Planning and Measurement - Part 2 Flashcards
Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for $1. Dough assigns the following probabilities to selling additional boxes:
Additional sales Probability 60 .6 100 .4 What is the expected value of Dough's decision to buy 100 additional boxes of muffins? A. $28. B. $40. C. $52. D. $68.
C. $52.
Income or net cash inflow is expected to increase:
$52 = .6[60($3-$2) + 40($1-$2)] + .4[100($3-$2)].
The .6[ ] term reflects the expected sales of 60 units at regular price less their cost, and 40 at the reduced price less their cost. The .4[ ] term reflects the expected sales all at regular prices less their cost.
The coefficient of determination, r squared, in a multiple regression equation is the
A. Percentage of variation in the independent variables explained by the variation in the dependent variable.
B. Percentage of variation in the dependent variable explained by the variation in the independent variables.
C. Measure of the proximity of actual data points to the estimated data points.
D. Coefficient of the independent variable divided by the standard error of regression coefficient.
B. Percentage of variation in the dependent variable explained by the variation in the independent variables.
The definition of r squared reflects the overall model’s explanatory power of the independent variables in predicting the dependent variable.
Johnson Co., distributor of candles, has reported the following budget assumptions for year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson's only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of year 1. What is the budgeted gross margin for year 1? A. $60,000 B. $70,000 C. $75,000 D. $87,500
B. $70,000
Gross Profit ($70,000) is determined by subtracting Cost of Goods Sold ($350,000) from Sales ($420,000). Sales is calculated by multiplying a markup of 20% based on cost of goods sold (i.e., $420,000 = 1.2($350,000). Cost of Goods Sold is easily determined by using an accounts payable T-account to calculate purchases of $350,000 by using the cash paid of $300,000 and the beginning and ending balances of accounts payable ($100,000 and $150,000, respectively).
Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes? A. Accounts payable. B. Mortgages payable. C. Bonds payable. D. Common stock.
A. Accounts payable.
The percentage of sales forecasting method is used to define operating costs such as cost of goods sold, supplies expense, sales discounts, etc. It also defines the percentage of sales that are collected in cash and the percentage of purchases that are paid for in cash and, consequently, accounts payable.
A flexible budget is appropriate for a Marketing budget Direct material usage budget No No No Yes Yes Yes Yes No
Marketing budget Direct material usage budget
Yes Yes
Flexible budgets are budgets produced at different activity levels. Direct material usage budgets are commonly prepared for different activity levels to indicate the level of cost that should be incurred at those levels. The actual cost is then compared with the budget for the level of activity actually attained. The comparison is much more relevant for evaluation purposes than would be the comparison between the actual and the master or static budgets if the level of activity in the master and static budgets were not the same.
The same idea applies for marketing cost, although there typically is less “flex” in this type of budgeted cost. A good proportion of the marketing cost is fixed. Other portions are variable (e.g., commissions). Both costs, however, can be expressed as part of a flexible budget. Many flexible budgets include fixed components. The term “flexible” budget does not imply the exclusion of fixed costs.
What is the required unit production level given the following factors?
Units Projected sales 1,000 Beginning inventory 85 Desired ending inventory 100 Prior-year beginning inventory 200 A. 915. B. 1,015. C. 1,100. D. 1,215.
B. 1,015.
Since the desired ending inventory is 15 units more than the beginning inventory, production must be 15 units greater than the projected sales level of 1,000 units.
A Year 1 cash budget is being prepared for the purchase of Toyi, a merchandise item. The budgeted data are as follows:
Cost of goods sold for Year 1 $300,000 Accounts payable 1/1/Year 1 20,000 Inventory - 1/1/Year 1 30,000 12/31/05 42,000 Purchases will be made in 12 equal monthly amounts and paid for in the following month. What is the Year 1 budgeted cash payment for the purchase of Toyi? A. $295,000. B. $300,000. C. $306,000. D. $312,000.
C. $306,000.
First, the budgeted annual purchases of the item must be determined, and then the budgeted payment amount is calculated.
Beginning inventory + purchases = ending inventory + cost of goods sold
$30,000 + purchases = $42,000 + $300,000
purchases = $312,000
Budgeted cash payment = accounts payable at 1/1/Year 1 + (11/12)purchases for purchases in Year 1
=$20,000 + (11/12)($312,000)
= $306,000
Only 11/12 of the Year 1 purchases, i.e., the purchases made in the first eleven months, will be paid for in Year 1 under the company’s policy of payment for purchases.
A static budget contains which of the following amounts?
A. Actual costs for actual output.
B. Actual costs for budgeted output.
C. Budgeted costs for actual output.
D. Budgeted costs for budgeted output.
D. Budgeted costs for budgeted output.
A static budget is a comprehensive financial plan produced at the beginning of the year for the entire enterprise and does not change (or flex) during the year. Thus, it uses budgeted costs based on budgeted output.
Lon Co.’s budget committee is preparing its master budget on the basis of the following projections:
Sales $2,800,000
Decrease in inventories 70,000
Decrease in accounts payable 150,000
Gross margin 40%
What are Lon's estimated cash disbursements for inventories? A. $1,040,000. B. $1,200,000. C. $1,600,000. D. $1,760,000.
D. $1,760,000.
First, purchases must be computed, and then the estimated payments to be made on accounts payable. With inventory declining, purchases must equal cost of sales less the decline in inventory. In other words, purchases are less than cost of sales if inventory declines. If the gross margin is 40% of sales, then cost of sales is 60% of sales.
Purchases = cost of sales - inventory decline
= (.60)($2,800,000) - $70,000
= $1,610,000
If accounts payable (AP) is to decrease, payments on AP must exceed purchases. Estimated payments on AP = $1,610,000 + $150,000 decrease in AP = $1,760,000.
State College is using cost-volume-profit analysis to determine tuition rates for the upcoming school year. Projected costs for the year are as follows:
Contribution margin per student $ 1,800
Variable expenses per student 1,000
Total fixed expenses 360,000
Based on these estimates, what is the approximate break-even point in number of students? A. 129 B. 200 C. 360 D. 450
B. 200
This answer satisfies the basic breakeven quantity formula of fixed costs divided by contribution margin per unit (i.e., $360,000/$1,800).
State College is using cost-volume-profit analysis to determine tuition rates for the upcoming school year. Projected costs for the year are as follows:
Contribution margin per student $ 1,800
Variable expenses per student 1,000
Total fixed expenses 360,000
Based on these estimates, what is the approximate break-even point in number of students? A. 129 B. 200 C. 360 D. 450
B. 200
This answer satisfies the basic breakeven quantity formula of fixed costs divided by contribution margin per unit (i.e., $360,000/$1,800).
Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following:
Variable manufacturing costs $9
Variable selling and administrative costs 6
Total $15
Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit? A. $3,000 increase. B. $4,200 increase. C. $3,000 decrease. D. $4,200 decrease.
C. $3,000 decrease.
This problem compares the increase in revenue due to the possible increased spending on advertising. The $15,000 for advertising is just another fixed cost. The contribution margin ratio is used to determine 40% of the new revenue of $780,000 = $312,000 resulting in only $12,000 more in contribution margin as compared to a new fixed advertising cost $15,000. The difference between the $15,000 and the $12,000 is a $3,000 decrease in income.
In Year 1, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed costs of $1,000,000 and a profit before income taxes of $200,000. Due to an adverse legal decision, Thor’s Year 2 liability insurance increased by $1,200,000 over Year 1.
Assuming the volume and other costs are unchanged, what should the Year 2 price be if Thor is to make the same $200,000 profit before income taxes? A. $120.00. B. $135.00. C. $150.00. D. $240.00.
B. $135.00.
The problem first requires that the variable cost per unit (V) be computed so that the price can then be made a variable. V does not change in the question.
80,000($120 - V) - $1,000,000 = $200,000
V = $105
Now to solve for the new selling price S
80,000(S - $105) - $2,200,000 = $200,000
S = $135
Del Co. has fixed costs of $100,000 and breakeven sales of $800,000.
What is its projected profit at $1,200,000 sales?
A. $50,000.
B. $150,000.
C. $200,000.
D. $400,000.
A. $50,000.
The objective is to determine the contribution margin ratio and apply it to the sales figure. This results in the total contribution margin because the contribution margin ratio is (sales - variable costs)/sales. Then subtract fixed cost to find the projected profit.
Breakeven sales = fixed cost/contribution margin ratio
$800,000 = $100,000/cmr
.125 = cmr
Projected profit = .125($1,200,000) - $100,000 = $50,000
Cott Company 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.
B. $24,000.
The margin of safety is the difference between current sales and breakeven sales. Thus, breakeven sales are $120,000 ($200,000 - $80,000).
In other words, the firm has breathing room of $80,000 of sales. Sales could fall by this amount before the firm would dip below breakeven.
breakeven sales = Fixed cost/contribution margin percentage
$120,000 = Fixed cost/.20
$24,000 = Fixed cost
Selected costs associated with a product are as follows:
Total standard hours for units produced 5,000
Total actual direct labor cost $111,625.00
Actual per hour labor rate $23.50
Standard per hour labor rate $24.00
What amount is the total direct labor price variance? A. $2,375 unfavorable. B. $2,375 favorable. C. $2,500 unfavorable. D. $2,500 favorable.
B. $2,375 favorable.
To solve this we would use the formula (SP - AP) AQ. We are given SP and AP, but not AQ. We can find the AQ by dividing the actual total cost of $111,625 by the AP of $23.50 to get 4,750 hours. Now we multiply AQ of 4,750 by the $0.50 difference between the SP of $24 and the AP of $23.50 to get the price variance of $2,375. Since the actual price of $23.50 is less than the expected standard cost of $24, the variance is favorable.
Relevant information for material A follows:
Actual quantity purchased 6,500 lbs.
Standard quantity allowed 6,000 lbs.
Actual price $3.80
Standard price $4.00
What was the direct material quantity variance for material A? A. $2,000 favorable. B. $1,900 favorable. C. $1,900 unfavorable. D. $2,000 unfavorable.
D. $2,000 unfavorable.
Quantity variances are calculated as the actual quantity less standard quantity, multiplied by standard price: (AQ - SQ) SP. Thus, (6,500 lbs. - 6,000 lbs.) $4.00 = $2,000. The variance is unfavorable since actual quantity required of 6,500 lbs. was more than the planned level of 6,000 lbs.
Yola Co. manufactures one product with a standard direct labor cost of four hours at $12.00 per hour. In June, 1,000 units were produced using 4,100 hours at $12.20 per hour. The unfavorable direct labor efficiency variance was A. $1,220. B. $1,200. C. $820. D. $400.
B. $1,200.
The DL efficiency variance =
(actual labor hours)(standard wage rate) - (standard labor hours)(standard wage rate) =
(4,100)($12) - (1,000 units x 4 hours)($12) =
$49,200 - $48,000 = $1,200
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 materials usage variance was $2,500 unfavorable, and the standard materials allowed for May production was 17,000 pounds. What was the materials price variance for May?
A. $17,500 favorable. B. $17,500 unfavorable. C. $15,000 favorable. D. $15,000 unfavorable.
A. $17,500 favorable.
This answer is correct. Using the model suggested in the study text to perform the calculations:
Units Price/Unit Total Standard Costs 17,000 lbs. x Std. Price = ??? Actual Costs 17,500 lbs. x $4.00* = $70,000 Differences (500) lbs. ??? ??? *Actual Price = $70,000/17,500 lbs. = $4.00
Usage variance = ($2,500) = Difference in Units x Std. Price
= (500) x Std. Price
Std. Price = ($2,500) / (500) = $5.00 per unit
Substituting the standard price into the previous calculation, we now have:
Units Price/Unit Total Standard Costs 17,000 lbs. x $5.00 = $85,000 Actual Costs 17,500 lbs. x $4.00* = $70,000 Differences (500) lbs. $1.00 $15,000
Price variance = Difference in Price x Actual Quantity Used =
$1.00 x 17,500 = 17,500 favorable various
Check: Usage Variance + Price Variance = Total Difference in Costs
($2,500) + $17,500 = $15,000
In Year 1, a department’s three-variance overhead standard costing system reported unfavorable spending and volume variances. The activity level selected for allocating overhead to the product was based on 80% of practical capacity.
If 100% of practical capacity had been selected instead, how would the reported unfavorable spending and volume variances have been affected?
Spending variance Volume variance
A. Increased Unchanged
B. Increased Increased
C. Unchanged Increased
D. Unchanged Unchanged
C. Unchanged Increased
The spending variance is unaffected by the volume used for allocating the fixed overhead. The spending variance for the variable overhead is the difference between the actual overhead and the budgeted overhead based on actual direct labor hours. The spending variance for the fixed overhead is the difference between the actual overhead and the master budget for the fixed overhead. Neither variance is affected by the denominator used for allocating the fixed overhead.
However, the volume variance (computed for fixed overhead only) is the difference between the master budgeted fixed overhead and the allocated fixed overhead. The allocated fixed overhead is the product of the predetermined overhead rate per direct labor hour, and standard direct labor hours. An increase in the denominator of the predetermined fixed overhead rate from 80% to 100% of capacity would cause the predetermined overhead rate to decline, along with the allocated fixed overhead. This would increase the volume variance because the master budgeted fixed overhead would remain unchanged.
The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed costs and the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.
D. Increase the fixed costs and decrease the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.
Breakeven analysis assumes that over the relevant range A. Unit revenues are nonlinear. B. Unit variable costs are constant. C. Total costs are constant. D. Total fixed costs are nonlinear.
B. Unit variable costs are constant.
In a graph with the Y-axis being cost and the X-axis being activity level, total variable cost begins at the origin and is an upward sloping line. The slope of this curve is variable cost per unit of activity and is a constant. If variable cost were not assumed to be a constant in the relevant range, breakeven analysis would not be possible.
Allen Harvey, an accounting major, is considering a full-time internship during the spring semester of his junior year. The internship opportunity is located in the town where he attends school, so he would be able to continue to live in his apartment that costs $600 per month.
The internship would pay $1,200 per month for January through May. If he does not take the internship, he will attend school at a cost of $4,000 for the semester.
If Harvey decides to stay in school full-time during the spring semester, which one of the following would be the amount of his opportunity cost and the amount of his incremental (or differential) cost?
Opportunity Cost Incremental Cost
A. $6,000 $6,000
B. $6,000 $10,000
C. $10,000 $10,000
D. $10,000 $13,000
B. $6,000 $10,000
Opportunity cost comprises the benefits associated with an alternative that is given up as a result of choosing another alternative. In this case, by choosing to stay in school, Harvey foregoes the pay he would have received from the internship, or $1,200 x 5 months (January - May) = $6,000.
Incremental cost (also called differential cost) is the difference in total cost between two decision alternatives; in this case, between going to school and going to work.
Going to school would cost $4,000 for the semester. Going to work would have provided a benefit of $6,000 (5 months x $1,200 per month). Thus, the total difference between the two alternatives is $10,000.
By going to school, Harvey incurs a total economic cost of $10,000. Or, put another way, if Harvey goes to work, he earns $6,000 and does not have the $4,000 cost of going to school.
Which of the following items is never relevant to a sell or process further decision?
A. Incremental revenue after the split-off point.
B. Incremental cost after the split-off point.
C. Joint costs.
D. Additional contribution margin realized if processed further.
C. Joint costs.
Joint costs are sunk costs that are unavoidable, regardless of whether the item is sold at split-off or processed further.
