ACCTCY 2010 Runyan

The magnitude of operating leverage for Blue Ridge Corporation is 3.9 when sales are $270,000 and net income is $43,000. If sales decrease by 6%, net income is expected to decrease by what amount? $4,260 $10,062 $2,580 $1,711

$10,062 Decrease in net income = Net income × (Percentage decrease in sales × Magnitude of operating leverage) Decrease in net income = $43,000 × (0.06 × 3.9) = $10,062

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: Unit-level material cost $3 Unit-level labor cost $2 Unit-level overhead $1 Batch-level set-up cost (5,000 units per batch) $25,000 Product-level supervisory salaries $37,500 Allocated facility-level costs $20,000 The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be: $10,500 more than if the switches are purchased. $27,000 less than if the switches are purchased. $20,000 less than if the switches are purchased. $30,500 more than if the switches are purchased

$10,500 more than if the switches are purchased. Outsourced cost of the relay switches: $20 per unit × 5,000 units = $100,000 Relevant cost for expected production of the relay switches: Unit-level costs [($3 + $2 + $1) × 5,000 units] $30,000 Batch-level costs ($25,000 × 1 batch) 25,000 Product-level costs (supervisory salaries) 37,500 Facility-level costs (rent of factory space of $1,500 × 12 months) 18,000 Total relevant costs $110,500 The allocated factory-level costs are not relevant because the company will incur them whether it accepts or rejects the special order. If the company decides to make the parts, total costs will be $10,500 (= $110,500 − $100,000), more than if the switches are purchased.

Which costs are relevant for equipment replacement decisions? Unit-level costs Batch-level costs Product-level costs All of these answers are correct.

All of these answers are correct.

Compton Company expects the following total sales: Month Sales March $30,000 April $20,000 May $30,000 June $25,000 The company expects 60% of its sales to be credit sales and 40% for cash. Credit sales are collected as follows: 30% in the month of sale, 70% in the month following the sale. The budgeted accounts receivable balance on May 31 is: $12,240. $12,600. $20,400. $21,000.

$12,600. Budgeted accounts receivable balance on May 31 = May sales × Percent credit sales × Percent collected in month following the month of sale Budgeted accounts receivable balance on May 31 = $30,000 × 60% × 70% = $12,600

Valley Farm Supply started the period with $80,000 cash. Cash receipts for January were expected to total $350,000. Cash disbursements for January were expected to be $290,000. What is the expected cash balance at the end of January? $290,000 $350,000 $80,000 $140,000

$140,000 Ending cash balance = Beginning cash balance + Cash receipts - Cash payments Ending cash balance = $80,000 + $350,000 - $290,000 = $140,000

The following information is provided for Southall Company: Sales revenue $268,000 Variable manufacturing costs 91,000 Fixed manufacturing costs 69,000 Variable selling and administrative costs 36,000 Fixed selling and administrative costs 31,000 What is this company's contribution margin? $41,000 $108,000 $72,000 $141,000

$141,000 Contribution margin = Revenues − Variable expenses Contribution margin = $268,000 − ($91,000 + $36,000) = $141,000

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $20 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: Unit-level material cost$3 Unit-level labor cost$2 Unit-level overhead$1 Batch-level cost (5,000 units per batch)$5,000 Product-level supervisory salaries$37,500 Allocated facility-level costs$20,000 Assume that the company needs 15,000 of the switches, which would be produced in three batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be: $132,500. $162,500. $105,000. $142,500.

$142,500. Relevant cost for expected production of the electrical switches: Unit-level costs [($3 + $2 + $1) × 15,000 units]$90,000 Batch-level costs ($5,000 × 3 batches) 15,000 Product-level costs (supervisory salaries) 37,500 Total relevant costs$142,500 The allocated factory-level costs are not relevant because the company will incur them whether it accepts or rejects the special order.

The following information is provided for Southall Company: Sales revenue$286,000 Variable manufacturing costs 97,000 Fixed manufacturing costs 63,000 Variable selling and administrative costs 42,000 Fixed selling and administrative costs 37,000 What is this company's contribution margin? $47,000 $126,000 $84,000 $147,000

$147,000 Contribution margin = Revenues − Variable expenses Contribution margin = $286,000 − ($97,000 + $42,000) = $147,000

Ringgold Company had beginning finished goods of $36,000. During the period, the company produced goods that cost $150,000. If the ending balance in the Finished Goods Inventory account was $24,000, the amount of cost of goods sold was: $162,000. $150,000. $138,000. none of these.

$162,000 Cost of goods sold = Beginning finished goods + Cost of goods manufactured − Ending finished goods Cost of goods sold = $36,000 + $150,000 − $24,000 = $162,000

Ringgold Company had beginning finished goods of $36,000. During the period, the company produced goods that cost $150,000. If the ending balance in the Finished Goods Inventory account was $24,000, the amount of cost of goods sold was: $162,000. $150,000. $138,000. none of these.

$162,000. Cost of goods sold = Beginning finished goods + Cost of goods manufactured − Ending finished goods Cost of goods sold = $36,000 + $150,000 − $24,000 = $162,000

Chu Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: Dec. Year 1 Jan. Year 2 Feb. Year 2 Mar. Year 2 (Actual)(Budgeted)(Budgeted)(Budgeted) Cost of goods sold$80,000 $140,000 $180,000 $120,000 Desired ending inventory levels are 25% of the following month's projected cost of goods sold. Budgeted purchases of inventory in February Year 2 would be: $135,000. $165,000. $180,000. $225,000.

$165,000. Budgeted purchases of inventory = Budgeted cost of goods sold + Desired ending inventory − Beginning inventory Budgeted purchases of inventory in February = Budgeted cost of goods sold + (Budgeted cost of goods sold in March × 25%) − (Budgeted cost of goods sold in February × 25%) Budgeted purchases of inventory in February = $180,000 + ($120,000 × 25%) − ($180,000 × 25%) = $180,000 + $30,000 − $45,000 = $165,000

Ting Company started the accounting period with the following beginning balances: Raw Materials Inventory, $21,000; Work in Process Inventory, $45,000; and Finished Goods Inventory, $10,000. During the accounting period, the company purchased $30,000 of raw materials and ended the period with $8,000 in raw material inventory. Direct labor costs for the period were $60,000 and $63,000 of manufacturing overhead costs was allocated to work in process. Ending work in process was $41,000 and ending finished goods was $17,500. Goods were sold during the period for $162,500. The amount of cost of goods manufactured (i.e., amount transferred from work in process to finished goods) would be: $117,500. $170,000. $221,000. $166,000.

$170,000 Total manufacturing costs = (Beginning raw materials inventory + Purchases − Ending raw material inventory) + Direct labor + Actual overhead costs Total manufacturing costs = ($21,000 + $30,000 − $8,000) + $60,000 + $63,000 = $166,000 Cost of goods manufactured = Beginning work in process + Total manufacturing costs − Ending work in process Cost of goods manufactured = $45,000 + $166,000 − $41,000 = $170,000

Hilliard Company budgeted the following transactions for April Year 2: Sales (75% collected in month of sale)$200,000 Cash operating expenses 105,000 Cash purchases of investments 75,000 Cash payment of debt 15,000 Depreciation on operating assets 12,000 The beginning cash balance was $50,000. The company desires to have a $25,000 ending cash balance. The surplus (or shortage) of cash before considering any borrowings in April would be: $40,000 surplus. $40,000 shortage. $20,000 shortage. There is no cash surplus or shortage.

$20,000 shortage. Projected ending cash balance (before borrowing, if any) = Beginning cash balance + Cash receipts − Cash payments Projected ending cash balance (before borrowing, if any) = $50,000 + ($200,000 × 75%) − ($105,000 + $75,000) − $15,000 = $50,000 + $150,000 − $180,000 − $15,000 = $5,000 Since the projected ending cash balance (before borrowing, if any) = $5,000 and the company's desired ending cash balance is $25,000, the company has a $20,000 cash shortage.

Barnes Company expects to begin operating on January 1. The company's master budget contained the following operating expense budget: January February March Salary expense $36,000 $36,000 $36,000 Sales commissions, 5% of sales 30,000 32,000 24,000 Utilities 2,800 2,800 2,800 Depreciation on store equipment 1,000 1,000 1,000 Rent 7,200 7,200 7,200 Miscellaneous 1,800 1,800 1,800 Total operating expenses$78,800 $80,800 $72,800 Sales commissions are paid in cash in the month following the month in which the expense is recognized. All other expense items requiring cash payment are paid in the month in which they are recognized. The amount of accumulated depreciation appearing on the company's March 31 pro forma balance sheet is: $1,000. $2,000. $3,000. $12,000.

$3,000. Accumulated depreciation at March 31 = $1,000 + $1,000 + $1,000 = $3,000

Breezy Company is disposing of equipment that was originally purchased for $600,000 and has $240,000 of accumulated depreciation to date. The same equipment would cost $800,000 to replace. What is the total amount of sunk cost in this decision? $240,000 $360,000 $840,000 $800,000

$360,000 Since sunk costs have been incurred in past transactions, they cannot be changed and are not relevant for making current decisions. The book value of the equipment of $360,000 ( = $600,000 − $240,000) is not relevant.

Skymont Company wants an ending inventory each month equal to 30% of that month's cost of goods sold. Cost of goods sold for February is projected at $45,000. Ending inventory at the end of January was $12,000. Based on this information, purchases for February would be: $31,500. $46,500. $43,500. $33,000.

$46,500. Budgeted purchases of inventory = Budgeted cost of goods sold + Desired ending inventory − Beginning inventory Budgeted purchases of inventory in February = Budgeted cost of goods sold + (Budgeted cost of goods sold in February × 30%) − (Ending inventory of January) Budgeted purchases of inventory in February = $45,000 + ($45,000 × 30%) − $12,000 = $45,000 + $13,500 − $12,000 = $46,500

The magnitude of operating leverage for Blue Ridge Corporation is 3.2 when sales are $200,000 and net income is $36,000. If sales decrease by 6%, net income is expected to decrease by what amount? $3,840 $6,912 $2,160 $1,152

$6,912 Decrease in net income = Net income × (Percentage decrease in sales × Magnitude of operating leverage) Decrease in net income = $36,000 × (0.06 × 3.2) = $6,912

Oakton Furniture provided the following information relevant to its sales for December Year 1 and the first quarter of Year 2: Dec. Year 1 Jan. Year 2 Feb. Year 2 Mar. Year 2 (Actual)(Budgeted)(Budgeted)(Budgeted) Credit sales $120,000 $280,000 $310,000 $220,000 Cash sales$20,000 $50,000 $60,000 $24,000 Based on the company's collection history, 42% of credit sales are collected in month of sale, and the remainder is collected in the following month. Cash collections in January from December credit sales would be: $69,600. $81,200. $72,000. $84,000.

$69,600. Collections in January from December credit sales = December credit sales × Percent collected in month following month of sale Collections in January from December credit sales = $120,000 × (100% − 42%) = $69,600

The Mighty Music Company produces and sells a desktop speaker for $100. The company has the capacity to produce 50,000 speakers each period. At capacity, the costs assigned to each unit are as follows: Unit level costs $45 Product level costs $15 Facility level costs $5 The company has received a special order for 500 speakers. If this order is accepted, the company will have to spend $15,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order? $95 $45 $75 $60

$75 Budgeted cost for production of 500 speakers: Per Unit Unit-level costs $45 $22,500 Other incremental costs 15,000 Relevant cost $37,500 The other costs are not relevant because the company will incur them whether it accepts or rejects the special order. At a minimum, the company would need to earn revenue of $37,500 to be indifferent between accepting and rejecting this special order. The price per unit would be calculated as follows: $37,500 ÷ 500 units = $75 per unit

The Mighty Music Company produces and sells a desktop speaker for $100. The company has the capacity to produce 50,000 speakers each period. At capacity, the costs assigned to each unit are as follows: Unit level costs $45 Product level costs $15 Facility level costs $5 The company has received a special order for 500 speakers. If this order is accepted, the company will have to spend $15,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order? Multiple Choice $95 $45 $75 $60

$75 Budgeted cost for production of 500 speakers: Unit-level costs $45 $22,500 Other incremental costs 15,000 Relevant cost $37,500 The other costs are not relevant because the company will incur them whether it accepts or rejects the special order. At a minimum, the company would need to earn revenue of $37,500 to be indifferent between accepting and rejecting this special order. The price per unit would be calculated as follows: $37,500 ÷ 500 units = $75 per unit

Wu Company incurred $154,000 of fixed cost and $171,600 of variable cost when 3,900 units of product were made and sold. If the company's volume increases to 4,400 units, the total cost per unit will be: Multiple Choice $39.00. $35.00. $79.00. $74.00.

$79.00. Variable cost per unit = Total variable cost ÷ Number of units Variable cost per unit = $171,600 ÷ 3,900 units = $44.00 per unit Total cost per unit = Fixed cost per unit + Variable cost per unit Total cost per unit = ($154,000 ÷ 4,400 units) + $44.00 per unit = $79.00 per unit

The Juarez Corporation incurred the following transactions during its first year of operations. (Assume all transactions involve cash). Acquired $1,000 of capital from the owners. Purchased $400 of direct raw materials. Used $300 of these direct raw materials in the production process. Paid production workers $400 cash. Paid $200 for manufacturing overhead. Started and completed 200 units of inventory. Sold 50 units at a price of $6 each. Paid $40 for selling and administrative expenses. The amount of cost of goods manufactured would be: $1,000. $900. $800. $600.

$900 Total manufacturing costs = Direct materials used + Direct labor + Actual overhead Total manufacturing costs = $300 + $400 + $200 = $900 Cost of goods manufactured = Beginning work in process + Total manufacturing costs − Ending work in process Cost of goods manufactured = $0 + $900 − $0 = $900

Travis Company had no beginning work in process or finished goods. Its total manufacturing costs for the year were $427,000. If cost of goods manufactured was $332,000 and cost of goods sold was $250,000, the amount of ending work in process would have been: $82,000. $105,000. $95,000. $127,000.

$95,000. Cost of goods manufactured = Beginning work in process + Total manufacturing costs − Ending work in process $322,000 = $0 + $427,000 − Ending work in process Ending work in process = $427,000 − $322,000 = $95,000

Southeast Manufacturing Company has identified the following cost objects: Cost Object 1: The cost of operating the finishing department Cost Object 2: The cost of a particular product made in June Cost Object 3: The cost of operating the factory With respect to these cost objects, the cost of the salary of the supervisor of the finishing department is directly traceable to cost objects: 1 and 2. 2 and 3. 1 and 3. 1, 2, and 3.

1 and 3. The cost of the salary of the supervisor of the finishing department is traceable to the cost of operating the finishing department and the cost of operating the factory but is not easily traced to the cost of a particular product made in June.

The master budget normally covers: 3 months. 1 year. 1-5 years. 5-10 years.

1 year.

The following income statement is provided for Grant, Inc. Sales revenue (2,400 @ $15.90 per unit) $38,160 Variable costs (2,400 @ $7.90 per unit) 18,960 Fixed costs 5,900 Net income $13,300 What is this company's magnitude of operating leverage? 2.87 2.01 1.43 1.44

1.44 Magnitude of operating leverage = Contribution margin ÷ Net income Magnitude of operating leverage = ($38,160 − $18,960) ÷ $13,300 = 1.44

For the last two years BRC Company had net income as follows: Year 1 $83,000 Year 2 $103,000 Net Income What was the percentage change in income from Year 1 to Year 2? 19.42% increase 19.42% decrease 24.10% increase 24.10% decrease

24.10% increase % change = (Alternative measure − Base measure) ÷ Base measure % change = ($103,000 − $83,000) ÷ $83,000 = 24.10%

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $16,000. Assuming its selling price is $41.50 per unit and its variable costs per unit are $29, how many units must be sold to achieve its target given that total fixed costs are $62,000? (Do not round intermediate calculations.) 4,960 4,022 3,680 3,338

3,680 Sales volume in units = (Fixed costs + Desired profit) ÷ Contribution margin per unit Sales volume in units = [$62,000 + ($16,000)] ÷ ($41.50 per unit − $29 per unit) = $46,000 ÷ $12.50 per unit = 3,680 units

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $18,000. Assuming its selling price is $42.50 per unit and its variable costs per unit are $30, how many units must be sold to achieve its target given that total fixed costs are $69,000? (Do not round intermediate calculations.) 5,520 4,448 4,080 3,712

4,080 Sales volume in units = (Fixed costs + Desired profit) ÷ Contribution margin per unit Sales volume in units = [$69,000 + ($18,000)] ÷ ($42.50 per unit − $30 per unit) = $51,000 ÷ $12.50 per unit = 4,080 units

Which of the following statements is incorrect? A predetermined overhead rate may be used to allocate overhead costs when volume varies during the year. A predetermined overhead rate is calculated using actual cost and volume data. A predetermined overhead rate is calculated by dividing costs by volume, using a measure of volume such as direct labor hours or direct materials cost. A company may need to allocate overhead costs to products to make pricing decisions for the products.

A predetermined overhead rate is calculated using actual cost and volume data.

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Variable selling and administrative costs would be unaffected. What is the minimum price that Outdoor Living should accept for the special order? A price equivalent to the hammock's variable manufacturing cost per unit A price equivalent to the hammock's unit contribution margin The same price that Outdoor Living charges its existing customers None of these answers are correct

A price equivalent to the hammock's variable manufacturing cost per unit If the relevant revenue exceeds the relevant (avoidable) costs, the special order should be accepted. As such, the minimum selling price should equal the relevant cost per unit. The relevant costs in a special order decision are the unit-level and batch-level costs that will be incurred if the special order is accepted. In this situation, the variable manufacturing cost per unit is the relevant cost.

Selection of a cost driver depends on: The availability of information for both the cost and the potential cost driver. A cause-and-effect relationship between the cost driver and the cost. Judgment of management. All of the answers are correct.

All of the answers are correct.

With regards to financial statements, "pro forma" means: Budgeted. Prepared in advance. Financial condition or position that can be expected if planning assumptions prove correct. All of the answers are correct.

All of the answers are correct. Pro forma financial statements are based on projected (budgeted) rather than historical information.

Which of the following is not an important factor in determining the appropriate cost driver to use in allocating a cost? A cause-and-effect relationship between the cost and the cost driver. The availability of information about the cost and cost driver. The ability of the cost driver to allocate indirect costs to cost objects. All of the answers are important factors in determining the appropriate cost driver to use in allocating

All of the answers are important factors in determining the appropriate cost driver to use in allocating

Which of the following costs is an example of a batch-level cost? Assembly setup costs. Materials handling costs. Shipping and handling costs to ship an order to a customer. All of these answers are correct.

All of these answers are correct. Many products are generated in batches rather than individual units. Classifying costs as unit versus batch level frequently depends on the context rather than the type of cost.

Costs associated with holding inventory often include: theft, damage, and obsolescence. financing. warehouse space. supervision. All of these.

All of these. Inventory holding costs include, but are not limited to, financing, warehouse space, supervision, theft, damage, and obsolescence.

Budgeted depreciation expense would not appear on a: Selling and administrative expense budget. Budgeted income statement. Cash budget. All of the answers are correct.

Cash budget. Depreciation expense does not affect the cash payments schedule, which flows into the cash budget. The cash outflow for the related fixed assets occurs when the assets are purchased, not when they are depreciated.

Select the incorrect statement regarding service companies. Because service companies do not carry inventory, it is impossible to determine product costs. Because the products of service companies are consumed immediately, there is no finished goods inventory on their balance sheets. Managers of service companies are expected to control costs, improve quality, and increase productivity just like managers of manufacturing companies. Material, labor, and overhead costs of service companies are treated as period costs.

Because service companies do not carry inventory, it is impossible to determine product costs. The primary difference between manufacturing entities and service companies is that the finished products provided by service companies are consumed immediately.

Which of the following items typically found on the selling and administrative expense budget will also impact the cash budget? Depreciation expense Administrative salaries Advertising expense Both administrative salaries and advertising expense are correct.

Both administrative salaries and advertising expense are correct. Depreciation expense does not affect the cash payments schedule. The cash outflow for the related fixed assets occurs when the assets are purchased, not when they are depreciated.

At the break-even point: Sales would be equal to total costs. Contribution margin would be equal to total fixed costs. Sales would be equal to fixed costs. Both sales would be equal to total costs and contribution margin would be equal to total fixed costs are correct.

Both sales would be equal to total costs and contribution margin would be equal to total fixed costs are correct. Since net income is zero at the breakeven point, sales would be equal to total costs and contribution margin would be equal to total fixed costs. However, sales would not be equal to fixed costs.

Asset replacement decisions involve: Choices between continuing to use existing materials or replacing them with less expensive materials. Choices between closing down or continuing to operate a segment of a business. Choices between continuing to operate existing equipment or replacing it with new equipment. None of these answers are correct.

Choices between continuing to operate existing equipment or replacing it with new equipment.

Companies A and B are in the same industry and are identical except for cost structure. At a volume of 50,000 units, the companies have equal net incomes. When sales at both companies increase to 60,000 units, Company A's net income would be substantially higher than B's. Based on this information, Company A's cost structure has more variable costs than B's. Company A's cost structure has higher fixed costs than B's. Company B's cost structure has higher fixed costs than A's. At a volume of 50,000 units, Company A's magnitude of operating leverage was lower than B's

Company A's cost structure has higher fixed costs than B's. When sales change, the amount of the corresponding change in net income is directly influenced by the company's cost structure. The more fixed cost, the greater the fluctuation in net income. Since Company A's net income is substantially higher than Company B's when both companies experience an equal increase in sales, Company A has a fixed cost structure while Company B has a variable cost structure.

Companies A and B are in the same industry and are identical except for cost structure. At a volume of 50,000 units, the companies have equal net incomes. When sales at both companies increase to 60,000 units, Company A's net income would be substantially higher than B's. Based on this information, Company A's cost structure has more variable costs than B's. Company A's cost structure has higher fixed costs than B's. Company B's cost structure has higher fixed costs than A's. At a volume of 50,000 units, Company A's magnitude of operating leverage was lower than B's.

Company A's cost structure has higher fixed costs than B's. When sales change, the amount of the corresponding change in net income is directly influenced by the company's cost structure. The more fixed cost, the greater the fluctuation in net income. Since Company A's net income is substantially higher than Company B's when both companies experience an equal increase in sales, Company A has a fixed cost structure while Company B has a variable cost structure.

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Cost Items Appearing on the Income Statement Materials cost ($10 per unit) Depreciation on manufacturing equipment Company president's salary Salaries of administrative personnel Labor cost ($4 per unit) Research and development costs Advertising costs ($150,000 per year) Real estate taxes on factory Shipping and handling ($0.15 per unit)Inspection costs Easton can currently purchase the scooters it makes from another company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. Which of the following costs would be classified as a facility-level cost? Inspection costs Shipping and handling Materials cost Company president's salary

Company president's salary Facility-level costs are incurred to support the entire company. They are not related to any specific product, batch, or unit of product. Because these costs maintain the facility as a whole, they are frequently called facility-sustaining costs. Facility-level costs include building rent or depreciation, personnel administration and training, property and real estate taxes, insurance, maintenance, administrative salaries, general selling costs, landscaping, utilities, and security.

Which of the following items is qualitative? Cost of new machine Depreciation of existing machine Book value of the existing machine Degree to which the new machine can be integrated with existing machinery

Degree to which the new machine can be integrated with existing machinery

Sturbridge Company manufactures fine furniture and grandfather clocks. Sturbridge has an excellent reputation, and each grandfather clock sells for several thousand dollars. Which of the following should not be treated as direct costs, assuming the cost object is individual clocks? The clock face The timing mechanism for each clock Wood Depreciation on clock-making equipment

Depreciation on clock-making equipment The depreciation on clock-making equipment cannot be easily or economically traced to individual clocks; therefore, it is considered an indirect cost.

How a particular cost behaves (fixed versus variable) is dependent on whether the cost is classified as direct or indirect. True or False

False How a particular cost behaves (fixed versus variable) is independent of whether the cost is classified as direct or indirect.

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Which type of cost is considered a sunk cost to Outdoor Living's decision whether to accept or reject the special order? Raw materials to make the 500 hammocks Labor cost to make the 500 hammocks Depreciation on equipment that would be used to make the hammocks Materials handling cost

Depreciation on equipment that would be used to make the hammocks The annual depreciation expense is a measure of a cost that was incurred in a prior period. Since sunk costs have been incurred in past transactions, they cannot be changed and are not relevant for making current decisions.

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Which type of cost is considered a sunk cost to Outdoor Living's decision whether to accept or reject the special order? Raw materials to make the 500 hammocks Labor cost to make the 500 hammocks Depreciation on equipment that would be used to make the hammocks Materials handling cost

Depreciation on equipment that would be used to make the hammocks The annual depreciation expense is a measure of a cost that was incurred in a prior period. Since sunk costs have been incurred in past transactions, they cannot be changed and are not relevant for making current decisions.

Sturbridge Company manufactures fine furniture and grandfather clocks. Sturbridge has an excellent reputation, and each grandfather clock sells for several thousand dollars. Which of the following is an indirect cost, assuming the cost object is the Clock Department? Salary of the clock production supervisor. Depreciation on the factory building. Depreciation on clock-making equipment. All of the answers are correct.

Depreciation on the factory building. The depreciation on the factory building cannot be easily or economically traced to the Clock Department; therefore, it is considered an indirect cost. The other costs can be directly traced to the Clock Department.

All of the following are downstream costs except: packaging costs. advertising. research and development. sales commissions.

Downstream costs are costs incurred after the manufacturing process including marketing, distribution, and customer services. Research and development is considered an upstream cost because it is incurred before the manufacturing process.

Which of the following is an appropriate cost driver for allocating indirect costs to a human resources department in a service company? Number of employees Number of customers Square footage of office space Either number of employees or square footage of office space depending on the nature of the indirect cost

Either number of employees or square footage of office space depending on the nature of the indirect cost

Which of the following is a benefit of participative budgeting? Employees tend to be more motivated to achieve the budget. A twelve-month planning horizon is maintained at all times. Budget planning is highly centralized. Communication is clearer because it flows in only one direction—upward.

Employees tend to be more motivated to achieve the budget. Participative budgeting invites participation in the budget process by personnel at all levels of the organization, not just upper-level managers. Because they are directly responsible for meeting budget goals, subordinates can offer more realistic targets. The budget is thus a self-imposed constraint. Employees can hold no one responsible but themselves if they fail to accomplish the budget objectives they established.

The margin of safety ratio can be defined as the: Excess of budgeted sales over break-even sales divided by break-even sales. Excess of budgeted sales over break-even sales divided by budgeted sales. Excess of budgeted sales over fixed costs divided by budgeted sales. Excess of budgeted sales over variable costs divided by budgeted sales

Excess of budgeted sales over break-even sales divided by budgeted sales.

Which of the following items will not appear on a cash budget? Expected cash collections Expected cash payments Expected credit sales Financing activities

Expected credit sales The cash budget is divided into three major sections: (1) a cash receipts section, (2) a cash payments section, and (3) a financing section.

Which of the following costs typically include both fixed and variable components? Multiple Choice Direct materials Direct labor Factory overhead None of these

Factory overhead

Which of the following costs is not considered a period cost? Warehousing costs Depreciation of delivery vehicles Salaries paid to company executives Freight paid on a purchase of raw materials

Freight paid on a purchase of raw materials Period costs are associated with the general, selling, and administrative functions of the business. Product costs are all costs incurred to obtain a product or provide a service. Freight paid on a purchase of raw materials is considered a product cost.

Which of the following costs is not considered a period cost? Warehousing costs Depreciation of delivery vehicles Salaries paid to company executives Freight paid on a purchase of raw materials

Freight paid on a purchase of raw materials Period costs are associated with the general, selling, and administrative functions of the business. Product costs are all costs incurred to obtain a product or provide a service. Freight paid on a purchase of raw materials is considered a product cost.

Select the correct statement regarding the relationship between cost behavior and profits. A pure variable cost structure offers higher potential rewards. A pure fixed cost structure offers more security if volume expectations are not achieved. In a pure variable cost structure, when revenue increases by $1, so do profits. In a pure fixed cost structure, the unit selling price and unit contribution margin are equal.

In a pure fixed cost structure, the unit selling price and unit contribution margin are equal. Recall that contribution margin equals sales revenue minus variable costs. As such, in a pure fixed cost structure, because variable costs are zero, the unit selling price equals the unit contribution margin. Shifting the cost structure from fixed to variable reduces not only the level of risk but also the potential for profits.

Levenworth Company incurs unnecessary costs each period because of the excess quantities of inventory maintained to meet unexpected customer demand. The costs of inventory financing, storage, supervision, and obsolescence could most likely be reduced by which of the following practices? Activity-based costing Just-in-time inventory Total quality management Benchmarking

Just-in-time inventory Inventory holding costs include, but are not limited to, financing, warehouse space, supervision, theft, damage, and obsolescence. Many businesses have been able to reduce their inventory holding costs by making products available just in time (JIT) for customer consumption.

Select the incorrect statement regarding costs and expenses. Some costs are initially recorded as expenses while others are initially recorded as assets. Expenses are incurred when assets are used to generate revenue. Manufacturing-related costs are initially recorded as expenses. Non-manufacturing costs should be expensed in the period in which they are incurred.

Manufacturing-related costs are initially recorded as expenses. Product costs (i.e. manufacturing costs) are all costs incurred to obtain or manufacture a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs (i.e. non-manufacturing costs) are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made.

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Cost Items Appearing on the Income Statement: Materials cost ($10 per unit) Depreciation on manufacturing equipment Company president's salary Salaries of administrative personnel Labor cost ($4 per unit) Research and development costs Advertising costs ($150,000 per year) Real estate taxes on factory Shipping and handling ($0.15 per unit)Inspection costs Easton can currently purchase the scooters it makes from another company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. Which of the following costs would be classified as a unit-level cost? Company president's salary Depreciation on manufacturing equipment Materials cost Real estate taxes on factory

Materials cost Costs incurred each time a company generates one unit of product are unit-level costs. Examples include the cost of direct materials, direct labor, inspections, packaging, shipping, and handling.

Identify the false statement regarding how product costs in a manufacturing company differ from product costs in a service or merchandising company. Both manufacturing companies and service companies incur costs for supplies. Manufacturing companies accumulate product costs in inventory accounts, while service companies do not. Products of service companies such as restaurants are consumed immediately. Most labor costs for merchandising companies are treated as product costs.

Most labor costs for merchandising companies are treated as product costs. The primary difference between manufacturing entities and service companies is that the finished products provided by service companies are consumed immediately. Most labor costs incurred by service companies result from providing services to customers. These costs are treated as selling, general, and administrative expenses rather than being accumulated in inventory accounts as product costs. A merchandise company purchases goods and resales the goods to customers (i.e. Walmart). The labor cost for a merchandising company is not considered a product cost. Instead, it is considered a period cost.

Which of the following items would be least useful in preparing a schedule of cash receipts? Expected revenue from cash sales. Number of units expected to be purchased. Service charges for credit card sales. Past accounts receivable collection experience.

Number of units expected to be purchased. The sales budget has two sections. Section 1 shows the projected sales for each month; it would include the number of units expected to be sold (rather than purchased). Section 2 is a schedule of the cash receipts for the projected sales.

Cobalt Company management has identified the following cost objects: Cost Object 1: The cost of operating the finishing department Cost Object 2: The cost of operating the factory Cost Object 3: The cost of a particular product made in June With respect to these cost objectives, how would rent paid by the finishing department for storage space be classified? Object 1 Object 2 Object 3 A. Direct Direct Direct B. Direct Direct Indirect C. Indirect Indirect Indirect D. Indirect Indirect Direct Option A Option B Option C Option D

Option B The rent paid by the finishing department for storage space is traceable to the cost of operating the finishing department and the cost of operating the factory but is not easily traced to the cost of a particular product made in June.

Which of the following statements is true? Outsourcing decreases the extent of a company's vertical integration. Reputation of the supplier is a critical issue in an outsourcing decision. An outsourcing decision involves a purchase offer from a customer at a lower than normal selling price. Outsourcing decreases the extent of a company's vertical integration and the reputation of the supplier is a critical issue in an outsourcing decision.

Outsourcing decreases the extent of a company's vertical integration and the reputation of the supplier is a critical issue in an outsourcing decision. A company that uses vertical integration controls the full range of activities from acquiring raw materials to distributing goods and services. Outsourcing reduces the level of vertical integration, passing some of a company's control over its products to outside suppliers. The reliability of the supplier is critical to an outsourcing decision. An unscrupulous supplier may lure an unsuspecting manufacturer into an outsourcing decision using low-ball pricing. Once the manufacturer is dependent on the supplier, the supplier raises prices. If a price sounds too good to be true, it probably is too good to be true. Other potential problems include product quality and delivery commitments.

Which of the following is not considered a pro forma financial statement? Sales budget Balance sheet Cash flow statement Income statement

Sales budget

The inventory purchases budget is based on which budget? Cash budget Sales budget Selling and administrative expense budget None of the answers are correct.

Sales budget The inventory purchases budget shows the amount of inventory that must be purchased each month to satisfy the demand projected in the sales budget.

Which of the following would be prepared first when a merchandising company uses a master budget? Selling and administrative expense budget Budgeted income statement Sales forecast Inventory purchases budget

Sales forecast Preparing the master budget begins with the sales forecast (also referred to as a sales budget). Based on the sales forecast, the detailed budgets for inventory purchases and operating expenses are developed. The schedules of cash receipts and cash payments provide the foundation for preparing the cash budget.

Which of the following accounts would appear on the sales budget and the pro forma income statement? Selling and administrative expenses Sales revenue Accounts receivable Both sales revenue and accounts receivable are correct

Sales revenue

Which of the following is generally included in a sales budget? Schedule of cash receipts for the projected sales Desired ending inventory Budgeted cost of goods sold Schedule of cash payments for inventory purchases

Schedule of cash receipts for the projected sales Desired ending inventory and budgeted cost of goods sold appear on the inventory purchases budget. The schedule of cash payments for inventory purchases is prepared using information from the inventory purchases budget and provides information for the cash budget.

Blankenship Company operates a factory with two departments, X and Y. The utilities to heat and light the manufacturing facility would most likely be allocated to departments X and Y on the basis of: Square footage occupied. Machine hours. Direct labor hours. Units sold.

Square footage occupied. The company should use the driver with the strongest cause-and-effect relationship. It is likely that the square footage of the departments is driving the cost of the utilities (i.e., heating and lighting). It is less likely that the machine hours, labor hours, or number of units sold would be driving the utility cost.

Select the correct statement about budgeting and human behavior. People are usually very comfortable with budgets. The attitudes of upper managers significantly impact budget effectiveness. Budgets increase individual freedom within an organization. Participative budgeting contributes to fear and resentment.

The attitudes of upper managers significantly impact budget effectiveness. People are often uncomfortable with budgets. They limit individual freedom in favor of an established plan. Participative budgeting has frequently proved successful in creating a healthy atmosphere.

Chesterfield Corporation has been operating well above its break-even point. What will happen to Chesterfield's margin of safety if the variable cost per unit increases? The break-even point would decrease, and the margin of safety would decrease. The break-even point would decrease, and the margin of safety would increase. The break-even point would increase, and the margin of safety would decrease. The break-even point would increase, and the margin of safety would increase.

The break-even point would increase, and the margin of safety would decrease. Recall that the break-even point equals fixed costs divided by the contribution margin per unit. If variable costs per unit increase, contribution margin per unit decreases, and the break-even point increases. As a result, more units must be sold to break even, which decreases the margin of safety.

Based on the following cost data, what conclusions can you make about the costs of Product A and Product B? Total Cost Production: Product A Product B 10 units $100 ? 100 units $1,000 ? 1,000 units $10,000 ? Unit Cost Production: Product A Product B 10 units ? $10,000 100 units ? $1,000 1,000 units ? $100 The cost of Product A is a fixed cost and the cost of Product B is a variable cost. The cost of Product A is a variable cost and the cost of Product B is a fixed cost. The costs of Product A and Product B are both variable costs. The costs of Product A and Product B are both mixed costs.

The cost of Product A is a variable cost and the cost of Product B is a fixed cost. When the volume increases, the total cost of Product A increases; as such, the cost of Product A is a variable cost. The fixed cost per unit of Product B decreases when volume increases; as such, the cost of Product B is a fixed cost.

Alex brought his lunch today but now a coworker has asked him to go to the deli across the street. Select the correct statement from the following. The cost of the lunch Alex had brought is relevant to Alex's decision to have lunch with his friend. The cost of the lunch that Alex had brought has nothing to do with his current decision. The cost to buy lunch at the deli is not relevant because it has not yet been incurred. The cost of the lunch Alex already has represents the opportunity cost of dining with his friend.

The cost of the lunch that Alex had brought has nothing to do with his current decision. The cost of the lunch Alex had brought is a sunk cost. Since sunk costs have been incurred in past transactions, they cannot be changed and are not relevant for making current decisions.

Select the incorrect statement about the planning process. The longer the time period, the more specific the plans. Planning decisions can often be subdivided into three distinct planning phases: short term, intermediate term, and long term. The nature of planning changes with the length of the time period being considered. The shorter the time period, the less general the plans.

The longer the time period, the more specific the plans. Short-term plans are more specific than long-term plans.

Gibbs Corporation makes indoor gas fireplaces. A standard fireplace includes unit-level materials, labor, and overhead costs. In addition, the company incurs product-level engineering and advertising costs. Lastly, the company incurs facility-level costs related to renting the manufacturing building A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs's selling price. Which of the following costs would be relevant to this special order decision? The facility-level building rental costs The product-level engineering and advertising costs The unit-level materials, labor, and overhead All of these answers are correct.

The unit-level materials, labor, and overhead The relevant costs in a special order decision are the unit-level and batch-level costs that will be incurred if the special order is accepted. The product and facility-level costs are not relevant.

What information does the sales budget provide for pro forma financial statements? Total budgeted sales to be used on the pro forma income statement Cash collections from customers to be used on the pro forma balance sheet The ending balance in accounts payable, which appears on the pro forma balance sheet All of the answers are correct.

Total budgeted sales to be used on the pro forma income statement

Which of the following is not a step in allocating indirect costs to cost objects? Multiply the allocation rate by the weight of the cost driver. Trace direct costs to individual cost pools. Compute an allocation rate by dividing the total cost to be allocated by the total cost driver volume. All of the answers are steps in allocating indirect costs.

Trace direct costs to individual cost pools.

Select the incorrect statement regarding upstream and downstream costs. Companies normally incur significant downstream costs. To be profitable, companies must recover the total cost of developing, producing, and delivering products. Pricing decisions must consider both upstream and downstream costs in addition to manufacturing costs. Upstream and downstream costs are reported as product costs on the income statement.

Upstream and downstream costs are reported as product costs on the income statement. Upstream costs are costs that are incurred prior to manufacturing process including research and development costs and product design costs. Downstream costs are costs incurred after the manufacturing process including marketing, distribution, and customer services. Upstream and downstream cost are not reported as product costs on the income statement; instead, they are classified as general, selling, and administrative expenses and are expensed in the period they are incurred.

Which of the following transactions would cause net income for the period to decrease? Paid $2,500 cash for raw material cost Purchased $8,000 of merchandise inventory Recorded $5,000 of depreciation on production equipment Used $2,000 of office supplies

Used $2,000 of office supplies Costs that are not classified as product costs are normally expensed in the period in which they are incurred and, as such, decrease net income. These costs include general operating costs, selling and administrative costs (such as the use of office supplies), interest costs, and the cost of income taxes.

Allocation of costs to various cost objects may: affect managers' performance evaluation. affect the overall profitability of a company. affect the apparent profitability of the various products a company makes. affect managers' performance evaluation and the apparent profitability of the various products a company makes.

affect managers' performance evaluation and the apparent profitability of the various products a company makes.

Allocation of costs to various cost objects may: affect managers' performance evaluation. affect the overall profitability of a company. affect the apparent profitability of the various products a company makes. affect managers' performance evaluation and the apparent profitability of the various products a company makes.

affect managers' performance evaluation and the apparent profitability of the various products a company makes.

Cost of goods sold is equal to the cost of goods: manufactured minus ending finished goods. available for sale minus beginning finished goods. available for sale minus ending finished goods. manufactured minus beginning finished goods.

available for sale minus ending finished goods. Cost of goods sold = Beginning finished goods + Cost of goods manufactured − Ending finished goods Cost of goods available for sale = Beginning finished goods + Cost of goods manufactured Cost of goods sold = Cost of goods available for sale − Ending finished goods

The manager of Kenton Company stated that 45% of its total costs were fixed. The manager was describing the company's: operating leverage. contribution margin. cost structure. cost averaging.

cost structure.

Once sales reach the break-even point, each additional unit sold will: increase fixed cost by a proportionate amount. reduce the margin of safety. increase the company's operating leverage. increase profit by an amount equal to the per unit contribution margin.

increase profit by an amount equal to the per unit contribution margin. Recall that each additional unit sold will increase profit by the contribution margin per unit. Once the fixed costs are covered at the break-even point, the sales of each additional unit will increase profit by an amount equal to the contribution margin per unit.

The benefits of a just-in-time system would include all of the following except: increased warehousing costs. reduced inventory holding costs. improved customer satisfaction. reduced warehousing costs.

increased warehousing costs. Just-in-time systems deliver the product to the supplier just in time for the customer to purchase. This type of system has the benefit of decreased warehousing costs.

Which of the following items is qualitative? Cost of new machine Depreciation of existing machine Book value of the existing machine Degree to which the new machine can be integrated with existing machinery

integrated with existing machinery

A company that uses a just-in-time inventory system: has finished goods inventory on hand at all times in order to speed up shipments of customer orders. may find that having less inventory actually leads to increased customer satisfaction. assesses its value chain to create new value-added activities. adopts a systematic, problem-solving attitude.

may find that having less inventory actually leads to increased customer satisfaction. Many businesses have been able to simultaneously reduce their inventory holding costs and increase customer satisfaction by making products available just in time (JIT) for customer consumption. Many fast-food restaurants have discovered that JIT systems lead not only to greater customer satisfaction but also to lower costs through reduced waste.

Craft, Inc. normally produces between 120,000 and 150,000 units each year. Producing more than 150,000 units alters the company's cost structure. For example, fixed costs increase because more space must be rented, and additional supervisors must be hired. The production range between 120,000 and 150,000 is called the: differential range. median range. relevant range. leverage range.

relevant range.

All of the following are downstream costs except: packaging costs. advertising. research and development. sales commissions.

research and development. Downstream costs are costs incurred after the manufacturing process including marketing, distribution, and customer services. Research and development is considered an upstream cost because it is incurred before the manufacturing process.