American InterContinental University
ACCT420-Cost Accounting
Final Examination Review

Exam Name___________________________________

 

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.

1.       An unfavorable price variance for direct materials might indicate:

A) congestion due to scheduling problems

B) that the purchasing manager purchased in smaller quantities due to a change to just–in–time inventory methods

C) that the purchasing manager skillfully negotiated a better purchase price

D) that the market had an unexpected oversupply of those materials

 

2.       Conversion costs are an example of.          

A) indirect engineered costs          B) unused capacity costs

C) discretionary costs      D) direct engineered costs

 

3.       Balanced scorecard objectives are in balance when:             

A) the measurements are fair

B) debits equal credits

C) the measurements reflect an improvement over the previous year

D) financial performance measurements are less than the majority of measurements

 

 

Answer the following questions using the information below:

 

Wallace Company provides the following data for next year:

 

                                                Month                    Budgeted Sales

                                                January                               $120,000

                                                February                                108,000

                                                March                                    132,000

                                                April                                       144,000

 

The gross profit rate is 40% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 30% of next month’s sales, stated at cost.

 

4.       Purchases budgeted for January total:       

A) $72,000           B) $74,160            C) $130,800         D) $69,840

 

 

Answer the following questions using the information below:

 

Marcia Manufacturing is approached by a European customer to fulfill a one–time–only special order for a product similar to one offered to domestic customers. Marcia Manufacturing has a policy of adding a 20% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

 

                                Variable costs:

                                        Direct materials                                                  $30

                                        Direct labor                                                             10

                                        Manufacturing overhead                                   15

                                        Marketing costs                                                       5

                                Fixed costs:

                                        Manufacturing overhead                                 100

                                        Marketing costs                                                     20

                                Total costs                                                                    180

                                Markup (10%)                                                                36

                                Estimated selling price                                          $216

 

5.       If the European customer wanted a long–term commitment for supplying this product, what price would most likely be quoted?               

 

A) $216.00           B) $180.00            C) $66.00              D) $236.00

 

Answer the following questions using the information below:

 

Meale Company makes a household appliance with model number X500. The goal for 2012 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of X500 units that can be produced. The industry market size for appliances increased 10% from 2011 to 2012. The following additional data are available for 2011 and 2012:

 

                                                                                                       2011                       2012

        Units of X500 produced and sold                           10,000                   11,000

        Selling price                                                                       $100                         $95

        Direct materials (square feet)                                    30,000                   29,000

        Direct material costs per square foot                            $10                         $11

        Manufacturing capacity for X500 (units)              12,500                   12,000

        Total conversion costs                                            $250,000               $240,000

        Conversion costs per unit of capacity                          $20                         $20

 

6.       What is operating income for 2011?

A) $1,000,000      B) $750,000          C) $450,000         D) $700,000

 

Michael Company provided the following information:

        Budgeted input                              19,500    gallons

        Actual input                                   17,900    gallons

        Budgeted production                   10,000    units

        Actual production                        19,000    units

 

7.       What is the partial productivity ratio?      

 

A) 1.12 units per gallon   B) 0.97 units per gallon

C) 1.02 units per gallon   D) 1.06 units per gallon

 

Answer the following questions using the information below:

 

Stewart Corporation plans to grow by offering a sound system, the SS3000, that is superior and unique from the competition. Stewart believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy.

 

8.       Stewart’s strategy is:        

A) reengineering                B) cost leadership

C) downsizing   D) product differentiation

 

9.       When analyzing the change in operating income, the strategy component of price–recovery will increase when:                

 

A) more units are sold

B) production efficiencies are successfully implemented

C) selling prices are increased

D) capacity is reduced

 

10.    Relevant costs for target pricing are:          

A) variable manufacturing and variable nonmanufacturing costs

B) all fixed costs

C) variable manufacturing costs

D) all future costs, both variable and fixed

 

11.    Problems that should be avoided when identifying relevant costs include all of the following EXCEPT:

 

A) assuming all variable costs are relevant

B) using unit costs that do not separate variable and fixed components

C) assuming all fixed costs are irrelevant

D) using total costs that separate variable and fixed components

 

12.    An example of a qualitative factor for the decision–making process is:          

A) customer satisfaction                 B) units sold

C) labor hours incurred   D) material cost

 

13.    With a constraining resource, managers should choose the product with the:           

A) highest contribution margin per unit of the constraining resource

B) highest gross profit

C) lowest contribution margin per unit of the constraining resource

D) highest sales price

 

14.    Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have twice the rentals of other days of the week. The following information pertains to the store’s normal operations per week:

 

        Average rentals per day on Friday and Saturday                         1,150

        Average rentals per day on Sunday through Thursday                500

        Store hours per day                                                                                      12

        Total units available for rent                                                             10,000

 

        Variable operating costs per hour                                                        $ 40

        Marketing costs per week                                                                  $1,500

        Customer service costs per week                                                       $ 250

 

The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price that should be charged during peak rental days?              

 

A) $0.90                B) $0.83                 C) $0.60                D) $1.07

 

15.    Value engineering may result in all of the following EXCEPT:         

A) the evaluation of all business functions within the value chain

B) increases in the quantity of nonvalue–added cost drivers

C) changes in materials specifications

D) improved product design

 

Answer the following questions using the information below:

 

Bicker, Inc., is in the process of evaluating a new product using the following information:

∙       A new transformer has two production runs each year, each with $10,000 in setup costs.

∙       The new transformer incurred $30,000 in development costs and is expected to be produced over the next three years.

∙       Direct costs of producing the transformers are $40,000 per run of 5,000 transformers each.

∙       Indirect manufacturing costs charged to each run are $45,000.

∙       Destination charges for each transformer average $1.00.

∙       Customer service expenses average $0.20 per transformer.

∙       The transformers are selling for $25 the first year and will increase by $3 each year thereafter.

∙       Sales units equal production units each year.

 

16.    What are estimated life–cycle revenues?   

A) $310,000         B) $250,000          C) $280,000         D) $840,000

 

17.    Graphic analysis of incurred and locked–in costs provides several insights as to how the different concepts influence decisions. Which of the following statements is FALSE?

 

A) When and how costs are locked in are more important than when and how costs are incurred.

B) Most costs are locked in during the manufacturing process.

C) Costs are generally locked in before they are incurred.

D) After a product’s design has been approved, costs are difficult to influence.

 

Answer the following questions using the information below:

 

Block Island TV currently sells large televisions for $360. It has costs of $280. A competitor is bringing a new large television to market that will sell for $300. Management believes it must lower the price to $300 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 100,000 televisions per year.

 

18.    What is the target cost if target operating income is 25% of sales?   

A) $270                 B) $90    C) $225 D) $75

 

 

19.    Post–investment audits:

A) are usually not feasible in a large project because the cost accounting system does not collect actual costs at the same level of detail as the initial plans had.

B) include obtaining appropriation requests so that the funding will be authorized to purchase the equipment.

C) should be done as soon as possible after the investment is made.

D) provide management with feedback about the performance of a project.

 

20.    Depreciation is usually NOT considered an operating cash flow in capital budgeting because:          

A) depreciation usually does not result in an increase in working capital

B) depreciation is usually a constant amount each year over the life of the capital investment

C) depreciation usually has no effect on the disposal price of the machine

D) deducting depreciation from operating cash flows would be counting the lump–sum amount twice

 

21.    Snapper Tool Company has a production capacity of 3,000 units per month, but current production is only 2,500 units. Total manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug Levy offers to purchase 500 units at $76 each for the next five months. Should Snapper accept the one–time–only special order if only absorption–costing data are available?            

 

A) Yes, good customer relations are essential.

B) Yes, since operating profits will most likely increase.

C) No, the company will only break even.

D) No, since only the employees will benefit.

 

Answer the following questions using the information below:

 

John’s 8–year–old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it roadworthy again. His wife, Sherry, suggested that he should buy a 5–year–old used Jeep Grand Cherokee instead for $6,000 cash. Sherry estimated the following costs for the two cars:

 

                                                                        Trail Blazer      Grand Cherokee

        Acquisition cost                                          $25,000                   $6,000

        Repairs                                                            $ 6,000                             

        Annual operating costs

        (Gas, maintenance, insurance)                $ 2,280                   $2,100

 

22.    What should John do? What are his savings in the first year?          

A) Fix the Trail Blazer; $3,180       B) Buy the Grand Cherokee; $8,100

C) Buy the Grand Cherokee; $180                D) Fix the Trail Blazer; $6,280

 

Answer the following questions using the information below:

 

Fearless Frank’s Fertilizer Farm produces fertilizer and distributes the product by using his tanker trucks. Frank’s uses budgeted fleet hours to allocate variable manufacturing overhead. The following information pertains to the company’s manufacturing overhead data:

 

Budgeted output units                                                                                        600 truckloads

Budgeted fleet hours                                                                                                     450 hours

Budgeted pounds of fertilizer                                                                   24,000,000 pounds

Budgeted variable manufacturing overhead costs for 600 loads                        $75,000

 

Actual output units produced and delivered                                              630 truckloads

Actual fleet hours                                                                                                          436 hours

Actual pounds of fertilizer produced and delivered                         25,200,000 pounds

Actual variable manufacturing overhead costs                                                       $76,500

 

23.    What is the flexible–budget amount for variable manufacturing overhead?

A) $76,500           B) $80,000            C) $78,750            D) $75,000

 

Answer the following questions using the information below:

 

Lukehart Industries, Inc., produces air purifiers. Lukehart, Inc., produces the air purifiers in batches. To manufacture a batch of the purifiers, Lukehart, Inc., must set up the machines and assembly line tooling. Setup costs are batch–level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and tooling for different models of the air purifiers.

 

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup–hours. The following information pertains to June 2011:

 

                                                                                                          Budget                   Actual

                                                                                                      Amounts              Amounts

        Units produced and sold                                                   10,000                      9,000

        Batch size (number of units per batch)                                400                         375

        Setup–hours per batch                                                                   6                          5.5

        Variable overhead cost per setup–hour                               $50                         $52

        Total fixed setup overhead costs                                   $18,000                 $17,750

 

24.    Calculate the efficiency variance for variable setup overhead costs.               

A) $114 favorable              B) $264 unfavorable

C) $264 favorable              D) $150 favorable

 

Answer the following questions using the information below:

 

Manash Company manufactures tires.  Some of the company’s data was misplaced.  Use the following information to replace the lost data:

 

	Actual Results	Flexible Budget Variances	Flexible Budget	Sales–Volume Variances	Static Budget
Units sold	450,000		450,000		412,500
Revenues	$168,320	$4,000 F	(A)	$5,600 U	(B)
Variable costs	(C)	$800 U	$63,440	$9,360 F	$72,800
Fixed costs	$33,120	$3,440 F	$36,560	0	$36,560
Operating income	$70,960	(D)	$64,320	(E)	$60,560

 

25.    What are the actual variable costs (C)?

A) $72,800           B) $62,640            C) $64,240            D) $54,080

 

26.    Activity–based budgeting does NOT require:          

A) knowledge of the organization’s activities

B) knowledge about how activities affect costs

C) specialized expertise in financial management and control

D) the ability to see how the organization’s different activities fit together

 

Answer the following questions using the information below:

 

The following information pertains to the January operating budget for Casey Corporation.

 

        ∙       Budgeted sales for January $100,000 and February $200,000.

        ∙       Collections for sales are 60% in the month of sale and 40% the next month.

        ∙       Gross margin is 30% of sales.

        ∙       Administrative costs are $10,000 each month

        ∙       Beginning accounts receivable is $20,000.

        ∙       Beginning inventory is $14,000.

        ∙       Beginning accounts payable is $60,000. (All from inventory purchases.)

        ∙       Purchases are paid in full the following month.

        ∙       Desired ending inventory is 20% of next month’s cost of goods sold (COGS).

 

27.    For January, budgeted cash payments for purchases are:   

A) $14,000           B) $60,000

C) $70,000            D) None of these answers are correct.

 

28.    To prepare the cash budget, all of the following budgets are required EXCEPT:         

A) cost of goods sold budget          B) capital expenditures budget

C) revenue budget             D) budgeted balance sheet

 

29.    Brown Corporation recently purchased a new machine for $339,013.20 with a ten–year life. The old equipment has a remaining life of ten years and no disposal value at the time of replacement. Net cash flows will be $60,000 per year. What is the internal rate of return?           

A) 12% B) 16%   C) 20% D) 24%

 

 

30.    In the analysis of a capital budgeting proposal, for which of the following items are there NO after–tax consequences?

 

A) gain or loss on the disposal of the asset

B) reduction of working capital balances at the end of the useful life of the capital asset

C) cash flow from operations

D) None of these answers is correct.

 

31.    The phenol Corporation has an annual cash inflow from operations from its investment in a capital asset of $25,000 each year for five years. The corporation’s income tax rate is 40%. Calculate the five years total after–tax cash inflow from operations.

 

A) $ 75,000          B) $ 150,000         C) $ 125,000        D) $25,000

 

32.    The physical–measure method:   

A) allocates joint costs to joint products on the basis of the relative sales value at the splitoff point

B) allocates joint costs to joint products in a way that each product has an identical gross–margin percentage

C) allocates joint costs to joint products on the basis of a comparable physical measure at the splitoff point

D) allocates joint costs to joint products on the basis of relative NRV

 

33.    Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as:

 

A) a post–investment audit            B) management control

C) the audit trail                D) a cost–benefit analysis

 

34.    Which of the following statements is true in regard to the cause–and–effect relationship between allocated joint costs and individual products?   

 

A) A low individual product value results in a low level of joint costs.

B) A high individual product value results in a low level of joint costs.

C) A high individual product value results in a high level of joint costs.

D) There is no cause–and–effect relationship.

 

 

35.    Which cost allocation method should NOT be used to eliminate the conflict between decision making and performance evaluation?               

 

A) constant gross–margin percentage NRV              B) NRV

C) physical measures      D) sales value at splitoff

 

Answer the following questions using the information below:

 

The Oxnard Corporation processes a liquid component up to the splitoff point where two products, Mr. DirtOut and Mr. SinkClean, are produced and sold. There was no beginning inventory. The following material was collected for the month of January:

 

        Direct materials processed:                 250,000 gallons (242,500 gallons of good product)

 

        Production:       Mr. DirtOut             147,500 gallons

                                    Mr. SinkClean        95,000 gallons

 

        Sales:                  Mr. DirtOut             140,500 at $110 per gallon

                                    Mr. SinkClean        91,000 at $ 100 per gallon

 

The cost of purchasing 250,000 gallons of direct materials and processing it up to the splitoff point to yield a total of 242,500 gallons of good product was $760,000.

 

36.    What are the physical–volume proportions to allocate joint costs for Mr. DirtOut and Mr. SinkClean, respectively?

 

A) 39.18% and 60.82%     B) 59.00% and 41.00%

C) 60.82% and 39.18%     D) 59.79% and 40.21%

 

TRUE/FALSE.  Mark ‘A’ on the Scantron if the statement is true and ‘B’ if the statement is false.

 

37.    In calculating the net initial investment cash flows, any increase in working capital required for the project should be included.

38.    Discounted cash flow methods focus on operating income.              

39.    When replacing an old machine with a new machine, the purchase price of the old machine is a relevant cost.                

40.    The production method of accounting for byproducts recognizes byproducts in the financial statements at the time when production is completed.
               

41.    The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.
               

42.    The sales value at splitoff method is an example of allocating costs using physical measures.            

 

43.    One way to manage both variable and fixed overhead costs is to eliminate value–adding activities.  

 

44.    Downsizing is an integrated approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future.     

 

45.    Fixed costs may have a spending variance and/or an efficiency variance.