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FInal Exam Key
FInal Exam Key
Unit-level activity.
Batch-level activity.
Product-level activity.
Facility-level activity
a. Activity-Based Cost differs from traditional costing systems in that products are not cross-subsidized.
b. In Activity-Based Costing, cost drivers are usually what cause costs to be incurred.
c. Activity-Based Costing is more likely to result in major differences from traditional costing systems if
the firm manufactures only one product rather than multiple products.
ABC costing helps an organization implement its strategy through all of the following means except:
Overhead Costs Pool Cost Driver Overhead Cost Budgeted Level for Cost Driver
Sheen Co. has an order for 1,000 laser printers that has the following production requirements:
Number of batches 5
Using activity-based costing, applied miscellaneous factory overhead for the 1,000 laser printers order
based on direct labor hours is:
A. $7,800.
B. $10,000.
C. $10,500.
D. $150.
E. $21,600.
1. $48,000 ÷ 4,000 direct labor hours = $12 per labor hour
2. $12 × 650 labor hours = $7,800
What is the total overhead cost per unit of the laser printers order using activity-based costing (rounded
to the nearest cent)?
A. $39.55.
B. $40.05.
C. $42.25.
D. $50.65.
E. $58.30.
Using activity-based costing, applied quality control factory overhead for the baseball cleat order is:
A. $28,450.
B. $30,220.
C. $24,375.
D. $21,150.
E. $19,600.
High F 10,000
Great P 16,000
National uses a volume-based costing system to apply factory overhead based on direct labor dollars. The
unit prime costs of each product were as follows:
High F Great P
Total $1,349,040
National's controller had been researching activity-based costing and decided to switch to it. A special
study determined National's two products have the following budgeted activities:
High F Great P
Using activity-based costing, total overhead per unit of Great P model is (rounded to the nearest cent):
A. $42.61.
B. $45.99.
C. $61.32.
D. $66.73.
E. $168.00.
If a costing system uses a single base to allocate overhead costs that are results of several production
activities:
C. Involves the sales budget and both beginning and ending finished goods inventory amounts.
A. 712,025 units
B. 630,500 units
C. 664,000 units
D. 665,720 units
1
Unit sales of 200,000 × 105% = 210,000
2
Unit sales of 210,000 × 105% = 220,500
3
Unit sales of 210,000 × 80% = 168,000
4
Unit sales of 220,500 × 80% = 176,400
5
Unit sales of 220,500 × 105% × 80% = 185,220
The Johann's Professional Service Company expects 70% of sales for cash and 30% on credit. The
company collects 80% of its credit sales in the month following sale, 15% in the second month following
sale, and 5% are not collected (that is, they are "bad debts"). Expected sales for June, July, and August
are $48,000, $54,000, and $44,000, respectively. What are the company's expected total cash receipts in
August?
A. $45,920.
B. $61,400.
C. $87,600.
D. $50,400
E. $15,120
Doanne Food Processing expects to have 36,000 pounds of raw materials inventory on hand on March
31, the end of the current year. The company budgets the following production (in units) for April
through July, inclusive:
April 120,000
May 130,000
June 140,000
July 120,000
At the end of each month the firm desires its ending raw material inventory to be 10% of the next
month's production needs. Each finished unit requires three pounds of raw materials.
Doanne's budgeted purchases (in pounds) of raw materials for June would be:
A. 414,000.
B. 420,000.
C. 426,000.
D. 456,000.
E. 498,000.
Worton Distributing expects its September sales to be 25% higher than its August sales of $150,000.
Purchases were $100,000 in August and are expected to be $120,000 in September. All sales are on
credit and are expected to be collected as follows: 30% in the month of the sale and 70% in the
following month. Purchases are paid 25% in the month of purchase and 75% in the following month. The
cash balance on September 1 is $10,000. The ending cash balance on September 30 is estimated to be:
A. $56,250.
B. $56,500.
C. $65,250.
D. $66,250.
E. $76,250.
1. Beginning-of-month cash balance (given) = $10,000
2. Cash receipts in September from credit sales made in August ($150,000 × 0.70) = $105,000
3. Cash receipts in September from credit sales made in September ([$150,000 × 1.25] × 0.30) = $56,250
4. Cash disbursements in September from purchases made in August ($100,000 × 0.75) = $75,000
5. Cash disbursements in September from purchases made in September ($120,000 × 0.25) = $30,000
6. Ending cash balance = Beginning cash balance + Cash receipts from credit sales made in August +
Cash receipts from credit sales made in September - Cash disbursements from purchases made in
August - Cash disbursements for purchases made in September = $10,000 + $105,000 + $56,250 -
$75,000 - $30,000 = $66,250
87. Graham Corporation's budgeted production schedule, by quarters, for the coming year is as
follows:
Each unit of product requires three pounds of direct material. The company's policy is to begin each
quarter with 30% of that quarter's direct materials production requirements.
Graham expects to have 50,000 pounds of direct materials on hand at the beginning of Quarter 1.
What would be Graham's budgeted direct materials purchases (in pounds) for the third quarter?
A. 19,100 pounds.
B. 44,700 pounds.
C. 51,000 pounds.
D. 57,300 pounds.
E. 72,600 pounds.
1. Estimated beginning inventory of direct materials, Quarter 3 = 17,000 units × 3 lbs./unit × 0.30 =
15,300 lbs.
2. Desired ending inventory of direct materials, Quarter 3 = [(24,000 units × 3 lbs./unit) × 0.30] = 21,600
lbs.
3. Lbs. of direct materials needed for Quarter 3 production = 17,000 units × 3 lbs./unit = 51,000 lbs.
The practice of managers knowingly including a higher amount of expenditures (or lower amount of
revenue) in the budget than they actually believe will occur is called:
A. Goal congruency.
C. Participative budgeting.
D. Budgetary slack.
E. Kaizen budgeting.
Which of the following statements about processing cycle efficiency (PCE) is not true?
C. It is based on the relationship between actual processing time and total production time.
45,000
Budgeted usage of PPS
pounds
43,200
PPS purchased
pounds
39,000
PPS used
pounds
The standard cost per pound of PPS (to two decimal places) is:
A. $5.20.
B. $5.76.
C. $6.24.
D. $6.84.
E. $7.20.
Direct materials usage variance = (AQ - SQ) × SP = ((39,000) - [4,000 × (45,000 ÷ 5,000)]) × SP = $21,600;
therefore, SP = $21,600 ÷ 3,000 pounds = $7.20/pound
B. $56,160 favorable.
C. $62,208 favorable.
D. $64,840 favorable.
E. $72,000 favorable.
1. Direct materials quantity variance = (AQ - SQ) × SP (or, equivalently: (AQ × SP) - (SQ × SP)).
2. Standard cost per pound, SP: = (AQ × SP) - (SQ × SP) = (39,000 × SP) - ([4,000 × (45,000 ÷ 5,000)] × SP) =
$21,600; therefore, SP = $21,600 ÷ 3,000 pounds = $7.20 per pound.
3. Purchase-price variance = (AP - SP) × AQ = ($5.76 - $7.20)/pound × 43,200 pounds purchased = $62,208
favorable.
C. Actual production is less than the "denominator volume" (that is, the volume level used to establish the
fixed overhead application rate).
E. Actual fixed overhead costs are greater than budgeted fixed overhead costs.
The following information for the past year is available from Thinnews Co., a company that uses machine
hours to apply factory overhead:
B. $1,000 favorable.
C. $1,400 unfavorable.
D. $1,500 favorable.
E. $2,100 favorable.
1. Variable overhead spending variance = actual variable overhead cost incurred - flexible budget for
variable overhead cost, based on inputs (i.e., actual machine hours worked).
2. Actual variable overhead cost = $14,000 (Actual variable overhead cost incurred = Actual total overhead
cost - actual fixed overhead cost incurred = $24,000 - $10,000 = $14,000).
3. Flexible budget for variable overhead cost = 5,000 machine hours × $3.00/machine hour = $15,000.
4. Variable overhead spending variance = actual variable overhead cost - Flexible budget for variable
overhead cost = $14,000 - $15,000 = $1,000 favorable
A. $600 unfavorable.
B. $1,000 favorable.
C. $1,400 unfavorable.
D. $1,500 favorable.
E. $2,100 favorable.
1. Variable overhead efficiency variance = FB for variable overhead cost based on inputs - FB for variable
overhead cost based on outputs (i.e., based on standard allowed machine hours).
A standard is:
unrelated to budgeting since standards are used for control purposes only.
normally set at the ideal rather than the practical level of cost, efficiency, or quantity.
Kennedy Inc. has the following data for its operation in August:
Budgeted
What was the actual purchase price (AP) per set of direct materials purchased (to two decimal places)?
A. $3.35.
B. $3.40.
C. $3.72.
D. $3.80.
E. $3.85.
Actual price paid per set of direct materials purchased (AP) = (total standard cost of materials purchased
- favorable materials purchase-price variance) ÷ number of sets purchased = [(1,600 sets (given) ×
$3.60/set (given)) - $400 favorable purchase price variance (given)] ÷ 1,600 sets purchased (given) =
$3.35/set
What was the direct materials usage (quantity) variance in August?
A. $180 unfavorable.
B. $360 unfavorable.
C. $540 favorable.
D. $540 unfavorable.
E. $720 unfavorable.
Which of the following would be most appropriate for evaluating a cost center?
Return on investment
A static budget
C. Motivates managers.
Bonniwell Corporation has two divisions: the Delta Division and the Alpha Division. TheDelta Division has
sales of $620,000, variable expenses of $359,600, and traceable fixed expenses of $229,200. The Alpha
Division has sales of $820,000, variable expenses of $541,200, and traceable fixed expenses of $172,900.
The total amount of common fixed expenses not traceable to the individual divisions is $122,000. What
is the company's net operating income?
A. $539,200
B.$15,100
C. $137,100
D. $417,200
Return on investment (ROI) is a term often used to express income earned on capital invested in a
division (investment center). A division's ROI would increase if:
A. Sales increased by the same dollar amount as expenses and total assets increased.
B. Sales remained the same and expenses were reduced by the same dollar amount that total
assets increased.
D. Sales and expenses increased by the same percentage that total assets increased.
E. Net profit margin on sales increased by the same percentage that total assets increased.
A company currently earning a profit can increase its return on investment (ROI) by:
A. Increasing sales revenue and operating expenses by the same dollar amount.
Compared to return on investment (ROI), residual income (RI) may be a better measure of the financial
performance of an investment center because:
B. Of the fact that desirable investment opportunities will not be neglected by divisions currently
earning high rates of return.
The margin at Whalen was exactly the same in Year 2 as it was in Year 1.
A. $400,000
B. $800,000
C. $600,000
D. $500,000
A. 48.00%
B. 32.50%
C. 7.58%
D. 1.92%
ROI = Margin × Turnover
= 9.6% ÷ 1.2 = 8%
= 8% × 6 = 48%
A. 18%
B. 17%
C. 16%
D. 15%
= $300,000 × 8% = $24,000
= 9.6% ÷ 1.2 = 8%
= 8% × 6 = 48%
ROI = Net operating income ÷ Average operating assets
Residual income = Net operating income - Average operating assets × Minimum required rate of return
According to the general transfer-pricing formula given in the text, the minimum transfer price that home
office should charge the branch is:
A. $62.50.
B. $63.50.
C. $66.00.
D. $68.00.
E. $69.00.
Minimum Transfer Price = Incremental Cost = Out-of-Pocket Cost + Opportunity Cost = $68.00 = [$60.00
+ $2.50 + $3.50 + ($3.00 - $1.00)] + $0; note—while not asked, the maximum amount to be charged
would be the external market price (if such existed).
An appropriate transfer price between two divisions of The Stark Company can be determined from the
following data:
Fabricating Division:
Assembly Division:
What is the natural bargaining range (min and max transfer price) for the two divisions?
Total $170,000
An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels were
purchased from the outside supplier, $15,000 of annual fixed factory overhead could be avoided.
What is the highest price that Talbot could pay the outside supplier for the wheel and still be
economically indifferent between making or buying the wheels?
$1.70
$1.15
$1.00
$ .80
Management accountants are frequently asked to analyze various decision situations including the
following:
II. The cost proposed annually for the plant service for the grounds at corporate headquarters.
IV. The costs associated with alternative uses of plant space, to be considered in a make/buy decision.
V. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal
decision.
The costs described in situations III and V above are examples of:
A. Prime costs.
B. Sunk costs.
C. Discretionary costs.
D. Relevant costs.
E. Opportunity costs.
United Industries manufactures three products in its highly automated factory. The products are all
popular, with demand far exceeding the company's ability to supply the marketplace. To maximize
(short-term) operating income, management should focus on each product's:
In situations when management must decide on accepting or rejecting one-time-only special orders,
where there is sufficient capacity, which one of the following would not be relevant to the decision?
B. Differential costs.
C. Direct costs.
D. Variable costs.
E. Incremental costs.
Regis Company manufactures plugs at a cost of $36 per unit, which includes $8 of fixed overhead. Regis
needs 30,000 of these plugs annually (as part of a larger product it produces). Orlan Company has
offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the
annual fixed overhead cost will be eliminated, and the company may be able to rent the facility
previously used for manufacturing the plugs.
If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in net
savings annually. To achieve this goal, the minimum annual rent on the facility must be:
A. $10,000.
B. $40,000.
C. $70,000.
D. $190,000.
E. $280,000.
2. Relevant cost to make = Avoidable (i.e., incremental) cost = $36 - Unavoidable fixed cost/unit = $36 -
([($8/unit × 30,000 units) - $60,000] ÷ 30,000 units) = $36 - ($180,000 ÷ 30,000 units) = $36 - $6 =
$30/unit.
3. Difference = $33 - $30 = $3 per unit in favor of making the parts rather than purchasing the parts
from an external supplier.
4. Therefore, cost disadvantage of purchasing externally rather than making the parts = $3/unit ×
30,000 units = $90,000.
5. If a net benefit of $100,000 is desired, then the facility needs to be rented annually for an amount
equal to the cost disadvantage of purchasing externally (to recoup this cost) + targeted (desired) net
benefit from the decision = $90,000 + $100,000 (given) = $190,000.
A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. It can either be
disposed for $5,000 cash and replaced with a similar truck costing $27,000, or it can be rebuilt for
$20,000 and be brand new as far as operating characteristics and looks are concerned. The better
decision choice provides a net cost savings of:
A. $2,000.
B. $5,000.
C. $7,000.
D. $12,000.
40. Plainfield Company manufactures part G for use in its production cycle. The full cost per unit for
each of 10,000 units of part G are as follows:
Direct materials $3
Direct labor 15
Variable overhead 6
Fixed overhead 8
$32
Verona Company has offered to sell Plainfield 10,000 units of part G for $30 per unit. If Plainfield
accepts Verona's offer, the released facilities could be used to save $45,000 in relevant costs in the
manufacture of part H. In addition, $5 per unit of the fixed overhead applied to part G would be
eliminated. Which alternative is more desirable and by what amount?
Alternative Amount
A) Manufacture $10,000
B) Manufacture $15,000
C) Buy $35,000
D) Buy $65,000
E) Buy $10,000
1. Relevant cost to manufacture = Incremental (i.e., avoidable) variable cost per unit × number of units =
(direct materials cost/unit + direct labor cost/unit + variable overhead cost/unit) × 10,000 units = ($3 +
$15 + $6)/unit × 10,000 units = $24/unit × 10,000 units = $240,000
2. Relevant cost to buy = external purchase cost less avoidable fixed costs = ($30/unit × 10,000 units) -
$45,000 - ($5/unit × 10,000 units) = $205,000
Note: the relevant cost to make could also be defined as incremental variable cost + incremental fixed
cost = $240,000 + ($45,000 + [$5/unit × 10,000 units]) = $240,000 + $95,000 = $335,000. Relevant cost
to purchase = $30/unit × 10,000 units = $300,000. Difference = $335,000 - $300,000 = $35,000 in favor
of purchasing externally.
Products A, B, and C are produced from a single raw material input. The raw material costs $90,000,
from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period.
Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of
$12,500 and then sold for $5 per unit. Product A should be:
A. sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
B. processed further, since this will increase profits by $2,500 each period.
C. sold at the split-off point, since further processing will result in a loss of $2,500 each period.
D. processed further, since this will increase profits by $12,500 each period.