200
PRACTICE ACC EXAM QUESTIONS Spring 2009
TABLE OF CONTENTS
Selecting a Form of Business Ownership ................................................ 3 The Role of Accounting in Business ........................................................ 4 The Cash Basis of Accounting ................................................................. 6 The Accrual Basis of Accounting ............................................................ 9 Introduction to Taxation ....................................................................... 13 Ch 1: Accounting Information and Managerial Decisions .................. 15 Ch 3: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows ........................................................................................ 16 Ch 4: Cost Behavior and Relevant Costs .............................................. 20 Ch 5: Job Costing, Process Costing, and Operations Costing ........... 23 Ch 6: Activity-Based Costing ............................................................... 29 Ch 7: Cost-Volume-Profit Analysis and Variable Costing .................. 30 Ch 8: Relevant Costs and Product Planning Decisions ....................... 38 Ch 9: Long-Term (Capital Investment) Decisions ............................... 44 Ch 10: The Use of Budgets in Planning and Decision Making ........... 48 Ch 11: Variance Analysis- A Tool for Cost Control and Performance Evaluation ............................................................................................... 51 Ch 12: Decentralization and Performance Evaluation ........................ 53
2
Selecting a Form of Business Ownership
(from Section 1)
1. The owners of a(n) _________________ are subject to limited liability as in a corporati on, but are taxed as if the firm was a partnership. A. Sole proprietorship B. S-Corporation C. C-Corporation D. General partnership E. None of the above 2. Compared to sole proprietorships and partnerships, a major advantage of corporations is that they: A. are easier to form. B. have greater access to funds. C. receive more favorable tax treatment. D. avoid agency problems. 3. Double taxation is a disadvantage to which type of organization? A. Sole proprietorship B. General partnership C. Limited partnership D. S-Corporation E. C-Corporation 4. Which type of organization is required to follow generally accepted accounting principles (GAAP)? A. Sole proprietorship B. General partnership C. S-Corporation D. Publicly-held corporation E. Privately-held corporation 5. The XYZ Corporation has total earnings of $20 million and decides to pay its stockholders a dividend of $8 million. If the corporate tax rate is 30% and the personal tax rate on individual stockholders is 25%, the total amount of taxes paid on XYZs earnings would be: A. $11 million B. $8 million C. $6 million D. $5 million E. $3 million
SOLUTIONS: 1. B 2. B 3. E 4. D 5. B
3
The Role of Accounting in Business
(from Section 1) PROBLEM I: The following information is available for the ABC Company. Beginning of year: Assets Liabilities Owners Equity End of year: Assets Liabilities Owners Equity During the year, the following occurred: Additional issue of capital stock Revenues Expenses Dividends
$500,000 300,000 ?
700,000 ? 450,000
15,000 600,000 ? 50,000
REQUIRED: Solve for the three question marks above. Put your answers in the blanks below: Beginning of year Owners Equity = ________________ End of year Liabilities = ________________ Expenses during the year = ________________
MULTIPLE CHOICE: 1. Which financial statement is normally prepared first? A. B. C. D. Statement of retained earnings Balance sheet Statement of cash flows Income statement
2. Which accounting concept is being applied in the following statement: Material litigation involving the corporation is described in a footnote. A. B. C. D. E. Cost Concept Objectivity Concept Adequate Disclosure Concept Going Concern Concept Matching Concept 4
3. Which accounting concept is being applied in the following statement: Equipment currently valued at $20,000 is reported at its original purchase price of $30,000. A. B. C. D. E. Cost Concept Objectivity Concept Adequate Disclosure Concept Going Concern Concept Matching Concept
4. Which accounting concept is being applied in the following statement: If this concept was ignored, the confidence of users in the financial statements could not be maintained. A. B. C. D. E. Cost Concept Objectivity Concept Adequate Disclosure Concept Going Concern Concept Matching Concept
SOLUTIONS: PROBLEM I: Beg OE = $200,000 End Liab = $250,000 Expenses = $315,000 1. 2. 3. 4. D C A B
5
The Cash Basis of Accounting
(from Section 2) PROBLEM I: After recording all of its transactions for the first month of operations, the Tarheel Corporation had the following account balances (listed in alphabetical order): Cash Contributed Capital Dividends Equipment Land Miscellaneous expense Notes Payable Rent expense Salaries expense Sales Revenue 39,000 10,000 1,000 75,000 18,000 52,000 8,000 15,000 8,000 190,000
HINT: Before answering the following questions, label which financial statement each of the above accounts would go on. There is only one place for each of the above. Also note that since this is a brand new company, the beginning retained earnings balance is zero. A. What is net income?
B. What are total assets?
C. What are total liabilities?
D. What is the ending retained earnings balance?
E. What is total owners equity?
6
MULTIPLE CHOICE 1. During 2005, Thomas Inc. earned fees of $150,000, of which $100,000 was collected in cash. The company also incurred $65,000 in expenses, of which $35,000 was paid. If Thomas Inc. uses the cash basis of accounting, what was net income for 2005? A. B. C. D. $100,000 $65,000 $85,000 $280,000
2. During 2005, Jagger Inc. earned revenue totaling $1,000,000, of which $700,000 was collected in cash in 2003. The company also incurred $200,000 in expenses, of which $100,000 was paid in 2005. If Jagger uses the cash basis of accounting, net income for 2005 would be: A. $600,000 B. $500,000 C. $800,000 D. $900,000 E. $700,000 3. Stager Co. uses the cash basis of accounting. Which of the following transactions by Stager would cause stockholders equity to immediately increase? A. B. C. D. E. Purchase of store equipment Borrowing money from a bank Payment of dividends Cash sale to customer Payment of store rent
4. Rivers Inc. uses the cash basis of accounting. The company began business in September of 2004 and had the following transactions occur in its first month of operations: Sept 1 Sept 3 Sept 4 Sept 5 Sept 7 Sept 20 Sept 25 The company was started by the owners investing $5,000 cash in the business. Borrowed $10,000 from the bank. Purchased equipment costing $3,000. Received cash from fees earned totaling $2,000. Paid advertising, $100. Paid salaries, $800. Paid dividends, $100.
After doing transaction analysis on the above information, what would be the cash balance at the end of September? A. B. C. D. E. $16,000 $13,000 $10,000 $3,000 $17,900
7
5. After doing transaction analysis on the information, what would be the ending retained earnings balance at the end of September? A. B. C. D. E. $1,100 $18,000 $5,900 $6,000 $1,000
-----------------------------------------------------------------------------------------------------------SOLUTIONS: PROBLEM I: A. B. C. D. E. $115,000 $132,000 $8,000 $114,000 $124,000
MULTIPLE CHOICE: 1. 2. 3. 4. 5. B A D B E
8
The Accrual Basis of Accounting
(from Section 3) PROBLEM I: Wolfpack, Inc. sells inventory. The company uses the accrual basis of accounting. Below are transactions that Wolfpack incurred during its first month of operations: A. B. C. D. E. F. G. H. Wolfpack, Inc. was created when the owners deposited $25,000 in the cash account. The company purchased equipment for $7,000 cash. The company paid for one-years worth of insurance totaling $1,200. The company collected $500 from a customer for services to be provided in the future. The company provided $4,000 worth of services to a customer on account. The company paid salaries totaling $1,000. The company paid a dividend of $500 to the owners. The company collected $1,000 from a customer on their account.
REQUIRED: Enter each of the above transactions into the worksheet below. You do not need to do end of month adjustments. Remember to do the following: Write the column headings for the accounts affected in the above transactions. All of the columns in the worksheet may not necessarily be used. Put the amount and whether it is increasing or decreasing in the correct column If your transaction affects retained earnings, also show which particular component of retained earnings is affected. After recorded all the above transactions, total up your column headings. = + A. B. C. D. E. F. G. H. 9
1. Prepaid Insurance is an example of which type of account? A. B. C. D. E. Asset Liability Stockholders Equity Revenue Expense
2. As prepaid insurance expires over time, which of the following statements is true? (Assume the company uses accrual-basis accounting) A. B. C. D. E. Assets will increase Liabilities will decrease Revenues will increase Retained earnings will decrease Contributed capital will decrease
3. On 1/1/2003, a company (accrual-basis) collected $6,000 from a customer to be earned over the next six month. At the end of the first month, to properly reflect revenues, which account should be increased? A. B. C. D. E. Cash Unearned Revenue Retained Earnings Accounts Receivable Accounts Payable
4. True or False: All public corporations must use the cash basis of accounting. 5. A company sold inventory costing $2,000 for $5,000 cash. What is the overall net effect on the accounting equation? Assets Increase Increase Decrease Decrease No effect Liabilities Increase No effect No effect Decrease Decrease Owners Equity No effect Increase Decrease No effect Increase
A. B. C. D. E.
6. Which of the following transactions would cause an increase in owners equity? A. B. C. D. E. The company pays dividends. The company purchases a machine by signing a note payable. The company issued stock to new stockholders. The company paid off an account payable. The company receives cash for services to be provided in the future.
10
7. Which of the following accounts is an asset? A. B. C. D. E. Prepaid Insurance Unearned Revenue Capital Stock Retained Earnings Sales Revenue
8. During 2005, Jagger Inc. earned revenue totaling $1,000,000, of which $700,000 was collected in cash in 2005. The company also incurred $200,000 in expenses, of which $100,000 was paid in 2005. If Jagger uses the accrual basis of accounting, net income for 2005 would be: A. B. C. D. E. $600,000 $500,000 $800,000 $900,000 $700,000
9. As Unearned Revenue is earned over time, which of the following statements is TRUE? (assume accrual basis accounting) A. B. C. D. E. Assets will increase Assets will decrease Liabilities will increase Liabilities will decrease Owners Equity will decrease
10. During 2005, Thomas Inc. earned fees of $150,000, of which $100,000 was collected in cash. The company also incurred $65,000 in expenses, of which $35,000 was paid. If Thomas Inc. uses the accrual basis of accounting, what is net income for 2005? A. B. C. D. E. $100,000 $65,000 $85,000 $150,000 $280,000
11
SOLUTIONS: PROBLEM I: Cash A. B. C. D. E. F. G. H. Bal + 25,000 (7,000) (1,200) + 500 + 4,000 (1,000) (500) +1,000 16,800 AR Equip. Prepaid Ins = Unearned + Revenue CC + 25,000 + 7,000 + 1,200 + 500 + 4,000 (1,000) (500) (1,000) 3,000 7,000 1,200 500 25,000 2,500 4,000 4,000 1,000 500 1,000 500 RE Rev Exp Div
MULTIPLE CHOICE: 1. A 2. D 3. C 4. FALSE 5. B 6. C 7. A 8. C 9. D 10. C
12
Introduction to Taxation
(from Section 4) PROBLEM I: Caroline is a single individual. In 2007, she has gross income of $60,000. Her total itemized deductions are $15,000, her standard deduction is $5,350. She can claim one personal exemption equal to $3,400. A. Using the tax tables provided in Appendix A, what is her tax liability for 2007?
B. If Caroline has already had $8,000 withheld from her paycheck, does she need to send in additional money to the IRS, or is she owed a refund?
PROBLEM II: Thayer Enterprises (a corporation) reports total income of $100,000. The corporations taxable income is $80,000. A. What is the companys marginal tax rate? B. What is the companys average tax rate?
PROBLEM III: You would like to buy a $1,000 bond. Your marginal tax rate is 15%. You have narrowed it down to two choices: Buy a 5% taxable bond or a 4% municipal bond. Based on your circumstances, which bond would be the better financial choice and why? Clearly show your calculations and explain your answer.
13
MULTIPLE CHOICE: 1. Which of the following would be an example of a progressive tax? A. B. C. D. E. Federal Income Tax Sales Taxes FICA tax Excise tax on gasoline All of the above
2. True or False: The FICA tax is always a proportional tax. 3. True or False: Typically, only people who rent their homes qualify for the itemized tax deduction. 4. You would like to buy a $10,000 bond. Your marginal tax rate is 30%. You have narrowed it down to two choices: A 6% taxable bond or a 5% municipal bond. Taking into account taxes, which of the following statements is TRUE? A. You would be $100 better off by buying the municipal bond. B. You would be $30 better off by buying the taxable bond. C. You would be $320 better off by buying the municipal bond. D. You would be $80 better off by buying the municipal bond. E. You would be $100 better off by buying the taxable bond. ------------------------------------------------------------------------------------------------------ ----SOLUTIONS: PROBLEM I: A. $6,823.75 B. $1,176.25 refund due PROBLEM II: A. 34% B. 19.3% PROBLEM III: You would be better of by $2.50 if you buy the taxable bond. MULTIPLE CHOICE: 1. A 2. FALSE 3. FALSE 4. D
14
Ch 1: Accounting Information and Managerial Decisions
1. In the past 10-20 years, the role of the managerial accountant has: A. B. C. D. E. not changed much. been almost entirely eliminated. adapted to changes in the environment of business. replaced the role of the financial accountant. taken on the role of a tax accountant.
2. Operational planning: A. B. C. D. is the same as strategic planning. addresses long-terms goals and objectives. involves the development of short-term objectives and goals. all of the above
3. When comparing financial and managerial accounting, which of the following statements is true? A. Financial accounting is more flexible than managerial accounting. B. Managerial accounting is more forward looking, often emphasizing the future rather than the past. C. Financial accounting is more timely, often sacrificing accuracy in the process. D. Managerial accounting reports are required to follow generally accepted accounting principles. E. Financial accounting often emphasizes segments of an organization rather than the company as a whole. 4. Sunk costs: A. B. C. D. have already been incurred. cannot be avoided are not relevant. all of the above.
SOLUTIONS: 1. 2. 3. 4. C C B D
15
Ch 3: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
PROBLEM I: Wolfpack Inc. had the following information available for the month of September: Beginning $3,000 35,000 12,000 Ending $1,000 40,000 10,000
Raw materials inventory Work-in-process inventory Finished goods inventory During the month of September: Raw materials purchased Direct Labor Overhead
$20,000 10,000 7,000
A. How much raw material was used in September? CIRCLE ANSWER.
B. What was cost of goods manufactured in September? CIRCLE ANSWER.
C. What was cost of goods sold in September? CIRCLE ANSWER.
16
MULTIPLE CHOICE: Use the following information to answer the next 10 questions. A company uses job-order costing. Use the following key to indicate the best cost classification for each of the following costs: A = Direct materials (Product cost) B = Direct labor (Product cost) C = Manufacturing Overhead (Product cost) D = Period Cost 1. Factory utilities 2. Advertising 3. Machine operator salaries 4. Administrative building rent 5. Indirect materials used in the factory 6. Direct materials used in the factory 7. Supplies used in the administrative building 8. Shipping charges 9. Factory maintenance worker salaries 10. Insurance on factory equipment 11. The account called Work-in-Process would be found on which financial statement? A. Income Statement B. Statement of Retained Earnings C. Balance Sheet D. All of the above E. None of the above 12. The account called Cost of Goods Sold would be found on which financial statement? A. Income Statement B. Statement of Retained Earnings C. Balance Sheet D. All of the above E. None of the above
17
13. During 2005, the Happy Face Co. manufactured a product that had a product cost of $20 per unit. Total non-manufacturing costs for 2005 were $50,000. If 50,000 units were produced in 2005, of which 40,000 units were sold for $50 each, what would be net income? A. B. C. D. E. $1,200,000 $1,450,000 $1,650,000 $1,949,950 $1,150,000
14. It is imperative that companies using a just-in-time (JIT) system: A. B. C. D. E. be willing to accept a higher level of defects. have the ability to manufacture products quickly and efficiently. keep a lot of raw materials on hand. have employees who refuse to work overtime. all of the above
15. Wolfpack Inc. had the following information available for the month of August: Beginning $10,000 80,000 20,000 Ending $20,000 70,000 25,000
Raw materials inventory --------------Work-in-process inventory -----------Finished goods inventory -------------During the month of August: Raw material purchased --------------Direct labor incurred -----------------Overhead incurred -------------------What would be cost of goods sold for August? A. B. C. D. E. $255,000 $320,000 $380,000 $340,000 $315,000
$70,000 200,000 50,000
18
SOLUTIONS: PROBLEM I: A. $22,000 B. $34,000 C. $36,000 MULTIPLE CHOICE: 1. C 2. D 3. B 4. D 5. C 6. A 7. D 8. D 9. C 10. C 11. C 12. A 13. E 14. B 15. E
19
Ch 4: Cost Behavior and Relevant Costs
PROBLEM I: Carter Company plans to double its advertising budget next year, which will increase its fixed costs by 20%. Variable costs per unit will remain the same. The current year costs are as follows: - Variable costs per unit - Fixed costs $10 $8,000
If next years production is 30,000 units, estimated total costs would be: CIRCLE ANSWER.
PROBLEM II: The administrator of Wake Hospital would like a cost formula to help predict overhead costs for the number of patients admitted during a month. The following data for the past five months has been collected. The activity base is number of patients admitted. # of patients admitted 1,800 1,900 1,700 1,600 1,500 Overhead Costs $14,700 15,200 13,700 14,000 14,300
Month May -------------June -------------July --------------August ----------September -------
A. Using the high-low method, what is the variable cost per patient? Round to nearest penny. CIRCLE ANSWER.
B. Using the high-low method, what are the fixed costs per month? CIRCLE ANSWER.
C. Using the high-low method, write the equation to predict total overhead costs for the month. CIRCLE ANSWER. (Answer should be in the format of Y = a + bx)
D. If management expects 2,000 patients to be admitted in October, what are the total expected overhead costs for the month? CIRCLE ANSWER.
20
MULTIPLE CHOICE: 1. You are given the following cost and volume information for a product: Volume Total Cost 1 unit $25 5 units 125 10 units 250 Which type of cost is given? A. B. C. D. E. Variable cost Fixed cost Step cost Mixed cost Cannot be determined
2. Yang Mfg. makes a product called Yin. The company incurs three cost types (Type I, II, and III) in the production of Yin. The relevant range of operations is between 2,500 units and 10,000 units of Yin per month. Per unit costs at two activity levels for each cost type are presented below. Type I $4.00 $4.00 Type II $9.00 $6.00 Type III $4.00 $3.00
5,000 units 7,500 units
Refer to the above information. Identify the cost behavior of each type. Type I Fixed Fixed Variable Variable Mixed Type II Variable Mixed Mixed Fixed Variable Type III Mixed Variable Fixed Mixed Fixed
A. B. C. D. E.
3. Within the relevant range, which of the following statements is true with respect to fixed costs? A. Fixed costs per unit increase as the activity level increases. B. Fixed costs per unit remain constant as the activity level changes. C. Fixed costs per unit decreases as the activity level increases. D. Fixed costs in total dollar amount will decrease as the activity level decreases.
21
4. A mixed cost is one which: A. Arises from annual decisions by management to spend in certain areas such as research. B. Contains both variable and fixed cost elements. C. Varies in direct proportion to changes in a particular activity. D. Remains constant in total dollar amount within the relevant range. 5. The Ritter Company plans on making a tax-deductible contribution of $2,000 to a local charity. If the companys tax rate is 30%, what would be the after-tax cost? A. $2,000 B. $1,400 C. $600 D. $2,600 E. $3,400 SOLUTIONS: PROBLEM I: $309,600 PROBLEM II: A. B. C. D. $2.25 $10,925 Y=10,925 + 2.25x $15,425
MULTIPLE CHOICE: 1. A 2. D 3. C 4. B 5. B
22
Ch 5: Job Costing, Process Costing, and Operations Costing
PROBLEM I: NYC Inc. is a legal firm. The company allocated overhead based on direct labor hours. At the beginning of 2006, the company estimated total overhead will be $100,000 based on an estimated 20,000 direct labor hours worked. At the end of the year, actual overhead costs totaled $115,000 and actual direct labor hours worked were 22,000. A. What was the predetermined overhead rate? CIRCLE ANSWER.
B. Assume that during the year, a particular job took 115 direct labor hours to complete. How much overhead should be assigned to that job? CIRCLE ANSWER.
C. At the end of the year, by how much was total overhead under or over-applied? Also, indicate whether it was over or under-applied. CIRCLE ANSWER.
23
PROBLEM II: Watkins Inc. manufactures a product that goes through two departments. The company applies the FIFO method to process costing. Information relating to activity in the first department is as follows: # units Work-in-process Beginning (30% complete) Started in current period Work-in-process Ending (80% complete) 10,000 units 200,000 units 25,000 units Costs (DM and CC) $20,000 $400,000
A. What are the total equivalent units for the period? CIRCLE ANSWER.
B. What is the cost per equivalent unit for the period? Round to nearest penny. CIRCLE ANSWER.
C. What is the cost of ending work-in-process inventory at the end of the period? CIRCLE ANSWER.
D. What is the cost of goods manufactured for the period? CIRCLE ANSWER.
24
MULTIPLE CHOICE 1. Conversion Costs are made up of which types of costs? A. B. C. D. E. Direct materials only Direct labor only Direct materials and overhead Direct labor and overhead Direct materials, direct labor, and overhead
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS: Gaddy Inc. manufactures a product that goes through three departments. The company applies the FIFO method to process costing. Information relating to activity in the first department is as follows: # units Work-in-process Beginning (40% complete) Started in current period Work-in-process Ending (30% complete) 2. What are the total equivalent units for the period? A. B. C. D. E. 97,400 eus 102,400 eus 100,600 eus 96,400 eus 113,000 eus 5,000 units 100,000 units 8,000 units Costs (DM and CC) $30,000 $400,000
3. Assume that the total equivalent units for the period were 100,000 eus, what would be the cost per equivalent unit? A. B. C. D. E. $25 $.25 $4 $.23 $4.30
25
4. The ABC Company under-applied overhead in 2006 by $4,000. At the end of 2006, they had the following account balances before the end of year adjustment to dispense of this under applied overhead: Ending direct materials --------------------$ 6,000 Ending work-in-process -------------------0 Ending finished goods ---------------------0 Cost of goods sold -------------------------28,000 Sales revenue -------------------------------60,000 Selling and administrative expenses ----12,000 After correctly adjusting for the under-applied overhead of $4,000, which of the following statements is true regarding the balances that should be shown on either the balance sheet or income statement for 2004? A. Direct materials should have a balance of $10,000. B. Selling and administrative expenses should have a balance of $8,000. C. Sales revenue should have a balance of $64,000. D. Cost of goods sold should have a balance of $32,000. E. Cost of goods sold should have a balance of $24,000. 5. In a traditional manufacturing environment, applied overhead is first accumulated in the ___________ account. A. cost of goods sold account B. direct materials account C. finished goods account D. work-in-process account E. sales revenue account 6. In its initial year of operation, Maple Inc. started 4,000 units of a particular product. At the end of the period, 800 of these units were only 25% complete. How many equivalent units were produced in the period? A. 3,000 B. 4,200 C. 3,800 D. 3,200 E. 3,400
26
7. When using process costing, which of the following statements is true regarding the FIFO method? A. It assumes that all units in beginning and ending inventory are the same percentage complete. B. It assumes that of the units completed in the current period, the first ones completed were beginning inventory units. C. It assumes that of the units completed in the current period, the first ones completed were ending inventory units. D. It assumes that of the units completed in the current period, one-half were from the beginning inventory and the other half were from units started in the current period. E. It assumes that all the units completed in the current period were started in the current period. 8. Hammond Inc. has the following information available for 2006: Work-in-process - beginning (25% complete) Started in current period Work-in-process ending ( 30% complete) 40,000 units 60,000 units 10,000 units
Using the FIFO method of process costing, how many units were both started and completed in 2006? A. B. C. D. E. 70,000 units 60,000 units 110,000 units 40,000 units 50,000 units
27
SOLUTIONS: PROBLEM I: A. $5 per direct labor hour B. $575 C. $5,000 underapplied PROBLEM II: A. Step #1: Compute number of EUs started and completed in current period: Beginning units Add: started in current period Less: Ending units Finished 10,000 units 200,000 (25,000) 185,000 (10,000 beg from and 175,000 started and completed in current period)
Step #2: Compute total EUs for the period. Beginning EUs (10,000 X 70%) Started and Completed in current period Ending EUs (25,000 X 80%) Total EUs 7,000 175,000 20,000 202,000
B. Cost per EU: $400,000/202,000 = $1.98 per EU C. Cost of Ending WIP: 20,000 EUs in ending WIP X $1.98 per EU = $39,600 D. Beginning WIP Add: Current Costs Less: Ending WIP CGM MULTIPLE CHOICE: 1. D 2. A 3. C 4. D 5. D 6. E 7. B 8. E $20,000 400,000 (39,600) $380,400
28
Ch 6: Activity-Based Costing
PROBLEM I: The following overhead information is available for the Columbus Corporation for the year ended June 30, 2006: Activity Purchasing Receiving Machine Setups Allocation Base Number of purchase orders Number of shipments received Number of setups Overhead Cost $300,000 100,000 500,000
The activities were as follows: Purchase orders -----------Shipments received ------Machine setups -----------30,000 20,000 2,500
A. What is the overhead rate for purchasing? B. What is the overhead rate for receiving? C. What is the overhead rate for machine setups? MULTIPLE CHOICE: 1. Which of the following statements comparing traditional and activity-based costing (ABC) systems is TRUE? A. B. C. D. E. ABC and traditional costing systems often produce similar product-cost information. ABC systems are generally more accurate than traditional costing systems. Traditional costing systems are generally more accurate than ABC systems. ABC systems are usually less expensive to implement than traditional costing systems. ABC systems usually result in a plant-wide overhead application rate.
SOLUTIONS: PROBLEM I: A. $10 per purchase order B. $5 per shipment received C. $200 per setup Multiple Choice: 1. B
29
Ch 7: Cost-Volume-Profit Analysis and Variable Costing
PROBLEM I Use the following information to answers questions A through E below: The ABC Company sells one product. The following information is available for this product: Sales price Variable Costs: Variable product costs Variable period costs Fixed Costs: Fixed product costs Fixed period costs $60 per unit
$12 per unit $ 6 per unit
$60,000 $140,000
A. What would be the contribution margin per unit in terms of dollars?
B. What would be the contribution margin ratio expressed as a percentage?
C. What is the break-even point in terms of units? Round to nearest whole unit.
D. Fill in the blank: For each additional dollar in sales, net income will go up by $ _____.
E. Assume that total sales are currently totaling $900,000. If sales go up by 10%, what will be the increase in net income?
30
PROBLEM II: Jasper, Inc. produces one type of machine with the following costs and revenues for the year: Total revenues Total fixed costs Total variable costs Total units produced and sold $5,000,000 $1,600,000 $2,000,000 100,000 units
A. What is the selling price per unit?
B. What is the break-even point in terms of sales dollars? Round to nearest whole dollar.
C. What is the companys operating leverage? Round to nearest hundredth.
D. How many units must be sold in order to earn an operating profit of $1,500,000 (ignore income taxes)? Round to nearest whole unit.
E. If the company is in a 40% tax bracket, what would sales have to be for an after -tax net income of $1,000,000?
PROBLEM III: Wolfpack Inc. plans to sell 15,000 special Peach Bowl t-shirts with fixed costs of $20,000 and variable expenses at 60 percent of sales.
31
QUESTION: In order to have net income of $100,000, the sales price of each t-shirt must be set at what? Ignore taxes.
PROBLEM IV: Compton Company produces two products, A and B. 60% of sales are of product A, while 40% are of product B. Other information is as follows: Product A $200 120 Product B $160 100
Sales price per unit Variable costs per unit
In addition, the company incurs $50,000 in fixed costs per year. QUESTION: In order to earn a profit of $200,000, how many units of Product A need to be sold? Round to nearest whole unit. Ignore income taxes.
32
MULTIPLE CHOICE: 1. Which of the following would normally be classified as a variable cost? A. B. C. D. E. Direct materials Direct labor Variable overhead Both B and C A, B, and C
2. Company A has a lower operating leverage ratio than Company B. Which of the following statements is TRUE? A. Company As net income is lower than Company Bs net income. B. Given the same percentage increase in sales, Company As net income would increase less than Company Bs. C. Company As sales revenue must be less than Company Bs. D. Company A has few assets than Company B. E. All of the above are true. 3. Sales of gizmos are down, and management has planned to increase salespersons commissions on the sales of this product by 10%. If sales revenue goes up by more than 10% as a result of this change, which of the following statements is TRUE (all else being equal)? A. B. C. D. Contribution margin will increase Variable costs will decrease Fixed costs will increase Net income will decrease
4. Decision makers should consider: A. B. C. D. quantitative factors qualitative factors both quantitative and qualitative factors none of the above
33
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT FOUR QUESTIONS: The ABC Company sells one product. The following information is available for this product: Sales price Variable costs: Variable product costs Variable period costs Fixed costs: Fixed product costs Fixed period costs $100 per unit
$20 per unit $10 per unit
$50,000 $30,000
5. Fill in the blank: For each additional unit sold, net income will go up by $ ______. A. B. C. D. E. $70 $.70 $100 $30 $79,970
6. Fill in the blank: For each additional dollar in sales, net income will go up by $______. A. B. C. D. E. $70 $.70 $100 $30 $79,970
7. What is the break-even point in terms of units? Round to nearest whole unit. A. B. C. D. E. 114,286 units 70 units 80,000 units 1,143 units 800 units
34
8. Assume that sales are currently totaling $500,000. If sales go up by 20%, what will be the increase in net income (ignore taxes)? A. B. C. D. E. $350,000 $100,000 $520,000 $600,000 $70,000
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT THREE QUESTIONS: Casper, Inc. produced one type of product with the following costs and revenues for the year: Total revenues Total variable costs Total fixed costs Total # of units produced and sold $600,000 $300,000 $150,000 20,000 units
9. What is the companys operating leverage? Round to nearest hundredth. A. .5 B. 2.0 C. 4.0 D. 30.0 E. .25 10. How many units must be sold in order to earn a profit of $800,000? Ignore income taxes and round to nearest whole unit. A. B. C. D. E. 63,334 units 10,000 units 1,900,000 units 53,333 units 93,333 units
11. If the company is in a 40% tax bracket, what would sales have to be to generate an after -tax net income of $900,000? Round to nearest whole dollar. A. B. C. D. E. $3,300,000 $2,250,000 $4,800,000 $1,020,000 $5,800,000
35
12. Tarheel Corp plans to sell 10,000 special t-shirts with fixed costs of $30,000 and variable expenses at 70% of sales. In order to generate net income of $100,000, the sales price of each t-shirt must be set at what? Ignore taxes. A. B. C. D. E. $18,57 $23.33 $43.33 $13.00 $30.33
13. Marshall Inc. produces three products, A, B, and C. 50% of sales are of product A, 30% are of product B, and 20% are of Product C. Other information is as follows: Product A $100 60 Product B $80 50 Product C $70 40
Sales price per unit Variable costs per unit
**In addition, the company incurs $40,000 in fixed costs per year. In order to earn a profit of $200,000, how many units of Product A need to be sold? Round to nearest whole unit. Ignore income taxes. A. B. C. D. E. 3,429 units 2,728 units 3,600 units 1,200 units 2,857 units
14. Which of the following is least likely to be a variable cost? A. B. C. D. Rent Direct material Direct labor Factory supplies
36
SOLUTIONS: PROBLEM I: A. B. C. D. E. PROBLEM II: A. B. C. D. E. $50 $2,666,667 2.14 103,333 units $5,444,445 $42 70% 4,762 units 70 cents $63,000
PROBLEM III: $20 per unit PROBLEM IV: 2,083 units of product A MULTIPLE CHOICE: 1. E 2. B 3. A 4. C 5. A 6. B 7. D 8. E 9. B 10. A 11. A 12. C 13. A 14. A
37
Ch 8: Relevant Costs and Product Planning Decisions
PROBLEM I: Pleasant Creations has the following three product lines: Product A $130,000 38,000 92,000 85,000 $7,000 Product B $130,000 50,000 80,000 90,000 ($10,000) Product C $250,000 60,000 190,000 100,000 $90,000 Total $510,000 148,000 362,000 275,000 $87,000
Sales Variable Costs CM Fixed Costs Net Income
The company is considering the discontinuation of Product B. If they do discontinue Prod uct B, one-half of Product Bs fixed costs would go away. QUESTION: By how much would net income increase or decrease if Product B were discontinued? Indicate whether an increase or decrease.
PROBLEM II: Bakery Creations has a particular pastry it makes that can be sold immediately after baking or decorated and then sold for a higher price. The following information is available regarding the sales prices and costs if it is sold immediately after baking or processed further: Initial sales price -------------------Initial cost ---------------------------Sales Price after decorating -------Cost of decorating -----------------$2.00 .50 2.30 .40
Regardless of whether the pastries are decorated or not, the bakery can sell as many as 7 5 pastries per day. QUESTION: If Bakery Creations does process the pastries further, what would be the increase or decrease in contribution margin? Indicate in your answer whether it is an increase or decrease.
38
PROBLEM III: Soft Mattress Inc. produces both a queen and a king size bed. Selected data related to each product is as follows: Queen $800 300 1 King $1,200 450 2
Sales price per unit --------------Variable costs per unit ----------Stuffing hours required ----------
**In addition, fixed costs total $300,000 per year. The company employs three employees who are trained to stuff the mattresses. There are a total of 7,000 stuffing hours available per year. The company believes that it could sell a maximum of 3,000 queen-size and 4,000 king-size mattresses per year. QUESTION: If the company maximizes profits, but stuffing hours are a constraint, what is the maximum amount of net income for the year (ignore income taxes)?
39
PROBLEM IV: The Southwest Desk Company needs 20,000 doorknobs annually to complete their desk drawers. Currently, the company makes the doorknobs internally with the following costs: Direct materials Direct labor Variable overhead Fixed overhead $.90 per unit .20 per unit .25 per unit .10 per unit
Southwest is considering purchasing the doorknobs externally from a supplier. The supplier would charge $1.20 per doorknob. If Southwest purchases the doorknobs from the supplier, 50% of the fixed overhead costs would go away. QUESTION: If Southwest purchases the doorknobs from the supplier, what will be the increase or decrease in net income (ignore income taxes)? Indicate whether it is an increase or decrease.
40
PROBLEM V: Championship T-Shirts Ltd. has the following cost information at the expected production level of 20,000 shirts: Direct Materials Direct Labor Variable overhead Fixed overhead $4 per shirt $4 per shirt $2 per shirt $1 per shirt
The company has the capacity to produce as many as 25,000 shirts. Normally, the co mpany sells each shirt for $18.00. A local charity has contacted the company requesting 400 t-shirts. The charity would like Championship to monogram each shirt. The cost to monogram each t-shirt would be $3.00 per shirt. The charity wishes to pay $12 per shirt. QUESTION: If Championship accepts this special order, and sells the shirts to the charity for $12.00 each, by how much would the companys net income increase or decrease? Indicate whether it is an increase or decrease.
QUESTION: What would be a qualitative reason for Championship to make the t-shirts? (one sentence)
41
MULTIPLE CHOICE: 1. When are fixed costs relevant to a make or buy decision? A. B. C. D. Fixed costs are never relevant to a make or buy decision. Fixed costs are always relevant to a make or buy decision. Fixed costs are relevant when they differ among alternatives. Fixed costs are relevant when they do not differ among alternatives.
2. The Optimum Computer Company produces and sells computers. Each of the computers that it makes needs a keyboard. Currently, the company is making 10,000 keyboards internally with the following costs: Direct materials Direct labor Variable overhead Fixed overhead $10 per unit $4 per unit $2 per unit $1 per unit
The company is considering purchasing the keyboards externally from a supplier. The supplier would charge $20 per keyboard. If the company purchases the keyboard from a supplier, 70% of the fixed costs would go away. Assuming the company does decide to purchase the keyboards externally, what would be the increase or decrease in net income (ignore taxes)? A. B. C. D. E. net income would increase $33,000 net income would decrease $33,000 net income would increase $30,000 net income would decrease $30,000 net income would increase $37,000
3. Extra Balance Company manufactures hockey sticks. The companys capacity is 5,000 sticks per month; however, it is currently only selling 4,000 sticks per month. The company normally asks a selling price of $130 per stick. A local team has asked Extra Balance to sell it 500 sticks for $100 per stick. When they produce 4,000 sticks, Extra Balance records the variable cost of each stick to be $40 and the fixed costs of each stick to be $10. If Extra Balance were to accept this special order, what would be effect on net income? A B. C. D. E. net income would increase $45,000 net income would increase $30,000 net income would increase $25,000 net income would decrease $15,000 net income would decrease $45,000
42
4. Treehouses, Inc. produces two types of custom-crafted treehouses the Standard and the Deluxe. Selected data related to each product is as follows: Standard $2,000 500 6 Deluxe $3,000 1,000 10
Sales price per unit ------Variable costs per unit --Assembly hours required
The company employs four employees who are trained to assemble these treehouses. There are a total of 8,000 assembly hours available per year. The company believes it could sell a maximum of 700 standard and 500 deluxe treehouses per year. If the company maximizes profits, but assembly hours are a constraint, what is the maximum contribution margin for the year? (ignore income taxes) A. B. C. D. E. $2,316,000 $1,150,000 $1,810,000 $2,050,000 $251,000
SOLUTIONS: PROBLEM I: Overall decrease in net income of $35,000 PROBLEM II: Overall contribution margin would decrease $7.50 PROBLEM III: maximum net income would be $2,700,000 PROBLEM IV: $4,000 increase in net income PROBLEM V: A. $400 overall decrease in net income B. Gesture of goodwill, future sales contact MULTIPLE CHOICE: 1. 2. 3. 4. C B B C 43
Ch 9: Long-Term (Capital Investment) Decisions
1. You purchased a certificate of deposit at the beginning of the year which pays 4% compounded semi-annually. If you expect to withdraw $8,000 at the end of two years, how much did you originally deposit? Round to nearest whole dollar. A. $7,390 B. $7,541 C. $7,360 D. $4,322 E. $5,880 2. On 1/1/2005, Sullivan Inc. purchased a machine costing $40,000 by making a down -payment of $8,000 and financing (borrowing) the rest at 10% compounded annually. The loan will be paid off in equal payments over the next ten years, with the first payment beginning on 12/31/2005. What will be the amount of each of the annual payments? Round to n earest whole dollar. A. B. C. D. E. $24,578 $6,510 $12,336 $83,009 $5,208
3. Crazy Inc. purchased a machine for $9,533 on 1/1/2005. The machine will generate annual cash inflows of $2,000 for the next six years. Assuming these cash inflows occur at the end of each year, what rate of return did the company earn on this machine? A. B. C. D. E. 7% 21% 26% 5% 4%
4. Candice will be buying a car costing $30,000 by borrowing the money at 12% interest compounded quarterly. She will be paying off her loan by making equal quarterly payments of $2,016.47. How many quarterly payments will she need to make in order to pay back the loan? A. B. C. D. E. 23 15 14 20 17
44
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS: On 1/1/2006, RET Inc. purchased an asset at a cost of $300,000. Annual operating cash flows are expected to be $80,000 for five years. The salvage value at the end of the assets life is expected to be $5,000. The cost of capital is 12%.
5. What is the net present value (ignore taxes)? Round to nearest whole dollar. A. B. C. D. E. $56,400 ($8,779) $6,408 $105,000 ($251,771)
6. What is the payback period of this investment? A. B. C. D. E. .75 years 5 years 1.33 years 3.53 years 3.75 years
7. The Unique Gardner Company is considering the purchase of a customized delivery van costing approximately $40,000. Using a discount rate of 15%, you estimate the present value of future cost savings at $50,000. To yield the 15% return, the actual cost of the van should not exceed the $40,000 estimate by more than: A. B. C. D. E. $10,000 $50,000 $7,500 $6,000 $13,500
45
8. A company is considering investing in an asset which cost $17,000. The cash flows are expected to be as follows: - $5,000 in year 1 - $4,000 in year 2 and 3 - $2,000 in years 4 through 7 Approximately how long is the payback period? A. B. C. D. E. 5 years 4 years 1.5 years 7 years 3 years
9. Shaeffer Inc. invested $70,000 in a new machine. The machine will generate cash flows at year-end of $50,000, $40,000, and $30,000 for the next three years, respectively. The company uses a 15% cost of capital. What is the net present value (ignore income taxes)? A. B. C. D. E. $107,004 $203,984 $23,449 $19,207 $50,000
10. The Tiger Golf Club is considering an investment into golf carts that requires $60,000 and promises to return $108,637 in four years. The companys internal rate of return is: (ignore taxes) A. B. C. D. E. 14% 12% 16% 1.81% .55%
46
11. Waller, Inc. purchased an asset at a cost of $102,000. Annual operating cash flows are expected to be $30,000 each year for six years. At the end of the assets life, there will be a $10,000 residual (salvage) value. The income tax rate is 30%, and the company uses straightline depreciation with no half-year convention. Taking into account income tax effects, what is the net present value if the cost of capital is 12%? Round to nearest whole dollar. A. B. C. D. E. $26,408 $8,854 $57,779 $36,811 $10,373
12. Which of the following statements is TRUE regarding depreciation expense? A. B. C. D. E. It generates an after-tax cash outflow. It generates a before-tax cash outflow. It generates an after-tax cash inflow. It generates a before-tax cash inflow. It will always cause the net present value of an asset to be positive.
13. The ABC Company only invests in assets which generate a return of 20%. The company is considering the purchase of an asset costing $100,000, whose net present value is ($5,000). Based on these facts, which of the following statements is TRUE? A. The present value of the cash inflows is greater than the present value of the cash outflows. B. The actual return the asset generates is more than 20%. C. The actual return the asset generates is equal to 20%. D. The actual return the asset generates is negative. E. The actual return the asset generates is less than 20%. SOLUTIONS: 1. A 2. E 3. A 4. D 5. B 6. E 7. A 8. A 9. C 10. C 11. B 12. C 47
13. E
Ch 10: The Use of Budgets in Planning and Decision Making
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS: Portman Inc. produces and sells a specialty product. The production department prepared the following second quarter sales forecast: April ----May ----June ----20,000 units 24,000 units 30,000 units
Inventory at March 31 was budgeted at 2,000 units. Sales for July are expected to be 35,000 units. The desired quantity of finished-goods inventory at the end of each month is to be equal to 10% of the next months budgeted unit sales. Each completed unit of finished product required 5 ounces of material. The cost per ounce is $1.25 per ounce. The company has determined that it needs 20% of next months production needs in raw materials on hand at the end of each month.
1. What is the total projected production for the second quarter? A. B. C. D. E. 81,400 units 73,400 units 75,500 units 74,000 units 72,500 units
2. How much should the company plan on spending on direct material for the month of May? A. B. C. D. E. $161,125 $153,750 $166,375 $142,063 $128,900
48
3. Brown Inc. sells high-end bicycles. The price of each bicycle is $600. All sales are on account. Brown collects 40% of a months sales in the month of sale, 50% in the month following sale, and 10% in the second month following sale. Budgeted sales (in units) for the first six months of 2006 are as follows: January --------February ------March ---------April -----------May -----------June -----------3,000 units 4,000 units 6,000 units 8,000 units 9,000 units 9,000 units
How much cash will be collected in the month of April? A. $10,800,000 B. $3,060,000 C. $4,800,000 D. $8,040,000 E. none of the above 4. One advantage of the budgeting process is that it: A. reduces communication throughout the organization. B. forces management to focus on the past and not be distracted by daily crisis in the organization. C. can help management identify and deal with potential bottlenecks before they become major problems. D. can decrease the coordination of organizational activities. E. all of the above 5. Mulligan Inc. has the following purchases budget for the last half of 2006: July -----------------August --------------September ---------October ------------November ----------December ----------$200,000 190,000 150,000 210,000 230,000 200,000
Historically, the company pays one-third at the time of purchase and the remainder in the month following purchase. What are the expected cash disbursements for October? A. $150,000 B. $210,000 C. $170,000 D. $223,333 E. $70,000
49
6. The usual starting point in the budget process is: A. B. C. D. E. the direct materials purchases budget. the sales budget. the production budget. the cash receipts budget. the cash disbursements budget.
SOLUTIONS: 1. 2. 3. 4. 5. 6. C A E (3,960,000) C C B
50
Ch 11: Variance Analysis- A Tool for Cost Control and Performance Evaluation
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS: Gibson Inc. produces hand-crafted office desks. The direct materials and direct labor standard costs for one desk are as follows: Direct Material: 5 sheets of lumber at $10 per piece Direct Labor: 16 hours at $15 per hour In July, 400 sheets of lumber were purchased for $12 per piece. Of that number, 350 pi eces of material were used to produce 65 desks. Labor costs for July were $14,000 for 1,000 hours. 1. What would be the direct materials price variance? A. B. C. D. E. $1,300 U $1,300 F $1,550 U $800 U $800 F
2. What would be the direct materials usage variance? A. B. C. D. E. $750 U $750 F $250 U $250 F none of the above
3. What would be the direct labor rate variance? A. $1,000 F B. $1,000 U C. $1,600 F D. $1,600 U E. $600 F 4. What would be the direct labor efficiency variance? A. B. C. D. E. $1,000 F $1,000 U $1,600 F $1,600 U $600 F
51
5. The advantage of a flexible budget over a static budget is that, in a flexible budget, actual costs are compared to the costs that should be incurred for the: A. B. C. D. Planned level of activity Actual level of activity Average level of activity of competitors Optimum level of activity
6. As a hobby, Denise makes and sells clay pottery bowls for sale at local art festivals. Her budget for the production and sale of 100 sculptures is as follows: @ 100 sculptures $7,000 1,500 2,000 $3,500
Sales Revenue Variable Costs Fixed Costs Net Income
Due to an increased interest in handmade pottery, Denise was able to actually make and sell 180 sculptures. If she prepares a flexible budget for 180 sculptures, what would be net income? A. B. C. D. E. $6,300 $9,100 $3,500 $9,900 $7,900
SOLUTIONS: 1. 2. 3. 4. 5. 6. D C A E B E
52
Ch 12: Decentralization and Performance Evaluation
1. Which of the following statements about segment costs is FALSE? A. A good test for deciding whether to allocate indirect fixed costs is to determine whether the cost would be reduced or eliminated if the segment were eliminated. B. Segment costs should include all costs attributable to that segment but only those costs that are actually caused by the segment. C. In general, all common costs should be allocated to segments. D. Common costs are indirect costs that are incurred to benefit more than one segment and cannot be directly traced to a particular segment. 2. Grayson Toy Company had sales of $550,000 and net operating income of $275,000. Beginning of the year operating assets were valued at $125,000 and end of the year operating assets were valued at $175,000. Graysons return on investment (ROI) was: A. 91.7% B. 157% C. 183.3% D. 220% E. 54.55%
3. Lovely, Inc. has two types of product lines skin care and hair care. The following is a segmented income statement for the most recent year: Total Skin Care Hair Care Sales revenue ----------------$2,000,000 $1,100,000 $900,000 Variable expenses ------------1,245,000 660,000 585,000 Contribution margin ---------$755,000 $440,000 $315,000 Traceable fixed costs --------200,000 140,000 60,000 Segment margin --------------$555,000 $300,000 $255,000 Common fixed costs ---------200,000 Net Income ------------------$355,000
Lovely, Inc. plans on having an aggressive advertising campaign, but the company can only af ford to advertise for one of its products. The cost of the advertising will be $40,000. Marketing studies have indicated that such a campaign would increase sales of the Skin Care division by $300,000 and increase sales of the Hair Care division by $400,000. Which of the following statements is TRUE about the division they should select for the campaign, and the overall effect on net income of the campaign? A. They should select the Skin Division because the incremental effect on net income will be $120,000. B. They should select the Skin Division because the incremental effect on net income will be $20,000. C. They should select the Hair Division because the incremental effect on net income will be $100,000. D. They should select the Hair Division because the incremental effect on net income will be $140,000. E. It does not matter which division they select. Incremental net income will go up by the same amount for each division.
SOLUTIONS: 1. C 2. C 3. C 53