Accounting 2102 Midterm 2

Incremental Analysis Approach

- Decisions involve a choice among alternative actions. - Process used to identify the financial data that change under alternative courses of action. - Both costs and revenues may vary or - Only revenues may vary or - Only costs may vary

Advantages of Standard Costs:

1. Facilitate management planning 2. Promote greater economy by making employees more "cost-conscious " 3. Useful in setting selling prices 4. Contribute to management control by providing basis for evaluation of cost control 5. Useful in highlighting variances in management by exception 6. Simplify costing of inventories and reduce clerical cost

Gimball and Sons, Inc. builds high-quality homes ranging in price from $300,000 to $1,200,000. John Ellis, a local physician, has asked Gimball and Sons to show him some house plans. Dr. Ellis has selected a plan that calls for $320,000 in building materials, $200,000 in labor, and $80,000 in add-ons, but he doesn't want to pay more than $650,000 for this home. Gimball and Sons typically prices its homes based on the total cost of construction plus 20%. What price would Gimball and Sons normall

720,000 320,000 + 200,000 + 80,000 = 600,000 .20 x 600,000 = 120,000 600,000 +120,000 = 720,000

Martian Company management wants to maintain a minimum monthly cash balance of $15,000. At the beginning of March, the cash balance is $16,500, expected cash receipts for March are $210,000, and cash disbursements are expected to be $220,000. How much cash, if any, must be borrowed to maintain the desired minimum monthly balance?

8,500 16,500 + 210,000 - 220,000 = 6,500 15,000 - 6,500 = 8,500

Static Budget Report

A Static budget is a projection of budget data at one level of activity • When used in budgetary control, each budget included in the master budget is considered to be static • Ignores data for different levels of activity • Compares actual results with budget data at the activity level used in the master budget

Labor Price Variance Formula

AH( AR - SR)

Price Variance Formula

AQ(AP - SP)

Favorable variance

Actual costs < Standard costs

Unfavorable variance

Actual costs > Standard costs

Distinguishing b/w Standards/Budgets

Both standards and budgets are predetermined costs, and both contribute to management planning and control. There is a difference: • A standard is a unit amount • A budget is a total amount

Return on Investments (ROI) Formula

Controllable Margin (Sales - Variable costs - Fixed costs - Controllable fixed costs) / Average Operating Assets

Residual Income Formula

Controllable Margin - ( Minimum rate of return (ROI) x Average Operating assets

Target Selling price formula

Cost + Markup = Target Selling Price

Calculate Material Loading Charge

Estimated Purchasing, Receiving, handling, storing costs/Estimated costs of parts and materials + Desired profit margin on materials

Balanced Scorecard Perspectives

Financial, customer, internal process, learning and growth

Becker Company estimates that 2022 sales will be $15,000 in quarter 1, $20,000 in quarter 2, and $25,000 in quarter 3. Cost of goods sold is 80% of sales. Management desires to have ending finished goods inventory equal to 15% of the next quarter's expected cost of goods sold. Prepare a merchandise purchases budget by quarter for the first six months of 2022.

First Quarter Budgeted Cost of Goods sold 12,000 + Desired Ending Inventory 2,400 Total 14,400 - Beginning Inventory 1,800 Required merchandise purchases 12,600 Second Quarter Budgeted Cost of Goods sold 16,000 + Desired Inventory 3,000 Total 19,000 - Beginning Inventory 2,400 Required merchandise purchases 16,600 12,600 + 16,600 = 29,200

Total Budgeted Costs Formula

Fixed costs + Variable costs

Calculate Charges for a Job

Labor Charges + Material Charges + Material Loading Charge

Target Cost formula

Market Price − Desired Profit = Target Cost

Customer

Percentage of customers who would recommend product Customer retention Response time per customer request Brand recognition. Customer service expense per customer

Internal Process

Percentage of defect-free products Stockouts Labor utilization rates Waste reduction Planning accuracy

Learning and Growth

Percentage of employees leaving in less than one year. Number of cross-trained employees. Ethics violations Training hours Reportable accidents

Lawler Company expects to produce 5,000 units of product CV93 during the current month. Budgeted variable manufacturing costs per unit are direct materials $6, direct labor $15, and overhead $24. Monthly budgeted fixed manufacturing overhead costs are $10,000 for depreciation and $5,000 for supervision. In the current month, Lawler actually produced 5,500 units and incurred the following costs: direct materials $33,900, direct labor $74,200, variable overhead $120,500, depreciation $10,000, and

Production in units Budget: 5,000 Actual: 5,500 Variable Costs.. Direct Materials ($6) Budget 30,000: Actual: 33,900 (U) Direct Labor ($15) Budget: 75,000 Actual: 74,200 (F) Overhead ($24) Budget: 120,000 Actual: 120,500 (U) Total Variable Costs Budget: 225,000 Actual: 228,600 (U) Fixed Costs.. Depreciation Budget: 10,000 Actual: 10,000 Supervision Budget: 5,000 Actual: 5,000 Total Fixed Costs Budget: 15,000 Actual: 15,000 Total Costs Budget: 240,000 Actual: 243,600 (U)

ROI formula

ROI = net income ÷ invested assets

Calculate the Labor Rate

Rate includes:o Direct labor cost (includes fringe benefits).o Selling, administrative, and similar overhead costs.o Allowance for desired profit (R OI) per hour

Sunbelt Company produces 100,000 Smoothie blenders per month, which is 80% of plant capacity. Variable manufacturing costs are $8 per unit. Fixed manufacturing costs are $400,000, or $4 per unit. The Smoothie blenders are normally sold directly to retailers at $20 each. Sunbelt has an offer fromKensington Co. (a foreign wholesaler) to purchase an additional 2,000 blenders at $11 per unit. Acceptance of the offer would not affect normal sales of the product, and the additional units can be manufa

Reject Order: Revenue = 0 Costs = 0 NI = 0 Accept Order: Revenue = 22,000 (2,000 x 11$) Costs = 16,000 (2,000 x $8) NI = 6,000 (22,000 - 16,000) Accept Order, Increases income $6,000 Fixed costs are not relevant costs since company is within operating capacity

Jeff coat Company has a factory machine that originally cost $110,000. It has a balance in AccumulatedDepreciation of $70,000, so the machine's book value is $40,000. It has a remaining useful life of four years. The company is considering replacing this machine with a new machine. A new machine is available that costs $120,000. It is expected to have zero salvage value at the end of its four-year useful life. If the new machine is acquired, variable manufacturing costs are expected to decreas

Replace Retain : Variable Costs = 640,000 (160,000 x 4 years) New Machine costs = 0 Sale of old machine = 0 Total = 640,000 Replace : Variable costs = 500,000 ( 125,000 x 4 years) New machine cost = 120,000 Sale of old machine = (5,000) Total = 615,000 (500,000 + 120,000 - 5,000) 615,000< 640,000

Financial

Return on assets Net income Credit rating Share price Profit per employee

Quantity Variance formula

SP(AQ - SQ)

Labor Quantity Variance Formula

SR( AH - SH)

Markup (profit) Formula

Selling Price − Cost = Markup (Profit)

Relevant Costs

Those costs and revenues that differ across alternatives

Income State. Presentation of Variances

Under a standard cost accounting system, cost of goods sold is stated at standard cost and the variances are disclosed separately. • Unfavorable variances increase cost of goods sold • Favorable variances decrease cost of goods sol

Negotiated Transfer Price Formula

Variable Cost + Opportunity cost = Minimum transfer price

In Strassels Company's flexible budget graph, the fixed cost line and the total budgeted cost line intersect the vertical axis at $36,000. The total budgeted cost line is $186,000 at an activity level of 50,000 direct labor hours. Compute total budgeted costs at 30,000 direct labor hours.

Variable Costs: Total Budgeted cost $186,000 Fixed Cost $36,000 Variable Costs at 50,000 hours 150,000 (186,000 - 36,000) Variable Cost per hour $3 (150,000/50,000) Direct Labor Hours 30,000 Total Variable costs 90,000 ($3 x 30,000) Total Fixed Costs $36,000 Total Budgeted cost (at 30,000 hours) $126,000 ($90,000 + $36,000)

Budgetary Control

Works best when a company has a formalized reporting system which: 1. Identifies the name of the budget report 2. States the frequency of the report 3. Specifies the purpose of the report 4. Indicates the primary recipient(s) of the report

Sunk Cost

a cost that has already been committed and cannot be recovered

The Outland Company manufactures 1,000 units of a part that could be purchased from an outside supplier for $12 each. Outland's costs to manufacture each part are as follows: Direct materials $2 Direct labor $3 Variable manufacturing overhead $4 Fixed manufacturing overhead $8 Total $17 All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses. a) Should Outland continue to manufacture the part? b) W

a) Make: Relevant Costs = 2 + 3 + 4 = 9 9 x 1,000 = 9,000 Buy: 12 x 1,000= 12,000 MAKE 9,000 < 12,000 b ) Yes Make : 9,000 Buy: 12,000 - 5,000 = 7,000 7,000 < 9,000

Soriano Company is preparing its budgeted income statement for 2022. Relevant data pertaining to its sales, production, and direct materials budgets can be found below. Soriano budgets 0.5 hours of direct labor per unit, labor costs at $15 per hour, and manufacturing overhead at $25 per direct labor hour. Its budgeted selling and administrative expenses for 2022 are $12,000,000. Qty Unit of Measure Unit Cost Direct materials 3 pounds $5.00 Direct labor 0.5 hours $15.00 Manufacturing overhead

a) $35 3 x 5 = 15 .5 x 15 = 7.5 .5 x 25 = 12.5 15 + 7.5 + 12.5 = 35 b) Sales (1,200,000) 61,500,000 - Cost of Goods sold (1,200,000 x 35/unit) 42,000,000 = Gross Profit 19,500,000 - Selling and admin expenses 12,000,000 = 7,500,000

Fine Line Phones is considering introducing a fashion cover for its phones. Market research indicates that 200,000 units can be sold if the price is no more than $20. If Fine Line decides to produce the covers, it will need to invest $1,000,000 in new production equipment. Fine Line requires a minimum rate of return of 25% on all investments. Determine the target cost per unit for the cover. a. $18.75 b. $20.00 c. $25.00 d. $38.75

a. $18.75 Desired Profit = 1,000,000 x .25 = 250,000 Each cover must result in profit of 250,000/200,000 = 1.25 Market price - desired profit = target cost per unit 20 - 1.25 = 18.75

A private university is considering a plan to offer summer school courses at a special rate because summer enrollments have been dropping. Which of the following is not a relevant consideration in this decision? a. Depreciation will be recorded on the academic buildings. b. Professors who aren't normally paid during the summer will be needed to teach the courses. c. If summer enrollments don't increase enough, total revenues will be lower under the new pricing system. d. High enrollments wil

a. Depreciation will be recorded on the academic buildings.

A company produced 3,000 defective music players. The players cost $12 each to produce. A recycler offers to purchase the defective players "as is" for $8 each. The defects can be reworked for $10 each, and the players then sold at their regular market price of $19 each. The company should: a. Rework the players and sell at the regular price. b. Sell the players to the recycler for $8 each. c. Sell 2,000 to the recycler and rework the rest. d. Sell 1,000 to the recycler and rework the rest.

a. Rework the players and sell at the regular price. Sell "As is": Revenue : 8.00 Cost : 0 NI = 8.00 "Rework": Revenue : 19.00 Cost : 10.00 NI = 9.00 NI Inc/Dec = 1.00

The essentials of effective budgeing do not include: a. Top-down budgeting b. Management acceptance c. Research and analysis d. Sound organizational structure

a. Top-down budgeting

A company receives a special one-time order for 3,000 units of its product at $15 per unit. The company has excess capacity, and it currently produces and sells the units at $20 each to its regular customers. Production costs are $13.50 per unit, which includes $9 of variable costs. To produce the special order, the company must incur additional fixed costs of $5,000. Should the company accept the special order? a. Yes, as incremental revenue exceeds incremental costs. b. No, as incremental co

a. Yes, as incremental revenue exceeds incremental costs. Incremental Revenue = 3,000 x 15 = 45,000 Incremental costs = 3,000 x 9 + 5,000 = 32,000 45,000 - 32,000 = 13,000

Under responsibility accounting, the evaluation of a manager's performance is based on matters that the manager: a. directly controls b. directly and indirectly controls c. indirectly controls d. has shared responsibility for with another manager

a. directly controls

The decision rule in a sell-or-process further decision is: process further as long as the incremental revenue from processing exceeds: a. incremental processing costs b. variable processing costs c. fixed processing costs d. (none of the above)

a. incremental processing costs

A segment of Gentry Inc. has the following data: Sales $200,000 Variable expenses $140,000 Fixed expenses $100,000 If this segment is eliminated, what will be the effect on the remaining company? Assume that 50% of the fixed expenses will be eliminated and the rest will be allocated to the remaining segments of the company. a. $120,000 increase to income. b. $10,000 decrease to income. c. $50,000 increase to income. d. $10,000 increase to income.

b. $10,000 decrease to income. Gentry Inc. will lose the segment's CM of $60,000 (200,000 - 140,000), but will also get rid of $50,000 in fixed expenses. These two items net to a $10,000 (60,000 - 50,000) decrease in income.

Martell Corporation makes power tools. The Power Division makes a motor that the Small Tools Division needs for a new product. The Power Division's variable cost of manufacturing the component is $12 per unit. The component is also available on the open market at a price of $16 per unit. The Small Tools Division needs 60,000 motors per year. If the Power Division has adequate excess capacity to supply the 60,000 motors, what is the minimum transfer price? a. $4 b. $12 c. $16 d. Cannot be det

b. $12 Variable Cost + Opportunity Cost 12 + 0 = 12

Payton Sanchez runs a popcorn stand in the local amusement park. Her cost to produce a bag of popcorn is $0.40, which she sells for $2.00. If Payton wants to earn a 500% markup on a bag of popcorn, what price must she charge? a. $2.00 b. $2.40 c. $4.20 d. $8.00 e. $10.00

b. $2.40 Markup = Markup % x Cost Markup = 500% x .4 = 2.00 Price = Cost + Markup Price = .4 + 2.00 = 2.40

A store has the following budgeted sales for the next three months: July 180,000 August 220,000 September 240,000 Cash sales are 25% of total sales and all credit sales are expected to be collected in the month following the sale. The total amount of cash expected to be received from customers in September is _______________. a. $240,000 b. $225,000 c. $60,000 d. $165,000 e. $220,000

b. $225,000 Cash collected = .25 of September sales + .75 of Aug sales Cash collected = (.25 x 240,000) + (.75 x 220,000) = 225,000

Pleasant Company's northern region operates as an investment center. Greta, the region's director, has set a required 18% minimum rate of return for all investments. Greta is considering investing in a $50,000 machine that is expected to generate $15,000 in additional operating income. What is the machine's residual income? a. $2,700 b. $6,000 c. $6,300 d. $15,000 e. $35,000

b. $6,000 Residual Income = Operating Income - (Average Assets * Required Minimum Rate of Return) 15,000 - (50,000*.18) = 15,000 - 9,000 = 6,000

Classic Toys has examined the market for toy train locomotives. It believes there is a market niche in which it can sell locomotives at $80 each. It estimates that it could sell 10,000 of these locomotives annually. Variable costs to make a locomotive are expected to be $25. Classic anticipates a profit of $15 per locomotive. The target cost for the locomotive is: a. $80 b. $65 c. $40 d. $25

b. $65 Selling price - Desired Profit = Target cost 80-15 = 65

The following sales are budgeted for the next four months: April 480 May 560 June 600 July 480 Each month's ending inventory of finished goods should be 30% of the next month's sales. The budgeted production for May is ________________. a. 572 units b. 560 units c. 548 units d. 600 units e. 180 units

b. 560 units 1. Cover May's Sales, 2. Cover Ending Inventory Requirement , 3. Less Beginning Inventory 560 Units + (.3 x 600 units) - (.3 x 560 units) = 572 units

In a responsibility report for a profit center, controllable fixed costs are deducted from contribution margin to show: a. Profit center margin b. Controllable margin c. Net income d. Income from operations

b. Controllable margin

In the formula for return on investment (ROI), the factors for controllable margin and operating assets are, respectively: a. Controllable margin percentage and total operating assets b. Controllable margin dollars and average operating assets c. Controllable margin dollars and total assets d. Controllable margin percentage and average operating assets

b. Controllable margin dollars and average operating assets

A static budget is useful in controlling costs when cost behavior is: a. Mixed b. Fixed c. Variable d. Linear

b. Fixed

Gold Co. makes a product that can be sold "as is" or "processed further" then sold. The company has already spent $75,000 to produce 10,000 units that can be sold as is for $100,000. Instead, the units can be processed further at a cost of $80,000, and then sold for $220,000. Should Gold sell the 10,000 units as is or process them further? a. Sell "as is". b. Process further, then sell. c. Sell half "as is", then process further the other half. d. Don't sell at all.

b. Process further, then sell. Sell As is: Revenue = 100,000 Costs = 0 NI = 100,000 Rework : Revenue = 220,000 Costs = 80,000 NI = 140,000 (220,000 - 80,000) NI Inc/Dec = 40,000 increase

Information that (1) differs between the alternatives and that (2) occurs in the future; this information has an impact on decisions. a. Outsourcing b. Relevant information c. Assigned cost d. Theory of constraints

b. Relevant information

Cost-plus pricing means that: a. Selling price = Variable cost + (Markup percentage + Variable cost). b. Selling price = Cost + (Markup percentage * Cost) c. Selling price = Manufacturing cost + (Markup percentage + Manufacturing cost) d. Selling price = Fixed cost + (Markup percentage * Fixed cost)

b. Selling price = Cost + (Markup percentage * Cost)

Incremental analysis is the process of identifying the financial data that: a. do not change under alternative courses of action. b. change under alternative courses of action. c. are mixed under alternative courses of action. d. (none of the above)

b. change under alternative courses of action.

When making the decision to keep or replace equipment, the book value of the old equipment is a: a. opportunity cost. b. sunk cost. c. incremental cost. d. marginal cost.

b. sunk cost.

When a company uses time-and-material pricing, the material loading charge is expressed as a percentage of: a. the total estimated labor costs for the year. b. the total estimated costs of parts and materials for the year. c. the total estimated overhead costs for the year. d. the total estimated costs of parts, materials, and labor for the year.

b. the total estimated costs of parts and materials for the year.

Thinkmore Products, Inc. is in the process of setting a selling price on its new video camera pen. It is a functioning pen that will record up to 2 hours of audio and video. The per unit variable cost estimates for the new video camera pen are as follows: per unit Direct materials $23.00 Direct labor $17.00 V ariable manufacturing overhead $12.00 Variable selling & administrative expenses $8.00 Variable cost per unit $60.00 Additionally, Thinkmore has the following fixed costs per unit at a

c. $165 Variable cost + Fixed Cost + Markup 60 +65 + 40 = 165 b. 32% Markup = selling price - cost 165 - 125 = 40 Markup % = Markup / cost 40 / 125 = .32

The fixed budget for 20,000 units of production shows sales of $400,000; variable costs of $80,000; and fixed costs of $150,000. If the company actually produces and sells 26,000 units, what is the flexible budget income? a. $221,000 b. $170,000 c. $266,000 d. $146,000 e. $290,000

c. $266,000 Sales : 400,000/20000 = 20 20*26,000 = 520,000 Variable : 80,000/20,000 = 4 4 * 26,000 = 104,000 Fixed : 150,000 Total : 520,000 - 104,000 - 150,000 = 266,000

Given the following data, what is the total relevant cost of internal production of 300,000 parts? Cost per part from supplier $12.00 Internal costs per part: Direct materials $5.50 Direct labor $4.00 Variable overhead $0.50 Total fixed overhead $90,000 Avoidable fixed overhead $65,000 a. $3,000,000 b. $3,025,000 c. $3,065,000 d. $3,090,000

c. $3,065,000 Relevant Costs: Direct Materials 5.5 Direct Labor 4 Variable Overhead .5 Avoidable fixed overhead 65,000 (5.5 + 4 + .5) x 300,000 = 3,000,000 3,000,000 + 65,000 = 3,065,000

Discorama produces 100,000 CDs on which to record music. The CDs have the following costs: Direct Materials $10,000 Direct Labor $15,000 Variable Overhead $5,000 Fixed Overhead $20,000 None of Discorama's fixed overhead costs can be reduced, but another product could be made that would increase profit by $5,000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Discorama woul

c. $35,000 Maximum external price = DM + DL + VOH + Increased Profit Maximum external price = $10,000 + $15,000 + $5,000 + $5,000 Maximum external price = $35,000

Dominic is performing incremental analysis in a make-or-buy decision for Item A. If Dominic buys Item A, he can use its released productive capacity to produce Item B. Dominic will sell Item B for $12,000 and incur production costs of $8,000. Dominic's incremental analysis should include an opportunity cost of: a. $12,000 b. $8,000 c. $4,000 d. $0

c. $4,000 Opportunity cost is the forgone (lost) net benefit from next best alternative or course of action. In this case, the foregone net benefit from choosing to make Item A is the contribution margin from selling Item B (i.e., $12,000 - $8,000 = $4,000.

Expected direct materials purchases in Read Company are $70,000 in the first quarter and $90,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are: a. $96,000 b. $90,000 c. $78,000 d. $72,000

c. $78,000 (.4 x 90,000) + (.6 x 70,000) = 36,000 + 42,000 = 78,000

Mystery Co. provided the following info on the new product that it recently introduced: Total unit cost $30 Desired ROI per unit $10 Target selling price $40 What would be Mystery Co.'s percentage markup on cost? a. 125% b. 75% c. 33.33% d. 25%

c. 33.33% Markup = 40 - 30 =10 Markup % = 10/30 = 33.33%

A cost that cannot be changed because it arises from a past decision and is irrelevant to future decisions is: a. An uncontrollable cost b. An out-of-pocket cost c. A sunk cost d. An opportunity cost e. An incremental cost

c. A sunk cost

Each of the following budgets is used in preparing the budgeted income statement except the: a. Sales budget b. Selling and administrative budget c. Capital expenditure budget d. Direct labor budget

c. Capital expenditure budget

A pricing strategy that starts with the cost to produce a product or deliver a service and adds a markup to cover the company's operating costs and contribute to profit. a. Degree of operating leverage b. Break-even graph c. Cost-plus pricing d. Margin of safety

c. Cost-plus pricing Degree of operating leverage measures earnings volatility. Break-even graph shows the total revenues and costs and the breakeven point. Margin of safety is a measure of the difference between actual and breakeven sales.

A company predicts its production and sales will be 24,000 units. At that level, its fixed costs are budgeted at $300,000, and its variable costs are budgeted at $246,000. If its activity level declines to 20,000 units, what will be its budgeted fixed and variable costs? a. Fixed, $300,000; variable $246,000 b. Fixed, $250,000; variable $205,000 c. Fixed, $300,000; variable $205,000 d. Fixed, $250,000; variable $246,000 e. Fixed, $300,000; variable $300,000

c. Fixed, $300,000; variable $205,000 Fixed costs stay the same. Variable costs: 246,000/24,000 = 10.25 10.25 x 20,000 = 205,000

Houck Industrial Supply has three operating divisions, each headed by a divisional vice president. The divisions operate independently, and each vice president is responsible for all aspects of the division's operation. Most likely, each division operates as a(n) _________. a. Cost center b. Profit center c. Investment center d. Shopping center e. Recreation center

c. Investment center

Which of the following is not a benefit of budgeting? a. Management can plan ahead. b. An early warning system is provided for potential problems. c. It enables disciplinary action to be taken at every level of responsibility. d. The coordination of activities is facilitated.

c. It enables disciplinary action to be taken at every level of responsibility.

A plan that records the units to produce by a manufacturing company during the budget period is called a _____________. a. Sales budget b. Cash budget c. Production budget d. Manufacturing budget e. Capital expenditures budget

c. Production budget

Budgetary control involves all but which one of the following: a. Modifying future plans b. Analyzing differences c. Using static budgets, but not flexible budgets d. Determining differences between actual and planned results

c. Using static budgets, but not flexible budgets

In making business decisions, management ordinarily considers: a. quantitative factors, but not qualitative factors. b. financial information only. c. both financial and nonfinancial information. d. relevant costs, opportunity costs, and sunk costs.

c. both financial and nonfinancial information.

The most common method used to establish transfer prices is the: a. negotiated transfer pricing approach. b. opportunity costing transfer pricing approach. c. cost-based transfer pricing approach. d. market-based transfer pricing approach.

c. cost-based transfer pricing approach.

If management eliminates a segment that is unprofitable: a. net income will always increase. b. variable costs of the eliminated segment will have to be absorbed by other segments. c. fixed costs allocated to the eliminated segment will have to be absorbed by other segments. d. net income will always decrease.

c. fixed costs allocated to the eliminated segment will have to be absorbed by other segments.

It costs a company $15 of variable costs and $7 of fixed costs to produce product T that sells for $40. A foreign buyer offers to purchase 3,000 units at $20 each. If the special offer is accepted and produced with unused capacity, net income will: a. decrease $9,000 b. increase $60,000 c. increase $15,000 d. increase $9,000

c. increase $15,000 Incremental Revenue = 3,000 x 20 = 60,000 Incremental Costs = 3,000 x 15 = 45,000 Net income = 60,000 - 45,000 = 15,000

Target cost related to price and profit means that: a. cost and desired profit must be determined before selling price. b. cost and selling price must be determined before desired profit. c. price and desired profit must be determined before costs. d. costs can be achieved only if the company is at full capacity.

c. price and desired profit must be determined before costs.

In a competitive, common-product environment, a seller would most likely use: a. time-and-material pricing b. variable costing c. target costing d. cost-plus pricing

c. target costing Time-and-material pricing is a variation of cost-plus pricing, better suited to a tailored servie environment. Variable costing incorporates only variable costs which will lead to underpricing in a competitive environment. Cost-plus pricing is better for a less competitive environment.

At 9,000 direct labor hours, the flexible budget for indirect materials is $27,000. If $28,000 of indirect materials costs are incurred at 9,200 direct labor hours, the flexible budget report should show the following differences for indirect materials: a. $1,000 unfavorable b. $1,000 favorable c. $400 favorable d. $400 unfavorable

d. $400 unfavorable Flex Budget : (27,000/9,000 = 3*9,200 = 27,600 Actual = 28,000 $400 Unfavorable

The Plastics Division of Weston Company manufactures plastic molds and then sells them to customers for $70 per unit. Its variable cost is $30 per unit, and its fixed cost per unit is $10. Management would like the Plastics Division to transfer 10,000 of these molds to another division within the company at a price of $40. The Plastics Division is operating at full capacity. What is the minimum transfer price that the Plastics Division should accept? a. $10 b. $30 c. $40 d. $70

d. $70 Variable cost + Opportunity cost 30 +(70-30) = 70

Snowboards R Us produces snowboards. Per unit cost information: direct materials $12, direct labor $8, variable manufacturing overhead $6, fixed manufacturing overhead $14, variable selling and administrative expenses $4, and fixed selling and administrative expenses $12. Using a 30% markup percentage on total per unit cost, compute the target selling price. a. $16.80 b. $39.00 c. $69.00 d. $72.80

d. $72.80 Total Cost per unit = 12+8+6+14+4+12 = 56 Markup = 56 x .3 = 16.8 Target selling price = 56+16.8 = 72.80

Smith Brothers repairs small engines and charges $50 per hour of labor. It has a material loading percentage of 50%. On a recent repair job, Smith Brothers worked 3.5 hours and used parts costing $500. Calculate the total repair bill using time-and-material pricing. a. $425 b. $675 c. $750 d. $925

d. $925 3.5 x 50 = 175 .5 x 500 = 250 500 175+250+500 = 925

Payton Sanchez runs a popcorn stand in the local amusement park. Her cost to produce a bag of popcorn is $0.40, which she sells for $2.00. What is Payton's markup percentage on a bag of popcorn? a. 20% b. 40% c. 80% d. 400% e. 500%

d. 400% Markup % = Markup/Cost 2.00-.4/.4

A plan that shows the expected cash inflows and cash outflows during the budget period, including receipts from loans needed to maintain a minimum cash balance or repayments of such loans, is called _________. a. A rolling budget b. An income statement c. A balance sheet d. A cash budget e. An operating budget

d. A cash budget

The potential benefit of one alternative that is lost by choosing another is known as: a. An alternative cost. b. A sunk cost. c. A differential cost. d. An opportunity cost. e. An out-of-pocket cost.

d. An opportunity cost.

The budget for a merchandiser differs from a budget for a manufacturer, because: a. a merchandise purchases budget replaces the production budget b. the manufacturing budgets are not applicable c. (none of the above) d. Both (a) and (b) above

d. Both (a) and (b) above

Jetson, Inc. makes an unassembled product that it currently sells for $55. Production costs are $20. Jetson is considering assembling the product and selling it for $68. The cost to assemble the product is estimated at $12. What decision should Jetson make? a. Sell before assembly; net income per unit will be $12 greater. b. Sell before assembly; net income per unit will be $1 greater. c. Process further; net income per unit will be $13 greater. d. Process further; net income per unit will be

d. Process further; net income per unit will be $1 greater. Sell : Revenue = 55 Costs = 20 NI = 35 Process further: Revenue = 68 Costs = 32 (20 + 12) NI = 36 NI inc/dec = 1

Which of the following actions will not automatically increase return on investment (ROI)? a. Reducing variable selling and administrative expenses by 14%. b. Selling $100,000 in unused assets at a loss. c. Selling 20,000 additional units at a profit. d. Purchasing a $100,000 piece of equipment on sale for $75,000 cash.

d. Purchasing a $100,000 piece of equipment on sale for $75,000 cash. ROI = Controllable Margin / Avg. Operating Assets Reducing variable selling and administrative expenses will increase "Controllable Margin", thereby increasing ROI. Selling $100,000 in unused assets at a loss will decrease "Avg. Operating Assets", and therefore, will increase ROI. Selling 20,000 additional units at a profit will increase "Controllable Margin", thereby increasing ROI. Purchasing a $100K of equipment on sale for $75,000 cash would not increase "Avg. Operating Assets" and would not increase ROI.

Time-and-material pricing would most likely be used by a: a. garden fertilizer producer b. lawn-mower manufacturer c. tree farm d. lawn-care provider

d. lawn-care provider Typically, time-and-material pricing is used by service businesses.

A hardware store has budgeted cost of sales of $36,000 for its power tool department in July. Management wants to have $7,000 in power tool inventory at the end of July. Its beginning inventory of power tools is budgeted to be $6,000. What is the budgeted dollar amount of merchandise purchases? a. $36,000 b. $43,000 c. $42,000 d. $35,000 e. $37,000

e. $37,000 6,000 + x - 7,000 = 36,000 6,000 +x = 43,000 x = 37,000

Normal Standards

represent efficient levels of performance that are attainable under expected operating condition - Should be rigorous but attainable

Ideal Standards

represent optimum levels ofperformance under perfect operating conditions

opportunity cost

whatever must be given up to obtain some item

Essentials of Effective Budgeting

•Depends on a sound organizational structure with authority and responsibility for all phases of operations clearly defined •Based on research and analysis with realistic goals •Accepted by all levels of management