Review Sheet—Exam #2

Modules 13-15 Differences (Similarities) between financial and managerial accounting Strategic Cost Management Strategic Positioning Cost Drivers (Types, examples) Ethics in Managerial Accounting Different Cost Behavior Patterns Relevant Range Committed vs. Discretionary Fixed Costs Computing Total Costs, Average Unit Costs, Total (Unit) Variable Costs, Total (Unit) Fixed Costs Cost Estimation Tools Manufacturing Cost Hierarchy Assumptions of CVP Analysis Contribution Margin (Unit Contribution Margin, Contribution Margin Ratio) Contribution Income Statement Profitability Analysis Cost-Volume-Profit Analysis Break-Even Profit Planning Break-Even in Sales Dollars Operating Leverage Example questions (concept): 1. Which of the following is an example of a discretionary fixed cost? a. Depreciation of manufacturing facilities b. Donations to charitable organizations c. Salaries of production supervisors d. Property taxes on manufacturing facilities Answer: b. 2. The following procedure performed by a candy manufacturer is the BEST example of a product level activity within a manufacturing cost hierarchy: a. Cleaning the mixing machine for the next production run of candy, a special Halloween candy b. Developing an advertising campaign for a special Halloween candy c. Inspecting the quality of the candy produced during one of the special Halloween package

production runs d. Resetting the packaging equipment to wrap a special 36-count Halloween package Answer: b.

Example questions (calculation): 3. The Fairport Machine Shop wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data:

Month

Cost of Electricity (Y) Direct Labor-Hours (X)

January $13,000 1,500 April $15,000 1,700 July $17,000 2,000

October $14,500 1,600 What would be the best equation using the high-low method? a. Y = $4,000 + $7X b. Y = $0 + $9X c. Y = $1,000 + $8X d. Y = $4,000 + $8X Answer : c. 4. The following information pertains to Cutter Company’s weekly activity and total costs:

Volume of Activity Total Cost 110 units $1,400 120 units $1,500 130 units $1,600

What are Cutter’s weekly fixed costs? a. $0 b. $200 c. $300 d. $1,600 Answer: c. 5. Rozella’s income statement is as follows: Sales (10,000 units) $120,000 Less variable costs - 48,000 Contribution margin $72,000 Less fixed costs - 24,000 Net income $ 48,000 What is the unit contribution margin? a. $12.00 b. $7.20 c. $4.80 d. $2.40 Answer: b.

6. Rozella’s income statement is as follows: Sales (10,000 units) $120,000 Less variable costs - 48,000 Contribution margin $72,000 Less fixed costs - 24,000 Net income $ 48,000 What is the contribution margin ratio? a. 167 percent b. 30 percent c. 40 percent d. 60 percent Answer: d. 7. Rozella’s income statement is as follows: Sales (10,000 units) $120,000 Less variable costs - 48,000 Contribution margin $72,000 Less fixed costs - 24,000 Net income $48,000 If sales increase by 1,000 units, profits will: a. Increase by $12,000. b. Increase by $7,200. c. Increase by $4,800. d. Increase by $8,000. Answer: b. 8. Rozella’s income statement is as follows: Sales (10,000 units) $80,000 Less variable costs - 48,000 Contribution margin $32,000 Less fixed costs - 24,000 Net income $ 8,000 If sales increase by $15,000, profits will: a. Increase by $1,000. b. Increase by $4,000. c. Increase by $6,000. d. Increase by $15,000. Answer: c. 9. 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 b. $12,000 c. $33,333 d. $50,000

Answer: c. 10. The following information pertains to Oliver’s 2010 operations: Selling price per unit $50 Variable costs per unit $20 Total fixed costs $100,000 Oliver’s break-even point in units is: a. 2,000 units b. 3,333 units c. 5,000 units d. 60,000 units Answer: c. 11. The following information pertains to Manning, Inc: Selling price per unit $100 Variable costs per unit $70 Total fixed costs $420,000 Tax rate 40% The sales volume required to obtain a target after-tax profit of $108,000 is: a. 6,000 units b. 8,572 units c. 14,000 units d. 20,000 units Answer: d. 12. The following information pertains to Manning, Inc: Selling price per unit $100 Variable costs per unit $70 Total fixed costs $420,000

Tax rate 40% The break-even point in sales dollars is: a. $700,000 b. $427,000 c. $600,000 d. $1,400,000 Answer: d.

Modules 17-18 Product Costs vs. Period Costs Components of Product Cost Predetermined Overhead Rates Process Costing vs. Job Costing Job Order Records Statement of Cost of Goods Manufactured Raw Materials Used Calculation

Total Manufacturing Costs Calculation Cost of Finished Goods Calculation Cost of Sales Calculation Activities and Cost Drivers Activity-Based Costing Model Cost Objective Plant-Wide Rate and Traditional Product Costing Unit Activity Costs and ABC Benefits of ABC Activity-Based Management Example questions (concept): 1. How is depreciation on the manufacturing building and equipment classified in financial reporting? a. As an irrelevant cost because it has already been incurred b. As a current expense c. As part of the cost of the products produced d. As a period cost

Answer: c. 2. Which of the following costs are treated as part of the cost of product? a. Wages of plant security guards b. Insurance on the plant building and equipment c. Depreciation on the kitchen sink in the plant cafeteria d. All of the above are product costs Answer: d. 3. Which of the following is NOT a period cost? a. The president’s salary b. Sales commissions c. Depreciation on the mainframe computer in the Information Systems Department d. Subsidy of the plant cafeteria Answer: d. 4. For which of the following products would job order costing be least likely to be used?

a. Residential building b. Textbook printing c. Mortgage loan processing d. Newsprint paper Manufacturing Answer: d. 5. For which of the following manufactured products would job costing be more appropriate than process costing? a. Paint

b. Designer dresses sold to celebrities c. Chemicals d. Liquid soap Answer: b. 6. Traditional cost systems tend to _____________________ high-volume, low-complexity products. a. Undercost b. Overcost c. Accurately cost d. None of the above Answer: b. Example questions (calculation): 7. Irving Corp. obtained the following information from its accounting records: Sales = $18,000 Beginning Finished Goods Inventory = $10,500 Ending Finished Goods Inventory = $8,500 Cost of Goods Sold = $8,000 Ending Work-in-Process Inventory = $9,500 The Cost of Goods Manufactured this period equals: a. $8,000. b. $9,000. c. $10,000. d. $11,500. Answer: c. 8. Information from Rosedale Company is given below in $000s for this period: Sales $350 Selling and administrative costs 26 Purchases of raw materials 9 Direct labor 11 Manufacturing overhead 105 Raw materials used (all direct cost) 11 Cost of goods manufactured 68 Beginning raw materials inventory 25 Beginning work-in-process inventory 78 Beginning finished goods inventory 80 Ending finished goods inventory 75 Required Determine the following amounts in dollars: a. Ending Raw Materials assuming all Raw Materials costs are classified as direct costs. b. Ending Work-in-Process Inventory. c. Cost of Goods Sold.

Answer: a. $23 b. $137 c. $73

9. Tennco, Inc. has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows:

Maintenance $300,000 Inspection 200,000 The following data have been assembled for use in developing a bid for a proposed job: . Direct materials $3,000 Direct labor $8,000 Machine-hours 400 Number of inspections 4 Direct labor-hours 800 The practical capacity of machine-hours for all jobs during the year is 25,000, and for inspections is 800. These are the cost drivers for maintenance and inspection costs, respectively. Using the appropriate cost drivers, the total cost of the potential job is: a. $11,000. b. $7,200. c. $16,800. d. $15,000. Answer: c

10. Franklin, Inc uses activity-based costing. The company produces X and Y. Information relating to the two products is as follows:

X Y Units produced 38,000 50,000 Machine-hours 15,000 17,000 Direct labor-hours 16,000 24,000 Materials handling (number of moves)

8,000 12,000

Setups 10,000 14,000 The following costs are reported:

Materials handling $160,000 Labor-related overhead 480,000 Setups 240,000 Labor-related overhead costs assigned to product X are: a. $192,000. b. $232,000. c. $288,000. d. $272,500. Answer: a 11. The following information is available pertaining to Bonita Division, that uses a plant-wide overhead rate based on machine hours: Mixing Dept. Finishing

Dept. Total

Overhead $30,000 $60,000 $90,000 Direct labor-hours 7,500 2,500 10,000 Machine-hours 2,500 7,500 10,000 Production information pertaining to Job 101: Mixing Dept. Finishing

Dept. Total

Prime costs $5,000 $0 $5,000 Direct Labor-hours

250 0 250

Machine-hours 10 10 20 Units produced 500 0 500 What are the total overhead costs assigned to Job 101? a. $120 b. $200 c. $90 d. $180 Answer: d. 12. Bass Corporation manufactures two products: A and B. The total indirect manufacturing overhead resource costs of $91,700 have been assigned to four activity cost pools that use the following cost drivers: Product Number of Setups Machine Runs Packing Hours

Orders

Product A 40 70 2,000 150 Product B 20 140 3,000 250

Cost per Pool $7,500 $4,200 $60,000 $20,000 Required: a. Compute the unit activity costs for each of the cost drivers listed. b. Assign the overhead costs to products A and B using activity-based costing. Answer: a. Unit cost per Setup = $125.00 per setup Unit cost per Machine Run = $20 per run Unit cost per hour of Packing = $12 per hour Unit cost per Order = $50 per order b. Total cost of Product A = $37,900 Total cost of Product B = $53,800 Module 21

Advantages/Benefits of Budgeting Management by Exception Common Approaches to Budgeting The Budgeting Process The Master Budget (sale, purchase, expense, cash budgets, budgeted financial statements and production budget) Budgeting and Human Behavior Budgetary Slack Example questions (concept): 1. Which of the following costs would be reported in the general and administrative expense budget? a. Factory overhead b. Sales commissions c. Direct manufacturing labor d. Expenses incurred in an accounting department Answer: d

2. Which of the following budgets for a manufacturing firm indicates the raw materials that must be acquired to meet production needs and ending inventory requirements?

a. The sales budget b. The production budget c. The purchases budget d. The manufacturing disbursements budget Answer: c 3. Which of the following budgets tends to tie into all of the other budgets? a. The operating budget b. The cash budget c. The sales budget d. The purchasing budget Answer: b 4. Which of the following is (are) the primary source(s) of information for the cash budget? a. The prior year's financial statements b. The capital budget c. The sales forecast d. The purchases and operating expense budgets Answer: d Example questions (calculation): 5. Reinmund Company has a sales budget for next month of $500,000. Cost of goods sold is expected to be 40 percent of sales. All goods are purchased in the month used and paid for in the month following purchase. The beginning inventory of merchandise is $10,000, and an ending inventory of $12,000 is desired. Beginning accounts payable is $76,000. For Reinmund Company, the ending accounts payable should be: a. $78,000. b. $122,000. c. $178,000. d. $202,000. Answer: d 6. Arizona Corporation has a sales budget for next month of $200,000. Cost of goods sold is expected to be $100,000. All goods are purchased in the month used and paid for in the month following their purchase. The beginning inventory of merchandise is $8,000, and an ending inventory of $6,000 is desired. Beginning accounts payable is $26,000. How much merchandise inventory will Arizona need to purchase next month? a. $100,000 b. $98,000 c. $102,000 d. $200,000 Answer: b

7. Mazzitelli Company manufactures boxes. To manufacture a box, it takes 20 units of wood and 1 unit of plastic. Scheduled production of boxes for the next two months is 1,050 and 1,250 boxes, respectively. Beginning inventory is 8,000 units of wood and 60 units of plastic. The

ending inventory of wood is planned to decrease 1,000 units each of the next two months, and the plastic inventory is expected to increase 10 units each of the next two months.

Based on this information, the number of units of wood that Mazzitelli needs to purchase during the first month is: a. 1,000 units. b. 20,000 units. c. 2,000 units. d. 9,000 units. Answer: b 8. The Palack Manufacturing Company expects to incur the following per unit costs for 1,000 units of production: Direct materials 2lb. @ $10 = $20 Direct labor 1 hr. @ $12 = $12 Variable overhead 75% of direct labor costs Fixed overhead 50% of direct labor costs What is the total cost reported in the manufacturing cost budget? a. $12,000 b. $47,000 c. $57,000 d. $15,000 Answer: b

9. The forecasted sales pertain to Louis Corporation:

Month Sales September $100,000 October 80,000 Finished Goods Inventory (August 31) 7,000 Louis Corporation has a selling price of $5 on all units and expects to maintain ending inventories equal to 25 percent of the next month's sales. How many units does Louis expect to produce in September? a. 14,000 b. 18,000 c. 17,000 d. 25,000 Answer: c 10. Casey Productions needs to know its anticipated cash inflows for the next quarter by month. Cash sales are 10 percent of total sales each month. Historically, credit sales on account have been collected as follows: 60 percent in the month of sale, 30 percent in the month after the sale, and the remaining 10 percent two months after the sale. Sales for the quarter are projected as follows: April, $60,000; May, $50,000; and June, $70,000. Accounts receivable on March 31

were $30,000. Calculate the amount of Casey’s expected cash collections for June. Answer: Casey will collect $7,000 + $37,800 + $13,500 + $5,400 = $63,700. Modules 22-23 Responsibility Accounting Responsibility Centers Standard Costs Flexible Budget Standard Cost Variance Standard Cost Variance Analysis Materials Price and Quantity Variances Cause of Materials Price/Quantity Variance Labor Rate and Efficiency Variances Cause of Labor Rate/Efficiency Variance Variable Overhead Spending and Efficiency Variances Fixed Overhead Variance Sales Price and Volume Variances Segment Reports Segment Costs Segment Contribution Margin Segment Margin Transfer Pricing (Definition, methods) Return on Investment Residual Income (Dis)Advantages of ROI and residual Income Balanced Scorecard (Definition, measures) Example questions (concept): 1. A favorable labor efficiency variance is created when: A. actual labor hours worked exceed standard hours allowed. B. actual hours worked are less than the standard hours allowed. C. actual wages paid are less than amounts that should have been paid. D. actual units produced exceed budgeted production levels. E. actual units produced exceed standard hours allowed. Answer: B 2. The individual generally responsible for the direct-material price variance is the: A. sales manager. B. production supervisor. C. purchasing manager. D. finance manager. E. head of the human resources department.

Answer: C 3. A direct-labor efficiency variance cannot be caused by: A. inexperienced employees. B. poor quality raw materials. C. employee inefficiency. D. an out-of-date labor time standard. E. producing fewer finished units than originally planned. Answer: E 4. What will cause the variable-overhead efficiency variance? A. Efficient or inefficient use of a specific component of variable overhead (e.g., electricity). B. Full or partial utilization of major equipment resources. C. Production of units in excess of the number of units sold. D. Efficient or inefficient use of the cost driver (e.g., machine hours) for variable overhead. E. Changes in the salary cost of production supervisors. Answer: D 5. Easy-to-Use Software operates stores within five regions. Regional managers are held accountable for marketing, advertising, and sales decisions, and all costs incurred within their region. In addition, regional managers decide whether new stores will open, where the stores will be located, and whether the stores will lease or purchase the facilities. If store managers are accountable for marketing, advertising, and sales decisions, and costs incurred within their stores, ideally, what type of responsibility center should be used? Region Store A. Profit center Profit center B. Profit center Cost center C. Profit center Revenue center D. Investment center Profit center E. Investment center Cost center Answer: D 6. ROI is most appropriately used to evaluate the performance of: A. cost center managers. B. revenue center managers. C. profit center managers. D. investment center managers. E. both profit center managers and investment center managers. Answer: D 7. Consider the following statements about residual income: I. Residual income incorporates a firm's cost of acquiring investment capital. II. Residual income is a percentage measure, not a dollar measure. III. If used correctly, residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm. Which of the above statements is (are) true?

A. I. B. II. C. I and II. D. II and III. E. I and III. Answer: A 8. Transfer prices can be based on: A. variable cost. B. full cost. C. an external market price. D. a negotiated settlement between the buying and selling divisions. E. all of the above. Answer: E 9. Cook River Company management is analyzing the company’s standard cost variances for direct materials for the most recent period. The following information was available from company records. Actual quantity of materials used 24,000 units Budgeted quantity of materials used 22,000 units Actual price paid for materials $4 per unit Budgeted price paid for materials $6 per unit There were no increases or decreases in inventories during the period. Calculate the materials quantity variance for the period. Answer: Materials quantity variance = (budgeted quantity – actual quantity) × Standard Price $12,000 (U) 10. Red River Valley Company management is analyzing the company’s standard cost variances for direct materials for the most recent period. The following information was available from company records. Actual quantity of materials used 24,000 units Budgeted quantity of materials used 22,000 units Actual price paid for materials $8 per unit Budgeted price paid for materials $12 per unit There were no increases or decreases in inventories during the period. Calculate the materials price variance for the period. Answer: Materials price variance = (Budgeted Price – Actual Price) × Actual Quantity 96,000 (F) 11. Hartwell Engineering Company uses a standard cost system. The following information pertains to 20x7:

Actual total direct labor costs $160,000 Total standard labor hours allowed 12,000 hrs. Actual labor rate $16 per hour Standard labor rate $17 per hour Calculate Hartwell's labor efficiency variance. Answer: Labor Efficiency Variance = (Budgeted Labor Hours – Actual Labor Hours) × Standard Labor Rate 34,000 (F) 12. The management of Rose Enterprises is analyzing variable overhead variances for the fiscal period just ended. During the period, Rose’s management used 2,500 hours of direct labor. It had budgeted to use 4,000 hours of direct labor. Hours of direct labor is the single overhead driver of variable overhead. Variable overhead consists of two items. Indirect labor was budgeted as $3.00 per hour of direct labor. Indirect materials was budgeted as $2.00 per hour of direct labor. Actual variable overhead was $15,000. Calculate Rose's variable overhead efficiency variance. Answer: (Budgeted Quantity of the Variable Overhead Base – Actual Quantity of the Variable Overhead Base) × Standard Variable Overhead Rate = Variable Overhead Efficiency Variance $7,500 (F) 13. The management of Rose Enterprises is analyzing variable overhead variances for the fiscal period just ended. During the period, Rose’s management used 2,500 hours of direct labor. It had budgeted to use 4,000 hours of direct labor. Hours of direct labor is the single overhead driver of variable overhead. Variable overhead consists of two items. Indirect labor was budgeted as $3.00 per hour of direct labor. Indirect materials was budgeted as $2.00 per hour of direct labor. Actual variable overhead was $15,000. Calculate Rose's variable overhead spending variance. Answer: (Budgeted Quantity of the Variable Overhead Base × Standard Variable Overhead Rate) – Actual $5,000 (F) 14.

The following provides cost standards for product no. B55: Direct material 3 pounds at $2.50 per

pound $ 7.50

Direct labor 5 hours at $7.50 per hour 37.50 Actual results: Units produced 7,800 units

Direct material purchased 25,000 pounds at $2.70 $ 67,500 Direct material used 23,100 pounds at $2.70 62,370 Direct labor 40,100 hours at $7.30 292,730

Required: a. The direct-material quantity variance is: $750F. b. The direct-material price variance is: $5,000U. c. The direct-labor rate variance is: $8,020F. d. The direct-labor efficiency variance is: $8,250U. e. The standard hours allowed for the work performed are: 39,000. f. Collins Corporation had a favorable direct-labor efficiency variance of $5,250 for the

period just ended. The actual wage rate was $0.50 more than the standard rate of $10.00. If the company's standard hours allowed for actual production totaled 9,000, how many hours did the firm actually work: 8,475.

15. Wabash Company has the following information pertaining to its Stone Division for this year Stones Fixed manufacturing expenses $100,000 Fixed selling and administrative expenses 70,000 Sales 400,000 Direct manufacturing costs (variable) 100,000 Variable selling and administrative expenses

90,000

Common expenses for the year are $24,000. Calculate the Stone Division’s contribution margin. Answer: Contribution Margin: $210,000 16. Wabash Company has the following information pertaining to its Brick division for this year: Bricks Fixed manufacturing expenses $35,000 Fixed selling and administrative expenses 30,000 Sales 250,000 Direct manufacturing costs (variable) 40,000 Variable selling and administrative expenses 70,000 Corporate expenses allocated to the brick division are $24,000. Calculate the brick division’s division margin. Answer: Division Margin $75,000 17. Westchester Company has the following data for this year: Bottling

Division Mixing

Division Average operating assets $160,000 $400,000

Contribution margin 80,000 250,000 Operating income 40,000 60,000 Sales 200,000 600,000 Weighted-average cost of capital 18% 18% Westchester Company has a target ROI of 18 percent. Required: Calculate the following amounts for each division: a. Return on sales ratio b. Operating investment turnover c. ROI d. Residual income Bottling Division: a. Return on sales ratio= 20 percent b. Investment turnover ratio = 1.25 c. ROI = 25 percent d. Residual income = $11,200 Mixing Division: a. Return on sales ratio = 10 percent b. Investment turnover ratio = 1.50 c. ROI = 15 percent d. Residual income = $(12,000)

Note from the instructor: The sample questions, calculations in particular, are similar in

format to the ones to be found in you exams. The instructor will not be able to help you

with how to do the problems, but know that the problem structure is very similar to those

homework and exercises problems that we worked during each lesson. I encourage you to

discuss with others (via the threaded discussion under the exam #2 unit); compare answers

and methodology. Good luck!

All exams and exam reviews are properties of the school of accounting and are restricted to

the use in the current class, you are not allowed to make copies and distribute them.

Your exam will be open book/notes, which means that you may refer to the ppt slides of the

lecture notes, but should not refer to other class materials, such as homework solutions and

exam review sheets.