BEC - Operations Measurement

Which of the following items often provides a significant risk with off-shore operations?

Off-shore operations are especially vulnerable to cultural/language issues and difficulty protecting intellectual property rights.

Which quality definition can be described as "meeting or exceeding the needs and wants of customers?"

"Meeting or exceeding the needs and wants of customers" is the definition of the quality of design.

Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value. An unprotected crop subject to frost has an expected market value of $40,000. If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost. What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection?

.2 There are two states of nature that can affect the firm's earnings: frost and no frost. There are also two actions under consideration: provide frost protection for $10,000, or do not. The expected income under each action will depend on the probability of frost. Let p = the probability of frost. Expected net income if frost protection is provided = $90,000(p) + $60,000(1-p) - $10,000. Expected net income if frost protection is not provided = $40,000(p) + $60,000(1-p). The firm is indifferent between the two actions when the expected net income is the same for both. Setting the two expressions equal to each other and solving for p determines at what probability of frost the two actions provide the same income. $90,000(p) + $60,000(1-p) - $10,000 = $40,000(p) + $60,000(1-p) $50,000(p) = $10,000 p = .20 When the probability of frost exceeds .20, the expected income from providing frost protection exceeds that of not providing frost protection. This can be verified by entering a probability higher than .20 into both income expressions and determining the income. This is the expected result. As the probability of frost increases, the expected benefits of providing frost protection also increase. The opposite is true for probabilities lower than .20.

Wexford Co. has a subunit that reported the following data for year 1: Asset (investment) turnover 1.5 times Sales $750,000 Return on sales 8% The imputed interest rate is 12%. What is the division residual income for year 1?

0 To solve for residual income (RI), you must first solve for assets (investment) and income. Since an asset turnover of 1.5 is sales/investment and sales is $750,000, we use $750,000 / x = 1.5, where x = investment. Thus, investment is $500,000. Since a return on sales of 8% is profit/sales and sales is $750,000, we use x / $750,000 = 8%, where x = income. Thus, income is $60,000. Now, RI = income less the rate given at 12% multiplied by the investment. Thus, RI is 0 = $60,000 - .12 ($500,000).

The following information pertains to a by-product called Moy: Sales in Year 2 5,000 units Selling price per unit $6 Selling costs per unit 2 Processing costs 0 The inventory of Moy was recorded at net realizable value when produced in Year 1 and net proceeds from the sale were used to reduce joint costs. No units of Moy were produced in Year 2. What amount should be recognized as profit on Moy's Year 2 sales?

0 Where the net proceeds from the sale are used to reduce joint costs, no profit is recognized on sales of by-products.

What is the required unit production level given the following factors? Units Projected sales 1,000 Beginning inventory 85 Desired ending inventory 100 Prior-year beginning inventory 200

1015 Since the desired ending inventory is 15 units more than the beginning inventory, production must be 15 units greater than the projected sales level of 1,000 units.

Fab Co. manufactures textiles. Among Fab's Year 1 manufacturing costs were the following salaries and wages: Loom operators $120,000 Factory foremen 45,000 Machine mechanics 30,000 What was the amount of Fab's Year 1 direct labor?

120k Direct labor includes the wages of only those employees working directly in the manufacture of the product. Only the loom operators meet this definition. The factory foremen are supervisory, and the machine mechanics maintain the machines.

During the current year, the following manufacturing activity took place for a company's products: Beginning work in process: 10,000 units, 70% complete Units started into production during the year: 150,000 units Units completed during the year: 140,000 units Ending work in process: 20,000 units, 25% complete What was the number of equivalent units produced using the first-in, first-out method?

138k The FIFO method lets the costs and EUs associated with beginning WIP flow on to Finished Goods and bases the unit cost of production for the current period on the EUs started (and completed) during the period. Nominal Units % Complete Equivalent Units Beginning WIP 10,000 30% 3,000 Units started and finished 130,000 100% 130,000 Ending WIP 20,000 25% 5,000 Units to account for or Equivalent units 160,000 138,000

Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials at a cost of $70,000. The materials usage variance was $2,500 unfavorable, and the standard materials allowed for May production was 17,000 pounds. What was the materials price variance for May?

17.5 k favorable This answer is correct. Using the model suggested in the study text to perform the calculations: Units Price/Unit Total Standard Costs 17,000 lbs. x Std. Price = Actual Costs 17,500 lbs. x $4.00* = $70,000 Differences (500) lbs. *Actual Price = $70,000/17,500 lbs. = $4.00 Usage variance = ($2,500) = Difference in Units x Std. Price = (500) x Std. Price Std. Price = ($2,500) / (500) = $5.00 per unit Substituting the standard price into the previous calculation, we now have: Units Price/Unit Total Standard Costs 17,000 lbs. x $5.00 = $85,000 Actual Costs 17,500 lbs. x $4.00* = $70,000 Differences (500) lbs. $1.00 $15,000 Price variance = Difference in Price x Actual Quantity Used = $1.00 x 17,500 = 17,500 favorable various Check: Usage Variance + Price Variance = Total Difference in Costs ($2,500) + $17,500 = $15,000

For the current period production levels, XL Molding Co. budgeted 8,500 board feet of production and used 9,000 board feet for actual production. Material cost was budgeted at $2 per foot. The actual cost for the period was $3 per foot. What was XL's material efficiency variance for the period?

1k unfavorable A direct efficiency variance is the difference between the actual quantity and the standard quantity allowed multiplied by the standard price. The variance is unfavorable because the actual quantity is greater than expected based on the standard.

State College is using cost-volume-profit analysis to determine tuition rates for the upcoming school year. Projected costs for the year are as follows: Contribution margin per student $ 1,800 Variable expenses per student 1,000 Total fixed expenses 360,000 Based on these estimates, what is the approximate break-even point in number of students?

200 This answer satisfies the basic breakeven quantity formula of fixed costs divided by contribution margin per unit (i.e., $360,000/$1,800).

A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the following changes: sales price per cup to be $9.00; variable manufacturing costs to increase 33.3%; fixed costs to increase 10%; and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year's sales by 1,000 units. How many units does the company expect to sell this year?

22600 This is a detailed problem that requires working backwards through a contribution margin (CM) formatted income statement to determine total CM of $113,400. CM per unit ($5.25) is given by subtracting variable cost ($2.25) from price ($7.50). Year one units sold of 21,600 is calculated by dividing total CM ($113,400) by CM per unit ($5.25). Year two units sold (22,600 units) is equal to year one units plus 1,000 units.

A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct material usage variance?

25k unfavorable The usage or quantity variance is calculated by using SP (SQA - AQ). Standard price (SP) is $5; actual quantity (AQ) is 25,000; and 20,000 is standard quantity allowed (SQA). This provides a 25,000-pound unfavorable usage variance of $25,000.

A company forecast first quarter sales of 10,000 units, second quarter sales of 15,000 units, third quarter sales of 12,000 units and fourth quarter sales of 9,000 units at $2 per unit. Past experience has shown that 60% of the sales will be in cash and 40% will be on credit. All credit sales are collected in the following quarter, and none are uncollectible. What amount of cash is forecasted to be collected in the second quarter?

26k The correct forecasted cash collected in the second quarter of $26,000 consists of 60% of second quarter sales ($18,000 = 15,000 ($2) (.6)) and 40% of first quarter's sales of ($8,000 = 10,000 ($2) (.4)).

To measure inventory management performance, a company monitors its inventory turnover ratio. Listed below are selected data from the company's accounting records: Current year Prior year Annual sales $2,525,000 $2,125,000 Gross profit percent 40% 35% Beginning finished goods inventory for the current year was 15% of the prior year's annual sales, and ending finished goods inventory was 22% of the current year's annual sales. What was the company's inventory turnover at the end of the current period?

3.47 Inventory turnover is calculated by dividing the cost of goods sold by the average inventory. Cost of goods sold = $2,525,000(1 - .4) = $1,515,000; average inventory is [.15(2,125,000) + .22(2,525,000)] / 2 = $437,125. Thus, inventory turnover = $1,515,000 / $437,125.

The following direct labor information pertains to the manufacture of product Glu: Time required to make one unit 2 direct labor hours Number of direct workers 50 Number of productive hours per week, per worker 40 Weekly wages per worker $500 Workers' benefits treated as direct labor costs 20% of wages What is the standard direct labor cost per unit of product Glu?

30 The standard direct labor cost per unit is the product of the standard wage rate per hour used for direct labor computations, and the standard quantity of hours per unit. This firm includes benefits in the wage rate used for direct labor application: Standard direct labor cost per unit = [($500)(1.2)/40 hours)](2) = $30 The 1.2 factor above is the effect of including the employee benefits (at 20% of wages) in direct labor.

A Year 1 cash budget is being prepared for the purchase of Toyi, a merchandise item. The budgeted data are as follows: Cost of goods sold for Year 1 $300,000 Accounts payable 1/1/Year 1 20,000 Inventory - 1/1/Year 1 30,000 Inventory - 12/31/Year 1 42,000 Purchases will be made in 12 equal monthly amounts and paid for in the following month. What is the Year 1 budgeted cash payment for the purchase of Toyi?

306k First, the budgeted annual purchases of the item must be determined, and then the budgeted payment amount is calculated. Beginning inventory + purchases = ending inventory + cost of goods sold $30,000 + purchases = $42,000 + $300,000 purchases = $312,000 Budgeted cash payment = accounts payable at 1/1/Year 1 + (11/12)purchases for purchases in Year 1 =$20,000 + (11/12)($312,000) = $306,000 Only 11/12 of the Year 1 purchases, i.e., the purchases made in the first eleven months, will be paid for in Year 1 under the company's policy of payment for purchases.

Black, Inc. employs a weighted average method in its process costing system. Black's work in process inventory on June 30 consists of 40,000 units. These units are 100% complete with respect to materials and 60% complete with respect to conversion costs. The equivalent unit costs are $5.00 for materials and $7.00 for conversion costs. What is the total cost of the June 30 work in process inventory?

368k This answer is correct because (40,000 units * $5 materials cost * 100%) + (40,000 units * $7 conversion cost * 60%).

Clay Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the following applied manufacturing overhead costs: Fixed costs $21,000 Variable costs 33,000 The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

40750 None of the applied fixed manufacturing costs should be considered, because the company has excess capacity, implying that the special job will not cause any additional fixed capacity costs to be incurred. Only the external design costs and variable costs are included, as only those costs are truly incremental and caused by the special job.

A company receives an offer to purchase a special order of units of a product that normally sells for $10 each to regular customers. The cost of manufacturing the units is shown here. If all other conditions are favorable, what is the absolute lowest price that the company would be able to feasibly accept for the order if it has enough idle capacity to handle the order? Cost per unit Direct materials $2 Direct labor $1 Avoidable fixed costs $2 Unavoidable fixed costs $3

5 With idle capacity, only the avoidable costs need to be covered. These include direct materials, direct labor, and avoidable fixed costs. These total $5.

Cook Co.'s total costs of operating five sales offices last year were $500,000, of which $70,000 represented fixed costs. Cook has determined that total costs are significantly influenced by the number of sales offices operated. Last year's costs and the number of sales offices can be used as the basis for predicting annual costs. What would be the budgeted costs for the coming year if Cook were to operate seven sales offices?

672k Variable cost per office = ($500,000 - $70,000)/5 = $86,000 Total estimated cost of seven offices = $86,000(7) + $70,000 (fixed cost) = $672,000

The target capital structure of Traggle Co. is 50% debt, 10% preferred equity, and 40% common equity. The interest rate on debt is 6%, the yield on the preferred is 7%, the cost of common equity is 11.5%, and the tax rate is 40%. Traggle does not anticipate issuing any new stock. What is Traggle's weighted average cost of capital?

7.10% The calculation of the weighted average cost of capital (WACC) involves proportional weighting for debt and equity with the debt figure reduced for deductible taxes. Thus, the cost of debt is 1.8% = 50% (6%) (1 - .4); the cost of owners' equity is split for the preferred 0.7% = 10% (7%); and the common 4.6% = 40% (11.5%). Thus, the WACC is 7.1% = 1.8% + 0.7% + 4.6%.

Johnson Co., distributor of candles, has reported the following budget assumptions for year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson's only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of year 1. What is the budgeted gross margin for year 1?

70k Gross Profit ($70,000) is determined by subtracting Cost of Goods Sold ($350,000) from Sales ($420,000). Sales is calculated by multiplying a markup of 20% based on cost of goods sold (i.e., $420,000 = 1.2($350,000). Cost of Goods Sold is easily determined by using an accounts payable T-account to calculate purchases of $350,000 by using the cash paid of $300,000 and the beginning and ending balances of accounts payable ($100,000 and $150,000, respectively).

A company has a tax rate of 40%. Information for the company is as follows: Amount Before-tax Cost Mortgage bonds $1,200,000 7.2% Common stock $3,800,000 10% What is the weighted average cost of capital (WACC)?

8.64% The calculation is ($1.2M / $5M) (.072) (1 - .4) + ($3.8M / $5M) (.1).

Which changes in costs are most conducive to switching from a traditional inventory ordering system to a just-in-time ordering system?

A JIT system is designed to reduce inventory carrying costs by ordering more frequently, but in lower quantities, so that inventories are kept to a minimum. When inventory holding costs (lost interest, security costs, warehousing costs) are rising, there is an incentive to reduce inventories and instead order inventories only when they are needed (and so they arrive just in time for use). In addition, declines in the cost of purchasing make the JIT system even more appropriate. A JIT system orders smaller numbers of units per order, but orders more frequently to avoid inventory build up. Thus, JIT increases total order costs. With decreasing order costs, the total ordering costs is kept to a reasonable level. Furthermore, the decrease in holding costs from holding less inventory more than covers the increased cost of ordering more frequently.

Wages earned by machine operators in producing the firm's product should be categorized as

A direct cost is a cost that is traceable to the product. The wages of workers working directly in the production of a product are direct costs. This cost is also controllable. A cost is controllable if the foreman has significant influence over it. The foreman is responsible for allocating workers to production and often for scheduling production.

In an activity-based costing system, cost reduction is accomplished by identifying and eliminating

ABC systems increase (rather than eliminate) the number of cost drivers, to enable better modeling of cost along cause-effect lines. Cost drivers are explanatory variables that help to explain the behavior of cost. One or two independent variables typically are insufficient to explain the behavior of many indirect manufacturing costs. ABC systems also seek to eliminate nonvalue-added activities, which are activities that do not add to the value of the product as perceived by the customer. In so doing, the total cost of producing the product is reduced without any effect on the value of the product.

What is the normal effect on the numbers of cost pools and allocation bases when an activity-based cost (ABC) system replaces a traditional cost system?

ABC systems identify more cost drivers (allocation bases) than traditional costing systems do. Cost drivers are independent variables that help to explain the behavior of cost and are, therefore, useful in providing cost allocations that more closely reflect the causal factors affecting cost behavior. Costs are divided into a greater number of cost pools for this purpose, to group together those costs that behave similarly and that may be related to smaller production cells. The number of different costs in each pool is smaller than is the case for traditional systems, which may aggregate costs by department or product line.

Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes?

AP The percentage of sales forecasting method is used to define operating costs such as cost of goods sold, supplies expense, sales discounts, etc. It also defines the percentage of sales that are collected in cash and the percentage of purchases that are paid for in cash and, consequently, accounts payable.

At the end of Killo Co.'s first year of operations, 1,000 units of inventory remained on hand. Variable and fixed manufacturing costs per unit were $90 and $20, respectively. If Killo uses absorption costing rather than direct (variable) costing, the result would be a higher pretax income of

Absorption costing includes both variable and fixed manufacturing costs as product costs. Direct costing includes only variable manufacturing costs as product cost and expenses fixed manufacturing costs as a period expense. In this case, absorption costing includes $20,000 of fixed manufacturing costs (1,000 x $20) in ending inventory while direct costing expenses the full amount of fixed manufacturing costs. Pretax income is consequently $20,000 higher for absorption costing.

Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost situations?

Acceptable joint cost allocation methods include sales value at split-off, physical measures, and constant gross margin. Flexible budget amounts are not used for joint cost allocation.

North Bank is analyzing Belle Corp.'s financial statements for a possible extension of credit. Belle's quick ratio is significantly better than the industry average. Which one of the following factors should North consider as a possible limitation of using this ratio when evaluating Belle's creditworthiness?

Accounts Receivable Marketable Securities The quick ratio (also called the acid-test ratio) measures the relationship between current assets that are cash or can be converted to cash quickly and the total of current liabilities. Current assets that can be converted to cash quickly include (in addition to cash) accounts receivable and marketable securities (expected to be sold in the near term). Inventories are not included in the quick ratio because, normally, they cannot be converted to cash quickly. By excluding inventories (and other current assets that cannot be converted to cash quickly, e.g., prepaid assets), the measure of assets available to pay current liabilities in the quick ratio is more conservative than the measure of assets used in the working capital (or current) ratio; thus, the quick ratio is also called the acid-test ratio.

Which of the following accurately reflects prevailing thought processes regarding the new value based metrics?

Accrual-based metrics are discredited. Accrual-based metrics are discredited, since they are not designed to reflect true economic substance, but to meet other external reporting goals.

In an activity-based costing system, what should be used to assign a department's manufacturing overhead costs to products produced in varying lot sizes?

Activity-based costing seeks multiple cost drivers to explain the behavior of cost. The technique recognizes that there is no single independent variable to explain how a cost behaves. Breaking down costs into lower levels of aggregation also helps to identify the factors that are relevant in explaining cost, and to exclude other factors. Multiple cause and effect relationships.

A job order cost system uses a predetermined factory overhead rate based on expected volume and expected fixed cost. At the end of the year, underapplied overhead might be explained by which of the following situations?

Actual volume - less than expected Actual fixed costs - greater than expected Underapplied overhead occurs when actual overhead was greater than applied overhead. Applied Overhead = (bud. FOH/bud. volume) X (actual volume) For overhead to be underapplied, either the actual fixed costs must be greater than the budgeted fixed costs or the actual volume must be less than the budgeted volume.

Wren Co. manufactures and sells two products with selling prices and variable costs as follows: A B Selling price $18.00 $22.00 Variable costs 12.00 14.00 Wren's total annual fixed costs are $38,400. Wren sells four units of A for every unit of B. If the operating income last year was $28,800, what was the number of units Wren sold?

Adding an operating income of $28,800 to fixed costs of $38,400 = contribution margin (CM) of $67,200. Total CM for A = $6, while CM for B = $8. Since the ratio of units in the sales mix is 4 parts A to 1 part B, the proper equation would be 6(4/5)Q + 8(1/5)Q = $67,200; thus, Q = 10,500.

Which measures would be useful in evaluating the performance of a manufacturing system? I. Throughput time. II. Total setup time for machines/Total production time. III. Number of rework units/Total number of units completed.

All three measures are relevant to the evaluation of how a manufacturing system is performing. Throughput time is the total time required for an item to make its way through the manufacturing system. The ratio of setup time to total production time reflects the adaptability of the system to required changes in production capability. If this ratio is excessive, the firm is unable to alter its product to meet changing customer demand. The ratio of rework to total units is a measure of quality. A lower ratio indicates higher quality and less interruption to the production process.

In a job cost system, manufacturing overhead is

Another term for overhead is indirect cost. Indirect costs cannot be traced to specific jobs. In other words, overhead is not directly attributable to specific jobs. All manufacturing cost is, by definition, a necessary ingredient of the total production cost. All jobs consume some overhead or receive the services of an overhead department or cost center.

Why is cost avoidance a faster way to increase profits than to increase revenue?

Avoiding costs provides a direct and immediate effect on profits, while increasing revenue often results in at least some proportional cost increases as well. Increasing revenue often results in at least some proportional cost increases.

The basic difference between a master budget and a flexible budget is that a master budget is

Based on one specific level of production, and a flexible budget can be prepared for any production level within a relevant range. A master, also called a static, budget is developed for planning and resource allocation purposes. Therefore, it is based on one specific level of activity. A flexible budget, as its name implies, can be developed for any activity level within the range that the firm has the capacity to produce.

each of the following should be considered in the selection of appropriate cost drivers for an activity-based costing system

Behavioral effects. Cost of measurement. Degree of correlation. You Answered Correctly! CORRECT! Volume-based production is somewhat of an opposite to activity-based costing in the sense that the volume-based approach, while simple, does not accurately reflect the relationship between the products produced and the costs incurred, as it systematically overassigns costs to some products and underassigns costs to others.

The management of a company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts?

Benchmarking provides a relevant comparison when trying to achieve the optimal outcome by comparing to others.

A standard cost system may be used in

Both types of systems use standard cost systems. Standards are reasonable expectations of input quantity per unit of output and input cost per unit of input. Both systems can specify reasonable expectations for both of these types of standards.

On January 1, 2005, Lake Co. increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Lake's budgeted breakeven point and budgeted margin of safety?

Budgeted breakeven point increase Budgeted margin of safety decrease Contribution margin percentage (cmr) = (sales - variable costs)/sales breakeven sales = fixed cost/cmr Budgeted margin of safety = Budgeted sales - breakeven sales. If direct labor wage rates increase, then the total variable cost increases. Contribution margin and cmr are decreased, causing breakeven sales to increase. (The firm is now contributing less per sales unit toward the fixed cost.) With the increase in breakeven sales, the margin of safety declines. (The firm has less breathing room now because actual sales are closer to the breakeven point, which has increased.)

A static budget contains which of the following amounts?

Budgeted costs for budgeted output. You Answered Correctly! A static budget is a comprehensive financial plan produced at the beginning of the year for the entire enterprise and does not change (or flex) during the year. Thus, it uses budgeted costs based on budgeted output.

Which of the following items is a process management approach that involves radical change?

Business process reengineering. You Answered Correctly! Business process reengineering is a process analysis approach that typically results in radical change. This is a different approach from incrementally reducing and eliminating non-value added activities, and otherwise improving processes.

How is contribution margin (CM) different from gross margin (GM)?

CM equals sales less variable costs; GM equals sales less cost of goods sold. CM classifies costs by behavior and is used internally. CM = sales less variable costs; GM equals sales less cost of goods sold.

Management would like to calculate return on investment (ROI) for the current year. The following information is available: Operating assets at the end of the year $ 6,600,000 Operating assets at the beginning of the year 5,400,000 Sales 1,150,000 Operating expenses 550,000 What percentage amount is the ROI?

CORRECT! Return on investment (ROI) is computed as: Netincome(beforeinterestexpense)/Averagetotalassets In this question, the amount of interest expense is not given separately. Therefore, the Net income calculation must be based on Sales ($1,150,000) - Operating expenses ($550,000), or $600,000. The average operating assets for the year is computed as: Beginning $5,400,000 + Ending $6,600,000 = $12,000,000/2 = $6,000,000. Thus, the correct calculation is: $600,000/$6,000,000 = .10 (10%).

A company estimates that it will sell 100,000 units of finished goods in March. Each finished good requires 5 feet of raw materials. The projected March 1 inventory balances are 10,000 units of finished goods and 40,000 feet of raw materials. Desired March 31 inventory levels are 9,000 units of finished goods and 42,000 feet of raw materials. What amount of raw materials should the company plan to purchase during March?

CORRECT! The key to answering this question is to determine the beginning and ending amounts of raw materials and of finished goods and the differences between the two. These amounts come from beginning FG (multiplied by 5 for FG) and beginning RM amounts as reported between the periods: beginning FG + beginning RM × 5 (40,000 + 50,000) and the same for ending FG + ending RM × 5 (45,000 + 42,000). The sums add up to be 90,000 and 87,000, showing a positive difference of 3,000. Since the company started with 500,000 feet and it has an additional 3,000 feet, it only needs to purchase 497,000 feet to have enough raw materials.

In process 2, material G is added when a batch is 60% complete. Ending work in process units, which are 50% complete, would be included in the computation of equivalent units for

Conversion costs include labor and overhead, and thus, are incurred continuously. The ending inventory would be 50% complete with respect to conversion costs. But material is added at the 60% point and the inventory is only 50% complete. Thus, no materials would be present in the ending inventory for this process. These units would be the same as zero units with respect to material, for the purpose of costing ending inventory.

A company is trying to determine the cost of capital for a major expansion project. A survey of commercial lenders indicates that cost of debt is currently 8% based on the company's debt ratio of 40%. The company complies with this requirement and has determined that a stock issuance would require a 10% return in order to attract investors. Which of the following is the company's cost of capital?

Cost of debt is equal to 8%, and the debt ratio = debt/equity (40%). stock is to be issued at 10% and debt is weighted at 40% while stock is 60%. Therefore, cost of debt is 8% (.40) = 3.2%; equity is 10% (.60) = 6.0% and 3.2% + 6% = 9.2%.

Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For Year 2, unit standard costs were unchanged from Year 1. In Year 2, the only beginning and ending inventories were finished goods of 5,000 units. How would Lynn's ratios using absorption costing compare with those using variable costing?

Current ratio = current assets/current liabilities. Return on stockholders' equity = net income/average owners' equity. Absorption costing allocates both variable and fixed manufacturing costs to inventory. Variable costing assigns only variable manufacturing cost to inventory and expenses fixed manufacturing overhead as a period cost. Therefore, ending inventory, and thus, current assets, are higher under absorption costing by the amount of fixed overhead allocated to ending inventory. The current ratio under absorption costing is, therefore, higher than under variable costing. Income in the current period is the same under both absorption costing and variable costings because the fixed overhead allocation rate has not changed, and ending inventory quantities have not changed. Therefore, total expenses recognized for the life of the firm for absorption costing are less than for variable costing by the amount of fixed overhead remaining in those 5,000 units at the end of Year 2. Thus, retained earnings are higher for absorption costing, causing the denominator of return on stockholders' equity to be greater, and finally causing the ratio to be smaller for absorption costing. Current ratio greater Return on stockholders' equity smaller

A direct labor overtime premium should be charged to a specific job when the overtime is caused by the

Customer's requirement for the early completion of a job. When the requirements of a specific job cause overtime to be incurred, the premium is incremental to that job and should be charged to it. A customer's immediate need for a product requiring personnel to stay overtime would be an example.

The following information is available on Tackler Co.'s two product lines: Chairs Tables Sales $180,000 $48,000 Variable costs (96,000) (30,000) Contribution margin 84,000 18,000 Fixed costs: Avoidable (36,000) (12,000) Unavoidable (18,000) (10,800) Operating income (loss) $ 30,000 ($ 4,800) Assuming Tackler discontinues the tables line and does not replace it, the company's operating income will

Decrease by $6,000. With the sale of tables, operating income will be reduced by the loss of the tables' contribution margin of $18,000. Also, $12,000 of avoidable fixed cost provided a relevant total decrease of $6,000 = ($18,000 - $12,000).

The most likely strategy to reduce the breakeven point would be to

Decrease the fixed costs and increase the contribution margin. The breakeven point is the ratio of fixed costs to the contribution margin ratio (or contribution margin per unit for the unit breakeven point). If the fixed costs are decreased (numerator), and the contribution margin is increased (increasing the denominator of either breakeven formula), then the ratio and, therefore, the breakeven point decrease. Decreasing the fixed costs causes the numerator of the ratio to decrease, and increasing the contribution margin causes the denominator to increase. Both changes have the effect of decreasing the ratio. This also makes real-world sense. If fixed costs have decreased, it is easier for the firm to break even because there are less fixed costs to cover. Likewise, if the contribution margin increases, each unit provides a greater contribution to covering fixed costs, thus requiring the sale of fewer units to break even.

A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

Employee benefits expense provides no clear relationship to the manufacturing operations portion of the company. At least the other allocation bases have some relationship to the manufacturing process.

Birk Co. uses a job order cost system. The following debits (credits) appeared in Birk's work in process account for the month of April Year 1: April Description Amount 1 Balance $4,000 30 Direct materials 24,000 30 Direct labor 16,000 30 Factory overhead 12,800 30 To finished goods (48,000) Birk applies overhead to production at a predetermined rate of 80% of the direct labor cost. Job No. 5, the only job still in process on April 30, Year 1, was charged with direct labor of $2,000. What was the amount of direct materials charged to Job No. 5?

Ending balance in work in process: $4,000 + $24,000 + $16,000 + $12,800 - $48,000 (all attributable to Job No. 5, the only remaining job) = $8,800 Less direct labor charged to Job No. 5: (2,000) Less overhead charged to Job No. 5: .80($2,000) (1,600) Equals materials charged to Job No. 5: $5,200

Lon Co.'s budget committee is preparing its master budget on the basis of the following projections: Sales $2,800,000 Decrease in inventories 70,000 Decrease in accounts payable 150,000 Gross margin 40% What are Lon's estimated cash disbursements for inventories?

First, purchases must be computed, and then the estimated payments to be made on accounts payable. With inventory declining, purchases must equal cost of sales less the decline in inventory. In other words, purchases are less than cost of sales if inventory declines. If the gross margin is 40% of sales, then cost of sales is 60% of sales. Purchases = cost of sales - inventory decline = (.60)($2,800,000) - $70,000 = $1,610,000 If accounts payable (AP) is to decrease, payments on AP must exceed purchases. Estimated payments on AP = $1,610,000 + $150,000 decrease in AP = $1,760,000.

Mat Co. estimated its material handling costs at two activity levels as follows: Kilos handled Cost 80,000 $160,000 60,000 132,000 What is Mat's estimated cost for handling 75,000 kilos?

Fixed costs and variable cost per unit must be estimated from the data using the high-low method. Total costs can then be estimated using the following equation: y = a + b(x), where y = total costs, a = fixed costs, b = variable cost per unit, and x = number of kilos. The variable cost per unit (slope of the line) is the change in cost divided by the change in kilos: b = ($160,000 - $132,000)/(80,000 - 60,000) = $1.40. The fixed cost (y intercept point) can be derived from either data point by entering the variable cost per unit and one of the data points into the equation: $160,000 = a + 1.40(80,000) $48,000 = a. Therefore, at 75,000 kilos, an activity within the range of the data, we can expect the following amount of cost: Cost = $48,000 + $1.40(75,000) = $153,000

When production levels are expected to increase within a relevant range, and a flexible budget is used, what effect would be anticipated with respect to each of the following costs?

Fixed costs per unit - decrease Variable costs per unit - no changes Total fixed costs are a constant amount in the relevant range. Therefore, when increasing production levels within that range, cost per unit decreases. Fixed costs per unit are not useful for prediction purposes because they change as production levels change. Variable costs per unit are a constant amount in the relevant range. But total variable costs increase in constant proportion to increases in production. Variable costs are useful for forecasting because unit costs are reasonably constant in the relevant range, allowing for direct predictions of total variable cost at any level in the range.

A flexible budget is appropriate for a

Flexible budgets are budgets produced at different activity levels. Direct material usage budgets are commonly prepared for different activity levels to indicate the level of cost that should be incurred at those levels. The actual cost is then compared with the budget for the level of activity actually attained. The comparison is much more relevant for evaluation purposes than would be the comparison between the actual and the master or static budgets if the level of activity in the master and static budgets were not the same. The same idea applies for marketing cost, although there typically is less "flex" in this type of budgeted cost. A good proportion of the marketing cost is fixed. Other portions are variable (e.g., commissions). Both costs, however, can be expressed as part of a flexible budget. Many flexible budgets include fixed components. The term "flexible" budget does not imply the exclusion of fixed costs.

In the GPK Coffee Company, the Strudel Division has strudel that can be sold either to outside customers or to the Bean Division that also sells coffee. Information about these divisions is given below: Case 1 Case 2 Strudel Division: Capacity in units of strudel 1,000 1,000 Number of units sold or demanded externally 600 1,000 Market selling price $2.00 $1.50 Avoidable outlay costs per unit $1.50 $1.30 Unavoidable costs per unit based on capacity $0.20 $0.20 Bean Division: Number of units of strudel needed 400 400 Budgeted price per unit $1.95 $1.45 Given the facts in case 2, what are the minimum and maximum transfer prices?

Following the general rule, the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price. However, this is only true where idle capacity exists to make the transfer. There is no idle capacity in case 2. Thus, the market value serves as both the ceiling and the floor for price. This value is $1.50.

In the GPK Coffee Company, the Strudel Division has strudel that can be sold either to outside customers or to the Bean Division that also sells coffee. Information about these divisions is given below: Case 1 Case 2 Strudel Division: Capacity in units of strudel 1,000 1,000 Number of units sold or demanded externally 600 1,000 Market selling price $2.00 $1.50 Avoidable outlay costs per unit $1.50 $1.30 Unavoidable costs per unit based on capacity $0.20 $0.20 Bean Division: Number of units of strudel needed 400 400 Budgeted price per unit $1.95 $1.45 Given the facts in case 1, what are the minimum and maximum transfer prices?

Following the general rule, the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price. These values are $1.50 and $2.00, respectively.

The sales and cost information for Gamore Company are as follows: Sales (250,000 units) $5,000,000 Direct materials and direct labor 1,500,000 Factory overhead: Variable 200,000 Fixed 350,000 Selling and general expenses: Variable 50,000 Fixed 300,000 Gamore's breakeven point in the number of units is

Given sales of $5,000,000 and total variable costs of 1,750,000, the contribution margin (CM) is the difference of $3,250,000. Then the CM is divided by the units: $3,250,000 / 250,000 units = $13 CM per unit. From here, the BE point in units is equal to the total fixed costs divided by the CM per unit: $650,000 / $13 = 50,000 units.

A delivery company is implementing a system to compare the costs of purchasing and operating different vehicles in its fleet. Truck 415 is driven 125,000 miles per year at a variable cost of $0.13 per mile. Truck 415 has a capacity of 28,000 pounds and delivers 250 full loads per year. What amount is the truck's delivery cost per pound?

Given that the truck costs $16,250 per year = 125,000 miles @ $0.13 per mile, and given that the truck has a capacity of 7,000,000 lbs. per year = 250 loads @ 28,000 lbs. each, the cost per lb. is $.00232 = $16,250 / 7,000,000 lbs.

Jago Co. has two products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the

Greater contribution margin per hour of manufacturing capacity. You Answered Correctly! This is a short run situation. In the long run, the firm should expand to take advantage of the market for its products. But given that capacity cannot be increased in the short run, the product that produces the highest contribution margin per hour should be produced. There are only so many hours of production capacity available. Maximizing the contribution margin per hour also maximizes profits and cash flow, as fixed costs remain unchanged.

Which of the following types of risk are best addressed with hedging?

Hedging offsets exposure to future price fluctuations by locking in a given price in the future. Thus, foreign currency exchange or commodities would provide examples where hedging would be an appropriate risk management technique.

In a quality control program, which of the following is (are) categorized as internal failure costs? I. Rework. II. Responding to customer complaints. III. Statistical quality control procedures.

I An internal failure cost is incurred when a product that does not conform to its design specifications is detected before shipment to customers. The cost to rework items that do not meet design specifications is incurred before the items are shipped, and therefore, qualify as internal failure costs. Other internal failure costs include spoilage, scrap, and breakdown maintenance. Responding to customer complaints occurs after items are shipped, and therefore, is not included in internal failure costs. The cost of receiving and responding to customer complaints is a component of external failure costs. Statistical quality control programs are designed to distinguish between in-control and out-of-control operations, and thus, to signal when to investigate the operation, determine the problem, and solve the problem. These programs are partially preventive in nature because they often provide signals of developing problems that have not yet reached the point where remedial action is cost-effective. These programs also play an appraisal role in identifying units that fail to conform to design specifications. Their cost is incurred regardless of whether the product fails to meet its design specifications.

Nonfinancial performance measures are important to engineering and operations managers in assessing the quality levels of their products. Which of the following indicators can be used to measure product quality? I. Returns and allowances. II. Number and types of customer complaints. III. Production cycle time.

I and II Only returns and allowances and customer complaints are measures of product quality. Returns and allowances are direct measures of the quality of the product; a high frequency of returns and allowances indicates lower product quality. Customer complaints about product quality are an important input to firms about the quality of their product. However, production cycle time, also called manufacturing lead time, is the time from setup to the finished good. Cycle time is relevant to determining the optimal production system, but is not directly concerned with product quality. Longer waiting times in the manufacturing setting may indicate the need to increase the number of machines, but again, there is no direct tie-in to quality.

Book Co. uses the activity-based costing approach for cost allocation and product costing purposes. Printing, cutting, and binding functions make up the manufacturing process. Machinery and equipment are arranged in operating cells that produce a complete product starting with raw materials. Which of the following are characteristic of Book's activity-based costing approach? I. Cost drivers are used as a basis for cost allocation. II. Costs are accumulated by department or function for the purposes of product costing. III. Activities that do not add value to the product are identified and reduced to the extent possible.

I and III Both I. and III. are common characteristics of the ABC approach. For the purpose of cost estimation and allocation. Single variables such as direct labor hours or machine hours are not used, but rather, multiple variables are identified (which could include the latter two), in an effort to identify the underlying relationship between cost and its causes. Also, nonvalue-added activities are identified and eliminated or reduced. Inventories are typically reduced along with the related storage and security activities, and paperwork and other activities that do not add value to the product are minimized. However, II. is not a characteristic of ABC systems. II. is a statement of the way overhead costs are allocated in traditional costing systems. ABC disaggregates overhead costs into specific activities or drivers, computes overhead rates for each driver, and then allocates overhead to products based on their consumption or the use of the driver. Thus, ABC first allocates overhead to activities and then to products, rather than to departments and then to products, as is the case with traditional systems.

A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company's next steps?

If production remains at 10,000 units, profits will decrease by $100,000. You Answered Correctly! At the current level of 10,000 units, a contribution margin per unit of $35 = $85 - $50, and fixed costs of $300,000, the contribution margin is $350,000 and the operating income is $50,000. If variable costs increase by 20%, the contribution margin per unit decreases to $25 = $35 - $60, or $300,000 total, resulting in an operating loss of $50,000. Thus, profits would decrease by $100,000.

In its April Year 1 production, Hern Corp., which does not use a standard cost system, incurred total production costs of $900,000, of which Hern attributed $60,000 to normal spoilage and $30,000 to abnormal spoilage. Hern should account for this spoilage as

Inventoriable cost of $60,000 and period cost of $30,000. You Answered Correctly! The distinction between normal and abnormal spoilage is that normal spoilage is an expected part of the production process. The cost represents units or materials that were lost in the normal production process. They are indirect manufacturing costs (overhead) and, thus, are inventoriable. Abnormal spoilage is unexpected, and is over and above the anticipated level. It represents a loss for financial accounting purposes. No benefit is derived from abnormal spoilage.

On January 1 Maples had two jobs in process: #506 with assigned costs of $10,500 and #507 with assigned costs of $14,250. During January three new jobs, #508 through #510, were started and three jobs, #506, #507, and #508, were completed. Materials and labor costs added during January were as follows: Job number Materials Labor 506 $0 $2,000 507 0 1,500 508 4,000 3,600 509 3,800 2,000 510 2,600 3,100 Manufacturing overhead is assigned at the rate of 200 percent of labor. What is the January cost of goods manufactured and transferred from work-in-process?

Jobs 506 - 508 were the only jobs completed so the costs of these jobs is the focus of this question. DM and DL for those jobs is $35,850, but OH had to be added at ($2,000 + $1,500 + $3,600) x 200% = ($7,100 x 2) + $35,850 = $50,050.

Which of the following items is never relevant to a sell or process further decision?

Joint costs are sunk costs that are unavoidable, regardless of whether the item is sold at split-off or processed further.

A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced in Year 2 was the same as in Year 1. The Year 2 variable costing statement reported a profit, whereas the Year 2 absorption costing statement reported a loss. The difference in reported income could be explained by the units produced in Year 2 being

Less than the units sold in Year 2. Absorption costing includes fixed manufacturing costs as part of product costs; direct costing expenses fixed manufacturing costs as a period expense. Because of this, inventory valuation under absorption costing is more than inventory valuation under direct costing. When a firm sells more than it produces, it must use some of its existing inventory. Since absorption costing has a higher inventory valuation, the cost of goods sold under absorption costing will be higher (and income lower) than under direct costing.

Which of the following production processes best describes lean manufacturing?

Making small batches of a high variety of unique products with cross-trained labor. Lean manufacturing is accurately described as using small batches of a high variety of unique products with highly skilled, cross-trained labor.

Which of the following statements correctly describes the structural differences between mass and lean manufacturing?

Mass production usually has higher setup times and dedicated equipment. You Answered Correctly! Mass production is typically characterized by higher setup times, dedicated equipment, and low-skilled workers with a high degree of specialization. In contrast, lean production is characterized by lower setup times, flexible equipment, and highly skilled, cross-trained workers.

Weighted average and first in, first out (FIFO) equivalent units would be the same in a period when which of the following occurs?

No beginning inventory exists. The only distinguishing difference between the FIFO and weighted average methods of calculating equivalent units is the treatment of beginning inventory. Thus, the results will be equivalent for the two methods, where no beginning inventory exists.

Hoyt Co. manufactured the following units: Saleable 5,000 Unsaleable (normal spoilage) 200 Unsaleable (abnormal spoilage) 300 The manufacturing cost totaled $99,000. What amount should Hoyt debit to finished goods?

Normal spoilage is a manufacturing cost because it is an expected and inherent part of production. Thus, it is included in the cost of finished goods. Abnormal spoilage is the amount of spoilage in excess of normal spoilage, and it is treated as a period cost. The total units completed are 5,500 (5,000 + 200 + 300). Of this total, 5,200 are included in finished goods. Thus, 5,200/5,500 of the total cost incurred is included in finished goods. The remainder is a period cost. Debit to finished goods = $93,600 = (5,200/5,500)$99,000

Bell Co. changed from a traditional manufacturing philosophy to a just-in-time philosophy. What are the expected effects of this change on Bell's inventory turnover and inventory as a percentage of total assets reported on Bell's balance sheet?

One of the striking effects of a JIT system is the lowered level of inventory maintained by the firm. Rather than maintain a large amount of inventory as a buffer for stockouts, the JIT system purchases inventory only when necessary. The inventory is to arrive just in time for its use in production or sales. Thus, much less inventory must be maintained at any one time. Inventory turnover = cost of goods sold/average inventory. Inventory percentage = ending inventory balance/total assets. With lower amounts of inventory on hand at any time, inventory turnover INCREASES because its denominator decreases, and inventory percentage DECREASES because its numerator decreases by a greater percentage than does its denominator. Inventories turnover much more frequently because the quantity on hand is so small and inventory is sold soon after it is acquired or produced. Inventory turnover increases Inventory percentage decreases

As part of a benchmarking process, a company's costs of quality for the current month have been identified as follows: Employee training $20,000 Product recalls 8,000 Scrap 4,500 Quality inspectors 48,000 Preventive maintenance 19,500 Supplier education expense 17,500 Materials inspection expense 60,000 Processing product returns 2,500 What amount is the company's prevention cost for the current month?

Prevention costs are those that try to include proactive efforts to prevent defects before the products are produced. In this problem these include employee training, preventive maintenance, and supplier education expense for a total of $57,000.

During the month of March 2005, Nale Co. used $300,000 of direct materials. On March 31, 2005, Nale's direct materials inventory was $50,000 more than it was on March 1, 2005. Direct material purchases during the month of March 2005 amounted to

Purchases is the amount required to provide the materials used ($300,000) and the increase in inventory ($50,000) for total purchases of $350,000. Beginning material inventory + purchases = ending material inventory + material used Purchases = ending inventory - beginning inventory + material used Purchases = inventory increase + materials used Purchases = $50,000 + $300,000 = $350,000

Relevant information for material A follows: Actual quantity purchased 6,500 lbs. Standard quantity allowed 6,000 lbs. Actual price $3.80 Standard price $4.00 What was the direct material quantity variance for material A?

Quantity variances are calculated as the actual quantity less standard quantity, multiplied by standard price: (AQ - SQ) SP. Thus, (6,500 lbs. - 6,000 lbs.) $4.00 = $2,000. The variance is unfavorable since actual quantity required of 6,500 lbs. was more than the planned level of 6,000 lbs.

Galax, Inc. had an operating income of $5,000,000 before interest and taxes. Galax's net book value of plant assets on January 1 and December 31 were $22,000,000 and $18,000,000, respectively. Galax achieved a 25% return on investment for the year, with an investment turnover of 2.5. What were Galax's sales for the year?

ROI = (income / sales) * asset turnover; and ROI = 25% = $5M / sales * 2.5. Thus, solving for sales, the result is $50M.

The following information pertains to Quest Co.'s Gold Division for Year 1: Sales $311,000 Variable cost 250,000 Traceable fixed costs 50,000 Average invested capital 40,000 Imputed interest rate 10% Quest's return on investment was

ROI = division income/average invested capital = ($311,000 - $250,000 - $50,000)/$40,000 = .275 Traceable fixed costs are deducted in determining division income. Corporate fixed costs would not be deducted. The imputed interest rate is not relevant to the question.

Nile Co.'s cost allocation and product costing procedures follow activity-based costing principles. Activities have been identified and classified as being either value-adding or nonvalue-adding as to each product. Which of the following activities, used in Nile's production process, is nonvalue-adding?

Raw materials storage activity. You Answered Correctly! A value-added activity is one that makes the product or service more valuable to the customer. The only activity listed in the answer alternatives that adds no value to the product or service as perceived by the customer is raw materials storage. ABC systems and JIT purchasing systems are frequently used together. One objective is to minimize inventory holdings. The level of inventory held has no bearing on product quality or the satisfaction of the customer. By reducing inventories, less material must be stored, reducing all the attendant activities and costs related to material storage. Thus, the total cost is reduced without affecting the customer and sales.

Tennis rackets can be purchased for $60 each from an outside vendor. It costs the manufacturer $80 a piece to produce them, of which 30% is unavoidable fixed overhead cost. What are the relevant costs for this decision? Based only on these costs, which option should the company choose?

Relevant costs to make and buy are correct, but without considering any additional information, since the cost to make is cheaper than the cost to buy, the prudent decision would be to make the rackets. Relevant Costs Buy and Make Decision $60 and $56 Make

A company has two divisions. Division A has an operating income of $500 and total assets of $1,000. Division B has an operating income of $400 and total assets of $1,600. The company's required rate of return is 10%. Division B's residual income would be which of the following amounts?

Residual income is calculated as operating income less the investment (total assets here) multiplied by the required rate of return. Thus, Division B's residual income is $400 - .1($1,600) = $240.

Smart Co. uses a static budget. When actual sales are less than budget, Smart would report favorable variances on which of the following expense categories?

Sales commissions When actual sales are less than budget, the cost of sales commissions will be less than planned. This results in a favorable cost variance on sales commissions. Building rent will remain unchanged by planned versus actual sales.

In June, Delta Co. experienced scrap, normal spoilage, and abnormal spoilage in its manufacturing process. The cost of units produced includes

Scrap and normal spoilage, but not abnormal spoilage Scrap is the material left over after making a product. It has minimal or no sales value. Scrap is automatically included in work in process for a product because it is part of the material cost of a product. In many manufacturing settings, it is impossible to use every bit of material input. For example, the circular punch-outs for conduit boxes are scrap. Normal spoilage is output that cannot be sold through normal channels. It is an inherent result of production. In many cases, it is not cost effective to attempt to reduce the normal spoilage cost to zero. It is a normal part of the production process and, therefore, its cost is included in the cost of units produced. Abnormal spoilage is considered avoidable. It occurs as a result of an unexpected event, such as a machine breakdown or accident. This cost is treated as a loss rather than a normal production cost.

A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period, actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures, whereas income was substantially greater than the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the income increase is that, compared to budget, actual

Selling and administrative fixed expenses had decreased. Gross profit is the difference between sales and the cost of goods sold. The cost of goods sold includes fixed and variable manufacturing costs assigned to the units sold. Contribution margin equals sales less variable costs. Both the gross profit and the contribution margin are approximately as expected, which implies that sales, variable manufacturing costs, variable selling and administrative expenses, and fixed manufacturing costs are as expected. The only remaining component, fixed selling and administrative expenses, must be responsible for the variation in income.

A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period, actual sales revenues, total gross profit, and total contribution margin approximated the budgeted figures, whereas income was substantially below the budgeted amount. There were no beginning or ending inventories. The most likely explanation for the income shortfall is that, compared to budget, actual

Selling and administrative fixed expenses had increased. You Answered Correctly! Gross profit is the difference between sales and the cost of goods sold. The cost of goods sold includes the fixed and variable manufacturing costs assigned to the units sold. Contribution margin equals sales less variable costs. Both the gross profit and the contribution margin are approximately as expected, which implies that sales, variable manufacturing costs, variable selling and administrative expenses, and fixed manufacturing costs are as expected. The only remaining component, fixed selling and administrative expenses, must be responsible for the variation in income.

A manufacturing company that produces trivets has established the following standards for the current year: Standard price per pound $3.00 Standard material usage per trivet 2.00 During April, the company purchased 10,000 pounds of material for $33,000 and used 9,400 pounds to produce 4,500 trivets. Four thousand trivets were sold during April. What amount should be reported as the materials' quantity (usage) variance?

Since this is a usage variance and we are given the standard price of $3, we only need to multiply that sp = $3 by the difference between the quantities. Actual quantity used of 9,400 lbs. is given. Std quantity allowed is found by multiplying the 2 lb. std quantity by the actual outputs of 4,500 lbs. = 9,000 lbs. By using the formula (SQ - AQ) SP we have (9,000 - 9,400) $3 = $1,200.

What tools does Six Sigma commonly use to achieve quality control?

Six Sigma is very similar to total quality management (TQM) and uses TQM tools such as control charts, run charts, pareto histograms, and Isikawa (fish-bone) diagrams.

Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?

Standard variable cost is preferable. The "variable" part of the cost description results in passing to the purchasing division only the incremental costs of the item. The purchasing division should not pay for the fixed costs of the selling division unless the order caused those fixed costs to increase (which is not implied by the question's data). The "standard" part of the cost description makes sure that the purchasing division is not charged for inefficiencies in the selling division. The question does not contain sufficient information to deviate from a commonly used rule for setting transfer prices: standard variable cost + lost contribution margin to seller.

Which of the following terms describe or are consistent with systematic risk?

Systematic risk is also known as market risk or nondiversifiable risk and is associated with large-scale economic events or natural disasters and typically affects all companies to some degree.

Yola Co. manufactures one product with a standard direct labor cost of four hours at $12.00 per hour. In June, 1,000 units were produced using 4,100 hours at $12.20 per hour. The unfavorable direct labor efficiency variance was

The DL efficiency variance = (actual labor hours)(standard wage rate) - (standard labor hours)(standard wage rate) = (4,100)($12) - (1,000 units x 4 hours)($12) = $49,200 - $48,000 = $1,200

Which of the following types of performance measures integrates financial performance, internal operations, learning and growth, and customer satisfaction?

The balanced scorecard is defined somewhat by its four categories of financial, customers, internal business processes, and learning and growth.

Mighty, Inc. processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2 and each pound of legs sells for $1. If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a net realizable value basis?

The calculation is Value of breast meat / Value of both meats * Joint costs = (100,000 lbs. * $2) / ((100,000 lbs * $2) + (50,000 lbs. * $1)) * $600,000 = $480,000.

Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first 4 months of Year 1. What is the estimated variable order filling cost component per order? Month Orders Cost January 1,200 $3,120 February 1,300 $3,185 March 1,800 $4,320 April 1,700 $3,895 6,000 $14,520

The calculation of the variable cost per unit (or slope term) uses the high and low production points, provided they are representative of the distribution. The change in the cost for the two points (March is high, January is low) is divided by the change in activity level. Slope = ($4,320 - $3,120)/(1,800 - 1,200) = $2.00

In the profit-volume chart below, EF and GH represent the profit-volume graphs of a single-product company for 2004 and 2005, respectively. If the 2004 and 2005 unit sales are identical, how did the total fixed costs and unit variable costs of 2005 change as compared to 2004?

The changes in 2005 from 2004 are as follows: fixed costs decreased (the Y intercept is less negative for G), and the variable cost per unit increased (the slope of G is less than the slope of F). The slope of the profit-volume graph is the contribution margin per unit. With the increasing variable cost per unit, the contribution margin decreases. The change in 2005 indicates a turn away from capital-intensive production and a relative increase in the use of labor.

In using regression analysis, which measure indicates the extent to which a change in the independent variable explains a change in the dependent variable?

The coefficient of determination, identified as R2 (R-squared), indicates the degree to which the behavior of the independent variable(s) predicts or explains the dependent variable.

Kode Co. manufactures a major product that gives rise to a by-product called May. May's only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a by-product to a joint product, what would be the effect on Kode's overall gross margin?

The current method of accounting for May is to reduce the cost of goods sold of the major product by net sales of $3 per unit of May. The effect of this method of accounting is to increase gross margin by $3 per unit of May sold. If the method of accounting were changed to joint product accounting, then sales would increase to $4 per unit of May sold, without any addition to variable cost. The $1 cost associated with each unit of May would be classified as a sales expense, which is subtracted below gross margin. The $1 expense would no longer affect gross margin. Therefore, by changing the method of accounting, the gross margin increases by $1, while expenses below gross margin in the income statement increase by $1. Gross margin would reflect the full $4 gross sales of May, rather than only the net reduction in the cost of goods sold of $3.

Which of the following balanced scorecard perspectives examines a company's success in targeted market segments?

The customer perspective evaluates the organization's success in targeted customer and market segments.

Yarn Co.'s inventories in process were at the following stages of completion on April 30, Year 1: No. of units Percent complete 100 90 50 80 200 10 Equivalent units of production amounted to

The equivalent units of production for the period is the amount of work, measured in terms of completed units, that was performed during the period. In total, 150 equivalent units of work were performed during the period, which is the same amount of work that would have been performed had 150 units been started and completed during the period. 150 = .90(100) + .80(50) + .10(200)

Sender, Inc. estimates parcel mailing costs using the data shown on the chart below. What is Sender's estimated cost for mailing 12,000 parcels?

The following equation must be estimated: y = a + bx or Mailing cost = fixed cost + (cost per parcel X # or parcels) A = fixed cost = $15,000 (from the picture - the Y intercept) B = variable cost (slope) = ($75,000 - $15,000)/($20,000 - 0) = $3.00 The estimated cost for mailing 12,000 parcels is $15,000 + $3.00($12,000) = $51,000.

In a traditional job order cost system, the issue of indirect materials to a production department increases

The issuance (use in production) of indirect materials results in a debit (increase) to factory overhead control. This account accumulates actual overhead cost incurrence. Actual overhead is not debited to work in process. Rather, work in process is debited to factory overhead applied. factory overhead control

Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs?

The item "Tracking the number of products reworked" is the only choice given that reflects an internal failure.

Management has reviewed the standard cost variance analysis and is trying to explain an unfavorable labor efficiency variance of $8,000. Which of the following is the most likely cause of the variance?

The maintenance of machinery has been inadequate for the last few months. An unfavorable labor efficiency variance reflects the use of a greater quantity of labor hours than planned. This can be caused by inadequate machine maintenance, which results in equipment not running as fast or as smoothly, increasing labor time. This can also cause machines to create defective units in some cases, which may require additional time for rework.

Cott Company has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott's fixed cost?

The margin of safety is the difference between current sales and breakeven sales. Thus, breakeven sales are $120,000 ($200,000 - $80,000). In other words, the firm has breathing room of $80,000 of sales. Sales could fall by this amount before the firm would dip below breakeven. breakeven sales = Fixed cost/contribution margin percentage $120,000 = Fixed cost/.20 $24,000 = Fixed cost

Del Co. has fixed costs of $100,000 and breakeven sales of $800,000. What is its projected profit at $1,200,000 sales?

The objective is to determine the contribution margin ratio and apply it to the sales figure. This results in the total contribution margin because the contribution margin ratio is (sales - variable costs)/sales. Then subtract fixed cost to find the projected profit. Breakeven sales = fixed cost/contribution margin ratio $800,000 = $100,000/cmr .125 = cmr Projected profit = .125($1,200,000) - $100,000 = $50,000

What is the objective of the demand flow approach?

The objective of the demand flow or demand flow technology (DFT) approach is to link process flows and manage those flows based on customer demand.

Which of the following standard costing variances would be least controllable by a production supervisor?

The overhead volume variance equals the difference between the master budget for fixed overhead and applied fixed overhead. The variance has one cause only: producing a number of units different from that specified in the master budget. The variance can be broken down into the following: (master budget production volume - actual production volume)(PF)(SQ), where PF is the predetermined overhead rate for fixed overhead based on direct labor hours, and SQ is the standard quantity of direct labor hours per unit. The production supervisor has less control over the actual production volume than the factors underlying the other variances listed, because actual production is strongly influenced by sales demand, a factor not under the control of the production supervisor. The supervisor has some responsibility for the volume level, however, when the volume falls below required levels due to maintenance and other internal problems. But typically, the volume variance is not one of the variances that is considered controllable by the production supervisor.

In Year 1, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed costs of $1,000,000 and a profit before income taxes of $200,000. Due to an adverse legal decision, Thor's Year 2 liability insurance increased by $1,200,000 over Year 1. Assuming the volume and other costs are unchanged, what should the Year 2 price be if Thor is to make the same $200,000 profit before income taxes?

The problem first requires that the variable cost per unit (V) be computed so that the price can then be made a variable. V does not change in the question. 80,000($120 - V) - $1,000,000 = $200,000 V = $105 Now to solve for the new selling price S 80,000(S - $105) - $2,200,000 = $200,000 S = $135

A company is offered a one-time special order for its product and has the capacity to take this order without losing current business. Variable costs per unit and fixed costs in total will be the same. The gross profit for the special order will be 10%, which is 15% less than the usual gross profit. What impact will this order have on total fixed costs and operating income?

The problem states that fixed costs stay the same. So, as long as the contribution margin is positive and variable costs remain constant on a per unit basis, increased volume will cause income to increase. Total fixed costs do not change, and operating income increases.

Related to the CFROI metric, "the required annual cash investment needed to replace fixed assets" is the definition of what?

The required annual cash investment needed to replace fixed assets is the definition of economic depreciation.

Gram Co. develops computer programs to meet customers' special requirements. How should Gram categorize payments to employees who develop these programs?

The salaries of the employees working on the programs are directly related to the value-added activity of developing the computer programs. The salaries are directly traceable to the end product. Without the work of these employees, the products would not be possible. As the number of specialized program orders increases (for different programs), the salary cost increases. The work of these programmers could not be eliminated without jeopardizing this part of the business, and thus, it is a value-added cost. A value-added cost is one that, if eliminated, would reduce the value of the product to the customer.

In Year 1, a department's three-variance overhead standard costing system reported unfavorable spending and volume variances. The activity level selected for allocating overhead to the product was based on 80% of practical capacity. If 100% of practical capacity had been selected instead, how would the reported unfavorable spending and volume variances have been affected?

The spending variance is unaffected by the volume used for allocating the fixed overhead. The spending variance for the variable overhead is the difference between the actual overhead and the budgeted overhead based on actual direct labor hours. The spending variance for the fixed overhead is the difference between the actual overhead and the master budget for the fixed overhead. Neither variance is affected by the denominator used for allocating the fixed overhead. However, the volume variance (computed for fixed overhead only) is the difference between the master budgeted fixed overhead and the allocated fixed overhead. The allocated fixed overhead is the product of the predetermined overhead rate per direct labor hour, and standard direct labor hours. An increase in the denominator of the predetermined fixed overhead rate from 80% to 100% of capacity would cause the predetermined overhead rate to decline, along with the allocated fixed overhead. This would increase the volume variance because the master budgeted fixed overhead would remain unchanged.

A company manufactures two products, X and Y, through a joint process. The joint (common) costs incurred are $500,000 for a standard production run that generates 240,000 gallons of X and 160,000 gallons of Y. X sells for $4.00 per gallon, while Y sells for $6.50 per gallon. If there are no additional processing costs incurred after the split-off point, what is the amount of joint cost for each production run allocated to X on a physical-quantity basis?

The total physical quantity produced is 400,000 gallons (240,000 + 160,000). Sixty percent of this quantity is attributable to Product X (240,000 gallons / 400,000 gallons); therefore, 60% of the joint costs should be allocated to Product X ($500,000 * 60% = $300,000).

The regression analysis results for ABC Co. are shown as y = 90x + 45. The standard error (Sb) is 30 and the coefficient of determination (r2 ) is 0.81. The budget calls for the production of 100 units. What is ABC's estimate of total costs?

Total cost (y) is expressed as $90 of variable cost per unit + $45 of fixed cost. Given that x represents units, we solve for y = $90(100) + $45 = $9,045.

Central Winery manufactured two products, A and B. The estimated demand for product A was 10,000 bottles, and for product B, 30,000 bottles. The estimated sales price per bottle for A was $6.00, and for B, $8.00. The actual demand for product A was 8,000 bottles, and for product B, 33,000 bottles. The actual price per bottle for A was $6.20, and for B, $7.70. What amount would be the total selling price variance for Central Winery?

The total selling price variance is determined by taking the difference between the actual and estimated selling prices for each product and multiplying the difference by the actual sales volume for the product. It is calculated as follows: Product A price variance = ($6.20 - $6.00) * 8,000 = $1,600 Favorable Product B price variance = ($7.70 - $8.00) & 33,000 = $9,900 Unfavorable Total price variance = $1,600 Favorable + $9,900 Unfavorable = $8,300 Unfavorable

Mig Co., which began operations in Year 1, produces gasoline and a gasoline by-product. The following information is available pertaining to Year 1 sales and production: Total production costs to split-off point $120,000 Gasoline sales 270,000 By-product sales 30,000 Gasoline inventory, 12/31/Year 1 15,000 Additional by-product costs: Marketing 10,000 Production 15,000 Mig accounts for the by-product at the time of production. What are Mig's Year 1 cost of sales for gasoline and the by-product?

The value of the by-product, being insignificant in relation to the cost of the primary product, is treated as a reduction in the cost of the primary product at production. The separable costs associated with the by-product reduce the amount by which the cost of sales of gasoline is decreased. In this question, the value of the by-products is recognized at production (not sale). In this case, the net realizable value of the by-product at production is subtracted from the cost of the primary product (gasoline). None of the joint production cost is allocated to the by-product. Thus, the cost of sales for the by-product is zero. The $25,000 of costs associated with the by-product ($10,000 + $15,000) reduces the net realizable value of the by-product. For the primary product: Net Realizable Value of the By-product: +Sales value $30,000 -Less separable by-product costs (25,000) =Equals net realizable value $5,000 Cost of Goods Sold for Main Product: +Joint production cost $120,000 -Less net realizable value of by-product (5,000) =Adjusted production cost for main product $115,000 -Less ending inventory of gasoline (15,000) =Equals cost of goods sold for gasoline $100,000

The following information pertains to Roe Co.'s Year 1 manufacturing operations: Standard direct labor hours per unit 2 Actual direct labor hours 10,500 Number of units produced 5,000 Standard variable overhead per standard direct labor hour $3 Actual variable overhead $28,000 Roe's Year 1 unfavorable variable overhead efficiency variance was

The variable overhead efficiency variance is computed only for variable overhead and equals: (actual DL hours - standard DL hours)(standard variable overhead per DL hour) = [10,500 - 5,000(2)]($3) = $1,500. In manufacturing 5,000 units, 10,000 direct labor hours should have been used at standard (5,000 units x 2 hours per unit). The actual number of hours used in the period was 500 more than this standard amount. At $3 standard variable overhead cost per direct labor, that means that $1,500 of variable overhead was incurred, because more direct labor hours were used than the standard.

A process costing system was used for a department that began operations in January Year 1. Approximately the same number of physical units, at the same degree of completion, were in work in process at the end of both January and February. Monthly conversion costs are allocated between ending work in process and units completed. Compared to the FIFO method, would the weighted average method use the same or a greater number of equivalent units to calculate the monthly allocations?

The weighted average method (WA) uses the equivalent units of work to complete beginning inventory, as well as goods started in the period. There is no beginning inventory in January; thus, WA and FIFO would use the same equivalent units for calculating costs per equivalent unit and for allocating to work in process and transferred out units. However, in February, there is a beginning inventory, and WA would use a greater number of equivalent units. FIFO uses only the current number of units started in the period to compute cost per equivalent unit for each input.

The forming department is the first of a two-stage production process. Spoilage is identified when the units have completed the forming process. The costs of spoiled units are assigned to units completed and transferred to the second department in the period when spoilage is identified. The following information concerns forming's conversion costs in May Year 1: Units Conversion costs Beginning work-in-process (50% complete) 2,000 $10,000 Units started in May 8,000 75,500 Spoilage-normal 500 Units completed and transferred 7,000 Ending work-in-process (80% complete) 2,500 Using the weighted average method, what was forming's conversion cost transferred to the second production department?

The weighted average method counts all work done, including the beginning inventory, in the computation of the cost per equivalent unit. The method, thus, produces costs per equivalent unit that are averages of the work done in two different periods. Normal spoilage is detected at completion. Thus, the spoiled units receive a full complement of conversion (and material) cost. Equivalent units for conversion cost under the weighted average method: Units completed and transferred out, including normal spoilage 7,500 Ending inventory (.80)2,500 2,000 Equals total equivalent units of work for conversion cost through the end of the current period 9,500 Total conversion cost/equivalent unit for conversion cost = ($10,000 + $75,500)/9,500 = $9. Conversion cost of goods transferred out: $9(7,500) = $67,500.

Brewster Co. has the following financial information: Fixed costs $20,000 Variable costs 60% Sales price $50 What amount of sales is required for Brewster to achieve a 15% return on sales?

This answer follows a contribution margin income statement format involving a 15% markup on sales, solves for quantity, (i.e., $50Q - 0.6(50Q) - $20,000 = 0.15(50Q)), and then multiplies quantity by price ($50 x 1,600 = $80,000). Note: variable costs are 60% of sales, not 60% of total costs.

Rodder, Inc. manufactures a component in a router assembly. The selling price and unit cost data for the component are as follows: Selling price $15 Direct materials cost 3 Direct labor cost 3 Variable overhead cost 3 Fixed manufacturing overhead cost 2 Fixed selling and administration cost 1 The company received a special one-time order for 1,000 components. Rodder has an alternative use for production capacity for the 1,000 components that would produce a contribution margin of $5,000. What amount is the lowest unit price Rodder should accept for the component?

This price covers the total variable cost of $9 and provides a contribution margin equal to that of the alternative use ($14-$9 = $5 CM per unit; $5,000/1,000 units = $5 CM per unit). 14

Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following: Variable manufacturing costs $9 Variable selling and administrative costs 6 Total $15 Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit?

This problem compares the increase in revenue due to the possible increased spending on advertising. The $15,000 for advertising is just another fixed cost. The contribution margin ratio is used to determine 40% of the new revenue of $780,000 = $312,000 resulting in only $12,000 more in contribution margin as compared to a new fixed advertising cost $15,000. The difference between the $15,000 and the $12,000 is a $3,000 decrease in income.

A ceramics manufacturer sold cups last year for $7.50 each. The variable cost of manufacturing was $2.25 per unit. The company needed to sell 20,000 cups to break even. Its net income was $5,040. This year, the company expects the price per cup to be $9.00; the variable manufacturing cost to increase by 33.3%; and the fixed costs to increase by 10%. How many cups (rounded) does the company need to sell this year to break even?

To calculate the breakeven point, we must first find the fixed cost of the prior year. Fixed costs (FC) / contribution margin (CM) = breakeven point in units. Thus, using prior year data, FC / ($7.50 - $2.25) = 20,000 units. Solving for FC = $105,000. Current year FC = 1.1(prior year FC) = $115,500; thus, breakeven units for the current year = $115,500 / ($9 - $3) = $19,250.

Selected costs associated with a product are as follows: Total standard hours for units produced 5,000 Total actual direct labor cost $111,625.00 Actual per hour labor rate $23.50 Standard per hour labor rate $24.00 What amount is the total direct labor price variance?

To solve this we would use the formula (SP - AP) AQ. We are given SP and AP, but not AQ. We can find the AQ by dividing the actual total cost of $111,625 by the AP of $23.50 to get 4,750 hours. Now we multiply AQ of 4,750 by the $0.50 difference between the SP of $24 and the AP of $23.50 to get the price variance of $2,375. Since the actual price of $23.50 is less than the expected standard cost of $24, the variance is favorable.

The following information pertains to Lap Co.'s Palo Division for the month of April: Number of units Cost of materials Beginning work in process 15,000 $5,500 Started in April 40,000 18,000 Units completed 42,500 Ending work in process 12,500 All materials are added at the beginning of the process. Using the weighted average method, the cost per equivalent unit for materials is

Under the weighted average method, the cost per equivalent unit includes all the work done through the end of the current period, including the work performed on beginning inventory during the previous period. This is why the method is called the weighted average method. In this situation, material is added at the beginning of the process. Therefore, all units are considered complete with respect to materials. The costs associated with this effort form the numerator of the calculation. The sum of units completed plus units in ending inventory equals 55,000 (42,500 + 12,500). The total cost incurred on material equals $23,500 ($5,500 + $18,000). Thus, the cost per equivalent unit for materials is $.43 ($23,500/55,000).

LM Enterprises produces two products in a common production process, each of which is processed further after the split-off point. Joint costs incurred for the current month are $36,000. The following information for the current month was Product Units produced Units sold Separable costs Selling price per unit L 10,000 9,500 $20,000 $ 8 M 5,000 4,000 40,000 20 What amount would be the joint cost allocated to product M, assuming that LM Enterprises uses the estimated net realizable value method to allocate costs?

Using NRV, the final revenue for L is $8 (10,000 units produced) = $80,000; the final revenue for M is $20 (5,000 units produced) = $100,000; Sales less separable costs is $80,000 - $20,000 = $60,000 for L, while sales less separable costs for M is $100,000 - $40,000 = $60,000 for M also. Accordingly, both products have the same net realizable value, so the $36,000 in joint costs would be split 50/50 providing each with an allocation of $18,000.

When production levels are expected to decline within a relevant range, and a flexible budget is used, what effect would be anticipated with respect to each of the following?

Variable cost per unit in the relevant range is defined to be a constant. This assumption enables cost-volume-profit analysis and many other functions within cost accounting. Total fixed cost is assumed to be constant in the relevant range. With declining production, fixed costs per unit would increase because the number of units produced is decreasing.

A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows: Per unit Total Direct materials $4 $40,000 Direct labor 3 30,000 Fixed plant facility cost 2 20,000 The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company's monthly costs change?

Variable costs are presumed to be avoidable and fixed costs are presumed to be unavoidable to start with. Then $5,000 for rent was avoidable when they decided to buy. Thus, the cost to buy is $95,000 = $80,000 + $15,000 in fixed cost that are presumed unavoidable versus a cost to make of $90,000. increase 5k

A company would most benefit from using an activity-based costing (ABC) system as opposed to a traditional costing system under which of the following conditions?

When indirect costs are a high percentage of total costs A company would most benefit from using ABC when indirect costs are a high percentage of total costs. This is due to the fact indirect costs must be allocated while direct cost assignments are traceable.

Lanta Restaurant compares monthly operating results with a static budget. When actual sales are less than budget, would Lanta usually report favorable variances on variable food costs and fixed supervisory salaries?

When sales are lower than in the static budget, total actual variable costs will also be lower than in the static budget, because variable costs per unit are constant. A favorable variance results. At lower sales levels, lower variable costs are expected. However, there should be no variance for fixed salaries. The level of fixed cost budgeted should be the same as actually incurred.

In a process cost system, the application of factory overhead usually would be recorded as an increase in

Work-in-process inventory control. You Answered Correctly! Journal entries to record the manufacturing cost are similar for job-order and process costing. When overhead is applied, it is debited to work in process. The credit is to factory overhead applied. Work in process receives only applied overhead, unless some underapplied factory overhead is allocated to work in process at the end of the period.

In describing the regression equation used for cost prediction, Y = a + bx, which of the following is correct?

a is the total fixed cost. You Answered Correctly! The constant, a in a regression equation to calculate cost depicts the total fixed cost.

When using a flexible budget, a decrease in production levels within a relevant range

decreases total costs Total costs decrease when production decreases. The decrease equals the decline in total variable costs resulting from the production of fewer units. Fixed costs are assumed to be constant.

At the breakeven point, the contribution margin equals total

fixed costs Profit is equal to Sales - Variable Costs - Fixed Costs. At the breakeven point, profit is zero. Since the contribution margin equals sales minus variable costs: Contribution Margin - Fixed Costs = 0, and therefore Contribution Margin = Fixed Costs.

In a regression analysis, the coefficient of determination measures

goodness of fit Coefficient of determination measures goodness of fit.

A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows: Per unit Total Direct materials $4 $40,000 Direct labor 3 30,000 Fixed plant facility cost 2 20,000 The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company's monthly costs change?

increase 5k Variable costs are presumed to be avoidable and fixed costs are presumed to be unavoidable to start with. Then $5,000 for rent was avoidable when they decided to buy. Thus, the cost to buy is $95,000 = $80,000 + $15,000 in fixed cost that are presumed unavoidable versus a cost to make of $90,000

A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows: Per unit Total Direct materials $4 $40,000 Direct labor 3 30,000 Fixed plant facility cost 2 20,000 The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company's monthly costs change

increase 5k Variable costs are presumed to be avoidable and fixed costs are presumed to be unavoidable to start with. Then $5,000 for rent was avoidable when they decided to buy. Thus, the cost to buy is $95,000 = $80,000 + $15,000 in fixed cost that are presumed unavoidable versus a cost to make of $90,000.

In computing the current period's manufacturing cost per equivalent unit, the FIFO method of process costing considers current period costs

only FIFO considers only the current period cost and effort in computing cost per equivalent unit. The cost of the work performed during the previous period, embodied in beginning inventory work in process, is assumed to be the first transferred out (first-in, first-out). Goods transferred out will reflect the earlier cost and effort applied to beginning inventory at the cost per equivalent unit in the previous period. But it will also reflect the remaining work to complete the inventory during this period, at the cost per equivalent unit for the current period. This also means that the goods started and completed during the period, and the ending inventory work in process, will reflect only the current period costs. The FIFO assumption does not mix the costs and effort of two periods when computing cost per equivalent unit.

Which one of the following costs, if any, is relevant when making financial decisions?

opportunity costs Sunk costs are resource costs that have already been incurred. These costs will not be changed as a result of current or future decision-making and, therefore, are not relevant when making financial (or other) decisions. Opportunity costs are the benefits (e.g., revenues) given up when a selection of one course of action precludes another course of action (and the benefit it would have provided). As the name implies, these are the costs of forgoing one opportunity by choosing another opportunity.

Which of the following types of risk are best addressed with insurance?

peril or hazard Insurance is specifically designed to reduce or eliminate peril or hazard risk where a specific type of risk of loss is involved (i.e., pure risk).

Which of the following methodologies would be most effective for a company that wants to reduce its rate of defective products?

six sigma Six Sigma is the only well-recognized quality program used to minimize defects while reducing costs.

joint costs

sunk costs that are unavoidable, regardless of whether the item is sold at split-off or processed further.

Breakeven analysis assumes that over the relevant range

unit variable costs are constant In a graph with the Y-axis being cost and the X-axis being activity level, total variable cost begins at the origin and is an upward sloping line. The slope of this curve is variable cost per unit of activity and is a constant. If variable cost were not assumed to be a constant in the relevant range, breakeven analysis would not be possible.

Box Co. uses regression analysis to estimate the functional relationship between an independent variable (cost driver) and overhead cost. Assume that the following equation is being used: y = A + Bx. What is the symbol for the independent variable?

x

In the GPK Coffee Company, the Strudel Division has strudel that can be sold either to outside customers or to the Bean Division that also sells coffee. Information about these divisions is given below: Case 1 Case 2 Strudel Division: Capacity in units of strudel 1,000 1,000 Number of units sold or demanded externally 600 1,000 Market selling price $2.00 $1.50 Avoidable outlay costs per unit $1.50 $1.30 Unavoidable costs per unit based on capacity $0.20 $0.20 Bean Division: Number of units of strudel needed 400 400 Budgeted price per unit $1.95 $1.45 Will the internal transfer likely take place? Answer for Case 1 and 2 separately

yes, no In case 1, the floor of $1.50 and ceiling of $2.00 provide a viable range for the transfer to take place. Moreover, excess capacity allows for no service disruption to regular customers. In case 2, for the transfer to take place, the units necessary would need to be denied from regular customers, since no excess capacity exists; thus, the transfer will likely not take place