard cost and an actual cost.
  7. Identifying the reasons for variances is usually a quick and easy process.
  8. The direct materials price variance is often based on materials purchased, rather than on materials used.
  9. The direct materials efficiency variance tells managers about the efficiency of the purchasing process.
  10. The total direct labor variance can be broken down into two components: the efficiency variance and the price variance.
  11. Unreasonable standards may be the cause of direct materials variances, but not of direct labor variances.
  12. A contract with a new supplier may cause an unfavorable materials price variance.
  13. Normal fluctuations in labor hours may cause a favorable direct labor efficiency variance.
  14. The variable overhead budget variance is the difference between allocated variable overhead cost and actual variable overhead cost.
  15. The fixed overhead spending variance is normally zero because fixed costs are constant within a relevant range of activity.
  16. The fixed overhead budget variance can be broken down into two parts: the spending variance and the production volume variance.
  17. Errors in the accounting records related to actual production output could lead to a fixed overhead production volume variance.
  18. If the total variances in the accounting information system are favorable, accountants must adjust some accounts by decreasing costs during the closing process.
  19. If a variance is considered material, it should be allocated to work in process inventory, finished goods inventory, and cost of goods sold.
  20. If a variance is unfavorable, it should be closed directly to cost of goods sold.
  21. Variance analysis can be used for both costs and revenues.
  22. (Appendix 11A) The sales price variance is calculated as (actual price – standard price) X actual volume sold.
  23. (Appendix 11A) For organizations that sell multiple products, contribution margin and sales mix variances are often useful for decision making.

 

 

Multiple Choice

 

Use the following information for the next 4 questions.

Welch Company budgeted the following cost standards for the current year:

Direct materials = 1.40 pounds per unit @ $1.50 per pound

Direct labor = 0.75 hours per unit @ $6 per hour

Actual production and costs were as follows:

Units produced = 2,800

Direct materials used = 4,500 lbs.

Direct materials purchased = 5,000 lbs. @ a cost of $5,850

Direct labor incurred = 2,000 hours at a cost of $13,000

  1. The material price variance for materials purchased was
  2. $1,650 F
  3. $870 U
  4. $2,520 U
  5. $780 F
  6. The material efficiency variance was
  7. $1,650 F
  8. $870 U
  9. $2,520 U
  10. $780 F
  11. The labor price variance was
  12. $600 F
  13. $400 U
  14. $4,800 F
  15. $1,000 U
  16. The labor efficiency variance was
  17. $600 F
  18. $400 U
  19. $4,800 F
  20. $1,000 U

 

Use the following information for the next 4 questions.

Burkett Company uses a standard cost system. Indirect costs were budgeted at $200,000 plus $15 per direct labor hour. The overhead rate is based on 10,000 hours. Actual results were:

Standard direct labor hours                     9,000

Actual direct labor hours                      10,000

Fixed overhead                                 $190,000

Variable overhead                            $185,000

  1. The fixed overhead production volume variance was
  2. $15,000 F
  3. $20,000 U
  4. $10,000 F
  5. $10,000 U
  6. The variable overhead spending variance was
  7. $10,000 F
  8. $50,000 U
  9. $35,000 U
  10. $15,000 U
  11. The variable overhead efficiency variance was
  12. $10,000 F
  13. $50,000 U
  14. $35,000 U
  15. $15,000 U
  16. The over- or underapplied overhead was
  17. $50,000 under
  18. $10,000 over
  19. $60,000 under
  20. $20,000 over

 

Use the following information for the next 6 questions.

Hyteck, Inc. is a capital intensive firm. Indirect costs make up nearly 70% of the product costs.  The company has no direct material costs because customers provide the direct materials used for each job.  To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labor hours, are derived from the master budget.

Master               Actual

Budget               Results

Units produced                           2,000               1,820

Direct labor hours                     10,000               9,200

Fixed overhead                     $100,000           $98,000

Variable overhead                $160,000         $150,000

Direct labor                           $100,000           $90,000

  1. The fixed overhead spending variance was
  2. $9,000 U
  3. $2,000 F
  4. $7,000 U
  5. $2,800 U
  6. The fixed overhead production volume variance was
  7. $9,000 U
  8. $2,000 F
  9. $7,000 U
  10. $2,800 U
  11. The variable overhead spending variance was
  12. $1,200 F
  13. $2,000 F
  14. $2,800 U
  15. $1,600 U
  16. The budget variance for variable overhead was
  17. $2,800 U
  18. $7,000 U
  19. $4,400 U
  20. $9,000 U
  21. The direct labor price variance was
  22. $2,000 F
  23. $2,800 U
  24. $1,000 U
  25. $1,000 F

 

  1. The direct labor efficiency variance was
  2. $2,000 F
  3. $2,800 U
  4. $1,000 U
  5. $1,000 F

 

Use the following information for the next 4 questions.

Hogle Mfg. Co. uses a standard costing system. The standard time to produce one unit is 4 hours, and normal production is 3,000 units monthly. Overhead costs were estimated to be $135,000. The standard variable overhead rate is $5 per machine hour. During April the following results were recorded:

Units produced                                       3,100

Units sold                                               2,800

Machine hours required                        12,800

Actual overhead costs                       $136,000

  1. The combined fixed and variable overhead spending variance was
  2. $1,000 U
  3. $2,000 F
  4. $7,000 U
  5. $3,000 F
  6. The variable overhead efficiency variance was
  7. $8,000 U
  8. $4,000U
  9. $2,000 U
  10. $4,000 F
  11. The fixed overhead production volume variance was
  12. $1,000 U
  13. $2,500 F
  14. $1,500 F
  15. $5,000 U
  16. The total overhead allocated was
  17. $135,000
  18. $139,500
  19. $141,500
  20. $137,000

 

Use the following information for the next 3 questions.

Baldwin, Inc uses a standard job cost system and purchased 25,000 lbs. of material at $6 per lb., and used it all.  The standard amount allowed for the output achieved is 22,500 lbs, and the standard price is $6.50 per lb. The company also incurred 37,500 direct labor hours for $450,000. The standard hourly price was $11 per hour, and 39,000 hours were allowed at standard.  Assuming all variances are immaterial, answer the following questions.

  1. The entry to record the direct material price variance will include a
  2. Debit to materials inventory for $150,000
  3. Debit to account payable for $162,500
  4. Credit to the price variance for $12,500
  5. Debit to the price variance for $16,250
  6. The entry to record the direct material efficiency variance will include a
  7. Debit to work in process inventory for $146,250
  8. Credit to the efficiency variance for $16,250
  9. Credit to the efficiency variance for $12,500
  10. Credit to materials inventory for $150,000
  11. The entry to record the direct labor variances will include a
  12. Credit to wages payable for $429,000
  13. Debit to wages expense for $450,000
  14. Debit to work in process inventory for $412,500
  15. Credit to direct labor efficiency variance for $16,500

 

Use the following information for the next 2 questions.

Brodie Co. uses a standard job cost system and a denominator volume of 25,000 direct labor hours for allocating overhead. The actual output was 12,000 units, which cost $185,700 for direct labor (23,000 hours), $27,525 for variable overhead, and $136,400 for fixed overhead. The standard variable overhead per unit is $2 (2 hours @ $1 per hour), and the standard fixed overhead per unit is $10 (2 hours @ $5 per hour). All variances are immaterial and are closed to Cost of Goods Sold at the end of the period.

  1. The entry to close the variable overhead variances includes a
  2. Credit to the variable overhead spending variance for $4,525
  3. Credit to work in process for $24,000
  4. Credit to the variable overhead efficiency variance for $1,000
  5. Debit to Cost of Goods Sold for $5,525
  6. The entry to close the fixed overhead variances includes a
  7. Credit to work in process for $120,000
  8. Debit to fixed overhead control for $125,000
  9. Debit to Cost of Goods Sold for $16,400
  10. Debit to the fixed overhead production volume variance for $5,000

 

Use the following information for the next 5 questions.

Mason, Inc. uses a standard costing system.  Overhead costs are allocated based on direct labor hours. The standard variable overhead and fixed overhead rates are $1 and $5 per direct labor hour, respectively.  Data relevant for the current period include:

Direct materials purchased                         50,000 lbs. @ $12 per lb.

Direct materials used                                 50,000 lbs.

Standard quantity of direct materials
for actual production                           45,000 lbs.

Direct materials standard price                   $13 per lb.

Direct labor costs incurred                         75,000 hours @ $12 per hour

Standard direct labor hours for
actual production                                 78,000 hours

Standard direct labor cost per hour            $11 per hour

Variable overhead costs incurred               $77,070

Fixed overhead costs incurred                   $381,920

  1. The purchase of direct materials would be recorded in direct materials inventory at
  2. $540,000
  3. $585,000
  4. $600,000
  5. $650,000
  6. The cost of direct materials added to work in process would be
  7. $540,000
  8. $585,000
  9. $600,000
  10. $650,000

 

  1. The direct materials efficiency variance is
  2. $60,000 Favorable
  3. $60,000 Unfavorable
  4. $65,000 Favorable
  5. $65,000 Unfavorable
  6. The direct labor price variance is
  7. $30,000 Favorable
  8. $30,000 Unfavorable
  9. $75,000 Unfavorable
  10. $78,000 Unfavorable
  11. The variable overhead spending variance is
  12. $930 Favorable
  13. $2,070 Unfavorable
  14. $33,000 Unfavorable
  15. $33,000 Unfavorable
  16. Given the following account balances at the end of the first year of operations:

Work in process inventory                $  90,000

Finished goods inventory                    165,000

Cost of goods sold                              495,000

Direct labor price variance                    35,000 U

Direct labor efficiency variance           17,000 F

Assuming that variances are considered material, the entry and amount of direct labor variances allocated to the Finished Goods Inventory is

  1. Credit $3,740
  2. Debit $2,160
  3. Credit $770
  4. Debit $3,960

 

Use the following information for the next 2 questions.

Given the following account balances at the end of the first year of operations:

Direct materials inventory                 $  60,000

Work in process inventory                  120,000

Finished goods inventory                    180,000

Cost of goods sold                              600,000

Direct material price variance               65,000 U

Direct material efficiency                   195,000 F

  1. Assuming that variances are considered material, the entry and amount of the direct material efficiency variance allocated to work in process inventory is
  2. Credit $26,000
  3. Credit $24,375
  4. Debit $17,333
  5. Debit $8,125
  6. Assuming that variances are considered material, the entry and amount of the direct material price variance allocated to Cost of Goods Sold is
  7. Debit $40,625
  8. Debit $41,082
  9. Credit $43,333
  10. Debit $39,935

 

  1. Expected costs per unit of input are called
  2. Standard prices
  3. Standard costs
  4. Standard quantities
  5. Standard ideals
  6. The budget that reflects the level of activity management expects to attain is the
  7. Flexible budget
  8. Standard budget
  9. Master budget
  10. Expected budget
  11. Standard costing allows management to
  12. Measure performance
  13. Identify inefficiencies

III. Control costs

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and III
  5. For overhead variances, the difference between the flexible budget amounts and actual costs incurred is called the
  6. Efficiency variance
  7. Budget variance
  8. Favorable variance
  9. Quantity variance
  10. Which department is customarily responsible for an unfavorable material price variance?
  11. Sales
  12. Purchasing
  13. Engineering
  14. Production
  15. Favorable price variances occur because of
  16. Rising prices of finished goods
  17. Increases in raw materials efficiency
  18. Price decreases in raw materials
  19. Efficiency in the production department
  20. Which of the following is a possible cause of an unfavorable materials efficiency variance?
  21. Using materials that do not meet specifications
  22. Using a higher class of labor than called for
  23. Using a higher quality of material than called for
  24. Using fewer hours of labor than labor specifications call for
  25. In a traditional manufacturing accounting system, the standard cost of a unit of output is the sum of the standard costs of
  26. Direct material, direct labor, and variable overhead
  27. Direct material, direct labor ,and fixed overhead
  28. Direct material, direct labor, and period costs
  29. Direct material, direct labor, variable overhead, and fixed overhead

 

  1. Standard costs should be reviewed
  2. Daily
  3. Monthly
  4. Annually
  5. As often as managers and accountants deem necessary
  6. The process of calculating variances and analyzing the reasons they occurred is called
  7. Variance analysis
  8. Budget analysis
  9. Historical analysis
  10. Activity-based analysis
  11. Variance analysis includes which of the following processes?
  12. Calculating variances
  13. Analyzing the reasons variances occurred

III. Predicting variances in future periods

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and III
  5. Managers investigate
  6. All variances
  7. All unfavorable variances
  8. Variances they consider important
  9. Variances that are reported in the financial statements
  10. How do managers decide which variances are important enough to investigate?
  11. By considering whether they are favorable or unfavorable
  12. By calculating and investigating all possible variances

III. By considering whether it is large enough to justify investigation

  1. I only
  2. II only
  3. III only
  4. I and III only
  5. Which of the following is not a typical step in variance analysis?
  6. Calculate variances
  7. Identify reasons for variances
  8. Report variances in financial statements
  9. Draw conclusions and take action
  10. Variance analysis involves the steps listed below. In which order should the steps be performed?
  11. Calculate variances
  12. Choose variances for further investigation
  13. Draw conclusions and take action
  14. Identify reasons for variances
  15. 1, 2, 3, 4
  16. 2, 1, 3, 4
  17. 2, 1, 4, 3
  18. 1, 2, 4, 3

 

  1. The production manager of CLR Corporation calculated a material and unfavorable variance of $4,000 with respect to the cost of direct materials. Which of the following is a likely next step for the production manager?
  2. Identify and discipline the responsible employee
  3. Take actions to prevent the variance from recurring
  4. Ascertain the cause of the variance
  5. Switch suppliers for direct materials
  6. If a variance is investigated and determined to be random, managers should
  7. Write off the variance against cost of goods sold
  8. Do nothing
  9. Identify and discipline the employee(s) responsible
  10. Write off the variance against work in process
  11. If a variance analysis shows that operations are better than expected, managers should
  12. Do nothing
  13. Revise standard costs to make them harder to achieve
  14. Distribute extra dividends to shareholders
  15. Monitor quality to ensure it was maintained
  16. Variances can be caused by
  17. Out-of-control operations
  18. Better-than-expected operations

III. Inappropriate benchmarks

  1. I and III only
  2. II and III only
  3. I and II only
  4. I, II, and III
  5. Theft of raw materials is most likely to lead to
  6. Direct materials price variance
  7. Favorable direct materials price variance
  8. Unfavorable direct materials efficiency variance
  9. Favorable direct materials efficiency variance
  10. Unattainable standards are likely to lead to
  11. Errors in the accounting information system
  12. Favorable variances

III. Unfavorable variances

  1. I only
  2. II only
  3. III only
  4. I and III only
  5. At the end of 20×1, ELM Corporation’s production manager estimated direct labor overtime hours at 200 for the first quarter of 20×2. At the end of the first quarter, actual overtime hours totaled 180.  This difference is most likely to lead to
  6. Favorable variable overhead spending variance
  7. Unfavorable production volume variance
  8. Favorable labor efficiency variance
  9. Unfavorable labor efficiency variance

 

  1. Intentional worker damage is most likely to result in which type of variance?
  2. Direct materials price variance
  3. Direct materials efficiency variance
  4. Direct labor price variance
  5. Variable overhead spending variance
  6. ELM Corporation introduced a new automated production process that has reduced the amount of labor needed, but not affected the use of materials. The standard cost system has not been changed yet to reflect this new process.  Assuming the machinery is functioning properly and that workers were properly trained in its use, which of the following variances is most likely to result?
  7. Favorable variable overhead spending variance
  8. Favorable direct labor efficiency variance
  9. Unfavorable direct labor efficiency variance
  10. Favorable direct materials price variance
  11. LST Corporation entered into a new contract with one of its raw material suppliers. The new contract required the supplier to deliver raw materials with a 24-hour notice from LST.  This reduces LST’s material handling costs, but has increased the cost of the raw materials delivered.  Which of the following variances is most likely to result?
  12. Unfavorable direct material price variance
  13. Favorable direct price variance
  14. Unfavorable variable overhead spending variance
  15. Unfavorable fixed overhead spending variance
  16. A favorable variance in one area might be offset by
  17. Favorable variance in another area
  18. Unfavorable variance in another area
  19. Increase in period costs
  20. Decrease in period costs
  21. Rewarding employees in one production department for meeting or exceeding standard cost benchmarks can create new sets of problems for organizations. Which of the following is not one of them?
  22. An unfavorable efficiency variance because of rework needed on work from another department
  23. Variances in another production department
  24. Unmotivated employees in that production department
  25. Poor quality finished goods
  26. Which of the following statements regarding tradeoffs among variances is true?
  27. Managers generally do not need to consider tradeoffs in variance analysis
  28. Managers may sometimes make tradeoffs between favorable and unfavorable variances
  29. Unfavorable direct material price variances often lead to unfavorable direct labor efficiency variances
  30. Favorable direct material price variances often lead to favorable direct material efficiency variances
  31. Accountants investigate manufacturing overhead spending variances to determine
  32. Which specific overhead costs differ from expectations, and whether corrections are needed
  33. Which specific direct costs differ from expectations, and whether corrections are needed
  34. Which specific marketing costs differ from expectations, and whether corrections are needed
  35. Whether the variance is material

 

  1. During the middle of the fiscal year, AWR Corporation unexpectedly revised its estimate of a plant asset’s life from 5 years to 7 years. That revision is most likely to lead to
  2. No variance, since the plant asset’s cost is sunk
  3. Fixed overhead spending variance
  4. Fixed overhead production volume variance
  5. Variable overhead spending variance
  6. Fixed overhead costs are not expected to vary with production volumes. Therefore, production volume variances
  7. Do not exist in most organizations
  8. Exist only if production volume is higher than anticipated
  9. Exist only if production volume is lower than expected
  10. Exist because of estimates in the calculation of the overhead allocation rate
  11. Because managers use estimates in calculating overhead allocation rates, they are likely to experience
  12. Fixed overhead production volume variances
  13. No fixed or variable overhead variances
  14. Direct labor price variances
  15. Lower than expected profits
  16. The production volume variance provides information about
  17. Capacity utilization
  18. Variable overhead costs which vary with volume
  19. Fixed overhead costs which vary with volume
  20. Sales levels
  21. Variable overhead spending variances can result from unattainable variable allocation rates. In turn, those rates may be caused by
  22. Inappropriate allocation bases
  23. Poor estimates of total overhead costs

III. Change in estimated life of depreciable assets

  1. I only
  2. I and II only
  3. I and III only
  4. I, II, and III
  5. Overhead efficiency variances
  6. Provide managers with useful information for cost management
  7. Do not provide marginal information for cost management because they involve estimates
  8. Do not provide new cost management information because direct cost efficiency variances provide the same information
  9. Provide useful information for financial reporting purposes
  10. Which of the following variances is least likely to provide useful information for making decisions, if calculated as part of a comprehensive set of variances?
  11. Variable overhead spending
  12. Production volume variance
  13. Direct material price
  14. Direct labor efficiency

 

 

Use the following information for the next 7 questions.

Paris Perfumery sells two perfumes, L’Amor and Plaisir.  The expected sales mix is one bottle of L’Amour to five bottles of Plaisir.  Planned sales and variable costs for last period were as follows:

L’Amour                              Plaisir               Total

Sales                      (10,000 units)  $600,000      (50,000 units)  $400,000      $1,000,000

Variable costs                               200,000                             230,000           430,000

Contribution Margin                   $400,000                           $170,000      $   570,000

 

During the period there was an economic downturn.  Sales of L’Amour dropped off, so Paris reduced its price.  Actual sales were as follows:

L’Amour                              Plaisir               Total

Sales                      (7,500 @ $45)  $337,500      (36,000 @ $8)  $288,000         $625,500

Variable costs                               165,000                             153,000           318,000

Contribution Margin                   $172,500                           $135,000         $307,500

  1. (Appendix 11A) The revenue sales quantity variance for L’Amour was
  2. $150,000 U
  3. $150,000 F
  4. $262,500 U
  5. $112,000 U
  6. (Appendix 11A) The contribution margin sales mix variance was
  7. $11,330 F
  8. $9,150 U
  9. $9,150 F
  10. $10,250 U
  11. (Appendix 11A) The sales price variance for L’Amour was
  12. $172,500 F
  13. $172,500 U
  14. $0
  15. $112,500 U
  16. (Appendix 11A) The contribution margin sales volume variance was
  17. $204,500 U
  18. $204,500 F
  19. $147,600 U
  20. $0
  21. (Appendix 11A) The contribution margin budget variance was
  22. $262,500 U
  23. $262,500F
  24. $ 0
  25. $87,500 U
  26. (Appendix 11A) The contribution margin variance was
  27. $123,525 U
  28. $115,000 F
  29. $87,500 F
  30. $114,900 U
  31. (Appendix 11A) The contribution margin sales quantity variance was
  32. $204,500 U
  33. $156,750 U
  34. $175.500 U
  35. $204,500 F

 

 

More Difficult Multiple Choice

These multiple choice questions require more complex computations or present information differently than in the textbook.

 

Use the following information for the next 3 questions.

Pardee, Inc. completed operations for the week and the accountant was preparing to make journal entries necessary to prepare a set of interim financial statements. Unfortunately, he discovered some of the data concerning direct materials had been lost. He was able to find the following:

Efficiency variance                 $4,500 Unfavorable

Standard price                          $10 per unit

Actual units purchased            9,000

Inventory decrease                  1,000 units

Budget variance                       $900 Favorable

  1. The actual direct materials price paid per unit was
  2. $9.60
  3. $9.40
  4. $10.00
  5. $10.60
  6. The standard cost of the direct materials used was
  7. $90,000
  8. $95,500
  9. $100,000
  10. $94,000
  11. 77. The standard quantity of direct materials allowed for the month was
  12. 10,450
  13. 9,000
  14. 10,000
  15. 9,550

 

Use the following information for the next 6 questions.

Everett, Inc. budgeted $1,488,000 for total overhead.  The standard variable overhead rate was $2 per direct labor hour, or $6 per unit, based on an anticipated activity level of 600,000 direct labor hours. During the year 220,000 units were produced.  Fixed overhead costs incurred were $300,000.  The variable overhead budget variance was $19,800 unfavorable, and the actual variable overhead rate was $2.10 per direct labor hour.

  1. The actual variable overhead costs incurred were
  2. $1,339,800
  3. $1,320,000
  4. $1,260,000
  5. $1,300,200
  6. The standard direct labor hours allowed were
  7. 744,000
  8. 600,000
  9. 660,000
  10. 545,600
  11. The variable overhead efficiency variance was
  12. $76,000 U
  13. $63,800 U
  14. $46,200 F
  15. $44,000 F
  16. The standard fixed overhead rate per direct labor hour was
  17. $0.48
  18. $0.90
  19. $0.50
  20. $0.96
  21. The fixed overhead budget variance was
  22. $-0-
  23. $12,000 U
  24. $240,000 F
  25. $69,600 F
  26. The fixed overhead allocated was
  27. $300,000
  28. $316,800
  29. $288,000
  30. $330,000

 

Use the following information for the next 3 questions.

Dem Mfg. has gathered the following data in preparing to record their direct labor payroll costs for the week:

Actual hours worked                            18,500

Standard hours allowed                        20,000

Total direct labor variance                    $8,300 F

Direct labor price variance                    $3,700 U

  1. The standard direct labor price was
  2. $8.00
  3. $8.20
  4. $3.07
  5. $3.05
  6. The actual direct labor costs were
  7. $144,300
  8. $148,000
  9. $160,000
  10. $151,700
  11. The actual direct labor price was
  12. $8.00
  13. $8.20
  14. $9.10
  15. $7.80

 

 

Use the following information for the next 5 questions.

During the period Richeleau produced 1,000 units of product. The flexible budget for standard costs is:

Direct materials                                   $43,000

Direct labor                                           67,000

Variable overhead                                30,000

Fixed overhead                                     25,000

Variances for the period are:

Direct materials price                            $   400 U

Direct materials efficiency                         500 F

Direct labor price                                       600 F

Direct labor efficiency                               200 U

Variable overhead spending                      300 F

Variable overhead efficiency                    100 F

Fixed overhead spending                           500 F

Fixed overhead production volume        1,000 U

  1. The direct materials inventory increased during the period by 1,000 (at standard cost). What was the actual cost of direct materials purchased during the period?
  2. $41,900
  3. $42,900
  4. $43,100
  5. $43,900
  6. The actual cost of direct labor incurred was
  7. $66,200
  8. $66,400
  9. $66,600
  10. $67,400
  11. The variable overhead allocated was
  12. $29,600
  13. $30,000
  14. $29,900
  15. $30,400
  16. The budgeted fixed overhead was
  17. $25,000
  18. $24,000
  19. $24,500
  20. $23,000
  21. The total under- or overapplied overhead for the period was
  22. $400 overapplied
  23. $500 underapplied
  24. $900 overapplied
  25. $100 underapplied

 

 

Use the following information for the next 4 questions.

White, Inc. produces a chemical product whose primary component is purchased on credit and any discounts are always taken. The following material and labor elements make up the costs of the product:

Purchase price for material                  $30 per gallon

Freight and handling                            $130 per 100 gallons

Each container of the chemical product contains 5.7 quarts of material. During the process 5% of the material is lost due to waste. Each container of product also requires 1.2 hours of labor. Each day 2 hours are taken for set-up, cleaning, and breaks. Also, the wage rate is $15 per hour and fringes/payroll taxes are 20% of wages.  Clients can take a 3% discount if they pay invoices within 10 days; otherwise, the entire invoice amount is due within 30 days.  1 gallon equals 4 quarts.

  1. The standard price per quart for materials is
  2. $7.825
  3. $7.50
  4. $8.05
  5. $7.60
  6. The standard quantity of material per finished unit is
  7. 6.0 quarts
  8. 5.4 quarts
  9. 5.7 quarts
  10. 5.415 quarts
  11. The standard rate per hour is
  12. $18
  13. $28.80
  14. $12
  15. $21.60
  16. The standard hours per finished unit is
  17. 1.2 hours
  18. 1.5 hours
  19. 1.6 hours
  20. 1.45 hours

 

 

Multiple Choice from Study Guide

s96.      The expected costs per unit of input are called

  1. Standard costs
  2. Standard prices
  3. Standard quantities
  4. Standard cost allowed

s97.      The difference between actual capacity used and budgeted capacity is called

  1. Direct labor efficiency variance
  2. Fixed overhead efficiency variance
  3. Variable overhead efficiency variance
  4. Production volume variance

 

Use the following information for the next 2 questions.

Bellingham, Inc. incurred the following during a recent period:

Actual            Standard

Machine hours                            1,350               1,425

Units produced                              570                  570

Variable overhead costs            $2,775             $2,850

s98.      The variable overhead efficiency variance equals

  1. $75 Favorable
  2. $150 Favorable
  3. $0
  4. $75 Unfavorable

s99.      The variable overhead spending variance equals

  1. $75 Favorable
  2. $150 Favorable
  3. $0
  4. $75 Unfavorable

s100.    (Appendix 11A) Contribution margin sales volume variance can be further subdivided into

  1. Contribution margin budget variance and contribution margin variance
  2. Contribution margin variance and contribution margin sales mix variance
  3. Contribution margin sales quantity variance and contribution margin sales mix variance
  4. Contribution margin sales quantity variance and contribution margin budget variance

 

Use the following information for the next 3 questions.

Vashon Corporation had the following activity during a recent period:

Standard quantity of direct materials                                          9,000 pounds

Actual quantity of direct materials purchased and used              8,800 pounds

Efficiency variance                                                                  $2,400 favorable

Total direct materials budget variance                                          $200 favorable

s101.    The standard price per pound was

  1. $12.00
  2. $12.25
  3. $12.50
  4. $13.00

s102.    The actual price per pound was

  1. $12.00
  2. $12.25
  3. $12.50
  4. $13.00

s103.    The direct materials price variance was

  1. $2,200 unfavorable
  2. $2,600 unfavorable
  3. $2,000 favorable
  4. $2,200 favorable

s104.    A favorable direct materials price variance could be caused by

  1. The purchasing manager acquiring an excessive quantity of direct materials
  2. The purchasing manager acquiring materials of higher quality
  3. The purchasing manager acquiring materials of lower quality
  4. Either (a) or (c)

s105.    The variance over which management probably has the least control is the

  1. Direct labor efficiency variance
  2. Direct materials price variance
  3. Variable overhead efficiency variance
  4. Production volume variance

 

s106.    Which of the following statements is false?

  1. The actions of a purchasing manager can affect a production manager’s variances
  2. The actions of a production manager can affect a purchasing manager’s variances
  3. Inefficient use of the fixed overhead cost allocation base will cause an unfavorable production volume variance
  4. Inefficient use of the variable overhead cost allocation base will cause an unfavorable variable overhead efficiency variance

 

Use the following information for the next 3 questions.

Anacortes, Inc. uses a standard cost system.  At the beginning of the year, it budgeted $50,000 for fixed overhead.  The estimated variable overhead allocation rate was $3.30 per machine hour, and machine hours is the cost allocation base for both variable and fixed overhead.  The static budget was based on 16,000 units of production and sales, and each unit was expected to use 2.5 machine hours.  Actual total overhead was $170,000, and Anacortes produced and sold 15,000 units during the year.  Actual machine hours for the year were 36,000.

s107.    The variable overhead efficiency variance was

  1. $4,950 favorable
  2. $3,750 favorable
  3. $1,200 unfavorable
  4. $3,125 unfavorable

s108.    The fixed overhead production volume variance was

  1. $4,950 favorable
  2. $3,750 favorable
  3. $1,200 unfavorable
  4. $3,125 unfavorable

s109.    The combined fixed and variable spending variance was

  1. $4,950 favorable
  2. $3,750 favorable
  3. $1,200 unfavorable
  4. $3,125 unfavorable

s110.    (Appendix 11A) The contribution margin sales mix variance will be unfavorable when the

  1. Actual sales in total units is less than total unit sales in the static budget
  2. Actual contribution margin is less than the static budget contribution margin
  3. Actual sales mix includes a lower proportion of the product with the highest contribution margin per unit than its proportion in the static budget sales mix
  4. Actual average selling price is less than the average selling price in the static budget

s111.    (Appendix 11A) The revenue sales quantity variance will be unfavorable when the

  1. Actual sales in total units is less than total unit sales in the static budget
  2. Actual contribution margin is less than the static budget contribution margin
  3. Actual sales mix includes a lower proportion of the product with the highest contribution margin per unit than its proportion in the static budget sales mix
  4. Actual average selling price is less than the average selling price in the static budget

 

Use the following information for the next 7 questions.

A small accounting firm budgets 200 hours of billings for the next month, and 60% of these hours are expected to be for tax return preparation services, with the remaining 40% for bookkeeping services.  Tax work is billed at $50 per hour, and bookkeeping work is billed at $40 per hour.  The variable costs for both types of services are $10 per hour.  During the month 180 hours were billed, 90 of which were for tax work.

 

s112.    (Appendix 11A) The revenue sales quantity variance was

  1. $720 unfavorable
  2. $540 favorable
  3. $900 unfavorable
  4. $180 unfavorable

s113.    (Appendix 11A) The contribution margin sales mix variance was

  1. $720 unfavorable
  2. $540 favorable
  3. $900 unfavorable
  4. $180 unfavorable

s114.    (Appendix 11A) The sales price variance was

  1. $720 unfavorable
  2. $540 favorable
  3. $0
  4. $1,200 unfavorable

s115.    (Appendix 11A) The contribution margin sales volume variance was

  1. $720 unfavorable
  2. $540 favorable
  3. $900 unfavorable
  4. $1,200 unfavorable

s116.    (Appendix 11A) The contribution margin budget variance was

  1. $720 unfavorable
  2. $540 favorable
  3. $900 unfavorable
  4. $1,200 unfavorable

s117.    (Appendix 11A) The contribution margin variance was

  1. $720 unfavorable
  2. $540 favorable
  3. $0
  4. $1,200 unfavorable

s118.    (Appendix 11A) The contribution margin sales quantity variance was

  1. $720 unfavorable
  2. $540 favorable
  3. $0
  4. $1,200 favorable

 

Use the following information for the next 2 questions.

Thurston Corp. uses a standard job cost system with the following standards:

Standard price per lb. of direct materials                                             $4.80

Standard price per hour of direct labor                                                $15.50

Standard quantity of direct materials allowed for actual output           2,100 lbs

Standard quantity of direct labor allowed for actual output                 505 hours

Thurston actually used 2,000 pounds of direct material that cost $10,000 and 500 direct labor hours that cost $7,500.

s119.    The entry to record the usage of direct materials would include a

  1. Debit to Work in process inventory for $9,600
  2. Credit to Raw material inventory for $10,000
  3. Debit to Work in process inventory for $10,500
  4. Credit to Direct materials efficiency variance for $480

s120.    The entry to record the usage of direct labor would include a

  1. Credit to Direct labor efficiency variance for $77.50
  2. Debit to Work in process inventory for $7,500
  3. Credit to Accrued payroll for $7,827.50
  4. Debit to Direct labor price variance for $250

 

Use the following information for the next 2 questions.

Keyport, Inc. uses a standard job cost system.  The standard price for direct material is $15 per ounce, and Keyport used 60,000 ounces this period.  The standard quantity allowed for direct materials this period was 58,000 ounces.  The standard price for direct labor is $9 per hour, and Keyport used 5,000 direct labor hours, at an actual cost of $10 per hour this period.  The standard quantity allowed for direct labor this period was 5,200 hours.

s121.    The entry to record the usage of direct materials would include a

  1. Debit to Work in process inventory for $900,000
  2. Debit to Direct materials efficiency variance for $30,000
  3. Credit to Raw materials inventory for $870,000
  4. Credit to Work in process inventory for $60,000

s122.    The entry to record the usage of direct labor would include a

  1. Debit to Direct labor efficiency variance for $1,800
  2. Credit to Work in process inventory for $3,200
  3. Debit to Direct labor price variance for $5,000
  4. Debit to Accrued payroll for $3,200

s123.    A credit to Direct materials efficiency variance indicates that

  1. Actual usage was greater than the standard quantity
  2. Actual price was less than the standard price
  3. Actual usage was less than the standard quantity
  4. Actual price was greater than the standard price

 

 

Multiple Choice from Web Quizzes (Available on Student Web Site)

w124    Standard costs are used to

  1. Allocate support department overhead
  2. Compare to actual costs for evaluation purposes
  3. Compare to expected costs for evaluation purposes
  4. Determine quality levels

w125    The direct materials price variance compares

  1. The standard price for labor with the actual price paid
  2. The standard price for direct materials with the actual price paid
  3. How efficiently labor is used
  4. How efficiently direct materials are used

w126    The fixed overhead spending variance measures

  1. The difference between what was spent and what was expected to be spent on fixed overhead
  2. The fixed overhead rate this period compared to the rate last period
  3. The difference between the labor hours used to allocate fixed costs and actual labor hours used
  4. The difference between actual and expected utilities costs

 

w127    The direct labor efficiency variance compares

  1. The standard cost for direct labor and the actual cost
  2. The labor hours used to allocate fixed overhead and the actual labor hours used
  3. The standard direct labor hours used for the output produced and the actual labor hours used
  4. Direct labor hours and the supervisor’s hours

w128    If more direct materials were used than expected at standard

  1. The direct materials efficiency variance would be favorable

b    The direct labor efficiency variance would be unfavorable

  1. The direct materials price variance would be favorable
  2. The direct materials efficiency variance would be unfavorable

w129    Variances are usually investigated when they are

  1. Material in amount
  2. Unfavorable
  3. Favorable
  4. Incurred, no matter how large or small they are

w130    (Appendix 11A)  The contribution margin sales volume variance calculates

  1. The effects of changes in contribution margins, given the actual level of sales
  2. The effects of changes in units sold, given the standard contribution margins
  3. The effects of changes in actual fixed costs, given the actual level of sales
  4. The effects of changes in standard variable costs, given the actual level of sales

w131    At the end of the period

  1. All variances are closed to cost of good sold if they are material
  2. Variances are summed but they need not be recorded
  3. Variances are prorated to inventory and cost of goods sold if they are material
  4. Ignored if they are immaterial

w132    Standard costs are developed using

  1. This period’s costs
  2. Last period’s costs
  3. Costs that have been updated for future expectations
  4. Information obtained from tax authorities

w133    Fixed overhead production volume variances reflect

  1. Normal fluctuation of volume of allocation base
  2. Out of control costs
  3. Some problem in production that needs to be corrected
  4. Inefficient productivity

w134    (Appendix 11A) All of the following are profit related variances except

  1. Sales price variance
  2. Fixed overhead production volume variance
  3. Contribution margin variance
  4. Revenue sales quantity variance

w135    The variable overhead spending variance is calculated by comparing

  1. Actual variable overhead cost incurred and the standard variable overhead rate times the actual amount of allocation base used during the period
  2. Actual variable overhead cost incurred and the fixed overhead cost incurred
  3. Actual price of direct materials and the expected price
  4. Actual direct labor hours used and the expected amount

 

w136    Boulder Corporation uses a standard costing system.  The following factory overhead and production data were reported in September.

Standard fixed overhead allocation rate per direct labor hour              $2

Estimated monthly direct labor hours                                            40,000

Standard direct labor hours for actual output in September           42,000

The fixed overhead production volume variance is

  1. $4,000 overapplied
  2. $4,000 underapplied
  3. $80,000
  4. $84,000

w137    The standard labor price is $10 per hour.  The standard labor hours required per unit are 3.  Last month 400 units were produced and 1,500 hours were used.  Actual labor cost was $15,750.  What are the direct labor price and efficiency variances?

Price variance        Efficiency variance

  1. $3,000 U $750 U
  2. $750 U $3,000 U
  3. $750 F $3,000 F
  4. $3,000 F $750 F

w138    When a large variance is investigated

  1. Only unfavorable variances really matter
  2. The standard is certainly wrong and must be corrected
  3. An extraordinary event could have occurred
  4. Managers are not concerned with quality issues related to the variance

w139    An unfavorable price variance may occur because

  1. The price of direct materials increased
  2. The price of direct materials decreased
  3. The manufacturing process is more efficient
  4. The manufacturing process is less efficient

 

Use the following information for the next 3 questions.

Cryolite uses a standard costing system to gauge results for their single product.  70,000 pounds of direct materials were purchased for $385,000.  Two pounds of direct materials are needed to produce one unit of product.  In March, the company produced 12,000 units.  The standard cost allowed for direct material was $120,000, and there was an unfavorable direct materials efficiency variance of $2,500.

w140    (CMA) Cryolite’s standard cost for one pound of direct material is

  1. $5.00
  2. $6.00
  3. $10.00
  4. $12.00

w141    (CMA)  The pounds of direct materials used in March to produce output totaled

  1. 12,500
  2. 23,500
  3. 24,500
  4. 25,500

w142    (CMA)  The direct materials price variance for March is

  1. $25,000 favorable
  2. $25,000 unfavorable
  3. $35,000 favorable
  4. $35,000 unfavorable

 

 

Matching

  1. Determining the reasons for variances is an important part of the overall process of variance analysis. Certain causes are commonly attributed to specific variances.  Match each reason on the left with the variance(s) it commonly creates.  Each numbered item has one or more correct answer(s).  Each lettered item may be used once, more than once, or not at all.

 

____    1.   A change in the quality of materials purchased

____    2.   A new supplier contract

____    3.   Error in the accounting records

____    4.   Change in proportion of spoiled materials

____    5.   Unreasonable standard

____    6.   Unanticipated overtime hours

____    7.   A change in the government-mandated minimum wage

____    8.   Equipment malfunction

____    9.   A change in average worker experience or training

A.  Direct materials price variance

B.  Direct materials efficiency variance

C.  Direct labor price variance

D.  Direct labor efficiency variance

  1. Determining the reasons for variances is an important part of the overall process of variance analysis. Certain causes are commonly attributed to specific variances.  Match each reason on the left with the variance(s) it commonly creates from the list on the right.  Each numbered item has one or more correct answer(s).  Each lettered item may be used once, more than once, or not at all.
____    1.   Unreasonable standard allocation rate

____    2.   Change in depreciation method for plant assets

____    3.   Change in wage rates for indirect labor

____    4.   Changes in normal spoilage

____    5.   Errors in the accounting records

____    6.   Fluctuation in efficiency of the allocation base

____    7.   Improved production processes

____    8.   Outsourcing hourly equipment maintenance services

____    9.   Poor cost estimates

A.  Variable overhead spending variance

B.  Variable overhead efficiency variance

C.  Fixed overhead spending variance

D.  Fixed overhead production volume variance

E.   Does not usually cause an overhead variance

 

 

  1. VSL Corporation’s managers developed the following standards for producing a widget:

Direct materials                                    1.5 lbs. @ $4.00 per lb.

Direct labor                                          2.5 hrs. @ $12.00 per hour

Variable overhead                               $8.00 per direct labor hour

Fixed overhead                                    $6.00 per direct labor hour

Generally, VSL uses 500 direct labor hours each month in producing widgets.  In a recent month, VSL produced 250 widgets and incurred the following costs:

Direct materials purchased & used      400 lbs. @ $4.25 per lb.

Direct labor                                          600 hrs. @ $12.50 per hour

Variable overhead                               $4,800

Fixed overhead                                    $3,200

VSL calculates the cost variances listed on the left below.  Match each variance on the left with the correct item on the right, based on the data above.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.

____    1.   Direct materials price variance

____    2.   Direct materials efficiency variance

____    3.   Direct labor price variance

____    4.   Direct labor efficiency variance

____    5.   Variable overhead spending variance

____    6.   Variable overhead efficiency variance

____    7.   Fixed overhead spending variance

____    8.   Fixed overhead production volume variance

A.  $106.25 favorable

B.  $300 favorable

C.  $550 favorable

D.  $750 favorable

E.   $100 unfavorable

F.   $300 unfavorable

G.  $200 unfavorable

H.  No variance

I.    Some other amount

 

 

Exercises

  1. Here is information about standard costs for Rusth Manufacturing:

Standard Cost per Unit

Direct materials (4 feet @ $6 per foot)                  $24

Direct labor (? hours @ $? per hour)                         ?

During the current period 3,500 units were produced. Rusth purchased 12,000 feet of material at a cost of $81,000.  The direct materials inventory decreased by 1,500 feet during the period. 5,000 hours were used at a cost of $41,250. The direct labor efficiency variance was $2,000 favorable and the combined price and efficiency variances for direct labor were $750 favorable.

 

  1. Determine direct materials price and efficiency variances.
  2. Determine the standard cost of direct materials for units produced.
  3. Determine the direct labor price variance.
  4. Determine the standard price per direct labor hour and the standard number of direct labor hours per unit.

 

  1. Solve for the missing amounts in the following data:
Actual direct labor hours worked 20,000
Standard direct labor hours for units produced 22,000
Actual variable overhead costs incurred $24,000
Variable overhead spending variance A
Variable overhead allocated B
Variable overhead efficiency variance $2,500 favorable
Standard variable overhead allocation rate per direct labor hour C
Actual variable overhead per direct labor hour D
Actual fixed overhead costs incurred $119,600
Budgeted fixed overhead costs E
Fixed overhead denominator activity level (in hours) F
Fixed overhead production volume variance $5,500 unfavorable
Standard fixed overhead allocation rate per direct labor hour G
Fixed overhead cost allocated $121,000
Fixed overhead budget variance H
Total underapplied or overapplied overhead I
  1. During the current period, Richeleau Company produced 1,000 units of product. The flexible budget for standard costs for the 1,000 units is:

Direct materials                                   $43,000

Direct labor                                           67,000

Variable overhead                                30,000

Fixed overhead                                     25,000

Richeleau purchases only the amount of material required for production each period; it does not maintain raw material inventories.  Variances for the period are:

Direct materials price                               $400 U

Direct materials efficiency                         500 U

Direct labor price                                       600 F

Direct labor efficiency                               200 U

Variable overhead spending                      300 F

Variable overhead efficiency                    100 F

Fixed overhead spending                           500 F

Fixed overhead production volume         1000 U

Prepare the journal entries necessary to record all variances and then to close them, assuming that they are all immaterial.

 

 

Short Answer

  1. List one similarity and one difference between price and efficiency variances for direct labor.
  2. If we expect fixed costs to remain constant regardless of volumes, why would we calculate a fixed overhead spending variance?
  3. You are developing a variance report that focuses only on cost control for the production manager. List the variances you would include, and give one reason that you included each one.
  4. Explain why the variance accounts need to be closed at the end of each accounting period.
  5. (Appendix 11A) Why would managers want to develop and monitor standards for expected contribution margins?
  6. (Appendix 11A) How are the revenue sales quantity variance and sales price variance related?
  7. Why would favorable variances be investigated?
  8. Suppose you are an accountant in a plant that manufactures thermostats for homes and commercial buildings. You have been asked to set up a standard cost system.  Explain how you would determine a standard cost for direct materials for each product line.
  9. Explain how variances are closed at the end of a period. Also explain how materiality affects this procedure.
  10. Provide one pro and one con for building waste into cost standards.

 

 

Problems

  1. Henton, Inc. budgeted $270,000 for overhead. Based on a normal activity level of 6,000 units and a standard of 3 machine hours per unit, the standard fixed overhead allocation rate is $12 per machine hour. During the current period, 6,200 units were produced and 5,600 units were sold. Actual machine hours were 18,000, and actual overhead was $272,000.

 

  1. Calculate the combined variable and fixed overhead spending variance.
  2. Calculate the variable overhead efficiency variance.
  3. Calculate the fixed overhead production volume variance.
  4. By how much was total overhead overapplied or underapplied?
  5. Explain why actual overhead costs are usually different than budgeted overhead costs.
  6. Explain why managers do not need to investigate a variable overhead efficiency variance, regardless of its materiality.
  7. Given the following data for LXG Corporation:

Standard direct materials per unit                                       4 oz.

Standard direct labor hours per unit                                   1.5 hours

Standard direct materials price                                           $5 per oz.

Standard direct labor rate                                                   $6 per hour

Production (in finished or equivalent units)                       2,000 units

Actual direct labor hours                                                   2,200 hrs

Actual direct labor cost                                                      $23,490

Actual direct materials used                                               7,800 oz.

Units sold                                                                          1,400 units

Direct materials purchased                                                 8,000 oz.

Cost of direct materials purchased                                     $34,000

 

  1. Calculate the direct material and direct labor price and efficiency variances.
  2. Suggest two possible causes for the largest variance in part (a). For each cause you identify, describe an appropriate action (if any) that managers should take.
  3. Describe two general factors that managers should consider in deciding whether to investigate the variances in part (a).

 

 

  1. The accountants at Value Vases developed the following standards for producing exquisite vases from a liquid silicate:

Direct materials                                    2.5 gallons @ $5 per gallon

Direct labor                                          3.5 hours @ $15 per hour

Variable overhead                               $10.00 per direct labor hour

Fixed overhead                                    $5.00 per direct labor hour

Value’s volume of direct labor hours for normal costing is 1,680 each month.  In a recent month, Value produced 500 vases and incurred the following costs:

Direct materials purchased & used      1,200 gallons @ $6 per gallon

Direct labor                                          1,700 hours @ $14 per hour

Variable overhead                               $15,000

Fixed overhead                                    $8,500

 

  1. Calculate the following eight variances.

Direct material price variance

Direct material efficiency variance

Direct labor price variance

Direct labor efficiency variance

Variable overhead spending variance

Variable overhead efficiency variance

Fixed overhead spending variance

Fixed overhead production volume variance

  1. Suggest one possible cause for each of the following variances calculated in part (a):

Direct material price variance

Direct labor efficiency variance

Fixed overhead spending variance

  1. (Appendix 11A) Wanda’s Wand Shop sells a variety of magic wands. In a recent month, Wanda’s accounting information system revealed the following information:

Budget              Actual

Units                                           2,500               3,200

Sales revenue                          $10,000           $12,000

Variable product costs                1,200               2,000

Fixed manufacturing costs             800                  700

Variable selling costs                  1,500               1,400

Fixed nonmanufacturing costs       500                  600

  1. Calculate the following variances:

Revenue budget variance

Sales price variance

Revenue sales quantity variance

  1. Suggest two reasons why managers might be interested in investigating one or more of the variances in part (a).
  2. Old Rose Nursery sells over 100 varieties of floribunda and hybrid tea roses. Old Rose’s accountant, Cynthia, recently calculated several variances for the nursery.  Results are shown below:

Direct materials price variance                             $500 unfavorable

Direct materials efficiency variance                      300 favorable

Direct labor price variance                                     800 favorable

Direct labor efficiency variance                            250 favorable

Variable overhead efficiency variance                  150 favorable

Variable overhead price variance                          230 unfavorable

Fixed overhead spending variance                         120 unfavorable

Fixed overhead production volume variance         130 favorable

 

  1. Prior to calculating variances, Cynthia had to establish standard costs for each rose in the nursery. List three types of information she would need to calculate the direct labor efficiency variance.  Also identify one reason why each type of information could vary over time.
  2. Even though Cynthia carefully developed standards and monitored performance, Old Rose could still experience poor profitability. Give two reasons why this could happen.
  3. Describe one way that Cynthia could use the direct labor efficiency variance to improve operations at the nursery.
  4. Some of the variances in the table are related to one another. For example, a favorable direct labor efficiency variance and a favorable direct materials efficiency variance could indicate that skilled workers worked more quickly and used less direct material than was budgeted.  Identify one other possible relationship between variances in the table.

 

True / False

  1. Agency theory is an analytical framework that tells managers how to solve potential conflicts with shareholders.
  2. Agency theory is related to accounting because organizations incur costs, including the costs to produce accounting information, to solve conflicts that might arise between managers and owners.
  3. An organization’s chief executive officer can be both a principal and an agent.
  4. Decentralization typically eliminates agency costs from for-profit organizations.
  5. Choices about decision-making authority and about organizational structure are often related.
  6. Technical details about complex manufacturing processes are examples of specific knowledge.
  7. Responsibility accounting is the process of using financial information to justify pay increases and promotions for managers.
  8. If manufacturing departments are only responsible for production decisions, they are considered cost centers.
  9. Investment center managers are held responsible only for their costs.
  10. In a profit center, managers’ primary goal is to maximize revenues.
  11. Return on investment is typically calculated as net income divided by total sales.
  12. Return on investment cannot be used effectively to evaluate profit centers because it motivates managers to make suboptimal decisions from the viewpoint of the organizations’ owners.
  13. Return on investment can be decomposed into two ratios: investment turnover and return on sales.
  14. Residual income measures a company’s profits given a required rate of return.
  15. Economic value added can be measured so that it reduces most of the problems that arise under residual income.
  16. Managers can reduce agency costs through the use of compensation contracts.
  17. Compensation contracts can be based on accounting and / or non-accounting measurements.
  18. Executive compensation is typically set by the shareholders at the annual meeting.
  19. A transfer price is required only when goods or services are transferred between cost centers in the same organization.
  20. An ideal transfer price would be the opportunity cost of internal transfers.
  21. If a supplying division has excess capacity, the best transfer price is the product’s variable cost.
  22. If a product has an external market and divisions are treated as profit centers, cost-based transfer prices can often lead to suboptimal decisions.
  23. In a dual-rate transfer pricing system, the selling department is credited for the market price and the buying department is charged the product’s variable cost.
  24. Transfer pricing policies can affect a company’s tax liability, particularly if it does business internationally.

 

 

 

Multiple Choice

  1. A segment with an ROI of 30% has an income of $84,000. The company’s required rate of return on segment investments is 18%. The segment’s residual income is
  2. $50,400
  3. $25,200
  4. $26,712
  5. $33,600
  6. Division A of a firm produces a single product, which is sold only to Division B. Division A has a total investment of $1,000,000, while Division B has a total investment of $2,000,000. Division A annually sells 100,000 units of its product to Division B for $5 per unit and earns $150,000 in operating income. Division B currently earns $250,000. If Division A raises its selling price to $6 per unit and nothing else changes,
  7. Division A’s ROI will increase to 20%
  8. The firm’s overall ROI will rise
  9. The firm’s overall ROI will fall
  10. The firm’s overall ROI will remain unchanged

 

Use the following information for the next 2 questions.

The Mukilteo Division of Snohomish Corp. produces and sells a product to outside and internal customers. Per-unit data collected from its operations include:

Outside sales price           $640

Direct materials                  105

Direct labor                        250

Fixed overhead                  180

  1. If Mukilteo is operating at full capacity and selling solely to outside customers, what price should another division pay for Mukilteo’s product?
  2. $285
  3. $625
  4. $640
  5. $480
  6. If Mukilteo has excess capacity available to meet an internal order, what transfer price should be set?
  7. $625
  8. $355
  9. $430
  10. $285
  11. Hitek, Inc has 2 divisions, Diodes and Boards. The diode can be sold internally or externally. If sold externally, the sales price is $15 per diode. The Boards division needs 3 diodes for each electronic board it produces. The external sales prices and costs are:

Diodes             Boards

Sales price per unit                        $15.00             $16.50

Variable costs (direct) per unit           6.00                 9.00

Fixed costs per unit                            3.00                 6.00

If Diodes can sell all of its production externally, what is the minimum price at which it would be willing to sell internally, and what is the maximum price the Board Division would be willing to pay?

Diodes                   Boards

Willing to Sell        Willing to Pay

  1. $15 $2.50
  2. $15 $7.50
  3. $15 $15.00
  4. $27 $27.00
  5. The Jupiter Division of Space, Inc. produces dilithium crystals. One-third of its output is sold to the Antari Division, and the remainder is sold externally. Jupiter’s estimated sales and cost data for the coming year are:

Antari Division       External Sales

Units                             12,500                   25,000

Sales                           $18,750                 $50,000

Variable costs               12,500                   25,000

Fixed costs                      3,750                     7,500

Assume that Jupiter cannot sell any additional crystals externally. If the Antari Division has an opportunity to buy from an outside supplier at $1.40 per crystal and Jupiter refuses to meet this price, the company as a whole will be

  1. $1,250 better off
  2. $3,750 worse off
  3. $6,250 better off
  4. $5,000 worse off

 

Use the following information for the next 2 questions.

The National Division of Roboto Company is buying 10,000 widgets from an outside supplier at $30 per unit. Roboto’s Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure:

Sales price per unit                        $45.00

Variable cost per unit                       22.50

Fixed cost (at capacity) per unit       15.00

  1. If the National Division buys its 10,000 widgets from the Overseas Division, the transfer price should be
  2. $45.00
  3. $30.00
  4. $22.50
  5. $37.50
  6. If the Overseas Division meets the outside supplier’s price and sells the 10,000 widgets to National, the effect on overall company profits will be
  7. $ 75,000 higher
  8. $150,000 lower
  9. $300,000 higher
  10. $225.000 lower

 

Use the following information for the next 2 questions.

Division A of Sibley, Inc. has operating data as follows:

Capacity                      20,000 units

Selling price                 $80 per unit

Variable costs              $45 per unit

Fixed costs                   $20 per unit

Division B wants to purchase units from Division A.  If Division A agrees to sell units to Division B, A’s variable costs will be $5 less per unit.

  1. If Division A is operating at capacity, what is the minimum price it should charge?
  2. $40
  3. $75
  4. $20
  5. $60
  6. If Division A has capacity available to meet B’s requirements, what is the minimum price it should charge?
  7. $40
  8. $75
  9. $20
  10. $60

 

Use the following information for the next 2 questions.

Division A produces a component for Hielkema Company’s main product — automobiles. The division operates as a profit center. It also sells to outsiders. The present selling price is $75 per component.  The company buys 600,000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount. Division A has adequate capacity to supply the needs of the Assembly division. The following data are for Division A:

Direct material                                                                   $30 per unit

Direct labor                                                                        $25 per unit

Variable overhead                                                             $10 per unit

Fixed overhead (based on a capacity of 5,000 units)           $6 per unit

  1. The minimum price at which A would sell components internally is
  2. $71
  3. $73
  4. $75
  5. $65
  6. The price range within which A would sell components to the Assembly Division is
  7. $71 to $73
  8. $65 to $73
  9. $71 to $75
  10. $65 to $75
  11. Which of the following responsibility centers can be evaluated using residual income?
  12. Cost centers
  13. Profit centers
  14. Revenue centers
  15. Investment centers
  16. THN Corporation reported operating income of $30,000, revenue of $50,000, and average operating assets of $40,000 for a recent year. Which of the following is true?
  17. THN has an adequate return on investment
  18. THN’s return on sales was 1.67
  19. THN’s return on investment was 75%
  20. THN’s return on sales was 80%
  21. KNY Corporation reported operating income of $80,000 and average operating assets of $120,000 in a recent accounting period. Which of the following transactions would definitely increase KNY’s return on investment?
  22. Increasing product prices
  23. Switching suppliers for raw materials
  24. Collecting accounts receivable
  25. Decreasing research and development expense
  26. Residual income is calculated as
  27. Operating income – (required rate of return × average operating assets)
  28. Net income – (required rate of return × average operating assets)
  29. Operating income – (required rate of return × average equity)
  30. Net income – (required rate of return × average equity)
  31. The Southern Division of WDY Corporation reported net income of $2,500, operating income of $4,000, average equity of $24,000, and average operating assets of $30,000 in a recent accounting period. If Southern’s required rate of return is 12%, its residual income was
  32. $380
  33. $(380)
  34. $400
  35. $1,100
  36. Economic value added uses “adjusted after-tax operating income” as one of its inputs. One purpose of using after-tax income, rather than operating income, is to
  37. Encourage managers to file tax reports
  38. Encourage managers to minimize taxes
  39. Improve information reported to the SEC
  40. Remove bias from the EVA calculation
  41. How are research and development costs treated for financial reporting and for economic value added (EVA) calculations?

Financial Reporting            EVA

  1. Capitalized Capitalized
  2. Expensed Expensed
  3. Capitalized Expensed
  4. Expensed Capitalized
  5. What type of theory provides an analytical framework for the conflicts that arise between owners and managers?
  6. Decision making theory
  7. Conflict resolution theory
  8. Agency theory
  9. Evaluation theory
  10. Agency theory recognizes two kinds of information consumers. Which of the following describes the relationship between them?
  11. Principals hire agents to make decisions for them.
  12. Agents hire principals to hold them accountable for decisions.
  13. Principals and agents work together in the best interest of the organization.
  14. Principals are government employees, while agents work in the private sector.
  15. To reduce agency costs, organizations implement various systems and controls to monitor behavior, including
  16. Publishing audited financial statements
  17. Filing income tax returns

III. Tying financial rewards to reported results

  1. I and III only
  2. I and II only
  3. II and III only
  4. I, II, and III
  5. Under what circumstances could organizations eliminate agency costs, according to agency theory?
  6. If they are not publicly traded
  7. If bonuses are based on financial performance
  8. If they publish audited financial statements
  9. Organizations cannot eliminate agency costs

 

  1. Which of the following is an agency cost from a business owner’s perspective?
  2. Losses from poor economic conditions
  3. Costs to provide appropriate incentive contracts for top management
  4. General supplier price increases
  5. Insufficient executive pay
  6. Because agents may not set the same goals and objectives as principals, organizations may experience which of the following general agency costs?
  7. Goal alignment costs
  8. Losses from a downturn in economic conditions

III. Monitoring costs

  1. I and III only
  2. II and III only
  3. III only
  4. I, II, and III
  5. Costs for producing and analyzing internal performance reports are examples of
  6. Goal alignment costs
  7. Losses from poor decisions
  8. Monitoring costs
  9. Contracting costs
  10. Managers can reduce agency costs by
  11. Giving agents less decision-making authority.
  12. Holding agents responsible for the results of their decisions and rewarding them for good performance.
  13. Constantly monitoring agents’ actions to ensure goal congruence.
  14. Reporting residual income in their SEC reports.
  15. When decision making is decentralized
  16. Upper management does not make decisions
  17. Decision-making authority is delegated throughout the organization
  18. The important information in an organization is very general
  19. Organizations are less likely to experience agency costs concerning goal congruence
  20. Which of the following best describes “general knowledge” in a decision-making context?
  21. Detailed information about manufacturing processes
  22. Customer lists and preferences kept by individual departments in retail sales
  23. Knowledge that is easily transferred between employees
  24. Knowledge that can be obtained only outside the organization
  25. Decision-making based on general knowledge is more likely to occur in this type of organization
  26. Centralized
  27. Decentralized
  28. Effective
  29. Ineffective
  30. Which type of knowledge is most costly to transfer within an organization?
  31. Centralized
  32. Decentralized
  33. Financial
  34. Specific

 

  1. Specific knowledge is
  2. More detailed than general knowledge
  3. More costly to transfer than general knowledge

III. An example of an agency cost

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and III
  5. An advantages of centralized decision making is
  6. More motivated employees
  7. More rapid decision making in all contexts
  8. Greater effectiveness in volatile environments
  9. Less monitoring of decisions
  10. Responsibility accounting includes
  11. Monitoring primarily for mistakes
  12. Assigning authority to subunit managers

III. Measuring the performance of subunit managers

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and III
  5. Budgets can be used to evaluate managerial performance in
  6. Cost centers
  7. Profit centers

III. Investment centers

  1. II only
  2. I and II only
  3. II and III only
  4. I, II, and III
  5. Among the responsibility centers listed, which type of responsibility center is most likely to use growth in sales as a performance measure?
  6. Cost
  7. Profit
  8. Revenue
  9. Investment
  10. Managers are held responsible for revenues in
  11. Revenue centers
  12. Profit centers

III. Investment centers

  1. I and III only
  2. II and III only
  3. I only
  4. I, II, and III
  5. Efficiency measures, such as number of new products developed, may be more useful than financial measures in
  6. Profit centers.
  7. Discretionary cost centers.
  8. Revenue centers.
  9. Investment centers.
  10. A corporate accounting department would most often be considered a
  11. Cost center, because it is typically a high cost operation
  12. Cost center, because its costs can be controlled by upper management
  13. Revenue center, if accountants have input in pricing decisions
  14. Cost center, because it is a support service
  15. Compensation contracts that provide incentives for agents to increase organizational value might include
  16. Cash-based bonuses
  17. Stock options

III. Cash bonuses based on stock price increases or targets

  1. I and II only
  2. II and III only
  3. I and III only
  4. I, II, and III
  5. “Reduce costs by 5%” is an example of a(n)
  6. Measurement
  7. Agency cost
  8. Benchmark
  9. Reward
  10. To protect shareholders from excessive compensation practices, executive compensation packages are best set by
  11. The board of directors
  12. A committee of primarily outside members of the board of directors
  13. A committee of top management employees
  14. The external auditors
  15. Stock-based compensation has been used to encourage
  16. Focus on long-range results
  17. Focus on short-term results
  18. Higher compensation for executives
  19. Lower compensation for executives
  20. Basing executive compensation on accounting earnings
  21. Is a popular practice in the United States
  22. Is sharply criticized because of potential negative long-term effects

III. Leads to unbiased accounting practices

  1. I and II only
  2. I and III only
  3. II and III only
  4. I, II, and III
  5. The price used to record exchanges of goods and services inside an organization is called a
  6. Transfer price
  7. Exchange price
  8. Full price
  9. Suboptimal price
  10. Setting transfer prices can be especially problematic when
  11. Managers are evaluated based on non-financial factors
  12. Compensation is tied to the financial performance of responsibility centers
  13. Centralized decision making is the organizational norm
  14. Compensation is tied to the financial performance of the organization as a whole

 

  1. A transfer pricing policy based on market price
  2. Maximizes total organizational profit.
  3. Is best because the market price is always objective and easily obtainable.
  4. May result in suboptimal decision making for the company as a whole.
  5. Is the only alternative accepted by the Internal Revenue Service.
  6. Which of the following is an advantage of cost-based transfer prices?
  7. Managers do not have much incentive to reduce fixed costs
  8. Managers may be motivated to purchase goods and services from outside the company

III. Contribution margins may be split between buying and selling divisions

  1. I only
  2. II only
  3. III only
  4. None of the above (I, II, and III are all disadvantages)
  5. When a company uses activity-based transfer prices
  6. The internal buyer is motivated to overstate the number of units to buy internally
  7. The internal buyer is motivated to understate the number of units to buy internally
  8. Capacity is usually reserved for products or services that are transferred internally
  9. Batch-level costs are excluded from the computation
  10. Problems with market-based transfer prices include
  11. Lack of knowledge about underlying costs
  12. Lack of objectivity
  13. Their impact on corporate profitability
  14. Their lack of reliance on supply-and-demand relationships
  15. Which prices are recorded by departments under a dual-rate transfer pricing system?

Selling                    Purchasing

Department            Department

  1. Variable cost Variable cost
  2. Variable cost Market price
  3. Market price Full cost
  4. Market price Variable cost
  5. Dual-rate transfer pricing systems are appropriate when the
  6. Market price is unknown
  7. Selling department has excess capacity
  8. Market price is higher than the variable cost
  9. Market price is higher than the full cost
  10. Which of the following transfer pricing systems potentially takes the most time to establish?
  11. Market-based
  12. Dual-rate
  13. Negotiated
  14. Full-cost

 

 

Use the following information for the next 3 questions.

Chicago Division has a required rate of return of 15%.  The weighted average cost of capital is 10%.  Information for Chicago Divisions operations over the past 2 years follows.

20×5                20×4

Current assets                                               $120,000         $100,000

Property, plant and equipment (cost)              300,000           280,000

Accumulated depreciation                                80,000             60,000

Current liabilities                                              90,000             70,000

Long-term debt                                                 85,000             80,000

Pretax operating income                                   52,800             48,900

Income tax rate                                                     30%                 30%

  1. What was the Chicago Division ROI for 20×5 (rounded to nearest 0.1%)?
  2. 11.2%
  3. 13.2%
  4. 15.5%
  5. 16.0%
  6. What was the Chicago Division residual income for 20×5?
  7. $(12,540)
  8. $3,300
  9. $15,300
  10. $19,800
  11. What was the Chicago Division EVA for 20×5?
  12. $3,960
  13. $11,960
  14. $20,460
  15. $27,800
  16. Which of the following is most likely to be an example of an agency cost caused by incongruent goals?
  17. Employee time working in a target costing team
  18. Loss on a special order because of unanticipated production problems
  19. Managers’ time to negotiate a transfer price
  20. Decline in sales from a change in consumer preferences

 

 

More Difficult Multiple Choice

  1. The Shannon Division of the Wasson Widget Co. requires a 12% rate of return. During a recent year Shannon had a net income of $400,000 and a residual income of $250,000. What was its ROI?
  2. 32%
  3. 15%
  4. 12%
  5. 26%

 

Use the following information for the next 4 questions.

Teresa’s Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%.

  1. The capital investment was
  2. $1,250,000
  3. $75,000
  4. $170,000
  5. $200,000
  6. The operating (pretax) income was
  7. $30,500
  8. $192,500
  9. $35,000
  10. $16,250
  11. The return on investment was
  12. 15.4%
  13. 21.67%
  14. 15.25%
  15. 17.5%
  16. The return on sales was
  17. 7%
  18. 6.1%
  19. 38.5%
  20. 3.25%
  21. Division S sold a part to both Division P and outside customers last year. The revenues from these sales were $30,000 (1,000 units) and $35,000 (1,000 units), respectively. Next year, S plans to increase the unit sales price to $42 and wants a proportionate increase in the sales price to Division P. The unit costs are $9 variable and $15 fixed. If Division P does not agree to the price increase, 50% of Division S’s fixed costs will be eliminated.

What is the highest price Division P would be willing to pay for external purchases?

  1. $30.00
  2. $36.00
  3. $16.50
  4. $28.50

 

 

Multiple Choice from Study Guide

s64.      A business segment that has responsibility for both revenues and expenses is called a(n)

  1. Administrative center
  2. Investment center
  3. Profit center
  4. Revenue center

s65.      For 2005, Aberdeen’s return on sales was 10% and its investment turnover was 2.0.  Return on investment for 2005 was

  1. 5%
  2. 10%
  3. 12%
  4. 20%

s66.      For 2006, Aberdeen’s return on investment was 26% and its investment turnover was 2.0.  Return on sales for 2006 was

  1. 10%
  2. 13%
  3. 24%
  4. 26%

 

s67.      Thurston, Inc. experienced a 14% rate of return on average investment of $1,000,000.  If the required rate of return is 12%, then residual income is

  1. $20,000
  2. $40,000
  3. $120,000
  4. $140,000

s68.      Suppose an office building is owned for which long-term leases have been signed, the tenants pay utilities and operating costs, and straight-line depreciation is taken.  The rate of return on the book value of this investment can be expected to

  1. Increase over time
  2. Remain constant over time
  3. Decrease over time
  4. Vary randomly over time

 

Use the following information for the next 5 questions.

Bellingham Division has a required rate of return by corporate headquarters of 20%.  The weighted average cost of capital is 12%.  You are given the following information for Bellingham’s operations for a two-year period:

2005                2004

Current assets                                   $  50,000         $  60,000

Long-term assets                                 200,000           204,000

Accumulated depreciation                    60,000             44,000

Current liabilities                                  40,000             20,000

Long-term debt                                   100,000           140,000

Operating income for the year              19,000             21,000

Tax rate                                                    40%                 40%

s69.      The ROI for 2005 was

  1. 9.3%
  2. 10.0%
  3. 3.7%
  4. 20.0%

s70.      The residual income for 2005 was

  1. ($21,000)
  2. ($22,000)
  3. ($14,000)
  4. $1,000

s71.      The average investment to be used in the EVA computation for 2005 was

  1. $257,000
  2. $227,000
  3. $279,000
  4. $175,000

s72.      The after-tax income for 2005 was

  1. $47,500
  2. $11,400
  3. $7,600
  4. $31,667

 

s73.      The EVA for 2005 was

  1. ($18,600)
  2. ($12,840)
  3. ($9,600)
  4. ($6,600)

 

Use the following information for the next 2 questions.

The Machining Division has a capacity of 2,000 units.  Its sales and cost data are:

Selling price per unit                                            $100

Variable manufacturing costs per unit                   $25

Variable administrative costs per unit                      $5

Total fixed manufacturing overhead               $20,000

Total fixed administrative costs                        $5,000

s74.      The Machining Division is currently selling 1,900 units to outside customers, and the Assembly Division wants to purchase 300 units from Machining.  If the transaction takes place, the variable administrative costs per unit on the units transferred to Assembly will be $2/unit, not $5/unit.  What should be the transfer price?

  1. $73.67
  2. $76.67
  3. $97.00
  4. $100.00

s75.      If the Assembly Division is currently buying from an outside supplier at $98 per unit, what will be the effect on overall company profits if internal sales take place at the optimum transfer price?

  1. $7,000 increase
  2. $7,300 increase
  3. $300 increase
  4. There is no effect

 

Use the following information for the next 2 questions.

The Kelso Division produces and sells a product to external and internal customers.  Per-unit information about its operations include:

Selling price per unit to external customers          $250

Variable manufacturing costs per unit                   115

Fixed manufacturing overhead costs per unit          70

s76.      If Kelso is operating at capacity and has unlimited external customer demand, what should be the transfer price for Kelso’s product?

  1. $245
  2. $250
  3. $115
  4. $185

s77.      If Kelso has sufficient excess capacity to meet internal demand, what should be the transfer price for Kelso’s product?

  1. $245
  2. $250
  3. $115
  4. $185

 

s78.      An advantage of centralization is

  1. Increased time for upper-level management to focus on the organization’s strategic goals
  2. The potential for decreased agency costs
  3. Managers of business segments feel more empowered to make decisions
  4. Managers of autonomous business segments are more likely to make decisions that are in the best interests of the organization as a whole

 

Use the following information for the next 3 questions.

Division X sells organic high-gluten flour to Division Y.  Division X incurs costs of $0.375 per pound of flour.  Division Y makes loaves of bread that sell for $2.50 each.  Division Y incurs costs of $1.25 per loaf, excluding the cost of the flour.  Each loaf of bread uses one-half pound of flour.

s79.      What is the operating income per pound of flour for Division X if the transfer price is set at $0.625/lb?

  1. $0.25
  2. $0.4375
  3. $0.625
  4. $0.8125

s80.      What is the operating income per loaf for Division Y if the transfer price is set at $0.625 per pound for flour?

  1. $0.6250
  2. $0.9375
  3. $1.2500
  4. $0.8750

s81.      What is the operating income for the entire organization if 100,000 loaves of bread are sold?

  1. $93,750
  2. $125,000
  3. $106,250
  4. $87,500

s82.      Which of the following performance measures can be used to compare the performance of business segments of varying sizes?

  1. Return on investment
  2. Residual income
  3. Economic value added
  4. All of the above

s83.      Aiden’s operating income was $100,000 and its ROI was 20%.  What are Aiden’s average operating assets?

  1. $20,000
  2. $200,000
  3. $500,000
  4. None of the above

s84.      An organization’s required rate of return is 13%.  The ROI of Divisions A and B, respectively, is 10% and 15%.  Each Division is considering a project that will have a 12% rate of return.  If ROI is used to evaluate divisions, which of the following statements is true?

  1. Both divisions will accept the project
  2. Both divisions will reject the project
  3. Division A will accept, and Division B will reject, the project
  4. Division A will reject, and Division B will accept, the project

s85.      An organization’s required rate of return is 13%.  The ROI of Divisions A and B, respectively, is 10% and 15%.  Each Division is considering a project that will have a 12% rate of return.  If residual income is used to evaluate divisions, which of the following statements is true?

  1. Both divisions will accept the project
  2. Both divisions will reject the project
  3. Division A will accept, and Division B will reject, the project
  4. Division A will reject, and Division B will accept, the project

s86.      ROI will decrease if

  1. Sales increase
  2. Investment turnover increases
  3. Return on sales increases
  4. Average operating assets increases

s87.      Operating income is

  1. Net income less taxes less interest expense
  2. Net income plus taxes plus interest expense
  3. Net income plus taxes
  4. Net income less interest expense

s88.      What is the difference between the definition of investment for residual income and EVA?

  1. Residual income does not include long-term assets
  2. EVA subtracts current liabilities from operating assets
  3. EVA does not include current assets
  4. EVA subtracts long-term debt from operating assets

 

 

Multiple Choice from Web Quizzes (Available on Student Web Site)

w89.     Transfer prices are used to value all of the following except

  1. Internal transfers of products
  2. Internal transfers of services
  3. Transfers to unrelated businesses
  4. Transfers to other divisions in the same company

w90.     Return on Investment is

  1. The same as residual income
  2. Net operating income divided by average operating assets
  3. A nonfinancial measure of performance
  4. Net operating income minus average operating assets X cost of capital

w91.     Governments often require the following type of transfer price for income taxes

  1. Variable cost
  2. Dual rate
  3. Market price
  4. Activity based cost

w92.     Residual income is

  1. The same as return on investment
  2. A nonfinancial measure of performance
  3. Net operating income minus a required rate of return X average operating assets
  4. Sales divided by net operating income

 

w93.     Which of the following is most likely to be the lowest transfer price?

  1. Variable cost
  2. Dual rate
  3. Market price
  4. Activity based cost

w94.     Agency costs include

  1. Losses from bad economic conditions
  2. Losses because managers’ interests sometimes conflict with owners
  3. Losses from natural disasters
  4. Losses from changes in customer preferences

w95.     An example of an agency cost because of inefficient behavior is

  1. Employees surfing the internet for personal reasons during working hours
  2. Employees spending an appropriate amount of time on long-term projects
  3. Team members working together with concentrated effort
  4. Exceeding a time budget because of uncontrollable price increases

w96.     Which of the following is most likely to be the highest transfer price?

  1. Variable cost
  2. Dual rate
  3. Market price
  4. Activity based cost

w97.     An advantage of using negotiated transfer prices is

  1. Both the selling and buying units have complete information about costs
  2. It may take more of managers’ time than is beneficial for the company
  3. The market price will always be chosen
  4. Once the price is set, it never needs to be adjusted

w98.     A transfer price that reduces suboptimal decisions without consuming a lot of time is

  1. Variable cost
  2. Dual rate price
  3. Market price
  4. Activity based cost

w99.     Specific knowledge is

  1. Not necessary in today’s business operations
  2. Not very costly to transfer
  3. The same as general knowledge
  4. Detailed technical knowledge about specific processes

w100.   The location of decision authority in an organization depends on

  1. The size of the organization
  2. Whether specific or general knowledge is most important in successful decision making
  3. Whether the organization is for-profit or not-for-profit
  4. Whether the organization uses a lot of technology

w101.   The manager in a profit center is responsible for

  1. Investments
  2. Only revenues
  3. Only the costs of production or services
  4. Both costs and revenues

 

w102.   In responsibility accounting, information is used to

  1. Measure performance
  2. Produce financial statements for external users

III. Motivate managers to perform well

  1. I only
  2. I and II only
  3. II and III only
  4. I and III only

w103.   The manager in a cost center is responsible for

  1. Investments
  2. Only revenues
  3. Only the costs of production or services
  4. Both costs and revenues

w104.   (CMA) The segment operating margin less imputed (estimated) interest on the assets used by the investment center is known as

  1. Return on investment
  2. Residual income
  3. Operating income
  4. Return on assets

w105.   (CMA) Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n)

  1. Profit center
  2. Revenue center
  3. Division
  4. Investment center

 

Use the following information for the next 3 questions.

Adler Industries is a vertically integrated firm with several divisions that operate as decentralized profit centers.  Adler’s System Division manufactures scientific instruments and uses the products of two of Adler’s other divisions.  The Board Division manufactures printed circuit boards (PCBs).  One PCB model is made exclusively for the Systems Division using proprietary designs, while less complex models are sold in outside markets.  The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Systems Division.  The costs per unit of the products used by the systems Division are presented below.

PCB             Transistor

Direct materials                    $2.50               $0.80

Direct labor                            4.50                 1.00

Variable overhead                 2.00                 0.50

Fixed overhead                      0.80                 0.75

Total cost                       $9.80               $3.05

The Board Division sells its commercial products at full cost plus a 25% markup and believes the proprietary board made for the Systems Division would sell for $12.25 per unit on the open market.  The market price of the transistor used by the Systems Division is $3.70 per unit.

w106    (CMA) A per unit transfer price from the Transistor Division to the Systems Division at full cost, $3.05, would

  1. Allow evaluation of both divisions on a competitive basis
  2. Satisfy the Transistor Division’s profit desire by allowing recovery of opportunity costs
  3. Demotivate the Systems Division and cause mediocre performance
  4. Provide no profit incentive for the Transistor Division to control or reduce costs

w107    (CMA) Assume the Systems Division is able to purchase a large quantity of transistors from an outside source at $2.90 per unit. The Transistor Division, having excess capacity, agrees to lower its transfer price to $2.90 per unit. This action would

  1. Optimize the profit goals of the Systems Division while subverting the profit goals of Adler industries
  2. Optimize the overall profit goals of Adler Industries
  3. Subvert the profit goals of the Transistor Division while optimizing the profit goals of the Systems Division
  4. Cause mediocre behavior in the Transistor Division as lost opportunity costs increase

w108    (CMA) The Board and Systems Divisions have negotiated a transfer price of $11.00 per printed circuit board. This price will

  1. Cause the Board Division to reduce the number of commercial printed circuit boards it manufactures
  2. Motivate both divisions as estimated profits are shared
  3. Encourage the Systems Division to seek an outside source for printed circuit boards
  4. Demotivate the Board Division causing mediocre performance

 

 

Matching

  1. Several examples of agency costs are listed below on the left, and general categories of agency costs are listed on the right. Match the lettered items on the right with the appropriate item on the left.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.

 

____    1.   Excessive executive pay because of CEO’s influence

____    2.   Purchasing poor-quality raw materials

____    3.   Cost of auditing financial statements

____    4.   Sales commissions

____    5.   Legal fees for contract negotiations

____    6.   Bonuses

____    7.   Stock options

____    8.   Expensive offices

____    9.   Excess travel costs

____    10. Prioritizing projects using suboptimal criteria

A.  Losses from poor decisions

B.  Losses from incongruent goals

C.  Monitoring costs

D.  Goal alignment costs

E.   Contracting costs

  1. Indicate whether each of the following is more descriptive of centralized (C) or decentralized (D) decision making.

____    1.      Decision makers may not fully understand organizational goals and strategies

____    2.      Decisions are more easily made for the benefit of the overall organization

____    3.      Decisions are made by individuals with the greatest knowledge

____    4.      Good for organizations with stable and less complex operations

____    5.      Lack of coordination among subunits may lead to duplication in efforts

____    6.      Although less monitoring of decisions is usually needed, more monitoring of employee effort is necessary.

____    7.      Managers are motivated more often through incentive contracting rather than by monitoring

____    8.      Poor quality decisions due to lack of information

____    9.      More timely decision making

____    10.    Upper management can focus on organizational strategies

  1. Indicate whether each item listed below is most closely associated with: (A) return on investment, (B) residual income, or (C) economic value added.  Each numbered item has only one correct answer.

____    1.      Adjustments incorporated in calculations are a matter of management judgment

____    2.      Components motivate managers to increase sales

____    3.      Discourages managers from investing in projects that may harm divisional results but may enhance overall organizational results

____    4.      Does not incorporate measurements of risk

____    5.      Does not penalize project investments with lower returns than current returns

____    6.      Easily compared with external benchmarks

____    7.      Incorporates weighted average cost of capital

____    8.      Larger subunits are more likely to report better results

____    9.      Measures the dollar amount of profits given a required rate of return

____    10.    Research and development costs are often capitalized in its calculation

  1. Indicate whether each transfer price below is (A) cost-based, (B) activity based, (C) market-based, (D) dual rate, or (E) negotiated.

____    1.      Require end-of-period adjustments for accurate organizational profit reporting

____    2.      Is required by the IRS and other international government taxing authorities

____    3.      Ensures that both managers have full information about costs and market prices

____    4.      Enhances organizational planning through accurate forecasts of internal demand

____    5.      Commonly used when no external market exists

  1. Several descriptions of responsibility centers are listed below (1-5). Match each description with a type of responsibility center (A-D) AND with a potential performance measure (I-V).  Each numbered item has only one correct answer from each list.  Each lettered item may be used once, more than once, or not at all.  Each Roman numeral item may be used only once.
Responsibility Center Types

A.   Cost center

B.   Revenue center

C.   Profit center

D.   Investment center

Potential Performance Measures

I.     Budgets and variances

II.   Inventory turnover

III.  Number of new products or processes introduced

IV.  Return on investment

V.   Revenue per passenger

(continued)

____    ____    1.   Franklin Toy Company’s Irish Division manufactures toys and is responsible for developing new lines of toys and games, including toys that use new technologies.

____    ____    2.   The Facilities Management Department of CPP Corporation handles office cleaning and grounds maintenance.

____    ____    3.   The Cruise Booking Department of All-Ways Travel manages group reservations of twenty passengers or more.  Its costs are largely fixed and determined by the travel agency manager.

____    ____    4.   MND Corporation’s Research and Development Department investigates new products and processes to increase organizational profits.

____    ____    5.   The Electronics Department of ESale.com, an Internet retail company, sells small electronics and sets its own product prices.

 

 

Exercises

  1. Delta Division had the following results for the year just ended:

Sales                                     $375,000

Variable costs                         225,000

Fixed costs                              120,000

Total operational assets           150,000

Delta is considering a new product line that would involve the following:

Sales                                       $75,000

Variable costs                           45,000

Fixed costs                                23,250

Total operational assets             37,500

Delta’s parent company, Omega, Inc., has a company-wide ROI of 14% and pays bonuses based on divisional ROI.

 

  1. Determine the effect on Delta’s ROI if it introduces the new product line. Would Delta’s managers be encouraged to introduce the new product line?
  2. Determine the effect on Omega’s ROI if Delta introduces the new product line. Would the top managers of Omega want to introduce the new product line?
  3. Assume a required rate of return of 10% on operational assets invested in each division. Determine the effect on Delta’s residual income if it introduces the new product. Would Delta’s managers be encouraged to introduce the new product line?
  4. Aberzombie, Inc. has 2 divisions, Alpha and Beta. Beta produces a unit that sells for $50, with the following costs based on its capacity of 250,000 units:

Direct materials                              $15.00

Direct labor                                      12.50

Variable overhead                             2.50

Fixed overhead                                  7.50

At present Beta does not sell any units to Alpha. Beta is selling 150,000 units externally, and Alpha is purchasing 75,000 units from an outside supplier for $45 per unit.

 

  1. Determine the benefit, if any, to Beta in meeting the outside supplier’s price.
  2. Determine the lowest price Beta would be willing to accept.
  3. Assume that a transfer price of $50 is used between Alpha and Beta. Determine the effect on the profits of Alpha, Beta, and Aberzombie, Inc.
  4. Clark and Lana are product managers at SML Corporation. They are considering two potential investments, data for which are estimated below:

Project A          Project B

Operating income                                       $   600             $   750

Adjusted after-tax operating income                500                  700

Adjusted total assets                                     1,000               3,500

Average operating assets                               1,200               4,000

Current liabilities                                             800                  500

Revenue                                                       1,000               1,200

SML’s weighted average cost of capital, which also serves as its required rate of return, is 12%.

If Clark and Lana can invest in only one project, which should they choose?  Why?

  1. Use appropriate information from the list below to calculate the amounts indicated.

Operating income                                         $  50,000

Adjusted after-tax operating income                 35,000

Adjusted total assets                                         80,000

Average operating assets                                   90,000

Current liabilities                                              15,000

Revenue                                                         120,000

Weighted average cost of capital                          10%

 

  1. Calculate return on investment
  2. Calculate residual income
  3. Calculate economic value added
  4. Two divisions of Interspatial Company report summary results as follows:

Pluto                Mars

Sales                                     $800,000         $900,000

Operating income                 $100,000         $150,000

Average investment              $200,000         $400,000

 

  1. Calculate the return on investment for each division and then break it down into the return on sales and investment turnover.
  2. What is the residual income for each division if the required rate of return is 20%?

 

 

Short Answer

  1. Describe agency theory and explain how it relates to accounting.
  2. Managers often make choices about the location of decision-making responsibility. What is the relationship between the type of knowledge that is important in the organization and the location of decision-making authority?
  3. Lazy A Stables has operations in Norco and Corona, California. Each geographic location has the following responsibility centers:  horse boarding, riding lessons, horse sales, and administrative support.  The director at each location is responsible for decisions regarding investments in facilities, horses, and any other type of investments.  In addition, the directors make operating decisions such as advertising, hiring, and evaluating personnel.  Department heads for the responsibility centers are responsible for daily operating decisions.

Identify the type of responsibility center for each of the following:  the two geographic locations and each of the responsibility centers—horse boarding, riding lessons, horse sales, and administrative support.  Explain your classifications.

  1. Compare and contrast return on investment, residual income, and economic value added. Which method is best for evaluating investment center managers?  Explain your reasoning.
  2. Why should executive compensation in public companies be set by an independent compensation committee of the board of directors?
  3. Define transfer prices in your own words. Describe one conflict that arises in setting transfer prices between two divisions.
  4. Other than cost-based prices, list and discuss three options managers have for setting transfer prices and suggest a setting that might be appropriate for each.
  5. An ice cream outlet that is part of a regional chain has begun purchasing its ingredients from an outside supplier instead of purchasing from the chain. The products from the outside supplier are cheaper, although the quality is not as high.  The transfer price for the products is based on the market price, even though the actual costs that the chain incurs are much lower than the market price.  Explain why the outsourcing decision is considered suboptimal.  What type of transfer price policy would help to avoid this problem?
  6. Centralized organizations may decide to decentralize their decision-making authority once they begin operations in foreign countries. Explain why this occurs.
  7. Why might some organizations use both ROI and EVA in their performance measures for bonus-based compensation?

 

Problems

  1. Norex Corporation is a manufacturer of electronic equipment. The large, diversified organization is decentralized and has a number of different divisions. The components division makes electronic components that can be sold either internally to the equipment division or sold to outside customers.  Currently, the components division is producing a tiny motor that is often used to run fans to cool equipment.  The variable cost of making the motors is $15 per unit, the fixed cost is $5, and the market price is $28.  Production is 100,000 units.

The equipment division uses the motor when assembling small fans that are sold to computer manufacturers.  Currently, the equipment division sells 50,000 fans.  The additional variable cost for processing the motors into fans is $8 per unit.  Top management is re-evaluating Norex’ transfer pricing policies.  The managers are considering the following price options:  variable cost, fully allocated cost, and market price.

 

  1. Assume the components division has enough capacity to meet both internal and external demand. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate?  Explain your reasoning.
  2. Assume the components division is operating at full capacity and could sell more units to the outside market. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate?  Explain your reasoning.
  3. Now assume the selling price for fans is $40 per unit, the transfer price is set at variable cost, and the components division could sell all of the units it produces externally.
  4. What is the contribution margin for Norex if the motors are sold externally? What is the contribution margin for the components division if the motors are sold externally?
  5. What is the contribution margin for Norex if the motors are sold internally? What is the contribution margin for the components division if the motors are sold internally?
  6. Would the managers of the components division be willing to sell any units to the equipment division? Explain.
  7. Calculate the opportunity cost of selling all of the motors externally.
  8. Recommend a transfer price policy to Norex that could potentially solve any problems of suboptimal decision making.
  9. Following is information for the Krishnan Company’s three business divisions.

Division A       Division B       Division C

Pretax operating income             $800,000         $400,000         $600,000

Current assets                                 80,000             60,000             80,000

Long-term assets                        3,200,000        2,600,000        1,600,000

Current liabilities                          400,000           200,000           300,000

Krishnan’s tax rate for the divisions is 30%, and its after-tax weighted-average cost of capital (WACC) for each segment is 12%.  The WACC is also used as a required rate of return.

 

  1. Determine the division with the highest ROI. Show your calculations.
  2. Determine the division with the highest residual income. Show your calculations.
  3. Determine the segment with the highest EVA. Show your calculations.
  4. Compare and contrast these three performance measures and their influence on managers.
  5. Why is it better to use multiple measures for evaluating manager performance rather than a single measure such as ROI or EVA?