Part I: True/False
1. One of the companies to first employ a successful cost leadership strategy was Carnegie Steel Company.
2. The number of units sold is a better independent variable than square feet of all manufacturing facilities in estimating the cost function of a headphone manufacturer.
3. The break-even point for a company with multiple products cannot be determined using a unit contribution margin calculation since there are multiple products each of which has a different unit contribution margin.
4. Differential analysis is an approach to the analysis of relevant costs that focuses on the costs that differ under alternative actions
5. If costs are accurately estimated when establishing an annual predetermined overhead rate, there should never be an overapplied or underapplied overhead balance.
6. The plant-wide rate approach is the simplest to apply, but it is also the most costly to implement, compared to a departmental or activity-based cost allocation system.
7. Just-in-time strives to eliminate inventories by using a pull approach
8. Benchmarking is just a more elegant term for corporate espionage
9. All type of Operations budgeting emphasizes activities performed, rather than traditional expense categories?
10. Unfavorable materials quantity variances may be partially explained by unfavorable materials price variances
11. The balanced scorecard approach for evaluating managerial performance is designed to overcome the limits of single measure performance systems, such as ROI or EVA, by evaluating performance on several key dimensions.
12. A “clean” audit report asserts – among other things – that (a) the auditor has prepared all necessary financial statements and (b) management has expressed its opinion that they are prepared in conformity with GAAP.
13. According to the revenue recognition principle, companies are required to record revenue when cash is received as this provides the most objective evidence for the auditors.
14. To close revenue accounts, a company must debit Retained Earnings because Revenue has a credit balance and debits must equal credits.
15. Net operating asset turnover (NOAT) measures a company’s profitability.
16. When a company reports a deferred tax asset it means that the company will receive a tax benefit in the future.
17. LIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet.
18. Fair-value changes in available-for-sale investments are recognized in the income statement as unrealized gains or losses.
19. A bond selling for an amount above face value is said to be selling at a discount.
20. A stock split is a monetary transaction. Consequently, a company that splits its stock must make several financial statement adjustments
21. The purpose of cost assignment is to match costs in a common cost pool to cost objectives
22. Target costing is generally more beneficial with products that have a short life cycle, rather than a long life cycle
23. The traditional justifications of budgeting include improved communications, improved planning, and improved sales.
24. A labor efficiency variance results from the inefficient use of labor quantity to produce a given amount of product or service
25. In the short run, the best profitability number for deciding the impact of discontinuing a segment is segment margin.
Part II: Multiple Choice
1.The process of selecting strategies to achieve goals is often referred to as:
2. This is an organizational cost driver for a discount department store chain:
A) The decision to price lower than a key competitor
B) The decision to rearrange merchandise within a store
C) The decision to issue a purchase order for raw materials
D) The decision to sale product globally versus only domestically
3. Mary French uses gas to heat her home. She has accumulated the following information regarding her monthly gas bill and monthly heating degree-days. The heating degree-days value for a month is found by first subtracting the average temperature for each day from 65 degrees and then summing these daily amounts together for the month.
|Month||Heating Degree-Days||Gas Bill|
What will be the increase in Mary’s monthly gas bill per heating degree-day using the high-low method?
A) $ 0.09
B) $ 0.39
C) $ 46.00
4. The following procedure performed by a dairy is the best example of a unit level activity within a manufacturing cost hierarchy:
A) Delivering dairy products to a grocery store
B) Filling milk into half-gallon cartons
C) Homogenizing milk in specially designed tanks
D) Receiving milk from farms
5. Rozella’s income statement is as follows:
|Sales (10,000 units)||$120,000|
|Less variable costs||– 48,000|
|Less fixed costs||– 24,000|
|Net income||$ 48,000|
What is the unit contribution margin?
B) $ 7.20
C) $ 4.80
D) $ 2.40
6. George Company sells one product at a price of $20 per unit. Variable expenses are 40 percent of sales, and fixed expenses are $20,000. The sales dollars level required to break even are:
A) $ 2,500
7. Which of the following statements is true when making a decision between two alternatives?
A) Fixed costs are never relevant.
B) Taxes are never relevant.
C) Variable costs may not be relevant when the decision alternatives have the same activity levels.
D) Variable costs are not relevant when the decision alternatives have different activity levels.
8. The point in the production process where joint products become separately identifiable is called:
A) The conversion point
B) The point of sale
C) The split-off point
D) The throughput point
9. The method of accounting for inventory that assigns all manufacturing costs to inventory is sometimes referred to as:
A) Prime costing
C) The weighted average cost method
D) Absorption costing
10. Which of the following accounts increases when raw materials are used?
A) Finished Goods Inventory
B) Raw Materials Expense
C) Raw Materials Inventory
D) Work-in-Process Inventory
11. In an activity-based costing model, total costs assigned to cost objectives may include:
A) Only direct costs
B) Both direct costs and resource costs
C) Both activity costs and resource costs
D) Both direct costs and activity costs
12. Assume that total costs assigned to the setup activity cost pool in March are $80,000 and 100 setups were completed in March. Further, assume that during March machines were setup 20 times to make product X5. The total setup cost that would be assigned to product X5 would be:
A) $ 1,600
B) $ 16,000
D) Cannot be determined
13. Check Company has two service departments whose direct department costs are $30,000 and $50,000, respectively, and two producing departments whose direct department costs are $320,000 and $300,000, respectively. The combined total department costs for the producing departments after allocating the service departments are:
14. Cycle time is comprised of each of the following components except:
A) Planning time
B) Set-up time
C) Waiting time
D) Inspection time
15. Which of the following is not a drawback to cost-based pricing?
A) Cost-based pricing requires accurate cost assignments.
B) The greater the portion of unassigned costs, the greater the likelihood of overpricing and underpricing individual products.
C) Cost-based pricing assumes goods or services are relatively scarce, and customers who want a product or service are, generally, willing to pay the price.
D) In a competitive environment, cost-based approaches increase the time and cost of bringing new products to market
16. Deb Burg is considering the production of a new line of jeans. Based on preliminary market research, management has decided that each pair of jeans should be priced at $160. Furthermore, management believes that the profit margin should be 30 percent of sales revenue. What is the target cost?
A) $ 32
B) $ 80
17.Which budgeting approach is widely used in government and non-profit organizations?
A) The continuous budgeting approach
B) The input/output approach
C) The incremental approach
D) Participation budgeting
18.All of the following are true of the sales budget except:
A) It contains a forecast of unit sales volume
B) It contains a forecast of sales dollars
C) It may contain a forecast of sales collections
D) It may contain a forecast of Kaizen activities
19. Which of the following departments would most likely be classified as a cost center in a large department store?
A) The men’s clothing department
B) The hardware department
C) The women’s shoe department
D) The accounting department
20. A flexible budget variance for a manufacturing cost is computed as the difference between:
A) Flexible budget costs and static budget costs
B) Actual costs and flexible budget costs
C) Departmental costs and cost center costs
D) Flexible budget costs and original budget costs
21. The term “division margin” is used to describe the:
A) Excess of manufacturing margin over all variable expenses
B) Sum of division cost of goods sold and net income
C) Amount a given division contributes toward covering common corporate expenses
D) Excess of division sales over its variable manufacturing expenses
22. What is a transfer price?
A) The amount charged for a product or service that one division provides another
B) The amount charged for goods and services offered to the government
C) An amount charged to cover the costs associated with import/export taxes
D) The amount charged the final consumer to cover all costs incurred along the value chain
23. Sales for the year = $108,229, Net Income for the year= $13,144, Income from equity investments = $3,309, and average Equity during the year = $47,556. Return on equity (ROE) for the year is:
E) There is not enough information to answer the question
24. The audit report is addressed to:
A) The audit committee
B) The board of directors
C) The shareholders
D) The board of directors and the shareholders
E) The Securities and Exchange Commission (SEC)
25. In 2006, Delphi Corporation had current assets of $9,916 million and current liabilities of $8,404 million. The firm’s net working capital is:
A) $9,916 million
B) $1,512 million
C) $(1,512) million
D) $18,320 million
E) None of the above
26. How would a purchase of $150 of inventory on credit affect the income statement?
A) It would increase liabilities by $150
B) It would decrease retained earnings by $150
C) It would increase assets by $150
D) Both A and C, above
E) None of the above
27. Which account is least likely to appear in an accounting adjustment?
A) Interest expense
B) Cost of goods sold
28. A statement of cash flows usually does not include which of the following?
A) Net income
B) Increase in accounts receivable
C) Contributed Capital
D) Depreciation expense
E) All of the above
29. Liquidity refers to:
A) The life cycle of the company
B) The amount of receivables the company has in the balance sheet
C) The amount of financial leverage
D) None of the above
30. The fiscal 2010 financial statements for Walgreen, Inc., report net sales of $67,420 million, net operating profit after tax of $2,145 million, net operating assets of $14,921 million. The 2009 balance sheet reports net operating assets of $14,140 million. Walgreen’s 2010 net operating asset turnover is:
E) There is not enough information to calculate the ratio.
31. In fiscal 2011, Microsoft Corp. reported a statutory tax rate of 35.0%, an effective tax rate of 17.53% and a tax rate on operating profit of 16.94%. The 2011 income statement reported income tax expense of $4,921 million. What did Microsoft report as income before income tax expense that year?
A) $14,060 million
B) $28,071 million
C) $29,050 million
D) $7,571 million
E) None of the above
32. Dow Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be:
A) Capitalized and depreciated.
B) Expensed in the current year.
C) Depreciated and expensed.
D) Capitalized only.
E) None of the above
33. At what amount will accounts receivable be reported on the balance sheet if the gross receivable balance is $20,000 and the allowance for uncollectible accounts is estimated at 15% of gross receivables?
34. The 2011 financial statements of BNSF Railway Company report total revenues of $19,548 million, accounts receivable of $1,189 million for 2011 and $955 million for 2010. The company’s accounts receivable turnover for the year is:
A) 16.4 days
B) 20.5 times
C) 18.2 days
D) 18.2 times
E) None of the above
35. Which of the following would not be considered an intangible asset?
A) Trademarks and internet domain names
B) Plant, Property, and Equipment
C) Patents, computer software, databases and trade secrets
D) Customer lists, production backlog, and customer contracts
E) None of the above
36. When equity method accounting is used for investment, which component of ROE would always be understated?
A) Net Profit Margin
B) Total Asset Turnover
C) Financial leverage
D) Return on Equity
E) None of the above
37. Wild Inc. receives a bill from Easton Inc. for $15,000. Easton has credit terms of 2/15, net 45. If Wild takes advantage of the discount, how much cash do they pay to Easton?
E) None of the above
38. Kirner Electric Corp. sells $100,000 of bonds to private investors. The bonds have an 8% coupon rate and interest is paid semiannually. The bonds were sold to yield 9%.
What periodic interest payment does Kirner make?
B) $ 4,000
C) $ 8,000
D) $ 2,250
E) None of the above
39. Which of the following should not be included in accumulated other comprehensive income?
A) Minimum pension liability
B) Currency translation adjustment
C) Unrealized gains and losses on available-for-sale securities
D) Unrealized gains and losses on trading securities
E) None of the above
40. The equity carve-out in which the parent company distributes the subsidiary’s shares as a dividend to shareholders is called which of the following?
D) Stock Split
E) None of the above
41. Which of the following cost categories would most likely use the number of orders placed with suppliers as its allocation base?
B) Maintenance and repairs
42. Which of the following is not a benefit of just-in-time processing?
A) Control of significant inventory balances
B) Enhanced product quality
C) Reduction of rework costs
D) Production cost savings
43. From a value chain perspective, value is defined by which of the following?
A) Only the costs associated with producing a product
B) The amount of worth the final customer places on a product or service
C) All costs necessary to deliver a product or service to the end user.
D) All costs associated with the life of a product or service (including all upstream and downstream costs
44. World-class organizations operating in competitive markets are more likely to take which one of the following approaches toward pricing?
A) Begin with cost data as given and determine price by adding a reasonable mark-up.
B) Determine price based on the amount management believes customers are willing to pay.
C) Employ a cost-based approach to pricing.
D) Determine the price that keeps the facilities fully utilized
45. Evaluating plans and budgets in comparison with actual activities is directly related to:
A) Cost control
C) Financial analysis
46. Budgets improve ____________________ and ____________________.
A) Communication; profits
B) Information; revenues
C) Revenues; profits
D) Communication; coordination
47. Both investment center and cost center managers are responsible for managing:
B) Net income
D) Contribution margins
48. By using time and motion studies, it is possible to determine how long it takes to perform an activity. This information is often used to formulate:
A) Standard allowances for labor hours
B) Standard labor prices
C) Standard allowances for materials
D) Standard material prices
49. Costs that would not be incurred if the segment were discontinued are called:
A) Avoidable segment costs
B) Indirect segment costs
C) Variable segment costs
D) Both A and C
50. Which of the following would normally not be included in an investment center’s asset base?
A) Accounts receivable
C) Land for a future plant site
Problem Solving Questions
1. Cost Estimation Using the High-Low Method (20 points)
The University Logo Products Company needs to predict the labor cost in producing specialty coffee mugs. The following production information is available:
|Year||Production Volume||Labor Hours||Labor Dollars|
Wage rates have steadily increased since 2006; however, management expects no further increases in 2012.
a. Select the appropriate independent variable for estimating labor cost. Explain the reason for your selection.
b. Develop an equation to predict for 2012 the labor cost of producing specialty mugs. Use the high-low method.
2. Break-Even Calculation (20 points)
Bountiful Company had the following functional income statement for the month of May, 2011:
|Bountiful CompanyFunctional Income StatementFor the Month Ending May 31, 2011|
|Sales (15,000 units)||$300,000|
|Cost of goods sold:|
|Variable manufacturing overhead||37,500|
|Fixed factory overhead||50,000||192,500|
|Selling and administrative expenses:|
|Net income||$ 80,000|
Calculate Bountiful’s break-even sales in units.
3. Make or Buy Decision (20 points)
Maple Paper Corporation manufactures 20,000 rolls of paper each period. The paper is used as an input for producing several other products that Maple manufactures. The full manufacturing costs for a batch of 100 rolls of paper are as follows:
|Direct materials||$ 270|
|Variable manufacturing overhead||200|
|Average fixed manufacturing overhead||350|
The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the paper. These assets have no other use than for the manufacturing of the paper. An outside supplier has offered to sell Maple the 20,000 rolls of paper necessary to meet production needs this period for a lump-sum of $150,000. What should Maple do if it wants to maximize its profit for the period?
4. Raw Materials Used Calculation (20 points)
Eleanor Corp. obtained the following information from the Raw Materials Inventory account and purchasing records for the first quarter of the current year:
|Beginning Raw Materials||$10,000|
|Ending Raw Materials||$12,000|
Calculate the amount of Raw Materials used for this quarter.
5. Activity-Based costing (25 points)
Angel Manufacturing Company has developed the following activity cost information for its manufacturing activities:
|Assembly||$30 per hour|
|Drilling||$8 per hole|
|Inspection||$4 per unit|
|Machine setup||$400 per batch|
|Movement||$30 per batch plus $0.20 per lb.|
|Shaping||$50 per hour|
|Welding||$10 per inch|
Filling a batch order for 45 units with a combined weight of 200 pounds required:
· Three sets of inspections
· Drilling four holes in each unit
· Completing 20 inches of welds on each unit
· 0.6 hour of shaping for each unit
· One hour of assembly per unit
Calculate the total cost to produce a batch of 45 units.
6. Direct Cost Allocation Method (20 points)
Airwalk Company has two service departments, Maintenance Department and Personnel Department, and two producing departments, X and Y. The Maintenance Department costs of $120,000 are allocated on the basis of standard service hours used. The Personnel Department costs of $18,000 are allocated on the basis of number of employees. The direct costs of Departments X and Y are $36,000 and $60,000, respectively. Data on standard service-hours and number of employees are as follows:
|Maint. Dept.||Person. Dept.||Dept. X||Dept. Y|
|Standard service hours used||200||100||600||300|
|Number of employees||5||10||45||45|
Using the direct method, calculate the cost of the Personnel Department allocated to Department X.
7. Cost-Based Pricing (25 Points)
Patty Corporation has predicted the following costs for this year for 100,000 units:
|Manufacturing||Selling and Administrative|
a. What is the markup on variable costs needed to achieve a target profit of $200,000?
b. What is the initial unit selling price needed to obtain a target profit of $200,000 using the variable cost markup method?
c. What is the manufacturing cost markup needed to obtain a target profit of $200,000?
d. What is the initial unit selling price needed to obtain a target profit of $200,000 using the manufacturing cost markup method?