Operations Management Flashcards
1
Q
Wright Corporation planned to produce 3,000 units of its single product, Pactium, during November. The standard specifications for one unit of Pactium include six pounds of materials at $.30 per pound. Actual production in November was 3,100 units of Pactium. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, one could conclude that:
A. more materials were purchased than were used.
B. more materials were used than were purchased.
C. the actual cost of materials was less than the standard cost.
D. the actual usage of materials was less than the standard allowed.
A
C. the actual cost of materials was less than the standard cost.
A material purchase price variance is computed:
MPPV = Quantity Purchased × Difference between actual and standard price
If this variance is favorable, the actual material price must have been less than the standard material price.
2
Q
The resource base figures prominently in performance measures such as return on investment, residual income, and economic value added. The theoretically superior (not necessarily the one most widely used) investment base would be:
A. book value.
B. historical cost.
C. replacement value.
D. All of the answer choices are correct.
A
C. replacement value.
Replacement cost is a measure of current value. Since revenue and most expenses are also stated in terms of current value, a more consistent performance measure (i.e., return on investment or residual income) will result when all variables are stated in current dollars. Use of replacement or current values assures that a more relevant performance result will be obtained.
3
Q
Jansen, Inc., pays bonuses to its managers based on operating income. The company uses absorption costing, and overhead is applied on the basis of direct labor hours. In order to increase bonuses, Jansen’s managers may do all of the following, except:
A. defer expenses such as maintenance to a future period.
B. increase production schedules independent of customer demands.
C. decrease production of those items requiring the most direct labor.
D. decrease production of those items requiring the least direct labor.
A
B. increase production schedules independent of customer demands.
Absorption costing treats fixed costs as product cost and assigns the fixed costs to the units produced. Fixed costs follow the units through work-in-process and finished goods as an inventoriable cost. Non-production costs are recognized when they are incurred. With absorption costing, a manager’s organization will show a higher operating income if some of the goods produced are inventoried since the inventoried goods will carry with them some of the fixed overhead costs that were incurred during the period.
Managers will show lower operating income if they decrease production of those items requiring the most direct labor. The lower operating income results from the fact that a decrease in the production of items that require the most direct labor hours means that each of the items that is produced will have more fixed costs associated with it. The increase in fixed costs per item will reduce operating income.
4
Q
What is the role of IT in business process re-engineering?
A. It is the major facilitator for new ways of sharing information within a specific organization and outside of the organization.
B. It only creates the systems that work the processes and workflows.
C. It is the minor facilitator for creating the systems that work the process and workflows.
D. It maintains the process management piece of the project.
A
A. It is the major facilitator for new ways of sharing information within a specific organization and outside of the organization.
IT is the major facilitator for coming up with new forms of working and sharing information within a specific organization, and also with organizations outside of the original organization. They are a key department to keep processes, workflows, and communications working.
5
Q
he following information pertains to a byproduct called Moy:
Sales in 20X2 5,000 units
Selling price per unit $6
Selling costs per unit 2
Processing costs 0
Inventory of Moy was recorded at net realizable value when produced in 20X1. No units of Moy were produced in 20X2. What amount should be recognized as profit on Moy’s 20X2 sales?
A. $0
B. $10,000
C.$20,000
D. $30,000
A
A. $0= (5000$6)-(6-2)5000-(2*5000)
Net realizable value equals expected market value (selling price) less any separable processing and selling costs. If byproduct Moy was recorded at net realizable value, the following entry would have been made in 20X1:
Dr. Byproduct Inventory 5,000($6-$2) $20,000
Cr. Work-In-Process $20,000
When the 5,000 units of Moy were sold in 20X2, the sale would be recorded using the following summary journal entry:
Dr. Cash (5,000 x $6) $30,000
Cr. Byproduct Inventory $20,000
Cr. Cash (for selling costs) (5,000 x $2) 10,000
As can be seen, no profit is recognized when byproduct inventory is recorded at net realizable value.
6
Q
Vested, Inc., made some changes in operations and provided the following information:
Year 2 Year 3
Operating revenue $ 900,000 $1,100,000
Operating expenses 650,000 700,000
Operating assets 1,200,000 2,000,000
What percentage represents the return on investment for Year 3?
A. 28.57%
B. 25%
C. 20.31%
D. 20%
A
B. 25%=(1100-700)/((1200+2000)/2
Return on investment (ROI) is calculated by dividing the average invested capital into the net income:
Average invested capital is (Operating assets from Year 2 + Operating assets from Year 3) ÷ 2.
Average invested capital = ($1,200,000 + $2,000,000) ÷ 2 = $3,200,000 ÷ 2 = $1,600,000
Net income is Operating revenue - Operating expenses:
Net income = $1,100,000 - $700,000 = $400,000
ROI = Net income ÷ Average invested capital:
ROI = $400,000 ÷ $1,600,000 = 0.25, or 25%
7
Q
The following information pertains to Base Manufacturing Co.:
Selected Cost Driver Costs
Estimated annual overhead $ 900,000
Estimated annual direct labor cost 1,800,000
Actual direct labor cost for March 160,000
Actual overhead for March 90,000
Base Manufacturing Co.’s applied overhead for March is:
A.$320,000.
B. $75,000.
C. $80,000.
D. $90,000.
A
C. $80,000=(900/1800)*160
The overhead rate is calculated as follows:
Estimated annual overhead ÷ Estimated annual direct labor = Overhead Rate
$900,000 ÷ $1,800,000 = 0.50
Therefore, overhead is applied at 50% of actual direct labor cost:
$160,000 × 0.50 = $80,000 applied overhead
8
Q
For a fixed-price proposal, the deliverables due on the contract are not clearly defined. As a result, the potential contractor should:
A. submit the bid because the client’s price seems more than adequate to meet the contract requirements.
B. modify the terms to account for unforeseen difficulties that may arise.
C. build in a cost escalator to adjust for materials price increases during the execution of the contract.
D. wait to bid until the deliverables are clearly defined.
A
D. wait to bid until the deliverables are clearly defined.
The answer choice “wait to bid until the deliverables are clearly defined” is correct because it is not possible to price a bid correctly if the costs that will be incurred are unknown. Those costs will not be known until the deliverables are clearly defined.
Other answers are incorrect because the costs that will be incurred are unknown.
9
Q
Which of the following is not considered a step in the planning stage?
A. Create a communications plan
B. Create a schedule
C. Create a quality control plan
D. Monitor the project
A
D. Monitor the project
The planning stage is the planning of the project and does not go beyond planning. As a result, the planning stage of a project includes the following:
Creating the project plan Creating a schedule Creating a control plan Creating a quality control plan Creating a risk management plan Creating a communications plan Creating a completion plan Monitoring the project occurs at a later stage.
10
Q
Madi and Molly, Inc., produces lumber, with an average pine tree having 61% of its trunk producing construction grade lumber. Of the remaining 39%, 22% is used for producing wood products for a local furniture manufacturer, and 17% goes to waste. Therefore, Madi and Molly’s lumber usage rate is 83%. In 20X1 the local furniture manufacturer closed, leaving no viable prospects for Madi and Molly to sell the 22% of the wood allocated to the furniture manufacturer. What improvement initiative should Madi and Molly implement to have its lumber usage rate rise back above 80%? You can assume that an increase in the lumber usage rate will replace 100% of the revenue lost from the furniture manufacturer.
A. Lean production
B. Business excellence framework
C. Six Sigma
D. Business process re-engineering
A
A. Lean production 精益生产
Upon the loss of sales to the furniture manufacturer, Madi and Molly were looking at waste of 39% (100% - 61% for lumber = 39%) as well as a loss in revenue. By implementing lean production tools to achieve 80% conversion of the raw materials (pine trees) into lumber, Madi and Molly would see its revenue stream remain even, while its waste was reduced from 39% to 20%. While it is true that waste was originally 17% before the loss of the furniture client, Madi and Molly’s decision to implement lean production tools must be based upon the current production data, which showed a 39% waste factor.
11
Q
Managers of the Doggie Food Co. want to add a bonus component to their compensation plan. They are trying to decide between return on investment (ROI) and residual income (RI) as the performance measure they will use. If Doggie adopts the RI performance measure, the relevant required rate of return would be 18%. One segment of Doggie is the Good Treats division, where the manager has invested in new equipment. The operating results from this equipment are as follows:
Revenues $80,000
Cost of goods sold 45,000
General and administrative expenses 15,000
Assuming that there are no income taxes, what would be the ROI and RI, respectively, for this equipment, which has an average value of $100,000?
A. $2,000, 20%
B. 35%, $3,600
C. $3,600, 35%
D. 20%, $2,000
A
D. 20%, $2,000
20%=(80-45-15)/100
2000=100*18%-(80-45-15)
Residual income (RI) is net income above a minimum desired rate of return on invested capital. The minimum desired net income is found by multiplying the desired rate of return by invested capital. Return on investment (ROI) is net income divided by invested capital.
Revenues of $80,000 less total expenses of $60,000 leaves net income of $20,000. Dividing $20,000 net income by invested capital of $100,000 gives a 20% ROI.
The desired return at 18% on invested capital of $100,000 is $18,000. Subtracting this from the $20,000 net income leaves residual income of $2,000.
12
Q
Mason Company uses a job order cost system and applies manufacturing overhead to jobs using a predetermined overhead rate based on direct-labor dollars. The rate for the current year is 200% of direct-labor dollars. This rate was calculated last December and will be used throughout the current year. Mason had one job, No. 150, in process on August 1 with raw materials costs of $2,000 and direct-labor costs of $3,000. During August, raw materials and direct labor added to jobs were as follows:
No. 150 No. 151 No. 152
Raw materials $ X $4,000 $1,000
Direct labor 1,500 5,000 2,500
Actual manufacturing overhead for the month of August was $20,000. During the month, Mason completed Job Nos. 150 and 151. For August, manufacturing overhead was:
A. over-applied by $4,000.
B. under-applied by $7,000.
C. under-applied by $2,000.
D. under-applied by $1,000.
A
C. under-applied by $2,000= (20-(15+5+2.5)*200%)
Actual August overhead $20,000
Overhead applied in August:
Job No. 150 direct labor $1,500
Job No. 151 direct labor 5,000
Job No. 152 direct labor 2,500
Total direct labor $9,000
Times overhead rate x 200%
Equals overhead applied $18,000
Under-applied overhead for August $ 2,000
13
Q
Three of the basic measurements used by the theory of constraints (TOC) are:
A. gross margin (or gross profit), return on assets, and total sales.
B. number of constraints (or subordinates), number of non-constraints, and operating leverage.
C. throughput (or throughput contribution), inventory (or investments), and operational expense.
D. fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross margin (or gross profit).
A
C. throughput (or throughput contribution), inventory (or investments), and operational expense.
The theory of constraints uses three measurements: throughput contribution, investments, and operating costs.
14
Q
Residual income is a performance evaluation that is used in conjunction with return on investment (ROI) or instead of ROI. In many cases, residual income is preferred over ROI because:
A. residual income is a measure over time while ROI represents the results for a single time period.
B. residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI
C. the imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI
D. average investment is employed with residual income while year-end investment is employed with ROI
A
B. residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI
Residual income is determined by subtracting imputed interest on assets used by a segment or project from the segment or project’s calculated net income. Residual income seeks to maximize absolute dollars of income.
Both residual income and ROI measure results for a single time period and use average investment. The target rate is the same as the imputed interest rate.
15
Q
Just-in-time production is also called:
A. kaizen.
B. lean manufacturing.
C. activity-based management.
D. backflush costing.
A
B. lean manufacturing.
Lean manufacturing is another term for just-in-time (JIT) production system, in which a company develops a group of vendors who can supply the inventory with minimum lead time just before the item is required in the manufacturing process. The goal is to maximize customer value and minimize costs.
16
Q
When comparing strategic planning with operational planning, which one of the following statements is most appropriate?
A. Strategic planning is performed at all levels of management.
B. Operational planning results in budget data.
C. Strategic planning focuses on authority and responsibility.
D. Operational planning is long-range in focus.
A
B. Operational planning results in budget data.
Operational planning results in budget data to be used in planning day-to-day operations. This is the only true statement among the answer choices.
Strategic planning is performed only at the highest level of management and focuses on long-range goals.
Preparation of performance reports depends on the result of operational planning.
17
Q
Which of the following costing methods provides the added benefit of usefulness for external reporting purposes?
Variable
Absorption
A. I only
B. II only
C. Both I and II
D. Neither I nor II
A
B. II only Absorption 吸收
The difference between variable and absorption costing relates to the way fixed overhead costs are handled. Under variable costing, fixed manufacturing costs are period costs, and under absorption costing, fixed manufacturing costs are inventoriable.
Since GAAP and tax law only allow the use of absorption costing, variable costing does not provide any benefits for external reporting purposes.
18
Q
A CPA would recommend implementing an activity-based costing system under which of the following circumstances?
A. The client is a single-product manufacturer.
B. Most of the client’s costs currently are classified as direct costs.
C. The client produced products that heterogeneously consume resources.
D. The client produced many different products that homogeneously consume resources.
A
C. The client produced products that heterogeneously consume resources.
Activity-based costing (ABC) systems use a two-step process. First, a separate pool accumulates the overhead costs associated with each activity and some distinct measure is found for that activity. Overhead costs from each activity pool are allocated to product lines on the basis of the activity measure. In a second step, the overhead costs accumulated by product line are then allocated to the individual units in the product line.
The idea is that when various products consume significantly different levels of resources, costs can be more accurately assigned by identifying the level of resource use for each different product. Therefore, activity-based costing would be appropriate if the client’s products heterogeneously consume resources (each takes different levels of resources).
A single product manufacturer would not be able to benefit from closely analyzing the cost structure of different products. ABC systems are used to assign indirect costs, not direct costs clearly associated with specific products. If the different products homogeneously consume resources, they all have the same level of resource consumption, so the client would not benefit from analyzing the differences in resource consumption
19
Q
Which of the following would not be appropriate to consider in the physical design of a data center?
A. Evaluation of potential risks from railroad lines and highways
B. Use of biometric access systems
C. Design of authorization tables for operating system access
D. Inclusion of an uninterruptible power supply system and surge protection
A
C. Design of authorization tables for operating system access
Authorization tables for operating system access address logical controls, not physical controls.
External risks should be evaluated to determine the center’s location. Biometric access systems control physical access to the data center. Power supply systems and surge protection are included in data center design.
20
Q
Which of the following is one of the four perspectives of a balanced scorecard?
A. Just-in-time
B. Innovation
C. Benchmarking
D. Activity-based costing
A
B. Innovation
A balanced scorecard considers several areas in comparing performance results of different business units, including customer satisfaction, learning and growth (innovation), internal business process improvements, and financial measures related to operations of the unit.
JIT (just-in-time) and benchmarking are management policies related to corporate strategies, but they have no relationship to performance measurement.
Activity-based costing is a method of assigning costs to products rather than a performance measurement tool.
21
Q
Which of the following is the best way to identify and manage risk?
A. Know the impact on the project
B. Have experts on the team
C. Control costs
D. Know the risks
A
B. Have experts on the team
The best way to identify and manage risk is to have experts in the area of the project on the team. These experts will have had experience in the aspects of the project and can help identify possible risks as well as manage the risks without busting the bank.
22
Q
Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott’s fixed cost?
A. $16,000
B. $24,000
C. $80,000
D. $96,000
A
B. $24,000= (200-80=BE) *20%=24
The contribution margin is sales revenue minus all variable costs. Fixed costs are not considered in calculating contribution margin.
Margin of safety is the excess of actual or budgeted sales over breakeven point sales. It is the amount by which sales could decrease before losses occur.
At sales of $200,000, Cott has a margin of safety of $80,000. Sales would be $120,000 at breakeven.
With sales of $120,000, the contribution margin toward fixed costs and profit is 20% of $120,000, or $24,000. However, there is zero profit at breakeven, so the contribution margin exactly equals fixed costs, which must be $24,000.
23
Q
Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs?
A. Inspection of in-process goods
B. Recording the number of products returned over time
C. Tracking the number of products reworked
D. Tracking warranty expenses over time
A
C. Tracking the number of products reworked
A decrease in the number of products reworked over time represents an improvement in product quality due to a reduction in defective products produced.
Internal failure means defective products identified in quality inspections that must be discarded or reworked. External failure means defective products delivered to customers that must be replaced. Inspection of in-process goods may identify defective units, but the inspection does not measure the improvement in quality. Improvement is measured by using the results of the inspections.
Recording the number of products returned over time and tracking warranty expenses over time are incorrect because they represent an external failure cost, not an internal failure cost.
24
Q
Which of the following is not a business process modeling tool?
A. Use case diagrams
B. Activity diagrams
C. Unified modeling language
D. Activity modeling diagram
A
D. Activity modeling diagram
Use case diagrams, activity diagrams, business process modeling notation, extended business modeling language, and unified modeling language are all business process modeling tools.
25
cost of conformance is the sum of ?
nonconformance (failure costs) include ?
cost of conformance is the sum of prevention costs plus appraisal costs
nonconformance (failure costs) include internal failure and external failure
26
The difference between standard hours at standard wage rates and actual hours at standard wage rates is referred to as which of the following types of variances?
A. Labor rate
B. Labor usage
C. Direct labor spending
D. Indirect labor spending
B. Labor usage
The direct labor employees are paid for the time worked at an agreed-upon rate. The direct labor cost on the flexible budget is based on the standard hours required for the activity level achieved at the standard price. The difference between what was actually paid to the workers and the flexible budget amount results in the total labor variance, which then can be separated into a rate variance and an efficiency (usage) variance.
For the spending variance, the comparison is made between the actual price and the standard price for the actual quantity purchased or used.
For the usage (efficiency) variance, the comparison is made between the actual quantity and the standard quantity at the standard price per unit.
27
In its first year of operations, Magna Manufacturers had the following costs when it produced 100,000 and sold 80,000 units of its only product:
Manufacturing costs--Fixed $180,000
Variable 160,000
Selling and admin. costs--Fixed 90,000
Variable 40,000
How much lower would Magna's net income be if it used variable costing instead of full absorption costing?
A. $36,000
B. $54,000
C. $68,000
D. $94,000
A. $36,000 = (100,000 - 80,000) x $1.80 = 20,000 x $1.80
Absorption costing requires that all manufacturing costs, variable and fixed, be treated as product costs, while selling and administrative costs are treated as period costs. Absorption costing is required by GAAP for external reporting. Variable costing or direct costing is a method in which costs of inventory include only the variable manufacturing costs.
Fixed manufacturing cost per unit under absorption costing is $1.80. (Computed $180,000 ÷ 100,000 units)
The difference in income can be computed:
Income difference = Change in inventory x Fixed cost per unit = (100,000 - 80,000) x $1.80 = 20,000 x $1.80
= $36,000
28
As part of a benchmarking process, a company's costs of quality for the current month have been identified as follows:
```
Employee training $20,000
Product recalls 8,000
Scrap 4,500
Quality inspectors 48,000
Preventive maintenance 19,500
Supplier education expense 17,500
Materials inspection expense 60,000
Processing product returns 2,500
What amount is the company's prevention cost for the current month?
```
A. $39,500
B. $57,000
C. $165,000
D. $175,500
B. $57,000 (20+19.5+17.5)
Prevention costs are the costs of production process changes that reduce the rate at which product defects occur. This category includes employee training ($20,000), preventative maintenance ($19,500), and supplier education ($17,500).
The cost of quality inspectors is an inspection cost that identifies a defect but does not prevent it.
Internal failure costs include reworking or scrapping defective products that are identified by the inspection process.
External failure costs include warranty and repair expenses and product recalls.
29
Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost situations?
A. Sales value at split-off
B. Flexible budget amounts
C. Physical measures such as weights or volume
D. Constant gross margin percentage net realizable value method
B. Flexible budget amounts
Production costs up to the split-off point are sometimes assigned to the products based upon a physical measure such as weight; however, the physical measure often bears no relationship to the ultimate sales value of the products involved.
Sales methods are often used in the allocation of production costs up to the split-off point. These methods are as follows:
Relative sales value at the split-off point method: Here, joint costs are assigned to individual products in proportion to the sales value of each product relative to the sales value of all products at the split-off point.
Net realizable value method: Here, joint costs are assigned to individual products in proportion to the net realizable value of the joint products as of the split-off point (defined as the net realizable value—the final sale price less all costs to complete the product in its final form).
The flexible budget is a tool used to compare actual results to expected results given a specific level of activity achieved during a given period. This is part of the control function of management and has nothing to do with the allocation of costs to various products.
30
Given that demand exceeds capacity, that there is no spoilage or waste, and that there is full utilization of a constant number of assembly hours, the number of components needed for an assembly operation with an 80% learning curve should:
increase for successive periods.
decrease per unit of output.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
A. I only increase for successive periods.
The learning curve is a graphical description of the learning process that shows the impacts of learning over a number of practice opportunities on work behaviors. The learning curve usually shows increases in work performance as an employee integrates learning experiences (classes, on-the-job training, etc.) into work practices. A basic assumption of the learning curve model is that the direct labor required for the n + 1st unit will always be less than the labor required for the n unit.
Since demand exceeds supply, the company will keep increasing production with a constant number of assembly hours. Increased production requires more units of raw material (components).
31
Controllable revenue would be included in a performance report for:
A. a profit center.
B. a cost center.
C. both a profit center and a cost center.
D. neither a profit center nor a cost center.
A. a profit center.
The performance report of a profit center would appear as follows:
Controllable revenue XXX
Less Controllable costs XX
= Profit center income XX
Note that controllable revenue does appear in this performance report. On the other hand, only controllable costs appear in the cost center performance report.
32
Kanban is:
A. a technique for managing a just-in-time (JIT) inventory system developed by the Japanese.
B. a method of evaluating alternative credit policies developed by the Japanese.
C. a method of determining the economic order quantity expressed in mathematical terms.
D. a method of developing a relationship between sales and inventory used in forecasting.
A. a technique for managing a just-in-time (JIT) inventory system developed by the Japanese.
Kanban is a technique for managing a just-in-time inventory system. The kanban is a tag attached to the storage container where component parts are kept. As a component is used, a kanban is placed in a box.
Managers determine the number of kanbans needed to be in the box of the component part before a reorder of that part is necessary.
33
Which of the following management practices involves concentrating on areas that deserve attention and placing less attention on areas operating as expected?
A. Management by objectives
B. Responsibility accounting
C. Benchmarking
D. Management by exception
D. Management by exception
Management by exception involves concentrating on areas that deserve attention and paying less attention to areas operating as expected.
Management-by-objectives (MBO) involves having manager and subordinate jointly develop objectives and plans.
Responsibility accounting is a method whereby responsibility is identified and related to managers. Then, managerial performance is monitored and evaluated based on this identification.
Benchmarking involves identifying “best in class” performance or other measure(s), then comparing the company's performance to that benchmark or standard.
34
The following direct labor information pertains to the manufacture of product Glu:
Time required to make one unit 2 direct labor hours
Number of direct workers 50
Number of productive hours per week, per worker 40
Weekly wages per worker $500
Workers' benefits treated as direct labor costs 20% of wages
What is the standard direct labor cost per unit of product Glu?
A. $30
B. $24
C. $15
D. $12
A. $30=((500/40)*2)*120%
Hourly wage = $500 per week / 40 hours = $12.50/HR
Standard Direct Hours per Unit = 2 (given)
Direct Labor Cost per Unit = 2 hrs x $12.50/hr. = $25
Workers' benefits = 20% of wages = .2 x $25 = $5
Standard Direct Labor Cost per Unit = $25 + $5 = $30
35
A newly introduced costing method that has recently been adopted at some firms is called ________ costing.
A. absorption
B. standard
C. throughput
D. variable
C. throughput
Throughput costing relegates all product costs except direct materials to period cost (expense) status. It is a newly proposed costing method.
Absorption, standard, and variable costing have been used for several decades.
36
```
A processing department produces joint products Ajac and Bjac, each of which incurs separable production costs after split-off. Information concerning a batch produced at a $60,000 joint cost before split-off follows:
Separable Sales
Product Costs Value
Ajac $ 8,000 $ 80,000
Bjac 22,000 40,000
Total $30,000 $120,000
```
What is the joint cost assigned to Ajac if costs are assigned using the relative net realizable value?
A. $16,000
B. $40,000
C. $48,000
D. $52,000
C. $48,000= (72/90)*60
Given:
Joint Cost = $60,000
NRV = Net Realizable Value
Product Ajac Bjac Total
Sales value $80,000 $40,000
Less separable costs 8,000 22,000
Net realizable value $72,000 $18,000 $90,000
Joint cost assigned to Ajac = (NRV Ajac / Total NRV) x Joint Cost
= ($72,000 / $90,000) x $60,000
= .80 x $60,000
= $48,000
37
Which of the following forecasting methods relies mostly on judgment?
A. Time series models
B. Econometric models
C. Delphi
D. Regression
C. Delphi
The Delphi method is a collaborative process whereby managers or members of a group are independently surveyed to reach a consensus on something that will happen in the future. With no empirical evidence, this method relies mostly on judgment.
A time series model involves specific measurements taken over equally spaced intervals that assist with forecasting those measurements in the future.
Econometric models combine mathematical economics, statistics, economic statistics, and economic theory. This model involves regression analysis.
Regression uses an independent variable to predict the value of another variable.
Time series, econometric, and regression analyses all utilize mathematics and observation. Each is less subjective than the Delphi method of forecasting.
38
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information summarizes operations relating to laptop computer model no. KJK20 during the quarter ending March 31:
Direct
Units Labor
Work-in-process inventory, January 1 100 $ 50,000
Started during the quarter 500
Completed during the quarter 400
Work-in-process inventory, March 31 200
Costs added during the quarter $720,000
Beginning work-in-process inventory was 50% complete for direct labor costs. Ending work-in-process inventory was 75% complete for direct labor costs. What is the total value of direct labor costs in ending work-in-process inventory using the weighted-average unit cost inventory valuation method?
A. $183,000
B. $194,000
C. $210,000
D. $216,000
C. $210,000=((50+720)/(400+200*0.75))*(200*0.75)
The weighted-average process cost method includes in equivalent units (EUs) all units completed plus work done on ending work-in-process (WIP).
Thus:
Weighted-average EUs = Units completed + Work done on ending WIP
For Kerner Manufacturing:
Direct labor EUs = 400 + 75% (200) = 400 + 150 = 550
Cost per direct labor EU = Total labor cost / Equivalent units = ($50,000 + $720,000) / 550 = $770,000 / 550
= $1,400
Ending direct labor WIP = 150 units in ending WIP x $1,400 per EU = $210,000
39
The management of a company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts?
A. Budget
B. Forecast
C. Benchmark
D. Utilize best practices
C. Benchmark
Companies strive for continuous improvement. One of the tools available to managers to help them to institute improvements within their organization is benchmarking. Benchmarking is the study of leading companies in the industry or companies that excel in various tasks. A company's management can strive toward improved performance by comparing and contrasting their performance to the performance of a “benchmark” organization.
40
Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?
A. Actual cost
B. Standard variable cost
C. Actual cost plus mark-up
D. Negotiated price
B. Standard variable cost
Responsibility accounting is segmented reporting useful in management and control that breaks the enterprise into organization subdivisions that are responsible for costs, profits, and investments according to the unit's ability to control these activities. Each center is judged on the basis of an evaluation of its performance relative to the activities over which it has control.
Variable costs include direct costs that can generally be controlled by the division to which they are allocated.
"Actual cost" and "Actual cost plus mark-up" are incorrect because actual costs can be controlled by the cost center. It should not be allowed to pass the excess costs over standard costs on to the next division.
"Negotiated price" is incorrect because a negotiated price usually would include some profit margin for the producing division, but that division only exercises control over costs rather than revenues or profit.
41
Baby Frames, Inc., evaluates manufacturing overhead by using variance analysis. The following information applies to the month of May:
Actual Budgeted
Number of frames manufactured 19,000 20,000
Variable overhead costs $4,100 $2 per DL hr
Fixed overhead costs $22,000 $20,000; $1 per unit
Direct labor hours 2,100 hours 0.1 hour per frame
What is the variable overhead efficiency variance?
A. $200 favorable
B. $200 unfavorable
C. $400 favorable
D. $400 unfavorable
D. $400 unfavorable
The variable overhead efficiency variance indicates the dollar result of either efficient or inefficient usage of the cost driver for variable overhead.
For Baby Frames, this cost driver is direct labor hours (DLHs). The computation is:
Variable overhead = Standard variable x Difference between actual = $2 (2,100 - (19,000 x .1)) = $2 (2,100 - 1,900) = $2 (200) = $400
Since actual DLHs exceeded budgeted DLHs, this variance is unfavorable.
Budgeted DLHs are based on budgeted hours for actual product output (19,000 frames), not what Baby Frames thought it would produce (i.e., 20,000 frames). The idea is to use the budgeted rate (0.1 hour per frame) but multiply it by the actual level of production (19,000 frames).
42
The definition of economic cost is:
A. all the dollar costs employers pay for all inputs purchased.
B. the opportunity cost of all inputs minus the dollar cost of those inputs.
C. the difference between all implicit and explicit costs of the business firm.
D. the sum of all explicit and implicit costs of the business firm.
D. the sum of all explicit and implicit costs of the business firm.
Economic cost is the total cost of all resources used to produce a good or service. These costs include explicit, out-of-pocket costs, as well as implicit costs. Implicit costs are the opportunity costs of using one's own resources. For example, if a small business owner uses her own capital of $100,000 to start a business, she does not pay interest expense to herself for use of this capital. However, it is an implicit cost of doing business since she could have been earning interest on the money if she had loaned it to someone else. This implicit cost is part of the total economic cost of doing business.
Economic cost includes the value of all of the resources used to produce something whether or not money actually changes hands.
43
o determine the best cost driver of warranty costs relating to glass breakage during shipments, Wymer Co. used simple linear regression analysis to study the relationship between warranty costs and each of the following variables: type of packaging, quantity shipped, type of carrier, and distance shipped. The analysis yielded the following statistics:
Standard
Coefficient of Error of
Independent Variable Determination Estimate
Type of packaging 0.60 1.524
Quantity shipped 0.48 1.875
Type of carrier 0.45 2.149
Distance shipped 0.20 4.867
Based on these analyses, the best driver of warranty costs for glass breakage is:
A. type of packaging.
B. quantity shipped.
C. type of carrier.
D. distance shipped.
A. type of packaging.
The coefficient of determination closest to 1.00 explains the most variability in a simple regression model.
R2 = SSR/SST, where r2 is the coefficient of determination, SSR is the sum of the squared deviations of regression (the explained part), and SST is the total sum of squared deviations of the dependent variable around its mean.
The independent variable, type of packaging, has the highest coefficient of determination (0.60) and the lowest standard error of estimate (1.524), thus it is the best driver for the dependent variable, warranty costs for glass breakage.
44
he following information is available on Crain Co.'s two product lines:
Chairs Tables
Sales $180,000 $ 48,000
Variable costs (96,000) (30,000)
Contribution margin $ 84,000 $ 18,000
Fixed costs:
Avoidable (36,000) (12,000)
Unavoidable (18,000) (10,800)
Operating income (loss) $ 30,000 $ (4,800)
Assuming that the table line is discontinued, and the factory space previously used to make tables is rented for $24,000 per year, operating income will increase by what amount?
A. $13,200
B. $18,000
C. $24,000
D. $28,800
B. $18,000= (48-30-12)+24
When looking at business segment issues, relevant items are those that are avoidable. In other words, revenue, variable costs, and avoidable fixed costs are relevant. The allocated common costs are not relevant since they will continue even if the table line is discontinued. If the segment margin is positive, this means that the segment is making a contribution toward the common costs of the organization. Reordering the information given in the problem, it can be seen that the table segment has a positive segment margin.
Total Chairs Tables
Sales $228,000 $180,000 $ 48,000
Variable costs (126,000) (96,000) (30,000)
Contribution margin $102,000 $ 84,000 $ 18,000
Avoidable fixed costs (48,000) (36,000) (12,000)
Segment margin $ 54,000 $ 48,000 $ 6,000
Unavoidable fixed costs (28,800)
Operating income $ 25,200
What items are relevant if the table line is discontinued? The table-line segment margin would be eliminated; however, factory space that would be freed up could then be rented for $24,000 per year (opportunity cost).
Lost contribution to overhead $(6,000)
Rental opportunity 24,000
Increase in operating income $18,000
45
Colter Corp. is conducting an analysis of a potential capital investment. The project is expected to increase sales by $100,000 and reduce costs by $50,000 annually. Depreciation expense is $30,000 per year. Colter's marginal tax rate is 40%. What is the annual operating cash flow for the project?
A. $42,000
B. $72,000
C. $90,000
D. $102,000
D. $102,000 (30+(100+50-30)*0.6*(1-40%)
Annual operating cash flow is computed as follows:
Pretax operating income
($100,000 + $50,000 - $30,000) $120,000
Less taxes at 40% (48,000)
After-tax operating income $ 72,000
Add back noncash expenses (depreciation) 30,000
Annual operating cash flow $102,000
46
Based on standard direct labor hours, a fixed overhead volume variance measures:
A. deviation from standard direct labor hour capacity.
B. deviation from the normal, or denominator, level of direct labor hours.
C. fixed overhead efficiency.
D. fixed overhead utilization.
B. deviation from the normal, or denominator, level of direct labor hours.
Fixed overhead volume variance is the difference between fixed overhead applied using a predetermined rate and budgeted fixed overhead. If fixed overhead is applied on the basis of direct labor hours, a deviation from the normal, or budgeted, level of direct labor hours used in determining the predetermined rate, would result in a fixed overhead volume variance.
47
Which of the following is not a typical characteristic of a just-in-time (JIT) production environment?
A. Lot sizes equal to one
B. Insignificant setup times and costs
C. Push-through systems
D. Balanced and level workloads
C. Push-through systems
The just-in-time (JIT) production environment is characterized by production generated by need. This is a “demand-pull” system in which sales occur first and trigger the production of units. Typical features of a JIT system include small lot sizes, low setup times/costs, and balanced workloads.
Traditional production systems, on the other hand, produce products based on expected demand. They produce on a fixed schedule in a “push-through” mode.
48
Which of the following does not support business process management
A. Approaches
B. Systems
C. Techniques
D. Measures
B. Systems
Business process management is supported by the approaches, techniques, and measures of the organization (not the systems). These processes are analyzed throughout the life of the organization.
49
A direct labor overtime premium should be charged to a specific job when the overtime is caused by the:
A. increased overall level of activity.
B. customer's requirement for early completion of job.
C. management's failure to include the job in the production schedule.
D. management's requirement that the job be completed before the annual factory vacation closure.
B. customer's requirement for early completion of job.
When actual amounts differ from standard amounts, a variance is recorded. The variance should be assigned to the department or division that has the ability to control the activity that causes the variance. The customer’s early completion requirement for this job was the activity that caused the overtime cost, so the additional cost should be charged to this job.
"Increased overall level of activity" is incorrect because an increase in general demand is not a cost that can be controlled. "Management's failure to include the job in the production schedule" is incorrect because the job did not cause the overtime; management’s planning error did. "Management's requirement that the job be completed before the annual factory vacation closure" is incorrect because management’s decision caused the overtime rather than the current specific job.
50
Which of the following describes an off-shore operation?
A. A U.S. company incorporates in Japan.
B. A Japanese company produces right off the Japanese shore.
C. It is an internal department.
D. It is a cost-saving process.
A. A U.S. company incorporates in Japan.
Off-shore operations” describes an organization incorporating outside of the original jurisdiction of the primary operations. The organization will be considered off-shore if it:
incorporates under offshore company laws.
incorporates as a nonresident.
does not trade within the offshore jurisdiction.
meets nominal tax expenses.
51
What is the main purpose of outsourcing?
A. To improve management
B. Better training
C. To reduce costs
D. To increase personnel
C. To reduce costs
Outsourcing to other countries helps reduce costs. A corporation in the United States will outsource to Japan because Japan will pay employees much less wages for the same work.
52
A manufacturer that wants to improve its staging process compares its procedures against the check-in process for a major airline. Which of the following tools is the manufacturer using?
A. Total quality management
B. Statistical process control
C. Economic value-added
D. Benchmarking
D. Benchmarking
Benchmarking entails comparison of process performance with other process performers, usually best-in-class performers. The other company can be in the same industry or other industries.
The other answer choices do not involve comparisons with outside companies:
Total quality management is the application of quality principles to all processes to better satisfy customers.
Statistical process control is a method of process control that uses statistical methods.
Economic value-added measures excess value created by an entity’s investments.
53
Cost allocation is the process of assigning indirect costs to a cost object. The indirect costs are grouped in cost pools and then allocated by a common allocation base to the cost object. The base that is employed to allocate a homogeneous cost pool should:
A. have a cause-and-effect relationship with the cost items in the cost pool.
B. assign the costs in the pool uniformly to cost objects even if the cost objects use resources in a nonuniform way.
C. be a nonfinancial measure (e.g., number of setups) because a nonfinancial measure is more objective.
D. have a high correlation with the cost items in the cost pool as the sole criterion for selection.
A. have a cause-and-effect relationship with the cost items in the cost pool.
All costs in a homogeneous cost pool should have a cause-and-effect relationship with the base that is employed for allocation.
An averaged or smoothed allocation may result in significant under or over allocation of costs.
Both financial and nonfinancial measures may be used as allocation bases.
Economic plausibility as well as high correlation are desirable for allocation bases.
54
What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?
A. ROI is a percentage, while RI is a dollar amount.
B. ROI may lead to rejecting projects that yield positive cash flows.
C. ROI does not necessarily reflect the company's cost of capital.
D. ROI does not reflect all economic gains.
B. ROI may lead to rejecting projects that yield positive cash flows.
Return on investment (ROI) is calculated by dividing the invested capital into the net income.
Residual income (RI) is the amount of net income in excess of a minimum desired rate of return on invested capital. This can be expressed in the equation: Reported net income - (Desired rate of return × Invested capital). Since ROI is calculated using accounting income, depreciation expense has been subtracted which might lead to rejections of projects with positive cash flow.
Although ROI is expressed as a percentage and residual income is a dollar amount,this fact is not a disadvantage. Neither ROI nor residual income necessarily reflect the company’s cost of capital. ROI can be compared with the cost of capital and RI can use the cost of capital as the desired rate of return, but it could also use some other desired rate. Neither ROI nor RI reflect economic income because the calculations are based on accounting numbers which do not reflect economic income.
Choices A, C, and D are all true statements, but they are not disadvantages.
55
Augusta, Inc., expects manufacturing and sales of 70,000 units of product Maggie, its only product, to occur evenly over a 10-week period. Augusta pays for materials in the week following use. The balance of accounts payable for materials at the beginning of the 10-week period is $40,000. There are no beginning inventories. The following information pertains to product Maggie for the 10-week period:
Sales price $11 per unit
Materials $3 per unit
Manufacturing conversion costs—Fixed $210,000
Variable $2 per unit
Selling and administrative costs—Fixed $45,000
Variable $1 per unit
Using variable costing, what is Augusta’s budgeted income for the period?
A. $95,000
B. $140,000
C. $305,000
D. $350,000
A. $95,000=(11-3-2-1)*70,000-210-45
Variable costing is a method of costing in which fixed costs are charged to expense as period costs when incurred.
Variable cost per unit is $3 for material, $2 for other manufacturing costs, and $1 for selling and administrative, for a total of $6. Since the sales price is $11, the unit contribution margin ($11 − $6) is $5 per unit.
Total contribution margin for the period will be $5 × 70,000 units, or $350,000.
Manufacturing fixed costs are $210,000, while selling and administrative fixed costs are $45,000, for a total of $255,000 for fixed costs.
Subtracting fixed costs of $255,000 from the contribution margin of $350,000 leaves a budget net income of $95,000 for the period.
56
Parat College allocates support department costs to its individual schools using the step method. Information for May is as follows:
Support Departments
Maintenance Power
Costs incurred $99,000 $54,000
Services percentages provided to:
Maintenance -- 10%
Power 20% --
School of Education 30% 20%
School of Technology 50% 70%
100% 100%
What is the amount of May support department costs allocated to the School of Education?
A. $40,500
B. $42,120
C. $46,100
D. $49,125
C. $46,100=((99*0.3)+54)*2/9+(30%*99)
Step allocation is the allocation of the costs of each service department in sequence to all departments that receive the service, whether other service departments or production departments. In each step, costs are allocated only to remaining departments such that ultimately all service costs are allocated to production; this method recognizes some of the service rendered from one to another service department.
The School of Education would receive 30% of $99,000, or $29,700, from maintenance. Power would receive 20% of $99,000, or $19,800. After that allocation, the Power Department would have $73,800 ($54,000 + $19,800) to allocate to Education and Technology. Education would receive 2/9 of $73,800, or $16,400 from the Power Department. Therefore, total support department cost allocated to the School of Education is $46,100 ($29,700 from Maintenance and $16,400 from Power).
57
Asta, Inc., is a medical laboratory that performs tests for physicians. Asta anticipates performing between 5,000 and 12,000 tests during the month of April. Compared to industry averages, at the low range of activity Asta has a lower sales price per test, higher fixed costs, and the same breakeven point in number of tests performed. At the high range of activity, Asta’s sales price per test and fixed costs are the same as industry averages, and Asta’s variable costs are lower. At the low range of activity (0 to 4,999 tests performed) fixed costs are $160,000. At the high range of activity (5,000 to 14,999 tests performed) fixed costs are $200,000.
Sales price per test $60
Variable costs per test 20
Depreciation on the laboratory equipment is calculated on the basis of service hours. How is the depreciation on laboratory equipment categorized?
A. Direct material cost
B. Direct labor cost
C. Variable cost
D. General and administrative cost
C. Variable cost
Depreciation based on service hours is a cost that increases directly as production increases, so it is a variable manufacturing cost.
"Direct material cost" and "direct labor cost" are incorrect because this cost is not a material cost nor is it a labor cost. "General and administrative cost" is incorrect because this depreciation is a cost incurred for production; it is not an administrative cost.
58
Birk Co. uses a job order cost system. The following debits (credits) appeared in Birk's work-in-process account for the month of April:
April Description Amount
1 Balance $ 4,000
30 Direct materials 24,000
30 Direct labor 16,000
30 Factory overhead 12,800
30 To finished goods (48,000)
Birk applies overhead to production at a predetermined rate of 80% of direct labor cost. Job No. 5, the only job still in process on April 30, has been charged with direct labor of $2,000. What was the amount of direct materials charged to Job No. 5?
A. $3,000
B. $5,200
C. $8,800
D. $24,000
B. $5,200
April 30 balance of work-in-process =
BI + DM used + DL used + Factory OH applied -Transferred to finished goods
= $4,000 + $24,000 + $16,000 + $12,800 - $48,000
= $8,800
Cost of direct materials
charged to Job No. 5 = WIP balance - Direct labor - Overhead
= $8,800 - $2,000 - .80($2,000)
= $8,800 - $2,000 - $1,600
= $5,200
59
A manufacturing company produces two main products and a byproduct out of a joint process. Main Product 1 could be sold at split-off. Main Product 2 requires additional processing before it can be sold. The company employs the estimated net realizable sales value method to allocate the joint product costs. The net realizable value of the byproduct is used to reduce the joint product costs.
Data regarding the two main products and the byproducts for the current month:
Joint production costs of $75,000 were incurred in the current month for the quantities produced.
Distribution costs of $0.05 per gallon are incurred on the sale of the byproduct.
Selling price of the byproduct is $0.55 per gallon.
Product volume for the byproduct is 10,000 gallons.
Net realizable sales value for Main Product 1 is $80,000.
Net realizable sales value for Main Product 2 is $320.000.
The joint product costs assigned to Main Product 1 for the current month would be:
A. $13,900.
B. $16,000.
C. $14,000.
D. $15,000.
C. $14,000.
Net realizable value (NRV) of byproduct = 10,000 gallons ($.55 - $.05) = $5,000
Net joint cost = $75,000 - $5,000 = $70,000
Net joint cost allocated to 1 = ($80,000 / ($80,000 + $320,000)) x $70,000 = .20 x $70,000 = $14,000
60
Based on the following data, what is the gross profit for the company?
Sales $1,000,000
Net purchases of raw materials 600,000
Cost of goods manufactured 800,000
Marketing and administrative expenses 250,000
Indirect manufacturing costs 500,000
Beginning Inventory Ending Inventory
Work in process $500,000 $400,000
Finished goods 100,000 500,000
A. $200,000
B. $400,000
C. $600,000
D. $900,000
C. $600,000
Cost of goods sold is beginning finished goods plus cost of goods manufactured, less ending finished goods:
$100,000 + $800,000 - $500,000 = $400,000
Gross profit is sales less cost of goods sold:
$1,000,000 - $400,000 = $600,000
61
Berol Company plans to sell 200,000 units of finished product in July 20X1 and anticipates a growth rate in sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of the next month's estimated sales. There are 150,000 finished units in inventory on June 30, 20X1.
Each unit of finished product requires four pounds of direct material at a cost of $1.20 per pound. There are 800,000 pounds of direct material in inventory on June 30, 20X1.
Berol Company's production requirement in units of finished product for the three-month period ending September 30, 20X1, is:
A. 712,025 units.
B. 630,500 units.
C. 664,000 units.
D. 665,720 units.
As projected July sales are 200,000 units and sales are expected to grow 5% per month, sales can be projected as follows:
July August September October
200,000 200,000 x 1.05 210,000 x 1.05 220,500 x 1.05
200,000 210,000 220,500 231,525
As ending inventory is to be 80% of next month's projected sales, ending inventory can be projected as follows:
July August September
Next month's projected sales 210,000 220,500 231,525
Projected Ending Inventory 168,000 176,400 185,220
June's ending inventory is 150,000 units.
To determine production requirements, construct the following table:
Projected July August September
Ending Inventory 168,000 176,400 185,220
+ Sales 200,000 210,000 220,500
- Beginning Inventory 150,000 168,000 176,400
= Required Production 218,000 218,400 229,320
So total quarter production required is:
218,000 + 218,400 + 229,320 = 665,720
62
Which of the following is not a test to determine if an organization is using business process re-engineering (BPR)?
A. The effort focused on critical business processes
B. The receptiveness of senior management.
C. The desired improvement's ambition
D. The effort focused on project management
D. The effort focused on project management
There are three questions that need to be answered to see if an organization is implementing BPR:
Is the effort focused on critical business processes that, if they are changed, can have a major impact on performance?
How ambitious is the desired improvement?
How receptive is senior management to change?
63
Generally, the most appropriate basis on which to evaluate the performance of a division manager is the division's:
A. contribution margin.
B. net revenue less controllable division costs.
C. gross profit.
D. net income less the division's fixed costs.
B. net revenue less controllable division costs.
The most appropriate basis to evaluate the performance of a division manager is one that includes only measures over which the division manager has control.
Therefore, the division's net revenue less controllable division costs is the most appropriate basis for evaluating a division manager's performance.
64
Management has reviewed the standard cost variance analysis and is trying to explain an unfavorable labor efficiency variance of $8,000. Which of the following is the most likely cause of the variance?
A. The new labor contract increased wages.
B. The maintenance of machinery has been inadequate for the last few months.
C. The department manager has chosen to use highly skilled workers.
D. The quality of raw materials has improved greatly.
B. The maintenance of machinery has been inadequate for the last few months.
The labor efficiency (usage) variance is the difference between standard cost of actual hours and the standard cost of the budgeted labor hours.
The labor efficiency variance is caused by direct labor employees working more hours than standard for the actual output attained. This could be due to improper machinery maintenance, resulting in extra hours worked to rework products that do not meet quality standards.
"The new labor contract increased wages" is incorrect because the labor rate per hour does not affect the labor efficiency variance.
"The department manager has chosen to use highly skilled workers" is incorrect because highly skilled workers should work fewer hours than standard, not more.
"The quality of raw materials has improved greatly" is incorrect because improved raw material quality should result in fewer defective units that need to be reworked, and therefore decreasing, not increasing, direct labor hours.
65
Which of the following is a disadvantage of using a process costing system versus job order costing?
A. It is difficult to determine cost of goods sold when partial shipments are made before completion.
B. It is difficult to ensure that material and labor are accurately charged to each specific job.
C. It involves the calculation of stage of completion of goods-in-process and the use of equivalent units.
D. It is expensive to use, as a good deal of clerical work is required.
C. It involves the calculation of stage of completion of goods-in-process and the use of equivalent units.
Job order costing assigns costs to specific production batches or jobs and is used when a product or service consists of discreetly identifiable items. Job costing, not process costing, would be concerned with determining the cost for a partial shipment (before the job is complete) and charging material and labor costs to each job.
Process costing assigns costs to processes and calculates the average cost for all units produced. This calculation of equivalent units of production is a unique disadvantage to the process costing system. Process costing is used when similar goods or services are produced in mass quantities and discrete units are not readily identified.
These two methods are used for different types of manufacturing; therefore, one would not choose one over the other simply because of the cost to implement.
66
A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced in the current year was the same as in the previous year. The variable costing statement reported a profit whereas the absorption costing statement reported a loss. The difference in reported income could be explained by units produced being:
A. less than units sold.
B. less than the activity level used for allocating overhead to the product.
C. in excess of the activity level used for allocating overhead to the product.
D.in excess of units sold.
A. less than units sold.
Variable product costs (material, labor, and variable overhead) are charged against revenue in the period the product is sold under both absorption and variable costing.
Fixed overhead is treated differently. It is expensed in its entirety during the period incurred under variable costing but under absorption costing it is applied to product and appears on the income statement only when the product is sold.
In the situation described, absorption costing reported less income than variable costing because some of the previous year's fixed overhead was included in cost of goods sold as a result of producing less units than were sold in the current year.
Fixed overhead is a product cost for absorption costing at time of sale and a period cost under variable costing at time of production.
67
Which one of the following statements relating to the drum-buffer-rope (DBR) theory developed by Dr. Eliyahu Goldratt is incorrect?
A. DBR assumes that within a manufacturing system, there is at least one (or a limited number) of constraints created by scarce resources.
B. In order to best protect the throughput of a manufacturing operation, the limiting factor of the manufacturing process must be protected.
C. It is important to focus on the queuing throughout the entire manufacturing system in order to provide for a smooth transition from one area to another.
D. It is important to protect against inflationary inventory levels (inventory build ups) that can occur at bottlenecks.
C. It is important to focus on the queuing throughout the entire manufacturing system in order to provide for a smooth transition from one area to another.
The drum-buffer-rope theory:
assumes that within a manufacturing system there is at least one (or a limited number) of constraints created by scarce resources.
states that in order to best protect the throughput of a manufacturing operation, the limiting factor of the manufacturing process must be protected.
states that it is important to protect against inflationary inventory levels (inventory build ups) and the associated carrying costs which can occur at bottlenecks (constraints).
focuses on only the queuing area within a manufacturing firm that is in front of the constraint (bottleneck).
68
LM Enterprises produces two products in a common production process, each of which is processed further after the split-off point. Joint costs incurred for the current month are $36,000. The following information for the current month was also gathered:
Units Units Separable Selling Price
Product Produced Sold Costs per Unit
L 10,000 9,500 $20,000 $ 8
M 5,000 4,000 40,000 20
What amount would be the joint cost allocated to Product M, assuming that LM Enterprises uses the estimated net realizable value method to allocate costs?
A. $20,000
B. $12,000
C. $15,000
D. $18,000
D. $18,000
Net realizable value equals eventual sales price less separable costs.
For Product L, this is $80,000 (10,000 units produced × $8 selling price per unit) less $20,000, or $60,000.
For Product M, it is $100,000 (5,000 units × $20) less $40,000, or $60,000.
Net realizable value of the two products together is $120,000, so Product M is allocated 60/120 or 50% of joint costs. Multiplying joint costs of $36,000 by 50% gives $18,000.
69
Ribbonwood Corporation, a defense contractor, spent June completing Job CC818 for a government space contract. Information about Job CC818, other June costs, and relevant annual estimates follows:
Material issued:
(60% for direct use on Job CC818 and 40%
for indirect factory use through June) $ 4,000
Labor:
Direct labor for Job CC818
(200 direct labor hours at $15 per hour) 3,000
Indirect factory labor for June 850
Other June Costs:
Depreciation (50% factory, 50% administrative) 600
Other (60% factory and 40% administrative) 1,000
Cost driver is Direct Labor Hours
Estimated annual overhead 323,000
Estimated annual direct labor hours 4,000
Mark-up as a percent of costs 150%
What is Ribbonwood's actual overhead for June?
A. $1,750
B. $3,350
C. $16,150
D. $26,917
B. $3,350
$1,600 (Indirect materials: $4,000 × 40%)
+ $850 (Indirect labor: $850)
+ $300 (factory depreciation: $600 × 50%)
+ $600 (Other factory costs: $1,000 × 60%)
= $3,350
70
Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value. An unprotected crop subject to frost has an expected market value of $40,000. If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost. What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection?
A. .167
B. .200
C. .250
D. .333
B. .200
Expected market value when protected with a frost $90,000
Less expected market value when not protected with a frost 40,000
Change in EMV resulting when protected from frost $50,000
At Cal's indifference point:
Cost of protection = Probability of frost x Change in EMV
$10,000 = Probability of frost x $50,000
$10,000 / $50,000 = Probability of frost
.200 = Probability of frost = 20%
71
Kode Co. manufactures a major product that gives rise to a byproduct called May. May's only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a byproduct to a joint product, what would be the effect on Kode's overall gross margin?
A. No effect
B. Gross margin increases by $1 for each unit of May sold
C. Gross margin increases by $3 for each unit of May sold
D. Gross margin increases by $4 for each unit of May sold
B. Gross margin increases by $1 for each unit of May sold
When May is treated as a byproduct, its $3 net realizable value (i.e., $4 - $1) is subtracted from the main product cost so only that $3 is included in the computation of gross profit for the main product.
However, when May is treated as a joint product the entire $4 selling price enters into the computation of gross margin. The $1 is not subtracted in computing gross margin. This $1 shows up in selling costs which appear after the computation of gross margin.
The effect of a change from byproduct to joint product status is a $1 increase in gross margin. It should be noted that bottom line net income does not change, however.
72
Gram Co. develops computer programs to meet customers' special requirements. How should Gram categorize payments to employees who develop these programs?
A. By direct costs and value-adding costs
B. By direct costs only
C. By value-adding costs only
D.By neither direct costs nor value-adding costs
A. By direct costs and value-adding costs
Direct costs are costs that relate directly to and are traceable to products. The payments Gram makes to employee programmers can be traced to the programs so they are direct costs. Value-adding costs are those costs that are necessary to production and add value to the product. Clearly, the employee programmers' efforts are value-added costs.
Some production costs such as manufacturing machine set-up or administrative work related to licensing of programs is necessary but does not add value per se to the product.
73
A department adds material at the beginning of a process and identifies defective units when the process is 40% complete. At the beginning of the period, there was no work-in-process. At the end of the period, the number of work-in-process units equaled the number of units transferred to finished goods. If all units in ending work-in-process were 66-2/3% complete, then ending work-in-process should be allocated as follows:
A. 50% of all normal defective unit costs
B. 40% of all normal defective unit costs
C. 50% of the material costs and 40% of the conversion costs of all normal defective unit costs
D. None of the normal defective unit costs
A. 50% of all normal defective unit costs
Units are identified as defective when production is 40% complete. Since the ending work-in-process inventory was 66-2/3% complete, all of the defective units had already been identified in work-in-process as well as finished goods.
The cost of normal spoilage is spread evenly over the remaining good units. At the end of the period, the number of work-in-process units equaled the number of units transferred to finished goods. Therefore, the same defective unit cost is allocated to finished goods as to work-in-process, meaning that 50% of the cost is allocated to each.
74
Spar Co. calculated the following ratios for one of its profit centers:
Gross margin percentage 30%
Return on sales 25%
Capital turnover 0.5 times
What is Spar's return on investment for this profit center?
A. 7.5%
B. 12.5%
C. 15.0%
D.25.0%
B. 12.5%
Return on investment = (Income / Sales) x (Sales / Capital)
= Return on Sales x Capital Turnover
= 25% x 0.5
= 12.5%
Return on sales = Income / Sales
Capital turnover = Sales / Capital
Return on investment = Income / Capital
75
DJ Co. has a job order cost system. The following debits (credits) appeared in the Work in Process account for the month of March:
March 1, balance $ 12,000
March 31, direct materials 40,000
March 31, direct labor 30,000
March 31, manufacturing overhead applied 27,000
March 31, to finished goods (100,000)
DJ Co. applies overhead at a predetermined rate of 90% of direct labor cost. Job No. 101, the only job still in process at the end of March, has been charged with manufacturing overhead of $2,250. What was the amount of direct materials charged to Job No. 101?
A. $2,250
B. $2,500
C. $4,250
D. $4,725
C. $4,250
Guidance for this problem can be found in a cost of goods manufactured (COGMFg) statement. Using the data supplied, the COGMfg statement can be developed as follows:
Beginning work-in-process inventory $ 12,000
Direct material used $40,000
Direct labor used 30,000
Manufacturing overhead applied 27,000
Manufacturing costs to account for 109,000
Less: Ending work-in-process inventory* 9,000
Cost of goods manufactured $100,000
* Combining the beginning balance of work-in-process with costs added during the month gives a total of $109,000. Subtracting the costs transferred to finished goods of $100,000 leaves an ending work-in-process balance of $9,000.
Thus, the ending work-in-process inventory represents the direct materials, direct labor, and manufacturing overhead applied to the job still in process at the end of the period. The cost of the direct materials charged to the job still can be determined as follows:
Ending work-in-process inventory $9,000
Manufacturing overhead applied (2,250)
Direct labor ($2,250 / 0.90) (2,500)
Direct material charged to Job No. 101 $4,250
76
At the start of its fiscal year, a company anticipated producing 300,000 units throughout the year. The annual budgeted manufacturing overhead was $150,000 for variable costs and $600,000 for fixed costs. In April, when there was a beginning inventory for finished goods of 5,000 units, the company showed an income of $40,000 using absorption costing. That same month, ending inventory for finished goods was 7,000 units. What amount would the company recognize as income for April using variable costing?
A. $35,000
B. $36,000
C. $44,000
D. $45,000
B. $36,000
Under variable costing (also called direct costing), fixed manufacturing is regarded as a period cost and is deducted in full, regardless of the number of units sold. Because fixed manufacturing costs are treated differently between absorption costing and variable costing, operating income will be different if sales and production are not equal. When production is greater than sales, absorption costing operating income will be greater than variable costing operating income because some of the current period’s fixed costs are held in inventory (rather than expensed) until the next period.
The difference is the change in inventory units (7,000 units – 5,000 units = 2,000 units) times the fixed overhead per unit ($600,000 ÷ 300,000 units = $2.00). Variable costing income will be $4,000 (2,000 units × $2.00) less than the $40,000 absorption income, or $36,000.
77
The following selected data pertain to the Darwin Division of Beagle Co. for the current year:
Sales $400,000
Operating income 40,000
Capital turnover 4
Imputed interest rate 10%
What was Darwin's current-year residual income?
A. $0
B. $4,000
C. $10,000
D. $30,000
D. $30,000
Capital turnover = Sales / Invested capital
4 = $400,000 / Invested capital
4 x Invested capital= $400,000
Invested capital= $400,000 / 4 = $100,000
Operating income $40,000
Less imputed interest on
invested capital (10% x $100,000) 10,000
Equals residual income $30,000
78
Key Co. changed from a traditional manufacturing operation with a job order costing system to a just-in-time operation with a back-flush costing system. What are the expected effects of these changes on Key's inspection costs and recording detail of costs tracked to jobs in process?
A. A decrease in both inspection costs and detail of costs tracked to jobs
B. A decrease in inspection costs and an increase in detail of costs tracked to jobs
C. An increase in inspection costs and a decrease in detail of costs tracked to jobs
D. An increase in both inspection costs and detail of costs tracked to jobs
A. A decrease in both inspection costs and detail of costs tracked to jobs
Key's inspection costs will decrease because in a just-in-time operation the number of vendors is reduced and remaining vendors are expected to deliver higher-quality materials on a timely basis.
A back-flush system is based on removal of the standard cost of finished products from the work-in-process inventory upon completion. The effect is to significantly decrease the detail of costs tracked to jobs.
79
In developing a predetermined factory overhead application rate for use in a process costing system, which of the following could be used in the numerator and denominator?
A. Numerator, actual factory overhead; Denominator, actual machine hours
B. Numerator, actual factory overhead; Denominator, estimated machine hours
C. Numerator, estimated factory overhead; Denominator, actual machine hours
D. Numerator, estimated factory overhead; Denominator, estimated machine hours
D. Numerator, estimated factory overhead; Denominator, estimated machine hours
An overhead application rate is calculated by dividing the overhead costs by the volume of the allocation base.
Estimated factory overhead would be used as the numerator, while estimated machine hours would be the denominator if machine hours are chosen as the allocation base.
Actual machine hours and actual factory overhead will not be known until the end of the period, and therefore they cannot be used in a predetermined application rate.
80
A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?
A. Electricity expense
B. Repair and maintenance expense
C. Employee benefits expense
D. Depreciation expense
C. Employee benefits expense
The allocation base is an activity measure used to allocate costs. The allocation base should have a cause-and-effect relationship to the variability of that cost.
The company has been assigning overhead costs in all four categories using machine hours as the cost driver. The more a machine is used, the more cost is allocated to that product line. Assuming that machines are powered by electricity, more machine hours result in increased electricity cost, so this seems an appropriate cost driver for electricity. The more a machine is used, the greater the repair and maintenance cost incurred, so machine hours would be the appropriate cost driver.
Similarly, it seems appropriate to use machine hours to allocate depreciation on machinery. However, it is likely some machines will use many more employee hours than other machines, so machine hours seem inappropriate as the cost driver for employee benefit expense. It is likely the cost driver for employee benefit expense will be changed to direct labor hours or direct labor dollars, both of which would be more directly related to changes in employee benefit cost incurred.
81
Spear Corp. had sales of $2,000,000, a profit margin of 11%, and assets of $2,500,000. Spear decided to reduce its debt ratio to 0.40 from 0.50 by selling new common stock and using the proceeds to repay principal on some outstanding long-term debt. After the refinancing, what is Spear's return on equity?
A. 3.5%
B. 5.3%
C. 14.7%
D. 22.9%
C. 14.7%=（Profit/equity)=220,000/1500,000=(2,000*11%)/(2500-2500*0.4)
Assets total $2,500,000. The sum of liabilities and equity also equals $2,500,000. The company will have debt equal to 40% of the $2,500,000, or $1,000,000. That leaves equity of $1,500,000. Since the profit is 11% of the $2,000,000 sales, the company has a profit of $220,000. Return on equity is net income divided by equity; profit of $220,000 divided by equity of $1,500,000 gives return on equity of 14.7%.
82
Nonfinancial performance measures are important to engineering and operations managers in assessing the quality levels of the products. Which of the following indicators can be used to measure product quality?
Returns and allowances
Number and types of customer complaints
Production cycle time
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
A. I and II only
Both returns and allowances and the number and types of customer complaints are measures of product quality as perceived by the ultimate judge of quality, the customer.
Product cycle time, the start to finish time for producing a product, is a measure of quantity produced rather than a quality measure.
83
Hoyt Co. manufactured the following units:
Salable 5,000
Unsalable (normal spoilage) 200
Unsalable (abnormal spoilage) 300
Manufacturing costs totaled $99,000. What amount should Hoyt debit to finished goods?
A. $90,000
B. $93,600
C. $95,400
D. $99,000
B. $93,600=((5000+200)/5500)*99,000)
The cost of normal spoilage should be absorbed by the good (saleable) units whereas the cost of abnormal spoilage is a loss to be recognized in the period during which the abnormal spoilage occurred.
Total units produced = 5,000 + 200 + 300 = 5,500
Total good units plus normally spoiled units = 5,000 + 200 = 5,200
Cost to be allocated to good units = (5,200 / 5,500) x $99,000 = $93,600
Cost to be allocated to abnormal spoilage = (300 / 5,500) x $99,000 = $5,400
84
```
In its first year of operations, Magna Manufacturers had the following costs when it produced 100,000 and sold 80,000 units of its only product:
Manufacturing costs
Fixed $180,000
Variable 160,000
Selling and admin. costs
Fixed 90,000
Variable 40,000
How much lower would Magna's net income be if it used variable costing instead of full absorption costing?
```
A. $36,000
B. $54,000
C. $68,000
D. $94,000
A. $36,000=(180,000/100,000)*20,000
Under full absorption costing, a product cost is the sum of direct materials, direct labor, variable overhead, and fixed overhead. Under variable costing, it is only direct materials, direct labor, and variable overhead. Thus, under absorption costing the fixed cost associated with unsold goods is carried forward as an asset (through inventory). Using variable costing, all fixed costs are deducted in the year the item is produced.
In this question, 20,000 fewer units are sold than produced. Each unit contains $1.80 of fixed cost ($180,000 ÷ 100,000 units produced). Since variable costing subtracts this cost in the year of production and full absorption costing carries it forward, Magna's net income will be 20,000 × $1.80, or $36,000, lower using variable costing instead of full absorption costing. The selling and administrative items are not a factor in this question.
85
Fab Co. manufactures textiles. Among Fab’s June manufacturing costs were the following salaries and wages:
Loom operators $120,000
Factory foremen 45,000
Machine mechanics 30,000
What was the amount of Fab’s June direct labor?
A. $195,000
B. $165,000
C. $150,000
D. $120,000
D. $120,000
Overhead includes all costs of the manufacturing process other than direct labor and direct materials. Overhead is the costs that cannot be economically traced to individual units of finished product and includes indirect labor (e.g., foremen's salaries), indirect materials (e.g., oil and lubrication for machinery), and miscellaneous indirect costs (e.g., depreciation, manufacturing utilities costs, rent, and insurance).
The salaries of factory foremen are an overhead cost, not direct labor allocable for specific jobs. Similarly, the wages of machine mechanics are part of maintenance cost that cannot be allocated to specific jobs. Instead, it is part of overtime cost as well. That leaves only the $120,000 labor cost of those who directly operate production equipment, the loom operators, to be included in direct labor.
86
The standard direct material cost to produce a unit of Lem is 4 meters of material at $2.50 per meter. During May of the current year, 4,200 meters of material costing $10,080 were purchased and used to produce 1,000 units of Lem. What was the material price variance for May?
A. $400 favorable
B. $420 favorable
C. $80 unfavorable
D. $480 unfavorable
B. $420 favorable
For 1,000 units of LEM:
$10,080 ÷ 4,200 = $2.40
Material Quantity Difference between
Price Variance = purchased and used x standard and actual cost
= 4,200 meters x ($2.50 - $2.40)
= 4,200 x $.10
= $ 420
Since actual price was less than standard price, this variance was favorable. The number of units produced (1,000) is a factor in calculating material quantity variance but not material price variance in this case.
87
Wolk Corporation is a highly automated manufacturing firm. The vice president of finance has decided that traditional standards are inappropriate for performance measures in an automated environment. Labor is insignificant in terms of the total cost of production and tends to be fixed, material quality is considered more important than minimizing material cost, and customer satisfaction is the number one priority. As a result, delivery performance measures have been chosen to evaluate performance. The following information is considered typical of the time involved to complete orders.
Wait time:
From order being placed to start of production 10.0 days
From start of production to completion 5.0 days
Inspection time 1.5 days
Process time 3.0 days
Move time 2.5 days
What is the manufacturing cycle efficiency for this order?
A. 25.0%
B. 13.6%
C. 37.5%
D. 69.2%
A. 25.0%
Manufacturing Cycle = Manufacturing or Process Time /
Efficiency Time from Start of Manufacturing to Delivery
= 3 days / (5 days +1.5 days + 3 days + 2.5 days)
= 3 days / 12 days
= 25.0%
88
Selected information concerning the operations of a company for the year ended December 31 is as follows:
Units produced 20,000
Units sold 18,000
Direct materials used $80,000
Direct labor incurred $40,000
Fixed factory overhead $50,000
Variable factory overhead $24,000
Fixed selling and administrative expenses $60,000
Variable selling and administrative expenses $9,000
Work-in-process inventories at the beginning and end of the year as well as the beginning finished goods inventory were zero. What was the company's finished goods inventory cost at December 31 under the variable (direct) costing method?
A. $23,900
B. $19,400
C. $17,000
D. $14,400
D. $14,400
Under the variable costing method, fixed manufacturing costs are assumed to be period costs. Only variable production costs are inventoriable.
The cost of the ending finished goods inventory can be determined by calculating the total product costs incurred during the period and dividing that total into two components:
Cost of goods sold (COGS) for the period
Ending finished goods inventory
```
Direct materials used $ 80,000
Direct labor incurred 40,000
Variable factory overhead 24,000
Total production costs $144,000
Units produced / 20,000
Cost per unit $ 7.20
```
Cost of endinG finished goods inventory = Units in inventory x Cost per unit = 2,000 x $7.20 = $14,400
89
Augusta, Inc., expects manufacturing and sales of 70,000 units of product Maggie, its only product, to occur evenly over a 10-week period. Augusta pays for materials in the week following use. The balance of accounts payable for materials at the beginning of the 10-week period is $40,000. There are no beginning inventories. The following information pertains to product Maggie for the 10-week period:
Sales price $11 per unit
Materials $3 per unit
Manufacturing conversion costs—Fixed $210,000
Variable $2 per unit
Selling and administrative costs—Fixed $45,000
Variable $1 per unit
Actual results are as budgeted, except that 60,000 of the 70,000 units produced were sold. Using absorption costing, what is the difference between the reported income and the budgeted net income?
A. $10,000
B. $20,000
C. $75,000
D. $95,000
Absorption costing is a method of costing in which manufacturing fixed costs are treated as product costs and assigned to the units produced. Fixed costs follow the units through work-in-process and finished goods as an inventoriable cost and are expensed through cost of goods sold (COGS) when the units are sold.
Unit sales 60,000 70,000
Revenue $660,000 $770,000
Less COGS 480,000 560,000
Gross profit $180,000 $210,000
Less Fixed selling/admn. 45,000 45,000
Less Variable selling/admn. 60,000 70,000
Net profit $ 75,000 $ 95,000
The difference is pre-tax net income of $20,000 ($95,000 − $75,000).
90
Mig Co., which began operations this year, produces gasoline and a gasoline byproduct. The following information is available pertaining to current-year sales and production:
Total production costs to split-off point $120,000
Gasoline sales 270,000
Byproduct sales 30,000
Gasoline inventory, end of year 15,000
Additional byproduct costs:
Marketing 10,000
Production 15,000
Mig accounts for the byproduct at the time of production. What are Mig's current-year cost of sales for gasoline and the byproduct?
A. Gasoline: $105,000; Byproduct: $25,000
B. Gasoline: $115,000; Byproduct: $0
C. Gasoline: $108,000; Byproduct: $37,000
D. Gasoline: $100,000; Byproduct: $0
D. Gasoline: $100,000; Byproduct: $0
Total production costs to split-off point $120,000
Less:
Byproduct sales $30,000
Marketing costs (10,000)
Additional production costs (15,000)
Cost recovery from byproduct 5,000
Production cost allocated to gasoline 115,000
Less gasoline inventory, end of year 15,000
Cost of sales of gasoline $100,000
There is no cost of sales for byproduct because the excess of sales over additional cost related to byproduct is treated as a reduction in cost of the main product, gasoline.
91
Which of the following performance measures may lead a manager of an investment center to forgo investments that could benefit the company as a whole?
A. Return on investment
B. Residual income
C. Profitability index
D. Economic value added
A. Return on investment
Return on investment (ROI) is net income divided by invested capital. It does not consider profitability to the company as a whole because it does not use the corporate cost of capital. A division manager may decide to forego an investment that has an ROI below the division ROI even though it is above the overall corporation cost of capital.
Residual income (RI) is net income above a minimum desired rate of return on invested capital. The minimum desired net income is found by multiplying the desired rate of return by invested capital. Division managers would desire to accept projects that exceed the overall corporate cost of capital.
The profitability index is an analysis of investment alternatives rather than a performance measurement. It is calculated as the present value of the cash flows not counting the initial investment divided by the amount of that investment.
Economic value-added (EVA) is the earnings above the required cost of capital for shareholders; this measure is similar to residual income, but it is applied by external investors rather than the company's management.
92
On January 1 Maples had two jobs in process: #506 with assigned costs of $10,500 and #507 with assigned costs of $14,250. During January three new jobs, #508 through #510, were started and three jobs, #506, #507, and #508, were completed. Materials and labor costs added during January were as follows:
```
Job No. Materials Labor
506 $ 0 $2,000
507 0 1,500
508 4,000 3,600
509 3,800 2,000
510 2,600 3,100
Manufacturing overhead is assigned at the rate of 200% of labor. What is the January cost of goods manufactured and transferred from work-in-process?
```
A. $25,300
B. $35,850
C. $42,950
D. $50,050
D. $50,050
Total costs added during January for all five jobs included $10,400 of material and $12,200 of labor. Multiplying the $12,200 of labor costs incurred by 200% gives $24,400 of overhead applied during January. Combining the $10,400 of material, the $12,200 of labor, and the $24,400 of overhead gives total costs added to work-in-process of $47,000.
The two jobs in process at the end of January (#509 and #510) had $6,400 of material and $5,100 of labor. Multiplying the $5,100 labor cost by 200% gives $10,200 as overhead applied to the two jobs still in process. Total cost incurred during January on the two jobs still in process included material of $6,400, labor of $5,100, and overhead of $10,200, for total ending work-in-process cost of $21,700.
Beginning inventory of work-in-process $24,750 ($10,500 + $14,250) plus costs added during the month of $47,000 gives $71,750 cost of goods available to be completed. Subtracting ending inventory of work-in-process of $21,700 gives $50,050 as cost of goods manufactured and transferred out of work-in-process.
93
The New Wave Co. is considering a new method for allocating overhead to its two products, regular and premium coffee beans. Currently New Wave is using the traditional method to allocate overhead, in which the cost driver is direct labor costs. However, it is interested in using two different drivers: machine hours (MH) for separating and roasting beans, and pounds of coffee for packing and shipping. Machine hours for the current month are 700 hours, direct labor cost per pound of coffee is $1.25, and direct materials cost per pound of coffee is $1.50. There are 1,000 pounds of coffee packed and shipped for the current month. The following data are also available:
Regular Premium
Overhead for the current month $5,000.00
Cost pool for separating androasting beans
3,500.00 150 MH 550 MH
Cost pool for packing and shipping
1,500.00 500 lbs. 500 lbs.
What is the total cost per pound for the premium coffee using the new activity-based costing method?
A. $5.00
B. $5.75
C. $7.75
D. $9.75
D. $9.75
The $1,500 cost pool for packing and shipping would be allocated between regular and premium based on pounds. Since 500 of the 1,000 pounds are premium, half ($750) of the packing and shipping costs would be allocated to premium.
The $3,500 cost pool for separating and roasting beans would be allocated based on machine hours. Since 550 of the 700 (150 + 550) hours relate to premium, the fraction 550/700 × $3,500 is allocated to premium ($2,750).
Combining the allocated packing and shipping costs of $750 with the allocated separating and roasting costs of $2,750 results in $3,500 being allocated to premium, which is $7.00 per pound for the 500 pounds.
In addition, direct labor ($1.25) and direct material ($1.50) are allocated, a total of $2.75 per pound. Combining the direct costs of $2.75 per pound with allocated overhead of $7.00 per pound totals $9.75 total cost per pound of premium coffee.
94
Jonathan Mfg. adopted a job-costing system. For the current year, budgeted cost driver activity levels for direct labor hours and direct labor costs were 20,000 and $100,000, respectively. In addition, budgeted variable and fixed factory overhead were $50,000 and $25,000, respectively. Actual costs and hours for the year were as follows:
Direct labor hours 21,000
Direct labor costs $110,000
Machine hours 35,000
For a particular job, 1,500 direct-labor hours were used. Using direct-labor hours as the cost driver, what amount of overhead should be applied to this job?
A. $3,214
B. $5,357
C. $5,625
D. $7,500
The amount of overhead charged to a job is determined by multiplying the total overhead by an overhead rate. The overhead rate in this problem is determined by the cost driver of direct labor hours. The solution involves looking at the direct labor hours used as a percentage of total budgeted direct labor hours. Apply this result to the budgeted overhead to allocate the same proportion of overhead to the job. In this case, the overhead can be found by:
Overhead charged =
Direct labor hours used on job/Estimated total direct labor hour= Total budgeted overhead to the job
Direct labor hours used = 1,500
Estimated total direct labor hours = 20,000
Total budgeted overhead = Variable ($50,000) + Fixed ($25,000) = $75,000
Overhead=1,500/20,000*75,000
Overhead = .075 x $75,000 = $5,625
95
All of the following are examples of imputed costs, except:
A. the stated interest paid on a bank loan.
B. the use of the firm's internal cash funds to purchase assets.
C. assets that are considered obsolete that maintain a net book value.
D. an asset that is overstated in value on the firm's books.
A. the stated interest paid on a bank loan.
Imputed costs are implied costs; they are not known with certainty and must be estimated. The stated interest paid on a bank loan is known and therefore need not be imputed. The other examples must be calculated from other figures and cannot be known with certainty. They are, therefore, imputed costs.
96
Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For Year 2, unit standard costs were unchanged from Year 1. In Year 2, the only beginning and ending inventories were finished goods of 5,000 units. How would Lynn’s ratios using absorption costing compare with those using variable costing?
A. Current ratio, same; Return on stockholder's equity, same
B. Current ratio, same; Return on stockholder's equity, smaller
C. Current ratio, greater; Return on stockholder's equity, same
D. Current ratio, greater; Return on stockholder's equity, smaller
D. Current ratio, greater; Return on stockholder's equity, smaller
The only differences on the balance sheets between absorption and variable costing would be inventory and retained earnings. Since fixed manufacturing costs are inventoried when using absorption costing and expensed when using variable costing, the inventory values would be higher using absorption costing. If all other current assets and current liabilities were unchanged, a larger value for current assets (which includes inventory) would result in a greater current ratio when using absorption costing.
If inventory is unchanged during the year, then cost of sales, gross margin, and net income would be the same for the current year using absorption costing as compared to variable costing. However, total assets will be greater under absorption costing than under variable costing.
Stockholders’ equity will be greater under absorption costing as well due to lower cost of sales under absorption costing in prior years, which resulted in a higher net income being closed to retained earnings. Dividing unchanged net income for the current year by a larger stockholders’ equity at the end of the current year will give a lower return on stockholders’ equity when using absorption costing as compared to variable costing.
97
Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate when:
A. manufacturing is limited to a single product flowing through identical departments in a fixed sequence.
B. various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.
C. cost drivers, such as direct labor, are the same over all processes.
D. individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.
B. various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.
A single plant-wide rate would be appropriate only when all products pass through all departments and receive the same “dosage” of overhead application base. Obviously this is a rare situation. Multiple (departmental) rates are preferred when:
several products are produced and products do not pass through the same (or all) departments or processes.
98
Which of the following balanced scorecard perspectives examines a company's success in targeted market segments?
A. Financial
B. Customer
C. Internal business process
D. Learning and growth
B. Customer
The balanced scorecard concept is a management method used to help companies achieve the goals in their mission statements. There are four sections, or perspectives, to this method: financial performance, customer knowledge, internal business processes, and learning and growth.
Targeted market segments would be specific groups of customers to whom a company wishes to advertise and sell. The study or review of success in these markets would fall under the customer perspective.
Learning and growth encompasses the continued improvement of the major resource of companies—the training and mentoring of human resources, or employees.
The financial perspective is the more traditional way to manage a business. It is based on financial data such as overall profits and financial ratios.
Internal business processes allow managers to receive information that provides feedback regarding how well the products or services fulfill the overall mission of the business.
99
A manufacturing company employs a process cost system. The company's product passes through both Department 1 and Department 2 in order to be completed. Conversion costs are incurred uniformly throughout the process in Department 2. The direct material is added in Department 2 when conversion is 80% complete. This direct material is a preservative that does not change the volume. Spoiled units are discovered at the final inspection and are recognized then for costing purposes. The physical flow of units for the current month is presented below.
Beginning work-in-process 14,000
in Department 2 (90% complete
with respect to conversion costs)
Transferred in from Department 1 76,000
Completed and transferred to 80,000
finished goods
Spoiled units - all normal 1,500
Ending work-in-process in 8,500
Department 2 (60% complete
with respect to conversion costs)
If the manufacturing company uses the weighted-average method, the equivalent units for direct materials in Department 2 for the current month would be:
A. 67,500.
B. 80,000.
C. 81,500.
D. 90,000.
C. 81,500=Equivalent units for direct materials = 80,000 + 1,500 + 0 = 81,500
Under weighted-average process costing, equivalent units is equal to units completed (both good and spoiled) plus work done on ending work-in-process.
Hint: There is a reason why the ending work-in-process (WIP) is not included in the answer to this problem. The information that precedes the question says that direct material is added in Department 2 when conversion is 80% complete. The question then asks for the equivalent units for direct materials in Department 2. Since the ending WIP is only 60% complete with respect to conversion costs, direct materials have not yet been added to the ending WIP. Therefore, 60% of the 8,500 is not part of the equivalent units for direct materials.
100
Which of the following costing methods will yield the lowest inventory value?
A. Absorption
B. Hybrid
C. Process
D. Variable
D. Variable
Variable costing (also known as direct costing) includes only variable manufacturing costs in inventory. Since it excludes fixed manufacturing overhead, it results in a lower inventory value than alternative methods.
Absorption costing includes both fixed and variable manufacturing costs in inventory. A hybrid system includes elements of both job order and process costing, which normally include both fixed and variable costs in inventory. A process costing system normally includes both fixed and variable costs in inventory.
101
The Forming Department is the first of a two-stage production process. Spoilage is identified when the units have been completed in the Forming process. Costs of spoiled units are assigned to units completed and transferred to the second department in the period spoilage is identified. The following information concerns Forming's conversion costs in May of this year:
Conversion
Units Costs
Beginning work-in-process
(50% complete) 2,000 $10,000
Units started during May 8,000 75,500
Spoilage-normal 500
Units completed and transferred 7,000
Ending work-in-process
(80% complete) 2,500
Using the weighted-average method, what was Forming's conversion cost transferred to the second production department?
A. $59,850
B. $64,125
C. $67,500
D. $71,250
Beginning units 2,000
Units started 8,000
Units to account for 10,000
Units completed 7,000 x 100% = 7,000
Normal spoilage 500 x 100% = 500
Ending units 2,500 x 80% = 2,000
Units accounted for 10,000 9,500 equivalent units
Conversion cost per equivalent unit =
Conversion Cost / Equivalent Units
= ($10,000 + $75,500) / 9,500
= $85,500 / 9,500 = $9 per unit
Conversion cost = Cost per Unit x (Good units + Normal spoilage transferred = $9 (7,000 + 500) = $67,500
102
If a burden rate is not employed, and the volume of production is increased over the planned level, the cost per unit for manufacturing overhead would be expected to:
A. decrease for fixed costs and remain unchanged for variable costs.
B. remain unchanged for fixed costs and increase for variable costs.
C. decrease for fixed costs and increase for variable costs.
D. increase for fixed costs and increase for variable costs.
A. decrease for fixed costs and remain unchanged for variable costs
If a burden rate is not employed, and the volume of production is increased over the planned level, the cost per unit for manufacturing overhead would be expected to decrease for fixed costs and remain unchanged for variable costs. Note, however, that regardless of whether or not the company uses a burden rate, costs per unit typically change as production levels change. This is an essential point that drives the use of activity-based costing.
103
In an activity-based costing system, what should be used to assign a department's manufacturing overhead costs to products produced in varying lot sizes?
A. A single cause and effect relationship
B. Multiple cause and effect relationships
C. Relative net sales values of the products
D. A product's ability to bear cost allocations
B. Multiple cause and effect relationships
Under conventional costing, all of a department's overhead would be accumulated in a single overhead account (or cost pool). This overhead would then be applied to product based on a single driver such as labor hours or machine hours.
Activity-based costing systems identify several activities and the resources (i.e., overhead costs) related to those activities. Then, appropriate cost drivers are identified and activity costs calculated. These activity costs are then assigned to products based on the products' consumption of activities.
The use of multiple activities results in multiple cause and effect relationships in activity-based costing in contrast to a single cause and effect relationship used in conventional costing.
104
During the current year, the following manufacturing activity took place for a company's products:
Beg work-in-process, 70% complete 10,000 units
Units started into production during the year 50,000 units
Units completed during the year 140,000 units
Ending work-in-process, 25% complete 20,000 units
What was the number of equivalent units produced using the first-in, first-out method?
A. 138,000
B. 140,000
C. 145,000
D. 150,000
A. 138,000
Equivalent units is the number of units that would have been completed had the same production effort been devoted to starting and finishing a smaller number of units (the number of complete units).
On a FIFO (first-in, first-out) method, the equivalent units are calculated as follows:
Units completed during the period XX
Plus equivalent units in-process at end of period XX
Less equivalent units in-process at beginning of period XX
Total equivalent units for FIFO method XXX
Units completed during the year = 140,000 units
Equivalent units in-process at end of period = 25% of 20,00 = 5,000 units
Equivalent units in-process at end of period = 70% of 10,000= 7,000 units
140,000 + 5,000 - 7,000 = 138,000 equivalent units
105
Costs that can be definitely influenced by a given manager within a given time span are best defined as:
A. controllable costs.
B. period costs.
C. fixed costs.
D. variable costs.
A. controllable costs.
Costs that are definitely influenced by a given manager within a given time span are controllable costs. The following definitions are not contingent upon direct influence by a given manager:
Period costs are those deducted as expenses during the current period without having been previously classified as costs of inventory.
Fixed costs are those that remain unchanged in total for a given time period despite wide fluctuations in activity.
Variable costs are those that are uniform per unit produced but fluctuate in total in direct proportion to changes in the related total activity or volume.
106
Rodder, Inc., manufactures a component in a router assembly. The selling price and unit cost data for the component are as follows:
Selling price $15
Direct materials cost 3
Direct labor cost 3
Variable overhead cost 3
Fixed manufacturing overhead cost 2
Fixed selling and administration cost 1
The company received a special one-time order for 1,000 components. Rodder has an alternative use for production capacity for the 1,000 components that would produce a contribution margin of $5,000. What amount is the lowest unit price Rodder should accept for the component?
A. $9
B. $12
C. $14
D. $24
C. $14
Rodder needs to sell the components in order to earn as much money as he would have had he used them for his alternate production use. In other words, he needs to determine the sales price that would allow him to keep the $5,000 contribution margin.
The contribution margin is the difference between the revenue for the components and the variable cost of the components.
The variable cost to produce these components is $9 per unit ($3 direct material + $3 direct labor + $3 variable overhead), or $9,000 total ($9 per unit × 1,000 units).
$5,000 (Contribution margin) = Revenue - $9,000
Revenue = $5,000 + $9,000 = $14,000
$14,000 revenue for $1,000 units = $14 per unit
$14 per unit is the lowest price Rodder should accept in order to keep his contribution margin of $5,000.
107
In computing the current period's manufacturing cost per equivalent unit, the first-in, first-out (FIFO) method of process costing considers current period costs:
A. only.
B. plus cost of beginning work-in-process inventory
C. less cost of beginning work-in-process inventory.
D. plus cost of ending work-in-process inventory.
A. only.
The FIFO method of process costing uses an equivalent unit computation that includes only work done in the current period (i.e., Equivalent units work = Work done to complete beginning work-in-process + Work on units started and completed + Work done on units left in ending work-in-process).
In order to be consistent with 1., only current period costs are used in calculating cost(s) per equivalent unit.
Another method, the weighted-average method, averages some previous period costs with current period costs.
108
In process 2, material G is added when a batch is 60% complete. Ending work-in-process units, which are 50% complete, would be included in the computation of equivalent units for:
A. conversion costs.
B. material G.
C. both conversion costs and material G.
D. neither conversion costs nor material G.
A. conversion costs.
Once a batch has been started and partially completed, conversion costs would be included in the computation of equivalent units.
The 50% complete refers to conversion costs, and material is not added until the batch is 60% complete as to conversion cost. Since none of the material has been added at the 50% completion mark, no material G units would be included in ending work-in-process equivalent units.
It seems illogical for a product to be partially completed when no material has been added to the product. However, some raw material, such as water, air, or soil, has an insignificant cost and must be processed (for example, filtered to a high degree of purity) before the expensive materials are added. That may help to visualize partial completion when no material has yet been added to the process.
109
Zig Corp. provides the following information:
Pretax operating profit $300,000,000
Tax rate 40%
Capital used to generate profits 50% debt, 50% equity $1,200,000,000
Cost of equity 15%
Cost of debt 5%
What of the following represents Zig's year-end economic value added amount?
A. $0
B. $60,000,000
C. $120,000,000
D. $180,000,000
B. $60,000,000
The economic value added amount (EVA) is calculated by multiplying the capital employed at the beginning of the period by the difference between the return on capital employed (RCOE) and the weighted average cost of capital (WACC). Since a company is worth its book value if the RCOE is equal to its WACC, the positive difference between the two would be the percentage by which the value of the business is increased.
EVA is the income earned in excess of the normal rate of return represented by the WACC. Since the debt and equity proportions are each 50%, the WACC is 10% ((15% + 5%) ÷ 2).
Capital $1,200,000,000
WACC x 0.10
Normal return $ 120,000,000
Net income after tax ($300,000,000 x 0.60) 180,000,000
EVA ($180,000,000 - $120,000,000) $ 60,000,000
110
In a traditional job order cost system, the issue of indirect materials to a production department increases:
A. stores control.
B. work-in-process control.
C. factory overhead control.
D. factory overhead applied.
C. factory overhead control.
Indirect materials used is a part of factory overhead cost. A factory overhead control account is used to accumulate actual factory overhead cost incurred.
So, the issuance of indirect materials to a production department increases the factory overhead control account for that department.
The issuance decreases stores control.
Use of direct materials (and labor) would increase work-in-progress control.
The factory overhead control account is closed to factory overhead applied.
111
Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first four months of the current year. What is the estimated variable order filling cost component per order?
```
Months Orders Cost
January 1,200 $ 3,120
February 1,300 3,185
March 1,800 4,320
April 1,700 3,895
6,000 $14,520
===== =======
A. $2.00
```
B. $2.42
C. $2.48
D. $2.50
A. $2.00
Note that based on the number of orders, March is the “high” month and January is the “low” month.
Variable Rate Per = Change in cost / Change in orders
Order
= ($4,320 - $3,120) / (1,800 - 1,200)
= $1,200 / 600 orders
= $2.00 per order
112
A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct labor usage variance?
A. $25,000 favorable
B. $25,000 unfavorable
C. $30,000 favorable
D. $30,000 unfavorable
C. $30,000 favorable
The labor efficiency (usage) variance is the difference between standard cost of actual hours and the standard cost of the budgeted labor hours.
```
Standard cost (at $15 per hour) of the actual hours of 3,000 hours was $45,000.
Standard cost (at $15 per hour) of the standard hours (0.5 hours × 10,000 widgets) was $15 × 5,000 hours, or $75,000.
```
Since the actual cost was less than the budgeted cost ($45,000 – $75,000), the labor efficiency (usage) variance was $30,000 favorable.
113
One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y. Joint costs are $135. X is sold for $2.50 per pound and Y can be sold for $3.00 per pound or processed further into 30 pounds of Z (10 pounds are lost in the second process) at an additional cost of $60. Each pound of Z can then be sold for $6. What is the effect on profits of processing product Y further into product Z?
A. $60 increase
B. $30 increase
C. No change
D. $60 decrease
C. No change
Increase in revenue from processing =
(30 lbs. x $6) - (40 lbs. x $3) = $180 - $120 = $60
Effect of processing = Increase in revenue - Increase in cost = $60 - $60 = $0
(The joint cost is not relevant in this case because it is incurred under either alternative.)
114
Which of the following standard cost variances used in a standard cost system would be least controllable by a production supervisor?
A. Overhead volume
B. Overhead efficiency
C. Labor efficiency
D. Material usage
A. Overhead volume
Note these three factors related to overhead volume:
The overhead volume variance is related to fixed overhead only. There is no volume variance for variable overhead.
The fixed overhead rate is a function of estimated volume.
Overhead volume variance occurs when actual production volume differs from estimated volume.
The production supervisor has little, if any, control over the overhead volume variance. Efficiency or usage variances relate quantities used against standard quantities. The production supervisor should have control over quantities used.
115
A corporation manufactures two qualities (brands) of barbed-wire fencing for sale to wholesalers and large ranchers. Which of the following would be the best type of costing system for such a company to use?
A. Economic order quantity
B. Job order
C. Process
D. Retail inventory
C. Process
A process costing system is used in those cases where a company produces a standardized product that is sold to many different customers. The production department becomes the cost center.
An economic order quantity (EOQ) system is an inventory control tool, not a cost system.
A job order system is used where products are differentiated from one customer to the next. Each job (customer) is a separate cost center.
Retail inventory is a method for estimating inventory using retail prices. It is not a costing method.
116
The production and sales relationships of joint products P and Q. Joint costs are incurred until split-off, then separable costs are incurred in refining each product. Market values of P and Q at split-off are used to allocate joint costs.
If the market value of P at split-off increases and all other costs and selling prices remain unchanged, then the gross margin of:
A. P increases and Q decreases.
B. P increases and Q increases.
C. P decreases and Q decreases.
D. P decreases and Q increases.
D. P decreases and Q increases.
If the market value of P at split-off increases while everything remains the same, a larger portion of the joint costs would be allocated to P and a smaller portion of joint costs would be allocated to Q. Therefore, P would have greater cost of goods sold, resulting in lower gross margin. Similarly, Q would have smaller cost of goods sold, resulting in a higher gross margin.
Assume a joint cost of $100, a sales price at split-off of $100 for P and $100 for Q, and separable costs of $25 for each product. Also assume an eventual sales price of $200 for each product. Allocating joint cost of $100 on the ratio of sales value at split-off ($100 for each product out of $200 sales value of both) would result in a joint cost of 100/200 × $100, or $50 allocated to each product.
What would be the gross profit of each? Each would have a sales price of $200, from which we would subtract $50 of allocated joint cost and $25 separable cost for gross profit of $200 − $75, or $125.
Now assume that the market value of P at split-off increases to $150. We would allocate 150/250 × $100 of joint cost ($60) to P. Product P would still be sold for $200, from which we would subtract $60 of allocated joint cost and $25 separable cost for gross profit of $200 − $60 − $25, or $115 of gross profit. The gross profit of product P decreased from $125 to $115.
Like product P, product Q would have a gross profit of $125 under the original assumptions. When we increase the value of product P at split-off to $150, it changes the joint cost allocation for product Q to 100/250 × $100, or $40. Product Q would still be sold for $200, from which we would subtract $40 of allocated joint cost and $25 separable cost for gross profit of $200 − $40 − $25, or $135 of gross profit The gross profit of product Q increased from $125 to $135.
117
If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?
A. Direct materials
B. Direct labor
C. Prime costs
D. Conversion costs
D. Conversion costs
Direct material and direct labor are prime costs that would not change due to an increase in crude oil prices (unless crude oil is a material used directly in the product). Conversion cost is the cost of converting the material to finished goods, including direct labor and manufacturing overhead. Electricity used by the factory is part of overhead cost, so an increase in electricity cost would increase overhead and conversion cost.
It is possible that direct material cost would increase as well if electricity is a major cost incurred by the supplier of that material or if crude oil is part of the material used in the product, but that is not indicated in the problem. This factory will certainly see an increase in overhead cost.
118
Under Pick Co.’s job order costing system, manufacturing overhead is applied to work in process using a predetermined annual overhead rate. During January, Pick’s transactions included the following:
Direct materials issued to production $ 90,000
Indirect materials issued to production 8,000
Manufacturing overhead incurred 125,000
Manufacturing overhead applied 113,000
Direct labor costs 107,000
Pick had neither beginning nor ending work-in-process inventory. What was the cost of jobs completed in January?
A. $302,000
B. $310,000
C. $322,000
D. $330,000
B. $310,000=(90+113+107)
Applied overhead is the amount of overhead cost that has been assigned, using estimates of overhead costs and production levels, to finished goods and included in inventory (which will be expensed as part of cost of goods sold). Overhead applied at the standard or estimated rate does not necessarily equal the actual overhead incurred.
The work-in-process inventory at the beginning and end of the month were both zero, so the costs added to work-in-process during the month equal the cost of jobs completed during the month. Those costs included only direct materials ($90,000), overhead applied ($113,000), and direct labor ($107,000), which total $310,000. The indirect materials ($8,000) are part of the overhead costs and should not be included a second time.
119
A company uses process costing to assign product costs. Available inventory information for a period is as follows:
Inventory Material Conversion
(in Units) Cost Cost
Beginning 0
Started during the period 15,000 $75,000 $55,500
Transferred out 13,500
End of period 1,500
The ending inventory was 25% complete as to the conversion cost. 100% of direct material was added at the beginning of the process. What was the total cost transferred out?
A. $130,500
B. $126,973
C. $121,500
D. $117,450
C. $121,500
13500+1500*0.25=13875
55,000/13875=$4
75,000/15,000=$5
$9*13,500=121,500
Equivalent units (EU) for material were 15,000 (including 13,500 in units completed and 1,500 in ending work in process). The equivalent units of conversion cost in ending inventory equaled 1,500 units times 25%, or 375. Adding the 375 equivalent units in ending inventory to the 13,500 units completed gives 13,875 total equivalent units of conversion cost.
Dividing $75,000 of material cost by 15,000 EU for material gives $5 as the unit cost for material. Dividing conversion cost of $55,500 by 13,875 EU for conversion cost gives $4 as unit cost for conversion costs. Adding the $5 to the $4 gives $9 as total cost per unit completed. Multiplying the 13,500 units completed by $9 gives total cost transferred out of $121,500.
120
Which of the following statements is true regarding the relationship between absorption costing net income and variable costing income?
When production exceeds sales, variable costing income exceeds absorption costing net income.
When sales exceed production, absorption costing income exceeds variable costing net income.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The difference between absorption and variable costing is the treatment of fixed overhead costs:
Absorption costing: Fixed overhead costs are product costs and are, therefore, inventoriable.
Variable costing: Fixed overhead costs are period costs and are, therefore, expensed in the period in which they are incurred.
Over the long haul, the difference in the profit for the organization using absorption versus variable costing will be zero since the only difference between the two methods is the timing of recognizing the fixed overhead expense.
A summary of differences in net income for a given period using these two costing methods follows (assuming constant cost relationships):
Sales = Sales > Sales
121
Multiple regression differs from simple regression in that it:
A. provides an estimated constant term.
B. has more dependent variables.
C. allows the computation of the coefficient of determination.
D. has more independent variables.
D. has more independent variables.
Regression analysis seeks to identify change in a dependent variable (such as cost) related to change in an independent variable (such as a cost driver). Simple regression estimates a relationship between one dependent variable and one independent variable. On the other hand, multiple regression estimates a relationship between one dependent variable and two or more independent variables. Thus, multiple regression has more independent variables than does simple regression.
122
Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials at a cost of $70,000. The material usage variance was $2,500 unfavorable and the standard material allowed for May production was 17,000 pounds. What was the material price variance for May?
A. $17,500 favorable
B. $17,500 unfavorable
C. $15,000 favorable
D. $15,000 unfavorable
A. $17,500 favorable
First, use the equation for the direct material usage variance to solve for the standard price:
Material usage variance = Standard price × (Standard quantity - Actual quantity)
Standard price = Direct material usage variance ÷ (Standard quantity - Actual quantity)
Standard price = ($2,500) ÷ (17,000 pounds - $17,500 pounds)
Standard price = ($2,500) ÷ (500) = $5 per pound
Next, calculate the actual price using the information given in the problem:
Actual price = $70,000 ÷ 17,500 pounds = $4 per pound
Now, insert the price information into the material price variance formula:
Material price variance = Quantity purchased × (Standard price - Actual price).
Material price variance = 17,500 × ($5 - $4)
Material price variance = $17,500
This number is favorable because the actual price is lower than the standard price.
123
The method for allocating service department costs that best recognizes the mutual services rendered to other service departments is the:
A. dual-rate allocation method.
B. direct allocation method.
C. step-down allocation method.
D. linear algebra (reciprocal) allocation method.
D. linear algebra (reciprocal) allocation method.
The linear algebra or reciprocal allocation method recognizes reciprocity among service department by explicitly including the mutual services rendered among support departments.
The dual-rate allocation method is really a refinement of either the direct or step-down methods, depending upon how it is applied. In the dual-rate method, variable and fixed costs are allocated to departments in a two-step process, variable costs on current use and fixed costs on a long-term, maximum capacity basis. This method may not recognize any reciprocity of services among service departments.
The direct allocation method allocates the cost of service departments directly to the production departments without any intermediate allocations to other service departments. Thus, this method does not recognize any reciprocity of services among service departments.
The step-down allocation method allocates service department costs to other service departments and production departments usually starting with the service department that provides the most service to other service departments. This method allows for partial recognition of reciprocity of services among service departments.
124
Asta, Inc., is a medical laboratory that performs tests for physicians. Asta anticipates performing between 5,000 and 12,000 tests during the month of April. Compared to industry averages, at the low range of activity Asta has a lower sales price per test, higher fixed costs, and the same breakeven point in number of tests performed. At the high range of activity, Asta’s sales price per test and fixed costs are the same as industry averages, and Asta’s variable costs are lower. At the low range of activity (0 to 4,999 tests performed) fixed costs are $160,000. At the high range of activity (5,000 to 14,999 tests performed) fixed costs are $200,000.
How is the cost of the binders in which test results are given to physicians categorized?
A. Direct material cost
B. Fixed cost
C. Overhead cost for testing
D. General and administrative cost
A. Direct material cost
Since more binders are used for more tests, this is a cost of material used directly in production, a variable direct material cost. "Fixed cost" is incorrect because this cost varies as production increases.
"Overhead cost for testing" is incorrect because the binders are a direct part of the product produced, not overhead. "General and administrative cost" is incorrect because this is a cost of production, not a cost of administration.
125
Mighty, Inc., processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2 and each pound of legs sells for $1. If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a relative sales value basis?
A. $120,000
B. $200,000
C. $400,000
D. $480,000
D. $480,000
The joint costs should be allocated between the breast meat and legs according to the relative sales value of each.
Sales value of breast meat = 100,000 pounds × $2 per pound = $200,000
Sales value of legs = 50,000 pounds × $1 per pound = $50,000
Total sales value = $200,000 + $50,000 = $250,000
Breast meat has 80% of the sales value ($200,000 ÷ $250,000).
80% × $600,000 (total joint costs) = $480,000 of joint costs allocated to breast meat
126
Companies in what type of industry may use a standard cost system for cost control?
A. Mass production industry
B. Service industry
C. Both mass production and service industries
D. Neither mass production nor service industries
C. Both mass production and service industries
Historically, standard cost systems have been mainly used by companies involved in mass production of products. Cost categorization by materials, labor, and overhead fits in well with cost standards and variance analysis.
There is no inherent reason why standard cost systems would not work equally well for service-oriented companies. In fact, the number of service companies using standard cost systems has increased rapidly in the last decade.
In summary, both the mass production and service industries use standard cost systems.
127
The following were among Gage Co.'s current-year costs:
Normal spoilage $ 5,000
Freight in 10,000
Excess of actual manufacturing costs over standard costs 20,000
Standard manufacturing costs 100,000
Actual prime manufacturing costs 80,000
What was Gage's current-year actual manufacturing overhead?
A. $40,000
B. $45,000
C. $55,000
D. $120,000
A. $40,000=(100+20-80)
Standard manufacturing costs $100,000
+ Excess of actual manufacturing
costs over standard costs 20,000
= Total actual manufacturing costs $120,000
- Actual prime manufacturing costs 80,000
= Actual manufacturing overhead $ 40,000
128
In a process cost system, the application of factory overhead usually would be recorded as an increase in:
A. finished goods inventory control.
B. factory overhead control.
C. cost of goods sold.
D. work-in-process inventory control.
D. work-in-process inventory control.
Process costing is a system of accounting for production in which costs are assigned to units of finished goods indistinguishable from each other and produced in a continuous process.
During the process, raw material cost, direct labor cost, and applied overhead increase the work-in-process inventory account. As units are finished, the cost of those units reduces work-in-process and increases the finished goods account.
"Finished goods inventory control" is incorrect because overhead is applied as work is performed, not when units are finished. "Factory overhead control" is incorrect because the application of overhead to work-in-process would increase work-in-process, not the factory overhead control account. "Cost of goods sold" is incorrect because the application of overhead does not affect cost of goods sold. The overhead applied will be included in work-in-process, which is transferred to finished goods, which is then transferred to cost of goods sold as the goods are sold, but cost of goods sold is not affected when overhead is applied to work-in-process.
129
Universal Air, Inc., supplies instrumentation components to airplane manufacturers. Although there are only a few competitors in this market, the competition is fierce. In order to remain competitive, Universal Air's executive team conducted a customer survey and developed thirty new indicators to measure middle-management performance. This system was not successful, so new cross-functional teams, consisting of executives and middle managers, were formed to develop new performance measures. To ensure that the cross-functional teams are effective, all necessary resources should be provided. The most important such resource would be:
A. comfortable meeting rooms.
B. daily progress reports.
C. strong top management commitment to the process.
D. None of the choices listed are necessary.
C. strong top management commitment to the process.
Strong top management commitment to the process that is clearly communicated is extremely important to the success of this participative management effort. Comfortable meeting rooms and frequent progress reports are also important but are not as critical as actual and indicated top management support.
130
Limitations of an activity-based costing system include which of the following?
A. Control of overhead costs is enhanced.
B. Activity-based costing systems are less reliable.
C. The expense of obtaining cost data is relatively high.
D. It eliminates arbitrary assignment of overhead costs.
C. The expense of obtaining cost data is relatively high.
Activity-based costing (ABC) accumulates costs in cost pools related to separately identified activities that are allocated based on cost drivers. One limitation of an ABC system is that the cost of determining the pools and drivers is higher than a traditional allocation system based on one base, such as direct labor costs.
Enhanced control of overhead costs and elimination of arbitrary assignment of overhead costs are incorrect because they are advantages of ABC, not limitations. ABC systems are usually more reliable than traditional cost accounting systems because overhead costs are allocated to products in a more meaningful manner.
131
Cay Co.’s fixed manufacturing overhead costs totaled $100,000, and variable selling costs totaled $80,000. Under direct costing, how should these costs be classified?
A. Period costs $0; Product costs $80,000
B. Period costs $100,000; Product costs $180,000
C. Period costs $100,000; Product costs $80,000
D. Period costs $180,000; Product costs $0
D. Period costs $180,000; Product costs $0
Direct (variable) costing is a method of costing in which fixed costs are charged to expense as a period cost when incurred. It is more useful for management decision-making because it separates out fixed costs that do not change with the level of activity (volume).
Product costs are the costs of producing the product. However, under direct costing, fixed manufacturing costs are not treated as a product cost; only variable manufacturing costs are so treated. Variable selling costs of $80,000 are not a production cost, so are not included in product costs.
Period costs are costs charged to the income statement of a particular period. Under direct costing, all fixed costs are treated as period costs, so the fixed manufacturing overhead is a period cost of $100,000.
Selling costs (fixed or variable) are expensed in the period incurred, so the variable selling costs are treated as a period cost of $80,000 like any other selling cost.
