Managerial Final 3

If monthly fixed costs are $21,000 and the contribution margin ratio is 42%, the monthly sales volume required to break even is:

$50,000. {$21,000 ÷ 0.42 = $50,000}

Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What will be the monthly margin of safety (in dollars) if 1,800 units are sold each month?

$70,500 {(1,800 × $85) - $82,500 = $70,500}

A product sells for $125, variable costs are $80, and fixed costs are $45,000. If the selling price can be increased by 20% with a similar increase in variable costs, how many fewer units would have to be sold to earn $300,000? (Round the answer to the nearest unit.)

1,278 units {[($45,000 + $300,000) ÷ ($125 - $80)] - [($45,000 + $300,000) ÷ {($125 × 120%) - ($80 × 120%)}] = 1,278 units}

An effective just-in-time system will include:

An efficient plant layout.

A company may choose to use process costing or job order costing, but never both simultaneously.

False

A just-in-time manufacturing system is also known as a supply push system.

False

A schedule of the cost of finished goods manufactured summarizes the flow of manufacturing costs into and out of the finished goods inventory account.

False

Activities related to internal failure such as rework, scrap, and engineering change orders are value-added activities since they cannot be eliminated without increasing costs elsewhere in the value chain.

False

An overhead application rate is computed by dividing the actual overhead costs by the expected amount of units in the activity base.

False

As volume increases, per unit variable costs will decrease on a per-unit basis and stay the same in total.

False

Conversion costs include direct labor and direct materials associated with converting units, so that they can be transferred out of Work in Process.

False

Debiting Work-in-Process in Department Two and crediting Work-in-Process in Department One represents costs transferred from Department Two to Department One.

False

In a process costing system that uses equivalent units of production, the per-unit cost of direct materials equals the total cost of materials used in the current month divided by the number of units completed and transferred during the current month.

False

In a production cost report, the units in beginning Work-in-Process are always expressed as equivalent units.

False

Internal failure costs happen when an unsatisfactory good or service is delivered to a customer.

False

International Financial Reporting Standards (IFRS) require companies to expense costs associated with R&D activities.

False

Job order costing cannot be used for a service company.

False

Managerial accounting refers to the preparation and use of accounting information designed to meet the needs of decision makers inside and outside the business organization.

False

Manufacturing overhead is not applied to products when a process costing system is used.

False

One characteristic common to all types of costs is the tendency to rise and fall in direct proportion to changes in the volume of business output.

False

Pepsi Cola would most likely use a job order costing system.

False

Product costs are charged directly to expense accounts.

False

Product costs are offset against revenue in the period in which the related products are manufactured, rather than the period in which the products are sold.

False

Since cost accounting systems provide managers with information necessary to manage operations, the information from cost accounting systems is not useful for external reporting purposes.

False

The production cost report is an estimate of the equivalent units completed during the period.

False

When direct materials are applied to the production process, materials inventory is debited and work in process is credited.

False

When goods are sold, a journal entry is made transferring the goods from cost of goods sold to finished goods.

False

Completing 3,000 units, which were each 75% complete at the beginning of the period, represents 2,250 equivalent units of work during the current period.

False {If at the beginning of the period 3,000 units were 75% completed, then to complete these units during the current period, the equivalent units = 3,000 × (100% − 75%) = 750 equivalent units.}

Metalworks applies manufacturing overhead on the basis of direct materials used in production. During the current period, direct materials used for Job #123 amounted to $22,545. If Metalworks' overhead rate is 0.65 of direct materials used, the overhead applied to Job #123 for the period is $15,000.

False {Overhead applied to Job #123 in the current period is $14,654.25. $22,545 × 0.65 = $14,654.25}

Management expects total sales of $40 million, a margin of safety of $10 million, and a contribution margin ratio of 45%. Which of the following estimated amounts is not consistent with this information?

Operating income, $6 million {Variable costs = $40,000,000 - ($40,000,000 × 0.45) = $22,000,000 Fixed costs = $30,000,000 × 0.45 = $13,500,000 Break-even sales volume = $40,000,000 - $10,000,000 = $30,000,000 Only Operating income is not consistent ($4,500,000).}

A credit balance in the manufacturing overhead account at month end indicates that the actual overhead costs were less than the amount of overhead costs applied to jobs.

True

A process costing system is suitable for a company with a large volume of standard products produced on a relatively continuous basis, for example, golf balls or petroleum.

True

A value chain is a linked set of activities and resources necessary to create and deliver a product or service to a customer.

True

Activity-based costing systems always result in more accurate measurements of unit costs.

True

Activity-based costing uses multiple activity bases to assign overhead costs to units of production.

True

All three inventory accounts (raw materials, work in process, and finished goods) are considered current assets.

True

An overhead application rate is a device used to assign overhead costs to units of product in proportion to some "activity base" that can be traced directly to the manufactured products.

True

As units are completed, their cost is transferred from the Work in Process Inventory account to the Finished Goods Inventory account.

True

Contribution margin ratio is equal to contribution margin per unit divided by unit sales price.

True

Economies of scale can be achieved by using facilities more intensively.

True

Non-value-added activities do not directly increase the worth of a product to a customer.

True

Product costs become part of inventory and are placed on the balance sheet until the products are sold.

True

The cost transferred to Cost of Goods Sold is equal to the total manufacturing costs incurred for the units sold.

True

The margin of safety sales volume times the contribution margin ratio equals operating income.

True

The James Company has incurred the following costs of production: Direct Materials $350,000; Direct Labor $475,000; Manufacturing Overhead $722,000; and Selling and Administrative Costs $256,000. The James Company conversion costs are $1,197,000.

True {Conversion costs = Direct Labor $475,000 + Manufacturing Overhead $722,000 = $1,197,000}

Grayson Enterprises manufactures springs and shock absorbers. Springs account for 40% of the company's total sales revenue, whereas shocks account for about 60%. The contribution margin ratios for springs and shocks are 45% and 35%, respectively. Grayson's fixed costs average $450,000 per month. a. Grayson's monthly break-even point expressed in sales dollars is b. In order to earn an operating income of $252,000, Grayson's monthly sales must be:

a. $1,153,846. {$450,000 ÷ [(0.40 × 0.45) + (0.60 × 0.35)] = $1,153,846} b. $1,800,000. {($450,000 + $252,000) ÷ [(0.40 × 0.45) + (0.60 × 0.35)] = $1,800,000}

The Abrams Corporation incurred the following quality costs for the year ending December 31, 2018: Inspections $32,000 Training $15,000 Quality planning $7,000 Maintenance $12,500 Rework $3,000 Warranty $7,500 Testing of Equipment $6,300 Scrap $8,000 Lost sales $22,250 Downtime $8,700 Repairs $5,500 a. What are the total prevention costs for the Abrams Corporation? b. What are the total appraisal costs for the Abrams Corporation? c. What are the total internal failure costs for the Abrams Corporation? d. What are the total external failure costs for the Abrams Corporation? e. As a percentage of total costs, which quality cost category is the highest?

a. $34,500 {$15,000 + $7,000 + $12,500 = $34,500} b. $38,300 {$32,000 + $6,300 = $38,300} c. $19,700 {$3,000 + $8,000 + $8,700 = $19,700} d. $35,250 {$7,500 + $22,250 + $5,500 = $35,250} e. Appraisal { Appraisal $38,300 30% Prevention $34,500 27% Internal failure costs $19,700 15% External failure costs $35,250 28% Total Costs $127,750 100%

Summit Products, Inc. is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $90 for such a widget and that 50,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $65. a. If Summit Products requires a 25% return on sales to undertake production, what is the target cost for the new widget? b. At a price of $80, Summit's market research indicates that it can sell 60,000 units per year. Assuming Summit can reach its new target cost, how will Summit's profit at the $80 price compare to what it would have earned in the absence of the competitor's product?

a. $67.50 {$90 - ($90 × 0.25) = $67.50} b. Profit will be $75,000 higher. {(60,000 × [$80 − $60]) - (50,000 × [$90 − $67.50]) = $75,000 higher}

Techniques to manage costs in the value chain include all of the following except: a. Activity based management. b. Target costing. c. Process costing. Correct d. Total quality management.

c. Process costing.