ACCOUNTING EXAM 3 PRACTICE EXAM

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: Unit-level material cost$3 Unit-level labor cost$2 Unit-level overhead$1 Batch-level set-up cost (5,000 units per batch)$25,000 Product-level supervisory salaries$37,500 Allocated facility-level costs$20,000 The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be:

$10,500 more than if the switches are purchased. The allocated factory-level costs are not relevant because the company will incur them whether it accepts or rejects the special order. If the company decides to make the parts, total costs will be $10,500 (= $110,500 − $100,000), more than if the switches are purchased.

Chu Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: Dec. Year 1Jan. Year 2Feb. Year 2Mar. Year 2 (Actual)(Budgeted)(Budgeted)(Budgeted)Cost of goods sold$80,000 $140,000 $180,000 $120,000 Desired ending inventory levels are 25% of the following month's projected cost of goods sold. Budgeted purchases of inventory in February Year 2 would be:

$165,000. Explanation Budgeted purchases of inventory = Budgeted cost of goods sold + Desired ending inventory − Beginning inventory Budgeted purchases of inventory in February = Budgeted cost of goods sold + (Budgeted cost of goods sold in March × 25%) − (Budgeted cost of goods sold in February × 25%) Budgeted purchases of inventory in February = $180,000 + ($120,000 × 25%) − ($180,000 × 25%) = $180,000 + $30,000 − $45,000 = $165,000

Bantam Industries has budgeted the following information for March: Cash receipts$271,000 Beginning cash balance 5,000 Cash payments 280,000 Desired ending cash balance 25,000 If there is a cash shortage, the company borrows money from the bank. All cash is borrowed at the beginning of the month in $1,000 increments, and interest is paid monthly at 1% on the first day of the following month. The company had no debt before March 1. How much cash will the company need to borrow in March?

$29,000 Explanation Projected ending cash balance (before borrowing, if any) = Beginning cash balance + Cash receipts − Cash payments - Repayments Projected ending cash balance (before borrowing, if any) = $5,000 + $271,000 − $280,000 = $(4,000)

Markham Company has completed its sales budget for the first quarter of Year 2. Projected credit sales for the first four months of the year are shown below: January$30,000 February$36,000 March$45,000 April$48,000 The company's past records show collection of credit sales as follows: 40% in the month of sale and the balance in the following month. The total cash collection from receivables in March is expected to be:

$39,600. March collections = (February sales × Percent collected in month following month of sale) + (March sales × Percent collected in month of sale) March collections = ($36,000 × 60%) + ($45,000 × 40%) = $21,600 + $18,000 = $39,600

Asset replacement decisions involve:

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

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.

All of the following are examples of product-level costs except:

Costs incurred to support specific products or services are called product-level costs. Product-level costs include quality inspection costs, engineering design costs, the costs of obtaining and defending patents, the costs of regulatory compliance, and inventory holding costs such as interest, insurance, maintenance, and storage. Property and real estate taxes are considered a facility-level cost.

Wu Company incurred $146,200 of fixed cost and $163,400 of variable cost when 3,800 units of product were made and sold. If the company's volume doubles, the total cost per unit will:

Current cost per unit:Total cost per unit = (Fixed cost + Variable cost) ÷ Number of unitsTotal cost per unit = ($146,200 + $163,400) ÷ 3,800 units = $81.47 per unitCost per unit when volume doubles:Total cost per unit = [$146,200 + ($163,400 × 2)] ÷ (3,800 units × 2) = $62.24 per unit

QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below: Alternative A Alternative BProjected revenue$62,500 $75,000 Unit-level costs 12,500 18,000 Batch-level costs 6,250 12,000 Product-level costs 7,500 8,500 Facility-level costs 5,000 6,250 What is the differential revenue for this decision?

Differential revenue = Alternative A − Alternative B Differential revenue = $62,500 − $75,000 = $12,500

Which of the following is an appropriate cost driver for allocating indirect costs to a human resources department in a service company?

Either number of employees or square footage of office space depending on the nature of the indirect cos

Which of the following is a benefit of participative budgeting?

Employees tend to be more motivated to achieve the budget. EXPLANATION Participative budgeting invites participation in the budget process by personnel at all levels of the organization, not just upper-level managers. Because they are directly responsible for meeting budget goals, subordinates can offer more realistic targets. The budget is thus a self-imposed constraint. Employees can hold no one responsible but themselves if they fail to accomplish the budget objectives they established.

The margin of safety ratio can be defined as the:

Excess of budgeted sales over break-even sales divided by budgeted sales.

The magnitude of operating leverage for Forbes Corporation is 2.9 when sales are $210,000 and net income is $25,000. If sales increase by 5%, what is net income expected to be?

Expected net income = Net income + (Net income × (Percentage increase in sales × Magnitude of operating leverage))Expected net income = $25,000 + ($25,000 × 0.05 × 2.9) = $28,625

Ting Company started the accounting period with the following beginning balances: Raw Materials Inventory, $21,000; Work in Process Inventory, $45,000; and Finished Goods Inventory, $10,000. During the accounting period, the company purchased $30,000 of raw materials and ended the period with $8,000 in raw material inventory. Direct labor costs for the period were $60,000 and $63,000 of manufacturing overhead costs was allocated to work in process. Ending work in process was $41,000 and ending finished goods was $17,500. Goods were sold during the period for $162,500. The amount of cost of goods manufactured (i.e., amount transferred from work in process to finished goods) would be: Multiple Choice

Explanation Total manufacturing costs = (Beginning raw materials inventory + Purchases − Ending raw material inventory) + Direct labor + Actual overhead costs Total manufacturing costs = ($21,000 + $30,000 − $8,000) + $60,000 + $63,000 = $166,000 Cost of goods manufactured = Beginning work in process + Total manufacturing costs − Ending work in process Cost of goods manufactured = $45,000 + $166,000 − $41,000 = $170,000

At its $38 selling price, Atlantic Company has sales of $38,000, variable manufacturing costs of $6,000, fixed manufacturing costs of $3,000, variable selling and administrative costs of $4,000 and fixed selling and administrative costs of $3,000. What is the company's contribution margin per unit?

First, determine the number of units sold:Number of units sold = Sales ÷ Selling price per unitNumber of units sold = $38,000 ÷ $38 per unit = 1,000 unitsThen, determine the variable cost per unit:Variable cost per unit = (Variable manufacturing costs of $6,000 + Variable selling and administrative costs of $4,000) ÷ 1,000 units = $10 per unitFinally, determine the contribution margin per unit:Contribution margin per unit = Selling price per unit − Variable costs per unitContribution margin per unit = $38 per unit − $10 per unit = $28 per unit

All of the following would be considered a fixed cost for a bottled water company except:

Hourly wages for machine operators

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Variable selling and administrative costs would be unaffected. What is the minimum price that Outdoor Living should accept for the special order?

If the relevant revenue exceeds the relevant (avoidable) costs, the special order should be accepted. As such, the minimum selling price should equal the relevant cost per unit. 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. In this situation, the variable manufacturing cost per unit is the relevant cost.

The following income statement is provided for Grant, Inc. Sales revenue (3,000 @ $14.50 per unit)$43,500 Variable costs (3,000 @ $6.50 per unit) 19,500 Fixed costs 8,900 Net income$15,100 What is this company's magnitude of operating leverage?

Magnitude of operating leverage = Contribution margin ÷ Net income Magnitude of operating leverage = ($43,500 − $19,500) ÷ $15,100 = 1.59

Select the incorrect statement regarding costs and expenses.

Manufacturing-related costs are initially recorded as expenses.

Identify the false statement regarding how product costs in a manufacturing company differ from product costs in a service or merchandising company.

Most labor costs for merchandising companies are treated as product costs.

Which of the following items would be least useful in preparing a schedule of cash receipts?

Number of units expected to be purchased. Explanation The sales budget has two sections. Section 1 shows the projected sales for each month; it would include the number of units expected to be sold (rather than purchased). Section 2 is a schedule of the cash receipts for the projected sales.

Which of the following statements is true?

Outsourcing decreases the extent of a company's vertical integration and the reputation of the supplier is a critical issue in an outsourcing decision. Explanation A company that uses vertical integration controls the full range of activities from acquiring raw materials to distributing goods and services. Outsourcing reduces the level of vertical integration, passing some of a company's control over its products to outside suppliers. The reliability of the supplier is critical to an outsourcing decision. An unscrupulous supplier may lure an unsuspecting manufacturer into an outsourcing decision using low-ball pricing. Once the manufacturer is dependent on the supplier, the supplier raises prices. If a price sounds too good to be true, it probably is too good to be true. Other potential problems include product quality and delivery commitments.

Which of the following statements is true with regard to product costs versus general, selling, and administrative costs?

Product costs associated with units sold appear on the income statement as cost of goods sold.

Which of the following is not classified as manufacturing overhead?

Product delivery costs

Once sales reach the break-even point, each additional unit sold will:

Recall that each additional unit sold will increase profit by the contribution margin per unit. Once the fixed costs are covered at the break-even point, the sales of each additional unit will increase profit by an amount equal to the contribution margin per unit.

Which of the following is not considered a pro forma financial statement?

Sales budget

Which of the following budgets needs to be prepared prior to preparing an inventory purchases budget?

Sales budget Explanation 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 inventory purchases budget is based on which budget?

Sales budget Explanation The inventory purchases budget shows the amount of inventory that must be purchased each month to satisfy the demand projected in the sales budget.

The cash budget is based on which budget?

Sales budget Inventory purchases budget Selling and administrative expense budget Explanation The schedule of cash receipts (arising from the sales budget) and the schedule of cash payments (arising from the inventory purchases and selling and administrative expense budget) provide the foundation for preparing the cash budget.

Which of the following accounts would appear on the sales budget and the pro forma income statement?

Sales revenue

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $18,000. Assuming its selling price is $48.50 per unit and its variable costs per unit are $36, how many units must be sold to achieve its target given that total fixed costs are $69,000? (Do not round intermediate calculations.)

Sales volume in units = (Fixed costs + Desired profit) ÷ Contribution margin per unitSales volume in units = [$69,000 + ($18,000)] ÷ ($48.50 per unit − $36 per unit) = $51,000 ÷ $12.50 per unit = 4,080 units

Which of the following is generally included in a sales budget?

Schedule of cash receipts for the projected sales Explanation Desired ending inventory and budgeted cost of goods sold appear on the inventory purchases budget. The schedule of cash payments for inventory purchases is prepared using information from the inventory purchases budget and provides information for the cash budget.

Both direct and indirect costs can be relevant to a particular decision.

TRUE - 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. Accountants use cost accumulation to determine the cost of a particular object. As a result, relevant costs can include direct and indirect costs.

All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in-house. Which of the following is not likely to be relevant?

The book value of equipment used in making the component Explanation The book value of the asset and associated depreciation is based on a sunk cost that cannot be avoided because it has already been incurred and therefore is not relevant to current decisions.

Assume that a factory seeks to allocate rent to several departments that occupy the factory. The factory is occupied by all of the departments. Which of the following is the most logical cost driver for allocating the factory rent?

The company should use the driver with the strongest cause-and-effect relationship. The square footage is most likely driving the rent cost.

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 $4,500. The size of the proposed job is 11,000 square feet. The company's normal service costs are as follows: Unit-level materials$0.18per square footUnit-level labor$0.25per square footUnit-level variable overhead$0.08per square footFacility-level overheadAllocated at $0.10 per square foot If the company accepts the special offer:

The company will lose $1,110 on the job. Explanation Budgeted cost for production of 11,000 square foot (sf) special order:

Two different costs incurred by Ruiz Company exhibit the following behavior pattern per unit: Units Sold 50 100 150 200 Cost #1$300per unit$150per unit$100per unit$75per unitCost #2$2per unit$2per unit$2per unit$2per unit Cost #1 and Cost #2 exhibit which of the following cost behavior patterns, respectively?

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.

Custom Quilters makes decorative comforters, quilted garments, and other products in a small sewing factory. The company expects to make 2,000 comforters during the current year. With respect to the comforters, how would the supervisory salaries be classified?

The supervisory salaries would be classified as indirect because the salaries are not easily or economically traceable to each comforter. The supervisor salaries would be classified as a fixed cost because the total cost of the salaries is constant (i.e., it does not vary per comforter). For instance, the supervisor may be paid $30,000 a year. Therefore, whether one comforter or 1,000 comforters are sewn, the supervisor's salary remains constant at $30,000.

Warren Company applies overhead based on direct labor cost. Warren Company estimated that it would incur $180,000 in manufacturing overhead costs and $120,000 of direct labor costs during the current year. Actual manufacturing overhead cost totaled $150,000 and actual direct labor costs totaled $110,000 during the current year. If total manufacturing costs were $320,000, what amount of direct materials was used during the year?

Total manufacturing costs = Direct materials used + Direct labor + Actual manufacturing overhead costs Direct materials used = Total manufacturing costs − (Direct labor + Actual manufacturing overhead costs) Direct materials used = $320,000 − ($110,000 + $150,000) = $60,000

Which costs are relevant for equipment replacement decisions?

Unit-level costs Batch-level costs Product-level costs

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,

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.

Allocation of costs to various cost objects may:

affect managers' performance evaluation and the apparent profitability of the various products a company makes.

The benefits of a just-in-time system would include all of the following except:

increased warehousing costs.

Indirect costs are often pooled, and not allocated individually because:

individual allocation would be tedious.

A company that uses a just-in-time inventory system:

may find that having less inventory actually leads to increased customer satisfaction.

Craft, Inc. normally produces between 120,000 and 150,000 units each year. Producing more than 150,000 units alters the company's cost structure. For example, fixed costs increase because more space must be rented, and additional supervisors must be hired. The production range between 120,000 and 150,000 is called the:

relevant range.

All of the following are downstream costs except:

research and development