MBA Acct 2nd Sem

The New Products Division of Testar Company, had operating income of $9,100,000 and operating assets of $45,900,000 during the current year. The New Products Division has developed a potential new product that would require $9,600,000 in operating assets and would be expected to provide $2,500,000 in operating income each year. Testar has set a target return on investment (ROI) of 20% for each of its divisions. Assuming that the new product is put into production, calculate the residual income for the division.

$500,000 Residual income = Operating income − (Operating assets × Desired ROI)Residual income = ($9,100,000 + $2,500,000)− [($45,900,000 + $9,600,000) × 20%] = $500,000

The following income statement was produced when volume of sales was at 400 units. Sales revenue$2,000 Variable cost(1,200) Contribution margin$800 Fixed cost(300) Net income$500 If volume reaches 500 units, net income will be

$700 % change = (Alternative measure − Base measure) ÷ Base measure % change = (500 − 400) ÷ 400 = 25% Magnitude of operating leverage = Contribution margin ÷ Net income Magnitude of operating leverage = $800 ÷ $500 = 1.6 Increase in net income = Net income + (Net income × Percentage increase in sales × Magnitude of operating leverage) Increase in net income = $500 + ($500 × 0.25 × 1.6) = $700

The Mighty Music Company produces and sells a desktop speaker for $100. The company has the capacity to produce 50,000 speakers each period. At capacity, the costs assigned to each unit are as follows: Unit level costs$45Product level costs$15Facility level costs$5 The company has received a special order for 500 speakers. If this order is accepted, the company will have to spend $15,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order?

$75 Budgeted cost for production of 500 speakers: Per UnitUnit-level costs$45$22,500Other incremental costs15,000Relevant cost$37,500 The other costs are not relevant because the company will incur them whether it accepts or rejects the special order. At a minimum, the company would need to earn revenue of $37,500 to be indifferent between accepting and rejecting this special order. The price per unit would be calculated as follows: $37,500 ÷ 500 units = $75 per unit

Lindsay purchased a raffle ticket for $15. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $60, and another offered $95. What is Lindsay's opportunity cost of keeping the raffle ticket?

$95 An opportunity cost is the sacrifice that is incurred in order to obtain an alternative opportunity. Lindsay's opportunity cost of keeping the raffle ticket is the $95 offered by the second person.

Ann is trying to decide which one of two job offers she will accept. Several items are presented below: Job Offer A Job Offer B (1)Base salary$50,000 $50,000 (2)Overtime compensationComp.time Hourly rate (3)Moving allowance$3,000 $3,000 (4)Signing bonus$2,000 $0 (5)Job search costs incurred$300 $500 Select the items that are irrelevant to Ann's decision.

(1), (3), (5) Two primary characteristics distinguish relevant from useless information. Specifically, relevant information (1) differs among the alternatives and (2) is future-oriented.

The master budget normally covers:

1 year.

Huang Company reported the following information for the current year: Sales$400,000Average Operating Assets$250,000 Profit Margin10% The company's return on investment was:

16.00%. Margin = Operating income ÷ Sales10% = Operating income ÷ $400,000Operating income = 10% × $400,000 = $40,000ROI = Margin × TurnoverROI = (Operating income ÷ Sales) × (Sales ÷ Operating assets)ROI = 10% × ($400,000 ÷ $250,000) = 10% × 1.6 = 16.00%

Randall Company manufactures chocolate bars. The following were among Randall's manufacturing costs during the current year: Wages Machine operators$ 250,000 Selling and administrative personnel$ 70,000 Materials used Lubricant for oiling machinery$ 20,000 Cocoa, sugar, and other raw materials$ 200,000 Packaging materials$ 140,000 Randall's direct labor costs amounted to:

250,000 Direct labor costs include labor costs that can be easily and conveniently traced to products, such as the $250,000 of wages paid to machine operators. The wages of $70,000 paid to selling and administrative personnel would be classified as period costs.

Which of the following statements regarding profit centers is correct?

A manager of a profit center is evaluated on his/her ability to control costs and generate revenues. A cost center is an organizational unit that incurs expenses but does not generate revenue. A profit center differs from a cost center in that it not only incurs costs but also generates revenue. The manager of a profit center is judged on his ability to produce revenue in excess of expenses.

Packrall Company makes computer chips. Curtis is manager of the company's maintenance department. Because his maintenance technicians are so well trained in maintaining expensive and sensitive circuit board stamping equipment, Curtis has been authorized to contract to perform maintenance for outside customers. In this company, the maintenance department is likely organized as:

A profit center. Because the maintenance department will be performing maintenance for outside customers, this responsibility center is a profit center. Profit centers incur costs and also generate revenues, producing a measurable profit.

The kind of responsibility center that would be evaluated by comparing income on assets to the amount of assets invested is:

An investment center. Companies use ROI or residual income to evaluate the performance of investment center managers.

Select the statement concerning the application of the controllability concept to responsibility accounting.

As a practical matter, control of costs or revenues may be shared rather than absolute. The concept of control is crucial to an effective responsibility accounting system. Managers lose motivation when they are held accountable for actions that are beyond their scope of control. The controllability concept is crucial to an effective responsibility accounting system. Managers should be evaluated based only on revenues or costs they control.

What is the effect on the balance sheet of making cash sales of inventory to customers for profit?

Assets and stockholders' equity increase. The first part of the transaction is recording revenue from the sale. Recording cash revenue increases the asset account, Cash, and increases the stockholders' equity account, Retained Earnings. The second part of the transaction is removing the inventory that has been sold which decreases the asset account, Inventory, and decreases the stockholders' equity account, Retained Earnings. Overall, since the inventory was sold at a profit, the transaction will increase assets and stockholders' equity.

Which of the following costs would be classified as a direct cost for a company that produces motorcycles?

Both seats used in the motorcycles and wages of motorcycle assembly workers are correct. Direct costs can be traced to a specific product. The costs of the seats used in the motorcycles and wages of motorcycle assembly workers are direct costs. An indirect cost cannot be easily or economically traced to a specific product. The rent of the manufacturing facility that produces motorcycles is an indirect cost.

Asset replacement decisions involve:

Choices between continuing to operate existing equipment or replacing it with new equipment.

Companies A and B are in the same industry and are identical except for cost structure. At a volume of 50,000 units, the companies have equal net incomes. When sales at both companies increase to 60,000 units, Company A's net income would be substantially higher than B's. Based on this information,

Company A's cost structure has higher fixed costs than B's. When sales change, the amount of the corresponding change in net income is directly influenced by the company's cost structure. The more fixed cost, the greater the fluctuation in net income. Since Company A's net income is substantially higher than Company B's when both companies experience an equal increase in sales, Company A has a fixed cost structure while Company B has a variable cost structure.

When a company's district managers submitted their preliminary budget proposals, top management discovered that the southern district manager had requested a new project management information system. Unfortunately, the system is incompatible with the system used at headquarters. Which of the following advantages of budgeting reduces the likelihood that the company will end up with two incompatible systems?

Coordination The budgeting process forces coordination among departments to promote decisions in the best interests of the company as a whole.

The practice of delegating authority and responsibility is referred to as:

Decentralization.

Cost accumulation is used to

Determine the cost of a particular cost object.

Actual costs are not relevant in many decisions because actual costs cannot be determined until after the decision has been made. When accumulating the cost of a specific cost object, the indirect costs are allocated to the cost object. Actual costs are useful for evaluating managerial performance.

Direct costs can be easily traced to a cost object. Indirect costs cannot be easily traced to a cost object.

Two different costs incurred by Ruiz Company exhibit the following behavior pattern per unit: Units Sold50 100 150 200 Cost #1$300per unit$150per unit$100per unit$75per unit Cost #2$2per unit$2per unit$2per unit$2per unit Cost #1 and Cost #2 exhibit which of the following cost behavior patterns, respectively?

Fixed and variable The cost per unit of Cost #1 decreases when volume increases; as such, Cost #1 is a fixed cost. When the volume increases, the cost per unit of Cost #2 stays the same; as such, Cost #2 is a variable cost.

Which of the following is an advantage of budgeting?

Forces coordination among departments to promote decisions in the best interests of the company as a whole Provides advance notice of potential shortages, bottlenecks, or other weaknesses in operating plans Provides a way to evaluate performance

Levenworth Company incurs unnecessary costs each period because of the excess quantities of inventory maintained to meet unexpected customer demand. The costs of inventory financing, storage, supervision, and obsolescence could most likely be reduced by which of the following practices?

Just-in-time inventory Inventory holding costs include, but are not limited to, financing, warehouse space, supervision, theft, damage, and obsolescence. Many businesses have been able to reduce their inventory holding costs by making products available just in time (JIT) for customer consumption.

Which of the following types of labor costs will flow through the inventory account?

Plant supervision Material handling Assembly labor Product costs are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made. Sales commissions are a period cost. Therefore, the sales commissions will be expensed when incurred and will never flow through the inventory account.

Which of the following is a benefit associated with budgeting?

Promotes planning and coordination. The ability to take corrective action to improve performance. Enhances performance measurement. Budgeting promotes planning and coordination; it enhances performance measurement and corrective action.

Great Outdoors Company operates a store in downtown Denver that has five departments including a fishing department. If the fishing department is closed, the store manager's position will not be affected, but if the entire store is closed, the manager will be terminated. Which of the following lessons should be learned from this example?

Relevance of costs is context sensitive The concept of relevance is independent from the concept of cost behavior. In a given circumstance, relevant costs could be either fixed or variable.

To avoid suboptimization, many companies prefer to evaluate their investment centers using:

Residual income instead of return on investment.

Which of the following would be prepared first when a merchandising company uses a master budget?

Sales forecast Preparing the master budget begins with the sales forecast (also referred to as a sales budget). Based on the sales forecast, the detailed budgets for inventory purchases and operating expenses are developed. The schedules of cash receipts and cash payments provide the foundation for preparing the cash budget.

Which of the following items would be reported directly on the income statement as a period cost?

Selling and administrative salaries Selling and administrative salaries are reported directly on the income statement as a period cost. The cost of lubricant for oiling machinery and the wages paid to machine operators would be accumulated in inventory accounts as product costs.

regarding costs and expenses

Some costs are initially recorded as expenses while others are initially recorded as assets. Expenses are incurred when assets are used to generate revenue. Non-manufacturing costs should be expensed in the period in which they are incurred. Product costs (i.e. manufacturing costs) are all costs incurred to obtain or manufacture a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs (i.e. non-manufacturing costs) are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made.

Best alternative as an appropriate cost driver for allocating indirect costs of a human resources department in a service company with four revenue-generating departments?

Square footage of office space Number of employees Payroll of each department

Some costs that possibly could be traced directly to cost objects are nonetheless classified as indirect costs because:

Such costs cannot be traced to objects in a cost-effective manner. Direct costs can be traced to cost objects in a cost-effective manner. Indirect costs cannot be traced to objects in a cost-effective manner.

Selection of a cost driver depends on:

The availability of information for both the cost and the potential cost driver. A cause-and-effect relationship between the cost driver and the cost. Judgment of management.

Clean, Inc. cleans and waxes floors for commercial customers. The company is presently operating at less than capacity, with equipment and employees idle at times. The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $31,000. The size of the proposed job is 44,000 square feet. The company's normal service costs are as follows: Unit-level materials$0.40per square footUnit-level labor$0.47per square footUnit-level variable overhead$0.30per square footFacility-level overheadAllocated at $0.32 per square foot If the company accepts the special offer:

The company will lose $20,480 on the job. Budgeted cost for production of 44,000 square foot (sf) special order: Per sfRevenue$31,000Unit-level costs:Materials$0.4017,600Labor$0.4720,680Variable overhead$0.3013,20051,480Excess (deficiency) of relevant revenue over relevant cost$(20,480) The other costs are not relevant because the company will incur them whether it accepts or rejects the special order.

ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced the following operating results: Service 1 Service 2 Service revenue$155,000 $68,000 Unit-level materials$(35,000) $(17,000) Unit-level labor$(45,000) $(29,000) Product-level selling & administrative costs$(25,000)$(18,500) Company wide facility-level costs$(5,000) $(5,000) Net income (loss)$45,000 $(1,500) If the company stops providing Service:

The company's income will decrease by $3,500 per year. If it eliminates a product line, a company can avoid the unit-level, batch-level, product-level, and segment-level facility-sustaining costs. Relevant Revenue and Cost Data for Segment: Projected revenue$68,000 Projected costs: Unit-level costs: Materials 17,000 Labor 29,000 Product-level costs 18,500 Projected income (loss)$3,500 The companywide facility-level costs are not relevant because the company will incur them whether it eliminates the segment or continues to operate it.

Gibbs Corporation makes indoor gas fireplaces. A standard fireplace includes unit-level materials, labor, and overhead costs. In addition, the company incurs product-level engineering and advertising costs. Lastly, the company incurs facility-level costs related to renting the manufacturing building A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs's selling price. Which of the following costs would be relevant to this special order decision?

The unit-level materials, labor, and overhead The relevant costs in a special order decision are the unit-level and batch-level costs that will be incurred if the special order is accepted. The product and facility-level costs are not relevant.

Relevant revenues must differ among the alternatives.

Two primary characteristics distinguish relevant from useless information. Specifically, relevant information (1) differs among the alternatives and (2) is future-oriented. Relevant costs are frequently called avoidable costs.

Java Joe operates a chain of coffee shops. The company pays rent of $20,000 per year for each shop. Supplies (napkins, bags and condiments) are purchased as needed. The manager of each shop is paid a salary of $3,000 per month, and all other employees are paid on an hourly basis. Relative to the number of customers for a shop, the cost of supplies is which kind of cost?

Variable cost When the volume increases, the total cost of supplies increases; when volume decreases, the total decreases; as such, the cost of supplies is a variable cost.

Which of the following costs is considered a period cost?

Warehousing costs Depreciation of delivery vehicles Salaries paid to company executives Period costs are associated with the general, selling, and administrative functions of the business. Product costs are all costs incurred to obtain a product or provide a service. Freight paid on a purchase of raw materials is considered a product cost.

Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year: Retail DivisionWholesale DivisionOperating income$2,500,000$6,000,000Operating assets$16,000,000$36,000,000 Terra Company has set a target return on investment (ROI) of 15% for both divisions. Based on ROI, which division appears to have performed better?

Wholesale division. ROI = Operating income ÷ Operating assetsRetail division:ROI = $2,500,000 ÷ $16,000,000 = 15.6%Wholesale division:ROI = $6,000,000 ÷ $36,000,000 = 16.7%Based on ROI, the wholesale division performed better.

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold. For Rock Creek Bottling Company, the production manager's salary is an example of:

a fixed cost. The total amount of a fixed cost does not change when volume changes.

Budgeting that involves decisions such as whether to buy or lease equipment or build a new factory is referred to as:

capital budgeting

The budgeting process that involves adding a month to the end of the budget period at the end of each month, thus maintaining a twelve-month planning horizon, is referred to as:

continuous budgeting.

Budgeting that involves the development of a master budget to direct the firm's activities over the short term is referred to as:

operations budget

Pilot Motors Corporation is an automobile manufacturer. The company produces its own motors, tires, and other automobile parts. Pilot has the opportunity to purchase tires from another manufacturer instead of producing the tires in its own facility. This type of decision is typically known as a(n):

outsourcing decision. Companies can sometimes purchase products they need for less than it would cost to make them. This circumstance explains why this automobile manufacturer might purchase rather than make one or more of the parts in its cars. Buying goods and services from other companies rather than producing them internally is commonly called outsourcing.

The budgeting technique that provides for employee input into the planning process is known as:

participative budgeting. Participative budgeting invites participation in the budget process by personnel at all levels of the organization, not just upper-level managers. Information flows from the bottom up as well as from the top down during budget preparation.

When the manager's evaluation is based on residual income, the manager should accept a project if the residual income is:

positive. When the manager's evaluation is based on residual income, the manager is likely to accept the project when the additional investment increases the residual income generated by the investment (that is, when the residual income is positive).

downstream costs

sales commissions. advertising. packaging costs. Downstream costs are costs incurred after the manufacturing process including marketing, distribution, and customer services. Research and development is considered an upstream cost because it is incurred before the manufacturing process.

Planning concerned with long-range decisions such as defining the scope of the business is referred to as:

strategic planning.

Costs associated with holding inventory often include:

theft, damage, and obsolescence. financing. warehouse space. supervision.