Chapter 21, 22, 23, and 24
A flexible budget performance report compares the differences between
Actual performance and budgeted performance based on actual sales volume
Responsibility accounting performance reports
Are usually summarized at higher levels of management
Calculating return on investment for an investment center is defined by the following formula
Income/Average invested assets
Capital budgeting decisions usually involve analysis of
Long-term investments only
The salaries of employees who spend all their time working in one department are
Direct expenses
The break-even time (BET) method is a variation of the
Payback method
In business decision-making, managers typically examine the two fundamental factors of
Risk and return
Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine $68,000 $60,000 Net cash flow: Year 1 24,000 4,000 Year 2 24,000 26,000 Year 3 24,000 26,000 Year 4 0 20,000 The payback period in years for Project X is:
2.83. Project X payback period: $68,000/$24,000 per year = 2.83 years
An expense that is readily traced to a department because it is incurred for that department's sole benefit is a(n)
Direct expense
A budget based on several different levels of activity, often including both a best-case and worst-case scenario, is called a
Flexible budget.
A cost incurred to produce or purchase two or more products at the same time is a(n)
Joint cost
A cost center is a unit of a business that incurs costs without directly generating revenues. All of the following are considered cost centers except
Juice division at Coca Cola.
The time value of money concept
Means that a dollar today is worth more than a dollar tomorrow
Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?
Net present value
The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n)
Opportunity cost
Which methods of evaluating a capital investment project ignore the time value of money?
Payback period and accounting rate of return
Which methods of evaluating a capital investment project use cash flows as a measurement basis?
Payback period, internal rate of return, and net present value
Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the effect on net income will be
$11,250 increase Incremental revenue (15,000 feeders * $3) $45,000 Incremental costs (15,000 feeders * $2.25 variable cost) 33,750 Contribution margin increase $11,250
A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?
$118,855 ($1,800,000 - $30,000)/3 = $590,000 annual depreciation ($200,000 + $590,000) * 0.8929 = $705,391 ($200,000 + $590,000) * 0.7972 = 629,788 ($200,000 + $590,000 + $30,000) * 0.7118 = 583,676 $1,918,855 Initial investment (1,800,000) $118,855
Use the following data to find the direct labor efficiency variance if the company produced 3,500 units during the period. Direct labor standard (4 hrs. @ $7/hr.) $28 per unit Actual hours worked 12,250 Actual rate per hour $7.50
$12,250 favorable AH * SR (12,250) * $7/hr. $85,750 SH * SR (3,500 units * 4 hours/unit) * $7/hr. 98,000 Total direct labor variance $12,250 F
Hassock Corp. produces woven wall hangings. It takes 2 hours of direct labor to produce a single wall hanging. Bartels' standard labor cost is $12 per hour. During August, Bartels produced 10,000 units and used 21,040 hours of direct labor at a total cost of $250,376. What is Bartels' labor efficiency variance for August?
$12,480 unfavorable. AH * SR 21,040 * $12 $252,480 SH * SR (2 × 10,000) * $12 240,000 Direct labor efficiency variance $12,480 U
Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,000. The division sales for the year were $1,050,000 and the variable costs were $860,000. The fixed costs of the division were $193,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be
$132,100 decrease Revenues lost ($1,050,000) Variable costs avoided 860,000 Fixed costs eliminated 57,900 Impact on operating income ($132,100)
Georgia, Inc. has collected the following data on one of its products. The actual cost of the direct materials used is: Direct materials standard (4 lbs. @ $1/lb.) $4 per finished unit Total direct materials cost variance—unfavorable $13,750 Actual direct materials used 150,000 lbs. Actual finished units produced 30,000 units
$133,750. Budgeted direct materials (30,000 units * $4 each) $120,000 Unfavorable direct materials variance 13,750 Actual cost of direct materials used $133,750
A company's flexible budget for 12,000 units of production showed total contribution margin of $24,000 and fixed costs, $16,000. The operating income expected if the company produces and sells 15,000 units is
$14,000 Contribution margin per unit = $24,000/12,000 = $2.00 per unit Expected operating income for 15,000 units: Contribution margin (15,000 * $2.00) $30,000 Fixed costs (16,000) Operating income $14,000
Georgia, Inc. has collected the following data on one of its products. The direct materials price variance is: Direct materials standard (4 lbs. @ $1/lb.) $4 per finished unit Total direct materials cost variance—unfavorable $13,750 Actual direct materials used 150,000 lbs. Actual finished units produced 30,000 units
$16,250 favorable. Budgeted direct materials (30,000 units * $4 each) $120,000 Unfavorable direct materials variance 13,750 Actual cost of direct materials used $133,750 AQ × SP (150,000 lbs. * $1/lb.) = 150,000 Direct materials price variance $16,250 F
Hassock Corp. produces woven wall hangings. It takes 2 hours of direct labor to produce a single wall hanging. Bartels' standard labor cost is $12 per hour. During August, Bartels produced 10,000 units and used 21,040 hours of direct labor at a total cost of $250,376. What is Bartels' labor rate variance for August
$2,104 favorable. AH * AR Given $250,376 AH * SR 21,040 * $12 252,480 Direct labor rate variance $2,104 F
Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Axle for $45. If Wheeler buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying.
$2.20 cost per unit. Incremental cost = Purchase price less cost savings; $45 - ($10 + $24 + (55% * $16) = $2.20
Parallel Enterprises has collected the following data on one of its products. During the period the company produced 25,000 units. The direct materials price variance is: Direct materials standard (7 kg. @ $2/kg) $14 per finished unit Actual cost of materials purchased $322,500 Actual direct materials purchased and used 150,000 kgs.
$22,500 unfavorable. Actual cost (AQ × AP) $322,500 AQ × SP = 150,000 × $2 300,000 Direct materials price variance $22,500 U
A company's flexible budget for 12,000 units of production showed sales, $48,000; variable costs, $18,000; and fixed costs, $16,000. The operating income expected if the company produces and sells 16,000 units is
$24,000. Selling price per unit = $48,000/12,000 units = $4.00 per unit Variable costs per unit = $18,000/12,000 = $1.50 per unit Contribution margin per unit = $4.00 - $1.50 = $2.50 per unit Expected operating income for 16,000 units: Contribution margin (16,000 * $2.50) $40,000 Fixed costs (16,000) Operating income $24,000
Data pertaining to a company's joint production for the current period follows: L M Quantities produced 200 lbs. 150 lbs. Market value at split-off point $8/lb. $16/lb. Compute the cost to be allocated to Product L for this period's $660 of joint costs if the value basis is used
$264 Product Lb. Per lb. Total % $660 allocated L 200 $8/lb. $1,600 40%* $264 M 150 $16/lb. 2,400 60%* 396 Total $4,000 $660 *Product L: $1,600/$4,000 = 40%; Product M: $2,400/$4,000 = 60% Product L allocation = 40% * $660 = $264; Product M allocation = 60% * $660 = $396
Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,000. The division sales for the year were $960,000 and the variable costs were $475,000. The fixed costs of the division were $527,000. If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield's operating income for eliminating this business segment would be
$274,200 decrease Revenues lost ($960,000) Variable costs avoided 475,000 Fixed costs eliminated 210,800 Impact on operating income ($274,200)
Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows: End of Year Investment A B 1 $8,000 $0 2 8,000 0 3 8,000 24,000 The present value factors of $1 each year at 15% are: 1 0.8696 2 0.7561 3 0.6575 The present value of an annuity of $1 for 3 years at 15% is 2.2832 The net present value of Investment A is:
$3,266 Investment A: Net cash flows Present value factor Present value of net cash flows Year 1-3 $8,000 2.2832 $18,266 Initial investment (15,000) Net present value $3,266
Georgia, Inc. has collected the following data on one of its products. The direct materials quantity variance is: Direct materials standard (4 lbs. @ $1/lb.) $4 per finished unit Total direct materials cost variance—unfavorable $13,750 Actual direct materials used 150,000 lbs. Actual finished units produced 30,000 units
$30,000 unfavorable. AQ * SP 150,000 lbs. * $1/lb. = $150,000 SQ * SP 30,000 units * 4 lbs./unit * $1/lb. = 120,000 Direct materials quantity variance $30,000 U
A company has two departments, Y and Z that incur delivery expenses. An analysis of the total delivery expense of $9,000 indicates that Dept. Y had a direct expense of $1,000 for deliveries and Dept. Z had no direct expense. The indirect expenses are $8,000. The analysis also indicates that 40% of regular delivery requests originate in Dept. Y and 60% originate in Dept. Z. Departmental delivery expenses for Dept. Y and Dept. Z, respectively, are
$4,200; $4,800 Y Z Direct $1,000 $0 Indirect to A ($8,000 * 40%) 3,200 0 Indirect to B ($8,000 * 60%) 0 4,800 Total $4,200 $4,800
Differential Chemical produced 10,000 gallons of Preon and 20,000 gallons of Paron. Joint costs incurred in producing the two products totaled $7,500. At the split-off point, Preon has a market value of $6.00 per gallon and Paron $2.00 per gallon. Compute the portion of the joint costs to be allocated to Preon if the value basis is used
$4,500 Product Gallons Market value per Gallon Sales value at split-off Percent of total value at split-off $7,500 Allocated Preon 10,000 $6.00 $60,000 60%* $4,500 Paron 20,000 $2.00 40,000 40%* 3,000 Total $100,000 100% $7,500 *Preon: $60,000/$100,000 = 60%; Paron: $40,000/$100,000 = 40% Preon allocation = 60% * $7,500 = $4,500; Paron allocation = 40% * $7,500 = $3,000
Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8. An outside supplier has offered to sell the product to Axle for $32. Compute the net incremental cost or savings of buying the component
$5.00 cost per unit. Incremental cost = Purchase price less cost savings; $32 - ($10 + $14 + 3) = $5
Parallel Enterprises has collected the following data on one of its products. During the period the company produced 25,000 units. The direct materials quantity variance is: Direct materials standard (7 kg. @ $2/kg) $14 per finished unit Actual cost of materials purchased $322,500 Actual direct materials purchased and used 150,000 kg
$50,000 favorable AQ × SP = 150,000 * $2 $300,000 SQ × SP = (7kg * 25,000) * $2 350,000 Direct materials price variance $50,000 F
Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be
$6,000 Revenue if processed further: Premium (10,000 bags * $8 per bag) $80,000 Deluxe (3,000 bags * $6 per bag) 18,000 Total revenue if processed $98,000 Revenue if sold as Green Health (10,000 bags * $9 per bag) (90,000) Incremental revenue $8,000 Cost to process further (2,000) Incremental income to process further $6,000
Use the following data to find the direct labor rate variance if the company produced 3,500 units during the period. Direct labor standard (4 hrs. @ $7/hr.) $28 per unit Actual hours worked 12,250 Actual rate per hour $7.50
$6,125 unfavorable AH * AR (12,250) * $7.50/hr. $91,875 AH * SR (12,250) * $7/hr. 85,750 Total direct labor variance $6,125 U
A company provided the following direct materials cost information. Compute the cost variance. Standard costs assigned: Direct materials standard cost (405,000 units @ $2/unit) $810,000 Actual costs: Direct Materials costs incurred (403,750 units @ $2.20/unit) $888,250
$78,250 Unfavorable. Actual cost $888,250 - Standard cost $810,000 = $78,250 U
A company has two departments, Y and Z that incur wage expenses. An analysis of the total wage expense of $19,000 indicates that Dept. Y had a direct wage expense of $2,000 and Dept. Z had a direct wage expense of $3,500. The remaining expenses are indirect and analysis indicates they should be allocated evenly between the two departments. Departmental wage expenses for Dept. Y and Dept. Z, respectively, are
$8,750; $10,250 Indirect expenses = $19,000 − $2,000 − $3,500 = $13,500 Y Z Direct $2,000 $3,500 Indirect to A ($13,500 * 50%) 6,750 0 Indirect to B ($13,500 * 50%) 0 6,750 Total $8,750 $10,250
Vextra Corporation is considering the purchase of new equipment costing $35,000. The projected annual cash inflow is $11,000, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows: Periods 12 Percent 1 0.8929 2 1.6901 3 2.4018 4 3.0373 What is the net present value of the machine (rounded to the nearest whole dollar)?
($1,590). Net cash flows Present value of an annuity at 12% Present value of net cash flows Years 1-4 $11,000 3.0373 $33,410 Amount invested (35,000) Net present value ($1,590)
Butler Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Butler requires a 12% return on its investments. The present value of an annuity of 1 for different periods follows: Periods 12 Percent 1 0.8929 2 1.6901 3 2.4018 4 3.0373 What is the net present value of the machine?
($3,100). Net cash flows Present value of an annuity at 12% Present value of net cash flows Years 1-3 $1,200 + $10,000 2.4018 $26,900 Amount invested (30,000) Net present value ($3,100)
Two investment centers at Marshman Corporation have the following current-year income and asset data: Investment Center A Investment Center B Investment center income $415,000 525,000 Investment center average invested assets $2,400,000 1,950,000 The return on investment (ROI) for Investment Center A is
17.3% ROI = $415,000/$2,400,000 = 17.3%
A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. What is the approximate accounting rate of return?
19% ARR = $2,000/(($21,000 + 0)/2) = .1904
Identify the situation below that will result in a favorable variance
Actual revenue is higher than budgeted revenue
A responsibility accounting performance report displays
Both actual costs and budgeted costs
Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows: End of Year Investment A B 1 $8,000 $0 2 8,000 0 3 8,000 24,000 The present value factors of $1 each year at 15% are: 1 0.8696 2 0.7561 3 0.6575 The present value of an annuity of $1for 3 years at 15% is 2.2832 Which investment should Alfarsi choose
Both investments are acceptable, but A should be selected because it has the greater net present value. Investment A: Net cash flows Present value factor Present value of net cash flows Year 1-3 $8,000 2.2832 $18,266 Initial investment (15,000) Net present value $3,266 Investment B: Net cash flows Present value factor Present value of net cash flows Year 3 $24,000 0.6575 $15,780 Initial investment (15,000) Net present value $780
Factor Co. can produce a unit of product for the following costs: Direct material $8 Direct labor 24 Overhead 40 Total costs per unit $72 An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to
Buy since the relevant cost to make it is $48 Relevant cost to make one unit: Direct material $8 Direct labor 24 Overhead saved (40% * 40) 16 Total relevant cost to make $48
Bannister Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows: Direct material $45,000 Direct labor 30,000 Factory overhead (30% is variable) 98,000 If Bannister can buy 1,000 units from a subcontractor for $100,000, it should
Buy the product because the total incremental costs of manufacturing are greater than $100,000 Incremental cost to manufacture: Direct materials $45,000 Direct labor 30,000 Variable overhead ($98,000 * 30%) 29,400 Total incremental cost to manufacture $104,400
Frederick Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 5,000 units follows: Direct material $62,000 Direct labor 47,000 Variable factory overhead 38,000 Factory overhead 52,000 If Frederick can buy 5,000 units from a subcontractor for $130,000, it should
Buy the product because the total incremental costs of manufacturing are greater than $130,000 Incremental cost to manufacture: Direct materials $62,000 Direct labor 47,000 Variable overhead 38,000 Total incremental cost to manufacture $147,000
Costs that the manager has the power to determine or at least significantly affect are called
Controllable costs.
Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. Chang should
Correct the defects and sell the units at the regular price If the units are reworked: Incremental revenue from reworking ($21 - $5) $16.00 Incremental cost to rework (6.00) Net benefit to rework $10.00
Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should
Correct the defects and sell the watches at the regular price If the watches are reworked: Incremental revenue from reworking ($12.50 - $3) $9.50 Incremental cost to rework (5.00) Net benefit to rework $4.50
The calculation of the payback period for an investment when net cash flow is even (equal) is
Cost of investment/Annual net cash flow
Listmann Corp. processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: Product Sales Value with no further Processing Additional Processing Costs Sales Value after further processing Premier $1,350 $900 $2,700 Deluxe 450 225 630 Super 900 450 1,800 Basic 90 45 180 Which product(s) should not be processed further?
Deluxe Premier Deluxe Super Basic Revenue if processed further $2,700 $630 $1,800 $180 Revenue if sold as is (1,350) (450) (900) (90) Incremental revenue $1,350 $180 $900 $90 Cost to process further (900) (225) (450) (45) Incremental income $450 ($45) $450 $45
The calculation of annual net cash flow from a particular investment project should include all of the following except:
Depreciation expense
Expenses that are easily traced and assigned to a specific department because they are incurred for the sole benefit of that department are called
Direct expenses
The process of restating future cash flows in today's dollars is known as:
Discounting
The net cash flow of a particular investment project
Does not include depreciation
Static budget is another name for:
Fixed budget
Variable budget is another name for
Flexible budget.
A company's required rate of return, typically its cost of capital is called the:
Hurdle rate
A limitation of the internal rate of return method is that it
Ignores varying risks over the life of a project
Derby Inc. manufactures a product which contains a small part. The company has always purchased this motor from a supplier for $125 each. Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it. The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost. Direct materials $38 Direct labor 50 Overhead (fixed and variable) 75 Total $163 The required volume of output to produce the motors will not require any incremental fixed overhead. Incremental variable overhead cost is $21 per motor. What is the effect on income if Derby decides to make the motors?
Income will increase by $16 per unit. Relevant costs: $38 + $50 + $21 = $109 per unit Effect on Income: $125 - $109 = $16 increase per unit
Markson Company had the following results of operations for the past year: Sales (8,000 units at $20) $160,000 Variable manufacturing costs $86,000 Fixed manufacturing costs 15,000 Variable selling and administrative expenses 12,000 Fixed selling and administrative expenses 20,000 (133,000) Operating income $27,000 A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,600 for the purchase of special tools. If Markson accepts this additional business, its profits will
Increase by $1,900 Selling price per unit $14.00 Variable costs per unit Variable manufacturing costs ($86,000/8,000 units) $10.75 Variable selling costs ($12,000/8,000 units) 1.50 Total variable costs per unit ($12.25) Contribution margin per unit $1.75 Units in order * 2,000 units Total contribution margin $3,500 Less incremental fixed overhead $1,600 Incremental income from order $1,900
The type of department that generates revenues and incurs costs, and its manager is responsible for the investments made in operating assets is called a
Investment center
An opportunity cost
Is the potential benefit lost by choosing a specific alternative course of action among two or more
Epsilon Co. can produce a unit of product for the following costs: Direct material $8 Direct labor 24 Overhead 40 Total costs per unit $72 An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to
Make since the relevant cost to make it is $56 Relevant cost to make one unit: Direct material $8 Direct labor 24 Overhead saved (60% * 40) 24 Total relevant cost to make $56
An analytical technique used by management to focus attention on the most significant variances and give less attention to the areas where performance is reasonably close to standard is known as
Management by exception
In a responsibility accounting system
Managers are responsible for their departments' controllable costs
Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: End of Year Machine A B 1 $5,000 $1,000 2 4,000 2,000 3 2,000 11,000 Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase?
Only Machine B is acceptable. Machine A: Net cash flows Present value factor Present value of net cash flows Year 1 $5,000 0.8696 $4,348 Year 2 4,000 0.7561 3,024 Year 3 2,000 0.6575 1,315 Total $8,687 Initial investment (9,000) Net present value ($313) Machine B: Net cash flows Present value factor Present value of net cash flows Year 1 $1,000 0.8696 $870 Year 2 2,000 0.7561 1,512 Year 3 11,000 0.6575 7,232 Total $9,614 Initial investment (9,000) Net present value $614
Sales variance analysis is used by managers for
Planning and control purposes
Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should
Produce only Product B Product A Product B Selling price per unit $16.00 $12.00 Variable costs per unit (6.00) (5.00) Contribution margin per unit $10.00 $7.00 Machine hours per unit 5 hrs. 3 hrs. Contribution margin per machine hour $2.00 $2.33
A unit of a business that generates revenues and incurs costs is called a
Profit center.
Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine $77,000 $55,000 Net cash flow: Year 1 28,000 2,000 Year 2 28,000 25,000 Year 3 28,000 25,000 Year 4 0 20,000 If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?
Project X Payback period = (77,000/28,000) = 2.75 years
The most useful allocation basis for the departmental costs of an advertising campaign for a storewide sale is likely to be
Proportion of sales of each department
The difference between actual quantity of input used and the standard quantity of input used results in a
Quantity variance.
A report that accumulates the actual expenses that a manager is responsible for and their budgeted amounts is a
Responsibility accounting performance report
An accounting system that is set up to control costs and evaluate managers' performance by assigning costs to the managers responsible for controlling them is called a
Responsibility accounting system
Allocating joint costs to products using a value basis method is based on their relative
Sales values
A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do?
Sell the units as scrap Selling price of rebuilt units $8.00 Selling price of defective units 4.00 Incremental revenue from rebuilding $4.00 Incremental cost to rebuild Materials 1.00 Labor 2.00 Overhead 1.50 Total incremental cost to rebuild (4.50) Net loss from rebuilding ($0.50)
A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $200,000 original cost of the machine is an example of a(n)
Sunk cost
A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n)
Sunk cost
The internal rate of return method is not subject to the limitations of the net present value method when comparing projects with different amounts invested because
The internal rate of return is expressed as a percent rather than the absolute dollar value of present value
In regard to joint cost allocation, the "split-off point" is
The point at which separate products can be identified
Which department is often responsible for the direct materials price variance?
The purchasing department.
Which of the following is an objective of capital budgeting
To earn a satisfactory return on investment
Assume markup percentage equals desired profit divided by total costs. What is the correct calculation to determine the dollar amount of the markup per unit?
Total cost per unit times markup percentage per unit
To determine a product selling price based on the total cost method, management should include
Total production and nonproduction costs plus a markup
Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?
Yes, because incremental revenue exceeds incremental costs Per unit Total Revenue $5.00 $7,500 Relevant production costs: Variable costs $3.00 4,500 New machine 1,000 Total costs ($5,500) Net income from order $2,000
The difference between a profit center and an investment center is
an investment center is responsible for investments made in operating assets
Regardless of the system used in departmental cost analysis:
Indirect costs are allocated, direct costs are not
Standard costs are
Preset costs for delivering a product or service under normal conditions.
Standard costs are used in the calculation of
Price and quantity variances
The difference between actual price per unit of input and the standard price per unit of input results in a
Price variance.
