Module 47: Planning, Control, and Analysis 403

53. Yola Co. manufactures one product with a standard direct Standard manufacturing costs 100,000
manufacturing labor cost of four hours at $12.00 per hour. Actual prime manufacturing costs 80,000
During June, 1,000 units were produced using 4,100 hours
at $12.20 per hour. The unfavorable direct labor efficiency Gage’s 2014 actual manufacturing overhead was
variance was
a. $ 40,000
a. $1,220 b. $ 45,000
b. $1,200 c. $ 55,000
c. $ 820 d. $120,000
d. $ 400
57. Baby Frames, Inc. evaluates manufacturing overhead
54. The following direct manufacturing labor information in its factory by using variance analysis. The following
pertains to the manufacture of product Glu: information applies to the month of May:

Time required to make one unit 2 direct labor hours Actual Budgeted
Number of direct workers 50 Number of frames
Number of productive hours per week, manufactured 19,000 20,000
per worker 40 Variable overhead costs $2 per direct labor
Weekly wages per worker $500 $4,100 hour
Workers’ benefits treated as direct Fixed overhead costs $22,000 $20,000
manufacturing labor costs 20% of wages Direct labor hours 2,100 0.1 hour per frame
What is the standard direct manufacturing labor cost per unit What is the fixed overhead spending variance?
of product Glu?
a. $1,000 favorable.
a. $30 b. $1,000 unfavorable.
b. $24 c. $2,000 favorable.
c. $15 d. $2,000 unfavorable.
d. $12
58. Under the 2-variance method for analyzing overhead,
55. On the diagram below, the line OW represents the which of the following variances consists of both variable and
standard labor cost at any output volume expressed in direct fixed overhead elements?
labor hours. Point S indicates the actual output at standard
cost, and Point A indicates the actual hours and actual cost Controllable (budget) Volume
required to produce S. variance variance
a. Yes Yes
b. Yes No
$ W c. No No
d. No Yes
Total
Labor
Cost
59. During 2014, a department’s 3-variance overhead standard
costing system reported unfavorable spending and volume
S variances. The activity level selected for allocating overhead to
A
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 be
affected?
O Direct Man. Labor Hrs.
Spending variance Volume variance
Which of the following variances are favorable or unfavorable? a. Increased Unchanged
b. Increased Increased
Rate variance Efficiency variance c. Unchanged Increased
a. Favorable Unfavorable d. Unchanged Unchanged
b. Favorable Favorable 60. The following information pertains to Roe Co.’s 2014
c. Unfavorable Unfavorable manufacturing operations:
d. Unfavorable Favorable
Standard direct manufacturing labor hours per
56. The following were among Gage Co.’s 2014 costs: unit 2
Actual direct manufacturing labor hours 10,500
Normal spoilage $ 5,000
Number of units produced 5,000
Freight out 10,000
Standard variable overhead per standard direct
Excess of actual manufacturing costs over
manufacturing labor hour $3
standard costs 20,000
Actual variable overhead $28,000
404 Module 47: Planning, Control, and Analysis

Roe’s 2014 unfavorable variable overhead efficiency variance I. Product and Service Pricing
was
65. Cuff Caterers quotes a price of $60 per person for a dinner
a. $0 party. This price includes the 6% sales tax and the 15% service
b. $1,500 charge. Sales tax is computed on the food plus the service
c. $2,000 charge. The service charge is computed on the food only. At
d. $3,500 what amount does Cuff price the food?
61. Which of the following variances would be useful in a. $56.40
calling attention to a possible short-term problem in the b. $51.00
control of overhead costs? c. $49.22
d. $47.40
Spending variance Volume variance
a. No No 66. Based on potential sales of 500 units per year, a new
b. No Yes product has estimated traceable costs of $990,000. What is the
c. Yes No target price to obtain a 15% profit margin on sales?
d. Yes Yes
a. $2,329
Items 62 and 63 are based on the following: b. $2,277
c. $1,980
The diagram below depicts a factory overhead flexible d. $1,935
budget line DB and standard overhead application line OA.
Activity is expressed in machine hours with Point V indicating 67. Briar Co. signed a government construction contract
the standard hours required for the actual output in September providing for a formula price of actual cost plus 10%. In
2014. Point S indicates the actual machine hours (inputs) and addition, Briar was to receive one-half of any savings resulting
actual costs in September 2014. from the formula price being less than the target price of
$2,200,000. Briar’s actual costs incurred were $1,920,000.
$ How much should Briar receive from the contract?
Factory A
overhead
a. $2,060,000
B b. $2,112,000
c. $2,156,000
S d. $2,200,000
D

68. Vince, Inc. has developed and patented a new laser disc
reading device that will be marketed internationally. Which
O V C of the following factors should Vince consider in pricing the
Machine hours
device?
62. Are the following overhead variances favorable or I. Quality of the new device.
unfavorable? II. Life of the new device.
III. Customers’ relative preference for quality compared to price.
Volume (capacity)
variance Efficiency variance a. I and II only.
a. Favorable Favorable b. I and III only.
b. Favorable Unfavorable c. II and III only.
c. Unfavorable Favorable d. I, II, and III.
d. Unfavorable Unfavorable 69. The budget for Klunker Auto Repair Shop for the year is
as follows:
63. The budgeted total variable overhead cost for C machine
hours is
Direct labor per hour $ 30
a. AB. Total labor hours 10,000
b. BC. Overhead costs:
c. AC minus DO. Materials handling and storage $ 10,000
d. BC minus DO. Other (rent, utilities, depreciation, insurance) $120,000
Direct materials cost $500,000
64. Lanta Restaurant compares monthly operating results with
a static budget. When actual sales are less than budget, would Klunker allocates materials handling and storage costs per
Lanta usually report favorable variances on variable food costs dollar of direct materials cost. Other overhead is allocated
and fixed supervisory salaries? based on total labor hours. In addition, Klunker adds a charge
Variable food Fixed supervisory of $8 per labor hour to cover profit margin. Tardy Trucking
costs salaries Co. has brought one of its trucks to Klunker for an engine
a. Yes Yes overhaul. If the overhaul requires twelve labor hours and $800
b. Yes No parts, what price should Klunker charge Tardy for these repair
c. No Yes services?
d. No No
 Module 47: Planning, Control, and Analysis 405

a. $1,160 c. Floor, $48.00; Ceiling $70.00.

b. $1,256 d. Floor, $57.00; Ceiling $82.00.
c. $1,416
**72. Systematic evaluation of the trade-offs between product
d. $1,472
functionality and product cost while still satisfying customer
needs is the definition of
J. Transfer Pricing a. Activity-based management.
70. Ajax Division of Carlyle Corporation produces electric b. Theory of constraints.
motors, 20% of which are sold to Bradley Division of Carlyle c. Total quality management.
and the remainder to outside customers. Carlyle treats its d. Value engineering.
divisions as profit centers and allows division managers to
73. Which of the following statements regarding transfer
choose their sources of sale and supply. Corporate policy
pricing is false?
requires that all interdivisional sales and purchases be recorded
at variable cost as a transfer price. Ajax Division’s estimated a. When idle capacity exists, there is no opportunity cost
sales and standard cost data for the year ending December 31, to producing intermediate products for another
2014, based on the full capacity of 100,000 units, are as division.
follows: b. Market-based transfer prices should be reduced by
Bradley Outsiders any costs avoided by selling internally rather than
Sales $ 900,000 $ 8,000,000 externally.
Variable costs (900,000) (3,600,000) c. No contribution margin is generated by the transfer-
Fixed costs (300,000
, ) (1,200,000
, , ) ring division when variable cost-based transfer prices
Gross margin $(300,000
, ) $ 3,200,000
, , are used.
Unit sales 20,000 80,000 d. The goal of transfer pricing is to provide segment
managers with incentive to maximize the profits of
Ajax has an opportunity to sell the above 20,000 units to an their divisions.
outside customer at a price of $75 per unit during 2013 on a
continuing basis. Bradley can purchase its requirements from K. Short-Term Differential Cost Analysis
an outside supplier at a price of $85 per unit.
Assuming that Ajax Division desires to maximize its gross 74. Clay Co. has considerable excess manufacturing capacity.
margin, should Ajax take on the new customer and drop its A special job order’s cost sheet includes the following applied
sales to Bradley for 2014, and why? manufacturing overhead costs:
Fixed costs $21,000
a. No, because the gross margin of the corporation as a
Variable costs 33,000
whole would decrease by $200,000.
b. Yes, because Ajax Division’s gross margin would in- The fixed costs include a normal $3,700 allocation for in-
crease by $300,000. house design costs, although no in-house design will be done.
c. Yes, because Ajax Division’s gross margin would in- Instead the job will require the use of external designers
crease by $600,000. costing $7,750. What is the total amount to be included in the
d. No, because Bradley Division’s gross margin would calculation to determine the minimum acceptable price for the
decrease by $800,000. job?
71. The management of James Corporation has decided to a. $36,700
implement a transfer pricing system. James’ MIS department b. $40,750
is currently negotiating a transfer price for its services with c. $54,000
the four producing divisions of the company as well as the d. $58,050
marketing department. Charges will be assessed based on
75. For the year ended December 31, 2014, Abel Co. incurred
number of reports (assume that all reports require the same
direct costs of $500,000 based on a particular course of action
amount of time and resources to produce). The cost to operate
during the year. If a different course of action had been taken,
the MIS department at its full capacity of 1,000 reports per year
direct costs would have been $400,000. In addition, Abel’s
is budgeted at $45,000. The user subunits expect to request
2014 fixed costs were $90,000. The incremental cost was
250 reports each this year. The cost of temporary labor and
additional facilities used to produce reports beyond capacity a. $ 10,000
is budgeted at $48.00 per report. James could purchase the b. $ 90,000
same services from an external Information Services firm for c. $100,000
$70,000. What amounts should be used as the ceiling and the d. $190,000
floor in determining the negotiated transfer price?
76. Mili Co. plans to discontinue a division with a $20,000
a. Floor, $36.00; Ceiling $56.00. contribution margin. Overhead allocated to the division is
b. Floor, $45.60; Ceiling $56.00.

** CMA adapted
406 Module 47: Planning, Control, and Analysis

$50,000, of which $5,000 cannot be eliminated. The effect of this Variable selling and
discontinuance on Mili’s pretax income would be an increase of administrative 2,000 3,000 5,000
a. $ 5,000 Fixed selling and
b. $20,000 administrative 1,500
, 1,500
, 3,000
,
c. $25,000 Operating income (loss) $ 1,000 $ ((500) $ 500
d. $30,000
Fixed costs of goods sold are allocated to each segment based
**77. Following are the operating results of the two segments on the number of employees. Fixed selling and administrative
of Parklin Corporation: expenses are allocated equally. If Segment B is eliminated,
Segment Segment $1,500 of fixed costs of goods sold would be eliminated.
A B Total Assuming Segment B is closed, the effect on operating income
Sales $10,000 $15,000 $25,000 would be
Variable cost of goods
a. An increase of $500.
sold 4,000 8,500 12,500
b. An increase of $2,000.
Fixed cost of goods sold 1,500
, 2,500
, 4,000
,
c. A decrease of $2,000.
Gross margin 4,500 4,000 8,500
d. A decrease of $2,500.

** CMA adapted
 Module 47: Planning, Control, and Analysis 407

Multiple-Choice Answers and Explanations

Answers
1. d __ __ 17. d __ __ 33. c __ __ 49. a __ __ 65. c __ __
2. c __ __ 18. c __ __ 34. c __ __ 50. b __ __ 66. a __ __
3. a __ __ 19. b __ __ 35. d __ __ 51. d __ __ 67. c __ __
4. b __ __ 20. c __ __ 36. b __ __ 52. a __ __ 68. d __ __
5. b __ __ 21. d __ __ 37. a __ __ 53. b __ __ 69. c __ __
6. b __ __ 22. b __ __ 38. c __ __ 54. a __ __ 70. c __ __
7. b __ __ 23. c __ __ 39. d __ __ 55. d __ __ 71. b __ __
8. b __ __ 24. c __ __ 40. b __ __ 56. a __ __ 72. d __ __
9. d __ __ 25. a __ __ 41. c __ __ 57. d __ __ 73. d __ __
10. c __ __ 26. b __ __ 42. c __ __ 58. b __ __ 74. b __ __
11. a __ __ 27. c __ __ 43. d __ __ 69. c __ __ 75. c __ __
12. b __ __ 28. c __ __ 44. c __ __ 60. b __ __ 76. c __ __
13. c __ __ 29. b __ __ 45. a __ __ 61. c __ __ 77. c __ __
14. a __ __ 30. d __ __ 46. a __ __ 62. b __ __
15. c __ __ 31. a __ __ 47. a __ __ 63. d __ __ 1st: __/77 = __%
16. c __ __ 32. d __ __ 48. b __ __ 64. b __ __ 2nd: __/77 = __%

Explanations
1. (d) Any income statement can be expressed as

Sales – Variable costs – Fixed costs = Operating income $100,000

$800,000 =
At the breakeven point, operating income = $0. In addition, CM ratio
the Contribution margin = Sales – Variable costs. Therefore,
the above equation may be restated as CM ratio = 0.125, or 12.5%

Sales – Variable costs – Fixed costs = 0 Therefore, projected total contribution margin from $1,200,000
Sales – Variable costs = Fixed costs sales is $150,000 ($1,200,000 × 12.5%), and projected profit is
Contribution margin = Fixed costs $50,000 ($150,000 CM – $100,000 fixed costs).
4. (b) The requirement is to calculate the number of units
This makes sense because, by definition, the breakeven point is
that must be sold to generate earnings before interest and taxes
the point at which revenues equal expenses; after variable costs
(EBIT ) in an amount equal to 32% of the amount of capital
are subtracted from sales, the contribution margin remaining
invested. Answer (b) is correct because the number of units is
will be just enough to cover fixed costs.
32,143 as calculated below.
2. (c) The short-cut breakeven point formula is calculated as
follows: Desired return (EBIT) = 32% × $250,000 (investment)
= $80,000
Fixed costs Required number of = (Fixed costs + desired EBIT)/
Breakeven (units) = Contribution margin
units Contribution margin
Thus, by decreasing the numerator (fixed costs) and increasing = ($122,500 + $80,000)/($15 ×
the denominator (contribution margin), the breakeven point 42%)
will be reduced. = 32,143
5. (b) The requirement is to determine the price that Thor
3. (a) The solutions approach is to work backward from Lab should charge to make the same profit with increased fixed
breakeven sales to determine the contribution margin (CM) costs. The first step in solving this problem is to calculate the
ratio. The CM ratio can then be used to determine Del’s pro- variable cost per unit. The variable cost component is deter-
jected profit at $1,200,000 sales. This is accomplished by mined as follows:
plugging fixed costs and breakeven sales into the breakeven
equation.

Fixed costs
Breakeven sales = CM ratio