Accounting Exam II

Overhead expenses are budgeted at $3,000 per month. Included in the $3,000 are $1,000 of monthly depreciation expense and $450 of allocated expenses related to the insurance premium that is paid in September. What is the cash outflow for overhead for the month of May?

$1,550 3000 - 1000 Noncash expense - 450 Noncash expense = 1550

Budgeted sales for the month of April are shown in the following table: Sales April May June Cash Sales$ 950 Sales on Account$ 1,250 The company expects a 25% increase in sales per month for May and June. Also, the company expects to collect cash from receivables in the month following the month in which the receivables are established. The amount of accounts receivable appearing on the pro forma balance sheet would be

$1,953.13. June sales on account will be collected in July, therefore $1,953.13 will be the accounts receivable balance on June 30.

The following budget information is available for the HD Sales Company (HDC) for January: Sales$ 345,000 Freight out$ 0.15per unit sold Depreciation on Administrative Equipment$ 12,500 Sales & Administrative Salaries$ 43,000+ 4% of sales Advertising$ 14,500 Depreciation on Manufacturing Equipment$ 17,500 Lease on Sales Building$ 46,000 Miscellaneous Selling Expenses$ 5,500 All operating expenses are paid in cash in the month incurred. If HDC expects to sell 22,500 units of inventory, the total budgeted selling and administrative expenses would be what amount on the January pro forma income statement?

$138,675 Freight-out (22,500 units × 0.15) $ 3,375 Depreciation on Administrative Equipment 12,500 Sales and Administrative Salaries ($43,000 + (0.04 × $345,000)) 56,800 Advertising 14,500 Lease 46,000 Miscellaneous 5,500 Total $ 138,675 Depreciation on manufacturing equipment is a product cost and therefore is not included in the selling and administrative expense section of the income statement.

Harcourt Manufacturing (HM) has the capacity to produce 10,400 fax machines per year. HM currently produces and sells 7,200 units per year. The fax machines normally sell for $120 each. Modem Products has offered to buy 2,200 fax machines from HM for $70 each. Unit-level costs associated with manufacturing the fax machines are $19 each for direct labor and $44 each for direct materials. Product-level and facility-level costs are $52,000 and $67,000, respectively. How much would profit increase (decrease) if HM accepted this special order?

$15,400 Revenue (2,200 × $70) $154,000 Unit-Level Costs (2,200 × ($19 + $44)) (138,600) Contribution to Profit $ 15,400

Clairnex Company produces two products with selling price and variable cost per unit as follows: Product A Product B Selling price per unit $ 85 $ 142 Variable cost per unit 51 90 Due to labor constraints, demand for the products is greater than supply. Product A requires 2 hours of labor to produce and Product B requires 4 hours of labor to produce. Based on this information Clairnex should hire additional labor if the labor rate for product A is

$16 per hour. Contribution margin for Product A: $85 − $51 = $34 Contribution margin for Product B: $142 − $90 = $52 Contribution margin per labor hour for Product A: $34 ÷ 2 = $17 Contribution margin per labor hour for Product B: $52 ÷ 4 = $13 clairnex should purchase additional labor so long as the labor rate is less than the contribution margin per labor hour. In this case, Clairnex should hire labor at $16 per hour and use that labor to make more of Product A.

Roses, Incorporated made a batch of flower arrangements that were sold to grocery stores for Valentine's Day. The standard and actual costs of the roses used in each arrangement are as follows: Note: Do not round intermediate calculations. Standard Actual Number of roses per arrangement: 13 13.1 Price per rose: $ 1.30 $ 1.28 The company made and sold 650 of the Valentine's Day arrangements. Based on this information the materials price variance was

$170.30 Favorable (1.3-1.28)*(13.1*650)= 170.3 -Favorable if actual is more than standard

The Lamp Company (TLC) produces a variety of lamps in a highly automated manufacturing facility. The costs and cost drivers associated with four activity cost centers are given below. These data represent total costs for all types of lamps produced by the Company. Note: Round intermediate calculation to 2 decimal places. Activity CenterUnit-levelBatch-levelProduct-levelFacility-levelOverhead Cost$ 91,000 $ 37,200 $ 15,000 $ 72,600 Cost Driver13,000labor hours600setup % of use72,600unitsAllocation Rate$ 7per labor hours$ 62per setup $ 1per unit During the most recent accounting period TLC made 6,200 units of its small tiffany style lamps. Making the lamps required 1,200 labor hours, 42 setups, and consumed 20% of the product-level costs. If the Company uses direct labor hours as the single company wide cost driver, the amount of overhead cost allocated to the tiffany lamps is

$19,920. Cost to be allocated ÷ Allocation base = Allocation rate ($91,000 + 37,200 + 15,000 + 72,600) ÷ 13,000 labor hours = $16.60 per labor hour Allocation rate × Weight of the base = Amount to allocate $16.60 × 1,200 labor hours = $19,920 Total allocated overhead

A condensed income statement for Gilbert, Incorporated follows: ProductsFGHTotalSales (total)$ 210$ 181$ 330$ 721Total Unit-level Costs(124)(160)(202)(486)Contribution Margin8621128235Company-wide Facility-Level Costs(25)(30)(42)(97)Income (Loss)$ 61$ (9)$ 86$ 137 Gilbert's management is considering whether to eliminate manufacturing product G at the beginning of the next year. The elimination will have no effect on the sales or unit-level costs of products F and H. The change in income that would result from eliminating product G is

$20,800 decrease ($181,000 Revenue − $160,200 avoidable cost)

The cost accountant for Carlos Candies, Incorporated prepared the following static budget based on expected activity of 2,200 units: Revenues$ 69,000Variable Costs(38,500) Contribution Margin30,500 Fixed Costs(18,500) Net Income$ 12,000 If Carlos actually produced 1,600 units, the flexible budget would show variable costs of

$28,000. $38,500 ÷ 2,200 units = $17.5 per unit × 1,600 = $28,000

Amanda Manufacturing Company prepared the following static budget income statement: Revenues$ 140,250.00 Variable Costs(85,250.00) Contribution Margin55,000.00 Fixed Costs(32,000.00) Net Income$ 23,000.00 The budgeted costs were based on a planned sales volume of 5,500 units. Actual production was 6,100 units. The amount of net income based on a flexible budget of 6,100 units would have been

$29,000.00. Sales price per unit: $140,250.00 ÷ 5,500 = $25.50 Variable cost per unit: $85,250.00 ÷ 5,500 = $15.50 $ 155,550.00-(94,550.00)= Contribution Margin 61,000.00 - Fixed Costs(32,000.00) =Net Income$ 29,000.00

The following information is drawn from Royal Industries' cash budget: Cash Receipts$ 40,800 Beginning Cash Balance$ 18,000 Cash Payments$ 50,400 Desired Ending Cash Cushion$ 13,000 If there is a cash shortage, the company borrows money. If a surplus occurs funds are used to repay loans or to invest in short-term assets. The company had no debt before January 1st. The amount "needed" to borrow or the amount "available" for repayment of debt in January would be

$4,600 needed. 18,000+40,000= 58,800 -50,400 =8,400 (13,000-8,400)

The following information was drawn from the accounting records of Ashton Company. Budgeted Actual Sales $8,000 $10,200 Cost of Goods Sold (4,200)(5,400) Gross Margin 3,8004,800 Variable Cost (1,600)(2,100) Fixed Cost (1,700)(1,300) Net Income $ 500 $ 1,400 Based on this information Ashton Company has a

$400 favorable fixed operating cost variance ($1,700 − $1,300).

Based on the segment income statement below, Chips, Incorporated is considering eliminating its Barbecue Division line. Revenue from Barbecue Division sales$ 504,000Salaries for Barbecue Division workers(104,000)Direct material(306,000)Sunk costs (equipment depreciation)(76,000)Allocated company-wide facility-sustaining costs(52,000)Net loss$ (34,000) If the Division is eliminated, what is the total amount of avoidable cost?

$410,000. ($104,000 salaries + $306,000 materials).

At the beginning of the accounting period, Nutrition Incorporated estimated that total fixed overhead cost would be $55,770 and that sales volume would be 11,000 units. At the end of the accounting period actual fixed overhead cost amounted to $61,770 and actual sales volume was 11,500 units. Nutrition uses a predetermined overhead rate and a cost plus pricing model to establish its sales price. Based on this information the predetermined overhead rate is

$5.07 ($55,770/11,000 units)

The following information was drawn from the accounting records of Ashton Company. Budgeted Actual Sales $8,000 $10,200 Cost of Goods Sold (4,200)(5,400) Gross Margin 3,8004,800 Variable Cost (1,600)(2,100) Fixed Cost (1,700)(1,300) Net Income $ 500 $ 1,400 Based on this information Ashton Company has a

$500 unfavorable variable operating cost variance ($2,100 − $1,600) actual cost is greater than budgeted cost is unfavorable.

A sales budget has been prepared for April. Management wants the amount of ending inventory each month to be equal to 10% of that month's cost of goods sold. Cost of goods sold for April is projected at $64,500. Ending inventory at the end of March is expected to be $12,900. Based on this information, what would the amount of purchases be for April?

$58,050 Cost of Goods Sold64,500 Ending Inventory6,450 (10% of 64,500) add that and it equals: Inventory Needed70,950 (subtract) Beginning Inventory(12,900) = Required Purchases58,050

At the beginning of the accounting period, Nutrition Incorporated estimated that total fixed overhead cost would be $55,770 and that sales volume would be 11,000 units. At the end of the accounting period actual fixed overhead was $61,770 and actual sales volume was 11,500 units. Nutrition uses a predetermined overhead rate and a cost plus pricing model to establish its sales price. Based on this information the fixed overhead spending variance is

$6,000 unfavorable.

Metro, Incorporated sells backpacks. The Company's accountant is preparing the purchases budget for the first quarter operations. Metro maintains ending inventory at 20% of the following month's expected cost of goods sold. Expected cost of goods sold for April is $79,000. Sales January February March Budgeted cost of goods sold$ 44,500$ 59,000$ 64,500 Plus: Desired ending inventory11,800 Inventory needed56,300 Less: Beginning inventory(8,900) Required purchases$ 47,400 Based on this information the total amount of expected purchases for February is

$60,100. *same as above, multiply all by 20%

Jason Company is considering replacing equipment which originally cost $690,000. New equipment costs $590,000 and the old equipment can be sold for $445,000. What is the sunk cost in this situation?

$690,000 The original cost of the old equipment is the result of a historical event that cannot be changed by current or future action. In other words, you cannot change the past. Therefore the original cost of old equipment is a sunk cost that is not relevant to current or future decisions.

Tom's Toolery is operating at 80% of its productive capacity. It is currently paying $38 per unit for a part used in its manufacturing operation. Tom's estimates it could make the part internally for a total cost of $36 per unit, consisting of $24 of unit-level production costs and $12 of facility-level costs that are currently attributed to other products. Tom's usually purchases 56,000 units of the part each year. These units could be manufactured using Tom's excess capacity. What is the effect on cost if the company decides to start making the part?

$784,000 cost decrease (28-24=14) 56,000 units × $14 savings = $784,000 total cost decrease.

Budgeted sales for the month of April are shown in the following table: Sales April May June Cash Sales$ 950 Sales on Account$ 1,250 The company expects a 25% increase in sales per month for May and June. The amount of sales revenues that would appear on the company's 2nd quarter pro forma income statement would be

$8,387.51. *multiply each month by 25% then total

Roses, Incorporated made a batch of flower arrangements that were sold to grocery stores for Valentine's Day. The standard and actual costs of the roses used in each arrangement are as follows: Note: Do not round intermediate calculations. Standard Actual Number of roses per arrangement 13 13.1 Price per rose $ 1.30 $1.28 The company made and sold 650 of the Valentine's Day arrangements. Based on this information the materials usage variance was

$84.50 Unfavorable. The standard number of roses necessary to make 650 baskets is 8,450 roses (650 baskets × 13 per basket). The actual number of roses necessary to make the 650 baskets was 8,515 roses (650 baskets × 13.10 per basket). Usage Variance = (8,515 − 8,450) × $1.30 = $84.50 unfavorable

U-RIDE, Incorporated currently produces the electric engines that are used in golf carts made and sold by the Company. Electco has offered to sell the electric engines to U-RIDE at a price of $242 each. Current production information follows: Unit-level material and labor$ 205 Facility-level depreciation of manufacturing equipment$ 5,600/monthProduct-level engine production supervisor's salary$ 2,600/monthAnnual facility-level utilities$ 18,000 U-RIDE is currently operating profitably producing and selling 2,600 engines a year using 90% of its manufacturing capacity. Which of the following is true?

Buying the units would increase U-RIDE's cost by $25 per unit. (205-12(month Annual)=217) $25 per unit ($242 to buy − $217 to make).

Which of the following is a cost driver that may be used to allocate product-level costs?

Estimates of usage provided by engineers, lawyers and other professionals.

Harcourt Manufacturing (HM) has the capacity to produce 10,400 fax machines per year. HM currently produces and sells 7,200 units per year. HM currently leases its excess capacity for a rental fee of $16,000. The fax machines normally sell for $120 each. Modem Products has offered to buy 2,200 fax machines from HM for $70 each. Unit-level costs associated with manufacturing the fax machines are $19 each for direct labor and $44 each for direct materials. Product-level and facility-level costs are $52,000 and $67,000, respectively. Based on this information (ignore qualitative characteristics)

HM should reject the offer because accepting it will reduce profitability by $600. Revenue (2,200 × $70) $154,000 Unit-Level Costs (2,200 × ($19 + $44)) (138,600) Opportunity cost (rental fee)(16,000) Reduction in Profit$ (600)

Which of the following is the preferred method of establishing a transfer price?

Market based transfer price

The following information is drawn from Royal Industries' cash budget: Cash Receipts$ 40,800 Beginning Cash Balance$ 18,000 Cash Payments$ 50,400 Desired Ending Cash Cushion$ 13,000 If there is a cash shortage, the company borrows money. If a surplus occurs, funds are used to repay loans or to invest in short-term assets. All borrowing, repayments, and interest payments occur on the last day of the month. The company had no debt before January 1. The interest rate is 2.50% per month. The amount of interest expense incurred for January is:

None of these answers is correct. To achieve the desired ending balance of $13,000, the Company needs to borrow $4,600. However, the $4,600 would be borrowed on the last day of the month. Therefore the Company had zero debt during the month of January and the amount of interest expense for January would also be zero.

Which of the following items would not be relevant to an asset replacement decision?

The book value of the asset being replaced.

Kelfour Enterprises has divided its operations into two divisions. Relevant accounting data for each division is as follows: Divisions Sales Operating Assets Operating Income Western Division$ 210,000$ 160,000$ 21,000 Eastern Division$ 360,000$ 210,000$ 22,500 Kelfour has an additional $56,000 of funds to invest. The manager of the Western Division believes that she can invest the funds at a rate of return (ROI) of 17.00% while the manager of the Eastern Division has found a new investment opportunity that is expected to yield a 15.00% ROI. Kelfour uses residual income (RI) to evaluate managerial performance. The company wide desired ROI is 13.00%. Based on this information

The manager of the Western Division would accept the $56,000 additional investment opportunity because it would increase the Division's RI by $2,240.

Which of the following statements is true?

Voluntary costs are subject to the law of diminishing returns. Ultimately you reach a point where spending an additional dollar on voluntary costs produces less than a dollar of savings on failure cost.

Westmorland makes ink that it uses in ball point pens. The Company produces two colors of ink. One is blue the other is red. Ink is made in batches with setup costs being $3,600 per batch. Demand for blue ink is significantly stronger than for red ink. During the most recent week, the company made 2 batches of ink, one blue the other red. It requires 1 hour of labor to make a gallon of ink regardless of color. There were 700 hours of labor used to make the blue ink and the 500 hours of labor used to make the red ink. If the Company uses a single company wide overhead rate based on labor hours, the amount of setup cost allocated to the

blue ink is $4,200 and red ink is $3,000. Cost to be allocated ÷ Allocation base = Allocation rate ($3,600 × 2 batches) ÷ (700 hours + 500 hours) = $6 per hour Allocation Rate × Weight of Base = Amount allocated $6 × 700 hours = $4,200 for blue ink $6 × 500 hours = $3,000 for red ink.

To be relevant, information must

both of the answers are characteristics of relevant information.

The following information was drawn from the accounting records of Smith Company Static Budget Flexible Budget Actual Results Sales $13,500$ 19,000$ 21,100 Cost of Goods Sold (6,700)(8,600)(7,250) Gross Margin 6,80010,40013,850 Variable Cost (2,700)(3,450)(4,350) Fixed Cost (1,700)(1,700)(2,000) Net Income $2,400$ 5,250$ 7,500 Based on this information the

cost of goods sold volume variance is a $1,900 unfavorable variance. ($8,600 − $6,700 = $1,900). amount of cost of goods sold shown in the flexible budget is higher than the amount shown in the static budget, the variance is unfavorable.

Pro forma statements are based on

estimated information.

An unfavorable materials cost volume variance indicates that the production manager should be reprimanded. This statement is

false

Measuring performance on the basis of residual income is likely to lead to suboptimization. This statement is

false.

Quality refers to how superior one product is relative to other available competitive products. This statement is

false.

The central concept in decentralization is that the people at the top of the organization should have the primary decision making role because they know what is best for the organization as a whole. This statement is

false.

The theory of constraints focuses on the identification and expansion of bottlenecks that constrain profitability. This statement is

false.

Transfer pricing refers to the policies a company establishes for pricing the products it sells to its external customers. This statement is

false.

Kelfour Enterprises has divided its operations into two divisions. Relevant accounting data for each division is as follows: Divisions Sales Operating Assets Operating Income Western Division$ 150,000$ 100,000$ 15,000 Eastern Division$ 300,000$ 150,000$ 16,500 Based on this information Western Division's margin is

higher than Eastern's Margin.

A decision to open a new restaurant would be made by a manager of a(n)

investment center.

Strategic planning focuses on

long-range decisions

A plan that formalizes the overall goals and objectives of a company in financial terms is called a

master budget

Favorable and unfavorable variances are not necessarily indicators of good or bad performance. This statement is

true

A cost that is relevant to one decision may be irrelevant to a different decision. This statement is

true.

Activity-based costing improves accuracy by basing allocations on a variety of cost drivers that have a cause and effect relationship with activity centers instead of using a single company wide cost driver. This statement is

true.

An ROI of 15% means that a company received fifteen cents for every dollar it invested. This statement is

true.

Managers may act in their self-interest even if this action is detrimental to the interest of the company that employs them. This statement is

true.

The conflict between short-term versus long-term performance can be minimized by implementing an appropriate performance evaluation system. This statement is

true.

The ending cash balance in the pro forma statement of cash flows is equal to the cash balance shown on the pro forma balance sheet. This statement is

true.

The following information was drawn from the accounting records of Smith Company Static Budget Flexible Budget Actual Results Sales $13,500$ 19,000$ 21,100 Cost of Goods Sold (6,700)(8,600)(7,250) Gross Margin 6,80010,40013,850 Variable Cost (2,700)(3,450)(4,350) Fixed Cost (1,700)(1,700)(2,000) Net Income $2,400$ 5,250$ 7,500 Based on this information the

variable operating cost flexible budget variance is a $900 unfavorable variance. ($4,350 − $3,450 = $900) unfavorable because actual variable operating cost was higher than expected.