ac 612 - accounting master - forecasting and budgeting

Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales? A. $2,329 B. $2,277 C. $1,980 D. $1,935

A. $2,329 Since a 15% profit is desired, the cost of $990,000 would be 85% of sales. (Remember that profit + cost = sales.) Thus, sales are $1,164,700 ($990,000 ÷ 85%). $1,164,700 ÷ 500 units equals $2,329 per unit.

A company uses a standard costing system. The production budget for Year 1 was based on 200,000 units of output. Each unit requires two standard hours of manufacturing labor for completion. Total overhead was budgeted at $900,000 for the year, and the budgeted fixed overhead rate was $1.50 per direct manufacturing labor hour. Both variable and fixed overheads are allocated to the product based on direct manufacturing labor hours. The actual data for Year 1 are as follows: Actual production in units: 198,000 Actual direct manufacturing labor hours: 425,000 Actual variable overhead: $352,000 Actual fixed overhead: $575,000 What is the amount of unfavorable variable overhead efficiency variance? A. $21,750 B. $33,250 C. $43,500 D. $55,000

A. $21,750 Step 1: Determine the standard variable overhead rate. Budgeted FOH: 400,000 (budgeted labor hours) × $1.50 (budgeted FOH rate) = $600,000 Budgeted VOH: $900,000 (total budgeted overhead) - $600,000 (FOH) = $300,000 Standard VOH rate: $300,000/400,000 labor hours = $0.75/hour Step 2: Calculate variable overhead efficiency variance. VOH efficiency variance = Standard rate × (Actual hours - Standard hours allowed for actual volume) = $0.75 × (425,000 hours - 396,000* hours) = $21,750 *198,000 units × 2 hour/unit = 396,000 hours

In the first year of operation, Magna Manufacturers had the following costs when it produced 100,000 and sold 80,000 units of its only product: Manufacturing costs: fixed - $180,000 variable - 160,000 Selling&Admin costs: fixed - $90,000 variable - 40,000 How much lower would Magna's net income be if it used variable costing instead of full absorption costing? A. $36,000 B. $54,000 C. $68,000 D. $94,000

A. $36,000 The difference between variable costing and full absorption costing lies in the treatment of fixed manufacturing costs. Full absorption costing treats fixed manufacturing costs as product costs, while variable costing expenses these as period costs. Using full absorption costing: $180,000 / 100,000 units = $1.80 per unit produced $1.80 x 80,000 units sold = $144,000 fixed manufacturing costs expensed (through cost of goods sold) under full absorption costing. The remaining fixed manufacturing costs of $36,000 (= $180,000 - $144,000) remain in inventory as product costs. Variable costing treats all fixed costs as period costs, expensing the costs regardless of sales. Thus, the difference in net income would be the amount of fixed manufacturing costs inventoried under absorption costing: $180,000 - $144,000 = $36,000.

Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory overhead costs per water pump are based on direct labor hours and are shown below: Variable overhead (4 hours at $8/hour): $32 Fixed overhead (4 hours at $5*/hour): 20 Total overhead cost per unit: $52 *Based on a capacity of 100,000 direct labor hours per month The following additional information is available for the month of November -22,000 pumps were produced although 25,000 had been scheduled for production -94,000 direct labor hours were worked at a total cost of $940,000 -The standard direct labor rate is $9 per hour -The standard direct labor time per unit is four hours -Variable overhead costs were $740,000 -Fixed overhead costs were $540,000 The fixed overhead spending variance for November was: A. $40,000 unfavorable B. $70,000 unfavorable C. $240,000 unfavorable D. $15,000 favorable

A. $40,000 unfavorable Actual fixed overhead 540,000 Budgeted fixed overhead (100,000 DL hrs. × $5/hr.) 500,000 Unfavorable variance 40,000

Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table tops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly Department takes a manufactured table top and attaches the four purchased table legs. It takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables to ensure that 40% of next month's sales are in the finished goods inventory. Rokat also purchases sufficient direct materials inventory to ensure that direct materials inventory is 60% of the following month's scheduled production. Rokat's sales budget in units for the next quarter is as follows: July / 2,300 August / 2,500 September / 2,100 Rokat's ending inventories in units for June 30, Year 1 are: Finished goods / 1,900 Raw materials (legs) / 4,000 The number of tables to be produced during August, Year 1 is: A. 2,340 tables B. 1,400 tables C. 1,600 tables D. 2,380 tables

A. 2,340 tables Units: Budgeted sales - August - 2,500 Desired ending inventory, 8/31 (40% × 2,100 Sept. sales) 840 Total required 3,340 Less: beginning inventory 8/1 (40% × 2,500 Aug. sales) (1,000) Production 2,340

Which one of the following items is the last schedule to be prepared in the normal budget preparation process? A. Cash budget B. Cost of goods sold budget C. Manufacturing overhead budget D. Selling expense budget

A. Cash budget When preparing a budget, the last schedule to be prepared is the cash budget. Sometimes, pro forma accrual financial statements are prepared after this last schedule.

A budget that accommodates many levels of production volume is a: A. Flexible budget B. Zero based budget C. Cash budget D. Sales budget

A. Flexible budget A flexible budget has fixed and variable components and can accommodate many levels of production.

Metal Shelf Company's standard cost for raw materials is $4.00 per pound and it is expected that each metal shelf uses two pounds of material. During October Year 2, 25,000 pounds of materials are purchased from a new supplier for $97,000 and 13,000 shelves are produced using 27,000 pounds of materials. Which statement is a possible explanation concerning the direct materials variances? A. The production department had to use more materials since the quality of the materials was inferior B. The purchasing manager paid more than expected for materials C. Production workers were more efficient than anticipated D. The overall materials variance is positive; no further analysis is necessary

A. The production department had to use more materials since the quality of the materials was inferior The materials price variance is $3,000 favorable since 25,000 pounds of materials were purchased for $97,000. The materials usage variance is $4,000 unfavorable since it took 27,000 pounds of material to produce 13,000 shelves ($4.00 × 1,000 additional pounds). It is possible that the materials which were purchased from a new supplier at a lower price were of a lesser quality and caused more material to be used in the production process.

Under a standard cost system, labor price variances are usually not attributable to: A. Union contracts approved before the budgeting cycle B. Labor rate predictions C. The use of a single average standard rate D. The payment of hourly rates instead of prescribed piecework rates

A. Union contracts approved before the budgeting cycle Labor price variances would not be attributable to union contracts approved before the budgeting cycle. If the contracts are approved before, they would be used as the basis for the budget.

A management accountant performs a linear regression of maintenance cost vs. production using a computer spreadsheet. The regression output shows an "intercept" value of $322,897. How should the accountant interpret this information? A. Y has a value of $322,897 when X equals zero B. X has a value of $322,897 when Y equals zero C. The residual error of the regression is $322,897 D. Maintenance cost has an average value of $322,897

A. Y has a value of $322,897 when X equals zero The intercept value is the point at which the behavior of the independent variable on the X - Axis (production) stated in terms of the dependent variable (cost) intercepts the y axis as follows: x (production) / y (cost) 0 / 322,897 1,000 / 422,897 1,250 / 547,897 1,500 / 687,897 1,750 / 872,897 2,000 / 1,072,897

A company needs to sell 10,000 units of its only product in order to break even. Fixed costs are $110,000, and the per unit selling price and variable costs are $20 and $9, respectively. If total sales are $220,000, the company's margin of safety will be equal to: A. $0 B. $20,000 C. $110,000 D. $200,000

B. $20,000 The margin of safety is equal to total sales − breakeven sales dollars. Since the breakeven number of unit sales is 10,000, and the sale price is $20, breakeven sales dollars must be equal to $200,000. The margin of safety is therefore $220,000 − $200,000 = $20,000.

Roger Co. implemented activity-based costing in the current year. To select the appropriate driver for Cost Pool A, Roger performed regression analyses for two independent variables, Driver 1 and Driver 2, using monthly operating data. The monthly levels of Cost Pool A were the dependent variables in both regressions. Output results from the regression analyses were as follows: driver 1 / driver 2 r squared: 0.46 / 0.80 intercept: $551.00 / $970.00 x variable (slope): $0.55 / $0.33 At the budgeted production level for next month, the levels of Driver 1 and Driver 2 are expected to be 5,880 and 7,000, respectively. Based on this information, what is the budgeted amount for Cost Pool A for next month? A. $2,624 B. $3,280 C. $3,464 D. $3,785

B. $3,280 In deciding between two potential cost drivers and using regression analysis, the best cost driver to use is the one with the higher R squared. R squared represents the coefficient of determination, where a higher number indicates a better "fit" of the regression line. Driver 2 will therefore be the driver, and the regression equation will be equal to $970 + $0.33X. If X is 7,000, then the budgeted amount for Cost Pool A is equal to $970 + $0.33(7,000) = $3,280.

A company has gathered the following information from a recent production run: Standard variable overhead rate / $10 Actual variable overhead rate / $8 Standard process hours / 20 Actual process hours / 25 What is the company's variable overhead spending variance? A. $50 unfavorable B. $50 favorable C. $40 unfavorable D. $40 favorable

B. $50 favorable Actual: Actual process hours 25 Actual VOH rate x $8 Total = $200 Budgeted based on actual: Actual process hours 25 Standard VOH Rate x $10 Total = $250 The actual amount charged to the overhead account ($200) is less than the amount applied ($250) so the $50 variance is favorable. Overhead variances represent the analysis of the balance in the overhead account after application of overhead. Overapplied (more credit) is favorable because this means that actual is less than applied. Underapplied (more debit) is unfavorable because this means that actual is more than applied.

The following information for a company is given: Fixed cost per month: $2,500 Unit selling price: 100 Variable cost as a percentage of sales: 60% What amount of annual sales must the company achieve to break even? A. $100,000 B. $75,000 C. $50,000 D. $30,000

B. $75,000 Breakeven point in dollars = Total fixed costs / Contribution margin ratio Total fixed costs in this question are monthly costs of $2,500 times 12 months in the year, or $30,000. If variable costs are 60% of sales, then the contribution margin is equal to 40% of sales. Applying these amounts into the equation above, the breakeven point in dollars is calculated as $75,000. Breakeven point in dollars = $30,000 / 0.40 = $75,000

Mo' Joe Coffee Shops is concerned is concerned as to whether its brand name is working and wants to compute its market share variance to measure the effect of the company's market share on the company's contribution margin. Mo' Joe sold 90,000 units compared to a budgeted 120,000 units in a market that regularly commands 500,000 units in sales. The budgeted contribution margin per unit is $0.88 while the actual contribution margin achieved was $0.56 per unit. Mo' Joe's market share variance is: A. $26,400 B. ($26,400) C. $16,800 D. ($16,800)

B. ($26,400) market share variance = actual market share - budgeted market share x actual industry units x budgeted contribution margin per unit = 18.0%* - 24.0%** x 500,000 x $0.88 = ($26,400) * Actual market share = 90,000/500,000 = 18% ** Budgeted market share = 120,000/500,000 = 24%

State College is using cost-volume-profit analysis to determine tuition rates for the upcoming school year. Projected costs for the year are as follows: Contribution margin per student $ 1,800 Variable expenses per student 1,000 Total fixed expenses 360,000 Based on these estimates, what is the approximate breakeven point in number of students? A. 129 B. 200 C. 360 D. 450

B. 200 The breakeven point in units is 200. The breakeven point in units is computed by dividing fixed costs by contribution margin per unit. Both figures are given in the problem and are used to compute breakeven point in units (students) as follows: fixed costs 350,000 contribution margin per student ÷ 1,800 Breakeven point in students = 200

Grant Co.'s sales budget shows the following projections for the year ending December 31: quarter / units: first / 30,000 second / 40,000 third / 22,500 fourth / 27,500 total / 120,000 Inventory at the beginning was budgeted at 9,000 units. The quantity of finished goods inventory at the end of each quarter is to equal 30 percent of the next quarter's budgeted sales of the units. What amount should the production budget show for the units to be produced during the first quarter? A. 36,000 B. 33,000 C. 24,000 D. 12,000

B. 33,000 Budgeted production is equal to Budgeted sales + Desired ending inventory − Beginning inventory. With budgeted sales of 40,000 units in the second quarter, the desired ending inventory representing 30 percent of this amount is 12,000 units. Beginning inventory for the first quarter is 9,000 units and sales for the first quarter are 30,000 units. Budgeted production = 30,000 in sales + 12,000 in ending inventory − 9,000 in beginning inventory = 33,000 units.

Producto Industries had a beginning inventory of 1,000 units on January 1, 20X1, purchased 30,000 units during the year, and sold 28,000 during the year ended December 31, 20X1. In comparing the net income results related to the use of the absorption versus variable (direct) costing for the year ended December 31, 20X1: A. There will be no difference in net income amounts using absorption or variable costing B. Absorption costing will product a greater net income than variable costing C. Variable costing will produce a greater net income than absorption costing D. Variable costing will only produce greater net income if variable costs per unit are unchanged in relation to periodic fixed overhead applications

B. Absorption costing will product a greater net income than variable costing The only difference between variable and absorption costing is the treatment of fixed costs. Under variable costing approaches, all fixed costs are treated as periodic expenses. Using absorption costing, certain fixed costs are treated as unexpired (inventory) and only recognized as cost of goods sold when relieved from inventory. When inventory increases, cost of goods sold decreases and net income increases. An increase in inventory by 2,000 units as displayed in the fact pattern (30,000 − 28,000) indicates that some fixed costs, treated as period expenses under variable costing, have been included in inventory under absorption costing thereby decreasing cost of goods sold and increasing net income.

The performance of a standard cost center should be evaluated by comparing: A. Actual costs with fixed (static) budget costs B. Actual costs with flexible budget costs C. Flexible budget costs with fixed (static) budget costs D. Actual contribution of the cost center with budgeted contribution of the cost center

B. Actual costs with flexible budget costs Flexible budgeting adapts budgeted-per-unit and fixed-cost totals to the actual volume of production. Performance should be evaluated by comparing what actually happened (actual costs) with what was budgeted/expected to happen given the actual level of production.

Which one of the following items should be done first when developing a comprehensive budget for a manufacturing company? A. Determination of the advertising budget B. Development of a sales budget C. Determination of equipment acquisitions D. Preparation of a pro forma income statement

B. Development of a sales budget

A plan that is created using a budgeted revenue and costs but is based on the actual units of output is known as a: A. Continuous budget B. Flexible budget C. Static budget D. Master budget

B. Flexible budget A flexible budget uses budgeted revenue and costs per unit, but it is adjusted based on actual units of output.

In a regression analysis, the coefficient of determination measures: A. Economic plausibility B. Goodness of fit C. Independence of residuals D. Independence of variables

B. Goodness of fit The coefficient of determination measures the proportion of the total variation in the dependent variable (y) explained by the independent variable (x). The greater this proportion is, the better the "fit" of the regression equation linking the two variables.

All of the following statements regarding standards are accurate except: A. Standards allow for management to budget at a per unit level B. Ideal standards account for a minimal amount of normal spoilage C. Participative standards usually take longer to implement then authoritative standards D. Currently attainable standards take into account the level of training available to employees

B. Ideal standards account for a minimal amount of normal spoilage Ideal standards do not make any provisions for normal spoilage or downtime. They assume perfect efficiency and effectiveness, which is helpful as an initial benchmark but is often unrealistic and unattainable.

The cash budget provides management with information. Which of the following is not an example of information a cash budget provides? A. Availability of funds for distribution to owners B. The needs for internal financing C. Availability of funds for the repayment of debt D. Availability of funds for investment purposes

B. The needs for internal financing The cash budget provides information concerning the need for external financing, not internal financing.

Assumptions underlying cost-volume profit analysis include all of the following, except: A. All costs can be divided into fixed and variable elements B. Total costs are directly proportional to volume over the relevant range C. Selling prices are to be unchanged D. Volume is the only relevant factor affecting cost

B. Total costs are directly proportional to volume over the relevant range

Variable overhead is applied on the basis of standard direct labor hours. If for a given period, the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be: A. Favorable B. Unfavorable C. The same amount as the labor efficiency variance D. Indeterminable since it is not related to the labor efficiency variance

B. Unfavorable If variable overhead is applied on the basis of standard direct labor hours, and direct labor efficiency variance is unfavorable, the variable overhead efficiency will (also) be unfavorable.

ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of direct materials in inventory were purchased for $105,000, and two units of direct materials are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for materials was $60,000, and the unfavorable quantity variance was $2,500. The materials price variance for the units used in November was: A. $2,500 unfavorable B. $11,000 unfavorable C. $12,500 unfavorable D. $2,500 favorable

C. $12,500 unfavorable The materials price variance is typically calculated using the actual quantity of goods purchased, which is given as 35,000. However, this problem asks for the materials price variance for the units used, rather than the units purchased. Therefore, we first need to calculate the actual number of units used. In this problem, we are given the quantity variance ($2,500 unfavorable) and we can calculate the standard quantity and the standard price per unit: Standard quantity = 12,000 units produced × 2 units of raw materials per unit produced = 24,000 units of raw materials Standard price per unit = Total standard price / Standard quantity = $60,000 / 24,000 = $2.50 We can then use this information to calculate the Actual Quantity Used using the formula for the materials quantity usage variance. DM quantity usage variance = Standard price × (Actual quantity used − Standard quantity used) $2,500 = $2.50 × (Actual quantity used − 24,000) Actual quantity used = 25,000 Once the actual quantity used is known, we can calculate the price variance for the units used as follows: DM price variance for units used = Actual quantity used × (Actual price − Standard price) DM price variance for units used = 25,000 × [($105,000 / 35,000) − $2.50] = 25,000 × ($3.00 − $2.50) = $12,500 Because actual price was greater than standard price, the variance is unfavorable.

ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of direct materials in inventory were purchased for $105,000, and two units of direct materials are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for materials was $60,000, and the unfavorable quantity variance was $2,500. The materials price variance for the units used in November was: A. $2,500 unfavorable B. $11,000 unfavorable C. $12,500 unfavorable D. $2.500 favorable

C. $12,500 unfavorable Standard price per unit: $60,000 ÷ (12,000 units × 2) = 2.50 Actual price per unit: $105,000 ÷ 35,000 units = 3.00 Unfavorable price variance per unit .50 Actual units of material × 25,000 Unfavorable materials price variance 12,500 Note to Students: This question has a special "twist" that does not exist in many questions regarding materials price variances. The typical way to calculate materials price variance is to multiply the price variance by the actual units purchased, which would be 35,000 units in this case, causing a materials price variance of $17,500 (unfavorable). This is the method we describe in our textbooks. However, note that the $17,500 amount is NOT an available answer option. This is when it becomes increasingly important to READ THE QUESTION. The question specifically asks for the materials price variance for units USED in November. The units used were 25,000, which would cause the answer to be $12,500 (unfavorable). The calculation of the 25,000 actual units is as follows: Standard Price (Standard quantity − Actual quantity) = (2,500) $2.50 (Standard quantity − Actual quantity) = (2,500) Standard quantity − Actual quantity = (1,000) 24,000 − Actual quantity = (1,000) Actual quantity = 25,000 units

HL Co. uses the high-low method to derive a total cost formula. Using a range of units produced from 5,000 to 7,500, and a range of total costs from $35,000 to $45,000, producing 2,000 units will cost HL: A. $8,000 B. $14,000 C. $23,000 D. $29,000

C. $23,000 The high-low method is used to estimate both fixed and variable costs, and can then be applied to determine a total cost formula that is used to estimate total costs for any level of production. The difference between the total costs ($45,000 − $35,000) is divided by the difference in units (7,500 − 5,000) to derive a variable cost per unit of $4 ($10,000 / 2,500). Using either end of the range, fixed costs can then be estimated. Using total costs of $45,000 for 7,500 units, with variable costs at $4 per unit, $45,000 − 7,500($4) = $15,000 of fixed costs. The total cost formula for HL will be equal to: $15,000 + [$4.00 × # units]. 2,000 units will produce a total cost of: $15,000 + [$4.00 × 2,000] = $23,000.

Nanjones Company manufactures a line of products distributed nationally through wholesalers. Presented below are planned manufacturing data for Year 1 and actual data for November Year 1. The company applies overhead based on planned machine hours using a predetermined annual rate. Year 1 Planning Date: annual / november fixed manufacturing overhead - $1,200,000 / $100,000 variable manufacturing overhead - $2,400,000 / $220,000 direct labor hours - 48,000 / 4,000 machine hours - 240,000 / 22,000 Data for Nov. Year 1: direct labor hours (actual) - 4,200 direct labor hours (plan based on output) - 4,000 machine hours (actual) - 21,600 machine hours (plan based on output) - 21,000 fixed manufacturing overhead - $101,000 variable manufacturing overhead - $214,000 The fixed overhead volume variance for November Year 1 was: A. $1,200 unfavorable B. $5,000 unfavorable C. $5,000 favorable D. $1,200 favorable

C. $5,000 favorable The fixed overhead rate is $5 per machine hour [$1,200,000 / 240,000 = $5]. The amount of FIXED manufacturing overhead planned for November is $100,000. Therefore, the standard production for FIXED overhead is 20,000 machine hours [$100,000/$5 = 20,000.] The favorable variance is calculated as follows: Applied FIXED Overhead: Standard Fixed OH Rate x Actual Production) = $5.00 x 21,000 = $105,000 Budgeted Overhead Based on Standard Hours: Standard Fixed OH Rate x Standard Production) = $5.00 x 20,000 = $100,000 FAVORABLE Fixed Overhead Volume Variance = $5,000

A company has budgeted sales for January and February of 20,000 and 25,000 units, respectively. The selling price is $5 per unit and the purchase price is $3 per unit. Budgeted ending inventory is 10 precent of the next mont's sales. What is the budgeted cost of purchases for January? A. $54,000 B. $60,000 C. $61,500 D. $75,000

C. $61,500 Step 1: Determine budgeted purchases for January. 20,000 units × $3/unit = $60,000 Step 2: Determine the desired ending inventory at January 31. (25,000 units × 10%) × $3 = $7,500 Step 3: Determine beginning inventory at January 1. (20,000 × 10%) × $3 = $6,000 Step 4: Calculate the cost of purchases for January. Budgeted sales purchases + Desired ending inventory - Beginning inventory $60,000 + $7,500 - $6,000 = $61,500

Mien Co. is budgeting sales of 53,000 units of product Nous for October. The manufacture of one unit of Nous requires 4 kilos of chemical Loire. During October, Mien plans to reduce the inventory of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000 units. There is no Nous work-in-process inventory. How many kilos of Loire is Mien budgeting to purchase in October? A. 138,000 B. 162,000 C. 186,000 D. 238,000

C. 186,000 Mien plans to sell 53,000 units of product Nous, plus increase inventory of Nous by 6,000 units. This implies that 59,000 units must be manufactured, which will require 236,000 (= 59,000 x 4) kilos of Loire. Since there is already inventory of 50,000 kilos of Loire, only 186,000 kilos will need to be purchased. Budgeted sales of Nous 53,000 units Desired increase in Nous inventory 6,000 units Units of Nous to be manufactured 59,000 units Kilos of Loire required for each unit of Nous x 4 Total units of Loire required 236,000 kilos Amount of Loire be used from current inventory (50,000) kilos Amount of Loire to be purchased 186,000 kilos

At annual sales of $900,000, the Ebo product has the following unit sales price and costs: Sales price $20 Prime cost 6 Manufacturing overhead: Variable 1 Fixed 7 Selling & admin. costs: Variable 1 Fixed 3 Total costs (18) Profit $ 2 What is Ebo's breakeven point in units? A. 25,000 units B. 31,500 units C. 37,500 units D. 45,000 units

C. 37,500 units Step 1: Determine how many units were sold to generate the $900,000 in sales shown in the fact pattern: $900,000/$20 per unit = 45,000 units sold Step 2: Determine the total fixed costs: Unit costs: Fixed manufacturing costs 7 Fixed selling and administrative costs 3 Total fixed cost per unit 10 Total fixed costs = $10 per unit x 45,000 units = $450,000 Step 3: Determine the contribution margin per unit: Selling price per unit 20 Prime costs (6) Variable overhead costs (1) Variable selling and administrative costs (1) Contribution margin per unit 12 Step 4: Determine the breakeven in units: breakeven in units = fixed costs / CM per unit (450,000 / 12) = 37,500

Jordan Auto has developed the following production plan. month / units Jan - 10,000 Feb - 8,000 Mar - 9,000 Apr - 12,000 Each unit contains three pounds of raw material. The desired raw material ending inventory each month is 120 percent of the next month's production, plus 500 pounds. (The beginning inventory meets this requirement.) Jordan has developed the following direct labor standards for production of these units. dept 1 / dept 2 hours per unit: 2.0 / 0.5 hourly rate: $6.75 / $12.00 How much raw material should Jordan Auto purchase in March? A. 32,900 pounds B. 36,000 pounds C. 37,800 pounds D. 43,700 pounds

C. 37,800 pounds 3/1 Begin bal. (9,000 × 120% × 3) + 500 = 32,900 Purchases (squeeze) 37,800 Subtotal 70,700 Transfer out (9,000 × 3) (27,000) 3/31 End bal. (12,000 × 120% × 3) + 500 = $43,700

Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have been accounted for ten percent of total sales and payments for credit sales have been received as follows: 40% of credit sales in the month of the sale 30% of credit sales in the first subsequent month 25% of credit sales in the second subsequent month 5% of credit sales in the third subsequent month The forecast for both cash and credit sales is as follows: month / sales january / $95,000 february / 65,000 march / 70,000 april / 80,000 may / 85,000 Due to deteriorating economic conditions, Pine Hill Wood Products has now decided that its cash forecast should include a bad debt adjustment of two percent of credit sales, beginning with sales for the month of April. Because of this policy change, the total expected cash inflow related to sales made in April will: A. Decrease by $1,210.50 B. Decrease by $1,345.00 C. Decrease by $1,440.00 D. Decrease by $1,600.00

C. Decrease by $1,440.00 Cash inflow related to sales made in April will decrease by $1,440.00: April total sales 80,000 Credit sales percentage 90% Credit sales 72,000 Bad debt estimate × 2% Decrease in collections 1,440

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? A. Labor B. Overhead C. Depreciation D. Selling

C. Depreciation Depreciation is not likely to contain a variable cost component in a decision analysis situation. All of the following costs could contain a variable cost component in a decision analysis situation: 1. Labor 2. Overhead 4. Selling

Regression analysis: A. Estimates the independent cost variable B. Uses probability assumptions to determine total project costs C. Estimates the dependent cost variable D. Ignores the coefficient of determination

C. Estimates the dependent cost variable Regression analysis is a statistical model that can estimate the dependent cost variable based on changes in the independent variable.

In looking at both direct materials and labor variances, a company which pays more than the budgeted amount for the quantity of materials purchased will: A. Offset the impact by paying workers more then budgeted B. Accentuate the impact by selling fewer units than budgeted C. Offset the impact if workers worked fewer hours than budgeted D. Accentuate the impact by using fewer quantities than budgeted

C. Offset the impact if workers worked fewer hours than budgeted A company will have an unfavorable direct materials price variance if they pay more than budgeted. An offset to this must be a favorable variance, which would occur if actual hours worked were fewer than budgeted hours.

The production budget process usually begins with the: A. Direct labor budget B. Direct materials budget C. Sales budget D. Ending inventory budget

C. Sales budget The production budget process usually begins with sales budget and then adds in the effect of any changes in inventory levels

The cash budget is a useful tool in the planning process. Which of the following is not a true statement relating to the preparation of a cash budget? A. The cash budget is usually broken down into monthly periods B. The cash budget shows itemized cash receipts and disbursements during the period, including the financing activities and the beginning and ending cash balances C. The cash budget is typically done before all other budgets D. The cash budget alerts management to periods when there will be excess cash available for investment

C. The cash budget is typically done before all other budgets

A flexible budget is appropriate for a: marketing budget / direct material usage budget A. No / No B. No / Yes C. Yes / Yes D. Yes / No

C. Yes / Yes A flexible budget is a budget prepared at different levels of operating activity. It is appropriate for any activity that has variable costs. It is not necessary for the control of fixed costs since fixed costs do not vary with changes in the level of activity.

The contribution margin for a particular product is $40. If variable costs are $10, and breakeven sales in dollars are $150,000, fixed costs must be: A. $30,000 B. $37,500 C. $112,500 D. $120,000

D. $120,000 Fixed costs can be derived by taking the contribution margin ratio and multiplying it by breakeven sales in dollars. If the contribution margin is $40, and variable costs are $10, the sales price per unit must be $50. The contribution margin ratio will therefore be $40/$50, or 80 percent. Breakeven sales of $150,000 × 80 percent is equal to fixed costs of $120,000.

Quick Co. was analyzing variance for one of its operations. The initial budget forecast production of 20,000 units during the year with a variable manufacturing overhead rate of $10 per unit. Quick produced 19,000 units during the year. Actual variable manufacturing costs were $210,000. What amount would be Quick's flexible budget variance for the year? A. $10,000 favorable B. $20,000 favorable C. $10,000 unfavorable D. $20,000 unfavorable

D. $20,000 unfavorable The flexible budget variance is $20,000 unfavorable and represents the difference between actual performance and the budget at the achieved volume. Actual expenses are greater than the computed budget. actual: $210,000 flexible budget @ actual: 19,000 units x $10 = $190,000 *flexible budget variance (20,000) master budget: 20,000 units x $10 = $200,000 *volume variance (10,000)

Based on past experience, a company has developed the following budget formula for estimating its shipping expenses. The company's shipments average 12 pounds for shipment shipping costs = $16,000 / ($0.50 x pounds shipped) The planned activity and actual activity regarding orders and shipments for the current month are given in the following schedule. The planned activity and actual activity regarding orders and shipments for the current month are given in the following schedule. plan / actual: sales orders: 800 / 780 shipments: 800 / 820 units shipped: 8,000 / 9,000 sales: $120,000 / $144,000 total pounds shipped: 9,600 / 12,300 The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be: A. $20,920 B. $20,800 C. $21,000 D. $22,150

D. $22,150 $22,150 monthly flexible budget allowance for shipping costs: $16,000 + ($0.50 × 12,300 pounds shipped) $16,000 + $6,150 = $22,150

Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed-costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented below. Delphi is subject to a 40% income tax rate. **variable costs** direct material / $7.00 direct labor / 3.50 manufacturing overhead / 4.00 total variable manufacturing cost / 14.50 selling expenses / 1.50 total variable cost / $16.00 Delphi Company's management has stipulated that it will not approve the continued manufacture of the new product after the next fiscal year unless the after-tax profits is at least $75,000 the first year. The unit selling price to achieve this target profit must be at least: A. $36.60 B. $34.60 C. $41.41 D. $39.00

D. $39.00 After-tax profit 75,000 Reciprocal of tax rate (100% - 40%) ÷ 60% Pretax profit 125,000 Fixed cost 450,000 575,000 Maximum volume ÷ 25,000 Required contribution margin per unit 23 Variable cost per unit 16 Required selling price 39

In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, Year 1. The following information is being considered by Gunning Industries. - The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would cost an additional $30,000 - The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and total fixed costs of $40,000 per year - The investment in the new machine will require an immediate increase in working capital of $35,000 - Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of five years and zero salvage value - Gunning is subject to a 40 percent corporate income tax rate Gunning uses the net present value method to analyze investments and will employ the following factors and rates. period / present value of $1 at 10% / present value of an ordinary annuity of $1 at 10% 1 / .909 / .909 2 / .826 / 1.736 3 / .751 / 2.487 4 / .683 / 3.170 5 / .621 / 3.791 The acquisition of the new production machine by Gunning Industries will contribute a discounted net-of-tax contribution margin of: A. $242,624 B. $303,280 C. $363,936 D. $454,920

D. $454,920 $ per unit x units = $ in total @ 20,000 units sales: 40 x 20,000 = 800,000 (annual incremental revenue) variable cost: (30) x 20,000 = (600,000) (annual incremental expense) contribution margin: 10 x 20,000 = 200,000 (annual incremental contribution margin) less tax at 40%: 80,000 net-of-tax contribution margin: 120,000 PV of annuity for 5 years: x 3.791 discounted net-of-tax contribution margin: $454,920

The regression analysis results for ABC Co. is shown as y = 90x + 45. The standard error (Sb) is 30 and coefficient of determination (r2) is 0.81. The budget calls for production of 100 units. What is ABC's estimate of total costs? A. $3,090 B. $4,590 C. $9,030 D. $9,045

D. $9,045 The total cost formula is the formula for a line where total cost, the dependent variable (y), is equal to volume times the independent variable, variable costs (x), plus a constant (fixed costs). The formula for ABC Company is: y = 90x + 45 The problem tells us that we plan to produce 100 units so total costs, y, is computed as follows: y = (90 × 100) + 45 y = 9,045 The coefficient of determination measures the proportion of the total variation in "y" or total cost that is explained by the total variation in the independent variable, x, or variable costs. The coefficient of determination measures the reliability of the formula, but is not used for determining the value of "y". The standard error (also standard error of the mean) is a measurement used in conjunction with standard deviation computations and is not relevant to this projection.

Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For Year 2, unit standard costs were unchanged from the previous Year 1. In Year 2, the only beginning and ending inventories were finished goods of 5,000 units. How would Lynn's ratios using absorption costing compare with those using variable costing? Current ratio / Return on stockholders' equity A. Same / Same B. Same / Smaller C. Greater / Same D. Greater / Smaller

D. Greater / Smaller Under variable (direct) costing, fixed manufacturing overhead is treated as a period cost and expensed, while under absorption costing this expense is treated as a product cost and is inventoried. The two different methods will therefore result in different year-end inventory amounts, with inventory under the absorption method being higher. Since the current ratio includes inventory in current assets, the current ratio under absorption costing will be higher. Since inventory balances did not change, both methods will result in the same net income for the current year. However, this would not have been the case in every prior year. The first year that had an ending inventory would have resulted in a difference in income between the two methods, with absorption costing generating a higher income than variable costing. Since the previous year had an amount in ending inventory, this timing difference has not entirely reversed, and therefore stockholders' equity will be larger under absorption costing than under variable costing. A higher stockholders' equity with a constant net income results in a lower value for return on equity.

Jago Co. has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the: A. Lower total manufacturing costs for the manufacturing capacity B. Lower total variable manufacturing capacity C. Greater gross profit per hour of the manufacturing capacity D. Greater contribution margin per hour of the manufacturing capacity

D. Greater contribution margin per hour of the manufacturing capacity To maximize profit at full capacity, contribution margin per hour should be maximized.

A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company's next steps? A. If production is increased to 12,000 units, profits will increase by $50,000 B. If production is increased to 12,000 units, profits will increase by $100,000 C. If production remains at 10,000 units, profits will decrease by $50,000 D. If production remains at 10,000 units, profits will decrease by $100,000

D. If production remains at 10,000 units, profits will decrease by $100,000 Currently, the contribution margin per unit is $35 ($85 sales price minus $50 variable costs). If variable costs increase by 20%, the contribution margin per unit becomes $25 ($85 sales price minus $60 ($50 x 1.2) variable costs). The contribution margin will decrease by $10 per unit. If production remains at 10,000 units, profits will decrease by $100,000 (10,000 units times a $10 decrease in contribution margin per unit). Fixed costs are not relevant in this determination.

The cash receipts budget includes: A. Funded depreciation B. Extinguishment of debt C. Interest expense D. Loan proceeds

D. Loan proceeds

Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that would provide the necessary input data for the Direct Labor Budget would be the: A. Sales forecast B. Raw materials purchases budget C. Schedule of manufacturing overhead D. Production budget

D. Production budget The production budget (which includes projected units to be produced) would provide the necessary input data for the direct labor budget.

Which of the following inputs would be the most beneficial to consider when management is developing the capital budget? A. Supply/demand for the company's products B. Current product sales prices and costs C. Wage trends D. Profit center equipment requests

D. Profit center equipment requests In developing its capital budget, management would find the employee input associated with equipment requests from various profit centers most helpful. Departmental requests, appropriately justified, would provide key insights into the capital requirements of the business that are not otherwise known.

The most direct way to prepare a cash budget for a manufacturing firm is to include: A. Projected sales, credit terms, and net income B. Projected net income, depreciation, and goodwill amortization C. Projected purchases, percentages of purchases paid, and net income D. Projected sales and purchase, percentages of collections, and terms of payments

D. Projected sales and purchase, percentages of collections, and terms of payments The simplest (most direct) cash budget would include the components of cash collections (sales and percentage of collection) and cash disbursements (purchases and terms of payment).

Thompson company is in the process of preparing its budget for the next fiscal year. The company has had problems controlling costs in prior years and has decided to adopt a flexible budgeting system this year. Many of its costs contain both fixed and variable cost components. A method that can be used to separate costs into fixed and variable components is: A. Trend analysis B. Monte Carlo simulation C. Dynamic programming D. Regression analysis

D. Regression analysis Regression analysis can be used to separate costs into fixed and variable components by means of least squares. This method mathematically fits a trend line to minimize the distance between the trend line and the actual observations.

The master budget process usually begins with the: A. Production budget B. Operating budget C. Financial budget D. Sales budget

D. Sales budget

Which of the following statements is not true regarding use of variable and absorption costing for performance measurement? A. The net income reported under the absorption method is less reliable for use in performance evaluation because the cost of the product includes fixed costs, which means the level of inventory affects net income. B. The net income reported under the contribution income statement is more reliable for use in performance evaluations because the product cost does not include fixed costs C. Variable costing isolates contribution margins to aid in decision making D. The Internal Revenue Service allows either absorption or variable costing as long as the method is not changed from year to year, while US GAAP only allows absorption costing

D. The Internal Revenue Service allows either absorption or variable costing as long as the method is not changed from year to year, while US GAAP only allows absorption costing This is not a true statement. The I.R.S. only allows absorption costing for financial statements, which is the same method required for U.S. GAAP.

Once a company exceeds its breakeven level, profits can be calculated by multiplying: A. The sales price by unit sales in excess of breakeven units B. Unit sales by the difference between the sales price and fixed cost per unit C. The contribution margin ratio by the difference between unit sales and breakeven sales D. The contribution margin per unit by the difference between unit sales and breakeven sales

D. The contribution margin per unit by the difference between unit sales and breakeven sales The contribution margin per unit represents the difference between sales price and variable cost per unit. Once breakeven has been met, a company is recovering its fixed and variable costs. Any sales in excess of breakeven sales will result in a profit equal to the contribution margin per unit multiplied by the excess in unit sales above breakeven sales.

A favorable material price variance coupled with an unfavorable material usage variance would most likely result from: A. Machine efficiency problems B. Product mix production changes C. The purchase and use of higher than standard quality material D. The purchase of lower than standard quality material

D. The purchase of lower than standard quality material The purchase of lower than standard quality material will often result in an unfavorable material usage variance (the inferior material causes more waste) and a favorable material price variance (the inferior material costs less).

Basix Inc. calculates direct labor variances and has the following information: actual hours worked: 200 standard hours: 250 actual rate per hour: $12 standard rate per hour: $10 Given the information above, which of the following is correct regarding direct labor variances? A. The rate and efficiency variances are favorable B. The rate and efficiency variances are unfavorable C. The rate variance is favorable, while the efficiency is unfavorable D. The rate variance is unfavorable, while the efficiency is favorable

D. The rate variance is unfavorable, while the efficiency is favorable The direct labor variance is an expense variance. Therefore, when the actual hours worked are less (greater) than the standard hours worked, this is favorable (unfavorable). Also, when the actual rate per hour is less (greater) than the standard hours worked, this is favorable (unfavorable).