Accounting

Sanchez, Inc. budgets its fixed overhead for the year at $100,000 for budgeted sales of 1,000 units. The actual sales for the year were 1,050 units and actual fixed costs were $105,000. By what amount will the fixed overhead spending variance change if the actual fixed costs are $110,000?

An increase of $5,000, unfavorable

If managers want to set reasonable standards, which standard are they most likely to select?

Attainable standards

What are the four perspectives of a balanced scorecard?

Financial, internal business process, learning and growth, and customer

What is the most likely goal from a learning and growth perspective of a balance scorecard for a fast-food restaurant?

Hours of employee training

Identify a characteristic of IRR. See the PV tables to help formulate your answer.Present Value of $1 Received at the End of n PeriodsNote when viewing the present value table:Present Value of a $1 Annuity Received at the End of Each Period for n PeriodsNote when viewing the present value table:

IRR is the rate required to get an NPV of zero for a series of cash flows.

Which type of standards are established, assuming production conditions are perfect?

Ideal standards

What is the outcome of an employee training program that results in the efficient use of time?

Improved labor efficiency variance

Which is used when computing economic value added, but not while computing residual income?

Income tax expense Explanation Residual income takes into account pre-tax operating income, whereas EVA takes into account net operating profits after tax.

How can return on investment be improved?

Increasing operating profit margin

Which center is most likely to be responsible for costs, revenues, and investments in assets?

Investment center

Which of the following statements is true of a pro forma income statement?

It forecasts only operating items. Explanation Pro forma statements typically forecast only operating items on the income statement such as sales and EBIT, and not any items generated by financing or investing flows.

What is the benefit of using standard costing?

It helps estimate product costs without having to wait for actual product cost data.

New Manufacturing Company has a labor rate of $15 per hour and a standard labor rate of $12. If the labor rate is increased, how will it affect the labor rate variance?

It increases the labor rate variance.

Which of the following is part of the computation of operating income?

Trade discount Explanation Operating income is the income produced by a division from its daily activities. It excludes items used in the calculation of net income, such as income tax expense, interest income, interest expense, and any unusual gains or losses.

Which type of price is used to value the transfer of goods or services between divisions within the same company?

Transfer price

Stephan Electronics manufactures and sells radios. Each radio requires two speakers. The following figures are actual and standard for the year:Sales: actual 50,000 units, standard 0Purchase price of speakers: actual $10, standard $8What is the direct materials price variance?

Unfavorable $200,000

What is the difference between what is actually paid for variable overhead and what should have been paid, according to the standards?

Variable overhead spending variance

Which process analyzes the difference between budgeted costs and actual costs?

Variance analysis

Montreal, Inc. has two divisions: Raw and Processing. The variable cost for Raw is $0.50 per unit and it is operating at maximum capacity. It sells its product in the market at $1 per unit. Processing sells its product after a processing cost of $2, for $7. What should be the transfer price for sales to the Processing department?

$1, as it includes differential and opportunity cost Explanation The Processing department should set the transfer price at its variable cost of $0.50 per unit, plus the opportunity cost of selling internally of $0.50.

Giant Corporation provides the following information:Units to be produced 125,000Desired units of ending inventory 25,000Units in beginning inventory 20,000If the selling price is $10 per unit, what is the expected budgeted sales amount for the budget period?

$1,200,000

Sunshine Inc. provides the following information about its standard costs per unit:Direct materials $50Direct labor $150Variable manufacturing overhead ($45 per hour for 1.50 labor-hour per unit) $67.50What is the direct labor-rate per hour?

$100

O'Brien Shoe Company manufactures and sells shoes in Asia and Europe. Every pair of shoes requires two soles, which can be bought at a standard price of $10 per pair. Each shoe manufactured also requires 0.50 labor hours. The standard rate for one labor hour is $10. Variable manufacturing overhead is applied based on direct labor hours at a rate of $3.50 per hour. What is the standard variable production cost?

$16.75

Mimi Electronics provides the following information for the previous year.Revenues were $100,000Cost of goods sold was $35,000Administrative expenses were $15,000Depreciation was $10,000Interest paid was $5,000What will be the operating earnings in the current year if sales grow by 5% and all expenses but interest and taxes scale with sales? Assume the tax rate is 40%.

$22,200

Violet Electronics is in the process of preparing its production budget for the year. It expects sales of 2,000 units in each of its next eight quarters. It has a beginning inventory of 1,400 units at the start of the year. It plans to have an inventory of 1,500 units at the end of each quarter. Every unit it produces requires two units of speakers. Violet has budgeted 1,500 units of speakers as ending inventory. Each speaker costs the company $5. Assuming 700 units of beginning inventory, what is the total purchase cost of speakers during the period?

$25,000

Success Pens manufactures and sells high-quality writing equipment in Asia and Europe. Success buys the metal body for the pen at a price of $5 per unit. Each pen manufactured also requires 1.50 labor hours. The standard rate for one labor hour is $10. Variable manufacturing overhead is applied based on direct labor hours at a rate of $4.50 per hour. If 10,000 pens were sold during the previous year, what was the total budgeted variable production cost?

$267,500

Lee Industries provides the following figures for the current year:Sales $100,000Cost of good sold $50,000Depreciation $15,000Other expenses $5,000Net earnings $30,000What will next year's profit be if a 5% increase in sales is forecasted? (No additional equipment is required to be purchased due to an increase in sales. Assume cost of goods sold and other expenses also increase by 5%.)

$32,250 Explanation The answer is calculated using the following data:Sales $105,000Cost of goods sold $52,500Depreciation $15,000Other expenses $5,250Net earnings $32,250

Venice Choco Products provides the following information about sales in the previous year: First quarter 48,000 units; Second quarter 57,600 units; Third quarter 72,000 units; Fourth quarter 62,400 units. For the current year, sales are expected to increase by 20% and each unit sells at $50. What is the sales revenue for the current year's third quarter?

$4,320,000

Marine Engineering has an operating income of $125,000 in the previous year. It has a cost of capital of 8% and average operating assets of $1,500,000 in the previous year. It also has an inventory turnover of 0.67. What is the residual income of Marine for the previous year?

$5,000

What will the profit for the year be if the pro forma income statement is prepared with these details?Sales $75,000COGS $30,000Rent $20,000Depreciation $5,000Salaries $12,500

$7,500

Ortiz International provides the following information about the current year.Sales: $75,000COGS: $30,000Rent: $20,000Depreciation: $5,000Salaries $12,500It considers an increase of 5% in sales as its best case scenario and an increase of 2% as its worst case scenario. Assume all items will be affected by the same amount, except depreciation. What are the profits of Ortiz International for the worst case scenario using the percent-of-sales method? Note that no additional equipment is required to be purchased due to an increase in sales.

$7,750

Armstrong Industries has an operating income of $125,000 in the previous year. It has a cost of capital of 8% and average operating assets of $1,500,000 in the previous year. It also has an inventory turnover of 0.67. In the previous year, advertisement expenditure of $25,000 was expensed as per accounting requirements; however, for evaluation purposes the company wants to capitalize this expenditure for a period of five years. The tax rate is 30%. What is the economic value added for the previous year?

($20,100) Explanation EVA = operating income - (percent cost of capital x average operating assets). Operating income was $125,000, which should be adjusted for unamortized advertisement costs. Adjusted operating income was $145,000. After tax of 30%, net operating profit was $101,500. Unamortized cost will be added to average operating assets, thereby increasing it to $1,520,000. EVA = ($101,500 - [8% x $1,520,000]) = ($20,100).

Johnson Electronics is in the process of preparing its production budget for the year. It expects to sell 1,000 units in each of its next eight quarters. It had a beginning inventory of 700 units at the start of the year. It plans to have an ending inventory of 750 units at the end of each quarter. How many units must be produced in the first quarter of the year?

1,050

Cardinal Stationery has an operating profit margin of 15%. It has sales of $12,000,000 in the previous year, and average operating assets of $18,000,000. What is the return on investment for Cardinal Stationery for the previous year?

10%

Shen Corporation provides the following extract from its production budget for the first quarter:Units to be produced 4,080Desired units of ending inventory 480Units in beginning inventory 400Sales are expected to increase by 5% in every quarter. Selling price per unit is $10. What is the total number of unit sales for the year?

17,241

Jacobs Industries has a favorable efficiency variance of $22,500. Its actual labor rate is $15 per hour and its standard labor rate is $12. How many extra hours will the company get if the standard labor rate was fixed at $13?

3,750 hours Explanation Since there is no labor cost variance, labor rate variance will be $22,500, unfavorable. We know LRV = (AR - SR) x AH. Fitting the available numbers, we arrive at actual hours worked of 7,500 (22,500 ($15 - $12)). Using the same formula, but with standard labor rate at $13, the actual hours worked can be calculated as 11,250 hours. Additional labor hours are 3,750 (11,250 - 7,500).

Select a feature of a balanced scorecard.

A balanced scorecard helps create measures that motivate employees to reach company goals. Explanation Measures established across the four perspectives of the balanced scorecard are linked in a way that motivates employees to achieve company goals. The idea is to establish company goals first, then create measures that motivate employees to reach company goals.

Veronica Toy Products estimates that all of its administrative and selling overheads are fixed. Quarterly selling and administrative cost estimates for the coming year are as follows:Salaries $6,500Rent $750Advertising $12,000Depreciation $850Other $120It has estimated sales of 3,000 units in the first quarter at a unit selling price of $10. Sales are expected to remain constant throughout the year. Cost of goods sold account for 30% of sales, and it is expected to increase by 5% for the third and fourth quarter. What will be the effect on net income for the third quarter compared to the second quarter?

A decrease of $1,500

Sanchez, Inc. budgets its fixed overhead for the year at $100,000 for budgeted sales of 1,000 units. The actual sales for the year were 1,050 and actual fixed costs were $105,000. By what amount will the fixed overhead production-volume variance change if sales are only 1,000 units?

A decrease of $5,000

What is a projected income statement that shows predicted future operating cash flow?

A pro forma income statement Explanation A pro forma income statement is a projected income statement which shows predicted future operating cash flow. It shows what potential sales revenue, expenses, taxes, and depreciation might look like.

Which department is most likely to be a profit center in a decentralized company?

A standalone store of a retail chain. Explanation A profit center is an organizational segment that is responsible for costs and revenues, but not investments in assets. Retail stores for companies, such as Macy's or Kmart, are treated as profit centers.

True Industries has standard material cost of $10 per unit. Every unit of finished product requires three units of raw material. During the year, True manufactured and sold 5,000 units of finished product. It used 14,500 units of raw material in manufacturing finished products. The total material variance was $7,500 favorable. What will be the effect on material price variance if total material variance increases to $8,000, favorable?

An increase by $500, favorable

Blue Moon Crystal Products has an operating income of $345,000 in the previous year. It has a cost of capital of 8% and average operating assets of $2,800,000 in the previous year. It also has an inventory turnover of 0.75. In the previous year, research expenditure of $50,000 was expensed as per accounting requirements. However, for evaluation purposes, the company wants to capitalize this expenditure for a period of five years. The tax rate is 30%. What is the effect of capitalizing research expenditure on EVA?

An increase in EVA by $36,800

California Electronics manufactures radio sets. Every radio set requires two speakers. Speakers are purchased from the market at a price of $10 per unit. The company already has 12,000 units of speakers in inventory and it estimates its ending inventory to be 10,000 units. 40,000 units of radio sets are produced during the year. How much will the total cost change if the total units produced is 50,000 units of radio sets?

An increase of $200,000 Explanation Speakers needed in production are 80,000 units. Adding desired ending inventory of 10,000 units and deducting beginning inventory of 12,000 units, we get units to be purchased as 78,000 units. At cost per unit of $10, the total cost of purchase is $780,000. If 50,000 units were produced, the total cost will be $980,000 [($100,000 + $10,000 - $12,000) x $10]. Total cost will increase by $200,000.

Rustic Tables has an operating income of $12,000 and an inventory turnover of 0.67 in the previous year. It has a cost of capital of 8%. Operating assets are:Operating assets, beginning: $100,000Operating assets, ending: $120,000In the beginning and ending inventory, land of $10,000 is incorrectly included, which is not being used for operating purposes. What is the effect of excluding land on residual income?

An increase of residual income by $800 Explanation Residual income = operating income - (percent cost of capital x average operating assets)Original RI = ($12,000 - (8% x $110,000)) = $3,200.Revised RI = ($12,000 - (8% x $100,000)) = $4,000.Exclusion of land results in an increase of RI by $800 ($4,000 - $3,200).

To predict future sales and expenses, what does a properly forecasted balance sheet use?

Best judgment Explanation A properly forecasted balance sheet uses best judgment to predict future sales and expenses.

Which approach requires involvement of employees throughout an organization to create the operating budget?

Bottom-up

For an airline company, on-time arrival is most likely to be a goal of which perspective of the balance scorecard?

Customer Explanation On-time arrivals are likely to be an important goal from the perspective of the customer for an airline.

Which expense will increase by less than 7% when sales is expected to increase by 7%, while preparing a pro forma income statement using percent-of-sales method?

Depreciation

Purple, Inc. had actual fixed overhead of $15,000 for the year. Costs were budgeted for $16,200. Costs were applied at $16 per unit. 1,000 units were sold during the year. What is the amount of fixed overhead production volume variance?

Favorable $200 Explanation Fixed overhead production volume variance = budgeted costs - applied costs. Therefore, fixed overhead production volume variance is $200, favorable. This is computed as $16,200 - $16,000.

Brown Industries has a variable standard rate of $7.50 per direct labor hour and the standard direct labor hours required per unit is 0.50. Their actual data for the year is:Sales volume: 256,000 unitsDirect labor hours worked: 125,000 hoursTotal cost of variable overhead: $125,000What is the amount of variable overhead efficiency variance?

Favorable $22,500 Explanation Variable overhead efficiency variance = (AH x SR) - (SH x SR). Therefore, variable overhead efficiency variance is favorable $22,500, computed as (125,000 x 7.50) - (128,000 x 7.50).

What is the outcome of an employee training program that results in the efficient use of materials?

Improved materials quantity variance

Which perspective contains measures that management uses to evaluate the effectiveness of employee training?

Learning and growth

What is the difference between actual costs for materials purchased and budgeted costs based on the standards?

Materials price variance

While preparing a pro forma income statement using percent-of-sales method, what will be the effect of an increase in sales by 5%?

Net profit will increase.

Orange Corp. is considering buying a new machine which costs $1,000,000 and will last five years. It will save $250,000 annually in operating costs. It will also require insurance of $10,000 per year plus other yearly maintenance expenses of $5,000. Should Orange Corp. purchase this machine? The company's required rate of return is 10%.See the PV tables to help formulate your answer.Present Value of $1 Received at the End of n PeriodsNote when viewing the present value table:Present Value of a $1 Annuity Received at the End of Each Period for n PeriodsNote when viewing the present value table:

No, as it leads to a negative NPV of $109,165.

Mr. Smith has just won a competition. He will be paid $500,000 a year for the next 20 years as per the terms of the competition (Option I). Assume the prevailing interest rate is 3%. He also has an option to take $920,000 for the next 10 years (Option 2). Which option should Mr. Smith exercise?See the PV tables to help formulate your answer.Present Value of $1 Received at the End of n PeriodsNote when viewing the present value table:Present Value of a $1 Annuity Received at the End of Each Period for n PeriodsNote when viewing the present value table:

Option 2, as it has a present value of $7,847,787 Explanation Present value of an annuity of $500,000 for 20 years at 3% is $7,438,737 and present value of an annuity of $920,000 for 10 years at 3% is $7,847,787.

Which method evaluates how long it will take to recover the initial investment?See the PV tables to help formulate your answer.Present Value of $1 Received at the End of n PeriodsNote when viewing the present value table:Present Value of a $1 Annuity Received at the End of Each Period for n PeriodsNote when viewing the present value table:

Payback method

Which is the simplest method to prepare a pro forma income statement?

Percent-of-sales method

Define ROI

ROI is defined as operating income divided by average operating assets.

Mymart Industries had two divisions: Retail and Corporate. For the previous year, Retail has an operating income of $1,500,000. Corporate has an operating income of $2,500,000. For the previous year:Operating assets, beginning: Retail $12,000,000; Corporate $26,000,000Operating assets, ending: Retail $16,000,000; Corporate $24,000,000Which division performed better in the previous year based on ROI criteria?

Retail, as it has a higher ROI at 10.71%

The production budget uses data from which other budget?

Sales budget

Which is an estimate of all operating costs, other than production?

Selling and administrative budget

Stephen Stationery product has an operating profit margin of 15%. It has sales of $150,000 in the previous year. Operating assets are:Cash: ending balance $20,000 and beginning balance $40,000Accounts receivable: ending balance $25,000 and beginning balance $45,000Inventory: ending balance $35,000 and beginning balance $45,000Land (held for self): ending balance $100,000 and beginning balance $100,000Property, plant, and equipment, net: ending balance $100,000 and beginning balance $125,000.Land is not an operating asset. If Sustainable Paper Product, a competitor of Stephen, has ROI of 10%, who has performed better?

Stephen Stationery, as it has a higher ROI of 10.34% Explanation Stephen has average operating assets of $217,500; therefore, its assets turnover ratio is 0.69. ROI = operating profit margin x asset turnover. ROI is 10.34% (15% x 0.69).

Which of the following statements is true about budgets?

The cash budget is prepared after the budgeted income statement.

Mary Garment Company provides the following information for the year:Sales volume: actual 210,000 unitsDirect labor hours worked: actual 18,900 hours, standard 17,500 hoursCost of direct labor: actual $15 per hour, standard $16.50 per hourWhat is the amount of labor efficiency variance?

Unfavorable $23,100