Cost Accounting - Chapter 8

Parwin Corporation plans to sell 29,000 units during August. If the company has 11,000 units on hand at the start of the month, and plans to have 12,000 units on hand at the end of the month, how many units must be produced during the month? A. 30,000 B. 28,000 C. 40,000 D. 41,000

A. 30,000 (29,000 + 12,000 - 11,000 = 30,000)

Which of the following is a major factor that should be taken into consideration while planning the desired level of inventories? A. Costs of carrying inventory. B. General administrative policy of the company. C. Selling price of the finished product. D. Statutory requirements.

A. Costs of carrying inventory. (Factors considered for planning the desired level of inventories are costs of carrying inventory and costs of lost sales.)

Which of the following is not one of the reasons that organizations use budgets? A. The budgeting process enables managers to uncover bottlenecks as they occur. B. Budgets communicate financial goals throughout the organization. C. Budgets evaluate and reward employees.

A. The budgeting process enables managers to uncover bottlenecks as they occur. (Organizations use budgets to uncover potential bottlenecks before (rather than as) they occur.)

The number of units to be produced in a period can be determined by adding the expected sales to the desired ending inventory and then deducting the beginning inventory. A. True B. False

A. True

Companies prepare direct labor budgets to ________. A. avoid labor shortages B. determine the direct labor-hours per unit C. ensure timely supply of raw materials D. reduce inventories

A. avoid labor shortages (Companies prepare direct labor budgets to adjust the labor force according to the production schedule and to avoid the risk of labor shortages or costs of idle capacity.)

For a production budget, the ______ is the beginning inventory for the year. A. beginning inventory for the first quarter B. beginning inventory for the last quarter C. ending inventory for the last quarter D. sum of beginning inventories for the four quarters

A. beginning inventory for the first quarter (The beginning inventory for the first quarter is the beginning inventory for the year.)

In a budgeted income statement, _________ is subtracted from sales to arrive at gross margin. A. cost of goods sold B. interest expense C. selling and administrative expense D. depreciation expense

A. cost of goods sold

The value of the ending inventory is calculated by multiplying the number of units in ending inventory by the ________. A. unit product cost B. variable overhead cost per unit C. total overhead cost per unit D. the sum of the direct materials and direct labor cost per unit

A. unit product cost (The value of ending inventory is calculated by multiplying the unit product cost by the number of units in ending inventory. The unit product cost includes the direct material cost per unit, the direct labor cost per unit, and the manufacturing overhead cost per unit.)

Film Studio, Incorporated has beginning retained earnings of $80,000 and expects to earn net income of $70,000 during the budget period. What would be the budgeted ending balance in retained earnings if the company declares and pays dividends of $50,000? A. $80,000 B. $100,000 C. $150,000 D. $200,000

B. $100,000 (Ending retained earnings = Beginning retained earnings + Net income − Dividends; Ending retained earnings = $80,000 + $70,000 − $50,000 = $100,000)

Striker Company estimates its expected cash receipts for the period to be $80,000 and its expected cash disbursements to be $70,000. The beginning cash balance for the period was $5,000. The management wants to maintain a minimum cash balance of $40,000. How much cash will the company need to borrow? A. $15,000 B. $25,000 C. $30,000 D. $40,000

B. $25,000 (Excess (deficiency) of cash available over disbursements = Beginning cash balance + Cash receipts − Cash disbursements Excess (deficiency) of cash available over disbursements = $5,000 + $80,000 − $70,000 = $15,000 Amount to be borrowed = Minimum cash balance − Excess (deficiency) of cash available over disbursements Amount to be borrowed = $40,000 − $15,000 = $25,000)

Which of the following is deducted from the total selling and administrative expense budget to determine the cash disbursements for selling and administrative expense budget? A. Advertising expense B. Depreciation expense C. Selling commissions D. Utilities expense

B. Depreciation expense (Depreciation expense is a noncash expense that is deducted from the total selling and administrative expense budget to determine the cash disbursements for the selling and administrative expense budget.)

In a direct materials budget, the desired ending raw materials inventory for the year is equal to the ________. A. beginning balance of accounts payable B. desired ending raw materials inventory for the last period C. total merchandise purchased during the year D. value of raw material used during the year

B. desired ending raw materials inventory for the last period (In a direct materials budget, the desired ending raw materials inventory for the year is the same as the desired ending raw materials inventory for the last period.)

Smarton Company is in the process of preparing its budgeted income statement. It has determined its estimated gross margin to be $90,000. The company also expects to incur selling and administrative expenses of $30,000 and interest expense of $12,000. What is Smarton's budgeted net income? A. $18,000 B. $30,000 C. $48,000 D. $60,000

C. $48,000 (Budgeted net income = Gross margin − Selling and administrative expenses − Interest expense Budgeted net income = $90,000 − $30,000 − $12,000 = $48,000)

William Corporation has a contract with the labor union which guarantees its workers pay for at least 40,000 hours every quarter. Based on its direct labor budget for the current year, the company estimated it will need 39,000 direct labor-hours during the fourth quarter to produce 13,000 units of finished goods. Each unit requires 3 direct labor-hours (DLHs) and the cost of direct labor per hour is $12 per hour. What is the total direct labor cost for the fourth quarter? A. $432,000 B. $468,000 C. $480,000 D. $540,000

C. $480,000 (Even though the total direct labor-hours worked in the fourth quarter were 39,000 hours, William's contract with the labor union guarantees its workers pay for at least 40,000 hours every quarter. As a result: Fourth quarter total direct labor cost = 40,000 hours × $12 = $480,000)

Sparks Corporation has a cash balance of $14,100 on April 1. The company must maintain a minimum cash balance of $11,500. During April, expected cash receipts are $59,000. Cash disbursements during the month are expected to total $68,500. Ignoring interest payments, during April the company will need to borrow: A. $9,500 B. $11,500 C. $6,900 D. $4,600

C. $6,900 ($14,100 + $59,000 = $73,100) ($73,100 - $68,500 = $4,600) ($11,500 - $4,600 = $6,900)

Vineyard Corporation, a manufacturer of fine wines, began the year with 20,000 bottles in inventory. The company estimated the budgeted sales for the four quarters of the current year to be 200,000 bottles, 150,000 bottles, 250,000 bottles, and 400,000 bottles, respectively. The management feels that an ending inventory of 10% of the subsequent quarter's sales is appropriate. What are the production needs for the first quarter? A. 160,000 bottles B. 175,000 bottles C. 195,000 bottles D. 215,000 bottles

C. 195,000 bottles (Production needs for the first quarter = Budgeted sales of 200,000 bottles + Ending inventory of 15,000 bottles − Beginning inventory of 20,000 bottles = 195,000 bottles)

Vineyard Corporation, a manufacturer of fine wines, began the year with 20,000 bottles in inventory. The company estimated the budgeted sales for the four quarters of the current year to be 200,000 bottles, 150,000 bottles, 250,000 bottles, and 400,000 bottles, respectively. The management feels that an ending inventory of 10% of the subsequent quarter's sales is appropriate. What is the desired ending inventory for the second quarter? A. 15,000 bottles B. 20,000 bottles C. 25,000 bottles D. 40,000 bottles

C. 25,000 bottles (The desired ending inventory for the second quarter = Third quarter sales of 250,000 bottles × Ending inventory percentage of 10% = 25,000 bottles)

Which of the following explains why operating budgets generally span a period of one year? A. Accounting regulations mandate that all operating budgets be prepared for one year. B. Operating budgets, by definition, are prepared for one-year periods. C. Companies choose a span of one year to correspond to their fiscal years. D. Operating budgets need to correspond with the calendar year.

C. Companies choose a span of one year to correspond to their fiscal years. (Operating budgets generally cover a one-year period to correspond to the company's fiscal year.)

Which of the following is not a benefit of self-imposed budgets? A. A manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible to meet. B. Budget estimates prepared by front-line managers are often more accurate and reliable. C. Lower-level managers are encouraged to create budgetary slack since they are more knowledgeable of day-to-day operations. D. Motivation is generally higher.

C. Lower-level managers are encouraged to create budgetary slack since they are more knowledgeable of day-to-day operations. (One of the limitations of self-imposed budgeting is that it may allow lower-level managers to create too much budgetary slack. Because the manager who creates the budget will be held accountable for actual results that deviate from the budget, the manager will have a natural tendency to submit a budget that is easy to attain (i.e., the manager will build slack into the budget).)

The purpose of preparing a direct materials budget is to ________. A. allocate the cost of raw materials to production departments B. estimate the manufacturing overhead C. estimate the quantity of raw materials to be purchased D. estimate the unit cost of direct materials to be purchased

C. estimate the quantity of raw materials to be purchased (The purpose of the direct materials budget is to determine the quantity of raw materials to be purchased each period to fulfill the production needs and to provide for adequate inventories.)

The budgeting process begins with the preparation of the ______ budget. A. cash B. direct materials C. production sales

C. production sales (The budgeting process begins with the preparation of the sales budget, which is a detailed schedule showing the expected sales for the budget period.)

When preparing a direct materials budget, the required purchases of raw materials in units equals: A. raw materials needed to meet the production schedule − desired ending inventory of raw materials − beginning inventory of raw materials. B. raw materials needed to meet the production schedule + desired ending inventory of raw materials + beginning inventory of raw materials. C. raw materials needed to meet the production schedule + desired ending inventory of raw materials − beginning inventory of raw materials. D. raw materials needed to meet the production schedule − desired ending inventory of raw materials + beginning inventory of raw materials.

C. raw materials needed to meet the production schedule + desired ending inventory of raw materials − beginning inventory of raw materials.

Haylock Incorporated bases its manufacturing overhead budget on budgeted direct labor-hours. The direct labor budget indicates that 8,700 direct labor-hours will be required in August. The variable overhead rate is $1.60 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $100,500 per month, which includes depreciation of $8,850. All other fixed manufacturing overhead costs represent current cash flows. The August cash disbursements for manufacturing overhead on the manufacturing overhead budget should be: A. $114,420 B. $13,920 C. $91,650 D. $105,570

D. $105,570 ($8,700 x $1.60 = $13,920) ($13,920 + $100,500 = $114,420) ($114,420 - $8,850 = $105,570)

Pro Clean Company, a manufacturer of hand sanitizers, intends to produce 40,000 units in the third quarter and 35,000 units in the fourth quarter. Each unit requires 0.50 direct labor-hours (DLHs) and the cost of direct labor per hour is $18. What would be the total direct labor cost for the fourth quarter? A. $355,000 B. $360,000 C. $300,000 D. $315,000

D. $315,000 (Total direct labor cost for the fourth quarter = 35,000 units × 0.50 DLHs per unit × $18 = $315,000)

For the budget period ending December 31 of the current year, Aaron Corporation estimates its ending balances for cash as $4,000, accounts receivable as $16,000, finished goods inventory as $12,000, and raw materials inventory as $8,000. Invoices relating to raw materials in the amount of $14,000 are expected to be unpaid as of December 31. What is the amount of total current assets that will be reported on the budgeted balance sheet? A. $20,000 B. $26,000 C. $32,000 D. $40,000

D. $40,000 (Total current assets = Cash + Accounts receivable + Finished goods inventory + Raw materials inventory Total current assets = $4,000 + $16,000 + $12,000 + $8,000 = $40,000)

Precision Company estimates its machine-hour requirements for the four quarters to be 35,000 hours, 20,000 hours, 15,000 hours, and 30,000 hours respectively. The variable manufacturing overhead rate is $4 per machine-hour. The fixed manufacturing overhead is $50,000 per quarter, which includes $20,000 of depreciation expense. What is the budgeted variable manufacturing overhead for the year? A. $200,000 B. $260,000 C. $280,000 D. $400,000

D. $400,000 (Variable manufacturing overhead for the year = Variable manufacturing overhead rate per machine-hour × Total machine-hours required for the year Variable manufacturing overhead for the year = $4 × 100,000 machine-hours = $400,000)

Precision Company estimates its machine-hour requirements for the four quarters to be 35,000 hours, 20,000 hours, 15,000 hours, and 30,000 hours respectively. The variable manufacturing overhead rate is $4 per machine-hour. The fixed manufacturing overhead is $50,000 per quarter, which includes $20,000 of depreciation expense. What is the predetermined overhead rate for the year? A. $2 per machine hour B. $4 per machine hour C. $5 per machine hour D. $6 per machine hour

D. $6 per machine hour (Predetermined overhead rate = (Variable manufacturing overhead + Fixed manufacturing overhead) ÷ Total machine-hours required Predetermined overhead rate = [($4 × 100,000 machine-hours) + ($50,000 per quarter × 4 quarters)] ÷ 100,000 machine-hours or ($400,000 + $200,000) / 100,000 machine-hours = $6 per machine hour)

The usual starting point for a master budget is: A. the production budget. B. the direct materials purchase budget. C. the budgeted income statement. D. the sales forecast or sales budget.

D. the sales forecast or sales budget.

A company determines that the number of units sold is the cost driver for its variable selling and administrative expense budget. The product of its variable selling and administrative rate and budgeted unit sales will be ________. A. budgeted sales revenue B. total budgeted cash disbursements for selling and administrative expenses C. total budgeted fixed selling and administrative expenses D. total budgeted variable selling and administrative expenses

D. total budgeted variable selling and administrative expenses (When budgeted variable selling and administrative expenses are driven by the number of units sold, the variable selling and administrative rate per unit sold is multiplied by the budgeted unit sales to arrive at the total budgeted variable selling and administrative expenses. The total budgeted fixed selling and administrative expenses are then added to the total budgeted variable selling and administrative expenses to arrive at the total budgeted selling and administrative expenses. Finally, the total budgeted selling and administrative expense is adjusted by subtracting any noncash selling and administrative expenses to arrive at the budgeted cash disbursements for selling and administrative expenses.)